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Tax Tips

The Taxing Problems Caused By Incentive Stock Options

Many large public companies, technology businesses and startups have lured workers with incentive stock options (ISOs). If you have ISOs after the recent Internet fallout, you might wonder about the tax bite. When exercising ISOs, taxpayers may trigger the alternative minimum tax (AMT).

But if you carefully time when you sell the stock from the exercised ISOs, the IRS may treat the gain as long term with a tax rate of only 20%. To get this rate, you'll need to hold the stock for the later of one year after exercising the ISO and for two years after you receive the option.

What if the stock drops? Consider selling it before year end. Otherwise, you'll still have to report a gain from exercising the ISO on your AMT even if you never collect that gain. Selling will generate tax at your regular income rate, but you'll reduce your AMT.

Stipulate Gilt-Giving Abilities For Powers of Attorney

When you give someone - whether a family member or close friend - power of attorney, you must specify in a document his or her decision-making authority. The document should explicitly outline this persons power to decide, for example, your medical treatment and disposition of your assets.

The power can't be implied, such as by nodding your head, the Court of Federal Claims ruled in an estate case. The ruling resulted after a legally blind woman gave her nephew power of attorney. To minimize estate taxes, the nephew gave $10,000 apiece to 38 people. When the nephew sought a federal estate tax refund, the IRS denied his request because he lacked the power of attorney to make gifts. The nephew said he gained such power by having his aunt nod her head to approve each person's gift. Because the court found a nod wasn't an expressly stated approval, and the nephew didn't have full power of attorney, the gifts were included in the taxable estate.

Luxury Auto Tax Phase Out

This year, luxury auto buyers will see some tax relief from the business deduction. The federal luxury excise tax for cars with purchase prices exceeding $38,000 will be one percentage point less than last year's, currently 4%. And the tax will be phased out completely after Dec. 31, 2002. A lesser-known fact: Heavier, less-energy efficient vehicles such as some sport utility vehicles aren't taxed as much under the limited luxury automobile rules.

The Ins and Outs of Family Limited Partnership Contributions

In a recent Tax Court case, the court held that a father's initial contributions to newly formed family limited partnerships (FLPs) weren't taxable gifts. Why? Because all of the taxpayer's contributions were credited to his capital account, and the value of the other partners interests wasn't improved by the contribution. So the father set up two FLPs: He contributed certain assets and his children contributed real property in return for their interests in the partnerships. The Tax Court found no gift despite the father receiving lesser value partnership interests in return for his property transfer. In this case, the court refused to apply case law that had found gift treatment for contributions partially allocated to noncontributing partners.