Georgia Film Tax Credit Part 2

Last week I discussed the GA film tax credit and how you can buy these credits at a discount. There was a private letter ruling 200951024 by the IRS on 12/18/2009 that indicated that the discount amount has to be recognized as a capital gain on your tax return. For example, in my situation I received a credit of $1,130 on my 2012 GA return at a cost of $1,000 paid in 2013. On my 2013 tax return,  I have to show the $130 as a short term capital gain.

Georgia Film Tax Credit

In 2008, Georgia passed a law authorizing film production companies the right to credits against their tax liability or to sell those credits to any GA taxpayer in order to induce them to film in GA. There is a market for the credits which sell at a discount and are sold to the public by various private companies. I did it myself on my 2012 tax return receiving a $1,130 credit for $1,000. There is no maximum on the amount of credits you can buy. All you have to do on your tax return is list the company you purchased the credit from, the amount of the credit, the Federal ID number, and use code 122 on page 5 of GA form 500. Tax credits can be carried forward for 5 years if you can't use all of them in one year.

What a Will Doesn't Do

A will does many good things like naming a guardian for minors and naming an executor for your estate along with telling who you want your assets to go to. If you die without a will, then the distribution of your probate assets is determined by the state which may not be what you want. In general probate assets are assets you hold in your own name rather than jointly and where there are no designated beneficiaries like  a 401k plan. To transfer these assets to another person they have to go through a probate which involves  a court process. A will cannot govern the transfer of non probate assets like retirement plans which is determined by the named beneficiary. That is why it is so important to review your beneficiaries after changes in your life like divorce.  A will cannot disinherit a surviving spouse but can disinherit adult children, and finally you cannot avoid probate by having a will.

History of the US Income Tax

Our modern income tax goes back 100 years to the ratification of the 16th amendment on February 3, 1913 by 3/4s of the states. The amendment was passed by Congress on July 2, 1909 during the height of the progressive movement. The first form 1040 for 1913 was due March 1, 1914 for the period March 1 to December 31 of the previous year. The highest rate on taxable income was 6% on amounts over $500,000. For the first $50,000 of taxable income, the rate was 1%. Single filers had an exemption of $3,000 and joint filers had an exemption of $4,000 so probably 90% of income earners in the US paid no income tax at all. What amazes me is that the income tax was really just on the very wealthy if you factor in inflation and also at a very low rate as compared to today. The exemption of $4,000 in 2013 dollars would be $94,400 (2259.6% rate of inflation). The 1% rate applied to the first $1,180,000 in taxable income after converting $50,000 to today's dollars which means that 99.99% of taxpayers paid at the top rate of 1%  in 1913. I say let's go back to the 1913 rates and exemptions.

Master Limited Partnerships Held in Retirement Accounts

What do you do if you get a K-1 from a master limited partnership (MLP) and the owner is your IRA or another retirement account? Your IRA would even have its own Federal ID #. The correct thing to do is to provide this form to the plan custodian as your IRA owes any potential  tax and not you personally. Any business income over $1,000 from a MLP is subject to unrelated business tax of 35% even if owned by a tax exempt entity such as your IRA. Passive investment income such as dividends and interest earned by a MLP are not subject to the unrelated business tax.

Medical Deductions

Certain expenses such as dancing lessons, swimming lessons, health club dues, spa dues, vitamins, diaper service, teeth whitening, marijuana, nonprescription nicotine and gum, and food purchased per  a weight loss program are generally not deductible even if recommended by a doctor. To be deductible, expenses must be for the diagnosis, cure, mitigation, treatment or prevention of disease or affecting any structure or function of the body. Expenses to improve general health are not deductible.

Document Your Tax Deductions

If you are audited by the IRS, it is up to you to prove that you had a valid deduction. How do you do that? You need to keep invoices and bills that you pay. I attach the voucher part of my checks to the paid invoice which shows the date of the check and check number. If you don't have computer checks, write the check number and date on the invoice and keep them in a folder for the current year and at least the prior 3 years. Keep all of your business credit card statements that detail what you were charged. Write on the statement the names and relationships of anyone you paid a meal for. Keep all of your bank statements as the charges from debit cards can document business expenses. Pay the bank to provide check images each month if possible. It is worth the extra money. Going back and trying to get check images from banks several years old is very difficult and expensive and sometimes impossible. Also don't pay tax deductible bills with cash. Use checks.