Transcript The Federal Income Tax Update Dr. Linda Wang A Tax Expert Who is the figure behind every great man, the individual who knows his ultimate.

The Federal Income Tax
Update
Dr. Linda Wang
A Tax Expert
Who is the figure behind every great
man, the individual who knows his
ultimate secrets? A father confessor?
Hell no, the tax expert.
Louis Auchincloss
Timber Sale
Long-term capital gain
If you own your timber for more than 1 year, your sale
are taxed at the beneficial long-term capital gain rate
of maximum 15% (Sec. 631(b) or Sec. 1221)*, not the
ordinary rate of maximum 35%
* if you cut stumpage and get paid from the mill
for delivered timber, only part of the payment you
received is long-term capital gain, the difference
between the FMV of timber and delivered timber price
is taxed as ordinary income (Sec. 631(a))
Timber Sale
Filing requirement
Timber as investment:
File Schedule D and Form T (may be required)
Timber as business:
File Form 4797, Schedule D, and Form T (may be
required)*
*Schedule C for Sec. 631(a) cutting
Form T
Filing requirement
 Form T is required if you:
 Claim a cost/basis deduction (“depletion”)
 Outright sale in timber business (Sec. 631(b))
 Cut stumpage and sell delivered product (Sec.
631(a))
* Exception: you are not required to file Form T if you only have
an occasional sale of timber
Forest Planning Cost
Tax Law Changes
 Cost incurred in 2008 no longer use one-time 10%
investment tax credit
 The 10% investment tax credit was repealed in
2004 (by American Jobs Creation Act of 2004)
Forest Planning Cost
New tax write-off rules
 The new rules are:
Deduct the first $10,000 cost
Excess over $10,000 may be deducted
(“amortized”) over 8-year
The Size of the IRS
In fiscal year 2006, the
IRS employed almost
100,000 people and had a
total budget of about $10
billions!
Source: IRS website
Purchased Timberland
Establishing Basis for Land and Timber
 Basis is the cost of purchase, plus other acquisition
costs such as survey, forester’s fee, and legal fees
 You may deduct the basis from timber sale,
reducing taxable income at sale
 Basis for land and timber must be separately
documented
Timber Casualty Loss
Tax Deduction May be Limited
 Casualty loss: if loss caused by sudden,
unexpected and unusual forces such as fire or storms
(hurricane, ice, wind…)
 The amount of deduction is the lesser of: (1) the
adjusted basis of timber or (2) the FMV loss
Timber Casualty Loss
Two Key Points
 Basis is for the entire property (not just the
destructed portion) if one tax account is maintained for
the entire property
 Salvage sale may be tax-deferred if reinvested in
forestry
Timber Casualty Loss
New Audit Guide from the IRS
 The IRS issued a new audit guide for timber
casualty loss in September 2005
“Timber Casualty Loss Audit Techniques Guide”
Verification of basis and FMV valuation of loss are two
focal points of audit.
The Rich Learned to Have Money
Work for Them
President George W. Bush 2004 Tax Return
Salary
Interests
$397,065
$363,483
$672,788
Total Taxes:
Refund:
$207,307
$38,534
The Rich Learned to Have Money
Work for Them
Vice President Richard Cheney 2004 Tax Return
Salary
Dividend
Business Income
Capital Gains:
Rental:
$425,584
$326,729
$533,197
$222,463
$203,976
$1,734,373
Total Taxes:
Owe:
$393,518
$102,663
The Rich Learned to Have Money
Work for Them
Teresa Heinz 2003 Tax Return
Salary
Tax-Exempt Interests
Dividends
Taxable Income
Total Taxes:
Refund:
$0
$2,781,791
$2,216,280
$2,023,596
$628,401
$247,933
Cost Share Payment Received
Two Options
 Generally the payment must be included in income
 The expense may be deducted as part of the forest
management costs
Cost Share Payment Received
Qualified Program for Income Exclusions
 However, qualified cost share payment may be
excluded from income (Sec. 126)
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Forest Land Enhancement Program (FLEP)
Conservation Reserve Program (CRP)
Environmental Quality Incentives Program (EQIP)
Wetland Reserve Program (WRP)
Wildlife Habitat Incentive Program (WHIP)
Forest Renewal Program (SC)
Cost Share Payment Received
Exclusion Calculation
Last year you harvested 40 acres and
received $84,500 for the timber.
This year, you replanted the 40 acres at a
cost of $6,000 ($150/acre).
You received $3,900 in CRP cost-share
payments to cover the cost of replanting.
How much of $3,900 cost-share payment can be
excluded from your gross income?
Cost Share Payment Received
Exclusion Calculation
• Step 1:
Compute 10% of the average annual income
for the 3 previous years:
0.10 x ($84,500/3) = $2,817
• Step 2:
Multiply $2.50 times the number of affected
acres
$2.50 X 40 = $100
Cost Share Payment Received
Exclusion Calculation
• Step 3:
Compare the two values: $2,817 is larger.
Divide it by the interest rate:
$2,817 / 7.56% = $36,823
• Step 4:
$36,823 is larger than $3,900; you can
exclude the entire FIP payment from your
gross income.
New Tax Laws in 2007
Tax relief for business
In May 2007, the first major tax law was enacted:
Mom and pop timber business have the option not
being taxed as partnership
New Tax Laws in 2008
Tax Incentives for Business
 Business owners may write off up to $250,000 for
property purchased and placed in service in 2008
(“Sec. 179 Deduction”)
 Deductions are reduced if investment is more than
$800,000
 Bonus Depreciation: businesses may deduct 50% of
the cost (“basis”) of property purchased and placed in
service in 2008
Lump-Sum Timber Sale and Form 1099
New IRS Regulation Proposed
 In November 2007, the IRS proposed to require
Form 1099 reporting for lump-sum timber sale
Effective date: after the final regulations adopted in the
Federal Register
Source: REG-155669-04
Reference Materials
Forest Landowners’ Guide to Federal Income Tax
National Timber Tax Website: www.timbertax.org
State Agency and Extension Websites
J.K. Lasser’s Your Income Tax
IRS Publication 17: Your Federal Income Tax
Rising Tax Code Complexity
Gettysburg
Address
9,000,000
8,000,000
6,000,000
Declaration of
Independence
5,000,000
Constitution
7,000,000
4,000,000
Bible
3,000,000
2,000,000
Tax Code and
Regulations
1,000,000
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