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There is one other type of asset to be considered. For personal or real property used in a trade or business or held for the production of income, depreciation is available along with some of the attributes listed above.

Assume you have a rental home worth $100,000. You may depreciate (covered more fully in paragraph 3 below) the asset (EXCEPT FOR THE LAND) over a period of time and deduct the amount from current taxes (many caveats apply. If you want to know which ones contact a CPA or buy a book). Assume $25,000 was land and that the other $75,000 was used a tax deduction through depreciation over the years. When you go sell your property you need to add back in the land value and get $25,000. (If you hadn't taken all depreciation yet, the basis is adjusted accordingly.) If the property was worth $100,000, then you had a $75,000 long term capital gain ($100,000 minus adjusted/current basis of $25,000). Better tax aspects than an annuity though it's like comparing apples and oranges in other considerations. (And just so you know, the capital gains rate is based on your income tax bracket and does not exceed 20%. But depreciation is "recaptured" at a 25% rate.)

But you die again. Guess what? The basis is stepped up to the full value at the date of death- $100,000. Your beneficiaries then sell the property for $100,000 and have $0 tax. So, everything else being equal (caveats can apply), which is better?. Long term capital gains and a full step up in basis for many assets or ordinary income and no step up in basis for pension plans, IRA's, Keogh's.

3. Depreciation- This is a tax deduction that represent the wasting away of an asset. Business personal property is depreciated over various schedules of 3, 5 and 7 years. Residential real estate is depreciated over 27.5 years; commercial over 31.5 years (law changed to 39 years for property placed in service after May 13, 1993- exceptions apply). Do not depreciate land. Take out value of land, set aside and then add back in to existing or current basis when property is sold.

Under the new laws, depreciation is recaptured at a 25% rate. This may preclude the use of a home office deduction.

4. LTCG, LTCL, STCG, STCL-At the end of each tax year, an investor looks at all the long term positions (assets held over one year) and short term positions (held less than one year). If both positions are gains, they are taxed according to the long term capital gain rates and ordinary income as applicable. If there are long term gains and losses, they are offset each year against each other. The same is done with short term capital gains and losses- net them. If there are both long and short term positions when finished and they are different (gains and losses), an investor nets them together and whatever is left retains the characteristic of the larger. If a loss however, only $3,000 net losses may be used per year. The rest is carried over to subsequent years and netted again. The same criteria applies if both the long and short term positions are both negative. In such cases, only $3,000 is allowed as a deduction this year using the short term first. Anything left over is carried forward to the following year and the whole thing starts over.

Example: Assume $40,000 long term capital loss (LTCL) and a $60,000 long term capital gain (LTCG) in 2002

Also during 2002, a $90,000 short term capital loss (STCL) and a $50,000 short term capital gain (STCG).

Net long term positions= $20,000 LTCG

Net short term positions= $40,000 STCL

Net together. Whatever is larger is what it is. $40,000 STCL- $20,000 LTCG= $20,000 STCL. But an investor is allowed to use only $3,000 of a loss each year. So there would be a $17,000 STCL carryover and the process is started all over again.

The above numbers were developed as though everything was bought and sold during the year without taking into account the end result. The point being is that $17,000 of a Short term loss will need to be carried over to the next year. Wasn't there are possibility that something else might have been sold for a gain this year in order to absorb some of the excess loss?

The maximum capital gains rate is currently 15% bracket. Enjoy it while you can

5. Expensing option-

6. Social Security and Medicare-

7. Business Use of Home- Must be principal place of business and most of business income is attributable to activities there. Space must be used exclusively for business. Physical separation from rest of home is helpful. Taxpayer can deduct applicable percentage of maintenance and utilities for space and can actually depreciate space over 31.5 or 39 years. But value is lower of fair market value at time of business start or its basis. Deductions cannot exceed net income from business.

SPECIAL NOTE: Remember that when the home is sold, there is a lower basis overall and more appreciation and tax to pay. Additionally, any depreciation MUST be recaptured at 25%.

Before you take the deduction, check with an expert. The IRS has been contesting this. However, starting in both 1997, if you have inventory in a separate room, you may count that as part of the room "space" so the policy is now a little more liberal. And under the new 1998 tax rules, the office does NOT have to be the exclusive place of business.

8. Social Security Benefit taxation- Workers add their AGI, tax exempt interest income and one half of the social security benefits received that year. If the amount exceeds $25,000 single; $32,000 married filing joint; $0 if married filing separately, then the LESSER of the following is declared as taxable income- one half of the social security benefits which the worker received that year or one half the excess over the $25,000, $32,000 or $0 level.

If AGI exceeds $34,000 single or $44,000 MFJ, then the taxpayer must include in taxable income the LESSER of

1. 85% of social security benefits or

2. a fixed amount ($6,000 for MFJ or $4,500 for individuals) or the amount included under present law whichever is less; PLUS 85% of income (includes tax exempt interest) that exceeds $44,000 MFJ or $34,000 single.

In other words, the government is taxing the benefits received at 50% or 85% if there is too much money received from all sources- and that includes municipal bond interest. This is different losing benefits if you make too much money- item 6 above.

9. Deductible Interest- $0 for personal interest. All interest on a residential loan of $1,000,000 or less. But to that can be added another $100,000 of an HEL (Home Equity Line) and that is also fully deductible. Obviously many many homeowners have converted non deductible personal, credit card and car interest by taking out an HEL loan.

But consider this. Assume you had a $400,000 home paid in cash. When rates were low, you refinanced for a $250,000 loan. How much of the interest is deductible? Only the amount on $100,000. (Yes, there are issues regarding acquisition debt, substantial improvements, etc. but that is why you would need to contact a CPA.)

10. Kiddie Tax- Idea in past was to gift property to children and have assets taxed at lower tax rate. Parents could act as trustees on UGMA and UTMA's (Uniform Transfers to Minors).

SPECIAL NOTE: Parents may gift money to these accounts and put them into growth funds that might appreciate well until the child turns 18. However, the funds belong solely to the child at the age of majority and he/she may do anything they want. Most parents do not want to take the risk. Further, if the funds were to be used for college, college formulas look to take 35% of a child's assets but only 6% of a parents. Therefore it might be cheaper for a parent to pay the higher tax on any earnings, maintain control and actually give less to the college.

11. Gifting up to $11,000 per person per year is allowable without any reporting or tax consequences. Gifts over $11,000 per year up to the lifetime exemption of $1,000,000 must be reported but no tax need be paid. Gifts over $1,000,000 (excluding $11,000 amount available each year) is subject to gift tax.

IMPORTANT: Read again the above. It is possible to use your $1,500,000 (2005) lifetime exemption during life. You do not have to wait till you die. It may be very beneficial to take a highly appreciating asset out or your estate well before anticipated death. (However, tax is only offset for the first 1,011,000)

One other item. When you gift something, the asset received will normally carry the same basis as it had from the giftor. Sometimes it is not a good idea to gift. For example, if you were 75 years of age and in ill health, gifting an asset worth $10,000 with a $2,000 basis means the recipient, if they sold the asset then, would have long term capital gains on the $8,000 of profit. However, if you died and they received it as a beneficiary, the basis would have been stepped up to the value at the date of death. They would incur NO tax upon a sale at that price. The issue, is of course, timing and when you will die. But it's what you are supposed to think about in order to do good estate planning.

Lastly, there are a couple exceptions to the general rules. If, say, a grandparent pays your hospital expenses of $25,000 DIRECTLY to the hospital, there is not gift per se. If a grandparent pays your son's tuition directly to the University, there is not a gift, per se. Obviously, these are just the main elements and you need to review each tax section carefully to assure that you are not violating some section.

12. Real Estate losses- Most losses on real estate or other activities where there is not active involvement are not (usually) currently deductible against earned income. However, if an investor has an AGI under $100,000 and can be shown to have some form of involvement in the management of a property, then up to $25,000 of losses may be offset against the AGI. The allowance is only available on real estate and is phased out between AGI between $100,000 and $150,000.