Tuesday, September 30, 2014

A Tax Strategy for Multiple Income Streams

Successful folks are always in demand, which is why they often pick up board seats, consulting assignments and speaking fees. On top of that, there is the condo in, say, Aspen or Miami that is rented out half the year, producing yet more income. And so, without thinking about it, a problem of success arrives—a much higher tax bill.

Take "self-employment" gigs like consulting. On top of federal and state income taxes and a 0.9% Medicare tax, income may also be subject to the 15.3% self-employment tax, which includes FICA's Social Security and Medicare taxes. When it comes to self-employment income, you're responsible for all the FICA taxes that are normally split by employer and salaried employee.

So what's the most tax-efficient way to receive secondary income? Consider a seat on a company's board, a stimulating part-time job, particularly during semiretirement. Board members are usually paid with cash and shares in the company, typically restricted stock that vests after a few years.

You can reduce the tax impact by deferring the cash portion of your board fee through the company's deferred-compensation plan. Most companies have "nonqualified" plans that allow directors to funnel fees to 401(k)-like plans without contribution limits. The funds aren't tax-deductible, but they grow tax-deferred until retirement.

"If a member of the board who lives in New York moves to another state with no or low income taxes in retirement, they're going to pay a lot less tax," says Mitch Drossman, national director of the Wealth Planning Strategies Group at U.S. Trust. To avoid paying income tax in the original state, you must put the money in a 401(k) and take the income over at least a 10-year period in your new state.

Directors receiving restricted stock that vests over a number of years can accelerate rather than defer the taxes. Usually taxes are owed after stock is vested, based on the value of the stock at that point, but a director can opt to be taxed on its value when first received. This is a bet the stock is going to appreciate in excess of what you're paying in taxes now, usually in cases where "the company is going public or it's a good candidate to be acquired," says Drossman.

If you are generating a substantial self-employed income stream, consider creating your own "defined-contribution plan," similar to a 401(k). They're known as a Keogh or a SEP IRA, and they allow you to sock away 25% of your earnings, either pre-tax or tax deductible, up to $52,000.

A defined-benefit plan, meanwhile, works more like a pension plan, but is more complicated and currently limits maximum retirement payouts to $210,000 a year. But contributions are tax deductible in the year they're made, and that can go a long way toward blunting your current tax blow.

If your extracurricular business generates a profit, structure your windfall for a tax advantage. A limited liability company, or LLC, protects your assets outside the vehicle from lawsuits filed against the LLC, but S corporations can be sweeter for tax purposes. The S corporation owner is usually paid a salary and takes profit distributions. The owner pays taxes on the salary as is normal—including the self-employment FICA charge totaling 15.3%—but the profit distributions aren't subject to the self-employment tax.

But make sure to strike the right balance between salary and profit distributions. "The IRS' position is that the owner must receive reasonable compensation in the form of income. A tax return that shows zero cash income is an automatic red flag for an audit," says Stephen Kirkland, a tax specialist at Atlantic Executive Consulting Group in Columbia, S.C. Furthermore, to legitimately claim S corporation profits, the company must either have equipment, merchandise, or one or more employees.

What that means is, if your extra income is generated by personal services that can't arguably generate profits, such as board membership fees, you can't benefit from an S corporation. And here's another caveat: The IRS keeps a close, skeptical eye on S corporations after a U.S. Government Accountability Office report estimated that these entities, some four million in 2006, underpaid taxes by $23.6 billion in the 2003 and 2004 tax years.

So if you go down the S corporation path, make sure you keep detailed records of your journey.

Monday, September 29, 2014

How 30 Minutes Now Can Save You $1,000 Later in Taxes

With a headline like that, you might be prepared for a bait and switch. But we’re serious here. You really can save up to $1,000 in only a half-hour.

However, there is a catch. We have to talk about taxes.

I know! Who wants to talk about taxes in September? Not me, that’s for sure.

While tax planning isn’t anyone’s idea of fun, it doesn’t have to be long, difficult or painful. In the amount of time it would take to find out if the family on “House Hunters” is going to pick the perfect home or compromise for the obviously inferior property (hint: they always compromise), you could have done something to ensure you’ll have an extra $1,000 next April.

Find Deductions Hiding in Your Closets

The first way to put that half-hour to good use is by cleaning out your closets and taking the contents to your favorite thrift store for a tax deduction.

Set the timer for 30 minutes and go wild. Be ruthless. It’s like “Supermarket Sweep,” but you’re cruising through your home rather than running through the grocery aisles.

Those skis Junior never used? Gone. The baby clothes from your 4-year-old? Outta here. The scrapbooking supplies that haven’t seen the light of day in two years? Sayonara.

This strategy has a double benefit. Not only do you get a deduction that can lower your tax bill next year, you’re also making space just in time for the rush of holiday gifts that will be arriving shortly.

Beef Up Your Retirement Savings

Another way to use those 30 minutes is to review your retirement accounts and see if you can afford to contribute a little more.

For 401(k) and 403(b) accounts through your workplace, you can contribute up to $17,500 this year, an amount that can be deducted from your taxable income. If you’re 50 or older, you can contribute up to $23,000.

Even if you don’t have an employer-sponsored retirement fund, you can contribute money to your own IRA and get the same tax benefits. IRA contributions for most workers are maxed out at $5,500 in 2014, with those 50 and older eligible for a deduction on up to $6,500 in contributions.

Depending on your tax bracket, you could save 30 cents in taxes for every dollar you contribute to an eligible fund. Remember, there are income caps for some of these deductions, and you get an immediate tax benefit only if you have a traditional 401(k), 403(b) or IRA. If you have a Roth account, you still get tax benefits, but not until after you retire.

Friday, September 26, 2014

Limits On Tax-Free Lifetime Gifts Projected To Rise For 2015

It keeps getting less taxing to die rich. Based on inflation data released today by the Department of Labor, Wolters Kluwer , CCH has projected inflation-adjustments to various tax figures that affect financial planning for the well-off: the federal and gift tax exemption amount, the annual gift tax exclusion amount and the kiddie tax threshold.

The federal estate tax exemption—that’s the amount an individual can leave to heirs without having to pay federal estate tax—is projected to be $5.43 million, up from $5.34 million for 2014. That’s another $90,000 that can be passed on tax-free. The top federal estate tax rate is 40%. Talk about tax savings.

The gift tax is tied to the estate tax, so the inflation indexing helps the wealthy make the most of tax-free lifetime giving too. You can make the gifts during your lifetime; just you have to keep track of them as they count against the eventual estate tax exemption amount. In other words, you can’t double dip. So a woman who set up a trust for her kids with $5 million a few years ago could make new gifts to add to the trust and bring it up to the $5.43 million amount. A husband and wife each get their own exemption. So a couple would be able to give away $10.86 million tax-free in 2015 (assuming they haven’t made prior lifetime gifts).

Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount. Wolters Kluwer, CCH projects it won’t budge at $14,000 a year for 2015, the same as 2014, up from $13,000 a year in 2013. But it can be leveraged to add up. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.

If you want to make gifts and not have to bother to keep track for gift tax purposes, you can make gifts for medical, dental, and tuition expenses for as many relatives (or friends) as you’d like if you pay the provider directly. These gifts don’t count towards any of the limits.

With the federal estate tax exemption rising, most people won’t need to use the annual gift exclusion to whittle down their estates. But it’s a tool you can use if you live in one of 19 states plus the District of Columbia that impose separate state death tax levies. Forbes has an interactive map showing the states with death taxes (estate and inheritance taxes) in 2014 and in 2015.

One thing to watch out for if you’re making gifts to younger members of the family is the federal kiddie tax. The kiddie tax, which covers students through the age of 23, puts investment income, above small amounts, into the parents’ tax bracket. For 2014, the kid pays no tax on the first $1,000 of unearned income and then a 15% rate on the next $1,000. Wolters Kluwer, CCH projects the $1,000 base will go up to $1,050 for 2015–a little help.

The Internal Revenue Service will release the official figures in the fall.

Thursday, September 25, 2014

Obamacare complicates the coming tax season

Obamacare's individual mandate is going to affect personal tax filings for the first time in the upcoming tax season, and the impact just might be a doozy.
"At a recent convocation of enrolled agents, I found that a good many of the veteran preparers are considering retiring because of the health care confusion and complexity," says Ken Shirk, founder and president of Lebanon-based Sonrise TagsAnd-Tax LLC.
There are two main issues. The first requires that filers prove they had qualifying health care coverage in 2014, or an exemption; if not, they'll be subject to a penalty.
The second centers on the federal subsidies for those with income between 138 percent and 400 percent of the federal poverty level who purchased health insurance through the Obamacare marketplace. These subsidies were based on enrollees' income estimates for the year and could be received via payments to the insurer throughout the year or as a lump sum upon filing 2014 tax returns.
"Receiving too much or too little in advance can affect your refund or balance due," the IRS says. If your income estimate was too low and you chose to receive the subsidy throughout the year, you'll end up owing the government for the difference between what you got and what, in retrospect, you were actually entitled to.
According to the U.S. Department of Health & Human Services, subsidies dropped monthly premiums 74 percent for eligible Pennsylvania enrollees.
What that means for preparers
Shirk says this addition to the tax-filing process is going to require numerous new forms, and he and other preparers expect that many clients will not initially have all the necessary information and documentation.
"Add to that the likelihood of people trying to scam the system to get undeserved credits, which the preparer must guard against due to the sanctions and fines that the preparer is subject to, and it's not a nice picture," he says. "Fees will increase dramatically in some cases because of the extra work and the increased liability for an improperly prepared return."
The IRS Volunteer Income Tax Preparation program, which in Lancaster County is offered through the United Way and is available to individuals and families who make less than $50,000, won't see fees increase, because it's free. But Steve O'NeillUnited Way of Lancaster County's VITA adviser, does expect an increase in demand.

Last year, O'Neill says, about 185 volunteers prepared 4,850 returns in the county, saving participants an estimated $200 in preparation fees per return. The program has drawn mostly people from the lower end of the eligibility range, with average income of participants at about $18,000.
But because other services may be more complicated and more expensive this year, he thinks people who have gone to another preparer or done their own returns in the past may seek out VITA this year.
As usual, VITA is seeking new volunteer preparers, who don't need to be accountants but must pass an IRS certification program annually. This year, O'Neill says, they will be getting extensive training on the changes, but he doesn't think it will scare off veteran volunteers.
"I think they're looking forward to a new challenge and helping people with something that is difficult," he says.
One challenge VITA can't help people with directly is renewing or selecting health insurance through the Obamacare marketplace. Volunteers got lots of questions about that last year and referred them to other organizations with trained Obamacare navigators and assisters. This year, he says, the organizations might work together to have navigators and assisters at some VITA sites so they can answer questions immediately. <
"I think they're looking forward to a new challenge and helping people with something that is difficult."

Wednesday, September 24, 2014

Getting A Tax Benefit From Capital Losses

    As volatile as the stock market has been, you probably have some underperforming investments which have lost value that you are considering selling. Tax planning is especially important when you are considering selling at a loss. Why? Although you will be getting a potential tax benefit by reducing your taxes, locking in your losses will also lead to an economic loss when those investments bounce back after you sell. It is very important to consider both the tax and economic impact before you decide to sell underperforming investments.
The Short and Long of ItCapital losses — as well as capital gains — are reported in two categories:  Short term and long term (referring to investments held up to one year or investments held longer than one year, respectively). Short-term gains are taxed the same as ordinary taxable income, and long-term gains generally are taxed at a federal maximum individual income tax rate – either 15% or 20% –depending on the overall taxable income in a tax year.
Capital gains and losses are calculated on a net basis. For example, if you have $5,000 of long-term gains and $7,000 in long-term losses (for a net loss of $2,000), as well as $3,000 in short-term gains and $5,000 in short-term losses (for another net loss of $2,000), you would have an overall net capital loss of $4,000.
You are allowed to use up to $3,000 in capital losses each year to offset your ordinary taxable income (such as from salary and interest). Married taxpayers filing separately must split this amount and each can claim up to $1,500 per year. So, the above example would allow you to claim a $3,000 loss against your taxable income in the same tax year as the losses, as well as save the remaining $1,000 to carry forward to future years.
Choose CarefullyBear in mind that it may be difficult to determine which investments to sell at a loss. Selling investments that have declined the most in value relative to your purchase price will give you the biggest tax benefit. However, you will miss out on a potential recovery and the opportunity to add to your positions at favorable prices. One alternative is to buy back the stock after 30 days have passed. The IRS disallows losses under “wash sale rules” if you buy replacement stock within 30 days before or after the date of the sale because it assumes your only intention was to create tax losses.
It is important not to lose the tax deduction by replacing or buying “substantially identical investments” within the 30 days of the original sale. A common way to meet this rule is to swap one type of investment for a similar performing investment. For example, you can sell shares in one mutual fund and buy shares in a fund managed by another provider, or sell one company’s stock and buy the stock of its competitor. This approach can help you to realize a loss while maintaining your exposure to a similar investment type.
If you opt to buy back the investment you sold after 30 days have passed, there is another risk — if the investment performs well in the interim you may miss appreciation in fair market value. Alternatively, you can purchase more of the same security and then sell 30 days later, but your exposure is that the price may decline further while you own twice as much.
Only Part of the StoryWhile tax losses provide you with a valuable tax-management tool, they are just one of many decisions and considerations to keep in mind. Your tax and investment advisors can help as you determine which purchases and sales will help you pursue your financial goals. Often these decisions are made at the end of the tax year when the tax benefits and the investment results are clearer. You should always consult your advisors so you understand your best options.
Always Check Your Cost BasisTo determine your capital losses, you need to keep track of your cost basis, which is the original price you paid for securities plus any commissions, reinvested capital gains or reinvested dividends.
When your entire investment in the security comes from a single purchase date, this is a relatively simple calculation. But if you buy the same security at various times or prices, or if you reinvested dividends or capital gains, the calculation can become more difficult. If this is the case, you may have to choose a specific method for reporting cost basis by:
  • Using the average purchase price;
  • Choosing specific shares (a more detailed approach that provides maximum flexibility but that must be identified when the shares are sold); or
  • Using the “first-in, first-out” method, in which the first shares you purchased are considered to be the first shares you sold.
Each approach will provide a different tax impact, so be sure to get qualified advice about which specific method is best for your personal situation. 

Tuesday, September 23, 2014

Four hot business tax issues in 2014

When it comes to tax planning for your businesses, there are always income projections to consider, deductions to look into and tax credits to research. But each year-end also has a few prominent issues all its own. Here are four for 2014.
• Payroll tax management
Statistics show that payroll taxes and penalties are putting an increasingly heavy burden on small-business owners (and likely the owners of many midsize businesses as well). For example, the “NSBA 2014 Small Business Taxation Survey,” published by the National Small Business Association, found that payroll taxes were the No. 1 financial burden on owners and their businesses. And the administrative challenges of payroll taxes ranked second, behind only income taxes.
So, as you sit down with your managers and tax advisers to discuss year-end tax planning, also discuss the impact of payroll taxes. If you have, for instance, failed to deposit withheld taxes in a timely manner, you may be subject to late-deposit penalties and interest. Factor such penalties and interest into your total tax liability and look for ways to minimize or eliminate them.
Other year-end payroll activities to carry out include checking federal, state and local electronic tax filing requirements for this year, and reviewing accounts payable and general ledger records for unreported taxable items. Whether you handle payroll in-house or use a third-party provider, be sure you are aware of these responsibilities.
• Property and asset repairs
The final IRS regulations for tangible property repairs versus improvements took effect this year. In a nutshell, costs incurred to acquire, produce or improve tangible property must now be depreciated. But you can deduct expenses incurred on incidental repairs and maintenance of such property.
There are a couple of helpful safe harbors to consider. First, you may be able to deduct certain routine activities dedicated to using property and keeping it in efficient operating condition. These are activities that your business reasonably expects to perform multiple times during the property’s “class life,” under the IRS definition.
Second, for buildings that initially cost $1 million or less, qualified small businesses (generally, those with gross receipts of $10 million or less) may elect to deduct the lesser of $10,000 or 2 percent of the adjusted basis of the property for repairs, maintenance, improvements and similar activity each year.
The final regulations cover many other aspects of property repairs and improvements, as well. For example, they increase the dollar threshold for property that is exempt from depreciation from $100 to $200. And they address how to identify “units of property” when distinguishing repairs from improvements in relation to commercial buildings.
• Mergers and acquisitions
It’s been a booming year for mergers and acquisitions activity. In fact, the first half of 2014 was the busiest period of activity since the financial collapse of 2008, according to the July issue of FactSet Flashwire US Monthly (an M&A data tracking publication). Aggregate deal value shot up to $210.3 billion in June from $151.7 billion in May. As of this writing, the rest of the year is generally expected to follow suit.
All of this action means more and more companies are considering the ramifications of an M&A deal in their year-end tax planning. Even if you are only pondering the possibility of buying another company or entering negotiations to be acquired by a larger business, it’s important to have an early heads-up on the potential tax impact.
For starters, business structure plays a huge role in M&A tax planning. With a corporation, for instance, sellers usually prefer a stock sale for the capital gains treatment and to avoid double taxation. Buyers, on the other hand, generally want an asset sale to maximize future depreciation write-offs and avoid potential liabilities.
Another key issue is whether a deal should be set up as a tax-deferred transfer or taxable sale. Looking again at a corporation, ownership can be tax-deferred if it’s exchanged solely for stock or securities of the recipient corporation in a qualifying reorganization. But these types of transactions are strictly regulated.
For cash flow purposes, it’s typically better to postpone tax liability. There are, however, some valid reasons for agreeing to a taxable sale. The parties don’t have to meet the technical requirements of a tax-deferred transfer. Also, the seller doesn’t have to worry about the quality of buyer stock or other business risks of a tax-deferred transfer. The buyer benefits from a stepped-up basis in its acquisition’s assets while keeping the seller out of the picture as a continuing equity owner.
Naturally, the tax effects of a sale or acquisition are just one component of the deal’s viability. And, again, we’ve looked only at some of the aspects of a corporation’s sale here – other entity choices will involve different challenges and degrees of complexity.
• Additional Medicare tax
The additional 0.9 percent Medicare tax on the excess earnings of some highly compensated employees is nothing new. A provision of the Affordable Care Act, the tax took effect in 2013. But the IRS didn’t issue final regulations on the additional Medicare tax until earlier this year, and the agency even issued a follow-up FAQ about it in June.
Essentially, taxpayers with wages over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay the additional 0.9 percent on their excess earnings. Unlike regular Medicare taxes, the additional Medicare tax doesn’t include a corresponding employer portion. But, as an employer, you do need to withhold the additional tax to the extent that an employee’s wages exceed $200,000 in a calendar year. (Various other stipulations and exceptions may apply. Talk with your tax adviser about them.)
Withholding doesn’t have to begin until the first pay period when wages for the year exceed the $200,000 threshold – and that could very well be year-end. So now is a good time to learn more about the additional Medicare tax as well as assess which of your staff members may be subject to it.

Monday, September 22, 2014

Health Care Costs And Retirement Planning

Over the last month, I have had several people who are planning for retirement come to me with one burning question, “How much will my health care cost?”  I have also heard on numerous occasions, and with a weary tone, “Who can retire these days with the cost of health care?” We are all well aware of the effect that rising health care costs are having on our population, and as a result, the Medicare and Medicaid system in general. This is drastically affecting current retirees and, as we commonly refer to them, the baby boomers, who will be (and are already) retiring in droves over the next 10 to 15 years.  But, even if you’re not in that category, I would suggest that you keep reading because these points will likely have even more affect on you and your family over your lifetime, and it’s never too early to start planning for them.

According to the Center for Medicare and Medicaid Services, “health spending is projected to grow at an annual rate of 5.8 percent from 2012-2022, 1.0 percentage point faster than expected annual growth in the Gross Domestic Product (GDP)1.” For retirees, many of whom are on a fixed income, this could ultimately mean substantial reductions to their retirement income and purchasing power.

To make the matter worse, when it comes time to enroll in Medicare (most individuals are eligible upon reaching age 65) the complexity of available options is overwhelming.  Between Medicare (Part A, Part B and Part D) and Medicare Supplement (which range from Plan A to Plan N), understanding the choices is not easy.

Medicare Part A covers (up to certain limits): hospital care, skilled nursing care, nursing home care, hospice and home health services. Part A is typically provided at no cost because you (or your spouse) have already paid premiums through payroll deductions while you were working. Part B covers medical insurance, such as doctors’ services and outpatient care. Most individuals pay a monthly premium for Part B. Lastly, Part D covers prescription drug coverage, and also requires a monthly premium. Your premium costs will depend on your MAGI, which is the total of your adjusted gross income (AGI) and tax-exempt interest income (if you’re interested, pull up SSA publication No. 05-10536, which explains this in enough detail to make your eyes water).

To help cover any gaps that exist in coverage, insurance companies offer Medicare supplement or Medigap policies. These policies help cover copayments, coinsurance, deductibles or both. These plans range in benefits and are distinguished by a letter in the alphabet (plans A through N). Learn more here: http://www.medicare.gov/supplement-other-insurance/compare-medigap/compare-medigap.html

The costs for all these coverages are also rising dramatically. According to the 2012 and 2013 Medicare Board of Trustees Report, premiums have increased annually by an average rate of 7.87 percent for Part B; 7.12 percent for Part D; and 5 percent for Medigap insurance.

Out-of-pocket costs may include dental care, vision, hearing and medication costs not covered by the average prescription drug plan. Keep in mind that long-term care expenses are not covered by any of the Medicare or Medigap programs. We have a separate tool that helps us plan for the effects that long-term care expenses can have on your financial plan. There are also long-term care insurance products available, but that is a discussion for another day.

In summary, rising health care costs are likely to have a profound effect not only on retirees, but on our nation as a whole. One way we can better prepare ourselves is to plan for these costs and account for them in our financial plans.  One phrase we throw around often is, “People don’t plan to fail, they fail to plan.” We cannot control what the government is going to do, where taxes will be in the future, or where health care costs will be when we retire, but if we sit down and make reasonable assumptions and plan for the unexpected, not only will we be better off as families, but we will be better off as a community and a nation.

Sunday, September 21, 2014

Weighing tax benefits of S corporations

Factors to consider in deciding which type of incorporation is best for you

AS TAX LAWS continue to evolve, so do choices of entity. Being mindful of the alternatives is critical to achieving tax benefits. Both S corporations and Limited Liability Companies (LLC's) are flow-throughs, which have long been a desirable alternative to regular C corporations.

Unlike in C corporations, the incomes of flow-throughs are taxed directly to their individual owners, largely independent of distributions. C corporations, on the other hand, are double-taxed, incurring their own tax first, without any long-term capital gains break. Then, as money is distributed to owners, it is taxed again at the individual level, without a deduction to the corporation. The law enforces the double tax by limiting owner salaries to reasonable levels, and by preventing corporations from accumulating excess earnings.

However, S corporations have a newly enhanced tax advantage over LLC's. Only active shareholders of S corporations are exempt from the Affordable Care Act's new 3.8% tax on unearned investment income of joint filers making over $250,000. While inactive owners of both entities incur the new tax, highincome active members in LLC's do also, in that a 3.8% Medicare tax applies to their flow-through income.

There are several benefits and risks of becoming and operating as an S corporation. LLC's, on the other hand, feature absence of corporate formalities, unrestricted owner types, flexibility of income allocation and distributions, ability to distribute appreciated assets, and more immediate tax benefits of losses if incurred.

Ultimately, the choice of entity depends heavily on the direction of future tax legislation. The year 2013 saw increases in maximum tax rates for individuals to 43.4% for ordinary income and 23.8% for long-term capital gains and qualifying dividends. Meanwhile, maximum rates for C corporations held firm at 35% on all income. If C corporation rates decline to be more competitive globally, as many in the federal government advocate, flowthrough entities may lose their current appeal. Companies must work with their tax advisors to assure adequate consideration of the unique facts of their situations.

Election and ownership

Switching from a regular C corporation to an S involves a special election, which may have tax costs. Electing S status causes the loss of any credits or carryovers from previous years, and subjects the corporation to "built-in gains" tax at the time of the election, which includes adjustments of property to market value. If sold within a period of ten years after the election, S corporations may be open to double taxation.

The advantages of S corporations in taxes come with many restrictions, violation of which can result in termination of S status and loss of its tax benefits. The number of shareholders is limited to 100. Ownership is restricted to individuals, estates, certain trusts, and certain exempt organizations.

Corporations, partnerships, and nonresident aliens are ineligible. An S corporation cannot be an owned subsidiary of a C corporation or a multiple member LLC, but can be a 100%-owned subsidiary of another S corporation.

Transfer or sale of stock can have severe consequences. If a shareholder is an LLC with more than a single member, the S election terminates. It is advisable to have a shareholder agreement in place to provide a right of first refusal, in the event that stock is offered for sale to nonqualifying shareholders.

Moreover, only a single class of stock is allowed. For example, preferred shares may not be issued. A potential problem arises with undocumented shareholder debt. If upon audit, the Internal Revenue Service interprets the debt as a second class of stock, the S election terminates. On another note, voting right differences do not constitute separate classes of stock.

Choice of tax year-end is restricted. The concern is that shareholders could otherwise benefit from cash-basis timing differences. Selecting a year-end other than Dec. 31 requires that sufficient funds be kept on deposit with the U.S. Treasury to offset any timing benefit.

Taxation and compliance

Once operating as an S corporation, taxation takes place at the owner level from amounts reported on the schedule K-l from the form 1120-S. Unlike C corporations, dividend distributions are not taxed unless they exceed the shareholder's cumulative basis. The basis is the amount paid for the stock plus amounts lent to the company plus the pro rata share of the accumulated adjustments account, which is basically the equivalent of retained earnings while the entity is an S corporation. A shareholder's guarantee of debt does not constitute basis.

Additionally, unlike C corporations, losses may provide tax benefits for owners. The deductibility of losses for active shareholders, however, is limited to the basis in the stock. Losses in excess of basis must be carried forward.

Compensation of stockholders who are active in the business must not be unreasonably low or distributions unreasonably high. The reason is that these shareholders might evade payroll taxes by making non-taxable distributions instead. Some tax practitioners advise clients to apply a minimum benchmark of the FICA base, which is $117,000 in 2014.

Distributions are heavily restricted. In accordance with the formalities of having a single class of stock, distributions must be paid in proportion to ownership. Also, distributions must be made to the actual shareholders. For example, if a trust owns the stock and distributions are paid directly to beneficiaries, it might cause the Internal Revenue Service not to respect the existence of the trusts.

Moreover, distributions in excess of basis are taxed as capital gains. S corporations having C corporation earnings and profits face additional potential taxes. If paid out of C corporation earnings and profits, excess distributions are taxed at ordinary dividend rates. Passive investment income in excess of 25% of gross receipts is taxed at the highest C corporation tax rate. Continuing the excess for three years can cause the S election to terminate.

Fringe benefits

While shareholders of regular C corporations participate in tax-favored fringe benefits alongside their employees, their counterparts in S corporations are limited. Shareholders owning more than two percent of an S corporation are considered to be self-employed for purposes of many of the rules. They may not participate in certain programs, including cafeteria plans and flexible spending accounts. Other financial benefits, such as medical or education, are deducted by the company and taxed to the shareholder in year-end payroll reporting. The medical insurance portion of compensation is exempt from social security, Medicare, or unemployment taxes. Medical insurance premiums are deductible by shareholders as selfemployed medical expense on their personal income tax returns.

On the other hand, life insurance premiums are fully taxable to shareholders, without a personal tax deduction. There may be good reasons to carry life insurance outside of the business. If it is used to fund corporate buy-sell agreements among shareholders, proceeds from policies that are normally exempt from taxes for beneficiaries may be taxed at maximum rates under transfer of value rules. A separate partnership might be preferred to avoid the issue, while also retaining the benefit of increased equity interest basis brought about by individual surviving owners doing a cross-purchase.

S corporation considerations

Summarized here are the critical aspects of S corporations. Failure to comply with restrictions on ownership, distributions, or passive investment income could result in termination of S status. This means the S corporation reverts to a C corporation, and the benefits, including the single level of taxation, are immediately lost.

Election and ownership

* Electing S status may cause loss of certain tax benefits, including credits and carryovers from previous years.

* A sale may be double-taxed within ten years of making the S election.

* Number of shareholders may not exceed 100.

* Shareholders must be individuals, estates, certain trusts, or certain exempt organizations.

* Shareholders may not be corporations, partnerships, or non-resident aliens. The only exception is 100% ownership by another S corporation.

* Only a single class of stock is allowed, although voting right differences do not constitute separate classes of stock.

Taxation and compliance

* S corporation income flows through to its shareholders, who report their share on their individual income tax returns.

* S corporation losses are deductible only up to the basis in the stock.

* Distributions up to basis are not taxed.

* Shareholder compensation must not be unreasonably low, or distributions unreasonably high.

* Distributions must be proportioned to ownership.

* If entities are shareholders, distributions must be to those entities, not direct to beneficiaries.

* Distributions become taxable if paid in excess of cumulative undistributed income or out of prior C corporation accumulated earnings.

* Passive income must be within limits or risk termination.

2% shareholder fringe benefits

* Shareholders may not participate in certain programs, such as cafeteria plans and flexible spending accounts.

* Medical insurance and most other benefits are deducted by the S corporation as compensation and taxed to shareholders.

* Life insurance premiums are taxed to shareholders without an S corporation deduction.

* Life insurance proceeds from policies held within the S corporation risk taxation at maximum rates under transfer of value rules.

Friday, September 19, 2014

10 Basic Tax To-Dos for the Rest of 2014

Here are 10 things to consider as you weigh potential tax moves between now and the end of the year.

1. Make time to plan

Effective planning requires that you have a good understanding of your current tax situation, as well as a reasonable estimate of how your circumstances might change next year. There's a real opportunity for tax savings when you can assess whether you'll be paying taxes at a lower rate in one year than in the other. So, carve out some time.

2. Defer income

Consider any opportunities you have to defer income to 2015, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

3. Accelerate deductions

You might also look for opportunities to accelerate deductions into the 2014 tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year, instead of paying them in early 2015, could make a difference on your 2014 return.
Note:  If you think you'll be paying taxes at a higher rate next year, consider the benefits of taking the opposite tack--looking for ways to accelerate income into 2014, and possibly postponing deductions.

4. Know your limits

If your adjusted gross income (AGI) is more than $254,200 ($305,050 if married filing jointly, $152,525 if married filing separately, $279,650 if filing as head of household), your personal and dependent exemptions may be phased out, and your itemized deductions may be limited. If your 2014 AGI puts you in this range, consider any potential limitation on itemized deductions as you weigh any moves relating to timing deductions.

5. Factor in the AMT

If you're subject to the alternative minimum tax (AMT), traditional year-end maneuvers such as deferring income and accelerating deductions can have a negative effect. Essentially a separate federal income tax system with its own rates and rules, the AMT effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end tax planning. For example, if you're subject to the AMT in 2014, prepaying 2015 state and local taxes probably won't help your 2014 tax situation, but could hurt your 2015 bottom line. Taking the time to determine whether you may be subject to AMT before you make any year-end moves can save you from making a costly mistake.

6. Maximize retirement savings

Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) could reduce your 2014 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, so there's no immediate tax savings. But qualified distributions are completely free from federal income tax, making Roth retirement savings vehicles appealing for many.

7. Take required distributions

Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (an exception may apply if you're still working and participating in an employer-sponsored plan). Take any distributions by the date required--the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of the amount that should have been distributed.

8. Know what's changed

A host of popular tax provisions, commonly referred to as "tax extenders," expired at the end of 2013. Among the provisions that are no longer available: deducting state and local sales taxes in lieu of state and local income taxes; the above-the-line deduction for qualified higher-education expenses; qualified charitable distributions (QCDs) from IRAs; and increased business expense and "bonus" depreciation rules.

9. Stay up-to-date

It's always possible that legislation late in the year could retroactively extend some of the provisions above, or add new wrinkles--so stay informed.

10. Get help if you need it

There's a lot to think about when it comes to tax planning. That's why it often makes sense to talk to a tax professional who is able to evaluate your situation, keep you apprised of legislative changes, and help you determine if any year-end moves make sense for you.

Thursday, September 18, 2014

How will Obamacare affect businesses in 2015?

One of the challenges in writing about the Affordable Care Act is that the law still is fluid, changing as the president and lawmakers in Washington weigh the consequences of some of its requirements.
For example, 2014 was to be the year in which employers with 50 or more employees would be required to offer health insurance or pay a penalty. That changed to 2015, and then it changed yet again. Now, businesses with 100 or more employees face the 2015 deadline. Those with 50 to 99 employees have until 2016 to comply.
The law ultimately will affect the taxes and operation of any business with the equivalent of 50 or more full-time employees. It will require those businesses to offer coverage that is affordable and of minimum value, or to pay a fine.
Affordable coverage, according to the law, should cost employees no more than 9.5 percent of their W-2 income. For coverage to meet minimum value standards, it must pay at least 60 percent of costs.
Employers who do offer insurance must report the cost of their employee health care premiums on their employees’ W-2 forms. They will also have to include health care costs on their business income taxes.
Those who do not offer insurance may face fines. Fines are levied if at least one worker uses the health insurance marketplace and that worker qualifies for a tax credit. The fine: $2,000 per employee, after the first 30 employees.
You may think it’s simple for an employer to determine if his or her business hires 50 or more full-time employees, but for some, that figure fluctuates.
Full-time employees are those who work 30 hours or more. That’s easy enough, but businesses with seasonal or part-time employees must calculate those hours, too. Each batch of 30 hours is equivalent to a full-time position. If those hours bring an employer’s full-time equivalents to 50 or more, the business faces the mandate.
Fortunately, employers with 50 to 99 employees have 2015 to pay close attention to their payroll, talk with their tax adviser and make necessary adjustments before the 2016 calendar year.
Those businesses with 100 or more employees also have 2015 to talk with the tax adviser and make adjustments. Although they are subject to the employer mandate in 2015, they are required to cover up to 70 percent of their employees, not the 95 percent that was the original target. Those businesses will have to cover up to 95 percent of their employees starting in 2016.
As for businesses with fewer than 50 employees, they will find little change in 2015. Those business owners are not required to offer health care coverage, but they may be eligible for a health care credit if they use the Small Business Health Options Program (SHOP) and offer insurance to their employees. Employers can claim the credit on their business income tax returns. They can go into the marketplace at any time to make changes.
The upcoming year will force business owners to grapple with the Affordable Care Act, but they need to continue to give voice to ways to improve the law and its implementation. Employer concerns helped push back the employer mandate deadlines, and their input can continue to shape the law.

Wednesday, September 17, 2014

Strategies For Mitigating The Net Investment Income Tax: Reducing MAGI and AGI


Remember that a key consideration when exploring planning strategies for mitigating a taxpayer’s NIIT liability is to determine whether the NIIT would be imposed on a taxpayer’s Net Investment Income (NII) or excess Modified Adjusted Gross Income (MAGI) (or UNII (undistributed Net Investment Income) versus excess AGI (Adjusted Gross Income) for trusts and estates). If the NIIT would be imposed on excess MAGI or AGI, opportunities to reduce or defer any type of income should be explored. The following are several recommended strategies for reducing a taxpayer’s MAGI or AGI amount.

Roth IRA Conversions.
Unlike other qualified retirement plans, Roth IRAs have no minimum required distributions, and their withdrawals are tax-free. These qualities make Roth conversions an effective strategy for reducing a taxpayer’s AGI/MAGI over the long term. However, Roth IRA conversion income is considered taxable income and thus increases MAGI. Therefore, when suggesting Roth conversions as a planning strategy, planners should consider the cost and benefits of a Roth conversion including the following:

The current tax rate
Future tax rates
The availability of funds to pay income tax on the conversion
The client’s time horizon
This strategy might be most effective for clients who expect their income to exceed threshold amounts later in retirement due to Social Security benefits and required distributions from other qualified plans.

Charitable Giving.
Charitable planning is useful tool for reducing MAGI, especially the following three methods: (1) gifts to charities, (2) charitable remainder trusts (CRTs), and (3) charitable lead trusts (CLTs).

Direct Gifts to Charities. Gifting directly to a charity may cause an immediate charitable income tax deduction, resulting in a reduction in the donor’s MAGI.

Charitable Remainder Trusts. CRTs allocate a portion of net income as interest income received by the beneficiaries and then release the remaining portion to a charity. This also creates an immediate charitable income tax deduction on the portion released, which can be used to off set NII. CRTs are particularly significant as a planning strategy since they are tax-exempt entities. This means the trust has the option to sell contributing assets tax-free and reinvest the profit elsewhere. The trust’s income is spread out over annual payments throughout the trust term, helping to keep the beneficiary’s MAGI below the threshold. However, beneficiaries may still be subject to NIIT when they receive distributions.

Nongrantor Charitable Lead Trusts. CLTs behave like CRTs in reverse in that instead of a certain amount of income initially allocated to the trustee, a portion is allocated to a charity, with the remainder passing to noncharitable beneficiaries at the trust’s termination. The CLT receives a deduction for each annual distribution to the charitable beneficiary, some of which can be allocated to its NII. In essence, the CLT off sets NII against charitable deductions, so that such investment income is no longer taxable to the donor. This strategy is typically only effective for high net worth clients who can afford (and desire) to make generous contributions to charities.

Installment Sales.
Installment sales offer another planning opportunity for reducing a taxpayer’s MAGI. In an installment sale, the payment for the asset is spread out over a period of years rather than received as a lump sum. This in turn stretches capital gains and taxable MAGI across multiple years, allowing taxpayers to more easily remain below the NIIT threshold amount.

Above-the-Line Deductions and Exclusions.
One of the easiest ways to decrease taxable income is to increase “above-the-line” deductions that will reduce AGI and MAGI. Common above-the-line deductions and exclusions include the following:

Contributions to qualified retirement plans and IRAs
IRA deductions
Health Savings Account (HSA) and Flexible Spending Account (FSA) deductions
The deductible portion of the self-employment tax
Student loan interest deduction
Moving expenses
Deferred compensation

While regulations for the NIIT have been forthcoming, as previous posts have shown, there are still several areas that require guidance. Moving forward, it is important for both planners and clients to keep in mind that the NIIT is still fairly new, and consequently, effective planning strategies for mitigating the tax are still developing.

Tuesday, September 16, 2014

Section 529 Plans: Estate Tax and Income Tax Advantages

The $5 million exemption from federal estate tax eliminates the need for many to do complex estate planning. Because the exemption amount is indexed for inflation, a married couple’s assets must exceed $10,680,000, before estate tax would apply, and then only at the second of their deaths.

So in contrast to prior years, when many taxpayers were encouraged to make lifetime gifts to reduce a 55% federal estate tax, now the advice for all but the very wealthy is to retain your assets to ensure there is enough to live on for your lifetime. Passing assets at death has a second advantage: the recipient of the assets obtains a "step up" in the assets' basis to fair market value, thereby avoiding income tax on the sale.

When is gifting appropriate for tax purposes? Certainly taking advantage of 529 plans makes sense for grandparents and parents seeking to accumulate funds for run-away college tuition costs. Contributions to a 529 plan are treated as gifts for tax purposes. The contributions qualify for the $14,000 annual gift tax exclusion (also indexed for inflation). Also, contributions can be pre-funded for five years, meaning $70,000 per parent (or $140,000 for a married couple). Thus, funds in the 529 are removed from the donor’s estate faster than if contributions were made each year. The donor must survive the five years, or a portion of the gift is retained to the taxable estate.

For federal income tax purposes, the investment grows tax-free, and distributions to pay for the beneficiary's college costs come out tax-free. State law can affect the state income tax treatment.

There are other advantages, such as the donor controls the funds in the 529. Contrast the donor’s control over a 529, with the donor’s lack of control (1) in a custodial account, where the recipient receives the funds at either age 18 or 21; or (2) with other gift strategies, where typically control is lost in order to receive the benefit of estate tax exclusion. Perhaps the only disadvantage for 529’s is if you are relying on financial aid, the 529 can be considered an asset, depending on who set up the plan, such as a parent or grandparent.

Even though many gifts no longer make tax sense, 529 plans remain viable options for both estate tax exclusion and income tax reduction, without much complexity and cost.

Monday, September 15, 2014

Retirement: When to start Social Security

Your Social Security can be worth more in golden years' income than your 401(k) or individual retirement account. The trick: Know at what age to best file for benefits.

Consider a married couple who both begin Social Security with a first-year combined benefit of just $23,304, based on the Social Security program fact sheet. As of Dec. 31, 2013, the average retired benefits recipient gets $1,294 a month and a spouse $648 a month. A retirement plan needs a value today of $543,147 to provide the same income as Social Security for the next 20 years.

This assumes that each retiree in our couple lives an additional 20 years, during which each receives a cost of living increase of 2.5% per year and pays no federal income tax on Social Security income but does pay 10% federal income tax on all other ordinary income. Also assume that each spouse's 401(k) or IRA earns 4%, with distributions taxed at 10%.

Many preparing for retirement do not understand the value of benefits and how those benefits work, nor do the eventual retirees' financial advisors. Here are four ideas to help maximize your Social Security retirement income.

1. Use the proper start-date for benefits. Assume that you have sufficient income without starting your benefits at age 62 – your earliest date of eligibility, when you get reduced benefits – and that your life expectancy is average or better. Then, delaying your start date can be a good investment.

If you were born between 1943 and 1954, you can increase your monthly payments as much as 76% based on when you start your benefits, at 62 or 70, and does not include any cost-of-living-adjustment.

2. Integrate your retirement and lifestyle, and consider taxes. Today, many post-career years include new or different work in early retirement.

For example, a married couple, both 60 and with a current employer for more than a decade, feel unfulfilled and can't wait for a chance to change their lifestyle. They can work part-time or learn a new skill or both, while beginning to temporarily draw on their 401(k) or IRA. Both can integrate their retirement and work until they reach full retirement age (or FRA, 67 for anyone born after 1960) or continue this strategy until age 70, when they qualify for the maximum the Social Security benefit.

During this period, both in our couple take distributions from retirement accounts (distributions are taxable) and replace that income at full retirement age or up with higher Social Security income (not fully taxable).

3. Consider longevity planning and survivor protection. Longevity planning estimates how long you can collect benefits; survivor protection looks at how long your spouse can collect.

According to mortality tables, if you are a 65-year-old man you have a 50% chance of living to 85 and a 25% chance of making 92. If you are a woman the same age, you have the same relative odds of living to 88 and 94. A surviving spouse has a 50% chance of living to 92 and a 25% chance of making 97. A survivor at FRA or older can receive 100% of a deceased worker's benefit if that benefit exceeds his or her own.

Couples need to jointly decide start dates and take into account age differences and the benefit of the primary wage earner.

4. Enlist a qualified advisor prior to deciding. Social Security representatives are willing to help but not normally prepared to take time to give you a detailed analysis of your best start date. Find an advisor and ask:

Do you know when I need to stop and restart benefits between age 62 and my FRA or between FRA and 70?
Do you know how the following may affect my start date: the Social Security tax-favored advantage; use of separate start dates for spouses; the higher step-up survivor benefit?
Do you understand how to integrate my lifestyle with Social Security?
Does your retirement-income planning integrate Social Security with 401(k) and IRA income?
Do you know why I, the primary wage earner, may want to start benefits based on my spouse's lowerearnings record instead of on my own record?
Carefully consider your Social Security start date. These are just a few of the numerous factors to take into account.

Sunday, September 14, 2014

Tax Planning For College

Paying college expenses. You may be able to take a credit for some of your child's tuition expenses. There are also tax-advantaged ways of getting your child's college expenses paid by others.
Tuition tax credits. You can take an American Opportunity tax credit of up to $2,500 per student for the first four years of college - a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school-a 20% credit for up to $10,000 in tuition and fees.
The American Opportunity tax credit is 40% refundable. That means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who qualifies for the maximum credit of $2,500, but who has no tax liability would still qualify for a $1,000 (40% of $2,500) refund from the government.
Both credits are phased out for higher-income taxpayers. The American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out (for 2014) for couples with income between $108,000 and $128,000, and for singles with income between $54,000 and $64,000.
Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim an American Opportunity tax credit or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution isn't used for the same educational expenses for which a credit was claimed.
Scholarships. Scholarships are exempt from tax if certain conditions are satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies, and similar items (and not for room and board).
Although a scholarship is tax-free, it will reduce the amount of expenses that may be taken into account in computing the tax credits discussed above, and may therefore reduce or eliminate those credits.
In an exception to the rule that a scholarship must not be compensation for services, a scholarship received under a health professions scholarship program may be tax-free even if the recipient is required to provide medical services as a condition for the award.
Employer educational assistance programs. If your employer pays your child's college expenses, the payment is a fringe benefit to you and is taxable to you as compensation, unless the payment is part of a scholarship program that's "outside of the pattern of employment." Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).
Tuition reduction plans for employees of educational institutions. Tax-exempt educational institutions sometimes provide tuition reductions for their employees' children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.
College expense payments by grandparents and others. If someone other than you pays your child's college expenses, the person making the payments is generally subject to the gift tax to the extent the payments and other gifts to the child by that person exceed the regular annual (per donee) gift tax exclusion of $14,000 for 2014. Married donors who consent to split gifts may exclude gifts of up to $28,000 for 2014.
However, if the other person pays your child's school tuition directly to an educational institution, there's an unlimited exclusion from the gift tax for the payment. The relationship between the person paying the tuition and the person on whose behalf the payments are made is irrelevant, but the payer would typically be a grandparent. The unlimited gift tax exclusion applies only to direct tuition costs and not other college expenses.
Student loans. You can deduct interest on loans used to pay for your child's education at a post-secondary school, including some vocational and graduate schools. The deduction is an above-the-line deduction (meaning that it's available even to taxpayers who don't itemize). The maximum deduction is $2,500. However, the deduction phases out for taxpayers who are married filing jointly with AGI between $130,000 and $160,000 (between $65,000 and $80,000 for single filers).
Some student loans contain a provision that all or part of the loan will be cancelled if the student works for a certain period of time in certain professions for any of a broad class of employers, e.g., as a doctor for a public hospital in a rural area. The student won't have to report any income if the loan is canceled and he performs the required services.
Bank loans. The interest on loans used to pay educational expenses is personal interest which is generally not deductible (exception being student loans). However, if the loan is "home equity indebtedness," and interest on the loan is "qualified residence interest," the interest is deductible if you itemize. If interest is deductible as qualified residence interest, it can't be deducted as education loan interest.
Borrowing against retirement plan accounts. Many company retirement plans permit participants to borrow cash. This option may be an attractive alternative to a bank loan, especially if your other debt burden is high. However, typically there's no deduction for the personal interest paid on such a loan. 
Withdrawals from retirement plan accounts. IRAs and qualified retirement plans represent the largest cash resource of many taxpayers. You can pull money out of your IRA (including a Roth IRA) at any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 591/2 . However, the distributions are subject to tax under the usual rules for IRA distributions.
Not all of the above breaks may be used in the same year, and use of some of them reduces the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation.

Monday, September 1, 2014

Empty Nest Adjustments – Heartache or Opportunity

My wife and I are about to join a group that has always seemed far off in the future.   There is a large, collective sigh about to be heard among parents sending their youngest children away to college.   We knew this disruptive day would come. We are ending our wonderful, 32-year run of life with children at home.  As college freshmen settle into dorm rooms and college life, parents feel sad, nervous, anxious, afraid, excited and protective simultaneously. 

What is empty nest syndrome?

What are the symptoms?  Wikipedia says that  “there is a form of depression – a sense of having no purpose in life.  Parents ask themselves if they have prepared their child well enough to face life independently.”  Oprah Winfrey offers her own description.  She says:  “Confronting an empty nest requires enormous reorganization, only it’s not files or an office you are trying to rearrange, but the very architecture of your life, your identity and your connection with someone you love”.

Whoever coined the term “empty nest syndrome” did not think it through, however.  This is one reason my wife does not like hearing the term.   Like many buzz phrases, it is inaccurate.  The nest is not empty.  Children depart, but parents remain home affixed to care giving habits that they must adjust.  Certainly, emptiness factors into the situation in the form of grief.  But, it is a significant time, and anything but empty.  Evolving, but not empty.

Daily routines have been etched into our lives.  Being mothers or fathers is what we are.  No matter what other job we have, “parent” has been at the top of our job description since we brought our first baby home.  This is now as big an adjustment as bringing that first child home.  We now have a constant melancholic ache at the sense that life as we had come to know it was on the turn again. We must accept that a wonderful period in our life is over.   These are the seasons of parenthood.

We are going to miss our son.  Pretty soon he will have his own life.  A life we won’t be part of 24/7. We want him to leave the nest.  We are proud of him.  We are excited for him.  We need to trust our work and let him fly away.

We will miss the excitement and fascination of all those firsts.   Our children always brought constant newness to our lives.  When they leave, part of our youth goes with them.   Our main purpose has been to raise our children and get them on their own.  We will now fill that nest with an exciting and different sense of purpose and newness.

For parents, it is now just a matter of figuring out how to go on with just the two of you.  As my Irish mother said, “You need someone to tell your stuff too”.   It is time to recapture what first brought you together and rejuvenate that.  Now you have time to make your own schedules, to make your own rest of your lives what you want it to be.  It will take some growing into it but you can help each other out.  It is the end of a season, but also the beginning of another one.

As Robin Williams said, You're only given one little spark of madness. You mustn't lose it.”  We need to embrace some of the 18 year old in all of us.  We need to laugh every day, be spontaneous and do things without hesitation.  Make a bucket list.  Find new adventures.   Talk about maybe – maybe travel or maybe a boat or maybe acting classes – maybe is a liberating word and a hopeful one.

We are in charge of our own happiness.  The world of opportunity is at our fingertips.   Nothing can be as rewarding as raising children.   But other things can be rewarding in completely different ways.  Find something to do with as much passion as you have into being a parent.   Maria Shriver says that “this is a time of endless possibilities, enrichment, renewal and discovery.  The nest need never be empty; it presents new opportunities for fulfillment as it continues to evolve”.  Keep your doors open.  When one closes, open another.

The following poem “Come to the Edge” by Christopher Logue is for parents and for the child who will leave you soon:

Come to the edge.
We can’t. We’re afraid.
Come to the edge.
We can’t. We will fall!
Come to the edge.
And they came.
And he pushed them.
And they flew.

Terry Rice has 3 sons and lives in Milwaukee, Wisconsin.