Thursday, April 30, 2015

Converting a C Corporation to an LLC: Two Scenarios That Make Sense -


One of our toughest challenges as tax advisers is what to do with closely held C corporations that should not be C corporations.  You know the ones I mean….the owner received questionable advice at some point in the company’s history and became a C corporation.  Or the company has always been a C corporation.
Now the owner is realizing that the double tax hit if the C corporation sells its assets is a nightmare. What can we do?

Often the best answer is a conversion from a C to an S corporation.  The owner thinks (or hopes) he or she can wait until the built-in gain recognition period expires before selling the significant assets.
But if conversion to an S corporation was a possibility, the company would probably have already converted.
Perhaps conversion to an S corporation is not possible.  Maybe there are ineligible shareholders, two classes of stock, or the assets would generate passive investment income, just to name a few of the more common impediments to electing S.

If conversion to an S corporation is not an option, should the C corporation consider converting to an LLC?
Converting from a C corporation to an LLC is a deemed corporate liquidation, immediately triggering two levels of tax.  This is more drastic than converting to S.  The S corporation Built In Gain tax is payable when the appreciated assets are disposed of during the BIG recognition period, not immediately upon conversion to an S corporation (see IRC section 1374).

Causing a deemed liquidation and triggering the two levels of tax when a C corporation converts to an LLC may sound prohibitive. Still, here are two scenarios where converting a C corporation to an LLC is worth considering.

The Young, Growing Tech Company

Let’s say a growing technology company is a C corporation.  The stock is owned by the founder, a few key employees, and some friends and family.  Until now, during the development stage, the company has generated net operating losses and R&D credits.   Their technology is close to commercial feasibility.  The company doesn’t need much additional capital to bring the product to market.

The founders have been approached by venture capital firms that want to provide financing.  But the founders have rejected the VCs’ overtures because they wanted too much equity, and because they would require the company to remain a C corporation. Instead, the founders are considering either angel investors or a mezzanine loan with warrants for the next round of funding.  They’re realistic enough to understand that the likely exit is an asset sale, not an IPO or stock acquisition.

This company is the perfect candidate to explore conversion to an LLC.  The key is the valuation.  They need to obtain a valuation to determine the current fair market value of their assets, including intellectual property.  If there are still hurdles to commercialization of the product, then the value of the assets of the business may be low enough to require only minimal tax on the deemed liquidation.  It’s even possible that the corporate level tax liability on the conversion will be insignificant after the utilization of corporate NOLs and R&D credits.
There will also be tax at the shareholder level measured by the difference between the FMV of the assets received in the deemed liquidation and the shareholders’ tax bases in their C corporation stock.
The assets receive a stepped-up basis to FMV for tax purposes since the conversion is a taxable liquidation.  Depending on the form of the conversion, a section 754 election may be needed to secure the benefit of this step-up for the LLC owners.

Admittedly, for this scenario to pan out, some luck and good timing is necessary.  If the technology never achieves its expected upside, then the owners may have paid tax unnecessarily.  If the worst happens, the owners will only recover the tax paid upon the deemed liquidation via a capital loss.
But if the stars align and the company’s assets are sold for a significant premium over the appraised FMV on the conversion date, then the owners will pay much less tax on the ultimate sale of the assets.

Real Estate in a C Corporation

Probably our most challenging conundrum as tax professionals is a closely held C corporation that owns real estate.  Conversion to an S corporation is often not possible due to the net passive investment income tax.
While commercial real estate valuations have inched back somewhat since the financial crisis, they are still depressed in many markets.  Interest rates remain at historic lows.  In the right fact pattern, converting a closely held C corporation to an LLC can be combined with a refinancing.  The refi proceeds can provide liquidity to the owners to soften the cash hit of paying tax on the conversion from a C corporation to an LLC.

The right fact pattern would include (1) commercial real estate likely to appreciate in value held in a C corporation (2) debt levels below what the property can support, and (3) owners willing to take a long term view.
A high quality appraisal is the first step.  Once the FMV of the real estate is known, the company’s tax advisers can compute the tax consequences of the deemed liquidation to the C corporation and its shareholders.  We can present the tax consequences to the owners so they can make an informed decision.

If the conversion to an LLC can be combined with a cash-out refinancing, then the cash distributed to the owners can be a source of funds to pay the tax on the deemed liquidation.
It’s smart tax planning to maximize tax depreciation on the property after the conversion to an LLC.  The tax savings from depreciation on the stepped-up value will result in future tax savings that will reduce the net present value of the tax cost of converting from a C corporation to an LLC.

A cost segregation study should be done to insure maximum allocation of tax basis to 5, 7, and 15 year MACRs assets. The tax preparer should also take full advantage of the new repair and capitalization regulations to identify units of property that are likely to be replaced in a shorter cycle than 39 years.

If the property is later sold, appreciation since the conversion to an LLC will be taxed at only one level.  If the LLC owners decide to pass on the property to future generations, the date of death step-up means the future appreciation escapes income tax altogether.  A section 754 election for the LLC will insure that the heirs realize the tax benefit from the step-up at death.

What I Hope You Got Out of This

Sometimes paying a little tax now to save more tax later can make sense.  It’s up to us to be proactive tax advisers and discuss all options with our clients.  There are no easy answers to the double tax problem facing owners of a closely held C corporation.  But we owe it to our clients to present conversion to an LLC as one way out.
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Tuesday, April 28, 2015

A Plan to Avoid Capital-Gains Taxes


The woman’s late husband left her a portfolio of telecom stocks he had bought in the 1940s. It was worth $2 million dollars and had a cost basis of $600,000.

She wanted to use the portfolio for income during her lifetime, and then leave some of the money to her daughter as well as her favorite charity when she died.

But upon reviewing the portfolio, the adviser identified a more pressing problem than planning for its distribution. “My immediate fear was that she was in her 60s and 100% of these stocks were all in one sector,” Mr. Welch says.

He thought that the situation opened the woman up to risk should prices in the telecom sector fall. “But if we sold the stocks she would be stuck with a lot of capital-gains tax,” he says. The adviser devised a plan that addressed both his client’s concerns and his own with a charitable remainder trust.

When Mr. Welch suggested this trust, the estate-tax exemption was below $2 million. It was a good tool for an estate this size, says the adviser, and remains so for estates worth more than the current $5.43 million exemption for individuals.

The woman felt an emotional attachment to the telecom stocks and wanted to leave half of the shares to her daughter. So the adviser suggested that she place $1 million in a charitable remainder trust, and then sell the shares. The CRT would allow the woman to avoid paying $140,000 in capital-gains tax.

The woman could use the proceeds from the stock sale to create a diversified portfolio of stock and bonds. The investments would generate returns of about 7% a year, or $70,000, which the woman could use to fund her living expenses along with her Social Security benefits, pension and some savings she had in certificates of deposit.

Finally Mr. Welch suggested that his client put $17,500 of that income each year toward a $500,000 universal life-insurance policy, which would be held in an irrevocable trust for her daughter. The policy would help pay off any taxes the daughter would owe when she eventually inherits half of the telecom shares.

The adviser explained that the woman could name the charity of her choice as the beneficiary of the trust, and upon her death whatever money was left in the trust would go to the charity.

The woman agreed to the plan, happy to find a vehicle that would take care of her concerns while giving her an income from a diversified portfolio during her lifetime—as well as a charitable tax deduction.

When the woman died from cancer years later, her daughter inherited the $500,000 life-insurance policy and the shares. The client had decided to leave the remainder in her trust to the hospice organization that took care of her while she was sick. The organization received about $750,000.

“If you’re charitably inclined, a charitable remainder trust is a really good vehicle if you had an asset with a really low cost basis,” Mr. Welch says. “But the part that was really neat was being able to watch the daughter hand deliver a check to the organization that had been so important to her mother.”

Monday, April 27, 2015

Tax season is over. What did we learn that we can apply next year?

Hooray! If you filed your taxes by the April 15 deadline, the 2014 tax season is in the books for you.

So take a deep breath and don't think about taxes for the rest of the year, right? Sure. And then, to file next year's taxes, you can do the stress-filled mad dash all over again in 12 months, just like you swore you wouldn't every year for the last decade!

A well-known saying, which I tend to use quite frequently, is Albert Einstein's definition of insanity: "Doing the same thing over and over again and expecting different results."

As a wealth adviser, I have a first-row seat to witness the tax-driven display of insanity each year. I've learned a few things from my experiences, and I'm going to share with you three secrets to skipping the madness next year. But be warned, there's no magic solution in the following advice — just good old common sense and organization:

Assess the damage. Another timeless saying: "You can't know where you're going if you don't know where you've been." It holds true for financial planning and taxes. Planning for future tax years is much more effective with the perspective of prior years. This year, review your taxes carefully line by line and dig deeply enough that you understand the mechanics behind your filing. Go through your return with your tax professional or financial adviser while it's still top-of-mind and ask what tax items hurt or helped you. Talk about the strategies that can be employed this year to alleviate taxes next year. Use what you learn to put a plan in place to utilize the strategies you discussed. Finally, implement, implement, implement.

After all, a plan with no action is worthless.
Create a file. It sounds so simple, but hardly anyone does it. That's unfortunate, because this suggestion saves both money and time. Grab a big envelope, a manila file or a plastic organization box. Put it somewhere convenient where dropping tax information inside is a no-brainer. Put a small notebook or a sheaf of blank pages inside for notes. Then, any time tax information is received, drop it inside.

Common items? Receipts for home improvement projects or deductible expenses, information on health-related costs, and tax forms. Follow the same process for electronic records. Create a folder in a logical, easy-to-access place on your computer.

Make a similar folder in your e-mail. Commit to filing important, tax-related documents as you receive them. Do not, at any cost, wait until tax season of next year to start looking for the documents that should already be in your filing system. Remember, your system doesn't have to be complex. In fact, for most people, the more simple the system, the more likely they are to use it.

Make a date. If you followed the advice above and assessed the damage, you'll be due for a second date with your tax situation in the last quarter of the year. This time, you're not looking back. You're looking forward. Put a date on your calendar (and on your tax professional or financial adviser's calendar) in late November or December to do a trial run of your tax filing. Again, if you followed the suggestion and created a tax file, the information you need to complete your forecast should be easy to locate and work through.

Make no mistake, this suggestion requires commitment. However, the rewards are tangible. Opportunities can be found and capitalized upon. Potential problems can be recognized and corrected. Perhaps best of all, you'll close the year and enter tax season with peace of mind.

Believe me, it's worth the effort. Imagine the power you gain over your financial situation when you become a proactive planner, rather than someone who can only react to their situation because the opportunity to make decisions has already passed.

Friday, April 24, 2015

Tax season takeaways keep on coming


With the income tax filing sprint behind us, advisers and accountants are taking a look back at 2014's results and thinking about what they can do better for 2015.

As readers may recall, the 2013 tax filing season was an ugly one. Clients and advisers were trying to get their arms around the American Taxpayer Relief Act of 2012, which brought with it a top marginal income tax rate of 39.6% for single filers with taxable income over $400,000 ($450,000 for married-filing jointly).

At the time, advisers reported that clients were shocked by the size of the checks they had to write out to the federal government, even with ample warning leading up to the filing season. Admittedly, even this reporter learned a few costly lessons last April.

This year was again a tough one for accountants and advisers, albeit for different reasons: There were new tax forms related to health insurance coverage, for instance, and clients continued receiving late and corrected 1099 and K-1 statements.

“It feels like we went through battle, and we're exhausted and tired,” Craig M. Steinhoff, a certified public accountant and principal at Hill Barth & King. “We thought we were prepared for battle, and some of us were, but there are some lessons learned.”


Some clients tripped on their own bad decisions in 2014.

Jonathan Gassman, a CPA and personal financial specialist at The Gassman Financial Group, had a client who socked away a large sum of money into three mutual funds near the end of the year, just before the funds distributed their capital gains and declared dividends. “They were only in the funds for a couple of days but still had realized significant income because they got in before the dividend and capital gains,” he said.

The tax bill came to $60,000, thanks to the poor timing of the transaction.

Mr. Gassman says he would've suggested the client hold off on the investment until January or at least until after the distributions have been made, but he had been left out of this do-it-yourselfer's decision.

Another client decided to borrow from an IRA in 2014, erroneously believing that he had until April 15 to pay for it. Wrong: Borrowers have 60 days to return the funds to the IRA without incurring taxes and a penalty. “You could've saved yourself a few thousand dollars,” Mr. Gassman said.


New for the 2014 filing season, advisers and accountants had to ask clients about their health care situation: Did they have coverage? If so, did they have it all of last year? Did they get it through work? If not, did they receive tax credits to help cover the cost?

People who bought health care coverage last year through the exchanges received Form 1095-A in the mail, which had details those people needed to file a federal income tax return. Form 1095-A is also essential for those clients who need to file Form 8962 and claim a premium tax credit.

The problem is 800,000 people received erroneous information on those forms in February. Affected clients wound up waiting for corrected forms in what became a “Herculean nightmare” for accountants, Mr. Gassman said.

“It's a tremendous burden on the tax preparer to be the police for health insurance coverage,” he said, noting that it took hours to grasp the forms. “A lot of people don't understand the rules. Even the accountants don't understand the rules.”

“The first round of 1095-As were incorrect, and that was a lesson learned on our part,” Mr. Steinhoff said. “Don't assume that just because you got a form that it's right. Do your due diligence, and make sure it's what you expect to see.”


In a perfect world, clients would respond to accountants' requests for the pertinent tax prep documents in late January and be prepared to file by the end of February or beginning of March.

Accountants' efforts to wrap up their clients' tax returns in a timely manner were stymied by the late distribution of Form 1099, or receipt of an incorrect form altogether.

“There's been a trend in the last few years where 1099s are issued and then amended or corrected,” Stephen J. Bigge, a partner at Keebler & Associates, said. “In mid-March, they get a notice that says they're getting a corrected 1099. Basically I'm doing close to 75% of my returns in the last three to four weeks of tax season.”

Mr. Steinhoff noted that clients who bought homes or refinanced residences in 2014 received Form 1098, the mortgage interest statement. At times, the forms failed to account for the amount that the client paid at closing, which required an adjustment.

Don't forget that Schedule K-1, which is necessary for investors in master limited partnerships, can also come with mistakes.


With tax forms freshly filed, now might be a good time to circle back to those clients and talk to them about where they stand for 2015. Advisers and CPAs can also look for additional opportunities for clients who are in the highest tax bracket.

“It would be great to sit with other advisers in the company and get the top 10 mistakes that clients made this year,” Mr. Gassman said. “Clients who are in the highest tax bracket are good candidates for tax planning and investment planning ideas. They have time between now and Dec. 31 to make the changes to save on taxes and grow wealth prudently.”

Thursday, April 23, 2015

What if your tax refund is wrong?


Through early April, the IRS has sent out more than 77 million tax refunds. The average check amount is $2,800.

In most cases, the refund amounts are just what the filers expect. But occasionally, a tax refund is wrong.

In some cases, it's less than what was figured on the 1040. Every now and then, it's more.

Regardless of whether the refund discrepancy goes against you or favors you, some steps can be taken to resolve the matter. That way, even if you or the tax collector isn't necessarily satisfied with the eventual amount, you'll at least understand the mathematical misinterpretation.

Explanation en route
First, don't panic. There's usually a logical explanation for why you and the IRS came up with different numbers.

The IRS will send you a written explanation for the unexpected amount. The only problem is that the explanation doesn't always accompany the check. Such coordination of cash and comment is particularly difficult with directly deposited refunds, which are likely to show up unexplained in your account first.

Why your refund might be an unexpected amount:
Math errors were made in computing your tax bill.
Incorrect credit or deduction claims were made.
Estimated tax payments were not credited properly.
Other federal debts, such as a student loan, are collected.

Since the letter and check or direct deposit usually don't arrive simultaneously, you can always call the IRS if you get a refund check and have questions about the amount.

The main IRS toll-free number is (800) 829-1040 or (800) 829-4059 (TDD) for the hearing impaired. You also can call or visit your local Taxpayer Assistance Center. The IRS website has an interactive locator page to help you find the nearest one.

According to experienced tax pros, the best time to call is about an hour before the IRS office is scheduled to close. Mornings usually are very busy, and during tax-filing season, you'll probably be in for a long wait on hold at any time of the day.

Cash or hold the check?
As you're waiting for the explanation letter to clear up the refund issue, you also have to decide what to do with the more, or less, money you received.

"It's usually not a problem to cash it, especially if it's a smaller difference," says Bob D. Scharin, senior tax analyst for the Tax & Accounting business of Thomson Reuters.

In fact, if the check is less than you expected and it turns out that you were correct, once you and the IRS resolve the matter in your favor, the agency will make up the difference (plus a bit of interest if it takes more than 45 days to correct the error) and send you another check for the balance due.

If, however, the difference is larger or your refund is much more than you believe you should have received, it's generally a good idea to hold off cashing the check or spending the money until the issue is resolved.

"Recognize that you could be asked to send it back if the amount is more than you expected," says Scharin. That's easier to do if you still have all the IRS' mistakenly refunded money in hand.

Documentation of the difference
Once you get the official word on why your refund is not what you had expected, it's time to figure out what happened.

A typical notice will show you some basic 1040 information: adjusted gross income, taxable income and total tax due. In each of these categories, the IRS will indicate what you entered and what the agency came up with. A major difference in one of these areas will pretty clearly show you where the problem lies.

The document should also note how much tax you paid and any over- or underpayment. Additional charges or credits, such as interest and penalties, also are taken into account.

"Get out your return and try to reconcile it that way," says Scharin. If you used a tax professional to file your return, call that person for help in clearing up the matter.

In many cases, the notice will include a phone number. Scharin says a personal inquiry directly to the IRS could also help.

"You might want to call before sending documentation," he says. "You might find in speaking with a person, any confusion is cleared up, for good or otherwise." At least you'll know exactly what the agency needs from you to resolve the issue.

Common refund discrepancy causes
"Most likely it is an arithmetic error," says Scharin. In these cases, the IRS simply corrects your calculations and sends you the proper refund amount.

Even tax software doesn't make you immune to addition and subtraction issues.

Scharin recalls one individual who "did his taxes on a computer and forgot to press 'recompute.' So even though he entered in everything correctly, he didn't finish the process."

You also might have claimed something that, based on your income, you're not entitled to, says Scharin. "Income phaseouts, based on your adjusted gross income, affect several credits," he says.

But it just as easily could be an IRS error.

"You may have made estimated tax payments, and one was not credited properly," says Scharin. "From your records, you overpaid or paid properly, but the IRS doesn't think so. So send them a copy of the canceled check." If you paid your estimated taxes electronically, find that payment receipt and share it with Uncle Sam.

Estimated tax payments are a common culprit in divergent refund amounts. The amount of tax on the return is calculated correctly, but the filer and IRS come up with a difference on the amount of tax paid.

Other numbers that cause problems are those nine Social Security digits. When any of those are wrong (such as transposed numbers, or they don't match other records, perhaps involving name changes after marriage or adoption), problems with your tax return -- and refund -- appear.

Refund issues also crop up when names of dependents don't match Social Security numbers. Husbands and wives have different names, as do their children.

Other debts collected from refunds
Your tax refund also might be a direct path to other money you owe.

The government can go through your federal refund to collect if you owe money to other government agencies. The most common cases involve court-ordered financial payments associated with a former marriage (e.g., delinquent child or spousal support payments) or unpaid student loans.

The IRS will even make sure it gets prior federal tax debts that you didn't clear.

Even taxpayers who have a payment arrangement in place with the IRS could encounter refund issues. The agreement with the IRS says it can apply any refund you have against what you owe.

Self-correcting your mistakes
In a worst-case scenario, you might not even get a refund.

"You'll get a letter telling you to refile," says Scharin.

You also should refile your return and refigure your tax bill and any refund if you find a mistake that the IRS overlooked in processing. If the IRS does eventually notice the error, you'll face penalties and interest on the amount you didn't properly pay on time.

In these cases, file an amended return, Form 1040X, and send the original, incorrect refund check back to the agency. If the money was directly deposited, use it to pay your correct tax due.

Since you cannot e-file Form 1040X, the IRS says to include a letter of explanation with the returned check or corrected payment amount. The agency will issue you a refund for the proper amount when it processes your amended return.

When sending back an actual check, on the back where you normally would endorse it, write "void." Send the check and your letter detailing why you're sending back the check. Be sure to include your name, Social Security number, mailing address and a daytime telephone number in case an agent needs to follow up with you.

Send the check back to the issuing center; you'll find that location on the front of the check. Before you drop it in the mail, make a copy of the check and your letter for your files. It's a good idea to send the material with a return receipt for additional verification for your records.

You also can call the IRS' toll-free number and ask to speak to taxpayer accounts about steps to take, especially with regard to direct deposit refund discrepancies.

It's no fun to return tax cash, but by making sure you get your payment and refund records straight, you'll know you won't have to worry about unexpectedly hearing from the IRS in the future.

Wednesday, April 22, 2015

Top Estate Planning Issues Generation X Needs To Consider

Generally, when individuals consider planning their estate and organizing their personal affairs, two things come to mind -- death and taxes. Organizing one’s affairs for prior generations was simpler, as assets were generally easier to discern, locate, value and distribute. However, for Gen X (those born between the early 1960s and the early 1980s) and future generations, estate plans are no longer limited to traditional assets, such as real estate, stocks and bonds, and personal property. When organizing their affairs, Generation Xers have a vast array of issues to contemplate. Additionally, today’s estate planning is not just about death and taxes, but includes protection of one’s assets from the potential claims of creditors as well as personal income tax planning. Moreover, advancements in technology and the emergence of digital assets have expanded the planning process.

Here are some of the key planning issues that Gen Xers need to consider:

A virtual afterlife. Social media has significantly changed the way we live and communicate with others. Many people take great care to control their image on social media sites such as Facebook, Twitter, Instagram and LinkedIn. However, deciding who should have access to your social media accounts after death is an increasingly sensitive and significant issue. Social media accounts often contain personal messages, photos and videos and other information of an extremely private nature. Social media websites generally have strict privacy policies and often do not allow access to the accounts of users who have passed away. Facebook, for example, when notified of a user’s death, may “memorialize” the user’s Facebook page, but may not allow the family access to the account. As more information is stored on the Internet, Gen Xers should contemplate their “virtual afterlife” and have a plan detailing who should have access to what information.

Digital assets. In addition to information stored on a personal computer or “in the cloud,” such as pictures, videos or music, “digital assets” include e-mail accounts, domain names, account registrations and bitcoins, to name a few items. In the past, a person had only to check the mail to find the assets in a deceased relative’s estate. But as banking and bill payments have moved online (even to our phones) it has become increasingly difficult for executors to determine the extent of a person’s assets after he or she dies. Like social media websites, many e-mail services such as Gmail and Yahoo have strict user agreements to protect the privacy of their customers. Gmail, for example, recently created a feature that allows users to designate someone to have access to their e-mail accounts when they die. This must be done through Gmail and is akin to naming a beneficiary on a bank account.

Self-settled trusts. Although testamentary planning is often not a priority for fortysomethings, protecting assets from potential creditors may be. Our society is more litigious than it was only a couple of decades ago. It is commonplace for a high-net-worth individual to protect wealth by transferring assets to a trust for the benefit of family members. In most states, however, if the transferor retains a beneficial interest in the trust, the assets remain exposed to his or her creditors.

A self-settled trust is one that allows the creator of the trust (commonly referred to as the “settlor” or “grantor”) to also be a beneficiary, while also providing some level of protection of the assets from the claims of any future creditors. Such a trust can also be designed to provide estate and gift tax savings. These trusts have been around since the early 1990s, and a number of states have self-settled trust statutes, each with varying levels of protection. Nevada, South Dakota and Delaware tend to be the most popular.

Care must be taken when creating self-settled trusts, however, since there have been few cases testing their strength. It’s uncertain, for instance, how much protection a settlor will enjoy if he creates a self-settled trust in a state other than the one he resides in. One technique to mitigate the risk that creditors will make claims against the trust is to draft it so that the settlor is not an immediate beneficiary, but someone who can be added as one at a later date, whenever events warrant, by an independent person or entity. Additionally, it is recommended that self-settled trusts only make up a portion of one’s asset protection plan and that Gen Xers use other techniques as well, such as family LLCs or high-cash-value life insurance.

Super-charged income tax charitable trusts. High-earning Gen Xers may have a greater sensitivity to income taxes. The top federal income tax rate is 39.6%, and the top capital gains tax rate is 20%. Add the 3.8% tax on net investment income and state and local income taxes for those individuals who live in places such as New York City, and the effective rate can be well in excess of 50%.

One way to reduce one’s income tax liability is to increase income tax deductions. One way to do that is through charitable lead annuity trusts (commonly referred to as “CLATs,”) which allow individuals to take deductions and give proceeds to charity. CLATs can allow a person to take a significant income tax deduction in the year they are created, even though the payments to charity will be spread out over a number of years. Establishing a CLAT can be a valuable technique for those Gen Xers who have a large income tax event they must recognize in a particular year -- because they sold a business, received a onetime bonus or exercised stock options, for example.

Life insurance as an asset class. Earlier generations had two choices when it came to life insurance -- term or whole life -- and life insurance was only considered for the risk of an untimely death or to finance estate taxes. Today, there are multiple variations of term and permanent policies, including variable universal life insurance and indexed universal life insurance. With the risks in the stock market and real estate bubbles, life insurance has become viewed as a relatively safe asset class, and one that generally carries a significant level of creditor protection. For example, Florida law provides that the cash value of a life insurance policy and the death benefit payable to the policy beneficiaries are protected from the covered person’s creditors. Finally, a person’s ability to pull cash out tax-free from certain policies at a later date during the life of the policy has also helped ignite the popularity of life insurance.

While traditional estate planning documents such as wills, powers of attorney, health-care surrogate designations and living wills are still a vital part of any estate plan, technology and the markets have given Gen X more to consider than their parents or grandparents did not too long ago. In the words of Ferris Bueller, “Life moves pretty fast. If you don't stop and look around once in a while, you could miss it.” The same goes with organizing one’s affairs and protecting one’s family and wealth.

Tuesday, April 21, 2015

Ten IRS Rules For Amending Your Tax Return


Try to file once and file correctly! But if you need or want to amend, here are 10 things you need to know.

No. 1: Amended returns are NOT mandatory. This may surprise you, but you are not under an affirmative obligation to file an amended tax return. You must file a tax return each year with the IRS if your income is over the requisite level. In fact, you can be prosecuted for failure to file (a misdemeanor) or for filing falsely (a felony). As Wesley Snipes’s misdemeanor convictions show, failing to file carries smaller penalties than filing fraudulently. But once you’ve filed your return, you can’t be prosecuted for failing to file an amended return, even though something may happen after you file that makes it clear your original return contains mistakes. So first ask yourself whether the return you filed was accurate to your best knowledge when you filed it. If it was, you are probably safe in not filing an amendment.

No. 2: You can’t cherry-pick what you correct. You don’t have to file an amended return, but if you do, you must correct everything. You can’t cherry-pick and make only those corrections that get you money back, but not those that increase your tax liability.

No. 3: Some errors don’t merit an amended return. Math errors are not a reason to file an amended return, since the IRS will correct math errors on your return. Likewise, you usually shouldn’t file an amended return if you discover you omitted a Form W-2, forgot to attach schedules, or other glitches of that sort. The IRS may process your return without them, or will request them if needed.

No. 4: Timing counts. Most people suggest you must amend within three years of your original return filing. Actually, you must file a Form 1040X, Amended U.S. Individual Income Tax Return, within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

No. 5: Only paper will do. Amended returns are prepared on Form 1040X. You must use this form whether you previously filed Form 1040, 1040A or 1040EZ. Amended returns are only filed on paper, so even if you filed your original return electronically, you’ll have to amend on paper.

No. 6: You must amend each year separately. If you are amending more than one tax return, prepare a separate 1040X for each return.

No. 7: Amended returns are more likely to be audited. In general, amended returns are more likely to be examined than original returns.

No. 8: Refunds can be applied to estimated taxes. If you file an amended return asking for considerable money back, the IRS may review the situation even more carefully. As an alternative, you can apply all or part of your refund to your current year’s tax.

No. 9: The statute of limitations is kind to amended returns. Normally the IRS has three years to audit a tax return. You might assume that filing an amended tax return would restart that three-year statute of limitations. Surprisingly, it doesn’t. In fact, if your amended return shows an increase in tax, and you submit the amended return within 60 days before the three-year statue runs, the IRS has only 60 days after it receives the amended return to make an assessment. This narrow window can present planning opportunities. Some people amend a return right before the statute expires. Plus, note that an amended return that does not report a net increase in tax does not trigger any extension of the statute of limitations.

No. 10: Don’t forget interest and penalties. If your amended return shows you owe more tax than you reported on (and paid with) your original return, you’ll owe additional interest and probably penalties too. Even though you might be amending a return from two years ago, the due date for your original return and for payment has long passed. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions. The IRS will compute the interest and send you a bill if you don’t include it. If the IRS thinks you owe penalties it will send you a notice, which you can either pay or contest.

Monday, April 20, 2015

How the Mega-Rich Avoid Paying Taxes

It is rumored that some of the wealthiest Americans manage to pay less in taxes than some of their employees. They achieve this by one of two methods: doing their own financial and tax planning or paying someone to do it for them. Simple, isn’t it?

The point is that the rich are able to avoid taxes through legal processes. Some mega-rich may use sketchy methods to avoid taxes, and everyone’s definition of sketchy is different. However, most of the mega-rich use superior understanding of the tax laws to take advantage of all of the legal methods available to reduce their taxes. Here are just a few of those methods.

Capital Gains Management – Assets that are considered long-term capital gains (held for more than a year) are taxed at a 15% rate, or for the wealthiest Americans, a 20% rate that was recently introduced. Short-term capital gains are taxed at the ordinary income tax rate, which for the mega-rich is 39.6%. That’s almost a 50% tax savings.

Any monetary stream that can be classified as a capital gain will be classified that way in order to take advantage of the rates. Gains will be timed to bring the greatest tax advantage.

Losing ventures that result in capital losses can be used to offset capital gains. Tax-loss harvesting, or the strategy of selling off poorly performing investments at strategic times and using the losses to offset capital gains, optimizes the positive tax effects.

Income Modification – The mega-rich are adept at keeping their taxable income and applicable tax rates as low as possible.

By incorporating and paying themselves a reasonable, smaller salary, the mega-rich can take a higher portion of their income as dividends. Dividend income is generally taxed at the same 15%–20% capital gains rate. Another tactic is to take a portion of compensation as stock options, which are generally taxed only when the options are exercised.

Once you reach the mega-rich status, it is possible to take a significant portion of your income in dividends and receive a much smaller portion in traditional income taxed at normal rates.

Tax Deferral – The mega-rich enjoy the same tax-deferred benefits of retirement programs such as IRAs and 401(k)s as you do. Because of their wealth, they are in the position to max them out annually and take full advantage to the limits allowed by law.

There are other methods of tax deferral, such as with the stock option path listed above or deferred compensation plans that allow earnings to grow tax-free.

Borrowing Tactics – Strategic borrowing methods can actually earn money. Because of the leverage the mega-rich hold, they are able to borrow money in ways that can literally make money for them when they spot an opportunity.

One example is to purchase stock options at a fixed rate, then use those options as collateral to borrow money, which is used to make money off other opportunities. The loan is then paid off with those proceeds or by handing over the shares, thus avoiding capital gains.

Taxes Upon Death – Estate taxes can be dealt with by establishing an irrevocable trust where certain assets are no longer owned by the taxpayer. The trusts provide income while shielding the assets from taxes, and upon death, heirs will inherit the assets tax-free.

The “step-up” in basis is another method where capital gains taxes are avoided upon inheritance. The step-up refers to the value, or basis, of an asset. Consider a home you purchase for $200,000 that is worth $500,000 twenty years later upon your death. The $300,000 in extra value is not subject to capital gains because the basis is “stepped-up” or raised to its current market value for your heirs.

Otherwise, heirs would be stuck with a massive tax bill just to inherit the home, and those at lower incomes might not be able to keep the home. However, for the mega-rich, the step-up just becomes another nice tax break (albeit one that requires their death).

Perhaps someday you will be among the mega-rich and incorporate these and other tax-limiting methods in your financial strategy. If so, all we ask is that you keep the methods legal — and please do not forget about us if our advice helped you gain your mega-rich status.

Monday, April 13, 2015

How To File A Tax Extension In 7 Simple Steps. We can assist with the extension for free.


1. Choose your own adventure: finish your return or file an extension

You’re going to need to do something — either file your taxes or request an automatic six-month extension — by April 15 to avoid the late-filing penalty of five percent of the unpaid balance per month (this penalty doesn’t typically apply if you’re owed a refund). 
Whether you’ve gotten the ball rolling or not, if you have a straightforward tax situation — for instance a single person with one or two W-2s — you should carve out an hour between now and April 15 (NOT at 11 p.m.) and just do the damn thing. Pay close attention to detail, though, because last-minute filers are more likely to make a mistake.
If you’re almost finished, but waiting on an important tax document, like a missing 1099 or a corrected W-2, then by all means, file an extension and pay any taxes due, then wait until you receive the pertinent doc to file your return. 
If you haven’t started yet and you have a complicated tax situation because you do a lot of freelance work or own your own business, then you’ll also probably want to buy yourself some extra time.
BUT if you’re holding off simply because you don’t have the money you owe, that is a bad strategy. You’re merely delaying an inevitable few hours (maybe less!) of intense concentration and misery for a hefty price tag of increased interest and penalties. If a flush bank account is the only thing standing between you and your completed 2014 tax return, then just come clean to Uncle Sam now:
Whatever you decide, choose an adventure that doesn’t end with the I.R.S. levying your paychecks or seizing your property.

2. Estimate your 2014 tax liability

Once you’ve determined that filing an extension is the right course of action for you, you’ll need to approximate tax liability for 2014. If you’re using e-file, most software will help calculate that for you after you’ve entered your W-2s and 1099s. 
However, if you’re going the old-fashioned paper route, you’ll need to add up your gross income yourself. If you’re single with no kids, subtract the standard deduction of $6,200 (unless you’re itemizing your deductions because of extreme medical bills or charitable contributions) and your personal exemption of $3,950 from the total — the result is your adjusted gross income — then scan the 2014 tax table for your AGI and filing status to find your tax liability for this year.

3. Figure out how much you already paid

Again, tax software makes this step a lot easier by tallying it for you. E-file is unquestionably the way to go unless you’re allergic to the Internet or living in a remote cabin somewhere. If you’re filing a paper copy, you’ll need to collect all your W-2s and add up the federal taxes paid from line 2. Also check to see if you have any federal income tax withheld on line 4 of your 1099s, but that’s a lot more rare. 

4. Pony up 

Your unpaid tax balance is still due on April 15 even if you’re filing an extension. I repeat, your unpaid tax balance is still due on April 15 even if you’re filing an extension. Ideally you’ll be able to pay any outstanding taxes along with your extension. However, if you’re unable to pay in full at the moment, see the alternative options listed under step 1.

5. File Form 4868 either electronically or via mail 

Whether you e-file your extension or submit a paper copy, completing this application is a breeze. You’ll just need your usual name, address, Social Security number, and the totals from steps 2 and 3 above. Once you’ve filled everything out, simply click submit or pop it in the mail, and now you’re good to go until your newly extended October 15 deadline!

6. Figure out your state’s tax extension policy

Form 4868 covers your delay as far as Uncle Sam is concerned, but what about Auntie California or wherever you live? Requirements for tax extensions vary state by state. Some, such as Wisconsin, Alabama, and California, offer automatic extensions with no additional paperwork, but in other states, like New York, you need to file a request. Research your state’s rules and file an extension, if necessary.

7. Actually remember to finish your return

Yes, you garnered yourself an additional six months to do your taxes, but time flies and it’s important not to procrastinate right up to the deadline again. Your automatic extension gives you until October 15 to file your return, but why not finish as soon as you have everything you need and a few sober hours to get it all done? Just imagine how amazing that will feel.

Sunday, April 12, 2015

Why You Should Ask for a Tax Extension - We can help you file it for free

 Do you plan to spend the weekend cozying up to your tax forms?
With tax day looming, you may be considering filing an extension if you aren't quite prepared. If so, here are some things to think about.
First, if you need more time, you still have to file the extension paperwork by April 15. Tax form 4868 gives you an extra six months.
If it's just a matter of getting together some extra cash, you can go ahead and file while requesting a few extra months to pay. You will be hit with fees, but smaller ones than not filing.
And even if you do get an extension, you still need to make a payment if you think you owe money to avoid a monthly charge for late payment.
Remember, just ignoring tax day won't make it go away and it can cost you real money. Failure to file can cost you between 5 percent and 25 percent of what you owe.
And if you are in a bind, you may want to consider using plastic to pay. The fees on your credit card will likely be lower than penalties from the IRS.

Saturday, April 11, 2015

Should You File for a Tax Extension? Contact me for assistance in filing an extension.

The tax deadline of April 15 is rapidly approaching and maybe you’re in panic mode. If you don’t have all your documents, facts and figures together, you may be considering either devoting some midnight oil to the project, or filing an extension.
Many people believe that if after years of timely filing, they suddenly put in for an extension that a red flag will go up. Not so. The IRS does not track this behavior and oftentimes there are very good reasons to file an extension.
On the other hand, some folks believe that filing an extension is the best thing to do to minimize audit risk. There’s been a rumor going around for years that the IRS makes its selection of returns to audit by pulling from the seasonal pool – those returns that are filed by April 15. Well, this is just a rumor and I have never been able to substantiate it. Auditors claim no knowledge on the subject and I can’t tell if they are being truthful or if they have pledged secrecy. Personally, I think there are other factors that flag returns for audits; not the filing date.
The following guidelines regarding the wisdom of filing an extension are provided by John Petosa, CPA, JD, Professor of Accounting Practice at Syracuse Joseph I. Lubin School of Accounting and Whitman’s online master’s program, Accounting@Syracuse.
1. “File an extension if you are currently under audit.  If you are being audited and file an extension, the IRS cannot include the current year in their audit.” The outcome of the audit may also affect your current year filing. For example, you might have NOL, capital loss, passive loss or home office operating expense carry forwards that may be applied to the current year. If the audit results change any of those numbers, you will want to wait until the end of the audit to determine the proper carry forward amounts.
2. “If you don’t have all the information to file the return completely and accurately, you should wait.  The primary way that a person is audited either via a letter or in person is because the information on their return fails to match a 1099, W-2 or some other information form that was filed with the IRS using the taxpayer’s social security number.  Making sure you have all the information in your return is a wise reason to extend the return.” Because partnerships, S Corporations, and Trusts can extend to September 15 for the filing of those tax returns, the K-1s they generate that belong to your individual return may be delayed until then. It’s better to wait, then file and amend later. After all, amended returns are more likely to be audited.
3. “ An important reminder is that filing an extension does not extend the time to pay the tax due.  Even if you file the extension you are still required to pay the tax that you think is due with the extension.” Use IRS Form 4868 and paper file with a check for the amount you think you will owe. Best to overpay and get a refund than underpay and be penalized. Remember to put your Social Security number and Form 1040 2015 on the memo line of the check so it is applied properly.
4. “Filing the extension and paying the amount that is due avoids the penalty and possible criminal sanctions associated with the “failure to file”.  File the extension and get the extra time to file completely rather than not extend the return, file late and pay late and be subject to significant penalties and interest.”
5.“If you have asked for a private letter ruling on a particular tax position you are considering using you should extend the return in anticipation of the response.”

Friday, April 10, 2015

9 Innocent Tax Return Mistakes That Trigger IRS Problems

  1. Wrong or missing Social Security numbers. Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.
  2. Wrong names. Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.
  3. Filing status errors. Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on can help you choose the right one. Tax software helps e-filers choose.
  4. Math mistakes. Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.
  5. Errors in figuring credits or deductions.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.
  6. Wrong bank account numbers. You should choose to get your refund by direct deposit. But it’s important that you use the right bank and account numbers on your return. The fastest and safest way to get a tax refund is to combine e-file with direct deposit.
  7. Forms not signed or dated. An unsigned tax return is like an unsigned check – it’s not valid. Remember that both spouses must sign a joint return.
  8. Electronic filing PIN errors. When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If not, you’ll need to enter the Adjusted Gross Income from your originally-filed 2012 federal tax return. Don’t use the AGI amount from an amended 2012 return or a 2012 return that the IRS corrected.
  9. Mismatches between your tax return and Forms 1099. These key forms come in many varieties, and they are important. For interest and dividends there are Forms 1099-INT and 1099 DIV. And the granddaddy of them all, Form 1099-MISC. With each 1099, the IRS receives a copy. If you forget to include 1099 income on your return, expect a notice. It may include penalties and will almost surely include interest. It can even trigger a more comprehensive audit.
Be careful. Tax returns are filed under penalties of perjury. Simple reporting problems can lead to crippling mistakes that can cost big. The law has elaborate Form W-2 and Form 1099 reporting rules to serve as checks and balances. Yet a huge part of our tax system is about self-reporting.

Thursday, April 9, 2015

3 Tax Loopholes for the Merely Middle Class


Former presidential candidate Mitt Romney's legendary tax deduction for his horse may sound like the ultimate boondoggle of the super rich.

Ditto for writing off the private jet, stashing money in offshore accounts and paying the nanny as a corporate employee.

Here are some other tax loopholes that might be within your reach:

1. Maximize your 529. The tax benefits of a 529 college savings plan are baked right into the plan -- you put in after-tax money and the proceeds grow tax-free, like a Roth individual retirement account. In some 34 states and the District of Columbia, you also get a tax benefit on your state taxes. But there's more to it than that.

Depending on the state, each parent can make a contribution for each child. That's why Patrick Beagle, a financial planner at WealthCrest in Springfield, Virginia, has four accounts for his two children. Beagle and his spouse each contribute the maximum of $4,000 a year for his state's tax break, for a total of $16,000.

You can also "front-load" your 529 savings by making several years of contributions at once, something President Barack Obama and his wife Michelle were able to take advantage of for their two daughters, putting $240,000 away all at once in 2007.

Depending on the state, there may be no time limit on how long your contribution has to stay in the 529 account before you get a deduction. If you have a child who is already in college, you can make your yearly contribution, get the tax credit and then withdraw it for use immediately.

2. After-tax Roth conversions. Want to fill up your Roth but either make too much to qualify or find the $5,500 a year limit too low? You can contribute after-tax money to your 401(k) and convert it to a Roth, thanks to a new Internal Revenue Service notice.

Jim McGowan, a certified financial planner with the Marshall Financial Group in Doylestown, Pennsylvania, altered his tax-planning strategies for many of his clients because of this change.

For those whose companies allow it, McGowan is having clients put aside $20,000 to $30,000 extra in their 401(k)s after they have maxed out the $18,000 allowed with pre-tax money.

The total an individual can save a year, including any matching funds, is $53,000, so there is plenty of wiggle room.

McGowan's clients are just starting to utilize Roth conversions, so nobody has rolled over funds yet. "Potentially, it could be an enormous benefit tax-wise," he says.

Not the least of which is that if you put the same amount in a brokerage account, you'd be paying capital gains every year. But with the extra in a 401(k) and then rolled into a Roth, the funds are sheltered.

Likewise, you can make a "back-door" Roth contribution, even if you are over the income level of $183,000 for singles or $193,000 for married couples.

First, you contribute after-tax dollars to an IRA, which you can do up to the regular limits of $5,500 or $6,500 for those over 55. You can then convert this "non-deductible IRA" at will to a Roth, says Harvey Bezozi, a tax accountant with his own firm in Boca Raton, Florida.

"Some people commingle the funds with a traditional pre-tax IRA, but I like to keep them separate so you can keep track of what you did," he says.

3. 'Business' income. You don't have to buy a farm, like one of Patrick Beagle's clients did, just to get some additional expenses to off-set income. Any small business will do.

Beagle has clients who sell products at home-based parties through companies like Thirty-One and Silpada. This opens up a lot of other deductions because they are using part of their home as an office or to store merchandise. There are also phone costs, office supplies and advertising costs to consider.

And all that guacamole for the handbag party? A legitimate business expense.

Wednesday, April 8, 2015

3 common mistakes to avoid when filing your taxes

The most common tax mistakes are pretty dumb ones, like forgetting to sign the return, garbling a bank account number or using a nickname instead of the name on a Social Security card.
Even tasks that require some wattage, such as applying common deductions and credits, are not that tough for taxpayers filing electronically, since the software checks for these errors.
Still, there are several mistakes that careful people - even those who hire tax preparers - can make.
Among them:
1. Minimizing earned income
Business owners have a number of ways to pay themselves and reduce the income subject to Social Security and Medicare taxes. But doing so could put a significant dent in future Social Security benefits, sometimes far outweighing any savings.
One common strategy is to convert a business to an S corporation, which allows the owners to pay themselves a lower salary and then take dividends, which are not subject to Social Security taxes.
That might not cause problems for someone who already has a lifetime of high income, since Social Security bases benefits on the worker’s 35 highest-earning years, said financial planner Michael Kitces, a partner with Pinnacle Advisory Group in Columbia, Maryland. For others, though, the impact can be significant.
For example, Kitces says, someone paying 12.4 percent Social Security tax on $60,000 in earnings would increase the lifetime payout by $128.58 a month.
On the other hand, he says, avoiding $7,440 in Social Security taxes on that annual pay would cost $1,542.96 a month for life in Social Security payouts. Higher earners might suffer less but still could lose more in guaranteed, inflation-adjusted retirement benefits than they save in taxes.
Advisors should calculate the potential impact on Social Security benefits before recommending strategies to avoid the taxes, said Kitces, who blogs at Nerd’s Eye View (
2. Choosing the wrong tax preparer
The more complicated a tax return, the more likely it is to drift into gray areas of the law. Ideally, client and tax preparer will be temperamentally compatible when judgment calls need to be made.
A tax pro who is eager to push the envelope may be a bad fit for a conservative client. Likewise, a client who wants to be aggressive about reducing taxes is likely to be frustrated with a preparer who forgoes legitimate deductions for fear of triggering an audit.
“It’s more common that the taxpayer wants to push things,” said Phil Holthouse, managing partner of Holthouse Carlin & Van Trigt in Los Angeles. “But there are some tax preparers who want to be heroes and give them an answer that’s too good to be true.”
Holthouse recommends asking tax preparers straight out how aggressive they are. Ideally, he says, the professional will make it clear that he or she stays within the law, but is willing to explain the alternatives in a given situation and help clients evaluate the risk.
When a gray area comes up or if a client is confused about an issue, he or she should ask what rules apply.
“You can tell a lot by how definitive their answer is,” Holthouse said. “If they say, ‘Nobody’s going to see this’ or ‘Nobody’s going to find it,’ that’s a real red flag.”
3. Refusing to delegate
Most people, including some who file the easiest forms (1040EZ and 1040A), hire tax preparers these days. But some with more complicated returns still insist on doing it themselves. Even when they do not make mistakes, they may be investing more time than the task is worth.
The cost for preparing 1040 with Schedule A itemized deductions averaged $261 last year, according to the National Society of Accountants. The IRS says just preparing a typical 1040 takes four hours, with another hour to file it.
That does not even take into account an additional 17 hours for record keeping and tax planning.
Not all of those hours would disappear when using a professional, of course, but the time and hassle would certainly be less.