Today, I've got more answers to readers' tax questions.
Q: Steve M. asks: "Last week I heard that Eric Schmidt of Google was going to sell approximately $2.5 billion of his shares. The tax burden on that sale must be enormous! Are there special ways that people in those positions have of avoiding taxes ... that us normal people either don't know about or don't have access to?"
A: People in Schmidt's position reduce (but don't entirely avoid) taxes because the vast majority of their income is taxed as a capital gain rather than ordinary income.
"Salaries get taxed when you earn them. Capital gains only get taxed when you sell, and they get taxed at a lower rate. That's a benefit in and of itself, and it's in the law," says Lee Sheppard, a contributing editor with Tax Analysts.
Google disclosed in a Securities and Exchange Commission filing on Friday that Schmidt, Google's executive chairman (and former chief executive), planned to sell about 3.2 million shares of Class A stock, or about 42 percent of his total holdings of Class A and B common stock, over the next year "for individual asset diversification and liquidity."
Schmidt is selling under a Rule 10b5-1 program, which lets executives sell at predetermined prices or intervals to avoid accusations of illegal insider trading. Such programs are common among top executives, including Schmidt. "He has been selling a significant number of shares through 10b5-1 programs for a decade now," says Jonathan Moreland, director of research with InsiderInsights.com.
Schmidt joined Google in 2001, about three years before it went public. Tax experts say the cost basis in his stock, or what he paid for it, is probably very low, which means that most of his sales proceeds will be profit and taxed at the long-term capital gains rate.
For someone in Schmidt's tax bracket, that rate is 20 percent this year, up from 15 percent last year. Schmidt will also owe a new 3.8 percent Medicare tax on most of his capital gain, something that didn't exist last year. But that combined rate - 23.8 percent - is still well below the top rate of 39.6 percent that applies to salaries and other ordinary income.
Schmidt will also owe 13.3 percent on most of his gain to the state of California, assuming he is a California resident. (Public records and news reports say he lives in Atherton, although Google would not confirm his residence. Even if he claimed not to live in California, the Franchise Tax Board would argue that he does, Sheppard says.)
Consultants are always pitching tax avoidance schemes to wealthy people, Sheppard says, but "they don't work."
In the late 1990s, consultants, including some of the nation's top accounting firms, were marketing schemes designed to let clients avoid tax on the sale of appreciated assets. They went by nicknames such as Son of BOSS and typically involved creating paper losses to offset real capital gains. The IRS went after such schemes with a vengeance and effectively shut them down.
Q: Pauline J. asks, "If I paid my property management company to manage the rental house I own, do I need to issue a 1099-MISC form for the monthly management fees they deduct from the rent collected? Their fees were more than $1,000 in 2012."
A: No. If you own rental property, you don't have to file a 1099 because you are not a trade or business, says Rich Gunn, a partner with accounting firm Burr Pilger & Mayer. If the property management company hires someone to paint the walls or cut the grass at your rental property, it might have to file a 1099 depending on how much it paid and whether it paid an individual or contracting corporation, says Gunn.
Q: Jim T. asks, "If my wife and I own shares of a stock fund in joint ownership, and switch the ownership to individual, is it a taxable event?"
A: No. Transferring property between married spouses is not a taxable event, nor does it trigger any gift-tax issues, Gunn says.
Transferring property between two people who are not legally married in the eyes of the IRS (including same-sex couples) also does not trigger income taxes, but "you might have to file a gift tax return depending on how much you give," he adds. The return is for reporting purposes and generally does not result in a gift tax.
Q: Maria Y. asks, "I am a widow who is 55 years old. I have owned a house in San Francisco with my late husband for more than 20 years. The house was in our living trust. Since my husband passed away, my lawyer allocated 10 percent of the house into my living trust, and 90 percent in the estate trust, or trust B. I read your article about how seniors can sell the primary house in San Francisco and buy a new one in Santa Clara County and transfer the property tax to Santa Clara County. Since my house is located mostly in the estate trust, do I have this privilege?"
A: Under Proposition 60, California homeowners 55 and older get a one-time chance to sell their primary residence and transfer its property-tax assessment to a new one, but the market value of the new home generally must be equal to or less than the market value of the old home. Also, the new home must be in the same county as the old one or in one of eight counties (including Santa Clara) that accept incoming transfers of property values. For details, see my June 19 column at http://tinyurl.com/bwgzm9f
The Board of Equalization answers a lot of questions about Prop. 60 transfers on its website, but not this one, so I asked the board for an answer.
The response: "For property tax purposes, the assessor looks through the trust to identify the present beneficial owner of the trust property. Since the wife is the present beneficial owner of her trust and assuming that she is the present beneficiary of her husband's trust (probably as a life estate holder), she would be considered the owner of the real property and can transfer the base-year value under Section 69.5." For details on this, see www.boe.ca.gov/proptaxes/pdf/200_0075.pdf
Source: http://feeds.sfgate.com/click.phdo?i=d9f32dc331762fbd1d0108a73a0b08cf
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