June 2011 Newsletter

Sales Tax Rate Drops July 1st

Effective July 1, 2011, the combined statewide sales and use tax rate will decrease from 8.25% to 7.25%. The temporary 1% increase implemented in April 2009 expires June 30, 2011.

Remember that district taxes are still applicable, so the tax rates in most areas of California will be greater than 7.25%. For the scheduled rates for your county to go into effect on 7/01/2011, go to: http://www.boe.ca.gov/sutax/pam71.htm and click on “Tax rates effective July 1, 2011.

If the governor has his way, rates will increase, but that probably won’t?(TM)t happen until later this year. So this is a reminder to all business clients to reprogram their cash registers to charge the lower sales tax beginning July 1. And for everyone, sales taxes after June will mean a few bucks off the stuff we buy, at least for now.

Mid-Year Checkup on Your Investments

My gosh, half the year is almost over. Maybe its a good time to review your investment portfolio. The market since March of 2009 has done pretty well looking at the numbers.

But be cautioned a lot of the upswing is being attributed to Fed stimulus (Quantitive Easing I and QE II) manipulating the markets. What happens if and when it stops? Are we looking at inflation? Or deflation? Where are interest rates headed? How will this affect my portfolio?

In light of all this, all portfolios should be periodically reviewed depending on a lot of factors. Such things like, allocation of assets, ones age, possibly moving closer towards retirement and a necessary reallocation to safer assets, the state of the economy and the world and other factors.

A lot of people were affected by market drops in 2001 and 2008/2009 as well as previous drops. No one has a crystal ball but we are in an unprecedented time in history and the best advice I can give in this newsletter is – Be Safe and don’t get caught by surprise.

Do I still Need My Living Trust?

Under federal law in effect for deaths in 2011 and 2012, married couples have a new tax break: Together they can transfer up to $10 million without owing any federal gift or estate tax. There is a new word out her too, called “portability.” This means that the surviving spouse gets to “tack on” the decedents estate tax exemption to his or her own.

In the past, the decedents exemption died with the decedent.

For many couples, this eliminates the need to create the “AB Trust” or bypass trust that has been traditionally used to avoid estate tax.

This has raised the question by many, “do we still need a living trust?” $10 million!!! “I don’t have anywhere near that.” Why mess with it at all?

Caution: This new law is only scheduled to be in effect in 2011 and 2012. What happens after that? Who knows?

Remember that living trusts do much more than potentially save estate tax…they are used to avoid costly probate. They spell out the decedents wishes, provide for beneficiaries who may need special treatment like special needs or children from a prior marriage or whatever.

So they’re not total toss-outs, they still have a big place in your plan. But, just like your investment portfolio, your current living trust may need revisiting.

Many are set up to require a new trust to be created at the passing of the first spouse…the bypass trust. My experiences is that lots of the trusts out there have a requirement to create this trust whether it is beneficial or not. It many cases under current law this will create an unnecessary burden and create the need to file additional tax returns as well as reducing flexibility.

You would be wise to read your trust carefully or get it looked at to determine if it should be amended or restated to give you the choice of creating a new trust at the death of the first spouse or not.

A trust vehicle called an “AB Disclaimer Trust” may be a potential solution for this problem. As always tho, its not for everyone so check with an expert to determine if it works in your situation. Note that for this to work it must be in place before the death of the first spouse.

We’re looking a year and a half window and, depending on what changes take place after 2012, looking at maybe changing things up again after that. Additional expense, headaches, and uncertaintly – your tax dollars at work.

Business Standard Mileage Rate Increases for Last Half of 2011 — other rates also rise

The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will increase by 4.5¢ from 51¢ to 55.5¢ per mile for business travel from July 1, 2011 to Dec. 31, 2011 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices.

This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase 4.5¢ for the last half of 2011 from 19¢ to 23.5¢ per mile.

However, the prior standard mileage rates of 51¢ for business and 19¢ for medical or moving expenses, continue to apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes before July 1, 2011, and to mileage allowances paid: (1) to an employee before July 1, 2011, or (2) with respect to transportation expenses paid or incurred by the employee before July 1, 2011.

This requires separate mileage tracking…

This all means that if you deduct business mileage using the cents-per-mile method for 2011, you’ll need to track your business miles from January 1st thru June 30, 2011 and show them separately from the July thru December 31 figures in order to compute the deduction correctly.

IRS Audits on the Rise…Be on the lookout for an upcoming email update from me regarding the increase in audit activity at the IRS. Everyone including the federal, state, and local governments are looking for money.

The IRS, Franchise Tax Board, and the Employment Development Department are no different and are stepping up enforcement. Watch for my email but in the meantime…

Document everything and keep good records and mileage logs!

Thanks for reading and I’ll be back with you soon.

More to come. – Bob

Robert W Craig, E.A. Tax and Business Services

(805) 264-3305

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