Saturday, December 28, 2013

Year End tax planning Checklist

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As 2013 winds down, it is once again time to think about year-end tax planning. Similar to 2012, year-end planning will have its challenges as several key tax breaks were extended only through 2013. With a debt ceiling debate taking center stage in Congress, it is unclear whether many of these tax breaks will be extended to 2014 and beyond. We do know that for 2013 individual tax rates are higher than last year, and new taxes, such as the 3.8% Medicare surtax on net investment income, will require special attention.

Year-End Moves for Individuals
Following is a checklist of several tax planning actions that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.
These are just some of the year-end steps that can be taken to save taxes. Contact us and we can tailor a specific plan that will work best for you.

Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. The maximum contribution to a health FSA is $2,500.
If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.
Consider realizing losses on the sale of stock to offset other large capital gains (from the sale of stock, sale of a principal residence in excess of the exclusion amount, sale of investment property, etc.) to minimize the burden of the 3.8% tax on net investment income, assuming your adjusted gross income is in excess of $200,000 ($250,000 if married filing joint). This is especially important if your taxable income exceeds $400,000 ($450,000 married filing joint), as the long-term capital gain rate increases from 15% to 20% for those individuals.
Give appreciated stock as a charitable contribution. The value of your donation is the fair market value of the stock on the date of the contribution, and you will not have to pay any tax on the appreciation of the stock. This will also prevent the gain from being subject to the 3.8% tax on net investment income.
Starting this year, taxpayers whose modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 married filing joint) are subject to a 3.8% tax on the lesser of 1) their net investment income, or 2) the amount by which their MAGI exceeds the threshold. Net investment income includes taxable interest, dividends, and capital gains, as well as passive income, such as income from rental activities that do not constitute a trade or business. We can assist with strategies to minimize or eliminate this additional tax.
Consider making contributions to Roth IRAs instead of traditional IRAs. Roth IRA payouts are tax-free and thus immune from the threat of higher tax rates, as long as they are made 1) after a five-year period, and 2) on or after attaining age 59½, after death or disability, or for a first-time home purchase.
Take required minimum distributions (RMDs) from your IRA, 401(k) plan or other employer-sponsored retirement plan if you have reached age 70½. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn.
If you are 70½ or older, consider making charitable contributions (up to $100,000) directly from your IRA. While the contribution won’t be deductible, it will go towards satisfying your RMD even though it won’t be considered taxable income. This is one of the key tax breaks that expire on 12/31/13.
Consider using a credit card to prepay expenses that can generate deductions for this year.
If your adjusted gross income (AGI) will be in excess of $300,000, determine to what extent paying state and local income taxes, as well as making any large year-end charitable contributions, will be adversely impacted by the return of itemized deduction phaseouts in 2013. This should especially be considered if your 2014 income is expected to be lower than 2013.
Increase your withholding if you are facing a penalty for underpayment of federal estimated tax.
If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding or make estimated tax payments before year-end to pull the deduction of those taxes into 2013. Watch out for the alternative minimum tax (AMT) and consider itemized deduction phaseouts, as mentioned above.
You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals.

Year-End Moves for Business Owners

Ensure that your business is up to date on the provisions of the Affordable Care Act (commonly referred to as “Obamacare”) and understands its obligations to either provide qualifying health coverage or pay a penalty (if a large employer), or at least comply with the required notifications to employees. Although the large employer mandate was delayed until 2015, advanced preparation will make the process more efficient. Contact us for further information on this topic.
If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC). Under current law, the WOTC for qualifying veterans, which ranges from $2,400 to $9,600, won’t be available for post-2013 hires.
Put new business equipment and machinery in service before year-end to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance generally won’t be available for property placed in service after 2013.

Acquire and place in service business equipment and machinery qualifying for the business property expensing option. The maximum amount you can expense for a tax year beginning in 2013 is $500,000. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2013 exceeds $2,000,000 (the investment ceiling). For tax years beginning in 2014, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000.
Place qualified leasehold improvements in service before the end of the year to take advantage of the 15-year recovery period currently available for these assets. After 2013, most leasehold improvements will have a 39-year recovery period, precluding the taxpayer from being able to immediately expense the property or take bonus depreciation.
If you are in the market for a business car, consider buying in 2013 an SUV built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight. Due to a combination of favorable depreciation and expensing rules, you may be able to write off most of the cost of the heavy SUV this year. Next year, the write-off rules may not be as generous.
Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.
Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this or prior years. Partnership and S corporation losses are deductible only to the extent of your basis in the entity.

Tuesday, December 24, 2013

Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks

The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year.  Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.

It is also important to know that the recent tax act known as ATRA has extended many tax breaks for 2013.  If any of these tax breaks are available, it would be prudent to take advantage of them before they expire.

Also keep in mind that ATRA increased ordinary income tax rates for individuals from 35% to 39.6% starting in 2013 so owners of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.

The following presents some year-end tax strategies that may prove helpful to small businesses and other businesses:

1. Accelerating or deferring income/deductions as part of a year-end tax strategy
A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and later year(s).  (Historical note:  For those of you old enough to remember, there was an income averaging rule built into the tax code.  That provision has long been abolished.)

So every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2014 (and perhaps beyond) if they expect income to rise next year or in the future.

The strategy of accelerating or deferring income and deductions may apply to a number of transactions affecting your business including but not limited to the following:

Selling property
Compensation and bonus practices
Depreciation and expense elections.
Cash Basis Small Businesses
Generally, a cash-basis taxpayer recognizes income when received and takes deductions when paid. Here are some more rules for cash basis taxpayers:

Income is generally taxable in the year received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. (This is the so-called the “constructive receipt” rule.)  Therefore, businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or something equivalent to cash.
However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax into the year or years in which payment occurs. Examples include:
Installment sales, on which gain is prorated and taxed based upon the years over which installment payments occur
Like-kind exchanges through which no gain occurs except to the extent other non-like-kind property (including cash) may change hands
Tax-free corporate reorganizations under Section 368 of the Internal Revenue Code.
Deductions, however, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deductible. Therefore, a supply bill does not become deductible in the year that the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill.
Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if delivered in due course a few days into a new calendar year).
Cash basis businesses that expect to be in a higher tax bracket in 2014 should shift income into 2013 by accelerating cash collections this year, and deferring the payment of deductible expenses until next year, where possible. In this situation, small businesses should try to collect outstanding accounts receivables before the end of 2013.

Accrual Basis Small Businesses
Basically, for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.  Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate shipment of products or provision of services into 2013 so that your business’s right to the income arises this year.

Taking the opposite approach:  If you will be in a lower tax bracket next year, an accrual basis taxpayer would delay delivering services or shipping products.

2. Tax Break For Small Business Expense Election Under Section 179
ATRA extended until the end of 2013 the enhanced Code Sec. 179 small business expense. Small businesses that purchase qualifying property can immediately expense up to $500,000 this year.  This amount is reduced dollar for dollar to the extent of the cost of the qualifying property placed in service during the year exceeds $2 million. If you plan to buy property (even computer software qualifies), consider doing so before year-end to take advantage of the immediate tax write-off.

Warning:  Remember that any asset must meet the “placed in service” requirements as well as being purchased before year-end.

Also included as qualified Code Sec. 179 property (only temporarily though) is “qualified” real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to an immediate write-off of up to $250,000 of the total cost of these properties.

Note, the Section 179 expense limit goes down to $25,000 and the phaseout threshold kicks in at $200,000 starting in 2014.  Also the qualified leasehold-improvement breaks end at the end of 2013.  If you are planning major asset purchases or property improvements over time, you may want to take advantage of this break before year-end.

Final note:  In addition to new property, Section 179 can be applied to used property.

3. Bonus deprecation
ATRA extended this additional first year depreciation allowance into 2013.  This bonus depreciation allows taxpayers to immediately deduct fifty percent (50%) of the cost of qualifying property purchased and placed in service in 2013. Qualifying property must be purchased and placed into service on or before December 31, 2013.

Qualifying property must be new tangible property (refurbished assets do not qualify) with a recovery period of 20 years or less, such as office furniture, equipment and company vehicles, off the shelf computer software and qualified leasehold improvements.

Note that bonus depreciation is not subject to any asset purchase limit like Section 179 property.

4. Accelerated Depreciation
ATRA has retained through 2013 the tax break that allows a shortened 15 year recovery period for qualified leasehold improvements, restaurant and retail improvement property.  Normally the recovery period for this type of property is 39 years so this is a huge tax break.

5. Increased start-up expense deduction
New businesses can take advantage of the increased deduction for start-up expenditures. This start-up expense deduction limit is $10,000. The phaseout threshold is $60,000. Thus, if you have incurred during 2013 start-up costs to create an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may benefit from this increased deduction. Entrepreneurs can recover more small business start-up expenses up-front, thereby increasing cash flow and providing other benefits.

6. Repair Regulations
The so-called “repair” regulations include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met.

The IRS with their issuance of final regulations relaxed many of the requirements contained in the earlier temporary regulations.  For example, the final regulations removed the ceiling requirements on deductions and now allows the de minimis rule for businesses that do not generate financial statement (applicable financial statements (AFS)).  This allows many small businesses to take advantage of these tax breaks.

The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property purchases. For example, a business could deduct hundreds of lap-top computers or scanners costing $500 or less each year.

Bottom Line:  The modified safe harbor may be easier for certain small businesses than the Section 179 deduction and 100% bonus depreciation. Most importantly, the regulations now allow taxpayers that do not prepare financial statements to use de minimis safe harbor.  This provides a great benefit for many small businesses that do not normally generate these statements as part of their regular business operations.

7. Compensation arrangements
Timing of Compensation:
In a regular C corporation, compensation paid to employees reduces the taxable income of such corporation.  Ideally, compensation should be used to eliminate taxable income at the corporate level or at least minimize such income.  It is imperative that the total compensation paid is “reasonable” in light of the services performed and industry norms. For more insights into the reasonable compensation issue please read Reasonable Compensation:A Favorite Issue For IRS Auditors.

Use of Retirement Plans:
Corporate retirement plans such as profit sharing, money purchase pension, and defined benefit plans can generate large tax deductions for the entity.  These plans are quite useful when compensation has already reached the highest level of reasonableness.

Important Points:

These corporate retirement plans must be drafted and signed before year-end to get tax deductions for that year. These plans can generate a deduction even though the plan is not funded until after year-end, so long as funded by the due date (or the extended due date) of the corporate or entity return.  This gives the small business owner some after the taxable year-end planning flexibility.
Additionally and maybe more importantly, when compensation paid to owners is approaching their own:

Highest marginal tax bracket,
3.8% medicare tax threshold. (To learn more please read New 2013 Medicare Tax: 3.8% Stealth Tax),
0.9% medicare tax, or
Itemized deduction and exemption phase outs (To learn more on this and other individual tax planning issues please read 2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes), additional taxes can be saved by making contributions to such plans instead of paying more compensation to the owner.  This can produce a double benefit:  huge income tax savings  and having money being put into a retirement plan to grow tax-free for the benefit of the small business owner.

Use of 2 ½ Month Bonus Rule:
Particularly relevant to employers at year-end is an annual bonus rule. Bonuses paid within a brief period after the end of the employer’s tax year are deductible in that tax year. Compensation is generally considered paid within a brief period of time if it is paid within two and one-half months of the end of the employer’s tax year.

Compensation and K-1 Distributions
Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a significant difference to a business owner’s overall tax liability for the year.  For example, for an S corporation, payment of salaries are subject to social security taxes while K-1 income is not subject to this tax.  The strategy here would be to pay less in salary and have more income reported on the Form K-1.  However, taxpayers can be in trouble here if they get greedy.  The IRS is policing this area to make sure that the salary paid is reasonable.  Therefore,   a reasonable salary must be carefully determined and supportable in a tax audit.

Deferring payments of accrued bonuses
In certain situations, it may be preferable to simply ask that your employer pay your bonus in the following year where you expect that your tax bracket will be lower.

8. Other Tax Planning Strategies and Ideas
Here are a number of other year-end tax planning strategies you may want to consider, depending on your particular tax and business situation:

Accelerating installment sale proceeds or electing out of the installment method;
Elect slower depreciation methods;
Determine if you can write-off any bad debts;
Consider changing your accounting method to advance income or defer expenses.  This one needs careful consideration, however, as accounting method changes can have a binding effect on taxpayers for many future years;
Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other;
Cost Segregation Study:  For those who have purchased, constructed or rehabilitated a building this year, a cost segregation workup may save taxes.  It identifies property components and related costs that can be depreciated faster than the building itself, generating larger deductions.  For example, breaking out costs for fixtures, security equipment, landscaping and parking lots may generate larger tax deductions.  Be careful to take into account the impact of the alternative minimum tax and to consider states that do not follow the federal tax rules.

Final Thoughts:
The above are not intended as a comprehensive list of year-end tax planning tools for small businesses.  The point here is that each business has its own unique tax and business situation.  A case by case analysis to determine which tax planning tools will minimize taxes is the best course of action for small businesses.

If I have missed something or if there is a strategy you want me to explore or explain more fully, please leave a comment below.  I would be glad to help.

For an analysis of what deferral or acceleration planning at year-end may work best for you and your business, please do not hesitate to contact me.

Monday, December 23, 2013

Tax increases make year-end planning important for upper-income households

 A year ago, it was difficult for taxpayers to do last-minute tax planning because of uncertainty surrounding expiring tax breaks from the Bush era.
Lawmakers were at loggerheads on which, if any, deductions and credits to keep and whether to let tax rates rise.
This year, uncertainty isn't a problem. The American Taxpayer Relief Act, signed into law in January, has left taxes much the same for households with incomes of less than $250,000. And for those with income above that, the tax landscape is clear, too: They will owe Uncle Sam more.
“High-income taxpayers have tax increases coming at them from multiple directions,” said Tim Steffen, director of financial planning at Robert W. Baird in Milwaukee. “It's going to be some real sticker shock for them when they start looking at their tax returns a few months from now.”
Congress raised tax rates on regular income and capital gains for the affluent. It also created a new tax for them on investment income as well as adding an extra Medicare tax on high wages. And the well-off will once more see their itemized deductions reduced as income goes up.
There still is one uncertainty, though, at this late stage: When will the tax season start?
It had been scheduled for Jan. 21. But the government shutdown in October interrupted IRS preparations for the coming season, and the agency now says the launch of the tax season will be no earlier than Jan. 28, but no later than Feb. 4.
For taxpayers, here are some changes to be aware of for the 2013 tax season, as well as some moves to consider that might reduce how much you owe:
»The return of higher rates: The lower tax rates on regular income introduced during the Bush administration remain intact. But the wealthy will see the return of the top tax rate of 39.6 percent, which had disappeared for years. This rate applies to taxable income above $400,000 for singles and $450,000 for married joint filers.
Most people don't fall into this category. But those who do might want to consider shifting more toward nontaxable income, such as tax-exempt bonds, said Mark Luscombe, principal analyst with CCH, an Illinois-based provider of tax information.
Or, if self-employed, taxpayers can try to get below those $400,000 and $450,000 limits by postponing income into next year, such as sending bills to customers early next year, Luscombe said.
Taxpayers in these income thresholds also will see the rate on long-term capital gains go up from 15 percent to 20 percent.
Those in the two bottom tax brackets — 10 and 15 percent — will continue not to be taxed on capital gains. Everyone else remains taxed at a rate of 15 percent.
» Taxes to support health reform: The well-to-do will be kicking in more under two new taxes that were part of the Affordable Care Act, better known as Obamacare.
Workers already pay 1.45 percent of wages for Medicare. But high earners this year started paying an additional 0.9 percent on wages exceeding $200,000 for singles and $250,000 for joint filers.
Taxpayers at those income levels also will be subject to a new 3.8 percent tax on net investment income, which includes dividends, royalties, rents and capital gains.
This tax applies to whichever is less: the amount of net investment income or adjusted gross income over the $200,000 and $250,000 thresholds.
With this 3.8 percent tax plus regular capital gains tax, it's possible that some taxpayers will pay a rate of 18.8 percent or 23.8 percent on investment gains.
It gets complicated.
“At the end of the day, what's happened is it's become very difficult,” said David Rosen, director of tax services at RS&F, an accounting and business consulting firm in Owings Mills, Md. “Where I used to be able to go through a person's situation and figure out in my head what their next-year tax will be, you can't do it without a computer these days.”
» Keep income low: If possible, taxpayers should try to keep their income below the $200,000 or $250,000 threshold to lessen the tax impact of those taxes, Luscombe said.
For instance, they can contribute more pre-tax dollars to a retirement plan. Or instead of converting an entire traditional IRA to a Roth IRA — in which the amount converted is considered income for tax purposes — taxpayers should convert smaller sums over a few years to keep below the threshold, Luscombe said.
Taxpayers age 70½ and older with traditional IRAs can lower their adjusted gross income by making donations directly from the IRA to a charity, Luscombe said. They won't get a charitable deduction, but the distribution doesn't count as income on tax returns like regular required distributions older IRA owners must make annually.
And by lowering adjusted gross income, these taxpayers could avoid triggering the net income investment tax or find themselves eligible for other tax breaks with income limits, he said. This tax break, though, expires at the end of this year.
» Harvesting losses: If you sell securities, you can offset gains with losses on your tax return to minimize the capital gains tax bite. Given the new tax increases, this strategy of taking losses along with gains becomes even more attractive this year, Steffen said.
And when selling securities for a gain, Steffen added, high-income investors should look to jettison investments held for more than a year. Gains on investments held for less time will be taxed as regular income — or as much as 39.6 percent. Along with the 3.8 percent net investment income tax, wealthy investors could see gains taxed at a whopping rate of 43.4 percent.
» Donate stock: The typical tax advice is to make charitable donations before the end of the year to get a deduction. But with the stock market hitting new heights, consider donating appreciated shares. You can deduct the appreciated value of those shares without having to recognize the gain on your tax return.
Be aware, Steffen said, that if you sell shares held one year or less, the most you would be able to deduct is the cost basis — or the amount you paid for the shares.
» Medical deductions: In the past, you could deduct medical expenses that exceeded 7.5 percent of adjusted gross income. Now that threshold is 10 percent for people under age 65.
If possible, plan elective medical procedures within the same year so you have a better chance of meeting that new limit, Luscombe said.
» Health insurance: The deadline to buy a health insurance policy on government exchanges has been extended to Dec. 23 for those who want coverage to start on Jan. 1.
Taxpayers without coverage next year will have to pay a penalty. The IRS has the ability to enforce it — offsetting the penalty against current or future refunds — but can't file a lien or levy to collect it, Luscombe said.
» Expiration of tax cuts: Several tax breaks are set to expire at the end of this year — although Congress in the past has extended them.
“If we ever get a serious proposal for serious tax reform,” some of these tax breaks might go away in exchange for lower income-tax rates, Luscombe said.
One of them, for instance, is the ability to deduct state and local sales taxes on the federal return instead of state and local income taxes, he said. Taxpayers who believe reform could happen next year should consider making major purchases, such as a car or boat, this year instead of next to get the sizable sales tax deduction, he said.
Luscombe, though, said Washington lawmakers are so polarized that it's doubtful they will reach a deal, especially in an election year.

Sunday, December 22, 2013

Year-End Financial Planning: Tax Cutting Tips

After the Christmas holiday winds down, 2014 will be right around the corner.
With one week left in the year, what can you do to help yourself tax-wise and investment-wise in the New Year?

Before the end of any year, take time to call or even meet with your accountants to check on your taxes. They can offer sound advice based on your specific situation. However, there are some general ideas for saving on taxes and helping with retirement planning.
Charitable giving is a great way for you to do well while doing good. The key is that charitable gifts can be given in a variety of ways that can increase the tax advantage to you and still fully benefit the charity.

Typically, a gift is given to a charity through a cash or check donation. The important thing in gifting under any circumstances is to check that the charity is a qualified 501(c)(3) under IRS rules. A charitable organization must apply to the IRS and meet certain guidelines to qualify donations for a tax deduction. If you gift to a 501(c)(3) charity, they should send a letter clarifying the gift for you to keep for your tax records to qualify the deduction for tax purposes.

There are other ways to give charitable gifts that can further benefit you and the charity. If you are low on cash, an alternative way to give to charity is through the donation of appreciated securities. If you have taxable accounts (non-retirement) with a holding (mutual fund or stock) with large unrealized capital gains, it makes sense to gift the security rather than cash.

You get the full market value of the gifted security while avoiding the capital gains on the appreciation. If you have an IRA and must take Required Minimum Distributions (RMDs) because you are over the age of 70 ½, distributing the RMD directly to the charity will save you the Federal taxes on the distribution, a very advantageous tax-advantage. Charitable giving helps the community and can benefit you tax-wise. For a contribution to a charity to qualify for 2013, the gift must be complete by December 31, 2013.

Another way to limit your tax liability is to maximize your contributions to tax-deductible accounts, including Traditional Individual Retirement Accounts (IRAs) and employer plans. This is a way to pay yourself first rather than the government.

An employee contribution to an employer retirement plan must be done before the end of the year so you would need to act before your last paycheck for the year. An IRA has more flexibility and can be funded with as much as $5,500 ($6,500 if age 50 or over) for 2013 up until April 15, 2014. So you get an extra 3 ½ months to fully fund an IRA and see what its impact would be on your tax situation after you have an idea of your income.

Investors who are eligible for an employer plan may not be eligible to make deductible contributions to an IRA so check with your accountant to see if your Adjusted Gross Income (AGI) qualifies you for a contribution.

What if you had a bad year and don’t need to save on taxes? Perhaps you spent part of the year unemployed or your consulting income was down. It is possible to do some forward tax planning and convert your IRA to a Roth IRA. This may make sense for you given many factors.

The downside of this conversion is that all the money moved from the IRA to the Roth is taxable as income. Therefore, you need to pay taxes on the amount from money outside of retirement. The long term benefits are that a Roth continues to grow tax-deferred, any qualified distribution is tax-free and there is no required minimum distribution at 70 ½.

There are many more ways a family or individual can maximize their retirement savings and/or save on taxes. The best thing to do is to take time near the end of each year to strategize what works best with your financial advisor and accountant. That team working together can help you build your net worth through smart decisions, investment strategies and tax planning.

Sunday, December 15, 2013

Easy Tax Planning For A Bigger Refund

If, like most people, you could use some extra money these days, consider this: Three out of four Americans get an income tax refund from the IRS, and the average direct-deposited refund has totaled more than $2,800 for the last several years. Moving the needle above that average may be done with a little tax planning.

“To see exactly where you still have opportunities to save, do a dry run of your federal tax return,” said TaxACT spokesperson Jessi Dolmage. “DIY solutions like TaxACT are already updated with tax law changes so you can estimate your taxes as early as October each year.” These hints can help you maximize your refund or lower your tax liability.

1. Remember all your above-the-line adjustments, which are amounts you can deduct from your taxable income. They include college tuition and fees, educator expenses, moving expenses, alimony paid, contributions to a traditional IRA, student loan interest, and health insurance premiums if you’re self-employed.

2. Maximize your itemized deductions. Those may include charitable gifts (cash and non-cash, such as household items), unreimbursed medical expenses, job search expenses in your present occupation, tax preparation fees, mortgage interest and points paid, qualified mortgage insurance premiums, and personal property and real estate taxes. If you’re not sure if you have enough deductions to itemize, tax software can calculate whether claiming the standard deduction or itemizing is more advantageous, with the results typically backed by a maximum refund guarantee.

3. Watch for these commonly missed tax credits, some of which are refundable: Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit and Saver’s Credit. If you have college or other higher education expenses, don’t forget the American Opportunity and Lifetime Learning Credits.

4. Review your investments to see if offsetting capital gains with losses is appropriate for you. Keep in mind that your tax rate on long-term capital gains may be lower than your rate on short-term capital gains.

5. Save more for retirement. While the tax year ends December 31 for most tax benefits, you have until April 15 to max out contributions to traditional and Roth IRAs. Contribution limits for both (as long as neither you nor your spouse was covered for any part of the year by an employer retirement plan) are the lesser of your taxable compensation (wages, commissions, self-employment income, alimony and so on) or $5,500 for 2013 if you’re under age 50 ($6,500 if you’re age 50 or over). The contribution limit is reduced at higher incomes.

When the time comes to file your return, compare tax solutions carefully. Some brands charge more for returns with tax forms for more complicated situations. On the other hand, TaxACT’s free federal solution includes all e-fileable forms for simple and complicated returns.

The program uses simple interview questions to guide you through all your deductions and credits. The amount of your refund or taxes owed updates as you go. Some solutions, including TaxACT, also provide information about the tax implications of health care reform to help you make better-informed health insurance decisions.

General Tax Tips

• Choose e-file and direct deposit for the fastest refund.

• Don’t wait until April 15 to file—rushing often leads to errors.

• In the meantime, save all receipts, statements and tax forms in one place. Centralizing your information makes tax time easier and faster.

Saturday, December 14, 2013

How to Calculate ObamaCare Penalties

The Affordable Care Act, which will go into full effect in the New Year will not only change the health-care landscape, but it also promises to complicate tax laws.

As you are likely aware, beginning in 2014, individuals without health insurance for up to three consecutive months will face a penalty on their income tax return.

The monthly amount is equal to 1/12 of the greater of:

The “flat dollar amount,” the lesser of:
$695 per individual, which is the “applicable dollar amount,” for all individuals where there was a failure to meet coverage requirements but maxing out at $95 for 2014 and $325 for 2015. For anyone not yet age 18, 50% of the normal amount or
300% of the “applicable dollar amount” for the calendar year; or
An amount equal to the following percentage of the excess of household income over the amount of gross income triggering the requirement to file a return under IRC code section 6012(a)(1): 1% in 2014, 2% in 2015; and 2.5% after 2015
Good grief.

I think there are plenty of American taxpayers not to mention tax professionals, whose heads are spinning at the language, definitions and complications of deciphering the formulas. And obviously more than one formula must be used. In fact, the calculations have to be run three times. Using the term “greater than” and “less than” indicates a comparison and therefore requires the use of more than one formula to determine the correct answer.

Let’s use an example to help you determine what your penalty amount might be if you refuse to buy health insurance during 2014:

A family of six that consists of mom, dad and four kids under the age of 18 with an income that exceeds the ‘filing threshold amount’ by $30,000 could be on the hook for a couple hundred dollars. Using the “flat dollar amount” the result of using the formula in No. 1, the penalty would be calculated at $285, which is the lesser of the two formulas to determine the penalty:

$380 – 2 adults x $95 plus 4 kids x $47.50.
$285 - ($95 x 300%) or
If all we had to deal with were this formula then the penalty amount inflicted on this family would be $285 since that’s the lesser of the two calculations.

But we aren’t done.  That’s not necessarily the penalty amount that this family will be required to pay. They must compare this result to the result using the formula in #No. 2 above and between the two formulas the higher figure will be charged:

$300 (1.0% x $30,000 excess household income)

Now we have our answer: $300 - the greater of the two remaining results.

That might not sound terribly expensive. It’s cheaper than purchasing health insurance for a family of six, no doubt.  However, the variables in the formula increase as the years go on. By 2016, the $95 per person figure will be replaced with $695, and 1% variable in the formula under No. 2 will be replaced with 2.5%. Let’s see what this family will pay in 2016:

A. $2,780 (2 adults x $695 plus 4 kids x 347.50)
         B. $2,085 (300% x 695) or,

     2. $750 (2.5% x $30,000 excess household income)

The family will pay $2,085 in penalties for failing to provide health insurance.

As you know, health insurance is not cheap. I feel for families on a shoestring budget that will be severely penalized and it wouldn’t be surprising if we see an increase in the tax gap due to collection problems associated with levying these penalties

Thursday, December 12, 2013

Year’s End Money Matters: Tax planning for success

As 2014 approaches, many focus on year-end tax planning strategies to reduce the taxes they’ll owe in April. This year many will find themselves paying more, so proper planning is even more critical. Let’s look at some strategies to consider.
For Individuals
Most taxpayers will find their ordinary 2013 income tax rate similar to 2012’s. However, for those with taxable income exceeding $400,000 for single filers ($450,000 if married filing jointly), the top rate will increase to 39.6 percent. Furthermore, the phaseout of itemized deductions is back.
To potentially reduce your tax exposure:
- Time the payment of expenses to make the most of your deductions.
- Pay your fourth-quarter estimated state tax or real-estate property tax in December 2013 or January 2014—whichever year provides the greatest benefit.
- If you’re planning large donations, evaluate when to make the contribution in order to receive the best deduction. Additionally, review whether other charitable planning mechanisms, such as a charitable remainder trust or donor advised fund can provide additional benefit.
Many taxpayers will be subject to the net investment income tax (NIIT) and additional Medicare tax. The NIIT adds a 3.8 percent tax on the lesser of net investment income or the amount that a taxpayer’s modified adjusted gross income exceeds $200,000 for single filers ($250,000 if married filing jointly). The 0.9 percent Medicare tax applies to FICA wages and self-employment income exceeding that same threshold.
The capital gains and dividends tax rate has also increased to 20 percent (23.8 percent with NIIT) for individuals whose taxable income exceeds $400,000 for single filers ($450,000 if married filing jointly).
To potentially reduce your exposure:
- Work with your tax adviser to evaluate your participation in business and rental activities. The NIIT applies only to income classified as “passive,” so to the extent that you materially participate in the activity, you may be able to reduce your tax exposure.
- Use like-kind exchanges or sell assets on the installment method to defer gains.
- If you’re 70 1/2 or older, make a charitable distribution from your IRA to reduce your taxable income.
- Gift income-producing assets to your children.
- If you’re an LLC member or business owner with self-employment income, elect to be taxed as an S corporation. S corporation income isn’t considered net investment income.
- Realize losses in investment portfolios.
- Donate appreciated property (i.e. stock) to get a charitable deduction. This strategy allows for a deduction at the property’s fair market value while avoiding the capital gains tax and the NIIT.
For Businesses
In 2013, the maximum Section 179 depreciation deduction is $500,000 and begins to phase out when assets placed in service during the year exceed $2 million. Up to $250,000 of Section 179 expenses may apply to real property purchases. Effective in 2014, the Section 179 deduction reverts to only $25,000, with the real property provision expiring completely.
Additionally, bonus depreciation of 50 percent of a qualifying asset’s cost can be deducted—a provision that expires at the end of 2013. Leasehold improvements may be depreciated over 15 years (in 2014 this increases to 39 years), and may also be eligible for Section 179 expensing or bonus depreciation.
In light of these dramatic changes, note the timing of your significant asset purchases (and when assets are actually placed in service).
Think Ahead
While it’s tempting to put off tax planning, now is the time to act. You can still implement many of these strategies before the year’s end to impact your tax bill. Consult a tax professional to best implement these strategies and achieve results that fit with your overall financial goals.

Tuesday, December 10, 2013

Real estate professionals may be exempt from 3.8 percent ‘Obamacare tax’ on rental income.

Last week the IRS issued its final regulations governing how it will implement a new “Obamacare tax” that imposes a 3.8 percent levy on unearned income.
Taxpayers are subject to the Net Investment Income (NII) tax if their adjusted gross income (AGI) for the year exceeds $200,000 for singles, or $250,000 for marrieds filing jointly ($125,000 for marrieds filing separately).
If your AGI exceeds the applicable threshold, you’ll have to pay the NII tax on the lesser of (1) your net investment income, or (2) the amount that the your AGI exceeds the $200,000/$250,000 threshold.
“Unearned income” means income from all “passive” activities, including interest, dividends, annuities, royalties and rents. It does not include income from an actively conducted business.
However, it includes income from real estate rentals, even those that qualify as businesses, because rental income is always deemed to be passive income for tax purposes. Thus, landlords with profitable rentals whose AGI exceeds the threshold will be subject to the 3.8 percent tax on their rental income.
However, there is one lucky group of landlords who can avoid the NII tax on rental income: real estate professionals. As I explained in a prior article (“It pays for landlords to qualify as ‘real estate professional‘ “), the NII law provides a special exemption for them. They are not subject to the 3.8 percent tax on rental income if they “materially participate” in the real estate activity, and the activity qualifies as a business for tax purposes.
IRS regulations have long provided clear guidance on what constitutes “material participation” in an activity. For example, you materially participate if you work more than 500 hours at the activity during the year, or work 100 hours and more than anyone else. However, there have never been any clear bright-line rules on when a real estate activity qualifies as a business rather than an investment..

Here’s where the new regulations help real estate professionals out. They establish a “safe harbor” rule for when a rental activity conducted by a real estate professional is a business: So long as a real estate professional devotes a minimum of 500 hours per year in the rental activity, it will automatically qualify as a business for these purposes and the rental income will not be subject to the NII tax.
Alternatively, if a real estate pro has participated in rental real estate activities for more than 500 hours per year in five of the last 10 tax years, the rental activity will qualify as a business. (IRS Reg. Sec. 1.469-5T.)
If you have more than one rental property, you are allowed to group your rental activities together for these purposes. This way, you can combine the time you spend working on each rental property to satisfy the material participation and 500-hour tests. You must file an election with the IRS to group your rental activities.
The 500-hour rule is a safe harbor, not a minimum requirement. Thus, you don’t absolutely have to work a minimum of 500 hours per year at your rental activity for it to qualify as a business. You can work less hours and still qualify as a business.
But, in the event of an IRS audit, whether you qualify will require a judgment call by the IRS after looking at all the circumstances involved. However, the preamble to the new regulations provides that ownership of even a single rental unit can qualify as a business. But, again, this depends on the circumstances — for example, the type of property, number of units, and the day-to-day involvement of the owner or its agent.
It should go without saying that all real estate professionals who own rental properties should be keeping careful track of the time they spend dealing with their rentals and all their other real estate-related activities.

Monday, December 9, 2013

Small Business: Taking advantage of tax breaks


Tax planning may not be on your radar as year-end approaches, but it should be.
Some key provisions are set to expire Dec. 31, and the dollar limit for the popular Section 179 deduction on new or used equipment is scheduled to drop dramatically.
So before you ring in the new year, re-evaluate your tax strategy to optimize your deductions for the coming year.
"It's a last licks approach to using some of the great tax breaks we currently have," says Barbara Weltman, a Vero Beach, Fla.-based small business tax specialist and author of "J.K. Lasser's Small Business Taxes 2014" (Wiley; $22.95). "We're unsure if Congress will extend them, especially given the current uncertainty going on in Washington."

Equipment deduction: For one, the Section 179 deduction, which allows businesses an immediate deduction of up to $500,000 of the total cost of new or used equipment in the year it's purchased, rather than depreciating it over time, will drop to $25,000 next year, says Weltman. The deduction currently has a $2-million cap on annual purchases before the deduction limit declines; the cap will be $200,000 next year unless Congress intervenes.
Larger businesses with purchases exceeding $2 million can now take advantage of a 50 percent bonus depreciation deduction up front on eligible new assets, Weltman explains. That also expires Dec. 31 unless extended, she says.

This deduction would apply to equipment, furniture, fixtures and qualified leasehold improvements, says Jill Schneider, tax director at MayerMeinberg LLP, a Syosset-based accounting firm.
You can take the bonus depreciation no matter what your income is, she explains. But you cannot take the Section 179 deduction if by doing so it creates a taxable loss for your business, she notes.
Another change is the recovery period for leasehold improvements, says Schneider. In 2013, qualified leasehold improvements are depreciable over 15 years, she says. Next year, that will jump to 39 years.
R&D, hiring provisions: Two other expiring year-end provisions: the Research and Development credit, which allows a business to write off 20 percent of qualified research expenses, and the Work Opportunity Tax Credit, which ranges from about $2,400 to $9,600 for hiring targeted groups such as veterans.
"They usually extend the R&D credit every year," says Thomas Butler, partner in charge of tax services at Grassi & Co. in Jericho, noting that in the last couple of years lawmakers have done it after the year-end.
As for the other provisions, there's no crystal ball on whether they'll be extended, he notes.
"The sunset provisions are a problem," says Butler. "Instead of making some of these permanent in the tax code, every year you have to wait and see if Congress extends them and it creates havoc in tax planning."
But there's no question that if businesses need to purchase equipment, they should take advantage of the Section 179 deduction this year, says Butler.

That's exactly what Joseph Crook, vice president at Star Communications, did. The Hauppauge-based marketing, printing and mailing company made a "high six-figure purchase" of a 10-color printing press in May, says Crook.

"We made that purchase somewhat with that [Section 179] deduction in mind," he says. "It wasn't the only reason, but it certainly got us moving."

Also, with employee bonuses coming up, you might consider giving stock instead of cash.
If you have a C-corporation involved in technology, manufacturing, wholesale or retail that issues qualified small business stock before the year-end, the shareholder would benefit from a 100 percent exclusion on any capital gain realized from its sale as long as it's held more than five years, says Weltman. That exclusion will drop to 50 percent next year.

Monday, December 2, 2013

10 Tax Law Changes You Need to Know About

Our country’s tax code is long and complex and is regularly getting changed by lawmakers, making it hard to keep up with all the updates.

This year’s major tax law changes occurred early on with the president signing into law the American Taxpayers Relief Act of 2012 on Jan.2.  The rest of the changes to the tax code this year were enactments of new laws passed in prior years and from the Affordable Care Act.

Here’s a look at the tax law changes that take effect this year, and how they may impact your return:

1. The Child Tax Credit of a maximum of $1,000 per child under age 17 is now permanent.  If your income is greater than $110,000 (married filing joint), $75,000 (single, head of household or qualifying widow(er) or $55,000 (married filing separately) the amount of the credit you can take will be limited.

The part of the Child Tax Credit that is refundable will expire in 2017. For example: you have one child and a tax liability of $300. Currently, you would receive $300 to zero out your tax liability then a refund of $700, the remainder. Beginning in 2017, you will not enjoy the $700 refund.

2. Energy credits for improvements such as insulated hot water heaters, insulation, double-paned windows, etc.  expire after 2013. If you are considering improvements in these areas, be sure to install them before year end. The items that qualify for this special tax treatment will be marked by the manufacturer.  Be sure to keep this documentation in your tax file in the event of an audit.

3. Tax-free charitable distributions directly from an IRA to a qualified nonprofit organization by persons age 70 ½ or older continues through 2013. The maximum you may contribute is $100,000. This is handy for seniors who have paid off their homes and no longer itemize deductions.

You cannot take a charitable deduction unless you itemize.  To take advantage of this tax benefit, the IRA manager makes the allocated donation from the IRA distribution and only reports to the IRS the amount of the distribution received by the recipient. For example, you normally take $12,000 per year in IRA distributions--this amount would be 100% taxable income. However, let’s say you decide you want to donate $1,000 to charity. You ask your plan manager to make the donation from your IRA account and supply you with the remainder, $11,000 for the year. You will pay taxes on only $11,000. The donation will come off the top.

4.The Supreme Court handed down a decision that affects same sex legally married couples. The IRS now recognizes this marital status, so same-sex couples can now file their tax return as married filing joint rather than as two single individuals.

5.Education credits, specifically The American Opportunity Credit, will be allowed through 2017. And the existing provisions for Coverdell Education Savings Accounts are now permanent. However, the tuition deduction expires after 2013.

6.The student loan interest deduction is now deemed permanent.

7. Employer-provided education assistance benefits are now permanent

8. The dependent care credit as it stands at its current levels and calculations are permanent.

9. The Earned Income Tax Credit, a refundable tax credit for low to moderate income workers,  is set to expire in 2017.However, I expect that it will be renewed.

10. The estate tax exemption for 2013 is set at $5,250,000 with a top tax rate of 40%. If your estate is valued at less than this amount, and you die by Dec. 31, no estate tax return needs to be filed and there will be no estate tax levied.

Sunday, December 1, 2013

It’s not too late to think about income taxes

As the weather turns colder and the holidays are approaching, there is still enough time to do some year-end tax planning with an eye toward keeping as much of your money in your pocket as you can instead of shipping it off to Washington next April. Here are some tax savings techniques that may help you accomplish just that.

One simple thing to do now is to review the income that you have received year-to-date, along with the amount of taxes you have had withheld or paid as estimated payments. This review of your income versus tax payments is critical if you are a recent retiree, since you may not had enough experience in managing your taxes in retirement to achieve right mix of income and taxes payments.
Most taxpayers will avoid an under withholding penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. You can check out IRS publication 505 for further information.

Even if you haven’t paid in enough taxes yet, there is still ample time to take advantage of tax-saving strategies, such as last-minute 401(k) contributions, income deferral (if possible), charitable contributions, and prepayment of property taxes.

Here is a tax goodie you can trot out if you are way behind in your withholding/estimated payments, provided that you are older than 59 1⁄2 and have a traditional IRA: take a distribution from your IRA before year end and withhold all of the distribution in taxes. By taking this approach, you can catch up with your tax payments without any late penalties, since the IRS considers this tax payment as having been made throughout the year. Additionally, you can make one last estimated payment in January 2014 and avoid other tax penalties.

If you own stocks that are not part of a qualified plan, and if you are charitably inclined, you may want to consider gifting highly appreciated stock to your favorite charity. Your charitable deduction would be the value of the stock when you make the gift, not the price you paid for the shares when you purchased them. If you are in the highest tax bracket, this gifting strategy is of greatest value to you.
Another year-end winning strategy for the charitably inclined is to donate your required minimum distribution from your IRA custodian/trustee directly to a charity. Persons over 70 1⁄2 can transfer up to $100,000 before year end. There is a cascading effect of such a transfer, since the amount of the donated RMD is not included in one’s adjusted gross income, and this fact means that certain phase outs of other deductions that are tied to AGI might be averted.

Additionally, this IRA transfer is most valuable for those philanthropic individuals whose charitable contributions are already up against the 50 percent of AGI limit. Again, since the transferred distribution is not included in AGI, a charitable donation can be made without being included in the 50 percent of AGI limitation.

Most taxpayers will avoid an under withholding penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. You can check out IRS publication 505 for further information.

Even if you haven’t paid in enough taxes yet, there is still time.

There is another winning tax strategy for those persons who are participants in high deductible health insurance plans that provide for contributions to Health Savings Accounts. These persons can actually invest those dollars inside the HSA and use the accumulated values for retirement and not for health care expenses. They get a deduction for these contributions; growth in the plan assets are tax deferred; and monies may be withdrawn income tax-free for qualified health care expenses at any time in the future. Withdrawals for any other purpose after age 65 are taxable.

One final note, remember that the 2013 threshold for including medical expenses in itemized deductions is now 10 percent of AGI for taxpayers under age 65. The 7.5 percent limit for those older will remain until 2017.