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.

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 SaleLong-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 SaleFiling 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 TFiling 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 CostTax 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The 10% investment tax credit was repealed in 2004 (by American Jobs Creation Act of 2004)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 CostNew tax write-off rules

The new rules are:

Deduct the first $10,000 costExcess 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 TimberlandEstablishing 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 LossTax 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 LossTwo 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 LossNew 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 $397,065Interests $363,483

$672,788Total Taxes: $207,307Refund: $38,534

The Rich Learned to Have Money Work for Them

Vice President Richard Cheney 2004 Tax Return

Salary $425,584Dividend $326,729Business Income $533,197Capital Gains: $222,463Rental: $203,976

$1,734,373Total Taxes: $393,518Owe: $102,663

The Rich Learned to Have Money Work for Them

Teresa Heinz 2003 Tax Return

Salary $0Tax-Exempt Interests $2,781,791Dividends $2,216,280

Taxable Income $2,023,596

Total Taxes: $628,401Refund: $247,933

Cost Share Payment ReceivedTwo Options

Generally the payment must be included in income

The expense may be deducted as part of the forest management costs

Cost Share Payment ReceivedQualified Program for Income

Exclusions

However, qualified cost share payment may be excluded from income (Sec. 126)

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 ReceivedExclusion 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 ReceivedExclusion 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 ReceivedExclusion 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

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

Reference Materials

Rising Tax Code Complexity

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Words

GettysburgAddress

Declaration ofIndependence

Constitution

Bible

Tax Code andRegulations