Saturday, November 30, 2013

12 Smart Tax Moves to Make Now

Year-end tax planning should be easier this year than last. Thanks to the new law enacted in January, you won't have to wait to see whether Congress will reinstate popular breaks that have expired.

But don't break out the bubbly just yet. If you're a high-income taxpayer, there's a good chance you're going to owe more for 2013, and that makes year-end planning more important than ever.

1. Feed Your 401(k)
A good place to start is with your 401(k) or similar employer-based retirement plan. Money you contribute to your plan (if it's not a Roth) is excluded from your income, lowering your tax bill.
If you're not yet on track to max out your contributions by year-end, you can direct some extra dollars to your retirement plan during your last few pay periods -- or, if you get a year-end bonus, use it to fatten your savings.
This year, workers can contribute up to $17,500 to employer-based plans. Workers 50 and older can contribute up to $23,000.

2. Safeguard Your Refund (By Shrinking It)
When you file your tax return each year, the amount of tax withheld from your paycheck or submitted through estimated quarterly tax payments ideally should match the amount of tax you owe. In reality, that seldom happens.
The majority of Americans are addicted to refunds. More than 75% of U.S. taxpayers give Uncle Sam an interest-free loan year after year, with an average refund of about $3,000 -- that's $250 per month. Wouldn't you rather get your money when you earn it instead of waiting a year for a refund? What's more, that fat refund represents a security risk -- identity thieves have been filing fraudulent returns and stealing the refund.
There's an easy fix. Just file a revised Form W-4 with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld.
If your current financial situation is similar to last year's, just use our Tax Withholding Calculator . Answer three simple questions (you'll find the answers on your 2012 tax return), and we'll estimate how many additional allowances you deserve -- and how much your take-home pay could rise.
However, this tool won't be much help if your tax situation has changed since last year because, for example, you got married, had a baby or switched jobs. In that case, you might want to give the more-complicated IRS online withholding calculator a whirl.

3. Penalty-Proof Your Return
If you expect that you'll owe money when you file your 2013 tax return next spring, you can avoid an underpayment penalty by boosting your withholding now.
You needn't pay every penny of the tax you expect to owe. As long as you prepay 90% of this year's tax bill, you're off the hook for the penalty. Or you can escape its reach, in most cases, by prepaying 100% of last year's tax liability. However, note that if your 2012 adjusted gross income topped $150,000, you'll have to prepay 110% of last year's tax liability to avoid a penalty.
Taking these steps to boost your withholding at year-end will shield you from an underpayment penalty on your 2013 return, no matter how much you actually owe when you file your return.
If you have both wage and consulting income and expect to owe money on your tax return, you'll do better by boosting the taxes withheld from your last few paychecks rather than trying to make up the shortfall with your final estimated quarterly payment, due January 15, 2014.
Taxes that are withheld are treated as if they were spread out evenly throughout the year, so that approach sidesteps an underpayment penalty; the estimated-tax-payment approach does not.

4. Plan Your Itemized Deductions
If you expect your income to drop next year -- you plan to retire, for example -- deductions will probably be more valuable this year.
You may want to pay other deductible expenses before year-end, such as your January mortgage, 2014 real estate taxes and fourth-quarter estimated state income taxes. Be careful, though: If you're a candidate for the Alternative Minimum Tax, some of those deductions could be disallowed.
On the other hand, if you expect your income to increase next year, you'll want to defer charitable gifts and other deductible expenses because they'll be more valuable.

5. Review Your Portfolio
Allowing taxes to dictate your investment strategy is rarely a good idea. But if you're already considering selling appreciated securities or other assets -- even if you don't have losses to offset them -- cutting them loose by year-end could save you money (you can harvest losses to offset investment gains, plus shield up to $3,000 of ordinary income from taxes).
Offsetting gains is particularly important to taxpayers in the 39.6% tax bracket (income over $400,000 for singles; $450,000 for married couples), because they face taxes of up to 23.8% on dividends and long-term capital gains, not the 15% rate that applies to most investors.
If you're in the 15% tax bracket, you'll pay 0% on long-term capital gains. In 2013, you're eligible for the 0% capital-gains rate if your taxable income is $36,250 or less if you are single, or $72,500 or less if you are married filing jointly.
If you think your tax rate is going to rise sometime in the future, converting to a Roth makes a lot of sense. Withdrawals from traditional IRAs are taxed at your ordinary income tax rate, while all withdrawals from Roths are tax-free and penalty-free as long as you're at least 59½ and the converted account has been open at least five years. You do have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert.
Worried about not being able to pay the tax bill? Don't be. When you convert to a Roth, you can change your mind. You have until October 15, 2014, to undo the conversion and turn your Roth back into a regular IRA.

7. Beware End-of-Year mutual fund purchases
Sometime in December, many funds pay out dividends and capital gains that have built up during the year, and the payout goes to investors who own shares on what's known as the ex-dividend date. It might sound like a savvy move to buy just before that day so you get a whole year's worth of income.
That's not how it works, though. Yes, you'd get the payout, but at the time of the payout, the share price falls by exactly the same amount. If you get $2 a share in dividends, for example, the share price drops by two bucks. In effect, the fund is simply refunding part of your purchase price.
But the IRS doesn't see it that way. You have to report the payouts as income on your 2013 return -- and pay taxes on them -- even if the money is automatically reinvested in extra shares. (The tax threat does not apply to mutual funds held in 401(k) plans or other tax-deferred retirement accounts.)
Before you buy shares for a nonretirement account in December, check the fund company's Web site to find out exactly when the dividend will be paid.

8. Give to Charity
This is a great time of year to clean out your closets and garage, but you can write off donations to a charitable organization only if you itemize deductions. A few bags full of gently used clothes and household items can add up to hundreds of dollars in tax deductions, but valuing those donations can be difficult. (Try Turbo Tax's free tool ).
If you donate a used car worth more than $500 to charity, your deduction will be limited to the amount the organization receives when it sells it. But you may be able to claim a bigger deduction based on the vehicle's fair-market value if the charity uses it to deliver meals, for example, or gives it to a needy individual. The charity will list the vehicle's sale price, or whether an exception allowing a higher deduction applies, on Form 1098-C, which you must attach to your tax return. Because of previous abuses, donations of used cars and other noncash items may attract extra scrutiny from the IRS. So keep scrupulous records.
Send cash donations to your favorite charity by December 31 and hang on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you'll also need an acknowledgment from the charity.

9. Give Really Big to Charity
If you plan to make a significant gift to charity this year, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year. Doing so boosts the savings on your tax return. Your charitable-contribution deduction is the fair-market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit.
Individuals age 70½ can make a tax-free distribution of up to $100,000 from their IRAs directly to charity. The IRA-to-charity strategy is particularly helpful for people who have accumulated a lot of money in their IRAs but don't need the money to live on -- and would have to pay a big tax bill when they take their required withdrawals. The charitable transfer lets you give the money to charity and count it as a required minimum distribution but avoid taxes on the withdrawal. Not including RMD in adjusted gross income can also help you stay under the income cutoffs for the Medicare Part B and Part D high-income surcharge or taxable Social Security benefits. This tax break is scheduled to expire on Dec. 31, 2013, although Congress has extended it several times in the past.

10. Give to Your Family (Or Other Lucky People)
You can give up to $14,000 to as many individuals as you like before Dec. 31 without filing a gift-tax return. If you're married, you and your spouse can give up to $28,000 per recipient.
The case for using the annual gift-tax exclusion for transferring wealth to adult children (or other lucky recipients) isn't as strong this year as it has been in the past. The estate-tax exemption is now $5.25 million (and twice that for married couples), indexed to inflation. Only a handful of ultra-wealthy families need to worry about the estate tax at that level. But 21 states and the District of Columbia impose some type of estate or inheritance tax , and most come with much lower exemptions. Rhode Island, for example, taxes estates valued at more than $910,725 at a maximum rate of 16%.
If you're feeling really generous, you could do it all over again on January 1, 2014, when you can give up to $14,000 per person.

11. Give the Gift of Securities
If your adult children or parents are in the 10% or 15% tax bracket (taxable income of up to $36,250 for singles, $72,500 for married couples), they qualify for the 0% tax rate on long-term capital gains. When they sell the securities, profit that would have been taxed at a rate as high as 23.8% on your return will be tax-free on theirs. Children under 18 and full-time students under age 24 are subject to the "kiddie" tax. Investment income that exceeds $2,000 will be taxed at the parent's higher rate.
To qualify for the special rate for capital gains, the securities must have been held for at least 12 months. For securities given as gifts, though, the holding period includes the time you owned them.

12. Spend Down your Flex Plan (If You Need to)
The Treasury Department and IRS changed the rules so employers can allow people to carry over up to $500 in their accounts from one year to the next. Companies can choose to make this change before the end of 2013, but they're not required to do it.
If your employer won't make the change by year-end and doesn't offer a grace period, it's time to clean out your account. Remember that you can no longer use flex funds to pay for over-the-counter medicines, such as aspirin, ibuprofen or allergy meds, without a prescription (except for insulin). But that restriction does not apply to other nonprescription medical items, such as crutches, contact-lens solution or bandages. (For a list of what is allowed by law, see IRS Publication 502 .) The same rules on eligible purchases apply to health savings accounts.

Friday, November 29, 2013

138 shopping days until April 15

You will want to do some tax planning right now so that you can not only prevent a big surprise but prepare for it if need be.

You need to sit down and project your income and income tax withholding to year-end. Then if you used tax software to prepare your returns, you can enter this information and any other anticipated taxable transactions into the tax software along with your new filing status to see if you will owe or not.

Better yet, visit a tax professional with your projections and a copy of your 2012 income tax return and get an assessment – there may be factors that play in that you are not aware of. After all, the tax code is 73,000 pages long and incomprehensible to the average lay person. Plus a tax professional may guide you to some tax saving transactions that you can implement before year-end.

Listed below are tax-impacting situations that require the help of a professional:

Change in marital status. If you divorced this year or have a divorce that will be final by December 31, 2013, you will transition from the advantageous married filing jointly tax status to single or perhaps head of household if you have dependents or others who will qualify you for that filling status. You may end up owing, so it’s a good idea to find out now so you can adjust your withholdings or otherwise plan for the liability. If you got married this year, you will want to analyze the impact of joint finances on your tax liability. It’s a good idea to combine your finances in a spreadsheet then visit your tax pro to determine if there will be a liability or a refund. Take along your copies of your prior year tax return.

Buying or selling a home. Many folks think that they can write off the down payment, or take deductions for improvements made to their primary residence. Not so. However, if you go from being a renter to being a homeowner, you will enjoy a deduction for property taxes and mortgage interest. So rather than taking the standard deduction, you will be allowed to itemize deductions which will allow for additional write offs such as charitable contributions, DMV fees, state income taxes paid, investment expenses, employee business expenses, and medical, to name a few.

If you sell your home, part of your profit may be taxable. Consult with a tax professional to determine if you will end up owing due to a home sale. Bear in mind that the first $250,000 (single) or $500,000 (married filing joint) of profit is not includable in income for tax purposes. If you went from being a homeowner to a renter, you will likely lose the advantage of itemized deductions and may need to adjust your withholdings accordingly.

Job change. If you change jobs, you will be required to complete Form W4 to declare the number of exemptions you will claim. Depending upon whether there are other financial changes and if you are substantially increasing or decreasing your income, you may want to do some projections to see where you will stand next April 15. Your tax pro can help you determine how many exemptions to claim in order to align your withholdings to your liability.

Retirement. Many baby boomers are retiring and that generally changes their tax picture completely. Running the new numbers will help retirees determine how much should be saved toward taxes and whether or not to have withholdings on their retirement pay or social security benefits.

So before the holiday season hits and you get busy partying, think about and plan for your 2013 tax liability. Come next April you will be glad you did.

Thursday, November 28, 2013

Year-end financial planning checklist

Happy Thanksgiving. Today is a special day to enjoy with family and friends and reflect on how fortunate we all are to have what we have and to live in a country where we can enjoy life, liberty, and the pursuit of happiness.

Thanksgiving is also a reminder that we are entering the hustle and bustle of the Christmas holiday season with less than five weeks left in 2013. That leaves very little time to wrap up year-end financial matters. So here is my annual checklist, updated as usual for current tax law.

1. If you are a high income taxpayer, be ready to pay more tax. If you read my recent columns you are already aware of the new Net Investment Income Tax, the higher rates on capital gains and dividends, the phase-out of itemized deductions, and the Medicare earned income surtax.

2. If you were 71 or older in 2013, make sure you take the required minimum distribution (RMD) from your individual retirement account (IRA) before Dec. 31. If you don't, the IRS can penalize you 50 percent of the amount you should have withdrawn.

3. If you inherited an IRA in 2013 from someone who was taking required distributions, make sure that person took their RMD before they died. If not, then you must take it for them or pay the 50 percent penalty. And you must start taking distributions based upon your own life expectancy next year.

4. If you turned 70½ in 2013, you can wait until April 1 to take your 2013 RMD. You must still take your RMD for 2014, so it may not be tax-wise to wait.

5. If you are self-employed, review your retirement plan options and year-to-date contributions. Your choices include simple IRAs, SEP-IRAs, individual 401(k)s, and defined-benefit plans. Some plans must be in place by the end of the year. Check with your tax or financial adviser.

6. Examine your investments. If needed, rebalance your portfolio. If you have mutual funds or stocks that you want to sell or replace, look for losses to offset the gains.

7. Make your charitable donations now. If you own an IRA and are over 70½ you can instruct your IRA custodian to make a tax-free charitable contribution directly from your IRA using what the IRS refers to as a qualified charitable distribution.

8. You can give as much as $14,000 this year and next year to another person without filing a gift tax return. A married couple can give up to $28,000 per person. If you give by check, encourage the recipient to cash the check before Jan. 1 so you can prove the gift was made in 2013.

9. Set up a college savings (529) plan for your grandchild, niece, or nephew. You can contribute up to five years' worth of $14,000 annual exclusions all at once. That $70,000 is not taxable as a gift, does not count against your lifetime gift tax exclusion, and will not be included in your estate if you live for five years.

10. Ask your tax professional if you should pay your state estimated income tax before Jan. 1 so you can deduct the payment on your 2013 federal income tax return.

Wednesday, November 27, 2013

Helpful year-end tax tips

As 2013 comes to a close, there is still time to plan your year-end strategies for minimizing your 2013 tax liability. Let's consider some savvy tax-planning tactics that might apply to you.

Timing, Deductions And Credits

In order to plan, you will need a good sense of your expected 2013 income, adjusted gross income and corresponding tax bracket.

When it comes to taxes, timing can be important. By delaying income such as a year-end bonus or commissions, you can defer your taxes on that income until 2014. Or, if you expect to be in a higher tax bracket in 2014, taking that income in 2013 may be a better move. After you decide about the timing of your bonuses or commissions, you can then estimate your adjusted gross income by deducting common adjustments from your expected income, such as 401(k) and individual retirement account contributions, alimony and student loan interest payments, for example. These are adjustments you can take even if you do not itemize.

Next, you'll want to take a close look at possible deductions and tax credits. A deduction reduces your taxable income — that is, the amount of income on which your tax is calculated. How much a deduction saves you depends on your tax bracket. For example, in a 25 percent bracket, a $1,000 deduction saves $250 of tax. In a 33 percent bracket, the same deduction saves $330. Many people find that claiming itemized deductions for expenses such as mortgage interest, state and local tax, and charitable contributions provides them with a better tax result than claiming the standard deduction.

Unlike a deduction, a tax credit directly reduces your tax liability. Whatever your tax bracket, generally speaking, a $1,000 tax credit saves you $1,000 of tax. There are several tax credits you may qualify for, such as tax credits for children, child and dependent care, post-secondary education for someone in your household and even a saver's credit.

Investment Income

Investment income includes taxable interest, dividends, rents, royalties, annuities, capital gains and income from a business investment. If you have realized capital gains on investment sales this year, you can lower your tax liability by generating offsetting losses. Capital losses can be used to offset your gains, plus up to $3,000 of your ordinary income, too.

Conversely, if you have already sold some investments at a loss, you can take capital gains on appreciated stock that you may have been hesitant to sell because of tax consequences. As long as the gains aren't more than your available losses, you'll be able to take them without the tax liability.

New Medicare Tax

If you are a high-income earner, you may be subject to the new 3.8 percent tax on investment income, designed to help pay for the Medicare program. This surcharge will be imposed on taxpayers who have any amount of combined net investment income, if their adjusted gross income is greater than $200,000 for single filers, $250,000 for married filing jointly and $125,000 for married but filing separately. Working to reduce your adjusted gross income to below the appropriate threshold could help you avoid this tax.

Decisions That Work Best For You

On a final note, remember that pre-tax contributions to an employer's retirement savings plan and/or deductible contributions to an IRA can reduce your current taxes as well as help you save for retirement. If possible, try to max out your retirement plan contributions for the year.

Consulting with a tax professional can provide you clarity on how best to minimize your tax liability.

Tuesday, November 26, 2013

Year-end planning that will help lower your tax bill

You don't have much time if you are interested in cutting your income taxes for 2013.
Some people can pay less income tax or get a bigger tax refund by using powerful, and totally legal, tax strategies by December 31st. No strategy, obviously, applies to all individuals and all situations. But let's do a little last-minute tax planning for those who might benefit.

Start by postponing or receiving income to 2014 if you think you'll be in a "lower tax bracket" for that year. Accelerate income into 2013 if entering an expected "higher tax bracket" in 2014. Maximize the value of tax deductions, too. Remember that a tax deduction usually saves you more taxes in a year with higher tax rates.

Up for a fat year-end bonus at work? Arrange to receive bonuses in January if your taxes will be lower next year. Self-employed taxpayers may defer income by waiting until 2014 to send invoices, under the cash basis of accounting, to customers. Accelerate payments, on the other hand, if you think your taxes will be lower in 2013. Other timing issues to mull over:

• Determine holding or selling appreciated assets, like real estate or securities.
• Evaluate postponing or completing a Roth IRA Conversion.
• Tap retirement distributions in a year with lower taxes.

Push Tax Deductions to a Year You Take Itemized Deductions: Use your standard deduction, a base income that isn't subject to tax, in a year that your in
come isn't high enough to itemize. Some itemized deductions may be limited or not fully allowed on a 2014 Schedule A.

Medical deductions have changed for 2013. Now you can only deduct medical expenses such as doctors, prescriptions, health insurance, and hospital stays if they exceed 10% of your Adjusted Gross Income, if you are younger than age 65.

Also think about:
• Purchasing a new car might allow you to add sales tax paid on the car to sales tax amounts from the IRS Optional Tables.
• Evaluating your Adjusted Gross Income, gross income, deductions and credits.
• Considering which bills, such as charitable and medical, to pay this year or postpone until next.
Review Stock Portfolio for Tax Losses by Year-end: Think about selling an under-performing investment to offset taxable capital gains from investment sales and capital gains passed through by your mutual funds. Watch wash sale rules, though. You're not allowed to deduct a current loss for identical securities purchased within 30 days of sale.

Usually holding capital assets for at least 12 months is the way to go, unless you have lots of capital loss to offset your gains. Beware, next year AFTRA has increased the highest rate for capital gains and dividends to 20 percent for many affluent taxpayers.

Also ponder:
Maximizing Energy Credits: Take the $500 maximum lifetime credit for qualified energy efficiency improvements to your principal home. Contemplate making an appropriate purchase by December 31, 2013, if you haven't utilized this deduction, before this lucrative tax credit expires.

Avoiding Alternative Minimum Tax Trap: Think you might be subject to the Alternative Minimum Tax in 2013? Consider paying state and local income taxes, real estate taxes, and miscellaneous itemized deductions in 2014 because they may increase your taxes next year if you get hit with AMT.
Smart Charitable Giving: Give appreciated assets such as stocks, subject to long-term gain, to an IRS approved charity. Get a tax deduction for the full value of the securities, not just what you paid. If you donate the shares before selling the stock, this helps you avoid the capital gains tax.

Read more here:

Monday, November 25, 2013

Year-end tax suggestions for businesses

 It’s not too late to make moves to reduce your 2013 taxes if you are a business owner.

• Use the new “streamlined” home-office rules. Many self-employed taxpayers declined to claim the home-office deduction because it was so complicated to compute. For 2013, the deduction is streamlined, allowing for a deduction of $5 per square foot, up to a maximum of 300 square feet or $1,500.

• Create a retirement plan. It’s not too late to create a retirement plan for yourself and your employees if you have them. The plans can be simple to set up and administer, such as a Simplified Employee Pension (SEP) plan. A 401(k) plan could be established even for a one-person business. While some of these plans must be established by the end of the year, most can be funded up to the extended due date of the tax return.

• Purchase business equipment. Up to $500,000 (scheduled to be reduced significantly to $25,000 in 2014) in business equipment purchases can be expensed this year, rather than being expensed over a number of years. Additionally, there is also a 50 percent bonus depreciation allowance (that will not be available in 2014) if your purchases exceed the $500,000 limit. 2013 might be the last year to maximize your equipment purchase deductions to such an extent.

• Deduct health insurance. If you are self-employed, you are allowed to claim 100 percent of the amount paid for health insurance for yourself, your spouse, and your dependents as long as you follow certain conditions.

• Consider credit card purchases. If you want to purchase equipment or supplies for your business before the end of the year, but you are cash-strapped, consider using your credit card. Your deduction occurs this year when the purchase is made, not next year when the credit card charges are paid.

For guidance with year-end tax planning for your business, contact our office.

Saturday, November 23, 2013

Top 10 Estate Planning Considerations to Complete Before Year-End


With the proposed tax reforms listed in President Obama's budget, certain planning strategies are in the crosshairs and may not be around for long. McManus & Associates, an estate planning law firm based in the Tri-State Area, today released the latest chapter, "Top 10 Estate Planning Considerations to Complete before Year-End," in its free Educational Focus Series. During a client conference call, the firm's Founding Principal and top AV-rated Attorney John O. McManus highlighted effective financial tactics to use now, as well as maintenance items required to ensure one's family wealth remains protected. To review the top estate planning tips that should be applied before 2014, go to the firm's website at

"Although legislation next year could be made retroactive to January 1st, acting before the end of this year will ensure that any changes in 2014 won't affect your planning," explained McManus. "Get inside the castle walls before year-end; in instances when Congress has passed rules retroactively, the laws are made retroactive to the beginning of the calendar year, but not to the prior year."

1. Laws will change, but not before year-end.

a. President Obama continues to publically call for a reduction in the lifetime gift and Federal estate tax exemption amounts. With deficit negotiations upcoming next year, there could be potential for a reduction in the exemption amount, precluding clients from taking advantage of the current unprecedented exemption amount.

b. Grantor trusts are intentionally defective for income tax purposes, meaning that the grantor pays any income tax on income earned by the trust assets. In this way the grantor can preserve the assets and accelerate the growth of the trust. The powers that the grantor retains cause it to be a "grantor trust."

c. Even if you have an estate plan in place, it may not reflect the current legislation to best employ the exemption amounts and tax rates.

2. Your partnership is validly created, but is it validly maintained?

a. Family Limited Partnerships and LLCs provide tremendous opportunities for estate planning, taking advantage of discounted values for assets gifted to trust, and provide a further level of asset protection for your family.

b. Such entities must be run, however, as legitimate businesses, which means shareholders' meetings, etc. No personal use assets owned by the LLC/FLPs should own multiple assets (investment properties, business interests, liquid and illiquid financial instruments).

c. Have annual review meetings to review your partnership and asset performance.

3. You are making gifts to your loved ones -- be careful not to exceed your exemption amount.

a. First, keep close track of all your gifts. Timely filing of a gift tax return allows the donor to elect how he or she wants to deploy the Generation Skipping Tax Exemption and start the clock running on the statute of limitations.

b. Gifts made to life insurance trusts to cover premium payments, for example, may not apply to gifts that a grantor would want to have use up his exemption amount.

c. Such gifts to life insurance trusts require Crummey notices be sent to each beneficiary of the gift to notify them that such gift has been made to this trust.

d. Consider naming people other than your children when making gifts to a life insurance trust -- this way the client can still make annual exclusion gifts to his children through other means (such as in trust).

e. Are your trustees monitoring the performance of insurance policies in the ILIT?

4. You have done great estate planning -- do you know the current two hottest strategies?

a. As opposed to trusts with language that reads, "one fractional portion at 30, the next at 35, the final piece at 40" consider creating a trust for children for their lifetime.

b. Lifetime trusts provide a practical vehicle to preserve assets, yet allow children the power to appoint and remove trustees and even the ability to serve as trustee of the trust at a certain age. If the child works to build her own life and never needs to touch the assets in trust, they can continue to grow and pass on free of tax. Standards for distributions are described in four terms: health, education, maintenance and support.

c. A limited power of appointment allows a person the ability to decide who will receive the assets in the trust within a class of individuals as defined in the trust document, decided upon by the grantor. Such limited power does not grant the holder of such a limited power to transfer the property to his/her creditors.

5. Income tax deductions can be powerful -- here are three useful deductions to take:

a. For clients who itemize deductions, it may be most tax-efficient to accelerate certain payments if it will result in higher write-offs for 2013.

b. Accelerating a January house payment due in January adds a 13th month of deductible interest. Prepayment of state, local and property taxes due early in 2014 can reduce a client's federal tax bill. Miscellaneous and medical deductions can only be taken if they exceed 10% or 2% of a client's AGI, respectively. Consider prepaying college tuition, or if you live in a state with no personal income tax, you might consider making a major year-end purchase to write off sales tax.

c. WARNING: Prepayment is not always the right answer. This strategy will not work if you will pay the alternative minimum tax (AMT). Ask your accountants about how to best proceed.

6. Your adult children continue to love and respect you, but the law prohibits you from making decisions on their behalf. Do the fiduciaries and guardians named in your documents still reflect your current wishes?

a. In today's litigious society, it is critical to immediately move forward to create health care documents, name powers of attorney, and execute a living will.

b. Marriage, divorce, new children, or any major life change -- either personally or in assets owned -- should lead you to revisit your planning to ensure that your family is protected as you intend and that all fiduciaries named are still reflective of your current wishes.

c. If it has been more than 5 years since the execution of a power of attorney, it may be wise to re-execute. Certain states and institutions will want to see a more current power of attorney.

7. You love to make year-end gifts to charity. Here are two critical strategies:

a. As we enter the holiday season and are reminded of all the people in our lives for whom we are grateful, we also can pause to reflect on how richly blessed we have been over the past year. In this moment of thanksgiving, have you considered donations to charitable causes that are close to the mission of your family?

b. Make charitable gifts with appreciated stock so that you get the full deduction for the value of the donation without liquidating the stock and the realizing capital gains.

c. Establishing your own foundation can be a wonderfully unique way to bring the family to talk about values, assets, and how to best match personal passions and resources to help find solutions to problems in the world.

8. Surprise! You now have to make withdrawals from your IRA. Here's a strategy to avoid tax payment and fully benefit your charity.

a. The IRS allows up to $100,000 in cash donations from an IRA to charities for clients who have reached age 70 1/2. Such donation does count for the required minimum distribution from the IRA and can help prevent possible loss of itemized tax deductions, phase-out of personal exemptions or credits, etc.

9. Given the current interest rates, should you consider a GRAT or QPRT?

a. With current interest rates low, as set by IRC 7520, the interest hurdle to make the creation of a GRAT profitable is rather low. This device allows the grantor to gift assets to children in an irrevocable trust for a term of years. Over that term the grantor is entitled to receive back an annuity stream equal to the value of the gift plus the federal interest rate. For assets that a client expects to appreciate significantly over the next few years, this can be a valuable vehicle for removal of growth from the estate.

b. Conversely, if interest rates rise, consider creation of a QPRT. The higher the interest rate, the greater the discount that you enjoy from the actual fair market value of the gifted residence.

10. How should you consider harvesting capital gains, timing long-term losses?

a. If you own investments that have dropped in value since you acquired them, now might be a good time to sell off part or all of them to cut your tax bill. Direct your advisor to sell only those positions within the portfolio that have realized losses, namely the highest basis shares. You can deduct capital losses up to the amount of any capital gains that you'll have for the year.

b. The preferential long-term capital gains rates are only applicable to securities owned for over one year. Therefore, holding appreciated securities for over a year before selling makes great tax sense. There is of course market risk that stock prices could plummet during that year. That said, now may be a great time to cash in some long-term winners to benefit from the 20% tax rate.

"Before a year comes to a close, there are some very important tax planning strategies that you can take advantage of that just end and each year they are non-accretive," commented McManus. "If you don't do them by year-end, you may or may not get to do them in the New Year -- even if you do, you lost the opportunity to do them in the previous year."

Friday, November 22, 2013

A Good Year to Get Your Year-End Tax Moves Right

Taxpayers, check your calendars: There are 41 tax-planning days before the books close on 2013. With new tax provisions in place and several benefits expiring at the end of the year, now is the time to plot your year-end financial strategy.

Here are year-end moves that will make that April tax deadline less painful.
- First, check your income and your expected marginal tax rate for the year, so you can avoid surprises. If you're a high earner - or have special income coming this year - that's especially important because a variety of new taxes kick in this year at various income levels. Single taxpayers earning more than $200,000 and joint filers earning more than $250,000 will have a new 0.9 percent Medicare tax on wages exceeding that amount.

Even higher earners will face higher rates on income and capital gains, as well as limitations on the amount of tax deductions they can take.

Remember that a one-time event like a home sale or a retirement distribution can bump you into a much higher bracket for a year. If you're approaching these brackets, you can work now to defer income to next year or make strategic decisions about your investments.

-- Adjust your at-work tax withholding to avoid penalties for low-balling estimated taxes. You may discover that you will owe more in taxes than you thought you would, because of business or investment income. If you didn't fully account for that by making adequate quarterly estimated tax payments to the Internal Revenue Service, you can face penalties in April.
Overcompensate now, suggests TurboTax's Bob Meighan, who calls it a "favorite" year-end strategy. He tells taxpayers to arrange to have extra money withheld from now until the end of the year so they don't face penalties in April for sending in too little in quarterly estimated taxes.

-- Give away shares of stock. If you own investments outside of a tax-deferred retirement plan, you've had a very good year - the Standard & Poor's 500 stock index is up more than 25 percent for the year. Sell your shares and you'll have to pay sizeable taxes of as much as 20 percent on your gains. But give away your shares and there are benefits to spare. If you make your year-end charitable donation in the form of a gift of appreciated shares, neither you nor the receiving charity will have to pay taxes on those gains.

You can also give shares away to your adult children and possibly avoid gains taxes. Here are the rules: If your child is over 18 and not a student, or a full-time student age 24 or older, they are considered independent of you for tax purposes. If your child earns less than $36,250 as a single and $72,500 as a couple filing jointly, they are in a zero percent capital gains tax bracket for 2013. That means you can give them your shares, they can sell them, reap the gains, and owe no taxes on that income, says Meighan. That's a super way to help out a graduate student or young person just starting on their career. (Gift tax rules kick in once you hand over more than $14,000 per person.)

-- Front load your commuter benefits. For 2013, you can have your employer tuck away as much as $245 per month in pre-tax money to cover your commuting costs for public transportation. For 2014, that will revert to $130 a month. It's possible Congress will come in retroactively and change that for 2014, but there are no guarantees. So? Max out your bus fare card for December, if there is still time.

-- Finish your short sale. If you're trying to complete the short sale of a home that is worth less than you owe on it, do as much as you can to push your lender and your buyer to complete the whole transaction before the end of the year. Any interest they forgive will be taxable in 2014, tax-free if they do it before the end of the year.

-- If you live in Florida or Texas, consider buying that car or boat now. One of the biggest tax breaks scheduled to go away at year-end is the provision that allows taxpayers to deduct their state sales taxes instead of their state property taxes. Folks who live in states that don't have income taxes can save sizeable amounts by making their big-ticket purchases in 2013.

-- Check your miscellaneous deductions. Items like work-related expenses and tax-advice fees are only deductible once they exceed 2 percent of your adjusted gross income.

-- Set up a solo 401(k). If you are self-employed and want to create a 401(k) for yourself and feed it for 2013, you have only until December 31, 2013 to do that. You have until the day your taxes are due (typically April 15, or October 15, with extensions) to set up and feed other types of retirement accounts.

Thursday, November 21, 2013

8 Ways to Be Exempt From the Individual Mandate Under Obamacare


The official start of enrollment under Obamacare kicked off roughly seven weeks ago under less than ideal circumstances, and early enrollment figures, especially from the federally run website,, have been nothing short of dismal.

Despite the opposition's cries for repeal and a relatively poor start -- largely blamed on a mixture of poorly constructed IT architecture and the government not allotting enough time to test the system -- the keystone of the Patient Protection and Affordable Care Act, known as the individual mandate, has not been delayed and is still expected to go into effect on Jan. 1.

As a refresher, the individual mandate is the actionable part of the PPACA that requires individuals to purchase health insurance of face a penalty in 2014 of the greater of $95 or 1% of their annual income. This penalty increases in size through 2016, when it equates to the greater of $695 or 2.5% of annual income should an individual choose to go without insurance. Each year after 2016, it will increase by the inflation rate.

As you might imagine, a good chunk of people need to purchase health insurance, renew their existing plan, or choose to go without. There are, however, a select number of groups -- eight to be exact -- that are exempt from the individual mandate, and therefore its penalties. Let's take a closer look at which groups are currently exempt under the PPACA's laws.

1. Select religious groups

The first exemption relates to those religious sects whose beliefs forbid them from obtaining health insurance, such as the Amish. For those of you thinking of starting your own religious sect to remain exempt from the individual mandate, you may want to have a back-up plan; there are pretty cut-and-dried rules as to what qualifies. According to the IRS, an individual would need to prove membership in a qualified exempt religious sect and have waived all Social Security benefits and rights. Chances are better than not that you aren't exempt from Social Security. Furthermore, according to the IRS, the sect or division must have "been in existence at all times since December 31, 1950."

2. American Indians

One group more likely to see exemptions from the PPACA are members of federally recognized Indian tribes. The U.S. Department of Indian Affairs maintains a federal registry of all qualifying tribes, which equates to more than five full pages of exemptions. You can check to see if your tribe qualifies by going here (link opens PDF file). Keep in mind that this doesn't mean American Indians are all uninsured, because that isn't the case. It just means that Indian Health Service and tribal-run health facilities take care of their health needs on tribal land. Should American Indians choose to live away from their tribal land, they are free to obtain health insurance on their state- or federally run health exchange under Obamacare.

3. Citizens who do not need to file a tax return
In addition to qualifying religious sects and American Indians, those who fall below the federal household income threshold and don't need to file federal income taxes are exempt from the individual mandate. Simply put, the PPACA is all about bringing affordable health insurance to Americans. If someone's annual income is below the poverty level, they wouldn't be able to afford health insurance. Therefore, they aren't going to be penalized if for some reason they choose not to maintain health insurance.

4. Those who are incarcerated

No, this is not a calling card for you to go commit a crime to get out of Obamacare! But the truth is that people who are incarcerated in jail, prison, or other penal institutions are exempt from the individual mandate. Once you're free, though, you'll be expected to purchase health insurance unless you meet one of these other seven exemptions.

5. Citizens who would be required to spend more than 8% of their income on health insurance premiums

If you do make more than the income threshold that requires you to file income taxes, you're not out of luck just yet. If you as an individual plan holder or member of a company-sponsored plan pay more than 8% of your annual salary out of pocket in premium costs based on the lowest-cost plan available (i.e. bronze), then you are exempt from the individual mandate under the PPACA's laws. Keep in mind this is a fluid figure that could change on a year-to-year basis. Also, the employer mandate should crack down on incidences of this happening when it goes into full effect on Jan. 1, 2015. When fully enforced, it will penalize businesses with 50 or more full-time employees that aren't offering health insurance to employees and that aren't subsidizing health insurance premiums in cases where premiums hit a certain threshold of an employees' annual salary.

6. Those who can claim a hardship

It seems that every law has to have its gray area, and if there's an exemption that can sometimes be difficult to pinpoint, it's those persons claiming a hardship. The concern here is that a hardship doesn't meet one definition, but has roughly one dozen noted exemptions according to the Centers for Medicare and Medicaid Services guidelines. Hardships listed include being evicted within the past six months, being homeless, recently experiencing the death of a close family member, filing bankruptcy within the past six months, or being found ineligible for Medicaid because your state didn't expand its Medicaid program. These are just a handful of the hardships which may grant you an exemption. You can read the full list at the CMS' marketplace exemption website (link opens PDF file).

7. Those who are not lawfully present in the U.S.

Put plainly, those persons who are not U.S. citizens or U.S. nationals (i.e. without lawful presence) are exempted from the individual mandate. That might seem like a double-standard to let non-citizens off the hook, but there's no way to enforce a penalty on someone that most likely isn't even paying taxes or filing them in the U.S. in the first place!

8. Those citizens who go uninsured for a period of less than three months per calendar year

Go ahead and throw an asterisk next to this one, because it does assume that you'll be purchasing health insurance for nine of the 12 months out of the calendar year. However, the PPACA allows you to go without coverage for a period of up to three months per year without being penalized. This is to account for things like changing jobs or perhaps a temporary hardship like moving.

Wednesday, November 20, 2013

High-Income Earners Seek Strategies to Cut Year-End Tax Bite


The higher tax rates passed by Congress this year have some top U.S. earners seeking last-minute strategies to lower their tax bite as year-end calculations turn up unpleasant surprises.
“There are many, many high-income taxpayers now who are finding themselves facing tax rates in excess of 50 percent,” said Suzanne Shier, a tax strategist and director of wealth planning at Chicago-based Northern Trust Corp. “That really gets their attention.”
High earners are seeing a combination of federal tax increases for 2013: a top marginal rate of 39.6 percent, up from 35 percent; a 20 percent tax on long-term capital gains and dividends, up from 15 percent; and a new 3.8 percent tax on investment income. Also, limits on exemptions and deductions are taking effect for this tax year.
Some top earners are only now realizing they may owe much more by April 15 because they’ve been paying quarterly estimated taxes based on their liability for 2012, which the Internal Revenue Service allows in a “safe-harbor” rule, said Elda Di Re, a partner at Ernst & Young LLP.
Others are absorbing the effects as they rush to implement strategies before Dec. 31 to limit the tax bite on earnings, market gains and stakes in businesses.

States’ Take
State taxes can push the bill higher for some high earners. In California, the top rate is 13.3 percent on income exceeding $1 million.

Investors with significant portfolios are seeing some of the biggest increases this year, said Martin Kalb, co-chairman of the global tax group at Greenberg Traurig LLP.
For wealthy taxpayers, the rate on long-term capital gains and qualified dividends now can be as much as 25 percent, including the new surtax and limits on deductions, Kalb said. That’s a 67 percent increase from 2012. The rate on other investment income such as royalties, interest and rents can exceed 43 percent.
“Clients are a little startled at the amount of additional taxes they are paying,” said Maury Cartine, a partner at Marcum LLP whose clients include private equity and hedge fund managers.
According to an analysis by Cartine, a married couple in New York with $600,000 in wages, $100,000 in qualified dividends and $300,000 in long-term capital gains—as well as $145,000 in itemized deductions for real estate taxes, mortgage interest and state and local taxes—would pay about 17 percent, or $37,000, more in U.S. taxes this year.

$450,000 Threshold
By comparison, a family with $600,000 in wages, no investment income and $105,000 in itemized deductions would see about a 2 percent, or $3,000 increase, he said.
Congress set the top tax rate for income above $450,000 for married couples or $400,000 for individuals, after deductions. Those are the same thresholds for the top levy on long-term capital gains and dividends.
Additionally, two new taxes to help finance the 2010 health-care law—a 3.8 percent surtax on investment income and 0.9 percent added levy on wages—apply to income of more than $250,000 a year for married couples and $200,000 for individuals.
Lawmakers also reinstated phaseouts of personal exemptions and itemized deductions for adjusted gross income exceeding $250,000 for individuals and $300,000 for married couples.

‘Big Surprise’
“It’s going to be a big surprise when they find out they aren’t going to be able to take all of their itemized deductions,” said Tracy Green, a vice president in tax and financial planning in the advisory unit of Wells Fargo & Co.
With less than two months left in the tax year, advisers and accountants are focusing on clients with closely held business stakes, mutual-fund holdings, charitable donations and retirement accounts to help maneuver around higher rates.
To minimize the effect of the 3.8 percent tax, high earners are reviewing their interests in S corporations and other flow-through entities to see if they can become active rather than passive participants, said William Zatorski, a partner in PricewaterhouseCoopers LLP’s private company services practice. Business income from active participation isn’t subject to the surtax and that shift in S corporations doesn’t trigger self- employment tax, he said.
This year’s stock market rally—the Standard & Poor’s 500 Index returned 25 percent through October—has tax implications for many investors with mutual funds, said Green of Wells Fargo Advisors.

Capital Gains
“This year the chances of having long-term capital gain distributions are going to be pretty good,” she said.
Mutual fund companies are releasing estimates of distributions this month, which investors can use to plan, Green said. Those intending to sell a fund should do so before distributions, while investors seeking to buy shares should wait until after, she said.
Some high earners may have to shift their usual year-end strategies because the new top rate means they are no longer subject to the alternative minimum tax, or AMT, said Di Re of Ernst & Young. Taxpayers not subject to the minimum tax can pre-pay state income or real estate taxes before Dec. 31 to lower their taxable income, Zatorski of PwC said.
Bumping up charitable donations is another strategy, Kalb of Greenberg Traurig said. Taxpayers with gains in publicly traded stocks can donate them to a public charity or their own private foundation. They’d be eligible for a charitable deduction equal to the fair value of the security, and would avoid the long-term capital gains rates, he said.

Retirement Plans
Individuals age 70 1/2 or older should consider giving as much as $100,000 to a qualified charity directly from an individual retirement account, Wells Fargo’s Green said. The donation can meet all or a portion of the annual required minimum distribution for IRA owners and isn’t recognized as income.
Also, high earners can maximize contributions to tax-advantaged retirement plans and realize some losses to offset capital gains, Green said.
Another recommended strategy is to defer income by investing in private-placement life insurance and private annuities. These are designed for high net-worth individuals, Kalb said.

Looking Ahead
Beyond 2013, high-income investors can add tax-exempt bonds or convert some retirement savings to Roth accounts, Green said. When savers put money into Roth IRAs and Roth 401(k)s, they pay taxes on the money upfront in exchange for tax-free withdrawals later.
Funds that capture losses throughout the year to offset gains will be especially attractive to investors because the strategy can reduce net income reported on tax returns at year-end, Shier of Northern Trust said.
Once high earners figure out this year’s strategy, advisers are saying they should keep an eye on moves in Congress that could change their future tax picture.
House and Senate panels are considering making the biggest changes to the U.S. tax code since 1986. Representative Dave Camp, chairman of the House Ways and Means Committee, wants to lower the top individual rate to 25 percent in a way that would require eliminating or curbing many tax breaks. Camp, a Michigan Republican, has said he will release a plan this year.
Passage of any revisions would be difficult and wouldn’t happen until sometime in 2014, at the earliest.
The possibility of more tax changes has some high earners taking advantage while they can of breaks such as the sales tax deduction, Kalb said. That benefit, which allows deducting sales tax instead of state income tax, is set to expire Dec. 31 along with some other breaks.
“A lot of my clients are looking to buy very expensive assets that will pay a lot of sales tax, especially in Florida,” which doesn’t have a personal income tax, Kalb said. “If someone buys a $2 million boat this year, they can get the deduction for sales taxes.”

Tuesday, November 19, 2013

2013 Year-End Tax Planning Considerations

As the end of the 2013 tax year approaches, set aside some time to evaluate your situation. Here are some things to keep in mind as you consider potential year-end tax moves.

1. The tax landscape has changed for higher-income individuals

This year a new 39.6% federal income tax rate applies if your taxable income exceeds $400,000 ($450,000 if you’re married and file a joint return, $225,000 if you’re married and file separately). If your income crosses that threshold, you’ll also be subject to a new 20% maximum tax rate on long-term capital gains and qualifying dividends (last year, the maximum rate that applied was 15%). That’s not all–you could see a difference even if your income doesn’t reach that level. That’s because if your adjusted gross income is more than $250,000 ($300,000 if you’re married and file a joint return, $150,000 if you’re married and file separately), your personal and dependency exemptions may be phased out this year, and your itemized deductions may be limited.

2. New Medicare taxes apply Two new Medicare taxes apply this year.

If your wages exceed $200,000 this year ($250,000 if you’re married and file a joint return, $125,000 if you’re married and file separately), the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–is increased by 0.9%. Also, a 3.8% Medicare contribution tax generally applies to some or all of your net investment income if your modified adjusted gross income exceeds those dollar thresholds.

3. Don’t forget the basics–retirement plan contributions

 Make sure that you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2013 income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, but qualified Roth distributions are completely free from federal income tax. For 2013, you can contribute up to $17,500 to a 401(k) plan ($23,000 if you’re age 50 or older), and up to $5,500 to a traditional or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2013 contributions to an employer plan typically closes at the end of the year, while you generally have until the due date of your federal income tax return to make 2013 IRA contributions.

4. Expiring provisions A number of key provisions are scheduled to expire at the end of 2013, including: Increased Internal Revenue Code Section 179 expense limits and “bonus” depreciation provisions end.

The increased (100%) exclusion of capital gain from the sale or exchange of qualified small business stock (provided certain requirements, including a five-year holding period, are met) will not apply to qualified small business stock issued and acquired after 2013. This will be the last year that you’ll be able to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you’re 70½ or older; such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) you would otherwise have to receive from your IRA in 2013.

 The above-the-line deductions for qualified higher education expenses, and for up to $250 of out-of-pocket classroom expenses paid by education professionals, will not be available starting with the 2014 tax year. This will also be the last year you’ll be able to elect to deduct state and local sales tax in lieu of state and local income tax if you itemize deductions.

Monday, November 18, 2013

3 Business Tax Moves to Make Now


Some big-dollar tax deductions that affect businesses are set to expire in 2013, so now’s the time to make sure your company considers taking advantage of them for the current tax year. Doing so may allow you to buy more equipment, send less to the IRS, or both.

Senior Consultant Peter Brown of Sageworks, a financial information company, talks with accountants daily and said quite a few of these professionals are working on year-end planning right now, setting up client meetings and making calls. “Many accountants are trying to contact their clients and engage with them to help them identify and maximize deductions in order to save some money on their taxes,” Brown said. “They’re also encouraging clients to work with them now so they won’t have to file as many extensions.”

Michael Lortz, shareholder at Portland-based accounting firm Geffen Mesher, specializes in working with entrepreneurs and privately held businesses and said deductions related to equipment purchases and spending on research and development are among the things that could go away in 2014, assuming Congress doesn’t act to extend them.

Here’s a rundown on some moves to consider:

Section 179 deduction.

“Under the Section 179 deduction, businesses can write off dollar-for-dollar their equipment purchases,” with certain limits, Lortz said. For example, a business could buy a new truck, new machinery, or new servers and deduct the first $500,000 in costs for the 2013 tax year.

Without an extension by Congress, the allowed first-year deduction drops to $25,000 in 2014. “That’s a pretty significant incentive to purchase and place into service any fixed assets or equipment,” Lortz said. He noted that making sure the equipment is placed in service by Dec. 31 is important. “So, for example, if you were to order some new servers and you ordered them December 30 and installed them after January 5, technically, they don’t qualify for the deduction in 2013,” he said. Purchases exceeding $2 million start to lose that first-year deduction of $500,000, too, he noted.

Real estate purchases aren’t covered by the Section 179 deduction, but if you’re a tenant and you’re making certain leasehold improvements, you might be able to write off up to $250,000 of those expenses, according to Lortz.

First-year bonus depreciation.

Larger companies that spend more than $2 million on capital equipment should look into the “first-year bonus depreciation” allowed in 2013 but set to expire, Lortz said. Under that rule, brand new equipment can qualify for a write-off of 50 percent, with no limits, so $5 million of a $10 million purchase could be expensed.

R&D tax credit.

 Another tax-related item set to expire in 2013 is the tax credit for research and development. It has been extended numerous times over the years, and it’s one that tends to get extended, sometimes retroactively, Lortz said. Despite the high-tech-sounding name, this credit is not for tech companies alone. “If you’re having to come up with new ways of doing things, new processes, you very well might qualify,” Lortz said. Check with your tax advisor on the specifics of your situation, he suggested.

“Many businesses that might qualify for this tax credit aren’t aware that they qualify,” Lortz said. “The key here is making sure they’re talking to their tax professionals, saying, ‘Is there anything we do that would qualify for the research and development tax credit?’”

Another planning issue that small businesses should be looking at if they haven’t already this year is their business structure, Lortz said. The impact of new taxes for 2013 that are part of the Affordable Care Act (including a 3.8 percent tax on net investment income, which can affect investors in a business, and a 0.9 percent tax on earned income) can be reduced if your business is structured as an S-Corp.

“Those new taxes just give businesses another reason to take another look at whether they’ve got a good entity,” Lortz said. “Businesses ought to have taken a look at this structure already, but a lot of folks were crossing their fingers that the law would get overturned on appeal. If they had put off planning, it’s time to start.”

Sunday, November 17, 2013

Obamacare Will Lift Tax Fraud To A Whole New Level


The website continues to be a nightmare for those Americans trying to enroll and receive subsidized insurance. The law behind it all, the Patient Protection and Affordable Care Act, commonly known as Obamacare, is also causing millions of Americans to lose their current insurance (over 5 million so far). These unfortunate people had low-priced insurance plans with limited coverage, plans that do not meet the minimum requirements for insurance under Obamacare. There is only one group of people that appears set to win from Obamacare: tax fraudsters.

The main feature of Obamacare is a system of subsidies to make insurance affordable for people who earn too much to qualify for Medicaid and too little to afford market price insurance policies. The law also provides coverage for children under 26 on their parents’ insurance and people with pre-existing conditions can now buy insurance at more favorable premiums. However, the main mechanisms for expanding coverage are making people eligible for Medicaid or offering them subsidies.

People who earn slightly more than the poverty level and who were not previously eligible for Medicaid (either because of earning too much or because they are childless adults) will now get Medicaid, free federal government health insurance, if they live in a state that agreed to expand Medicaid to cover that group of people.

People who earn from 133 percent to 400 percent of the poverty line are eligible for subsidies when they purchase insurance policies through a state exchange. There are currently lawsuits over whether it is legal for the federal government to offer the subsidies to people who buy insurance from the federal exchange (the law never says they can). However, the Obama administration plans to offer the subsidies through the federal exchanges whether it is legal or not.

These issues are all fairly well known, but what has been much more sparsely reported is that the law is almost perfectly designed for tax fraud. This tax fraud, which will be at least somewhat legal, will happen in two stages.

First, the way the Obama administration is implementing the law allows people to state their income with little to no verification. By stating a low income, people can qualify for a large subsidy which gets paid in advance. When people receiving 2014 subsidies file their taxes in April 2015, if it turns out their income was higher than they originally stated, you might think they would then have to repay the subsidy.

But now we get to the second part of the tax fraud. Under the law it is not only difficult for the government to get its money back, in some cases it is legally impossible. There are two limits on the ability of the IRS to collect the overpayment.

The IRS is not allowed to place a lien on your property or garnish your wages in order to collect money owed under Obamacare. This applies to both overpayment of subsidies and to the penalty for not purchasing insurance at all. That means unless a person voluntarily pays what is owed the IRS can only collect money from people who would otherwise be owed a refund on their taxes. If someone owes money either for not purchasing insurance or overpayment of a subsidy, the IRS can deduct the amount owed from the refund the person would have received. If they are not owed a refund large enough to collect the entire amount, there is nothing more the IRS can do.

In addition to the above difficulties that the law places on the IRS, the law also limits the amount of any subsidy overpayment that must be repaid under any circumstances (look at the very end of the law in this link). In other words, if a person lies about their income in order to collect a larger subsidy, there is a good chance that they legally can keep at least some of the overpayment.

For example, for a family with actual income of less than 200 percent of the poverty line (around $47,000 for a family of four), the most that must be repaid is $600. If the family’s income is as high as $115,000, they still cannot be forced to repay more than $3,500.

Given that the Obamacare subsidies for a family of four can easily be $10,000 or more the difference between what is paid as an undeserved subsidy and the amount that must be repaid could be quite large.

Recent reports have described how the IRS has been paying $4 billion per year in fraudulent refunds filed by thieves who didn’t even do a particularly good job of disguising the fraud. The IRS was also found to have paid over $110 billion in fraudulent earned income tax credits over a decade. Thus, tax fraud is a major problem already and Obamacare seems almost to be intentionally designed to make tax fraud easy.

There is little that can be done to tighten up the income verification in an effort to prevent overpayment of subsidies to begin with. For one thing, the Obama administration does not want to verify incomes because they want people to get big subsidies and because it would slow the process down even more (if that is possible). Beyond that, the entire income verification problem is very complex. The IRS only has full income data for the last tax return filed, which is one year old. Using that, they must try to determine the family’s likely income in the coming year. Over a two year period, incomes can change a lot, so over- and under-payment of subsidies is unavoidable.

Worries about tax fraud related to the Obamacare subsidies caused Senators Hatch and Coburn to send a letter to the IRS last week asking about their plans to minimize such fraud. My guess is the answer will be nothing because the law does not really allow the IRS to stop the fraud.

Obamacare is going to be one of the largest government programs we have as measured by spending, with most of the spending occurring through the subsidies designed to make insurance affordable. Yet the program is designed in a manner that invites tax fraud on a massive scale. Just understate your income, arrange your withholding so you are not due a refund, and keep your subsidy overpayment with no fear of reprisal.

Given that an entire industry has grown up helping people commit tax fraud using the earned income tax credit, we should expect a similar phenomenon to arise around the Obamacare subsidies. If the IRS cannot minimize fraud when they have the full range of their enforcement powers, how bad is the fraud going to be when the IRS has both hands tied behind its back?

Saturday, November 16, 2013

How Obamacare will affect your federal tax return.

Politics aside, the Affordable Care Act could affect your federal taxes this year and in years to come.
The law’s tax implications aren’t as large as when President Ronald Reagan rewrote the tax code, but they are significant. Historically, I would compare it to when President Carter implemented the windfall profit tax. People don’t understand that there are tax implications.
The two biggest changes are the penalty for not buying insurance and the additional tax, called a Medicare surtax, starting on wealthier households.
If you don’t buy insurance for next year, the penalty is relatively small — $95 per adult and half that per child.
A family of four with a $54,500 income would have a $272 penalty in 2013. But by 2016, that penalty will increase to $2,085. Many families are dependent on their tax refund, and the penalty will be deducted from that.
For those with much higher incomes this year ($250,000 in adjusted gross income for a married couple) the Medicare surtax will add a tax of 3.8 percent on net investment income and 0.9 percent on compensation.
That’s a big deal from a tax preparation standpoint. Many who are getting taxed may not be paying enough in terms of withholding now and will owe that tax when they file.
One possible way to lower your income and avoid the tax is to invest in a Roth IRA or convert a regular individual retirement account to a Roth IRA.
Some employees are also having to make health insurance decisions for the first time if their employer drops coverage and pushes them to the new federal healthcare exchange.
A lot of people are afraid because they haven’t had to make that decision before and are confused about the subject. A lot of education is required.
Many are also unaware that they are eligible for tax credits to help pay insurance premiums.
The income levels are pretty high for the credit. It goes up to 400 percent of the poverty level, which can mean a modified gross income in the $90,000s for a family of four.
The tax credit is based on estimated income.
If your taxable income goes up when you file in 2015, you may have to refund the subsidy you got in 2014.

Read more here:

Thursday, November 14, 2013

Real Estate and the So-Called Medicare Tax

Somewhat lost in the welter of caterwauling and chaos surrounding the Affordable Care Act rollout was a 3.8 percent tax on certain investment income that included real estate and exempted qualified real estate professionals.

Congress passed the so-called Medicare tax in 2010, and it went into effect on Jan. 1 of this year. It applies to individuals with adjusted gross incomes above $200,000 and joint returns with an AGI of more than $250,000. Capital gains on the sale of a primary home totaling less than $250,000 for an individual and $500,000 for joint filers are still exempted. But the Medicare tax has ruffled feathers even if it affects a small and affluent group of people and transactions.

Real estate professionals are spared the pain, being exempt from the Medicare, net investment income and additional self-employment taxes on income from rental real estate. Of course, that’s assuming they qualify. To do so, they must devote more than half of their professional time—or 750 hours per year—to real estate activities like managing, developing, operating and brokerage work. They must also “materially participate” in the rental real estate sector.

There are seven or eight thresholds that can determine material participation. One is spending more than 500 hours on a rental property or activity. Another is spending at least 125 hours on “very significant” participation. A third criterion is that the individual spends more time than anyone else on the property or activity.

But despite the allure of evading the 3.8 percent tax, it’s unclear what effect it will have on real estate transactions.

When a real estate professional’s attention does shift to the tax—or his exclusion from it—the biggest change may have to do with the documentation required to stay in the Internal Revenue Service’s good graces. Anybody who does real estate thinks he’ll qualify,. And just telling the IRS you’re a real estate professional ain’t gonna cut it.

Other real estate issues stemming from the tax affect triple-net leases, whose owners are unlikely to qualify as material participants. And real estate dynasties may be in for a surprise, since children who own property but don’t actively manage it will have to pay up. Finally, sources said they’d handled a rising tide of 1031 like kind exchanges, thanks in part to the 3.8 percent tax.

Wednesday, November 13, 2013

Early preparation can ease 2013 tax burden.

Holiday season has only just begun, and the last thing taxpayers are probably thinking about is tax season. But anyone hoping to position themselves well for an interesting tax year should probably give it a little brainpower.

With taxes as a moving target, preparation is all about planning. Here are some things  taxpayers can do right now to get ready for what's ahead and possibly save money.

Get organized. Start gathering receipts and other items needed to support your 2013 returns. Day care receipts, health expenses and pay stubs all act as supporting documents for your returns.

Review the past. Sit with your old tax returns and current pay stubs and do an estimated tax return for 2013. If you can't do it yourself, spend about $50 to have a professional do it for you. The objective is to get an early idea of your tax liability so you can make proper adjustments.

Spend money to save money.  Actions such as increasing your 401(k) payments in these next few months or allocating money next year to medical reimbursement or dependent care accounts require you to pay pre-tax money, but they also lower your adjusted gross income, or AGI. The lower your AGI, the less you owe the government. You may even be able to do something as simple as adjust the withholding on your last few paychecks of the year to help bring your tax payments in line with your tax liability.

Be generous. Charitable donations can help you reduce taxes owed as long as you itemize your return. But be warned: A few $25 donations and a couple of Goodwill receipts are probably not going to help you much.

Know the law and act accordingly. It helps to be aware of tax law changes in any given year. In 2013, for example, higher-income individuals — singles with income of $200,000 or more or couples filing jointly with income of $250,000 or more — will pay more taxes.

The minimum for medical expense deductions for anyone under 65 increases from 7.5 percent to 10 percent of income, which means fewer people will qualify. In addition, the forgiveness debt on home foreclosures, sales tax deduction, private mortgage insurance deduction, teacher's classroom supplies deduction, tuition and fees deduction, and residential energy tax credit are only good for 2013. Taking action in these areas before the end of the year will put you in a position to take those deductions.

Consider the power of three. There is nothing wrong with doing your own taxes, but every three years it's a good idea to have an enrolled agent — a professional qualified to represent taxpayers before the Internal Revenue Service — complete or review your work. That way, if you missed something, you will still have time to file an amended return.

Tuesday, November 12, 2013

Obamacare tax could surprise some wealthy filers

It's hard to keep all the new Obamacare taxes straight, but there's one that some couples won’t see until they file their 2013 taxes next April, and bizarrely it could mean a surprise tax bill or a refund. It's the 0.9 percent Medicare surtax on wages and self-employment income (not to be confused with the separate new 3.8 percent net investment tax on capital gains, dividends and passive income).

Can you lessen the bite of the 0.9 percent surtax? In some cases, yes, if you act before year-end, says Mark Nash, a partner in PWC's Private Company Services practice in Dallas.

The surtax -- or additional Medicare tax (it is levied on top of the Medicare tax you already pay) -- is effective Jan. 1, 2013 and applies to wages and self-employment income above $250,000 per couple or $200,000 for a single. It applies to active income from a general partnership, but retirees get a break -- distributions from retirement accounts and Social Security benefits aren’t assessed the surtax.

Once you earn more than $200,000, you'll see the withholding for the 0.9 percent surtax on your paystub. Employers are obligated to collect the tax -- without regard to the employee's filing status or outside compensation.

So if you're a high-earner single with a corporate job, it's straightforward. You pay 1.45 percent Medicare tax on the first $200,000 of compensation plus 2.35 percent (1.45 percent plus the additional 0.9 percent) on compensation in excess of $200,000. (This is on top of the Social Security tax rate of 12.4 percent -- 6.2 percent paid by the employee and 6.2 percent by the employer -- calculated on the "wage base" up to $113,700 in 2013.)

Note: the impact of the additional Medicare tax goes up the more your salary goes up because unlike Social Security tax, there is no cap on the amount of compensation subject to Medicare tax, notes Mark Luscombe, a federal tax analyst with CCH, a Wolters Kluwer business, in the CCH 2013 Year-End Tax Planning Guide (.pdf file).

What gets complicated is if you hold more than one job, or have a day job and self-employment income on the side, and that pushes your total income above the threshold. Couples where one spouse is over the threshold and one is under, or where both spouses are under the threshold but combined they are over it, can all face underwithholding problems too.

Here's an example. If both spouses make $200,000, they're exempt on only $250,000, which means they're underwithheld by $1,350. That's what they'll owe come April if they don't adjust their W-4 withholding or pay in estimated tax payments to pay in now. If they don't take these corrective measures, they'd owe a penalty of about $27 calculates Kaye Thomas, founder of

For a couple with one high-earner spouse who sees the withholding on his paycheck and a spouse earning $100,000, they'll owe $900 in April.

Who gets a refund? A high earner spouse with a stay-at home or low-earner spouse. Say the high-earner spouse brings in $250,000 and the spouse is retired. The high-earner spouse's employer would be withholding on that extra $50,000, and it would be extra withholding.

Bizarrely, you can't fix this by asking your employer to stop withholding for the surtax -- nor can you fix the underwithholding example by asking your employer to withhold the surtax. Instead you have to adjust your W-4 to withhold more or less regular income tax.

"You're supposed to have figured this out," says Nash, who has been helping clients run the numbers to plan for the surtax.

Here are some ideas.

For wage earners, deferring the exercise of options or deferring some income as part of a nonqualified deferred compensation plan into next year could keep you under the threshold for this year. Unfortunately, the way the calculations work, stashing more in your 401k won't help reduce the amount of your wages subject to the surtax.

Self-employed individuals have more room to finesse or bunch their income. They could defer billing and collections until January 2014 and/or accelerate expense payments into 2013 to offset 2013 income. To the extent S Corp owners draw more than $200,000 in salary, they could take more as S Corp distributions and less as salary, but within reason. "You can’t manipulate this without any conscious at all," says Nash. (The Medicare base tax is 2.9 percent for the self-employed, so the surtax increases the total Medicare tax to 3.8 percent on self-employment income.)

Another warning: if you're just under the threshold, watch out. The threshold amounts are not indexed for inflation, so the tax will snare more people each year.

Monday, November 11, 2013

Empty Nesters: What Can You Do With a College Savings Plan if Your Kids Are out of School?


So your kids have completed college and you still have money left in your 529 college savings plan. You can siphon the remaining cash and spend it on anything you please, but it will cost you -- both a 10 percent penalty and income taxes apply.

There are, however, ways to skip the penalty and stretch the funds further -- you'll just have to apply it to further education.

It's never too late to go back to college
Consider going back to college. Just because your kids may not be using the money or have already finished college doesn't mean that the money has to go to waste. Many parents are going back to school in response to the economic troubles of the last decade. After all, only the original beneficiary's family members can take advantage of the funds without tax penalties.

No penalty with tax-free academic rewards
While in school, if your kids receive free scholarship or fellowship awards, you will not have to pay the penalty as stipulated by the 529 plan. This is an exception written into the IRS tax code. Unfortunately, you will pay income tax for any earnings from your distribution, just not the 10 percent penalty.

Some other exceptions include nontaxable distributions for education assistance from an employer or if the beneficiary receives veteran assistance or attends a U.S. military academy. If you can avoid the penalty fee based on these exceptions, you might consider rolling over this money into a retirement investment. Before you make a final decision, note that every state is different and the rules vary.

Change the designated beneficiary
If you feel that holding onto your account may be a better option, remember that your family can benefit from college savings even if your children are all finished with school. You may want to change the beneficiary to someone outside your immediate family. In most cases you can transfer the beneficiary to a first cousin, a brother or sister -- related by blood or marriage -- or an in-law. Make sure you check the bi-lines of your 529 plan and consult with a tax advisor to know for certain whom you may designate as the beneficiary.

Additionally, you can designate a future grandchild as a beneficiary. In this case, you would want to transfer the ownership of the account to your child so that your grandchild will be the beneficiary under their parent's account. You can do this penalty-free.

As with any other investment vehicle, always consult your CPA while you are planning your next move. Every decision you make will affect your taxes and planning each step is fundamental in getting the most out of your 529 plan.

Sunday, November 10, 2013

Tax-saving through gifts

This time of year is often tax-planning time for those who want to pay lower taxes overall. One tax-saving idea deals with gifts to family and friends and another uses IRA funds.

Each of us can make annual gifts of up to $14,000 per recipient to any number of individuals to reduce the future taxability of our estate and provide for family and friends now. That amount is excluded from gift taxes. In the coming years, the annual amount will be indexed for inflation.

Married couples can make a combined gift of up to $28,000 per recipient, even though only one owns the property, and the gift will escape this type of tax.

These gifts to family and friends can be in the form of cash or stocks, mutual funds or corporate bonds. When appreciated assets are transferred, the recipient will also receive the original owner's cost basis and holding period for future tax calculations.

Many who have planned wisely for retirement by putting money into IRA accounts now find that the required annual distributions are funds they do not really need after all. However, they must withdraw a certain amount or face a 50 percent federal tax penalty.

An alternative to paying the federal and state income taxes is available. Federal law currently permits anyone age 70-1/2 or older to make tax-free gifts from IRAs to their favorite charitable organizations during 2013.

Gifts up to $100,000 can be made by having the IRA manager transfer the funds directly to the nonprofit organization (private foundations, supporting organizations and donor advised accounts are excluded).

While regular IRA distributions are subject to federal and state income taxes, the charitable amounts escape federal taxes and most states, including West Virginia, also exempt the gift from taxes.

No personal benefit from the transferred amount is permitted.

An IRA gift counts toward the required minimum distribution for the year and doesn't impact or lessen the deductibility of any other charitable gifts made in 2013.

If you do not have an IRA, it may be worthwhile to discuss rolling over other tax-deferred retirement account funds into a newly established IRA to make such charitable gifts with your financial adviser.

Your hard-earned IRA funds can be a tax-free way to help your community and favorite nonprofits.

That's good planning.

Saturday, November 9, 2013

Start Tax Planning Early: 8 Great Year-End Tax Tips

When you think of the holiday season, what comes to mind? Gift exchanges? Holiday parties? Home-baked pies? Taxes?

I know you have a lot of other things to do this time of year, but the holiday season is a great time to make some last-minute tax moves before the year is over. Here are eight of my favorites:

1.  Ask for a New Year’s Bonus Instead of a Christmas Bonus
By delaying your bonus by only a week, you can push the payment of taxes on the income 15 months into the future — a year from next April.

2.   Clean Out Your Closets and Donate to Charity
You can clean out the old clothes, sporting goods, books, and other household goods that you no longer use and welcome the New Year with new space in your life, and get a quick tax deduction to boot. Document these donations by making a list of the items at the time you donate them.

3.  Pay Donations by Credit Card
Payments made by credit card are deductible in the year they are charged, not the year they are paid, so you can donate to your favorite charity by December 31 and not pay the bill until next year.

4. Contribute the Maximum to Your 401(k) or 403(b) Retirement Plans
Some employers will allow you to catch up on contributions by increasing your deduction on your last paychecks of the year. If you are 50 or over, don’t forget that you can contribute an additional $5,500 “catch-up” contribution in addition to the regular 401(k) or 403(b) $17,500 limit for 2013.

5.  Check the Balance in Your Flexible Spending Account
A wonderful fringe benefit, these helpful plans allow you to set aside a portion of your salary before taxes for certain purposes, such as child care or health care expenses.
These plans did work on the “use it or lose it” concept: any amount unused at the end of the year was lost, however the Treasury and IRS modified the rule and now employees may be allowed to carry over $500 of unused amounts for next year’s expenses.  Your employer may also offer the existing plan option to use unused amounts for up to two and half months following year end.

6.  Bunch your Medical Bills
Medical expenses are only deductible when they exceed 10% of your adjusted gross income (still 7.5% if you are over 65). If your income is low this year or your medical expenses are high, speed up your deductions accordingly. If you want to take the deductions this year, pay any outstanding medical bills before year-end, stock up on prescriptions, get new glasses, and pay your health insurance premiums before the end of the year.

7.  Estimate Your Taxes
Estimate your taxes and see if you need to make any last minute tax moves.  The IRS treats income taxes withheld from your paycheck as if they were paid in equal amounts throughout the year. So if your calculations show you’ll owe money, you can increase the withholding on your last paychecks of the year to make up the difference.

8.  Don’t Forget to Gather Your Receipts
You can deduct union dues, legal and professional fees relating to tax and investment advice, and unreimbursed employee business expenses of mileage, equipment, education, and supplies, among other things. If you pay a lot of expenses for your job or your investments, gather up the receipts and cancelled checks so you can save more money when you file your 2013 taxes.