Masonry Magazine October 1989 Page. 25
TAX MATTERS
Irving L. Blackman is the most published CPA in the country and spreads his tax knowledge as a dynamic speaker. Mr. Blackman specializes in closely held businesses and will consult with readers of this column. He is a partner in Blackman Kallick Bartelstein, a Chicago-based accounting and business consulting firm. Direct your questions to 300 S. Riverside Plaza, Chicago, IL 60606, or call (312) 207-1040.
A Unique Tax-Saving Idea For Investors
Let's talk about your investments and investment income—things like certificates of deposit, stocks, bonds, an interest in a profitable partnership and similar investments. Most clients with such investments want to accomplish three goals concerning these types of assets. They tell me they want to save income taxes, reduce or eliminate estate taxes, and stay in control of the property for as long as they live. Naturally, they want all the income and wealth to stay in the family. Sounds like the impossible dream.
But there is an easy way to get the job done. Here's how. Form a new corporation and elect S corporation status. Exchange the investments (say a $100,000 C.D.) for the stock of the S corporation. This transaction is tax-free.
Over a period of time, gift portions of the S corporation stock to your children, grandchildren or others. Only gift up to 49 percent of the stock. By keeping 51 percent of the stock, you will always be in control of the S corporation. Now let's take a look at the tax consequences.
Gift tax. You can gift up to $10,000 tax free per year to each donee (the person receiving the gift). If you are married, you can double the amount to $20,000 by having your spouse consent to the gift. It is smart not to exceed the $100,000/$200,000 value per year limit. Spread your gifts out over two or more years as is necessary.
Income tax. The stockholders pay tax on their proportionate share of the income. For example, let's say the income of the corporation was $10,000 for the year and the kids owned 40 percent of the stock. Their share of the income would be $4,000; yours would be $6,000. This is a great way to build an education fund for the kids. Remember, any child who has not attained age 14 must pay tax on unearned income in excess of $1,000 at his parent's top tax rate. But that's not so bad because of the estate tax result.
Estate tax. The shares of stock owned by other members of the family will not be included in your estate. The top estate tax rate is 55 percent. So, you can see significant savings are possible.
One warning: You must operate like a corporation. Title to the assets must be in the corporate name. Actually issue certificates of stock to each stockholder. Ask your professional advisor to make sure you follow all the necessary details.
Want to learn when and how you should use an S corporation for your business? Send for the special report, A New Tax Superstar... S Corporations, $25, to Blackman Kallick Bartelstein, 300 South Riverside Plaza, Chicago, Illinois 60606.
Now, Little Kids Need Social Security Numbers
Did you hear the one about The Family Support Act of 1988? Well, it's the law of the land. And it's no joke. Here's what the new federal law provides: If you want to claim a dependent for any child aged two or older, starting with your 1989 tax return, you must show the child's Social Security number (SSN).
If the child has reached the age of two by December 31, 1989, the SSN is required. Don't wait until your tax return must be filed. Get any needed SSNs now.
The easiest way to apply for SSNs is by a combination of telephone and mail. Just request Form SS-5, Application for a Social Security Card, by calling your local Social Security office. The number is listed under Social Security Administration. You will receive an application, along with a preaddressed envelope. To complete the application, you need evidence of the child's (1) age, (2) identity, and (3) U.S. citizenship or lawful alien status. Original or certified copies of original documents are needed. Sorry, photocopies are not acceptable.
A birth certificate can be used as evidence of age and citizenship for a child born in the United States. A medical or day-care record can be used to show identity. Other acceptable documents are shown on the application form. An application filed for a child can be signed by the parent or guardian, who must also provide evidence of identity. A list of acceptable documents is on the application form.
Mail the completed application, along with the required proofs, in the envelope provided. A Social Security card will be issued to the child within two to three weeks. All documents will be returned to you.
IRS Answers Some Transfer Questions
Sooner or later, every closely held business is transferred. The transfer is made voluntarily by the business owner during life, or it is forced on his family after death. In 1987, a new tax law changes the lifetime transfer rules. The thrust of the new rules is to prevent a business owner from freezing the value of his business for estate tax purposes. The law [Section 2036(c)] is a complex maze that has caused much confusion and uncertainty. After waiting for almost two years, the IRS has finally spoken by releasing Notice 89-99. The purpose of the notice is to answer a number of important questions. No, the notice does not answer all points, but it makes a start toward clearing up some of the confusion.
This article covers some of the more important points that apply to the transfer of a closely held corporation. Clearly, the owner of the family corporation can no longer recapitalize his corporation-that is, wind up owning the preferred stock while his children own the common stock. As far as the new law is concerned, there are two things wrong with a recapitalization. First, by owning the common stock, the children have received a transfer of property having a disproportionately large share of the potential appreciation a no-no. Second, by owning the preferred stock, the owner has retained an interest in the income of the business also a no-no. What's the result? When you die, the value of the common stock at your death will be included in your estate.