Fortunately, there is a way you may be able to avoid dire tax problems. Assuming that a suitable replacement property can be identified, you can arrange an exchange of properties. If the properties are considered “like-kind,” you generally do not have to pay current tax on the exchange.

Basic premise: The rules for like-kind exchanges apply to investment or commercial property. (They cannot be used for residential homes.) This refers to the nature, character or class of the property—not its grade or quality. For example, a swap of an office building for an apartment building of the same value can qualify as a like-kind exchange. As a result, neither party has to report taxable income.

Although other types of property may qualify under the rules, the majority of these transactions involve real estate. However, in the real world, trading real estate properties is usually not so simple.

Suppose you want to acquire real estate, but the owner is not interested in any of the properties that you own. The tax law allows you to take the like-kind exchange concept one step further. The exchange can involve multiple parties if the two owners cannot agree on the properties to be swapped.

Example: Tinker wants to acquire property owned by Evers. However, Tinker does not own any property that Evers desires in return. After discussing a number of locations, the two of them strike a deal with Chance. Evers agrees to take Chance’s property, Chance acquires title to a property owned by Tinker and Tinker obtains the property he wanted all along.

The IRS has approved the use of a qualified intermediary to facilitate the deal, as long as the intermediary is not connected with one of the other parties. Also, be aware that time restrictions are involved in a multiple-party swap. In general, the property you receive must be identified within 45 days of the original transfer, and you must take title within 180 days (or your tax return due date plus any extensions, if that is sooner).

Assuming like-kind properties are involved, the entire transaction may be tax-free if the deal is completed within these time frames. One catch: If you receive any money or property as part of the deal, the additional amount—called “boot”—is subject to income tax. On the other hand, no loss is recognized by the taxpayer who provides the boot. The assumption of a greater mortgage is also treated as taxable boot for this purpose.

Finally, be forewarned that the IRS is often suspicious of these transactions. This is a VERY complex area of the tax law, so professional assistance is a must.  Contact a KOS tax professional today at 847.580.4100.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax exemption for an individual was gradually increased from $1 million to $3.5 million for decedents dying in 2009. At the same time, the top estate tax rate was decreased from 55% to 45%. EGTRRA also “decoupled” the estate and gift tax systems and retained a lifetime gift tax exemption of $1 million.

Then EGTRRA repealed the federal estate tax, but only for decedents dying in 2010. The estate tax was scheduled to be reinstated in 2011, with only a $1 million estate tax exemption and a top 55% estate tax rate. Subsequently, the 2010 law created an estate tax exemption of $5 million with a top estate tax rate of 35%. The government recently announced that the inflation adjusted exemption for 2012 is $5.12 million.

Among other changes, the new law reunifies the estate and gift tax systems and allows portability of estate tax exemptions for married couples.

If a deceased spouse’s estate does not exhaust the entire exemption, the balance becomes available to the estate of the surviving spouse. Thus, heirs may more easily benefit from the maximum $10.24 million in exemptions ($5.12 million for the estate of each spouse in 2012), but only if both spouses die before 2013.

Example: John White owns assets valued at $3.5 million, and his wife Mary owns assets worth $6 million. They each have designated their children as their primary beneficiaries. John dies in 2012, so the $5.12 million estate tax exemption shelters the entire amount. Then Mary dies later in 2012. Because John’s unused exemption of $1.62 million is transferred to Mary’s estate, the combined exemption shelters the entire $6 million in assets she owns.

The new IRS Notice explains how to use the portability provision. Briefly, the estate can transfer any unused portion of the exemption for a deceased spouse to the surviving spouse by filing the requisite form for federal estate tax returns. No affirmative election is required.  The estate will be treated as having made the portability election as long as a return is filed in a timely fashion. Other issues will be addressed in future pronouncements from the IRS.

The rules pertaining to annual gift tax exclusion remain in effect without any change. Therefore, you can reduce the size of your taxable estate in 2012 and the foreseeable future by giving lifetime gifts up to the annual limit ($13,000 per recipient in 2012). You should coordinate lifetime gift-giving with other aspects of your estate plan. Rely on your estate planning advisers for guidance.  For more information about estate or tax planning for your future, please contact a KOS professional today at 847.580.4100.

1. Do not leave the beneficiary lines blank. If you don’t name specific beneficiaries for your accounts, or if you name your estate as the beneficiary, your heirs will likely end up in probate court. This can be both time-consuming and costly. If assets go to your estate, they are subject to the reach of creditors. A better option is to choose individual beneficiaries and list them on the forms.
2. Use trusts for beneficiaries who are minors. In some states, minors face restrictions until they turn 18 or 21. If you designate a minor as a beneficiary, a court will appoint a guardian to manage the funds until the child reaches the age of majority. Alternatively, you might establish a trust to handle the funds and name the trust as the beneficiary. Thus, you maintain control now and provide asset protection for minors when you are gone.
3. Understand the key rules. Other than your spouse, beneficiary designations on retirement accounts and insurance contracts will override your will. If you want someone besides your spouse to inherit assets, your spouse must sign a written waiver. Without the waiver, a non-spouse beneficiary designation will be invalid upon your death.
4. Inform your beneficiaries. Do not keep your designations a secret. Also, let the people whom you have designated as beneficiaries know where to find important documents and contact information for your professional advisers. On the other end, make sure your advisers have the vital contact information.
5. Double-check names and numbers. Make sure they are spelled correctly and that figures are accurate. This is particularly important when listing Social Security numbers and telephone numbers and addresses.
6. Use percentages instead of dollar amounts. For example, suppose you have an IRA worth $100,000, and you designate a nephew as beneficiary of $75,000 of that amount. If the IRA drops in value to $75,000 or below at your death, your nephew gets the entire amount—any remainder beneficiaries receive zero. Perhaps a better way to meet your objectives is to give your nephew 75% of the overall account value.
7. Name contingent beneficiaries. If your primary beneficiary has died and you have not named a replacement, the assets would go to your contingent (or “secondary”)  beneficiaries. Without a contingent  beneficiary, the assets are transferred  to your estate (see above). Avoid potential problems by indicating contingent beneficiaries in appropriate places.

Don’t stuff all the paperwork in a desk or drawer somewhere and forget about it. Make the proper adjustments, when warranted. And review your beneficiary designations periodically to ensure that they remain up-to-date.

A typical plan may permit employees to make hardship withdrawals. However, IRS regulations allow hardship withdrawals only if a participant has an immediate and heavy financial need and lacks other resources. In addition, such distributions may be subject to income tax and a 10% early withdrawal penalty.

Possible solution: A plan can address these shortcomings by including a loan feature. If it is warranted, an employee may borrow the greater of (a) $10,000 or (b) up to one-half of the first $100,000 in the account without paying any tax or penalty.

As with other retirement plan features, loan programs must meet regulatory requirements of the Department of Labor and the IRS. The eight key requirements are:

1. Availability: Loans must be available to all participants on a reasonably equivalent basis. To satisfy this requirement, loans must be available without regard to race, color, religion, sex or national origin. Also, when considering whether to make loans, plans can consider only such factors as commercial lenders would take into account, such as creditworthiness and financial need.
2. Nondiscrimination rules: A loan cannot be made available to highly compensated employees, officers or shareholders in amounts greater than those made available to other employees. This condition will not be violated merely because the loans do not exceed a maximum amount or a maximum percentage of a participant’s vested account balance.
3.  Specific plan provisions: Loans must be made under specific provisions contained in the plan. The plan must state the procedure to apply for loans, the basis on which loans are approved or denied, the limitations on types and amounts of loans, the procedure to determine a reasonable rate of interest, the collateral that may secure loans, and an explanation of default and how the plan will deal with it.
4. Reasonable rate of interest: A loan must bear a reasonable rate of interest. This test is met if the rate charged is similar to what banks or other commercial lenders would charge under similar circumstances.
5. Adequate security: Loans must be adequately secured. In other words, you need more than just a promise to pay—there must be security that could be sold so that the plan would suffer no loss of interest or principal. The regulations allow plans to permit the participant to use up to one-half of his or her account balance to secure loans. In other words, if loans are limited to 50% of a participant’s account balance, the plan can avoid the need to acquire additional security.
6. Amortization: There must be level amortization.
7. Length of term: Loans must be repayable within five years, except where the loan is used to acquire the principal residence of the participant.
8. Frequency of payments: Payments must be made in quarterly installments or at more frequent intervals (e.g., monthly, weekly, etc.).

Remember, however, that 401(k) plans are intended for retirement saving. Typically, borrowing from the account should not be the first option to examine. This is a VERY technical area of the law. Whether you are an employer or an employee, obtain expert assistance from your financial planner or contact a KOS professional at 847.580.4100.

One possible solution is to include a list of Web sites and passwords in the letter of instructions. A similar approach is to provide a separate listing of the passwords to one or more individuals whom you trust implicitly. It may take you about 15 minutes to a half an hour, or perhaps even longer, to collect all the required information and to record it.

A simpler version of this protection is to write down the names of Web sites and passwords on paper and keep it somewhere near your main computer. Then you can let family members know where to locate the information. But it usually does not make sense to store the password list in a safe deposit box, especially because passwords may be changed often.

The online account information might also be collected by a personal financial planner. The planner can store the sensitive data in a secure electronic vault. Obviously, you would pursue this possibility only if you have developed a strong relationship with a particular planner.

Alternatively, there are several firms that can provide “digital” estate-planning services. If you opt to use one of these firms, make sure that it requires a secure connection. Caveat: Critics contend that the risks of using an outside service outweigh the benefits. In effect, you are releasing the sensitive information to a multitude of people, and it may be accessed through illegal hacking.

What happens if someone dies suddenly? The rules for accessing the content on a site vary widely. For example, Yahoo users have agreed to a “non-transferability clause.” If representatives of a deceased person contact Yahoo, it may close the account. Facebook makes its accounts private so that only confirmed friends can see the profile, leaving a space for users to leave posts in memory, but prohibiting anyone else from logging in to that account. In contrast, Google may permit an authorized representative of a deceased user to access that person’s e-mail, although proof of death is required. Twitter may grant an executor an archive of public tweets.

Undoubtedly, there are risks associated with creating a password list, no matter what avenue you take. Seek guidance from your KOS advisers or IT professionals at 847.580.4100.

It seems lately that more people are open to the idea of donating their used cars to charity.  To most of us it seems like a no brainer: donate your car, avoid the time and effort required to sell it, feel good about yourself for giving back to your community and reap the benefits of a charitable tax deduction.  While this concept seems simple, there are some things you might want to consider before handing over your keys to a charity you might know little about.

First, verify that you are donating the vehicle to a qualified organization.  The most common types of qualified organizations are section 501(c)(3) charities.  Other types of qualifying organizations can be found in publication 526 on the IRS website.

Second, be sure you are both eligible to deduct charitable contributions and that your contributions will not be subject to any limitations.  For example, your total charitable contributions deduction, generally, cannot exceed 50% of your adjusted gross income. 

Finally, in order to avoid any unpleasant surprises, have a good understanding of the amount you will be able to deduct as a result of your donation.

How Much Will I Be Able to Deduct?
Usually the amount you may deduct for a vehicle contribution depends upon what the charity does with the vehicle.  Most charities sell the vehicles that are donated.  If the charity sells the vehicle, your deduction is generally limited to the gross proceeds of the sale.  This can result in a lower deduction than one may think because it is not always in the charities best interest to hold the vehicle for a long period of time waiting for the top dollar. 

There are a number of exceptions that would allow an individual to deduct an amount other than the gross proceeds received by the charity.  An individual may be able to deduct the fair market value of the vehicle in the following situations:

• The organization intends to make significant use of the vehicle (i.e. transporting food for a food pantry.)
• The organization intends to make a “material improvement” to the vehicle before selling it.
• The organization intends to give the vehicle to a needy individual at a price significantly below fair market value.
• The vehicle was sold for $500 or less.

If any of the above situations apply, the written acknowledgement provided by the charity (see below) must indicate, in detail, as such.

What Should I Expect to Receive From the Organization?
Regardless of the amount of your deduction, it is important that you obtain a written acknowledgment from the charity with the following information:

• Your name and taxpayer identification number
• The vehicle identification number
• The date of the contribution
• A description and good faith estimate of any goods or services, if any, that the charity provided in return for the donation

If the amount of your deduction exceeds $500, the following additional information must be included in the written acknowledgement:

• A statement certifying that the vehicle was sold in an arm’s length transaction
• The date the vehicle was sold
• The gross proceeds of the sale
• Any reasons for claiming the fair market value of the vehicle rather than the gross proceeds from the sale of the vehicle.

Non-Cash Charitable Contributions Over $5,000
If the deduction you are claiming is greater than $5,000, the charity must provide Section B of Form 8283, which must include the signature of an authorized official of the charity.   In addition, if the deduction is over $5,000 and not limited to the gross proceeds from the sale of your vehicle (meaning you are deducting the fair market value), you must get a written appraisal of your vehicle.

The bottom line is there are many factors to consider when determining the pros and cons of donating your vehicle.  If you think you might be interested in donating a vehicle in the future, feel free to contact KOS at 847.580.4100 and we would be happy to assist you in the decision making process.

Although your overall fate is still unknown, you can improve the likelihood of a happy retirement by assessing your situation and reacting accordingly. Here are several suggestions to follow:

• Figure out how much income you will need in retirement. Start with the amount of income you need right now. Although estimates of your exact requirements will vary widely, you can assume that you will need an amount close to your current income, minus some obvious amounts such as the monthly mortgage payment if your home is or will be paid off and college expenses if the children have already graduated. Caveat: While you may not have to save extensively for retirement anymore, retirement saving cannot end completely.
• Figure out how much you will receive from outside sources. This includes amounts you can expect to receive from Social Security and qualified retirement plans and IRAs if you have been able to set aside funds in these vehicles. Of course, Social Security remains a political “hot potato,” and its future remains somewhat uncertain for Baby Boomers and subsequent generations. Nevertheless, you can obtain projections under current law by accessing the online calculator provided by the Social Security Administration (SSA). The SSA says the average retired single worker received $14,000 a year in 2011; $23,000 for a couple.
• Figure out how much income you will need from your investments. Once you have figured what you will need and what you will receive, you can determine the amount needed from investments to pick up the slack. But understand that this income will have to sustain you through a hopefully lengthy retirement. As life expectancies continue to increase due to medical advances, the projected needs of investors increase, too. If you are retiring this year, you may need to plan for an additional 25 or 30 years of living—maybe more.
• Figure out how to invest. There are a wide variety of investment options at your disposal. Of course, you must balance the potential rewards against your tolerance for risk. Everyone’s situation is different, so develop a plan of action with the assistance of your investment advisers.

If you find that you are significantly short of meeting your goals, at least there is some comfort in knowing that you are not alone. Among workers who are older than 45, only 54% have managed to save $25,000 or more, despite several periods of robust growth in the equities markets.

In a pinch, you may consider scaling back, moving to a less expensive location and delaying retirement for a year or two. Doing so gives you longer to save, provides a longer time for savings to grow, reduces the time you will be living on a fixed income and increases your Social Security benefits.

Finally, know that the trail to retirement does not have to be a lonely one. Call a KOS professional at 847.580.4100 to show you the way.

There are several ways a qualified appraiser can assess the key aspects of a business to arrive at a final figure. As part of the process, the appraiser will provide a valuation report, explaining in detail the specific methodology used for the valuation. This will be important when the buyer conducts its own due diligence. The chances of consummating a deal will increase if the buyer knows that he or she is dealing with a professional.

However, this is not the be-all and end-all. The appraisal should be viewed as just the starting point for negotiations. For instance, one buyer may have strong reasons for acquiring your company and could be willing to pay more than the amounts offered by other interested parties. Conversely, another buyer might be looking to merely enhance an existing operation and may not be willing to pay for the company’s ongoing concern value. It is important to analyze the reasons behind the purchase before you establish a price.

Some of the key aspects that should be considered in this process are:

• both the primary and secondary factors influencing buyers
• different ways to add value before the sale occurs
• necessary adjustments to financial statements (especially those that portray your company in a favorable light)
• the methods and formulas used to put a price tag on a business

Other adjustments may be required if you are planning to sell only part of the business. Of course, your plans may change.

After the professional appraiser has established an approximate value for the business, you must use your negotiating skills to come to an agreement. Depending on the situation, you may be able to realize the full value of the business, or you might be willing to accept a slightly lower price if you are looking to sell quickly. Obtain guidance from your business broker concerning the going rate for a business such as yours.

One option is not to set a listing price at all. Instead, you might contact potential buyers and provide them with information about your business. Then you solicit bids from this select group and accept the highest bid. This process may help you realize a competitive price for your business in a relatively short period of time.

The best approach is to use the services of a professional adviser every step of the way. This can help ensure that you have established a reasonable and accurate value for your business in today’s marketplace. Alternatively, you may determine that it is not a good time to sell.  If you have questions, contact a KOS professional at 847.580.4100.

Credit cards: Essentially, a credit card allows you to use the issuer’s money to make a purchase. Then you pay back the issuer later. If you pay the bill within the billing period—usually 15 to 45 days—there is usually no interest charge. However, if you do not make payments in a timely fashion, you must pay interest at the established rate, on top of the regular charge for purchases.

Used responsibly, credit cards offer several advantages. They help build a strong credit rating when you pay your bills on time. Issuers often offer rewards for gifts, discounts and the like. In addition, you have some protection if someone steals your card or information. If you spot a fraudulent charge, you can call the card issuer, dispute the charge and have the amount removed from your balance. Conversely, if your debit card information is stolen, it can take weeks or even months to investigate the matter. In the meantime, you are out the funds.

Debit cards: A debit card is linked to your bank account, so your outlays are automatically subtracted from your account. This is a convenient alternative to paying cash, especially for online shopping. A debit card can also help you with your monthly budget. If you use the card regularly, your monthly statement can provide a valuable overview of expenses and payments. Unlike a credit card, your bank balance is reduced with each debit card transaction, so you are less likely to overspend—at least in theory.

Debit cards generally offer less protection than credit cards. Once you have used a debit card, the retailer has your money, so you do not have any leverage. For disputed charges, there is no guarantee you will ever get your money back. Comparison: When you pay for goods or services with a credit card and you are not satisfied with the purchase, the card issuer can legally withhold payment from the retailer until the matter is resolved.

If you are more inclined to use a credit card and expect to carry a balance, you may prefer a “plain-vanilla” card with no annual fee and a low annual interest rate. The interest you would have to pay on other cards with incentives will more than likely offset the available perks. Information comparing various credit cards can easily be found via the Internet. You can also apply for cards online, but limit your applications to one or two, to avoid damages to your credit rating.  Finally, be aware that card issuers can raise your interest rate, but there are restrictions under recent law changes.

So which type of card should you choose—credit or debit? Many consumers keep both in their wallets or purses. No matter which one you use, be careful not to spend more than you can legitimately afford.

The AMT is a parallel tax system to your regular tax liability. After you have figured out your regular taxable income, AMT liability is calculated through four basic steps:

1. First, you must add certain tax preference items to your taxable income and make other technical adjustments required by law.
2. Then you subtract the special exemption amount on your tax return based on your filing status.
3. Next, apply the AMT rate to the net amount. The applicable rate is 26% on the first $175,000 of AMT income and 28% for amounts above $175,000.
4. Finally, compare your AMT liability with your regular tax liability. If the AMT is higher, you are required to pay the excess in addition to your regular tax liability.

The list of preferences and technical adjustments is too long for the space allotted here. In brief, you are required to add back certain itemized deductions and personal exemptions. That’s one reason why large numbers of taxpayers have become unsuspecting victims of the AMT. For instance, taxpayers who report high state income tax deductions are particularly vulnerable. 

Ever since the monumental Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was passed in 2001, Congress has gradually increased the exemption amounts to account for inflation. But these AMT “patches” have been relatively small. The latest increase is effective only for the 2011 tax year. Unless subsequent legislation is enacted, the exemption amounts are scheduled to return to the levels they were before EGTRRA.

For 2011 returns, the exemption amount for joint filers is $74,450  (up from $72,450 for 2010). If you are a single filer, the exemption amount is $48,450 (up from $47,450). Finally, for married couples filing separately, it is $37,225 (up from $36,225).

However, the benefit of these exemption amounts is reduced for certain high-income taxpayers. Each exemption is reduced by 25 cents for each dollar of AMT income over $150,000 for joint filers; $112,500 for single filers and heads of household; and $75,000 for married couples filing separately. Despite the regular increases in exemption amounts, these figures have not been adjusted in recent years.

This is an extremely complex area of the tax law. It is recommended that you seek assistance from a KOS professional tax adviser by calling 847.580.4100.