Hard to Treat Diseases (HTDS): Good Tax info...if all pans out on CMKX!...

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JJSeabrook

Re: JJSeabrook post# 825

Sunday, 06/13/2004 8:30:56 PM

Sunday, June 13, 2004 8:30:56 PM

Good Tax info...if all pans out on CMKX! This is just a copy from 2 posts on the CMKM message board.

Help From A Tax Professional
« Thread started on: Today at 08:54am » index.cgi?board=news&action=post&num=1087134876"e=1087134876&start=0index.cgi?board=news&action=post&num=1087134876"e=1087134876&start=0

I am a practicing CPA in NY and I would like to clear up some confusion about taxes on this board. I must admit I am not a high powered NYC CPA, and I have never had a client come in who just made millions in the stock market, but I can explain some of the basics of how to reduce the impact of taxes on your gains. Unfortunately, I know very little about taxes outside the U.S. so I can't comment about taxes in other countries.

There are at least three different taxes you need to be concerned about. The tax you will owe when you sell stock at a gain, the tax you will owe on the investment income earned when you invest the proceeds from your sales, and the tax you will owe when you transfer wealth to others, through gifts and at your death.

First of all, if the stock price reaches the point where your gains from sales are going to be in the hundreds of thousands or millions you need the help of the best tax accountant you can find before you make any significant sales. Don't look in the phone book and pick out a small firm. That could cost you dearly. I would recommend one of the larger CPA Firms such as Ernst & Young, Price Waterhouse Coopers or Deloitte & Touche. These firms have offices and affiliates all over the world and they have staffs of thousands of CPA's with the ability to get you the specific type of expert advice you need. If you are near a large city, go to the largest office you can, because they will have the most professionals available. Most likely you will find someone there who is very comfortable working with your situation. I worked for Ernst & Whinney quite a few years ago before they became Ernst & Young, and these firms charge quite a lot, but they have the resources and they should save you a lot more than they cost.

Then when you've made the sale and realized huge gains, ask the accountant to recommend the best financial planner they know. Tell the planner you have made enough money to retire on and you want to conserve principal and receive the most income after taxes from your investment. You don't want to jeopardize your future lifestyle with risky investments when you've already ensured your future.

Finally, when you finish the first two steps, obtain the help of a first quality estate planner to minimize your estate tax. Estate tax can be devastating to a multi-million dollar estate.

SOME BASICS OF TAX PLANNING

INCOME FROM SELLING SHARES OF CMKX

First I'll discuss limiting the tax you will owe when you sell the stock at a gain. I'm only going to discuss federal taxes as most people will also be responsible for state income taxes and state income tax is different for each state. State taxes will also be considerably less than federal taxes so you need to concentrate on limiting federal tax first. One point to remember, you only owe taxes when you sell the shares, not because the price went up. So the longer you hold off selling the longer you hold off paying taxes.

Many people on this board wisely advised holding for one year to receive federal long term capital gains rates of 15% rather than the ordinary income tax rate which can be as high as 35% (2003 rates when taxable income reaches $311,951 for single, head of household and married filing jointly filers). This is a very smart move if you can hold off making your significant sales for a year. You can protect your profits somewhat by setting up sales orders if the stock price goes down a certain amount, but remember your sales order price is not guaranteed. A good investment planner may also be able to recommend a strategy to hedge your CMKX investment should the price fall. Remember, although it is risky to hold investments because the price may drop, you may also be rewarded with even a higher stock price the longer you hold. Also, the longer investors hold their shares the higher the price should go since there are less shares out in the market to buy.

Many people mentioned putting money into retirement plans. For the most part, retirement plan contributions are based upon earned income (e.g. wages, commissions, self-employment earnings), so your gains which are investment or passive income do not qualify. However, since most of you will continue to work (maybe at a job you enjoy) you should maximize your retirement plan contributions and start a retirement plan if you don't have one. Just remember, the amount of earned income you receive impacts the amount of retirement contributions you can make. Although the retirement plan contribution deductions are small compared to these potential gains, you need every bit of help at reducing your taxes you can get.

Starting a business in the year you cash in can be helpful, especially if there are significant deductible start up costs. For example, suppose you wanted to open a recording studio and you needed $100,000 (maximum deduction) in equipment. This equipment and any business losses could be written off against realized stock gains that year. Also, when you are self-employed you can also set up retirement plans that allow you to put much more money away tax free each year.

Buying an expensive home or second home can also help reduce taxes because the mortgage interest and taxes will be deductible and if you buy in a desirable location the value of your home is most likely to increase.

Hopefully everyone who makes a bundle on this stock will remember those less fortunate in a big way. Don't sell the stock and give cash. Give the appreciated stock instead. By giving appreciated property instead of cash can save significant taxes. For example, if you wanted to give $10,000 to a charity and the stock was selling for $1.00, you might sell 10,000 shares and donate the cash of $10,000. On your tax return, you'd have a gain of $10,000 since your cost is probably near $0, and a deduction for $10,000 to charity which is a wash. However, if you just donate the appreciated stock, you don't have to report the gain, yet you get credit for the deduction which can reduce other income.

INVESTMENT INCOME

I am not an investment expert but many people with high income put their money into double and triple tax free investments. Double means exempt from federal & state income tax and triple also includes exempt from city tax - useful if you live in a city which has an income tax. Interest rates paid on tax free investments are generally lower than rates paid on taxable interest, but when you are in a high tax bracket the tax free interest usually works out better. Also, recent tax law changes reduced the maximum tax rate on dividends to 15% so investing in blue chip stocks that have a history of paying high dividends can be a good move. With all of these investments find those that also have a history of maintaining principal. Always make sure you diversify your investments so they are less likely to be subject to major loss.

Your large firm accountant can provide you with other investment options that will save you taxes. However, remember, if it sounds too good to be true, it probably is. So make sure you ask about the risks of any unusual investment and if you're uncomfortable consult a different advisor and get his opinion. Some tax shelters have been disallowed by the IRS and the investors wind up paying the tax plus interest and maybe penalties.

GIFT TAXES

You are allowed to give anyone you choose $11,000 each year ($22,000 for maried couples) with no gift tax. If you give more, and you comply with the IRS requirements, you are required to file a gift tax return. If you give over $1.5 million in 2004 and you haven't given away taxable gifts in earlier years, you will pay gift taxes which start at 45%. Therefore, if you plan on giving away shares of stock to family members and friends, give it away before the value of the individual gift exceeds $11,000 or you may be required to file a gift tax return.

You must also be careful about holding shares for other people in your account. How do you know how much tax you should withhold from their proceeds when they want to sell. This income will be reported in your name to the IRS by the broker and you must report it on your return and pay the tax on it. You will need to keep good records in case of an audit. Last week when I started to feel the price was going up I transferred one million shares to my girlfriend while the value was only $400.

Also, remember that as your income increases so does the likelihood you will be audited. This forces you to do things the average employee taxpayer really doesn't need to be concerned about. You must document every deduction, file every return, and comply with all the rules because it is more likely the government will check up on you. However, it is a problem we all should wish we have because it means we made a lot of money.

I hope this helps clear up some things. Taxes are complicated and I can only cover so much. Although I have a good understanding of taxes I will also be looking to consult with the best tax/investment people I can find. I feel they will be worth the investment.

GO CMKX! LONG, STRONG & STILL BUYING!

ANOTHER POST OF INTEREST

Re: Help From A Tax Professional
« Reply #12 on: Today at 11:53am » index.cgi?board=news&action=post&num=1087134876"e=1087145638&start=0index.cgi?board=news&action=post&num=1087134876"e=1087145638&start=0

Thanks, Marley. You've said in greater detail what I've said here many times. Although I'm not a CPA, I was a financial planner in my prior life and am familiar with not only basic tax issues, but also your excellent suggestion to establish a financial triumvirate of a CPA, planner, and lawyer. Great work.

I'm going to copy and paste this email into a word document for later posting (with due credit given, of course) because tax questions pop up repeatedly here. In addition, I'm going to post a brief summary of income taxes below. I'm confident my numbers are right, but should you find any errors, please point them out to me. Thanks.

INCOME TAX SUMMARY
-----------------------
For tax purposes, capital gains are short-term if equities are sold within one year of purchasing them, long-term if more than one year (i.e., at least 366 days). Short-term capital gains (in the US) are taxed as ordinary income, at the commensurate tax rate. Therefore, depending on the size of the gain, the tax can be as little as 10% (if the gain, plus your income, minus deductions, ie, your Adjusted Gross Income, or AGI is less than $7000) and as much as 35% (if your AGI is = $311,951 or more).

To demonstrate, if you capital gains is $1M, then your tax due would be $350K ($1M x .35). However, if your capital gains (including other income) was only $5K, then your tax would only be $500.

In short, the ST capital gains rate IS NOT A FLAT RATE as some have suggested. Now, in terms of your long-term tax rate, unlike ST capital gains, they are NOT taxed as ordinary income. Instead, the rate you pay is based on your tax bracket without the gains figured in. Therefore, if you are in the 15% tax bracket or lower, then your LT capital gains rate is 5%. If you are in a tax bracket higher than 15%, however, then your LT rate is 15%.

Putting this to numbers, if your LT capital gains is $1M, and you have no other income, then you would pay only $50K in taxes ($1M x 5%). However, if you are in the 28% tax bracket, then you would pay $150K ($1M x .15).

Now, in addition to these FEDERAL taxes, you may also be liable for STATE taxes, depending on the state in which you live. However, state taxes on capital gains are normally single-digit rates.

NOTES:

* All of the info above is based on tax year 2003.
* Each individual equity purchase incurs its own individual transaction date, so if you have been accumulating shares over a period of time, it is possible that some of your shares may be long term while others are short term. Therefore, take care in determining which block you sell if you do not liquidate your whole position. Additionally, if dates are not a concern (ie, you are either all short-term or all long-term), to minimize your tax burden, use the HIFO method (ie, Highest Price In, First Out). If you need further explanation, please ask.

For a nice summary of this issue and others, see: http://partners.financenter.com/abcnews/learn/guides/itaxbasics/itaxcapgain.fcs

Hope this helps.

I am not a broker and profess to know nothing about trading stocks. Do your own DD. Buy, don't buy...sell, or don't sell at your own risk.