When you're unemployed taxes may be the last thing you want to think about, but it's important to continue your tax and other financial planning, even while you're looking for work. These practical tips that will help address tax concerns for individuals seeking employment.
Your Unemployment Income Is Taxable
Did you know that unemployment benefits are subject to both federal and, depending on where you live, state taxes? You must report and pay taxes on any kind of unemployment income, including both state and federally funded benefits. You can have Federal and state income taxes withheld from your unemployment check. This is worth considering, since it will help prevent you from spending money that should be set aside for taxes. Otherwise, you will be paying quarterly estimated taxes on your unemployment income to avoid underpayment penalties.
Don't Forget to File a Tax Return
Filing your tax return may seem unnecessary if you aren't earning income, but it's still likely required. Keep in mind that any severance benefit or vacation or sick pay you received when you were laid off will be included in your taxable income. On the upside, if you worked for part of the year and had taxes withheld or paid estimated taxes while employed, you may get a refund due to your subsequent drop in income.
You May Be Eligible for Tax Benefits and Credits
A lower income may help you qualify for a variety of programs, including the federal Earned Income Tax Credit (and similar state and local credits), that can lower your taxes or even provide a refund. Other credits that may reduce your federal tax outlay include the Child Tax Credit and the Child and Dependent Care Credit. Check to see if you qualify.
Keep Receipts for Costs Related to Your Job Search
Travel expenses for a job interview, the costs of preparation and mailing and outplacement agency fees are just some of the expenses you may be able to deduct if you itemize. Moving expenses may also qualify if your move is related to the start of your new job and you meet the distance and time requirements.
Learn about Self-Employment Taxation
You should be able to deduct many of the ordinary and necessary expenses related to starting up and running a new business, including costs associated with a home office or transportation. You will have to make quarterly estimated tax payments on your self-employment income. That will include paying the full cost of self-employment taxes as well as income taxes.
Are You Going Back to School
If you are going back to school to upgrade your qualifications or start a new career path, you may qualify for educational credits -- some of these credits are "refundable" -- meaning that you may get additional money back on your return.
Be Careful when Dipping into Retirement Plans
It is understandable that a taxpayer that is out of work will see the balance in their retirement plan as an easy source of cash. There are two ways to withdraw money, and both should be approached with caution. The first is a withdrawal. A withdrawal doesn't need repaid, but is taxable and if the taxpayer is under 59 ½ the person is subject to a 10% withdrawal penalty from a traditional IRA (or 55 years old from a 401(k) account).
The second way to take money from your account is a loan. Taking a loan is different from a withdrawal for tax purposes as it is not immediately taxable income and must be repaid to the account with interest. If the loan is not repaid, it will be deemed a taxable transaction.
Your Local CPA Can Help
Loss of a job is a tough blow, but there are many steps you can take to maintain a sound financial footing as you search for new employment. Your local CPA can offer advice on revising your budget, cutting expenses and dealing with tax and other financial issues.
Friday, February 28, 2014
Thursday, February 27, 2014
Tax filing season planning tips for businesses and individuals to manage and prepare for 2014
Tax tips on what to consider when filing your 2013 tax returns, what you can still do to lower your tax liability and how to make the most of planning for 2014.
What’s new for your 2013 return?
What’s changed since last year? You need to know before you start your 2013 return.
- There are new benefits for same-sex married couples. For the first time ever, the tax law has been harmonized to treat same-sex married couples the same as other married couples. Following the Supreme Court’s landmark decision in U.S. v. Windsor, the IRS issued new rules allowing same-sex married couples to file joint returns and enjoy equivalent treatment in all areas of federal income, gift and estate tax law. In fact, all couples with valid marriages, whether same sex or not, must file as a married couple in 2013, either married filing jointly or married filing separately.
- Higher earning individuals face higher taxes. For the first time in more than a decade, Congress raised individual tax rates. Individuals earning more than $400,000 and couples earning more than $450,000 are now subject to a 39.6 percent top rate. The top capital gains and dividend rates also went up from 15 percent to 20 percent, not including the new Medicare tax. Finally, the personal exemption phaseout (PEP) and “Pease” phaseout of itemized deductions are back in 2013. Both phaseouts complicate tax planning and return preparation while raising taxes.
- A new tax comes due. Another first for your 2013 returns is the calculation and payment of the 3.8 percent Medicare tax on net investment income. The tax became effective at the beginning of 2013 and imposes a 3.8 percent tax on investment income, like dividends, rents, royalties, interest, capital gains and annuities. Passive income from a trade or business in which you do not materially participate is also subject to the tax.
- Alternative Minimum Tax (AMT) indexed for inflation. Congress didn’t eliminate the AMT, as many had hoped. As part of New Year’s Eve legislation in 2012, lawmakers did decide to index the tax for inflation for the first time. Previously, Congress had simply “patched” the AMT for one or two years at a time.
Is it too late to make any changes to my 2013 return?
No, it’s not too late. While the books closed on your income, gain and loss at the end of 2013, there are still ways to reduce your tax liability, such as contributing to a traditional individual retirement account (IRA) or converting to a Roth IRA.
- Contribute to an IRA. You can still get an above-the-line deduction on your 2013 return by contributing to an IRA now, before you file your income tax return. Don’t have an IRA? You can set one up today, fund it, and still take advantage of the deduction. Contribution limits for 2013 are $5,500 plus a $1,000 catch-up for those 50 years old and older. If you were an active participant in your employer’s retirement plan, contributions to an IRA offer deductions only at income levels below $112,000 for joint filers and $68,000 for singles.
- Reconsider a Roth IRA rollover. In 2010, Congress eliminated the $100,000 income limit on rollovers from an IRA or 401(k) to a Roth IRA. Rolling over allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). These rollovers have been very popular. They should become even more popular in the future because, unlike distributions from a regular IRA, distributions from a Roth IRA do not increase your AGI — which is used in determining the new Medicare tax and the amount of the PEP and “Pease” phaseouts.
- Make a grouping election. The new 3.8 percent Medicare tax on net investment income will generally apply to any income you receive from a business in which you do not materially participate. While it’s too late to go back and change how much you participated in your businesses in 2013, you may be able to make a grouping election when you file your return to combine your activities for various business interests and satisfy the material participation tests.
- Make the 65-day election. Like individuals, most trusts are also subject to the new 3.8 percent tax on net investment income. “Complex trusts” are subject to the new tax in 2013 to the extent their undistributed investment income exceeds $11,950. By making a distribution of the income within 65 days of the end of 2013 (March 6, 2014), the trustee can elect to have the distribution treated as if it were made in 2013, shifting the income for tax purposes to the beneficiary. If the beneficiary is in a lower tax bracket than the trust, the election can reduce the overall tax burden.
How do I avoid filing season hassles?
Tax preparation is complicated, and a transposed number or a forgotten form can make matters worse. Keep these tips in mind when preparing this year’s return so you can avoid common filing season mistakes.
- Organize your receipts. Whether it’s a charitable contribution or a business deduction, the IRS wants to see proof of your expense. These expenses must be documented in order to be deducted. What’s proper documentation? Receipts, bank records, letters from a charity confirming your gift, and even electronic records like emails can be sufficient. Failing to substantiate expenses is a surefire way to lose an audit with the IRS. Proper organization can save you time, money and heartburn.
- Get with the times and file electronically. Filing electronically will not only expedite your refund, but it can also save you from making mistakes. As an additional incentive, the IRS will check your electronic return for commonly made errors. If you did make a mistake, the IRS gives you the chance to correct the problems before it accepts and processes your electronic return.
- Check your numbers twice. Make sure you have the right social security numbers, and, if necessary, employer identification numbers. The IRS may be working with a smaller budget than before, but its computers are still sophisticated enough to automatically match all Social Security numbers and check for simple math mistakes. Lately, the IRS has broadly used its “math error” authority to automatically fix these mistakes, but accidents do happen on their part.
- Don’t miss the deadline for filing an extension. The filing deadline is Tuesday, April 15, 2014. If you can’t make it by then, don’t worry! Filing for an automatic extension with Form 4868 is a painless process that will spare you penalties for missing the deadline. While extending the filing deadline does not extend the time for making a contribution to an IRA or extend the time for payment of any tax due, it will give you some breathing room to properly file your complete tax return. By the filing deadline, you must have paid at least 90 percent of your 2013 tax liability through withholding, estimated payments and any payment made with your extension.
How do I plan for 2014?
The last thing most people want to do immediately after filing their tax returns is to begin tax planning again. But doing so will give you a head start and prepare you for potential tax changes.
- Is tax reform on the horizon? Lawmakers have debated tax reform for years, and 2014 may present the best opportunity for Congress to dramatically change our tax laws. But, will reform be a benefit to individual taxpayers? It’s hard to tell. The top individual rates have risen to 39.6 percent, and Congress has discussed lowering corporate rates from their current peak of 35 percent. That could influence whether a business is organized as a pass-through entity, like a partnership or limited liability company, or as a corporation. After all, the greater the disparity in corporate and individual rates, the more opportunity to change the entity classification of your business.
- Materially participate in your business. The 3.8 percent Medicare tax on net investment income is imposed on passive income. For example, an individual taxpayer who doesn’t “materially participate” in a business will see that income taxed at a higher rate, due to this tax. By materially participating in the business, that investor can eliminate the 3.8 percent tax. Doing so can be tricky, but especially for family businesses that have relatives as owners, it makes sense to look into how to materially participate in the business.
- Understand foreign bank account reporting. The IRS and Department of Justice have, for the last several years, taken a hard look at U.S. taxpayers with unreported offshore financial accounts. Penalties for not reporting offshore income or the existence of those accounts are steep, and can include prison time. The IRS has a voluntary disclosure program for those individuals, which allows for reduced penalties and no prosecution. Keep in mind that the foreign bank account reporting form is not filed with your tax return — rather it must be filed by June 30 of each year with the Financial Crimes Enforcement Network (FinCEN), an agency within the Treasury Department.
Wednesday, February 26, 2014
Try this weird tax trick that can pay off 3 ways
By saving more for retirement, some earners may qualify for tax breaks and bigger health-insurance subsidies
Young adults are signing up in greater numbers for the new state health insurance marketplaces created by the Affordable Care Act, although still not in numbers that proponents had hoped for. But here's another reason to act: With a bit of savvy, a younger worker—or for that matter, anyone with a relatively modest income—can boost retirement savings, cut federal and state income taxes, and save on premiums, all at once. If you’re not in that demographic but are close to someone who is, you can help.
Young adults are signing up in greater numbers for the new state health insurance marketplaces created by the Affordable Care Act, although still not in numbers that proponents had hoped for. But here's another reason to act: With a bit of savvy, a younger worker—or for that matter, anyone with a relatively modest income—can boost retirement savings, cut federal and state income taxes, and save on premiums, all at once. If you’re not in that demographic but are close to someone who is, you can help.
Cut income, boost the subsidy
The trick is to reduce reported income. With the new exchanges, a premium subsidy kicks in for those with income 100 percent to 400 percent of the federal poverty level. For individuals in 2014, the ceiling for subsidies will be $45,960; for a family of four, $94,200. The subsidy is essentially a new kind of refundable tax credit. You can use it now to pay for coverage or apply it to your 2014 federal tax return, which you'll file in 2015.
With some exceptions, those who can afford coverage but don’t buy it must pay a fine when filing 2014 taxes; for individuals, it’s 1 percent of income or $95, whichever is higher. (The fine rises yearly to a maximum of 2.5 percent of income or $695 per person, whichever is higher, in 2016; after that it’s adjusted for inflation.)
To determine subsidy eligibility, the marketplaces consider an individual’s or household’s estimated 2014 modified adjusted gross income (MAGI). In this insurance calculation, MAGI is similar to adjusted gross income (AGI), but adds tax-exempt interest back in, as well as the income and housing cost of a citizen or resident living abroad, and the nontaxable portion of Social Security income that normally isn’t part of the AGI calculation.
You can deduct a number of items from MAGI, including college tuition, student-loan interest, pretax money put into health savings accounts and individual retirement accounts, and other expenses and deductions available to self-employed people. As you’ll see here, you can also reduce your MAGI with contributions to 401(k)s and other qualified retirement accounts.
Consider a 28-year-old single man in California with a MAGI of $23,000 a year, no employer-based coverage, and low expected use of medical services. In Covered California, that state’s marketplace, the lowest-priced “silver” policy with Anthem Blue Cross—considered middle-of-the- road coverage—would cost him $1,356 a year, with a subsidy of $1,836.
Contributing $2,000 to a traditional IRA would reduce his MAGI to $21,000. At that level, he’d pay $1,056 for coverage, saving $300 a year and gaining a higher subsidy for out-of-pocket costs. Assuming income-tax rates are stable between 2014 and 2013, he’d also save $300 in federal taxes and $71 in California state taxes. You could view the total $671 in savings as reducing his premium to $685.
With some exceptions, those who can afford coverage but don’t buy it must pay a fine when filing 2014 taxes; for individuals, it’s 1 percent of income or $95, whichever is higher. (The fine rises yearly to a maximum of 2.5 percent of income or $695 per person, whichever is higher, in 2016; after that it’s adjusted for inflation.)
To determine subsidy eligibility, the marketplaces consider an individual’s or household’s estimated 2014 modified adjusted gross income (MAGI). In this insurance calculation, MAGI is similar to adjusted gross income (AGI), but adds tax-exempt interest back in, as well as the income and housing cost of a citizen or resident living abroad, and the nontaxable portion of Social Security income that normally isn’t part of the AGI calculation.
You can deduct a number of items from MAGI, including college tuition, student-loan interest, pretax money put into health savings accounts and individual retirement accounts, and other expenses and deductions available to self-employed people. As you’ll see here, you can also reduce your MAGI with contributions to 401(k)s and other qualified retirement accounts.
Consider a 28-year-old single man in California with a MAGI of $23,000 a year, no employer-based coverage, and low expected use of medical services. In Covered California, that state’s marketplace, the lowest-priced “silver” policy with Anthem Blue Cross—considered middle-of-the- road coverage—would cost him $1,356 a year, with a subsidy of $1,836.
Contributing $2,000 to a traditional IRA would reduce his MAGI to $21,000. At that level, he’d pay $1,056 for coverage, saving $300 a year and gaining a higher subsidy for out-of-pocket costs. Assuming income-tax rates are stable between 2014 and 2013, he’d also save $300 in federal taxes and $71 in California state taxes. You could view the total $671 in savings as reducing his premium to $685.
Reap the Savers Credit
Lower- and middle-income workers who contribute to traditional IRAs, 401(k)s, and other qualified retirement accounts are also eligible for the federal savers credit. It’s 10 percent to 50 percent of the first $2,000 contributed. For tax-year 2013 it was available only to single workers with AGI of $29,500 or less, and couples with AGI of $59,000 or less (limits are slightly higher for 2014). In this example, the credit is $200. That brings his effective cost of insurance to $485 a year.
The savers credit applies to Roth accounts, too. Those after-tax contributions won’t lower MAGI or current taxes, or improve health insurance subsidy eligibility. But distributions are tax- and penalty-free after age 59 1⁄2, which could mean major benefits over traditional retirement accounts.
What if, instead of investing in an IRA, our worker contributed $2,000 to a 401(k) with an employer match? His savings would be the same as if he had contributed to an IRA. But a typical match of, say, dollar for dollar up to 6 percent of income would add $690 to his retirement savings. That’s not money directly in his pocket, but it effectively makes his insurance free.
Many at that salary range might not want to sacrifice 9 or 10 percent of income toward retirement savings. That’s where the help comes in, if you can afford it. If he agrees to contribute the $2,000, you offer to reimburse him all or some of that amount. Not only would you be helping him do the right thing for his health, you’d be improving his prospects for a healthy retirement.
The savers credit applies to Roth accounts, too. Those after-tax contributions won’t lower MAGI or current taxes, or improve health insurance subsidy eligibility. But distributions are tax- and penalty-free after age 59 1⁄2, which could mean major benefits over traditional retirement accounts.
What if, instead of investing in an IRA, our worker contributed $2,000 to a 401(k) with an employer match? His savings would be the same as if he had contributed to an IRA. But a typical match of, say, dollar for dollar up to 6 percent of income would add $690 to his retirement savings. That’s not money directly in his pocket, but it effectively makes his insurance free.
Many at that salary range might not want to sacrifice 9 or 10 percent of income toward retirement savings. That’s where the help comes in, if you can afford it. If he agrees to contribute the $2,000, you offer to reimburse him all or some of that amount. Not only would you be helping him do the right thing for his health, you’d be improving his prospects for a healthy retirement.
Tuesday, February 25, 2014
Capital Gains Tax: What You Need to Know in 2014
If you're prepared to pay higher taxes because of your income bracket -- especially if you're drawing on dividends, long-term investments, or sales of assets in the process -- then 2014 is a year to give special attention to the capital gains tax landscape.
This tax season, there's a fresh bump to net investment in play. Why is it there? The reason is tied to the Affordable Care Act, which created several new instruments -- ostensibly Medicare taxes (though in neither case does the tax revenue that they generate fuel health care directly). But regardless of the political underpinnings of the change, if you've made a profit from long-term holdings in the past tax year -- the result of some skilled portfolio management or otherwise -- devote some time to the following points.
Whether long-standing or recently introduced, you'll want the rules and thresholds in mind so that you can prepare for the federal tax implications.
Short-term capital gains are taxed as ordinary income, and when it comes to long-term investments, taxpayers in the lowest two brackets get to pay zero capital gains.
But once you're dealing with higher brackets, things start to shift. From the basics to recent additions, the following list will help paint the picture when it comes to capital gains rates in 2014.
Lower bracket exclusions: The fiscal cliff negotiations of 2012 extended the 0% tax rate on long-term capital gains for taxpayers in the 10% and 15% tax brackets. That is, this year,married payers filing jointly with taxable income of less than $73,800 -- and single taxpayers at less than $36,900 -- pay no capital gains tax.
Steady at 15%: Married couples with taxable income in excess of $73,800 but less than $457,600 -- and single payers making more than $36,900 but less than $405,100 -- pay capital gains at a rate of 15%.
Getting to 20%: It's when your married taxable income exceeds $457,600 -- or your single filer income passes the $405,100 mark -- that the maximum tax rate on long-term capital gains jumps from 15% to 20%. Here's an example: A married taxpayer filing jointly with wage income of, say, $400,000 plus long-term capital gains of $200,000 will pay a 15% income tax rate on the first $57,600 of long-term capital gains and 20% on the remaining $142,400.
The surtax factor: new charges on net investment income.
So, that's the bracket-related rate structure, but beyond the capital gains increase to 20%, what's in play additionally are the ways that the federal government's new surtax affects taxable dollars. The details are as follows.
3.8% surtax: This is the ACA-related change that affects capital gains. In 2014, married joint payers with an adjusted gross income in excess of $250,000 -- or $200,000, if single -- will pay a 3.8% surtax on all net investment income. What exactly is net investment income? No surprise, it's complicated (the definition consumes more than 100 pages in the written regulations). But think of it this way: It represents profits from sales, dividends, royalties, interest, and the like. And when it comes to numbers on your spreadsheet, this increases the maximum rate on long-term capital gains for taxpayers with taxable income in excess of $450,000 to 23.8%. Additionally, taxpayers should also note that the surtax can apply to estates and trusts. The threshold in these cases can be much lower. In tax year 2013, it was $11,950, and this year it's $12,150.
Surtax exception: A taxpayer will not be required to pay the 3.8% surtax on the sale of stock in a subchapter S corporation -- provided the S corporation conducts a trade or business and the taxpayer materially participates in what the business does.
Silver and gold (and capital gains): There's also a difference in the capital gains landscape when it comes to silver and gold, and similar commodities used as investments via exchange-traded funds. Collectibles such as gold and silver bullion aren't eligible for the normal long-term capital-gains rates. Rather, these collectibles are taxed at a rate of 28%. This special collectibles tax rate also applies to certain ETFs that deal with the physical commodities themselves -- examples include SPDR Gold , iShares Gold , and iShares Silver .
Attendant to all this, remember that capital gains can often be balanced by capital losses.
For example, if your portfolio is chock-full of $70 stocks and it took a hit that plunged those shares to a selling price of $60 per and you sell, then in your filing for that tax year, you can claim a $10 loss per share.
Another approach to balance capital gains with capital losses is to factor in depreciation of assets. Here, it gets nuanced pretty quickly, but a big-picture example would be that a small-business owner who has purchased, say, a garage where he conducts auto repairs, can take deductions over time. The amount of the deductions -- the capital losses -- are calculated against what the owner paid for the building itself (minus surrounding land, etc.).
Finally, you'll also want to know your state's capital gains tax parameters. Start with the website of the department of taxation (or its equivalent) where you live -- mining down to the capital gains rates and thresholds typically listed at those sites. From there, you can construct the whole picture when it comes to federal and state capital gains when you file this spring .
This tax season, there's a fresh bump to net investment in play. Why is it there? The reason is tied to the Affordable Care Act, which created several new instruments -- ostensibly Medicare taxes (though in neither case does the tax revenue that they generate fuel health care directly). But regardless of the political underpinnings of the change, if you've made a profit from long-term holdings in the past tax year -- the result of some skilled portfolio management or otherwise -- devote some time to the following points.
Whether long-standing or recently introduced, you'll want the rules and thresholds in mind so that you can prepare for the federal tax implications.
Short-term capital gains are taxed as ordinary income, and when it comes to long-term investments, taxpayers in the lowest two brackets get to pay zero capital gains.
But once you're dealing with higher brackets, things start to shift. From the basics to recent additions, the following list will help paint the picture when it comes to capital gains rates in 2014.
Lower bracket exclusions: The fiscal cliff negotiations of 2012 extended the 0% tax rate on long-term capital gains for taxpayers in the 10% and 15% tax brackets. That is, this year,married payers filing jointly with taxable income of less than $73,800 -- and single taxpayers at less than $36,900 -- pay no capital gains tax.
Steady at 15%: Married couples with taxable income in excess of $73,800 but less than $457,600 -- and single payers making more than $36,900 but less than $405,100 -- pay capital gains at a rate of 15%.
Getting to 20%: It's when your married taxable income exceeds $457,600 -- or your single filer income passes the $405,100 mark -- that the maximum tax rate on long-term capital gains jumps from 15% to 20%. Here's an example: A married taxpayer filing jointly with wage income of, say, $400,000 plus long-term capital gains of $200,000 will pay a 15% income tax rate on the first $57,600 of long-term capital gains and 20% on the remaining $142,400.
The surtax factor: new charges on net investment income.
So, that's the bracket-related rate structure, but beyond the capital gains increase to 20%, what's in play additionally are the ways that the federal government's new surtax affects taxable dollars. The details are as follows.
3.8% surtax: This is the ACA-related change that affects capital gains. In 2014, married joint payers with an adjusted gross income in excess of $250,000 -- or $200,000, if single -- will pay a 3.8% surtax on all net investment income. What exactly is net investment income? No surprise, it's complicated (the definition consumes more than 100 pages in the written regulations). But think of it this way: It represents profits from sales, dividends, royalties, interest, and the like. And when it comes to numbers on your spreadsheet, this increases the maximum rate on long-term capital gains for taxpayers with taxable income in excess of $450,000 to 23.8%. Additionally, taxpayers should also note that the surtax can apply to estates and trusts. The threshold in these cases can be much lower. In tax year 2013, it was $11,950, and this year it's $12,150.
Surtax exception: A taxpayer will not be required to pay the 3.8% surtax on the sale of stock in a subchapter S corporation -- provided the S corporation conducts a trade or business and the taxpayer materially participates in what the business does.
Silver and gold (and capital gains): There's also a difference in the capital gains landscape when it comes to silver and gold, and similar commodities used as investments via exchange-traded funds. Collectibles such as gold and silver bullion aren't eligible for the normal long-term capital-gains rates. Rather, these collectibles are taxed at a rate of 28%. This special collectibles tax rate also applies to certain ETFs that deal with the physical commodities themselves -- examples include SPDR Gold , iShares Gold , and iShares Silver .
Attendant to all this, remember that capital gains can often be balanced by capital losses.
For example, if your portfolio is chock-full of $70 stocks and it took a hit that plunged those shares to a selling price of $60 per and you sell, then in your filing for that tax year, you can claim a $10 loss per share.
Another approach to balance capital gains with capital losses is to factor in depreciation of assets. Here, it gets nuanced pretty quickly, but a big-picture example would be that a small-business owner who has purchased, say, a garage where he conducts auto repairs, can take deductions over time. The amount of the deductions -- the capital losses -- are calculated against what the owner paid for the building itself (minus surrounding land, etc.).
Finally, you'll also want to know your state's capital gains tax parameters. Start with the website of the department of taxation (or its equivalent) where you live -- mining down to the capital gains rates and thresholds typically listed at those sites. From there, you can construct the whole picture when it comes to federal and state capital gains when you file this spring .
Monday, February 24, 2014
Are you throwing money away this tax season?
Now that all of those important tax documents have arrived in the mail, it is time to start getting ready to file your 2013 federal and state tax returns. There aren't many ways to reduce your tax bill after the year ends. Contributions to a retirement plan is among the most common after the fact tax reduction tools.
The best way to reduce your income taxes is to start planning early in the year. When you get your 2013 returns completed, start your 2014 planning in earnest. Use your 2013 as a guide to estimate what will be on those same lines for 2014. Except for your salary and a few other guaranteed things, you will be making estimates for most of the entries. It is at this point where you can actually begin to quantify the benefit of reducing your interest and dividend income or harvesting investment losses to offset investment gains. Your actions may include changing the holdings in your portfolio, starting to contribute to your retirement plan now making it easier to afford larger contributions or deciding which accounts to use for next year's retirement income to minimize the tax impact.
The best way to reduce your income taxes is to start planning early in the year. When you get your 2013 returns completed, start your 2014 planning in earnest. Use your 2013 as a guide to estimate what will be on those same lines for 2014. Except for your salary and a few other guaranteed things, you will be making estimates for most of the entries. It is at this point where you can actually begin to quantify the benefit of reducing your interest and dividend income or harvesting investment losses to offset investment gains. Your actions may include changing the holdings in your portfolio, starting to contribute to your retirement plan now making it easier to afford larger contributions or deciding which accounts to use for next year's retirement income to minimize the tax impact.
Sunday, February 23, 2014
Evolving Tax Benefits Make Long-Term Care Planning More Attractive
Long-term care services, which are generally not covered by Medicare or regular health insurance, can be expensive. “Sticker shock keeps many from thinking about it,” says Ken Dehn, General Counsel for LTC Financial Partners LLC (LTCFP), one of the nation’s most experienced long term care insurance solutions agencies.
“The good news is that Uncle Sam and the states want to help,” says Dehn. The help, in the form of tax relief, applies to multiple ways of paying for care, ranging from long-term care insurance to annuities and reverse mortgages.
Tax benefits of owning long-term care insurance: For the 2014 tax year, federal tax deduction limits for LTC insurance range from $370 to $4,660, depending on age. That’s up from $360 to $4,550, the deduction limit range for 2013. “If you already have a policy, the 2013 limits will apply for this year’s return, due April 15,” says Dehn. “If you don’t have a policy, you can set future deductions in motion now, starting with the 2014 limits.”
In recent years, many states have followed Uncle Sam’s lead. “Well over half now offer some form of tax deduction or credit for owning LTC insurance,” says Dehn. “Our agents can provide local details.”
Tax benefits of life insurance and annuities that cover long-term care: So called long-term care riders convert life insurance or annuity benefits into an LTC benefit covering care when needed, “but most of the riders now available are not tax-qualified,” says Gil Edwards, President of LTCFP’s Annuities and Life division. “Fortunately, we represent a carrier that does offer tax-qualified LTC riders.”
Tax benefits of critical illness insurance: CI insurance is an increasingly popular, affordable means of protecting oneself from major conditions (such as cancer or dementia) that may lead to the need for long-term care. The premiums are not currently tax-deductible for an individual buying coverage; but the benefits are received tax-free.
Tax benefits of a reverse mortgage: Available to homeowners 62 or older, reverse mortgages are special mortgage loans insured by the Federal Housing Administration. They do not become due for as long as the homeowner resides in their primary residence. Uses are varied and include paying for long-term care if and when needed. “Reverse mortgages are designed with the needs of seniors in mind,” says Josh Stephens, President of Reverse Mortgage Direct, an affiliate of LTCFP. “Proceeds are tax-free, and getting a reverse mortgage does not generally affect one’s Social Security, Medicare or pension benefits.”
Organizations, like individuals, may also benefit from LTC tax incentives. “Premiums can be 100 percent tax-deductible to a business,” says Dehn. “Premiums are not considered income to the employee, and when benefits are received, they’re generally tax-free.”
“The good news is that Uncle Sam and the states want to help,” says Dehn. The help, in the form of tax relief, applies to multiple ways of paying for care, ranging from long-term care insurance to annuities and reverse mortgages.
Tax benefits of owning long-term care insurance: For the 2014 tax year, federal tax deduction limits for LTC insurance range from $370 to $4,660, depending on age. That’s up from $360 to $4,550, the deduction limit range for 2013. “If you already have a policy, the 2013 limits will apply for this year’s return, due April 15,” says Dehn. “If you don’t have a policy, you can set future deductions in motion now, starting with the 2014 limits.”
In recent years, many states have followed Uncle Sam’s lead. “Well over half now offer some form of tax deduction or credit for owning LTC insurance,” says Dehn. “Our agents can provide local details.”
Tax benefits of life insurance and annuities that cover long-term care: So called long-term care riders convert life insurance or annuity benefits into an LTC benefit covering care when needed, “but most of the riders now available are not tax-qualified,” says Gil Edwards, President of LTCFP’s Annuities and Life division. “Fortunately, we represent a carrier that does offer tax-qualified LTC riders.”
Tax benefits of critical illness insurance: CI insurance is an increasingly popular, affordable means of protecting oneself from major conditions (such as cancer or dementia) that may lead to the need for long-term care. The premiums are not currently tax-deductible for an individual buying coverage; but the benefits are received tax-free.
Tax benefits of a reverse mortgage: Available to homeowners 62 or older, reverse mortgages are special mortgage loans insured by the Federal Housing Administration. They do not become due for as long as the homeowner resides in their primary residence. Uses are varied and include paying for long-term care if and when needed. “Reverse mortgages are designed with the needs of seniors in mind,” says Josh Stephens, President of Reverse Mortgage Direct, an affiliate of LTCFP. “Proceeds are tax-free, and getting a reverse mortgage does not generally affect one’s Social Security, Medicare or pension benefits.”
Organizations, like individuals, may also benefit from LTC tax incentives. “Premiums can be 100 percent tax-deductible to a business,” says Dehn. “Premiums are not considered income to the employee, and when benefits are received, they’re generally tax-free.”
Saturday, February 22, 2014
10 states with highest capital gains rates
Investors, don't move to California. In addition to sunshine and sandy beaches, the Golden State boasts the nation's highest tax rate on capital gains, according to new research by the Tax Foundation, a Washington, D.C., tax think tank.
A well-heeled Californian in the state's highest tax bracket would give up 33 percent of his profit on investments to state and federal capital gains taxes, compared with just 25 percent for someone who lives in New Hampshire, according to the report.
In addition to looking at the rates themselves, Tax Foundation's analysis factors in the complex alchemy of federal and state income tax deductions, credits and phase-outs that can alter stated tax rates. Indeed, California's top tax rate of 13.3 percent -- if merely added to the top federal capital gains rate of 23.8 percent (that's the 20 percent base rate, plus the 3.8 percent excise tax on unearned income over set levels that was passed as part of the Affordable Care Act) -- would add to more than 37 percent. However, state income taxes are deductible on federal returns, so the real rate drops to 33 percent.
Still, that's far and away the highest capital gains levy in the country, according to the Tax Foundation. And high capital gains rates are particularly egregious when you consider that this levy is taxing income that arguably has already been taxed. After all, corporations pay income taxes on gross profits, passing on the remains to investors through dividends and increased value of their stock (capital gains). Plus, investors buy shares and other capital assets with after-tax dollars.
Levying another high tax on these gains discourages savings and investment, says Kyle Pomerleau, the Tax Foundation economist who conducted the study.
Here are the rest of the states with the 10 highest capital gains rates:
New York, 31.5 percent
Oregon, 30 percent
Minnesota, 30.9 percent
New Jersey, Washington, D.C. and Vermont, all at 30.4 percent
Maryland, 30.3 percent
Maine, 29.8 percent
Idaho, 29.4 percent
To see where your state's capital gains rate ranks, check out the Tax Foundation's capital gains map.
A well-heeled Californian in the state's highest tax bracket would give up 33 percent of his profit on investments to state and federal capital gains taxes, compared with just 25 percent for someone who lives in New Hampshire, according to the report.
In addition to looking at the rates themselves, Tax Foundation's analysis factors in the complex alchemy of federal and state income tax deductions, credits and phase-outs that can alter stated tax rates. Indeed, California's top tax rate of 13.3 percent -- if merely added to the top federal capital gains rate of 23.8 percent (that's the 20 percent base rate, plus the 3.8 percent excise tax on unearned income over set levels that was passed as part of the Affordable Care Act) -- would add to more than 37 percent. However, state income taxes are deductible on federal returns, so the real rate drops to 33 percent.
Still, that's far and away the highest capital gains levy in the country, according to the Tax Foundation. And high capital gains rates are particularly egregious when you consider that this levy is taxing income that arguably has already been taxed. After all, corporations pay income taxes on gross profits, passing on the remains to investors through dividends and increased value of their stock (capital gains). Plus, investors buy shares and other capital assets with after-tax dollars.
Levying another high tax on these gains discourages savings and investment, says Kyle Pomerleau, the Tax Foundation economist who conducted the study.
Here are the rest of the states with the 10 highest capital gains rates:
New York, 31.5 percent
Oregon, 30 percent
Minnesota, 30.9 percent
New Jersey, Washington, D.C. and Vermont, all at 30.4 percent
Maryland, 30.3 percent
Maine, 29.8 percent
Idaho, 29.4 percent
To see where your state's capital gains rate ranks, check out the Tax Foundation's capital gains map.
Friday, February 21, 2014
Thursday, February 20, 2014
Selecting an Audit Firm
If there is an audit committee, one of its primary responsibilities is to select an auditor who has the expertise and knowledge to perform an audit for a tax-exempt charitable nonprofit. (If there is no audit committee then the responsibility to recommend the retention of an auditor may fall to the executive director and the full board.) Before meeting with CPAs and/or audit firms, the audit committee should develop goals and objectives to help narrow the search to only those CPAs and/or audit firms that have the skills and experience to provide the services your organization needs. It is essential to make sure the CPA or audit firm is licensed in your state!
When it’s time to find a CPA or audit firm for your charitable nonprofit
- Check with other professional service providers and organizations similar to your own for recommendations on CPAs and/or audit firms.
- Not all auditors have nonprofit experience, so you should check references and ask for a copy of their Peer Review (most states require auditors to be audited themselves by a third party, which is called a "peer review").
- Before you decide on an auditor, do enough due diligence to know whether there are any conflicts of interest. Don't forget to check with your board members as part of that investigation.
- Sometimes free consultations can be an opportunity to interview potential CPAs or audit firms.
- Don’t hesitate to ask for references and/or resumes of individual CPAs within larger firms.
- Look for a CPA or auditing firm that understands accounting for charitable nonprofits and has expressed interest in your mission. Be sure to ask how the CPA or firm will educate your staff on how to prepare for the audit since that will be the most time-consuming process for your staff, and can most directly impact the time it takes for the auditors to investigate and complete their report. This is where the nonprofit can help control some of the costs of the audit!
- Research organizations that represent the accounting profession in your state, such as your State Board of Accountancy, to help you determine how to evaluate the CPA/audit firm, based on standards that CPAs are expected to follow in your state. (Memberships in some professional associations require CPAs to adhere to certain ethical standards of service. For example, the American Institute of Certified Accountants requires its CPA members to follow its Code of Professional Conduct.)
- Use a “request for proposals” process. Request a proposal letter from qualified CPA firms. When requesting a proposal for audit services, the objectives and scope of the audit should be clear. Ask them to meet with you, provide a quote, as well as their credentials and references. Be sure to ask for references from tax-exempt charitable organization clients.
- When evaluating a proposal for audit services, the audit committee should consider the following:
- The responsiveness to the request for proposal
- Relevant experience
- Availability of staff with professional qualifications and technical abilities
- The results of external quality control reviews
- References from other nonprofit clients, and
- Of course, costs.
Resources for choosing an auditor
- Sample Request for CPA Qualifications and Request for Proposal Letter from Qualified CPA Firms for their Services (AICPA)
- Sample Request for Proposal (RFP) for audit services (Raffa)
- How to purchase audit services (About.com)
- Choosing an External Auditor - While not intended for an audience of charitable nonprofits, this white paper contains very helpful information, especially in sections two and three about the RFP process and suggestions for the selection process. (Intergovernmental Audit Forum)
- RISKfacts: Outside Advisors – Selecting and Using Accounting and Insurance Experts (Charity First)
Conflicts of interests and auditor independence
Inevitably staff members are involved in the audit field work and in preparing the documents that are reviewed by the auditors. There is always the potential for a conflict in that staff are implementing the internal controls and because they are often the people with the most opportunity to mask financial irregularities.
The AICPA and the individual state governments require auditors to be independent. The Sarbanes-Oxley Act requires publicly traded companies to rotate lead auditors -- not necessarily audit firms -- every five years. While this provision of the Sarbanes-Oxley Act of 2002 does not apply directly to nonprofits, it is still a wise practice for a nonprofit to consider how to ensure that fresh eyes are periodically looking at its financial records. The rotation of the individual lead auditor periodically can ensure that the eyes of those examining the nonprofit’s financial records are fresh, and less likely to be overlooking something just because of a long-standing relationship with the nonprofit as a client. Auditor independence may also be compromised if the audit firm provides consulting services to a client-nonprofit, while at the same time performing an audit (or a financial review, or a compilation). (AICPA’s Code of Professional Conduct). As a result, it is considered “best practice” to refrain from engaging the same individual or firm for both auditing and non-auditing services (other than filing their IRS annual reports, such as the IRS Form 990). This will help avoid conflicts of interest.
Remember that CPAs and auditing firms work with their clients to improve financial practices and ensure accountability. In this sense, they are responsible to the public as well as to their clients. Therefore, CPAs and auditing firms, as licensed professionals with their own professional code of conduct and regulations, are charged with remaining independent and objective, regardless of the level of financial review they provide to the nonprofit client.
Resources
- Nonprofit Auditor-Selection Guide
- Independence and Conflicts of Interest (AICPA)
- AICPA Code of Professional Conduct (AICPA)
- Rule 102-2 Conflicts of Interest (AICPA)
Wednesday, February 19, 2014
3 Tax Strategies for the Self-Employed
Preparing and filing taxes can be cumbersome, time-consuming, and downright confusing. No one knows this more than self-employed individuals. But tax planning doesn't have to be taxing. Here are three tax strategies that'll save self-employed individuals both hours and dollars.
1. Fund a retirement account to lower your tax bill Although self-employed individuals don't have the luxury of a built-in workplace 401(k), you have lots of other great opportunities to save for retirement on a tax-deferred basis while reducing your taxable income today. The simplest of these plans, and one that can you still open and fund before the April 15th tax-filing deadline, is the SEP IRA.
Every dollar you contribute to a SEP IRA reduces your business' taxable income. And the contribution limits on these plans are remarkably high. In fact, a SEP IRA can potentially save your business up to tens of thousands of dollars in taxes every year. The SEP IRA allows contributions up to 25% of compensation or $51,000, whichever is less. Keep in mind the maximum amount of compensation that can be used in determining your contribution is $255,000 for the 2013 tax year.
2. Take advantage of the simplified home-office deduction If you "regularly and exclusively" conduct business in a space of your home , you're used to filing a lengthy form that requires you to enter a percentage of household expenses for mortgage interest, insurance, repairs, utilities, etc. Under the new simplified option for home office deduction, you now just deduct $5 per square foot of home office space. The limit is 300 square feet, for a $1,500 maximum tax deduction. This strategy alone can save you tons of time when preparing your taxes.
3. Prepare for the health insurance premium tax credit coming in 2014
In conjunction with Obamacare, individuals and families can soon take a new premium tax credit to help them afford health insurance coverage purchased through an insurance exchange. Starting in the 2014 tax year, you may be eligible to deduct premiums you pay for medical, dental, and qualifying long-term care insurance coverage for you, your spouse, and your dependents. Determine your eligibility and start planning for next year's tax credit. It's never too soon to figure out how to save money on next year's tax bill.
In conjunction with Obamacare, individuals and families can soon take a new premium tax credit to help them afford health insurance coverage purchased through an insurance exchange. Starting in the 2014 tax year, you may be eligible to deduct premiums you pay for medical, dental, and qualifying long-term care insurance coverage for you, your spouse, and your dependents. Determine your eligibility and start planning for next year's tax credit. It's never too soon to figure out how to save money on next year's tax bill.
Save time and money this tax season Taxes don't have to be taxing. Save time and give less money to Uncle Sam by implementing these tax strategies today.
Tuesday, February 18, 2014
Investment property tax deductions
Each year, millions of investment-property owners file tax returns claiming more net rental income than they should. Why? Because they do not take advantage of all of the tax deductions available. With good record-keeping and careful planning, anyone can take advantage of these deductions. Rental real estate held for investment affords more tax benefits than nearly any other investment.
Many of us with investment property keep good records of the easy stuff: hard expenses we spend actual money on, such as advertising, insurance, legal, repairs and supplies. However, many other expenses are available and deductible against rental income that we either do not track as well or simply do not think of mentioning to our accountants at tax time. These expenses can often result in a rental loss for tax purposes. Here are a few.
Home office. If certain requirements are met, home office expenses attributable to the square footage within your home designated as your office may be deducted from rental income. These include utilities, mortgage interest (or rent paid), homeowners insurance, and repairs and maintenance paid either to the entire home or directly to the office itself.
Interest. This is often our largest expense, especially in the first several years of owning the investment as much of the monthly mortgage payment is amortized to interest and not principal pay-down of the mortgage. However, this deduction might also include interest paid to a home equity line of credit on the property or even credit card interest for items paid toward the investment home.
Casualty, disaster and theft losses. If the investment property is damaged or destroyed due to a natural disaster or theft, you might be able to deduct part, if not all, of your loss related to the investment. Typically your loss is limited to your adjusted basis in the property and will likely also be limited by any insurance reimbursement.
Depreciation. If planned correctly, this “non-cash” expense can often mean the difference in paying tax on rental income or realizing the benefit of a tax loss. While most of the investment will be depreciated straight-line over 27.5 years (39 years for commercial real estate), you can increase depreciation expense in the first several years by using cost-segregation and identifying assets within the home such as appliances, cabinets and fences that can be depreciated over shorter taxable lives (five, seven and 15 years respectively in this case). Also, Section 179 depreciation and bonus depreciation may be available and advantageous.
In the end, nothing is more important than proper planning for tax purposes when adding investment real estate to your portfolio. Do your homework, spend time talking with a tax professional and remember to keep good accounting records along the way. By taking advantage of all of the tax benefits available to investment real estate, you can build true wealth over time with an appreciating asset as well as earn income along the way. Happy investing!
Monday, February 17, 2014
Upper brackets will feel weight of federal tax changes
How will the major tax changes approved by Congress affect your returns?
Taxpayers will find out soon as they plug figures into their tax returns, due April 15, and see for the first time the impact of last year’s federal tax law changes.
To get an idea of what they might find, the Globe asked tax preparer H&R Block to create some tax return scenarios, calculating tax liability under both the 2012 and 2013 tax rules using the same income numbers for both years.
The result: Taxpayers who are married and filing jointly with income of $250,000 or less may be pleased to find their taxes declining a bit. Even couples making $450,000 — enough to trigger most of the thresholds for new taxes, phased-out deductions, and phased-out personal exemptions — probably won’t see a dramatic increase in their tax bill.
For example, a couple earning $1 million but with no investment income will be untouched by the new 3.8 percent tax on net investment income. That couple will also be subject to the phase-out of itemized deductions, but they’ll feel the sting more acutely if they have substantial itemized deductions such as a big home mortgage.
Taxpayer unhappiness, however, may not be directly related to any actual increase in taxes. People are often more focused on the size of the check that they have to write when they file rather than the amount of their total tax bill, said Jackie Perlman, H&R Block principal tax analyst. And the size of that check will depend largely on taxes withheld from paychecks and any estimated taxes paid in 2013.
According to H&R Block, here’s what happens to the tax bill of hypothetical couples whose salaries, investment income, property taxes, and family size are exactly the same as in 2012. In each of these scenarios, investment income is $25,000 a year while the amount of property taxes, mortgage interest, state and local taxes, and charitable contributions increases as income rises. While these scenarios are based on married couples filing jointly, the same principles apply to individual filers, but with lower thresholds.
Married, employed, and with two dependent children, this couple doesn’t make enough to trigger any of the new tax thresholds. As such they escape:
■ The new 0.9 percent Medicare tax on earned income above $250,000 for those married filing jointly.
■ The 3.8 percent Medicare surtax on net investment income for those with modified adjusted gross income over the $250,000 married-filing-jointly threshold.
■ The phaseout of personal exemptions and itemized deductions, which is triggered when adjusted gross income exceeds $300,000 for couples filing jointly.
■ Higher tax rates, which go into effect once taxable income exceeds $450,000 for couples filing jointly. The top marginal rate jumps to 39.6 percent from 35 percent for 2012, and the top tax rate on capital gains goes to 20 percent from 15 percent.
This $250,000 couple, in fact, would experience a 1 percent decrease in taxes. The reason: Inflation indexing means personal exemptions increase to $3,900 per exemption in 2013 from $3,800 in 2012, a total increase of $400 for their family of four. As a result, this couple would pay $41,198 in taxes, which is $425 less than they paid for 2012.
This couple makes just enough to trigger every new threshold except the higher income tax and capital gains tax rates. Under the 2013 rules, they lose their personal exemptions, get $4,500 trimmed from itemized deductions, and must pay the new Medicare and net investment income taxes.
Yet their 2013 tax bill is only $1,363 higher than it was for 2012, a 1.4 percent increase. Why so small? A “permanent patch” on the alternative minimum tax, or AMT, approved last year means this couple pays $6,844 less in AMT than they did for 2012. The AMT, originally designed to keep wealthy taxpayers from using tax loopholes to avoid taxes, was affecting a growing number of middle-class taxpayers because it didn’t automatically adjust for inflation. Last year, Congress replaced periodic annual “patches” with a permanent inflation adjustment.
Scenarios for couples with income at $750,000 and $1 million saw big jumps in their tax bills. Here couples lose their personal exemptions and see their itemized deductions trimmed more aggressively. Moreover, they feel the impact of the new 39.6 percent top-income tax rate and the 20 percent capital gains tax rate, and they owe more for the new Medicare tax and tax on net investment income.
At the $750,000 income level, the total tax bill jumps 10.6 percent, leaving the couple owing Uncle Sam $202,990 or $19,450 more in taxes. At $1 million, the couple will see a 12.8 percent increase and owe $33,105 more in taxes, bringing the total tax bill to $291,100.
Once taxpayers complete their 2013 returns, they’ll have some clearer guidelines for plotting tax-saving strategies. Those who find themselves facing big taxes on net investment income, for example, may want to make sure that income-producing investments such as taxable bonds are held in tax-advantage accounts such as IRAs and 401(k)s.
Tax-loss harvesting — selling some investments at a loss to offset capital gains — also may become an important way of reducing net investment income.
Given the complexity of today’s returns, some may want to make use of financial advisers to fine-tune portfolios to help reduce tax liabilities. Fidelity Investments is seeing growing demand for personalized portfolio services that help investors manage not only their money but also navigate the tax environment, said John Sweeney, executive vice president of planning and advisory services at the Boston-based mutual fund company.
“Investing for an after-tax return can be more complicated,” said Sweeney.
Taxpayers will find out soon as they plug figures into their tax returns, due April 15, and see for the first time the impact of last year’s federal tax law changes.
To get an idea of what they might find, the Globe asked tax preparer H&R Block to create some tax return scenarios, calculating tax liability under both the 2012 and 2013 tax rules using the same income numbers for both years.
The result: Taxpayers who are married and filing jointly with income of $250,000 or less may be pleased to find their taxes declining a bit. Even couples making $450,000 — enough to trigger most of the thresholds for new taxes, phased-out deductions, and phased-out personal exemptions — probably won’t see a dramatic increase in their tax bill.
But as annual income rises above that level, so do tax bills. Despite all the news coverage about the new tax laws, that may still come as a surprise to many.
Moreover, the numbers will vary even among those with similar incomes, said Bob Lepson, vice president of financial planning at Braver Wealth Management in Needham. “The specific makeup of your income will make a big difference,” he said. For example, a couple earning $1 million but with no investment income will be untouched by the new 3.8 percent tax on net investment income. That couple will also be subject to the phase-out of itemized deductions, but they’ll feel the sting more acutely if they have substantial itemized deductions such as a big home mortgage.
Taxpayer unhappiness, however, may not be directly related to any actual increase in taxes. People are often more focused on the size of the check that they have to write when they file rather than the amount of their total tax bill, said Jackie Perlman, H&R Block principal tax analyst. And the size of that check will depend largely on taxes withheld from paychecks and any estimated taxes paid in 2013.
According to H&R Block, here’s what happens to the tax bill of hypothetical couples whose salaries, investment income, property taxes, and family size are exactly the same as in 2012. In each of these scenarios, investment income is $25,000 a year while the amount of property taxes, mortgage interest, state and local taxes, and charitable contributions increases as income rises. While these scenarios are based on married couples filing jointly, the same principles apply to individual filers, but with lower thresholds.
THE $250,000 COUPLE
Married, employed, and with two dependent children, this couple doesn’t make enough to trigger any of the new tax thresholds. As such they escape:
■ The new 0.9 percent Medicare tax on earned income above $250,000 for those married filing jointly.
■ The 3.8 percent Medicare surtax on net investment income for those with modified adjusted gross income over the $250,000 married-filing-jointly threshold.
■ The phaseout of personal exemptions and itemized deductions, which is triggered when adjusted gross income exceeds $300,000 for couples filing jointly.
■ Higher tax rates, which go into effect once taxable income exceeds $450,000 for couples filing jointly. The top marginal rate jumps to 39.6 percent from 35 percent for 2012, and the top tax rate on capital gains goes to 20 percent from 15 percent.
This $250,000 couple, in fact, would experience a 1 percent decrease in taxes. The reason: Inflation indexing means personal exemptions increase to $3,900 per exemption in 2013 from $3,800 in 2012, a total increase of $400 for their family of four. As a result, this couple would pay $41,198 in taxes, which is $425 less than they paid for 2012.
THE $450,000 COUPLE
This couple makes just enough to trigger every new threshold except the higher income tax and capital gains tax rates. Under the 2013 rules, they lose their personal exemptions, get $4,500 trimmed from itemized deductions, and must pay the new Medicare and net investment income taxes.
Yet their 2013 tax bill is only $1,363 higher than it was for 2012, a 1.4 percent increase. Why so small? A “permanent patch” on the alternative minimum tax, or AMT, approved last year means this couple pays $6,844 less in AMT than they did for 2012. The AMT, originally designed to keep wealthy taxpayers from using tax loopholes to avoid taxes, was affecting a growing number of middle-class taxpayers because it didn’t automatically adjust for inflation. Last year, Congress replaced periodic annual “patches” with a permanent inflation adjustment.
UPPER-BRACKET COUPLES
Scenarios for couples with income at $750,000 and $1 million saw big jumps in their tax bills. Here couples lose their personal exemptions and see their itemized deductions trimmed more aggressively. Moreover, they feel the impact of the new 39.6 percent top-income tax rate and the 20 percent capital gains tax rate, and they owe more for the new Medicare tax and tax on net investment income.
At the $750,000 income level, the total tax bill jumps 10.6 percent, leaving the couple owing Uncle Sam $202,990 or $19,450 more in taxes. At $1 million, the couple will see a 12.8 percent increase and owe $33,105 more in taxes, bringing the total tax bill to $291,100.
Once taxpayers complete their 2013 returns, they’ll have some clearer guidelines for plotting tax-saving strategies. Those who find themselves facing big taxes on net investment income, for example, may want to make sure that income-producing investments such as taxable bonds are held in tax-advantage accounts such as IRAs and 401(k)s.
Tax-loss harvesting — selling some investments at a loss to offset capital gains — also may become an important way of reducing net investment income.
Given the complexity of today’s returns, some may want to make use of financial advisers to fine-tune portfolios to help reduce tax liabilities. Fidelity Investments is seeing growing demand for personalized portfolio services that help investors manage not only their money but also navigate the tax environment, said John Sweeney, executive vice president of planning and advisory services at the Boston-based mutual fund company.
“Investing for an after-tax return can be more complicated,” said Sweeney.
Sunday, February 16, 2014
10 Common Mistakes Accountants Make with Quickbooks Accounting
FROM MYREALDATA.COM
The use of QuickBooks accounting software has outgrown drastically over the recent past and QB client base now includes a good number of CPAs, small business firms and individual accounting practitioners. However, it is a surprising fact that only few accountants are able to use the program correctly. It is mainly due to lack of accounting knowledge and analytical skills make these accountants are prone to making some or the other error. Here are ten commonly made errors by accountants:
1. They utilize QuickBooks only as a tool for bookkeeping
Many accountants make use of the QuickBooks accounting software only as a tool for bookkeeping. This means that they use it to capture their daily transactions. They have never even reviewed the QB reports to manage their business finances.
2. QuickBooks is not set up properly for their business
Many individual practitioners have not even set up QuickBooks properly for their business. It might also be possible that many of them are using the wrong edition of QuickBooks and are blaming the software for its limitations in functionality.
3. Use older version of QuickBooks
Usage of older version of QuickBooks makes accounting functionality obsolete. Why is this even important? It is so because QuickBooks has no table to support any versions which is older than three years.
4. Their bookkeeping is not up-to-date
There are many accounting users who don’t even upgrade their version of QuickBooks. It is indeed an uphill task to update your bookkeeping which undoubtedly is a necessary operation for maintaining a consistent state of your financial reports.
5. Hire the wrong person to do their accounting and QuickBooks
There are professionals who have unknowingly or knowingly hired someone who is not qualified or experienced enough to take care of the assigned QuickBooks accounting activities.
6. Improper plan for future growth
You may be doing accounting yourself or you may hired some else to do it. In either of the cases, you need to have a concrete plan as to in what direction your accounting function will grow with the growth of your business.
7. They are without a plan for when their accountant leaves
If at any point of time your accounting staff suddenly leaves, then what would you do? You can solve this problem by having in place an accounting process which will be independent of the people who are carrying out the process.
8. Don’t know how to monitor their accounting staff
Lots of business owners worry because they don’t know how to monitor their accounting staff. The reason for this is justifiable as they are unable to judge whether the staff is doing a good job and whether it really takes that long to get something done.
9. Don’t back up their QuickBooks files
Usually the starter business accountants are unaware of how and where to back up their data. In some cases, they don’t even realize the need to do so. In this scenario, they usually don’t have a contingency plan in place to restore their lost data.
10. Not Using Credit Card Accounts
Many new accountants forego to put in their credit card in hosted QuickBooks.
Saturday, February 15, 2014
Ways to Save on Taxes All Year Round
FROM DAILYFINANCE.COM
If you managed to claim every possible tax break that you deserved when you filed your return last spring, pat yourself on the back. But don't stop there. Those tax-filing maneuvers were certainly valuable, but you may be able to rack up even bigger savings through thoughtful tax planning all year round. The following ideas could really pay off in the months and years ahead.
Give yourself a raise. If you got a big tax refund this year, it meant that you're having too much tax taken out of your paycheck every payday. Filing a new W-4 form with your employer (talk to your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve about $225 a month extra. Try our easy withholding calculator now to see if you deserve more allowances.
Boost your retirement savings. One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute to up to $17,500 to your 401(k) or similar retirement savings plan in 2010 ($22,000 if you are 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income. Haven't started one yet? Read Why You Need a 401(k) Right Away.
Switch to a Roth 401(k). But if you are concerned about skyrocketing taxes in the future, or if you just want to diversify your taxable income in retirement, considering shifting some or all of your retirement plan contributions to a Roth 401(k) if your employer offers one. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth. On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket. Just remember that you'll have to pay income taxes on the amount you convert.
Fund an IRA. If you don't have a retirement plan at work, or you want to augment your savings, you can stash money in an IRA. You can contribute up to $5,500 ($6,500 if you are 50 or older by the end of the year). Depending on your income and whether you participate in a retirement savings plan at work, you may be able to deduct some or all of your IRA contribution. Or, you can choose to forgo the upfront tax break and contribute to a Roth IRA that will allow you to take tax-free withdrawals in retirement.
Go for a health tax break. Be aggressive if your employer offers a medical reimbursement account -- sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills.
The advantage? You avoid both income and Social Security tax on the money, and that can save you 20 percent to 35 percent or more compared with spending after-tax money. The maximum you can contribute to a health care flex plan is $2,500.
Pay child-care bills with pre-tax dollars. After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. If your boss offers such a plan, take advantage of it.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of educational assistance tax-free each year. That means the boss pays the bills but the amount doesn't show up as part of your salary on your W-2. The courses don't even have to be job-related, and even graduate-level courses qualify.
Be smart if you're a teacher or aide. Keep receipts for what you spend out of pocket for books, supplies and other classroom materials. You can deduct up to $250 of such out-of-pocket expenses ... even if you don't itemize.
Pay back a 401(k) loan before leaving the job. Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you're younger than 55 in the year you leave your job, hit with a 10 percent penalty, too.
Tally job-hunting expenses. If you count yourself among the millions of Americans who are unemployed, make sure you keep track of your job-hunting costs. As long as you're looking for a new position in the same line of work (your first job doesn't qualify), you can deduct job-hunting costs including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2 percent of your adjusted gross income.
Keep track of the cost of moving to a new job. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move ... even if you don't itemize expenses. If it's your first job, the mileage test is met if the new job is at least 50 miles away from your old home. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 24 cents a mile for a 2013 move, plus parking and tolls. If you move in 2014, the rate is 23.5 center a mile.
Save energy, save taxes. Congress extended a $500 tax credit for energy-efficient home improvements, such as new windows, doors and skylights, through 2013. Be advised, though, that $500 is the lifetime maximum, so if you claimed $500 in energy-efficient credits before this year, you can't claim this credit. There are also restrictions on specific projects; for example, the maximum you can claim for new energy-efficient windows is $200.
Think green. A separate tax credit is available for homeowners who install alternative energy equipment. It equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, and wind turbines, including labor costs. There is no cap on this tax credit, which is available through 2016.
Put away your checkbook. If you plan to make a significant gift to charity, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. 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. However, don't donate stocks or fund shares that lost money. You'd be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity.
Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.
Time your wedding. If you're planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a "marriage penalty" that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether Uncle Sam would prefer a December or January ceremony. And, whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you'll owe as a couple.
Beware of Uncle Sam's interest in your divorce. Watch the tax basis -- that is, the value from which gains or losses will be determined when property is sold -- when working toward an equitable property settlement. One $100,000 asset might be worth a lot more -- or a lot less -- than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.
The stork brings tax savings, too. A child born, or adopted, is a blessed event for your tax return. An added dependency exemption will knock $3,950 off your taxable income, and you'll probably qualify for the $1,000 child credit, too. You don't have to wait until you file your return to reap the benefit. Add at least one extra withholding allowance to the W-4 form filed with your employer to cut tax withholding from your paycheck. That will immediately increase your take-home pay.
If you managed to claim every possible tax break that you deserved when you filed your return last spring, pat yourself on the back. But don't stop there. Those tax-filing maneuvers were certainly valuable, but you may be able to rack up even bigger savings through thoughtful tax planning all year round. The following ideas could really pay off in the months and years ahead.
Give yourself a raise. If you got a big tax refund this year, it meant that you're having too much tax taken out of your paycheck every payday. Filing a new W-4 form with your employer (talk to your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve about $225 a month extra. Try our easy withholding calculator now to see if you deserve more allowances.
Boost your retirement savings. One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute to up to $17,500 to your 401(k) or similar retirement savings plan in 2010 ($22,000 if you are 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income. Haven't started one yet? Read Why You Need a 401(k) Right Away.
Switch to a Roth 401(k). But if you are concerned about skyrocketing taxes in the future, or if you just want to diversify your taxable income in retirement, considering shifting some or all of your retirement plan contributions to a Roth 401(k) if your employer offers one. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth. On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket. Just remember that you'll have to pay income taxes on the amount you convert.
Fund an IRA. If you don't have a retirement plan at work, or you want to augment your savings, you can stash money in an IRA. You can contribute up to $5,500 ($6,500 if you are 50 or older by the end of the year). Depending on your income and whether you participate in a retirement savings plan at work, you may be able to deduct some or all of your IRA contribution. Or, you can choose to forgo the upfront tax break and contribute to a Roth IRA that will allow you to take tax-free withdrawals in retirement.
Go for a health tax break. Be aggressive if your employer offers a medical reimbursement account -- sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills.
The advantage? You avoid both income and Social Security tax on the money, and that can save you 20 percent to 35 percent or more compared with spending after-tax money. The maximum you can contribute to a health care flex plan is $2,500.
Pay child-care bills with pre-tax dollars. After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. If your boss offers such a plan, take advantage of it.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of educational assistance tax-free each year. That means the boss pays the bills but the amount doesn't show up as part of your salary on your W-2. The courses don't even have to be job-related, and even graduate-level courses qualify.
Be smart if you're a teacher or aide. Keep receipts for what you spend out of pocket for books, supplies and other classroom materials. You can deduct up to $250 of such out-of-pocket expenses ... even if you don't itemize.
Pay back a 401(k) loan before leaving the job. Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you're younger than 55 in the year you leave your job, hit with a 10 percent penalty, too.
Tally job-hunting expenses. If you count yourself among the millions of Americans who are unemployed, make sure you keep track of your job-hunting costs. As long as you're looking for a new position in the same line of work (your first job doesn't qualify), you can deduct job-hunting costs including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2 percent of your adjusted gross income.
Keep track of the cost of moving to a new job. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move ... even if you don't itemize expenses. If it's your first job, the mileage test is met if the new job is at least 50 miles away from your old home. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 24 cents a mile for a 2013 move, plus parking and tolls. If you move in 2014, the rate is 23.5 center a mile.
Save energy, save taxes. Congress extended a $500 tax credit for energy-efficient home improvements, such as new windows, doors and skylights, through 2013. Be advised, though, that $500 is the lifetime maximum, so if you claimed $500 in energy-efficient credits before this year, you can't claim this credit. There are also restrictions on specific projects; for example, the maximum you can claim for new energy-efficient windows is $200.
Think green. A separate tax credit is available for homeowners who install alternative energy equipment. It equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, and wind turbines, including labor costs. There is no cap on this tax credit, which is available through 2016.
Put away your checkbook. If you plan to make a significant gift to charity, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. 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. However, don't donate stocks or fund shares that lost money. You'd be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity.
Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.
Time your wedding. If you're planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a "marriage penalty" that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether Uncle Sam would prefer a December or January ceremony. And, whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you'll owe as a couple.
Beware of Uncle Sam's interest in your divorce. Watch the tax basis -- that is, the value from which gains or losses will be determined when property is sold -- when working toward an equitable property settlement. One $100,000 asset might be worth a lot more -- or a lot less -- than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.
The stork brings tax savings, too. A child born, or adopted, is a blessed event for your tax return. An added dependency exemption will knock $3,950 off your taxable income, and you'll probably qualify for the $1,000 child credit, too. You don't have to wait until you file your return to reap the benefit. Add at least one extra withholding allowance to the W-4 form filed with your employer to cut tax withholding from your paycheck. That will immediately increase your take-home pay.
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