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Author: SpeleoFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121160  
Subject: A fun predicament Date: 11/26/2002 4:50 PM
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Hey Fools,

I'm facing a quandary I never thought I would face, and I could use a little help from some tax experts. My wife recently won a car in a charity raffle, and I know we're about to get hit with taxes on the value of the car. The trouble is, I'm having a hard time figuring out just how to value the car we won! But I'll get back to that....

Before I proceed further, let me spell out a few more facts and double-check that I've got the basics right: we took possession of the car only about 10 days ago, and I realize that a bump in income like that can trigger a penalty if withholdings are not taken care of. I believe I should have until Jan 15th to make an estimated tax payment for Q4 2002. I am not otherwise making estimated payments, and figure my federal obligation would have been less than $1000 owed before winning the car, so I believe just the one payment in January should avoid a penalty. Does this much sound right?

The car should count as "gambling winnings," which seems ironic to me as I am a compulsive non-gambler. I believe I am allowed to write off stuff such as lottery tickets or other gambling type stuff, but do I need to have kept a book for that? Or is that only for casinos & such? Probably doesn't matter much--I'd be surprised if we've spent $50 all year on such things.

Would winning the car open up any doors for other write-offs such as devalued stock (*grin*)? Yeah, I know--wishful thinking....

Finally, can anyone think of anything else I should look into before year's end? Any last-minute strategies to reduce our tax obligation? Should I hit the casinos, since I could either mail Uncle Sam my winnings or write off my losses? ;)

OK, now let's get back to the car. If we'd won a Ford Mustang I'd probably have started with kbb.com for a ballpark estimate and left it at that, but we won a 2002 MINI Cooper. These cars are very hard to come by. There's only one dealership in the Phoenix area, and there's a loooong waiting list to get a new Cooper. Complicating matters further, we didn't really get a new Cooper--there were 7000 miles on the car when we took possession. And so far there's no info that I can find on establishing a value for a used Cooper. And just to make matters even more interesting, we're supposed to get a 1099 from the charity, and I'm sure that will have a value on it, though I have no idea what that will be. Let me break it down:

A new Cooper has an invoice price / MSRP that I can access fairly easily through http://www.miniusa.com/ or KBB or even the local dealership, and ordinarily I'd consider this a good starting point to value a car. Let's call this Value A.

Now, because this car is hard to get, the dealer is selling them at a premium of up to $8000. Obviously, this could have a significant impact on our taxes. Let's call MSRP plus the premium Value B.

Of course, as I mentioned, we took possession with over 7k miles on the car. Ordinarily, a new car will lose a significant portion of its value as soon as it is driven off the lot, and 7k miles is a significant amount of driving (the car was manufactured in 02/02, so it's less than 10 months old). However, I don't think anyone is selling these cars yet (why would they, if there's a wait and a premium to even get one?). Basically, I don't know that FMV for what we got even exists, and I have no idea how to estimate it.

Finally, I know we'll be getting a 1099, but I don't expect that will arrive until after we'll need to make an estimated tax payment. I'm also a little concerned that the 1099 will reflect what the sponsors paid for the car (i.e., something close to Value B), although we did not actually receive a "new" car. It feels like bad karma to worry about that, but bad business sense not to do so. Thoughts?

So, how's that for a fun "what if" to mull over. I'll be anxious to hear what you have to say. Oh, and is TMFTaxes still around? Roy, are you still in Tempe? I'll trade you a ride in the Cooper for some tax advice! ;)

SpeleoFool.
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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62259 of 121160
Subject: Re: A fun predicament Date: 11/26/2002 6:03 PM
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SpeleoFool writes (in part):

Before I proceed further, let me spell out a few more facts and double-check that I've got the basics right: we took possession of the car only about 10 days ago, and I realize that a bump in income like that can trigger a penalty if withholdings are not taken care of. I believe I should have until Jan 15th to make an estimated tax payment for Q4 2002.

I reply:

If, aside from the car (congratulations!), your income is roughly constant from year to year (or if it increased this year), then there's an easier way to solve your problem. Increase your withholding, if necessary, so that your total withholding for 2002 is at least your total tax liability for 2001 (I'm assuming that your AGI for 2001 was no more than $150,000). As long as you qualify for this safe harbor, you can owe millions on April 15 but not owe a dime for underwithholding. --Bob

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62261 of 121160
Subject: Re: A fun predicament Date: 11/26/2002 6:14 PM
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SpeleoFool,

If your current tax liability was less then $1,000 then an estimated payment by Jan 15th will prevent any underwithholding penalties. Underwithholding penalties are essentially interest on the underpaid taxes. Since the income was in the last quarter of the year the interest would not start until after the payment is due in Jan. You need to make certain that is it recognized that the income is in the 4th quarter by filing form 2210.

Have you tried to contact the charity and find out the amount of the 1099 and how they determined the value? If the sponsors did pay for the car then the 1099 would reflect what they paid. Since it is was for a charity auction it is likely that they did not pay full retail. The car may have be donated or bought near retail cost. The only way to know is to ask.

Debra






the retail.

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Author: SpeleoFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62262 of 121160
Subject: Re: A fun predicament Date: 11/26/2002 6:15 PM
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Increase your withholding, if necessary, so that your total withholding for 2002 is at least your total tax liability for 2001.

Good point. I'll do some homework to see what kind of impact this will have (goodbye, December paychecks), but I should be able to make this work. It will buy us an extra 3 months to come up with the taxes for the car, which should also relieve the urgency of assigning a value before we get the 1099.

Thanks!
Speleo.

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Author: SpeleoFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62263 of 121160
Subject: Re: A fun predicament Date: 11/26/2002 6:30 PM
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Have you tried to contact the charity and find out the amount of the 1099 and how they determined the value?

Yes, though we've had a hard time locating the right person. We've spoken to people involved with the contest, but they have someone else doing accounting. And this being holiday time, it's been difficult to reach people.

If the sponsors did pay for the car then the 1099 would reflect what they paid. Since it is was for a charity auction it is likely that they did not pay full retail. The car may have be donated or bought near retail cost. The only way to know is to ask.

Ah, interesting point. I bet that's right....

You need to make certain that is it recognized that the income is in the 4th quarter by filing form 2210.

Thanks, I'll keep this in mind in case the "safe tax harbor" idea doesn't look like it'll work out.

Speleo.



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Author: medgoddess Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62264 of 121160
Subject: Re: A fun predicament Date: 11/26/2002 9:05 PM
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My husband is a development officer, and frequently does car raffles (the 4th T-bird off of the assembly line was last year's raffle). He always sent out the 1099s (although unofficially his office would tell the winner the approx value).
Kristi

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Author: SpeleoFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62273 of 121160
Subject: Re: A fun predicament Date: 11/27/2002 2:25 PM
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Have you tried to contact the charity and find out the amount of the 1099 and how they determined the value?

In case anyone is curious, I did get in touch with someone at the charity today who knows what's going on with the 1099. They are trying to determine FMV for the car since it was not new when we took possession, and they have been running into the same difficulties as I did. The car is too new to have established a pattern of depreciation, so the charity has been working with MINI to come up with a reasonable estimate. I did learn that the FMV will be calculated as MSRP minus this depreciation, though. Since I have the MSRP, I can use that number for now to ensure I pay at least as much as I need to.

Unfortunately, I've also discovered that our withholding has not been enough to make the "100% of 2001" withholding plan feasible. I had forgotten that we bumped up my wife's (pre-tax) retirement contributions to the maximum allowed this year, which significantly lowered our tax liability from last year. Hence, we've been withholding less this year and have too much ground t make up in one month. In fact, based on the latest number crunch it looks like we'll be better off anyway meeting 90% of this year's obligations. We'll probably have to make an estimated payment to do this, though I'm not sure. If we both sign over all of our earnings for December we might squeak by. :)

SpeleoFool.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62276 of 121160
Subject: Re: A fun predicament Date: 11/27/2002 8:30 PM
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SpeleoFool,

Underwithholding penalty is essentially interest on the amount of taxes subject to the penalty. Since the additional income is in the 4th quarter, penalties would not start until January.

I am not certain of the current interest rate. It is not an unreasonable interest rate. I believe, it is in the range of 7-8%. Which means that even if you did not pay additional amount until April 15th the penalty would at max be 2-3% of the taxes. Others may disagree but I would not go to extremes to try and pay the entire bill by Jan.

The interest is charged on the daily balance. It is possible to make more than one estimated payment in 2003 for 2002.

Debra

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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62279 of 121160
Subject: Re: A fun predicament Date: 11/27/2002 11:48 PM
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Since your withholding for this year is *probably* close to last year's tax you should overwithhold to make up the difference, or don't bother and pay the penalty. The penalty is simple interest of 6% on this difference--NOT on what you'll eventually owe.
Do not pay an estimated payment because you'll have to complete the entire form 2210 and Schedule AI to avoid a penalty whereas with ONLY withholding you don't have to do anything if you withheld as much as last year's tax. If you underwithheld there is a simple formula (the Short Method) to figure the penalty and the IRS will do it for you if you want.

vkg is technically right about the penalty starting in the last quarter but ONLY if you complete the entire 2210 and AI and compute the penalty yourself!

Don't sweat the car value. If you can sell it for $8,000 over list, do so and buy something you really want. ed


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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62284 of 121160
Subject: Re: A fun predicament Date: 11/28/2002 11:47 AM
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ed,

In this case, income is significantly greater in the fourth quarter, withholding was less than the previous year because of contributions to retirement plans, and it is now December with little time to catch up on withholding.

By default, the IRS assumes income is consistent across all quarters. Underpayment penalties can be assessed even when a refund is due. How does the Short Method make the IRS allocate income to the correct quarter?

Debra


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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62291 of 121160
Subject: Re: A fun predicament Date: 11/28/2002 11:08 PM
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Debra: The short method assumes withholding is averaged and that either none or 4 equal and on time instalments were made. Hence, income (actually tax) is averaged over the 4 quarters. this method is really just a way to apply a flat interest penalty on an overal underpayment. If the installments aren't equal or on time, the Regular Method computes the same penalty.
To avoid any penalty, you are right, an installment should be made on January 15. There are two ways to figure the amount of the lowest installment to avoid any penalty. In either case it is necessary to compute the net income in each quarter to complete the Schedule AI of form 2210, and compute the penalty if any. If you let the IRS compute the penalty they use the Regular method, NOT the AI method, even though you complete an AI:
1. Pay the difference between last year's tax and this year's withholding on January 15, 2003. If there is still a penalty in early quarters when you do this try applying withholding in the quarter it is earned instead of averaging. This works if you paid more withholding in later quarters.
2. Annualize your actual income for each quarter to determine the tax due each quarter in withholding and installments, see if averaging or applying withholding works best. Even though the car value will be in the 4th quarter the AI method will automatically apply the last year's tax safe harbor so that total payments will be no more than 1. above, but might be considerably lower in early quarters. You should get the same answer as in 1. UNLESS this year's tax will be no more than 10%higher than last year's tax, in which case 2. will get a lower amount than 1.
There is a quarterly installment calculator at http://www.edcosoft.com/qitc.html that will make all the calculations for you. ed

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