A common strategy for minimizing gift taxes on estates that are larger then the Federal Gift Tax Exclusion (Currently two million dollars) is for the person with the estate to gift some of the estate to their heirs before the person(s) dies.

This year you (And your spouse if your are married) can gift up to $12,000 to a person without incurring Federal Gift taxes.

So lets say you own an estate that is worth 3 million dollars.  This estate could include real estate, a business, cash or cash equivalents, farm land, stocks, bonds, mutual funds, etc.  Lets say you are married and have two children who are not married.  You and your spouse could decide to give each of your children $12,000 without incurring and Federal Gift Taxes.

Real Estate prices and stock prices are currently extremely low.  Gifts are valued on the date of transfer.  So you may want to consider gifting property that is depressed in value.

Mike Sylvester 

Tomorrow is October 15th, 2008.

The tax returns of individual taxpayers who “extended” their tax returns are due tomorrow.  They must be postdated as of October 15th!

Mike Sylvester, CPA/ABV “accredited in business valuation”

This is the second post in a ten part series on the excessive debt our nation has.

The first economic problem I want to discuss is the amount of money the Federal Government owes on a cash basis.

The media and the Federal government like to talk about the National Debt on a cash basis rather than an accrual basis.  Cash basis accounting tracks the actual money spent and does not take into account future liabilities.  Small businesses often use the cash basis of accounting; however, the Federal Government forces most larger businesses to use the accrual basis of accounting. 

On a cash basis of accounting the current Federal debt is just over 10.2 trillion dollars.  You can see the exact Federal debt at the below link:

http://www.brillig.com/debt_clock/

The Congress recently raised the National debt ceiling to 11.3 trillion dollars; they expect the National Debt to increase significantly due to the recent Wall Street “bailout” package.

What this means is that the Federal Government currently owes just over 10.2 trillion dollars and has financed this debt with US Treasury notes.  The US Government has sold these Treasury notes and we will pay these notes back with interest. 

These numbers are so large that some comparisons are in order.  If each person living in the US were required to pay an equal share of the Federal debt on a cash basis each of us would be forced to pay almost $33,500.  This would have to be paid by every man, woman, child, convicted felon, etc.  If each American had $33,500 and immediately paid that $33,500 to the Federal Government than the Federal Debt on a cash basis would be zero.  (Obviously this will not happen, I am just trying to illustrate the size of the problem.)   

Another way to pay off the current Federal Debt would be for the Federal Government to immediately seize every American home, sell it, and use the proceeds to pay off the Federal debt.  Numbers for 2008 are not yet available; so I will use the numbers from 2007; however, I think we all realize that these numbers are too high given the real estate market of 2008.  Last year the total value of all of the houses in the US was just over 20 trillion dollars.  Last year Americans had slightly less than 48% equity in their house (Meaning they on average owed 52% to the bank on mortgages).  So in 2007 if the Government seized every home in America and paid off the bank loans on each house and if they actually could sell all of these houses for last years fair market value without incurring any expenses they would raise 9.6 trillion dollars; however, all home owners would lose their house and the equity they had in their house.  This would pay off 94% of the Federal debt on a cash basis.  (Obviously this will not happen, I am just trying to illustrate the size of the problem.)   

Another way to pay off the Federal debt would be to cut Federal spending in half and use this money to pay off the Federal debt.  At current tax rates we could pay off the Federal debt in a little over 7 years if the Country did not descend into absolute chaos.  What this means is that if we fired ½ of all the Federal employees, cancelled ½ of the current Federal contracts, immediately cut all Social Security payments, welfare payments, and Medicare payments in half, etc. we would be able to pay off the Federal Debt on a cash basis in 7 years.  Of course we would have ½ of our current military, ½ the number of embassies, ½ the National Parks, etc.  (Obviously this will not happen, I am just trying to illustrate the size of the problem.)   

None of the three examples cited above will ever happen; however, they should illustrate the size of the problem that we have with the Federal Debt on a cash basis.  The Federal Debt is massive on a cash basis and can only be handled responsibly in two ways.  First we can cut Federal spending.  Second we can increase taxes.  These are the only two options available to us unless the Federal Government sells the lands it owns and is responsible for (National Parks, etc) and/or military assets to other nations.  The United States has 1.6 trillion in assets on its balance sheet in addition to 650 million acres of Stewardship Land that it owns.  If the Stewardship Land were sold at $10,000 per acre that would add another 6.5 trillion in assets for a total of 8.1 trillion dollars in assets.

The only way to handle the Federal Debt on a cash basis in a fiscally responsible way is to cut spending significantly while at the same time increasing taxes as much as possible without effecting future economic growth. 

Neither major political Party advocates this stance.

The Republicans advocate increased Federal spending while maintaining tax rates at current levels or lowering tax rates further.

The Democrats advocate increased Federal spending while increasing current tax rates on the wealthy while further subsidizing the poor. 

The first option is to decrease Federal spending.  I personally think we could easily cut Federal spending by 20%; however, neither major political Party has been willing to cut overall Federal spending in a long, long time.  I decided to analyze Federal spending over the last 50 years.  Over the last 50 years overall Federal spending decreased one time.  Federal spending in 1964 was 118.528 billion dollars and in 1965 it decreased to 118.228 billion dollars.  So from 1964 to 1965 Federal spending decreased by three hundred million dollars or by one quarter of one percent.  The other 49 years Federal spending increased each and every year.  In fact, over the last 50 years Federal spending has increased by an average of 6.93% per year. 

Based on the current political rhetoric from the Democrats and Republicans there is no chance of overall Federal spending decreasing in the near future; if at all.

The second option is to increase Federal revenues.  This can be done either by growing the economy or by increasing tax rates (without effecting the growth in the economy).  Over the last 50 years Federal revenues decreased six times.  Federal revenues decreased from 1959 – 1960, 1970 – 1971, 1982 – 1983, 2000 – 2001, 2001 – 2002, and 2002 – 2003.  Federal revenues increased each of the other 44 years.  On average Federal revenues increased by 6.49% per year.  Federal revenues are determined by Federal tax policy and the overall size of the tax base (economy). 

Over the past 50 years Federal revenues have overall increased by 6.49% per year and the Federal debt has skyrocketed over that same period due to the interest payments necessary to service the debt and out of control Federal spending.  I think that Federal revenues will likely remain steady or more likely slightly drop over the next couple of years due to the coming recession.  I am certain that tax rates are going to increase over the long term; however, taxes can only be raised so far before the tax increase will negatively effect the overall growth of the economy. 

Based on the current political rhetoric I think it is likely that overall tax rates will increase somewhat; however, I do not think they will increase enough to affect National Debt on a cash basis by a material amount since if taxes are increased by too much the economy will not grow as fast as it otherwise would.  I feel that it is possible that increasing taxes could slightly affect the National Debt in a positive way if done correctly.

After reading this post you should realize that there is only one possible way that the US Government will be able to handle its future financial obligations and that is to print more money.  By printing more money the value of the dollar will fall dramatically and inflation will rise dramatically.

I hope that you are frightened after reading this post.

Please realize that my next several posts will illustrate several factors that make our financial situation even worse than this post illustrates.

The next post will discuss the Federal debt on an accrual basis.  Please realize that on an accrual basis the Federal debt is almost six times as high as the Federal debt on a cash basis.

Mike Sylvester, CPA/ABV “accredited in business valuation”

This is the first post in a ten part series I have been working on since July 22nd, 2008. 

The events of the last three weeks have forced me to make some changes to this ten part series.

This is a ten part post that will focus on the largest problem facing this country.  It is a problem that you have heard little or nothing about during the Presidential and Congressional elections; however, it is the largest threat to our children and grand children. 

The United States has incurred a tremendous amount of debt at the Federal, state, and local government levels while at the same time American consumers are racking up larger and larger amounts of debt.  This does not bode well for our economy in the long term. 

I have started to shift my investments away from domestic stocks and even more weighted towards international stocks.  Now do not get me wrong, when the United States economy plunges (And plunge it will at some point) the rest of the world will plummet as well; however, I want to diversify my investments as much as I can.  I strongly feel that we are headed towards a depression that will rival the “Great Depression.”  I feel that this depression will most likely effect the entire world.  I feel this economic plunge will likely come in the next thirty years.  I think there is a good chance that it will be during my lifetime; however, I am certain my children will have to deal with it. 

The economic problems we have are as follows

1. The amount of money the Federal Government owes on a cash basis.  (Post two)

2. The amount of money the Federal Government owes on an accrual basis.  (Post three)

3.  The amount of money various state governments, city governments, school districts, etc. owe or have committed to spending.  (Post four)

4. Interest Rates.  (Post five)

5. The deteriorating financial condition of the “average” American household.  Our culture has changed from a “Layaway culture” to a “charge it now” culture.  (Post six)

6. The rising US Trade deficit.  (Post seven)

7.  The plunge in value of the dollar.  (Post eight)

8.  Both of our major political parties have turned a “blind” eye to the problem and are more worried about being re-elected then worrying about future generations.  (Post nine)

9. What you can do to prepare your family for the consequences of America’s growing debt situation.  (Post ten)

These problems are only getting worse and there is no doubt in my mind that we are heading towards a crippling economic recession at some point in the next thirty years.

Mike Sylvester

The Federal Reserve cut its “Federal Funds Rate” from 2% to 1.5% in another effort to ease the current “financial crisis.”

This move should help many people with adjustable interest rate loans.

This move should lower interest rates on interest bearing accounts which will mean that those with interest bearing accounts will be paid less interest.

Mike Sylvester

There is no doubt that mark to market accounting rules have contributed to the current “banking crisis.”

In simplest terms mark to market accounting rules cause the banks to have to adjust their assets once per quarter to the fair market value.

With foreclosures on the rise and real estate values decreasing nationwide this has forced the holders of these mortgages to “write-down” their assets.  When the asset is “written-down” the asset account is credited (Which lowers its value) and an expense account is debited.  This means the company will have to acknowledge the loss in its current profit and loss statement.

Due to the recent “housing crisis” the Securities and Exchange Commission has issued a statement clarifying some of the Fair Value Accounting rules.

One of the items that has made the current crisis worse is the fact that no one is currently purchasing “risky” mortgage assets due to the “credit crisis.”  Each company is responsible for writing their assets down to fair market value each quarter.  This is difficult in many circumstances since the mortgage holders have bundled these “risky assets” into large and complicated bundles involving complicated derivatives, mortgages of many types and terms, mortgages in differing geographic locations, etc. 

Merrill Lynch recently sold a package of “risky mortgage assets” for 22 cents on the dollar.  Rival Citigroup currently has their “risky mortgage assets” listed on their books for 53 cents on the dollar.   

With this “clarification” the SEC is basically allowing those holding assets that cannot be easily sold (Currently this includes “risky mortgage assets”) to value the assets at other then the “fire sale” price.  Their argument is that the “fire sale” price is not indicative of the actual fair value of the assets.

Mike Sylvester, CPA/ABV “accredited in business valuation”

I have had a couple of clients call me and ask about the tax treatment of losses from the sale of stocks and mutual funds this week and so I decided to put up a brief post on the topic.

In simple terms here is how stock losses from the sale of stocks and/or mutual funds are handled on your individual tax return:

First of all gains and losses from the actual sale of stocks and/or mutual funds are considered capital gains or capital losses. 

For each transaction, you have to calculate the gain or loss for that specific transaction.  These individual gains or losses are combined and result in a total net gain or net loss. 

If the loss is a net loss then you can deduct a maximum of $3000 from your taxable income on your individual tax return each year.  If your loss is greater then $3000 then this loss is carried forward to your next tax year.

The rules governing gains and losses are complicated and this post just discusses the topic in general terms!

Mike Sylvester, CPA/ABV “accredited in business valuation”   

We are happy to announce that we have added another CPA to our practice.  Brent joined us on August 18t, 2008.

Brent previously worked as an auditor for the Fort Wayne office of Ernst and Young.

Brent will be leading our Assurance Services division and we are extremely glad Brent decided to join our firm.

Brent is an army veteran and served in the Middle East while a member of the Indiana National Guard

Mike Sylvester

One of the more common reasons to get a business valuation is when business owners decide to buy or sell their shares to each other.  This can happen in many circumstances including:

• Death of one shareholder
• Divorce
• Irreconcilable differences
• One shareholder moves out of state
• Financial difficulties
• Retirement

There are many reasons that one shareholder may decide to buy the shares of another shareholder.  This is often a contentious process unless the shareholders have a written agreement stating how the business is to be valued in the event of a sale.  The majority of businesses do not have a written agreement that spells out how the business is to be valued in the event of a sale.

Unfortunately many shareholders end up in court due to a “disagreement” as to the fair market value of their business. 

When this occurs each shareholder will hire an attorney and often a business valuator.  This ends up with the shareholders incurring large fees.

One way that this can often be avoided is for both parties to mutually select a neutral business valuator and agree to use this persons opinion.

If you are in a shareholder dispute you may want to consider using just one “impartial” business valuator rather then having each shareholder hire their own professional and let them “dual” in court.

Mike Sylvester, CPA/ABV “accredited in business valuation”

Dave Ramsey is a Tennessee based financial planner.  He focuses on helping people make better financial decisions and he focuses on helping people get out of debt.

Dave Ramsey has a great television show on the Fox Business Channel and he is on many radio stations including one in Fort Wayne, Indiana.

If you are interested in learning more about why you should get out of debt and how you should get out of debt please visit his website at:

http://www.daveramsey.com/shop/index.cfm

Mike Sylvester, CPA/ABV “Accredited in Business Valuation”