Friday, May 31, 2013

Obamacares $2,500 annual cap on flexible spending accounts will amount to a tax on older and sicker Americans.


The central provisions of the Affordable Care Act require younger and healthier Americans to buy insurance policies that will, in essence, subsidize the healthcare of older and sicker Americans. But one of Obamacare's hidden taxes — a new limit on contributions to health flexible spending accounts, or FSAs — will hit older and chronically ill individuals hardest.

Starting this year, the healthcare law imposes a $2,500 annual cap on an individual's contribution to an FSA that is part of an employer's "cafeteria" benefits plan. Such contributions, diverted directly from one's paycheck, are not subject to federal income and payroll taxes. The money in an FSA can then be used to pay for qualified medical expenses such as deductibles, co-insurance and co-payments, as well as services not covered by insurance.

Before Obamacare, there were no FSA contribution limits for workers under federal tax law. Employers set their own annual limits, and many chose amounts well above $2,500. The federal government, as one example, allowed FSA contributions of up to $5,000 a year.

This implicit "tax" on wage income that now won't be diverted pretax into FSAs is expected to raise $1.5 billion this year, and a total of $13 billion between 2013 and 2019, according to the Joint Committee on Taxation.

So when President Obama offered his many variations on the assertion that if you have insurance from your job, nothing will change — that's not actually true. The FSA limit is just one of the ways the law extracts billions from already insured workers to pay for an expansion of Medicaid and subsidies for policies to be sold on health insurance exchanges.

The trick, of course, was to raise this tax revenue without aggravating more political backlash against the law when it passed in 2010. That meant making many such changes, and then rolling them out over multiple years to obscure the overall impact of higher taxes. Among them: an additional 0.9% payroll tax on individual salaries above $200,000, new taxes of 3.8% on investment income in similar higher-income households, and a 2.3% excise tax on the sale price of medical devices, all of which kicked in this year. The individual mandate to purchase federally approved health insurance arrives next year.

But this revenue enhancement strategy hit particularly vulnerable targets with this FSA cap.

In a 2012 study published in Forum for Health Economics & Policy James Cardon, Mark Showalter and Joel Moore examined patterns of FSA usage by income and health status from 1998 to 2008. They found that of the estimated 13.9 million households nationwide with an FSA, 35% will be affected by the new FSA cap, with an average tax increase of $101 in 2013. By 2020, an estimated 41% of FSA households will hit the FSA cap because medical costs will rise faster than the inflation-indexed limit on contributions.

Further, this tax burden will be highly skewed. The study found that among FSA-eligible households from 2004 to 2008, those who rank among the top 10% of contributors would have paid 66% of the additional tax if the cap were in place. And which households are most likely to set aside thousands a year for out-of-pocket health expenses? The sick. In fact, nearly two-thirds of these households included individuals with three or more chronic health conditions.

FSAs tend to be used for large and predictable healthcare expenditures such as prescription drugs to keep a chronic condition in check. Employees carefully estimate how much they should set aside because they forfeit the funds they don't use by the end of a health plan year. In other words, few individuals needlessly pad their FSAs.

Consider households that put more than $2,500 in an FSA three or more times in a five-year period. They tended to be older (average age 48) than those that never or rarely surpassed that amount. Also, 65% of such households were "unhealthy" (with three or more chronic conditions), while 35% of households that never used an FSA were "unhealthy."

Of course, the third of taxpayers who itemize their deductions might still be able to deduct a portion of their medical expenses without FSAs. About 10.4 million filers did so in 2010. But those deductions do not reduce payroll taxes, and they only apply to very large out-of-pocket costs — expenses exceeding 10% of a taxpayer's adjusted gross income. That's up from 7.5%, thanks to the healthcare law.

FSA caps reflect the bias throughout Obamacare for more comprehensive (and therefore costly) insurance coverage. Yet it was the flexibility of FSAs, which could fill certain gaps in coverage, that allowed employees to choose the more affordable plans that otherwise might appeal only to those with low health risks. This was good for employers too because they could get both "healthy" and "unhealthy" enrollees into one insurance pool, increasing the cost-sharing and risk-sharing across more people.

In March, the Senate approved an amendment to its budget to repeal the $2,500 FSA cap, but because a final joint House-Senate budget resolution for the next fiscal year remains extremely unlikely, we're probably stuck with this cap for now. Still, substantial support exists on Capitol Hill to remove this tax burden, which poses a danger to the health of chronically ill Americans. Congress should give it an expiration date before it produces more unintended harm.

Thursday, May 30, 2013

Roth IRAs and the New Tax Law


Tax planning is less of a guessing game these days with the tax law settled, at least until Congress decides to push some kind of tax reform.

In the wake of the American Taxpayer Relief Act of 2012, we need to revise and rethink some strategies about Roth IRAs, especially about converting traditional IRAs to Roth IRAs.

There are a number of factors to consider when deciding whether or not to convert a traditional IRA to a Roth IRA. I’ve discussed these in detail in the past. Detailed discussions also are in my books, Personal Finance for Seniors for Dummies and The New Rules of Retirement. Conversions have a trade-off. You pay income taxes on the converted amount today. In return, future distributions of compounded income and gains (after a five-year waiting period) are tax free.

Important factors in deciding whether to convert an IRA include the difference between today’s tax rates and future rates; how long the IRA will compound before you take distributions; whether you can use cash from outside the IRA to pay the conversion taxes; the expected investment return from the converted IRA; and whether in the conversion year you’ll be pushed into a higher tax bracket, have itemized deductions reduced, or incur other costs.

The American Taxpayer Relief Act of 2012 didn’t increase taxes on as many people as initially projected. But higher-income taxpayers saw their top rate increase from 35% to 39.6%. In addition, there is the new 3.8% tax on investment income for joint filers with adjusted gross income above $250,000. The law also resurrected the phase out of personal exemptions and the reduction of itemized deductions for higher income taxpayers.

There was a rush to IRA conversions in late 2012 because of fears that tax rates would be increased more substantially than they were. People who converted in 2012 should review that decision. You have until October 2013 to recharacterize, or reverse, that conversion.

Some people who did conversions in 2012 anticipating higher income tax rates have found that the new, higher rates don’t affect them. They should consider recharacterizing part of their 2012 conversions if they converted entire IRAs. Instead of paying all those conversion taxes in one year, they might prefer to convert a portion of the IRA each year and pay the taxes over time. Also, the serial conversions might be structured so the amount converted each year isn’t high enough to push you into a higher tax bracket. When those scenarios appeal to you, recharacterize a large portion of the 2012 conversion and instead convert that amount over several years.

For those who haven’t converted their IRAs, the new tax law makes serial or installment conversions more attractive. With tax rates apparently stabilized for a while, the long-term picture can dictate conversion decisions. You don’t have to attempt to guess where the tax law is headed.

With stable tax rates, there’s less reason to lump the conversion of an entire IRA in one year. Instead, you can convert an amount each year that avoids pushing you into the next tax bracket and convert the entire IRA over time. Or you can decide you want only part of the IRA converted.

Even so, there are potential extra costs to this strategy to beware of. Including a conversion amount in income each year could trigger other taxes or penalties. The higher income could lead to the phase out of personal exemptions, a reduction in itemized deductions, including Social Security benefits in gross income, the surtax on Medicare premiums, and more. You have to consider all the potential tax triggers when toting up the cost of a conversion and determining the amount to convert.

Taxpayers who now are in the top tax bracket or who would be moved into it by conversion amounts also need to consider the long-term view. It still could make sense for them to convert at least part of an IRA and pay taxes today to ensure a 0% tax rate on a portion of their investment income in the future. The conversion might be especially attractive when assets from taxable accounts are used to pay the conversion taxes, and income from those assets would have been subject to the new 3.8% tax on investment income in addition to regular taxes.

The new tax rules put some wrinkles in the IRA conversion decision. Don’t jump to a quick conclusion about the effects. There are several new factors to consider, not one. Analyze how all the factors affect you. There are so many factors to consider that it often makes sense to work with a financial planner or tax accountant who has some experience analyzing the trade offs.

I’ve long encouraged readers to have some tax diversification. None of us can be sure what the tax law will be in the future. Don’t assume it will move in one direction, because you’re likely to be hurt badly if it is something different. Instead, have all the different types of accounts: traditional IRA or 401(k), Roth IRA, taxable account, and perhaps an annuity or investment life insurance. That way, you’re likely to benefit from some tax changes and be hurt by others but not be hurt badly by under most scenarios.

Sunday, May 26, 2013

How to Use Your 2012 Tax Return for Future Planning


Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? Taking another look at your tax return from this past year and making a few changes could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term. Start by looking at six key elements:

1. Federal Withholding
If you received a large tax refund, it might be time to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. Do this in cases where your adjustments to income, exemptions and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

2. State Withholding
Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed to exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses and more because of certain AGI caps on these benefits.

3. Tax Rates and Adjusted Gross Income
As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6 percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33 percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households and single individuals. If you were hovering near the bottom of the 35 percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33 percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8 percent surtax on net investment income and a .9 percent additional Medicare tax. Does your adjusted gross income for last year approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

4. Investments
At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

5. Medical Costs
Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn’t pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

6. Retirement Planning
Don’t forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income, should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.

Friday, May 24, 2013

How companies can copy Apple's strategy to cut taxes


The image of the American income tax law is of horrible and immense complexity.

But it turns out that in many ways it is not that complicated. The Apple tax tactic that came in for denunciation at Tuesday's Senate subcommittee hearing was not particularly difficult to carry out, and it seems to have been something known to some tax experts - but not to many of those whose job it is to write tax laws.

"What impresses me is the effortlessness of Apple's international planning," said Edward Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Congressional Joint Tax Committee.

The planning involved setting up subsidiaries that would get the lion's share of Apple's profits on sales in Europe and Asia. Apple incorporated those subsidiaries in Ireland - making them exempt from immediate US taxation - and told Ireland that the subsidiaries were run from Apple's headquarters in Cupertino, Calif., and therefore were exempt from tax in Ireland.

"It hinges," said Kleinbard, "on nothing more than an Irish shell company whose management in fact is in Cupertino, and a contract between two arms of Apple's single global enterprise with no economic significance to anyone outside of Apple. It's as if Apple checked a box to elect out of worldwide taxation on a vast swath of their international income."

Was that shocking? It was to Sen. Carl Levin, the chairman of the subcommittee that held the hearing. He said he had not seen anything comparable at General Electric or Microsoft, two companies whose tax returns Senate staff aides had previously combed through.

Mark Mazur, the assistant Treasury secretary for tax policy, testified he had never heard of such a thing. It is his job to recommend changes in tax laws.

But Samuel Maruca, the Internal Revenue Service director of transfer pricing operations, sounded surprised that people were surprised.

Tim Cook, Apple's chief executive, saw nothing unusual. He vigorously denied Apple had used any "tax gimmicks."

It may be that once a loophole is spotted, using it is anything but complicated. But it can be very difficult to spot such a loophole without help from someone who has already found it.

If that is the case, Tuesday's hearing could have the exact opposite effect from the one that Levin intended. It is not hard to imagine other chief executives reading news reports and asking their chief financial officers why they never thought of that. That could lead to even more companies finding ways to avoid American income taxes.

To use Apple's strategy, companies will need to meet a few criteria.

First, they must be multinationals.

Second, a large part of their profits must come from what is called "intellectual property," such as patents or copyrights.

Third, it helps a lot if the company can do its tax planning before it is obvious to outsiders - or maybe even to insiders - just how profitable that intellectual property is going to be.

Finally, they must find one or more countries that will let them pull the trick. Ireland seems to have been very clever. It offers the benefit of "stateless subsidiaries" only to companies that have actual operations in Ireland. Apple has its European headquarters there, and employs a lot of people. In effect, Ireland pays companies to come to Ireland by offering to let them avoid taxes in their home countries.

In Apple's case, as with many technology and pharmaceutical companies, the cost of production is but a fraction of the price paid by the customers. Most of the profits will accrue to the owner of the intellectual property.

Apple does nearly all of its research near its Cupertino headquarters. But in 1980 it signed over to an Irish subsidiary the right to profit from that research in most of the world. Buy an iPhone in Brazil, and Apple US will benefit. Buy one in China, and the Irish operation books most of the profits.

  That deal appears to have been very one-sided, given what happened to Apple. But Apple renewed it in 2008.

Such an inter-company deal should be on "arm's-length" terms. But that is hard to know. It is, testified Maruca, the IRS official, "our most significant enforcement challenge."

Under American tax law, American companies owe tax on their worldwide profits - but with a major catch. "Foreign profits" are not taxed until they are brought home. Then they are taxed at the American rate of 35 percent, less whatever foreign tax was paid. But there is no requirement that they ever come home.

President John F. Kennedy called for ending that deferral. Congress refused to do so, but passed provisions that were supposed to make it harder for companies to abuse the deferral rules. Levin says that those rules have themselves been abused.

What will happen? Apple thinks the solution is simple. Let it bring the money home at a rate Apple and other companies would deem reasonable.

And what is reasonable? "To incent a huge number of companies" to bring back money, Cook testified, the new rate "would have to be a single-digit number."

Levin hopes that the hearing will inspire his colleagues to change the law in a different way. "These tax-shifting capabilities that these major corporations have cannot continue," he said.

But the result could be the opposite, with nothing happening on Capitol Hill as more companies use the Apple example to take a bite out of their tax bills.

Tuesday, May 7, 2013

Are You Ready For The 2013 Obamacare Investment Tax?

Obamacare is first and foremost a health insurance regulation, but investors would be mistaken if they believe it won't affect them if they don't invest in that sector and they already have health insurance. One of the major features of the regulation that has not been discussed much is the tax on investment income that is being levied to pay for the regulation. This tax is likely to be particularly important to retirees.

The tax I am referring to, which took effect starting January 1, 2013, is a flat 3.8% tax on "net investment income" (i.e. all income from investments) for investors with $200,000 a year in total income ($250,000 for couples). This tax is a flat tax, which is levied in addition to other taxes owed by the investor (e.g. capital gains taxes, federal income taxes, etc). So if you make $200K a year total from capital gains, dividends and coupon payments, your job salary, business profits, and all other income sources, you will be exposed to this tax. (There are select income exemptions that I discuss below.)

Now $200,000 a year in income may seem like a lot. And for many people it is - at least if they earn $200K each and every year. But this tax is likely to hit a lot more people than just that group. Most people know that stocks have returned about 9-11% annually for the last century or so. However, that average is dragged down by bad years and up by good years. As a result, there are a lot of years where the stock market averages gains of 15-20% or more.

Given that the average investor holds a stock for about 11 months and investors tend to cash out after markets have had a big run, these years of 15-20% gains in the stock market are likely to generate about that much in capital gains. What this means is that investors with total portfolio values of anywhere from perhaps $750K to $1 million are likely to face this Obamacare tax at some point in the next few years, particularly after dividend income is considered. (For example, $750K * 15% capital gains + 5% dividends + $50K salary/pension = $200K in annual income, and $5,700 in additional taxes from this Obamacare tax.)

Data from Federal Reserve studies and the IRS suggest that many retirees or upper middle class individuals nearing retirement have portfolios of this size, suggesting that they need to be very concerned with the tax.

MLPs and direct resource investments  will face less of a tax hit because part of their income should be sheltered by resource depreciation allowances, but the high level of income these stocks throw off is unlikely to be completely protected, so if possible moving them to a tax-advantaged retirement account is also wise.

Most investors with a sizable portfolio won't be able to and won't want to move all of their assets to an IRA or other tax-favored account. For these investors, timing gains and losses will be even more important than before. Investors should try and spread large gains out over multiple years (which I know is easier said than done after stocks have had a big run-up and one is nervous about a pullback), and when facing losses that are unlikely to be recouped, investors should try to sell these securities within the first year so that the losses qualify as short-term capital losses.

Finally, investors can avoid the Obamacare taxes by investing in traditional tax-exempt municipal bonds (though there has been some talk of the administration trying to reverse this exemption). The interest on these bonds is exempt from the Obamacare tax as well as federal income taxes, but investors still may owe the Obamacare tax on any capital gains from trading in munis as well as from interest on "Build America" Bonds.

Monday, May 6, 2013

IRS will require EIN holders to annually update information with IRS.

On Friday, the IRS issued final regulations requiring taxpayers that obtain employer identification numbers (EINs) to update their information with the IRS (T.D. 9617). The regulations, which will apply beginning Jan. 1, 2014, to give the IRS time to publish the relevant form and instructions, adopt without change proposed regulations that were issued last year (REG-135491-10).
The IRS issues EINs (which take the form 00-0000000) to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes. Apparently, many EINs are issued to nominees that act on the applicant’s behalf but then are no longer authorized to represent the applicant.
To address this problem, the IRS revised Form SS-4, Application for Employer Identification Number, to require the disclosure of the applicant’s “responsible party” and that person’s Social Security number, individual taxpayer identification number, or EIN. The definition of responsible party depends on the type of entity applying for the EIN and is listed in the instructions to Form SS-4.
The final regulations require any person that has been issued an EIN to provide updated information to the IRS in the manner and frequency required by the forms, instructions, or other appropriate guidance. According to the preamble, following the publication of the final regulations (scheduled for May 6, 2013), the IRS will publish a form for persons issued an EIN to use to disclose the correct application information to the IRS. The relevant form will require these persons to update application information about the name and taxpayer identifying number of the responsible party within the applicable time frame. The regulations apply to all persons possessing an EIN on or after Jan. 1, 2014 (which means the rules apply retroactively and not only to persons that applied for or were issued EINs after the effective date).

Thursday, May 2, 2013

Windfall Income Tax Planning!

You receive a call from a very excited client: your lawyer client settled a large case. Or your client won a large judgment. Or your client won the lottery. Now your client is about to receive a very large check: $1,000,000. $5,000,000. More? That’s the good news.

The bad news is that it is ordinary income, and large lump sums of ordinary income are taxed at the highest marginal rates and do not have easy tax planning “solutions.”
What alternatives should you help your client consider? In this discussion we will use $1,000,000, since you can multiply that figure by as much as necessary to make it interesting, and we will assume that all of it is in the maximum federal (and state) income tax brackets.
First, if at all possible, see if your client can split the receipt of the funds between this year and next year. Of course be sure that deferral does not jeopardize receipt of the funds or significantly reduce the value of the second year’s payment (due to the time value of money).
Why do this? Usually not because the client is likely to be in a lower bracket in the later year. Instead, this is because the best tax technique—a pension—works best when there are contributions in multiple years.

Second, seriously consider simply paying the tax and pocketing the difference. On $1,000,000 the tax will be 39.6% federal, leaving $604,000. In the highest taxed state, California, the tax would be (13.3% x (100 – 39.6 = ) 60.4% = ) 8.0332% net, meaning a total of 47.6332%, leaving $523,668.
The advantage of this approach is the KISS principle: Keep It Simple. Your client can put the $604,000 (or $523,668) in the bank; in tax-free muni bonds; in first trust deeds on real property; or your client can buy a building, depending upon investment preference, all without worrying about “tax structuring.”

Third, the most conservative tax structure is a pension plan. How much of a deduction can your client get? Probably a lot more than you think. A 45-year-old with a same-age spouse, both of whom have past service, can probably achieve a deduction of $320,000. The figure increases to $530,000 for a 55-year-old. There are ways to increase those figures. And there is a method that might allow that figure to triple in certain situations. (Of course, 99% of all plan consulting firms are not up to this task.) Pension plans are so safe and so important that it does not make sense to discuss other options until this one has been fully exhausted.

Fourth, a captive insurance company can be an attractive structure. A premium of as little as $400,000 can be economically appropriate, given the costs involved. And a premium of as much as $1,200,000 can be received by your client’s insurance company without incurring an income tax under Internal Revenue Code Section 831(b).

Of course, compared to the $3,500 per year cost of a third party administrator for a two-person pension plan, the captive costs run 10 to 20 times as much. However, in the right situations, this can be a terrific result in terms of risk management, estate and gift tax planning, asset protection planning, and income tax planning.

Fifth, a charitable limited liability company is a way to get a deduction of 85 percent or so of the funds. This is primarily of interest to people who have a favorite charity that they would like to support. However, for those people, this is a wonderful result. The client ends up with an LLC that is full of money that can be used for investment, including loans for business opportunities; and the charity receives a steady stream of revenue for its membership interest.

Sixth, a charitable lead annuity trust, or CLAT, can create a large percentage deduction. For example, contributing $1,000,000 to a 20-year term 5% payout generates an 88.436% deduction. For a 10-year term, the deduction is 46.853%. The cost of the upfront deduction is that the client is taxable on the trust’s earnings. However, that cost can be mitigated by investing the trust corpus into muni bonds. Although it is not currently easy to find muni bonds at 5%, even if the bonds generate only generate a significant portion of the 5% payout this can be an excellent result, especially for a client who is interested in a particular charity and/or trying to fund his or her own family foundation. This structure is also attractive psychologically: the client gets a large upfront deduction and then, at the end of 10 or 20 years, gets all of the assets back, probably at a time when the client will appreciate them even more.

Seventh, a charitable remainder unitrust, CRUT, for the lives of two people both age 65 provides a 34% charitable deduction. The deduction increases to 49% if the couple are both age 75. Like the CLAT, this works well as a part of an overall tax plan for the client with the windfall. The advantage to the CRUT is that the client retains the income for life, which is especially attractive for clients who either have no children or whose children have already been otherwise provided for.

Eighth, investment in an oil or gas drilling partnership typically results in a deduction of 100 percent of the investment. The primary challenge is the economics, not the tax results.
Ninth, investments in real estate involving agriculture—such as grapes, avocados and pistachios—gives the advantage of the upside historically associated with land plus the heavy tax benefits provided by Congress to farmers.

Finally, when all else fails, buy a good building and use component depreciation. Depending upon the building, you may be able to depreciate up to 40 percent of the value of the building within the first five years.

When your client is about to receive a windfall of ordinary income, you need to review the list of alternatives. Leave your preconceptions at the door. Some clients will prefer to simply pay the tax. Some will be satisfied with a pension plan. But some few will want a meticulous analysis of all of the alternatives and will, in the end, surprise you by allocating funds to many of them.