October 31, 2003

Egg Donor Fees Now Deductible 

            In a recent letter ruling, the IRS stated that egg donor fees and expenses related to obtaining a willing donor, paid by a taxpayer who could not conceive using her own eggs, were treated as preparatory costs to the performance of the taxpayer’s own medical procedure (the implantation of a donated egg), which qualified as medical care and thus, were deductible medical expenses of the taxpayer.

 

Convert to An S-Corporation

            Converting to an S Corporation is more attractive than ever under the new tax law.  The top rate on individuals and corporations is now the same, 35%.  S corporations were at a slight disadvantage in certain situations when the maximum tax rate for individuals was 38.6%.

            The new tax law states that most dividends paid by corporations are taxed at no more than 15%, 5% for individuals in the 10% or 15% tax brackets.

            Regular corporations still face double taxation when earnings are distributed, although the lower rates on dividends help to ease the pain.

            But, there are exceptions, particularly when regular corporations are in the 15% corporate bracket; taxable income of less than 50,000.  In that situation, choosing to be a regular corporation may pay taxwise.

            Some S corporations can pay tax-favored dividends to owners.  The 15% top rate does not apply to an S corporation’s owner’s pass-through share of the firm’s operating profits, according to some experts.

            Corporations that switch to S status have a planning opportunity if they had earnings and profits while they were regular corporations; they can elect to treat a portion of their S company pass through earnings as if that amount were paid from the prior regular corporation profits.  This way, that amount will be a dividend eligible for the 15% top rate.

            Other S corporations, those that have been there since inception, are out of luck.

 

Reality Bites 

            TV shows underscore the need for financial advice.

            When 12.3 million viewers tuned in to watch the two hour finale of NBC’s hit reality show “For Love or Money 2”, they got a lesson on why it’s important to seek financial advice when mixing love and money.  Erin chose Chad to be her boyfriend on the show.  Chad had the choice of taking $1,000,000 or Erin.  He chose Erin.  Erin then wrote a check to Chad for $500,000 out of her $2,000,000 winnings.  It made for great TV, but it was a costly mistake for Erin.  That’s because in 2003 Erin is allowed to give Chad only $11,000 without lowering her $1,000,000 lifetime gift exemption.

            The tax law allows Erin to give $11,000 to as many people as she likes, without gift tax consequences for them or for her.  But, by giving Chad the whole $500,000, she reduced her lifetime exemption by $489,000.  In other words, when she dies, Erin’s estate will pay a tax on anything above $511,000.  That means her heirs could be liable for an additional $245,000 in taxes.

            Indeed, reality TV may not be as real as it appears.  In a disclaimer quickly flashed on the TV screen at the end of the show, NBC noted that Erin’s $2,000,000 would be paid out in the form of an annuity over 40 years.  If Erin, who is 30 years old, does not want to wait until she is 70 to collect the full $2,000,000, she has the option of collecting the present cash value of that annuity.  The value of that lump sum payment would likely be less than $1,000,000.

            A spokeswoman for NBC says Erin has yet to decide how she wants to collect her winnings.  She also does not know how Erin will split her prize with Chad.

 

Summer Reading 

            It seems everyone writes of their summer reading list, so I thought I would give you mine.  My reading is almost always non-fiction and rarely does it consist of a book that I cannot put down.  This summer was different.  I read The Illusion of Victory by noted historian, Thomas Fleming, which is a retelling of the U.S. involvement in World War I and the Woodrow Wilson saga.  In school, we learned about how dastardly Germany was, how the noble Woodrow Wilson got us into the War to End All Wars and how he would Save the World with his Fourteen Points.  He was undone by the dastardly Senator Henry Cabot Lodge and the Isolationist Republicans.  This book rewrites history by portraying a scheming Great Britain, an inept and bigoted Wilson that neither Democrat nor Republican liked, a conspiracy to get us into war and to deny us our First Amendment rights, the Republican opposition position of an America involved in world affairs and not controlled by other nations in a League of Nations (a condition  rectified by the establishment of the Security Council in the United Nations).

            I wholeheartedly recommend the book and the author.

            If you have any questions about the foregoing or any other financial matters, please call us.  If you want to read more, visit the AOHL Newsletter Archives at www.lisch.com.

 

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