Thursday, August 28, 2014

IT'S YOUR MONEY: Tax planning doesn't have to be last minute

It's not April (or even late March). Why should you be thinking about tax planning? Because now may be a good time of year to do some planning that isn't reactionary, and that may be less painful than last-minute tax work.

If you're going to take it on, make an appointment with a tax professional who does tax planning in addition to tax preparation. That will involve taking your 2013 tax return with you along with your year-to-date paystub showing what you've been paid and what your withholdings have been.

Also, think through how your financial life has changed this year. Perhaps you bought or sold a home. Maybe one of your children is out of college and living away from home. Changing jobs may impact your tax situation.

Make a list of these financial life changes and take pertinent documents with you to your appointment.

A good tax professional can take all this information and do some calculations that will estimate if you're going to owe taxes or get a refund. You can make adjustments to your payroll withholdings or just be better prepared for the outcome.

If your tax planning doesn't give you good news, there may be some things you can do to reduce the taxes you might owe. Charitable giving is often a good way to lower taxes if you itemize your deductions. You can donate items you don't need any more. Goodwill, ARC and other nonprofit thrift stores are happy to take your used clothing, toys, furniture and other items. Make sure you get a receipt. Ideally, take a photo of the items before you donate them and attach that to your receipt. You can't deduct what you paid for the item, but you can deduct what the thrift store would probably sell the item for. Some of the larger thrift stores will have a list of common items and the prices they generally fetch.

Contributing to your employer's retirement plan might also save you taxes. That's a winning idea for most people beyond the immediate tax breaks. You save for retirement and, in many plans, the employer will match some of what you contribute. In that situation, you lose money by not contributing. The tax savings is just a bonus!

Don't be fooled into thinking that getting a big refund is a good deal. If it looks like you've overpaid on taxes so far for the year, don't intentionally pay in more so you can have a big refund. Would you want an investment that has no growth potential and will only give you your money back at a specific time? That's what a tax refund is.

You might not always be able to control your tax situation, but you can be informed about it.

Wednesday, August 27, 2014

Tax Planning for 2015

This year's tax planning is going to be heavily focused on accelerating deductions and maximizing tax credits, according to Evan Stephens, a tax manager at the business consulting and accounting firm Sensiba San Filippo.
“However, taxpayers should be advised that a number of tax benefits available in 2013 are not yet available in 2014, as Congress has let some very popular provisions lapse for 2014 and has yet to reinstate them into law for 2014,” he said. “These include bonus deprecation, larger Section 179 deductions, and a number of tax credits, such as the Research and Development Credit.”

Stephens recommends practitioners consider the following tips for their clients:

• Pay your real estate taxes, personal property taxes and state income taxes before year end in order to push down your taxable income by increasing you itemized deductions. However, be aware that these deductions can phase out and/or be limited by alternative minimum tax.

• Reduce income by taking advantage of other tax-exempt investment vehicles, such as muni bonds, which are tax-free for federal purposes, and, in most states, home-state bonds are also state tax-exempt for state purposes. However, be wary that investing in municipal bonds that have a private activity element (bonds funding new sports stadiums, etc.), as they are still taxable for Alternative Minimum Tax purposes.

• Congress has not yet committed to reinstating the added benefits of bonus depreciation on fixed asset purchases for 2014. However, there is still a much smaller benefit through a Section 179 deduction of up to $25,000.

• A small blip in the code allows for a much larger, $500,000 Section 179 benefit, for non-calendar year taxpayers whose tax years begin in 2013, but end in 2014. This may benefit some taxpayers who do not carry a calendar year end.

• Congress has not yet reinstated the Research and Development credits or nonbusiness energy credits, but given these programs’ popularity will likely do so before year end. Taxpayers should be sure to keep up with the latest legislation, as some believe these will likely be extended into 2014 at some point in the coming year.

• The business energy credits remain. These credits are for taxpayers that install solar, geothermal, combined heat and power (CHP), geothermal heat pump, fuel cell, microturbine or transition energy property for use in their business. The credit can be as much as 30 percent of the cost of the property.

“Long-term capital gains still maintain their preferential rates, but are subject to the additional 3.8 percent Medicare investment tax,” Stephens said. “Short-term capital gains are subject to ordinary income rates and the 3.8 percent Medicare investment tax.”

He recommends considering tax deferral mechanisms for significant tax gains, such as Section 1031 like-kind exchanges for real property sales or structuring the sale as an installment sale. “An installment sale will spread the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income,” he noted.

“Taxpayers should also consider realizing losses on existing stock holdings while maintaining the investment position by selling at a loss and repurchasing at least 31 days later or swapping it out for a similar but not identical investment. This is often referred to as loss harvesting,” said Stephens. “However, if the 31-day repurchase is not adhered to, the sales are considered a wash sales transaction and the losses are disallowed.”

Finally, Stephens urges his clients to maximize contributions to their tax savings and retirement vehicles such as 401K, 403(b), 457 plans, 529 plans, Health Savings Accounts, SEPs, and Keogh plans.

“If self-employed, set up a self-employed retirement plan,” he said. “Revisit decisions to contribute to a traditional versus a Roth retirement plan. Distributions from Roth IRAs and 401(K)s are not subject to regular tax or the Medicare investment tax and, therefore, are a more attractive retirement savings vehicle for high net worth individuals. On the contrary, if a taxpayer is hovering around the threshold for the new Medicare tax, he or she should consider moving Roth contributions to a traditional retirement plan. Maximizing contributions to a traditional plan could reduce taxable income below the threshold and, therefore, avoid an additional 3.8 percent tax on investment income.”

Monday, August 25, 2014

The Best 529 College-Savings Plans


For most parents, saving for college feels like climbing to the summit of a very tall mountain. And it doesn’t help that the path keeps getting steeper; tuition hikes have far exceeded inflation over the past several decades. If your child is a newborn, expect a degree from a four-year, in-state public college to run about $222,000, assuming 5% annual growth in the cost of college; four years at a private school could be double that.

Luckily, tools are available to help you scale the heights. State-sponsored investment programs known as 529 plans, as well as other kinds of savings programs, can provide the momentum you need to reach your goal. And you probably won’t need to save the full amount. Most families get a discount in the form of grants, scholarships and education tax breaks and use loans to fill the gap—more than two-thirds of college seniors graduate with student debt.

A more realistic goal: Save about one-third of your expected college costs. When the time comes, current income, grants and loans can cover the rest. “Planning ahead is the key,” says Betty Lochner, of the College Savings Plans Network, which collects data on 529 plans. (To estimate what you’ll need to save under different scenarios, use the college-savings calculator by The College Board.)

The best place to save is in a 529 plan. Sponsored by 48 states and the District of Columbia (neither Washington State nor Wyoming offers a 529 savings plan), these investment accounts let your savings grow tax-free, and the earnings escape tax completely if the withdrawals are used for qualified college expenses, which include tuition, fees, and room and board. The appeal of 529 plans lies in their easy access as well as their tax benefits. The plans have no income limit and set a high cap on contributions. Two-thirds of the states and the District of Columbia give a tax deduction or credit for contributions. If your child skips college, you can make the recipient a sibling, grandchild, niece or nephew (or even yourself) without losing the tax break.

There are a few drawbacks. If you cash out for non-college purposes, you’ll owe income tax and a 10% penalty on earnings (but not on contributions). You may have to return any state tax deductions, too. Plus, you’re limited to the investment options in your plan. After you pick a portfolio, you must wait 12 months before you can change the investment mix or transfer the money to another plan.

Which plan?

Buy a 529 plan directly from your state if it offers a tax break. Most states offer two types of college-savings plans: a low-cost plan sold directly by the state and a higher-cost plan sold by a broker. The lower expenses of a direct-sold plan mean more of your money will go toward building your college fund. And in most cases, the state tax break will trump lower fees in an out-of-state program. (Go to the Vanguard 529 State Tax Deduction Calculator or's State Tax 529 Calculator to find out what your potential tax savings would be in your state plan.)

If your state doesn’t offer a tax break—or if you live in Arizona, Kansas, Maine, Missouri, Montana or Pennsylvania, which offer a tax break no matter where you invest—you can search for the best state plan that meets your goals. Figuring out which plan that is depends on what matters most to you. Low fees? An aggressive or conservative investment track? A plan with lots of investment options?

States generally offer an array of choices, including age-based port­folios, which adjust the mix of in­vestments automatically to become more conservative as your child ages; funds that focus on stocks or bonds (or both); and guaranteed-principal or principal-protected funds. But some plans offer better-performing funds and a more diversified mix of investments than others. And some plans charge lower maintenance fees, have funds with lower annual expense ratios, or both.

With the help of several databases—including research firm Morningstar’s 529 plan center, the College Savings Plans Network and, all of which you can access—we looked for direct-sold plans that excel in various categories. See our state-by-state guide to our 529 picks for more.

Best for hands-on investors: The solid funds in the Utah Educational Savings Plan are mostly index-based. They include 18 from Vanguard and 6 from Dimensional Fund Advisors. And UESP ranks among the lowest-cost 529 programs in the country. But here’s what we really like about Utah for do-it-yourselfers: customization. As with most 529 plans, you can handpick individual funds from Utah’s so-called static portfolios. But this plan also lets you create a tailor-made portfolio and have it automatically adjust at three-year intervals according to your preferences as your child nears his college years. No other state plan offers this feature in its age-based tracks.

Best for low fees: New York’s 529 College Savings Program uses Vanguard funds, so it should come as no surprise that it has low costs. The average expense ratio charged by its underlying funds (0.17%, according to Morningstar) is significantly lower than the 0.76% expense ratio charged by the typical U.S. stock index fund. Even better, the plan has no annual maintenance fee.

We also like that the plan offers three age-based tracks with different risk profiles: aggressive, moderate and conservative. The aggressive track starts at birth with 100% in stocks and ends with 0% in stocks at age 19 (it’s 25% in the last three years of high school). New York’s age-based portfolios don’t include an international stock fund. But the program’s assortment of individual funds does have a foreign-stock option: Vanguard Developed Markets Index fund.

Best age-based plan for aggressive investors: If an aggressive track with top-tier funds is what you seek, you’ll find it in the Maryland College Investment Plan. From birth through age 4, the portfolio holds 100% stocks—including stocks in developed and emerging countries. As your child ages, the track adjusts every three years, ticking down its stock investments to 40% when your child hits age 14 and 23% at age 18. By contrast, the average 529 plan’s age-based allocation to stocks is 80% in the early years and 10% at age 19.

What’s more, Maryland’s 529 plan is packed with good funds from T. Rowe Price, including Blue Chip Growth, Mid-Cap Growth, Small-Cap Stock and International Growth & Income. The lineup helped the age-based track targeted for 2030 post a 14.0% three-year annualized return (through June 30), two percentage points ahead of the typical age-based track for children between birth and 6 years old.

Best age-based plan for conservative investors: This one is tricky. Some conservative age-based tracks are simply too conservative. The conservative age-based track of New York’s 529 plan, for instance, sets out at birth with 50% invested in stocks and pares that to zero by age 11. But at that age, you still have six or seven years before your child matriculates, and stocks offer the best chance of increasing the size of your portfolio. That’s why we like Utah’s moderate and conservative tracks for conservative investors. In the early years, both tracks load up on stocks (80% in moderate; 60% in conservative), but the mix trickles down to 0% stocks by age 19 in the moderate trajectory, and it goes to 0% by age 13 in the conservative path.

Best for nervous Nellies: After 2008, many plans added savings options backed by the Federal Deposit Insurance Corp. to their investment lineups. You won’t lose money in these kinds of funds, but you certainly won’t keep up with the rate of college-tuition inflation. Still, says Scott Kahan, a certified financial planner based in New York City, “If you have a big lump sum—enough money to put away for college—and you want to be conservative, or your child is going to college next year,” these savings plans can make sense. Many state plans have a high-yield savings account among their investment options. For stand-alone plans, we like the bank-sponsored option offered through Virginia’s CollegeWealth plan with Union First Market Bank. It recently offered a 2% yield (2.25% for balances greater than $10,000).

Best if you want hand-holding: Rather have an adviser do all of the work? That can be okay. Some fee-only advisers, such as Gifford Lehman, a certified financial planner in Monterey, Calif., set their clients up in direct-sold plans. (Lehman’s favorite plan is Utah’s.)

But if your adviser puts you in an adviser-sold plan, consider yourself warned: You’ll pay for that. Funds in adviser-sold plans cost an average of 1.28% in annual expenses, more than double the 0.60% average expense ratio for funds in direct-sold plans, according to Morningstar.

If you think the hand-holding is worth the cost, go with Virginia’s College America plan. It holds many top-notch American Funds, such as International Growth and Income and New Economy, which charge an average of 1.19% in expenses. (There is a $10 annual maintenance fee per account.) If your broker or adviser doesn’t have access to CollegeAmerica, try ARKANSAS’S ISHARES 529 PLAN, which invests in thrifty exchange-traded funds. The average annual expense ratio of the funds in the iShares plan is a low 0.59%. There’s also a $10 annual fee per account.

Wednesday, August 20, 2014

Accessing Your Retirement Income: Sooner Or Later


Most business owners want to retire … eventually; some sooner than others. While some owners profess to never wanting to exit their businesses, we know that ultimately everyone must exit. A business owner who sold his business at age 54 never looked back. He’s living the good life, playing his guitar and enjoying his grandkids. In contrast, last month a business owner told me he has retired three times. He just keeps, “getting sucked back into the business world.” Even so, I know countless business owners who are doing well physically, mentally and financially; and are looking for ways to put off retirement. No matter where you stand in this continuum of desires, it’s wise to have a plan for how you can get at your retirement funds when you need them.     
Getting At Your Income SOONER
Successful business owners are more able to retire early than most employees. They have equity in their businesses, substantial control over their compensation and tax structures, and there is no upside limit to their earning ability. Early retirement — or at least a planned slowdown —is a payback for long hours worked and risks taken. There are a number of ways business owners can access retirement capital without having to necessarily sell their business. Consider these three popular approaches.    
  1. Qualified Money:  As a business owner you may have built up a sizeable qualified retirement plan, but are frustrated by the fact that you can’t get at those funds. Taxable withdrawals from qualified plans before a participant attains age 59 ½ are subject to an early 10% withdrawal penalty. There is, however, an exception if taxable withdrawals are taken in the form of “substantially equal periodic payments.” Commonly referred to as a “72(t) plan” or a “SEPP.” A 10% penalty tax will not apply to these pre-59 distributions as long as you follow the rules. The amounts must be distributed at least annually, be calculated as a life expectancy payout and continue for a minimum of 5 years or until age 59 ½ (whichever is later). There are three methods for designing these payouts, each with their own advantages and disadvantages. All, however, have the benefit of allowing you to start drawing down your qualified plan money early. 
  2. Life Insurance: Qualified plans are a great way to defer taxes on current income, but there are limits on how much you can put in a plan and distributions are generally taxed as ordinary income. There is a product you can add to your portfolio in which you pay your taxes now, are not limited in how much you put away, and can receive tax-free income in the future — cash value life insurance. Excess capital that has already been taxed can be used to fund a cash rich life insurance policy. The cash values will grow tax-deferred. Then, when you are ready to start taking an income, you can first withdraw your principal tax-free and then switch to loans against the policy’s death benefit. The remaining death benefit provides a source of income if you have a spouse or children to support in retirement. Since life insurance is subject to insurability, this is a tactic a business owner should address well before the need for retirement income is pressing.     
  3. Recapitalization:  There are ways of leveraging your business equity that fall short of actually selling your entire business. With an improved economy, recapitalizations (recaps) are back in vogue, even for smaller companies. Essentially with a recap you are exchanging your business equity for a combination of cash and a piece of the capital stock of a new entity intended to support the company’s future growth. The concept can be analogized to taking some of the chips off the table, but letting you stay in the game. There are many uses for recaps, but one is to monetize some of the owner’s equity. It’s a way to “liquify” your business without liquidating the operation. Plenty of investment banks, private equity firms and other financers are structured for privately-held businesses. 
Delaying Your Income Until LATER
I had helped my father set up an IRA many years ago. Eventually he retired and, when he came into his 70s, found out he had to start taking required minimum distributions (RMDs). He was furious about being forced to take taxable distributions when he didn’t need the money. Back then, there weren’t many ways to avoid RMDs. Nowadays, there are a number of ways to structure a portfolio to delay the receipt of taxable income. Consider these three ideas. 
  1. Backdoor Roth: The Roth IRA concept has proved disappointing to many business owners because of the income limits placed on who can contribute ($191,000 income for a married couple) and how much you can contribute ($5,500 per year). Still, there is an approach that can help business owners who, like my father, want to put off receiving RMDs: A so-called “backdoor Roth” allows high income earners to delay receiving retirement income. With a backdoor Roth, the high income earner contributes to a traditional IRA and then converts that IRA to a Roth IRA. It accomplishes the same thing as opening a Roth directly, but avoids the limits on contributions.  The conversion will be taxed, but the account then grows tax-deferred and will pay out tax-free.  Think of it as paying tax on the seed and not on the harvest. Best of all, Roths are not subject to RMD rules, thereby allowing you to push off taking an income into the future. 
  2. Deferred Income Annuities:  I recently discussed the trend towards using deferred income annuities (DIAs) as a safety net for retirement income. These contracts involve putting money away currently into a contract that will, later in life (say age 75 or 80), pay out an income you can’t outlive. For the business owner who wants to delay retirement and stay in the business, the DIA can be an effective way to lock in an income stream for the golden years. And, now you can use your qualified plan funds as the source of that income stream. On July 1 the Treasury issued final regulations amending RMD rules to allow annuity investors to start collecting later. If you want to delay receipt of qualified money, you can put some of the funds in a DIA, and thereby avoid being forced to receive taxable income in the form of RMDs. 
  3. Your Business:  Finally, don’t forget that your business ownership offers tremendous flexibility in retirement income planning. You can structure cash flows and tax events so as to exit on your own terms. There are too many tactics to address here, but let me offer an example. Accumulate that income in your business as a way to delay receiving a retirement income. If you are an S Corp or LLC, your business income will be taxed to you as it is earned, but that also means you’re building an account of after-tax income. When you want to start slowing down at work, you can reduce your taxable salary, and instead start taking out tax-free dividends.   
Business equity is a wonderful thing to have, but some day you may also want retirement income.  You don’t have to decide now when you’ll receive retirement income, but it makes sense to have a plan for how to receive that income so it’s there when you need it.

Tuesday, August 19, 2014

Quarterly Estimated Tax Filers’ Biggest Mistakes


Weeks ahead of the next quarterly deadline for filing estimated taxes (September 15) marks a good moment to look at what these filers often do wrong.

These clients, possibly a growing segment of your practice, given business startups and recent groundswells in employment structures, sometimes need a lot of help to keep up on taxes. “Poor planning is their biggest problem,” said Cheryl Morse, an EA with Emerging Business Partners in Wellesley, Mass. “Anything from letting their bookkeeping get behind to not having the money to pay their estimated tax.”

“Not making estimates at all and not anticipating what they’re going to earn by the end of the year,” said Jeffrey Schneider, an EA with Florida-based SFS Tax and Accounting Services.

Errors vary by type of returns, whether for a business requiring quarterly payroll returns or for individuals requiring quarterly estimates, said EA Roy Frick of Ocean City, Md.-based Fairway Services Ltd. and Frick Accountants Ltd.

“We call all our business clients each quarter as a reminder that they have payroll tax returns due,” Frick said. “Individual estimates are another situation. We provide them vouchers and envelopes with their returns and advise them that if situations change to contact us. In all cases, we try to prepare safe harbor estimates. If they had a large capital gain in the prior year, that can be a problem, so we need to make sure they are adjusted during the year.”

‘Just laziness?’

Misconceptions about estimated quarterly taxes run rampant among taxpayers – if newly self-employed taxpayers realize such taxes exist at all. “Every year, my tax return instruction letter to all my clients states that they need to call me once it is determined that their tax situation may have changed. Very few do,” Schneider said. “Is it because of potential fees? Because they don’t want to deal with taxes until April? Or is it just laziness? I’m sure it’s a combination. Whatever their reason, it can be a big dilemma if the client owes more than they anticipated come April 15.”

Self-employment taxes, a common feature of quarterly filing, are minefields for potential audits and penalties little understood by most affected taxpayers. “The failure-to-pay penalty is really interest on the monies the IRS did not receive by a certain date. In most cases, it is not a huge number,” Schneider added.

“For my business clients, their income tax withholdings (via wages) are enough to cover their W-2 wages. The pass-through number can cause the issue. When a client has a large K-1 income amount, they may owe tax with the return. Many of [my clients] believe that they can make better use of their money than the amount they have to pay in the penalty. It is when they underestimate that ultimate number that causes the highest anxiety,” he said. “That’s when they kill the messenger.”

Schedule and remind

“I emphasize the bookkeeping aspect, and make sure they have a clear understanding that knowing their financial condition at any moment in time affects pricing and hiring, not just taxes, and can’t be put on the back burner,” Morse said. “I really drive home that letting this get out of control kills many good businesses.”

“When April 15th comes around and they do not have the cash to pay, ‘File an extension.’ they say,” Schneider reported. “I explain that an extension is an extension to file, not to pay and that monies have to be paid with the extension. I have to explain that the IRS can void the extension and that late-paying penalties will be assessed on any outstanding balance, plus interest. Many clients file zero extensions and will deal with the aftermath later.”

“I advise clients to open another account at their bank and transfer 25 percent with every deposit,” said Mike Habib, an EA in Whittier, Calif. “This way, the account is funded when payment is due.”

Massachusetts EA Morse makes sure to schedule appointments for such clients two weeks before estimates come due and reminds them of those appointments – “often twice” – in the weeks just before the appointment.

“We also schedule the next appointment while they’re with me,” she added. “Scheduling the year in advance always seemed to lead to conflicts for one of us.”

Monday, August 18, 2014

How Obamacare could make filing taxes a nightmare

This tax season will be a messy one for most of Obamacare's 8 million enrollees.

Individuals and families who bought subsidized coverage have been receiving tax credits based on whatever amount they thought they would earn this year. Upon filing taxes, the IRS will reconcile the amount of subsidy received, based on expected income, with the person's actual income.

That's where things can get ugly.

If the person underestimated their income for the year — and got a higher subsidy than they actually deserved — they'll owe the government the difference. But if they overestimated their income, and received too small a subsidy, they'll see a bigger tax return.

How much of a problem is this?

Since most Obamacare enrollees are expected to have significant changes in their incomes, this could be a significant problem.

"Income volatility is much higher among those who were uninsured before reform than among those who had insurance," says George Brandes, vice president for health care programs at Jackson Hewitt Tax Service. "Many people with stable, salaried jobs already had health insurance through their employers."

In a 2013 Health Affairs paper, economists estimated that over 98 percent of enrollees on the California exchange would have some change in their income from one year to the next (they looked at 2018 and 2019).

Their analysis suggests that 38.4 percent of enrollees receiving subsidies would owe the government some kind of repayment if individuals never reported income changes to the exchange. Another 41 percent would receive tax refunds, because they would become eligible for bigger subsidies over the year. People can reduce these uncertainties by updating their information if and when their income changes.

The health law places limits on how much tax credit reconciliation could slam most enrollees. The limit ranges from $600 for low-income families up to $2,500 for those who earn more. Though capped, these sums still represent substantial financial shocks to low-income families.

"From Jackson Hewitt's perspective, the repayment liability caps do offer consumers some level of protection and predictability," Brandes said. "We have some sense of the order of magnitude that this is going to have on our customers."

But if income for the year was over 400 percent of the federal poverty line (about $95,000 for a family of four), the family is obligated to repay the subsidy in its entirety when filing taxes.

"One number in that study that really jumps out: 19 percent of households between 250 and 400 percent of the federal poverty line could wind up above that 400 percent threshold, which means the caps wouldn't apply to them. Then they're on the hook for the full face value of the tax credit," Brandes said. "That's one group where we're paying particular attention."

Perhaps softening the impact, repayments owed for overly-generous subsidies would take the form of lower tax refunds for many families.

"Having to repay a health insurance exchange subsidy might not necessarily mean that money will be owed to the IRS," the Health Affairs authors write. "Of the 132 million Americans who filed income tax returns in 2009, 83 percent received refunds, and 17 percent owed additional taxes."

Enrollees can help by updating their information when their income changes

"All of this illustrates how challenging it is to subsidize health insurance for low- and middle-income families through the tax system," said Larry Levitt, a vice president at the Kaiser Family Foundation.

The best thing for individuals and families to do is update their information within the health insurance exchange as soon as something changes. They have to do that through the actual exchange interface — which will have a section for changes in income or family circumstances — not through their insurer. Instructions for updating information on can be found here.

If people reported their income changes to insurers and had tax credits adjusted in a timely fashion, the number of people owing repayment would fall by 7 to 41 percent, and the size of the average repayment could be reduced by up to 61 percent, authors of the Health Affairs report found.

Enrollees can also take steps before the tax-filing process, especially if they're near the cutoff where the repayment caps no longer apply.

"There are things that can be done to change someone's modified adjusted gross income — you can make contributions to tax-preferred retirement vehicles, for example," Brandes said. "That can reduce your taxable income and push you back down into the tax credit range that allows you to benefit from the cap. There's a role for the tax-preparing industry here, not just in doing the reconciliation but also in terms of good tax-planning."

The key to smoothing these problems is education and outreach, but that's easier said than done. According to recent polling from the Kaiser Family Foundation, an estimated 40 percent of people receiving insurance subsidies don't actually realize the cost of their coverage is being offset by financial assistance from the federal government.

According to the same poll, over half of enrollees who did report receiving subsidies are concerned that their income will change and they will no longer be eligible for this financial help.

Sunday, August 17, 2014

Succession and Tax Planning: An overview to accomplish your goals before the end of 2014

As we approach the middle of the third quarter, the end of the year likely seems like an eternity away. However, the end of 2014 is quickly approaching and the window to implement proper succession and tax planning will be over sooner than you may think.  Therefore, this is the first in a three-part series that will focus on succession and tax planning techniques, particularly for owners of closely held businesses.

Many clients wish to eventually transfer their ownership in the family business to either their children or grandchildren. From a succession, income tax, and estate tax planning perspective, there is tremendous benefit in transferring a portion of a closely held business to the next generation during the owner's lifetime.  Ownership is transferred to the eventual successors, giving them a greater connection to the business, and appreciation in the value of the business is removed from the client's estate.

The most straightforward method of transferring ownership would be to make small gifts of the business over an extended period of time to the younger family members.  If the amount of the gift is less than the annual gift tax exclusion, there will not be any gift tax due.  Spouses may make tax-free gifts of $28,000 per donee per year.  Thus, over a period of time, a portion of the equity may be transferred to family members in a younger generation.

If the business will potentially appreciate rapidly within a short amount of time, then making small gifts every year is not a viable option because the majority of the appreciation would remain in the client's estate.  However, it is possible to transfer significant portions of the business and thereby the appreciation on a relatively efficient gift tax basis through the use of a grantor retained annuity trust ("GRAT") or through a sale to a trust for the benefit of the business owner's children and grandchildren.  If structured properly, the appreciation will be removed at marginal gift-tax cost.

In some situations, the successor will not be a member of the owner's family—say for instance the business is owned equally by two unrelated parties.  In these cases, it is vital that there be either a redemption agreement or cross-purchase agreement in place if the desire is for ownership to remain in the hands of those that are active in the business, as opposed to the deceased owner's heirs. Depending on the classification of the entity (i.e. a C corporation, S Corporation, or LLC taxed as a partnership), then different tax considerations will affect the form of the agreement.

Regardless of whether the goal is to transfer a business to family members in a younger generation or to unrelated persons, proper planning is essential to accomplish either of these goals in the most tax efficient manner.  In the next installment, we will discuss specific income tax issues and viable solutions for closely held businesses.