Smart Estate Planning Tips for Entrepreneurs

FROM ENTREPRENEUR.COM

In his book The Tax & Legal Playbook, CPA and attorney Mark J. Kohlertargets the leading tax and legal questions facing small-business owners, and delivers clear-cut truths, thought-provoking advice, and underutilized solutions to save you time, money, and heartache. In this edited excerpt, the author discuss the strategies you can use to make things easier for your heirs after you pass on.

Millions of Americans die each year without any type of estate plan in place, and this forces their families into the court system, where they experience the high cost and time delay characteristic of probate proceedings. In fact, more than 50 percent of Americans don’t even have a will or any type of estate plan. So does everybody need to be scared into a revocable living trust (RLT)? Certainly not!

There are three main reasons to implement an RLT:

1. You have provisions you may want to implement for minor children or children that act like minors and have special needs for managing their finances;

2. You wish for your family to avoid probate because you own a personal residence, business, or rental properties; or

3. You wish to minimize estate tax with a marital bypass trust.

A quality estate plan typically includes an RLT, as well as a number of ancillary documents such as a will, powers of attorney for finances and health care, an advance medical directive or living will, burial instructions, a directive for organ donation, final instructions, etc.

One of the key reasons for using an RLT is to avoid probate, which means avoiding attorneys, judges, courts, and the state sticking their noses into the family affairs. Probate is essentially the court’s process of determining if the will is valid, then executing its provisions. If there isn’t a will, then the court distributes the assets according to state law.

In addition to helping your family avoid probate, the RLT becomes the instruction manual for how the estate is to be distributed among the beneficiaries. The process is administered by the trustee you appoint and avoids a tremendous amount of wasted time and money spent going through court.

In order to make sure the trust does its job, it needs to be funded by holding title to four main assets:

1. Real estate (typically your personal residence),

2. Entities (such as corporations and LLCs for rentals),

3. Investment accounts (including retirement accounts with see-through provisions), and

4. Life insurance (so that minor children receive it constructively).

Estate Tax and the A-B Trust Strategy

In the late hours of December 31, 2012, lawmakers in Washington, DC, passed the American Taxpayer Relief Act of 2012. Under the “fiscal cliff legislation,” as it came to be known, the estate and gift tax exemption was set at $5 million. This means that the first $5 million of an individual’s estate may be inherited (at death) or gifted (during life) before any estate or gift tax is due. This exemption amount is adjusted each year for inflation, and Bloomberg BNA projects it will edge up to $5.43 million each in 2015, making the total exemption for a married couple a whopping $10.86 million.

With a marital bypass trust, often referred to as an A-B Trust, a married couple can take advantage of both personal exemptions, thus doubling how much they can leave to their family without estate tax. This is a special trust that creates two subsequent trusts upon the death of the first spouse, thereby doubling the estate tax exemption of approximately $5.5 million. This is typically only undertaken when a family’s net worth is more than $5 million.

Creative Provisions for Children

Many parents and grandparents don’t realize how creative they can be in distributing their assets upon their passing. Here are a few options to consider:

• Require your trustee to hold children’s inheritance in trust until they reach the age of 25, 30, or 35. Give it to them in stages, e.g., a third at age 25, a third at age 30, and the final third at age 35.
• Use a joint trust for minor children until the oldest reaches age 18, then split up the trust into individual trusts for each child. This makes it easier for the trustee to manage the trust while the children are minors. Then when different children pursue business, education, marriage, or even world travel, their trust is accounted for separately from the others.
• Consider having the trustee give the guardian of your children a specific amount each month to take care of the living costs of your minor children (room, board, clothing, school supplies, etc.). It could be something like $1,000 a month, adjusted for inflation as of the date of your trust.
• Place restrictions on inheritance if there's drug or alcohol abuse. An attorney can insert a provision that prevents a distribution to any child with an abuse problem and allow for the trustee to hold their funds in the trust until they have their life under control.
• Give the inheritance in matching funds, distributing $1 for every $1 the child earns.
• Give them a bonus for graduating from certain levels of college or don't allow full distribution until they obtain a certain level of higher education. However, still distribute funds for school or any secondary education program, skills training course, etc.
• Distribute funds for education. Or use their GPA as a “carrot”: Distribute funds only if children maintain a minimum GPA that you set. You could also tie funds for tuition or books to GPA to help keep the children focused on finishing school, rather than becoming career students.
• Distribute a certain amount of funds for a wedding.
• Distribute funds to start a business upon the presentation of an acceptable business plan to the trustee. Name a board of advisors to approve any small business or investments by the children.

If you have a child whom you’d like to disinherit from your estate, don’t just leave their name out of the will and think this will accomplish your goals, as the laws in most states will presume you intended to have them inherit unless you specifically state otherwise. Following your spouse, your children are the presumed heirs to your estate by law in the absence of an estate plan. As a result, it's important to include a complete list of your children in the estate plan and to specifically mention any child who will not be an heir by stating something like, “It is the intention of the settlor [you] to disinherit the following child from the estate.” It’s that simple; just clearly indicate in writing that you specifically intend them not to inherit your estate, and they’re out.

Tax Moves for a Rising Real Estate Market

Real estate assets are rising in value — great news for your investments, but maybe not for your tax exposure.
That makes this a good time to look into tax strategies you can implement now. Doing so while the market’s experiencing an uptick could have a profound impact on how much you’re able to make of current gains, regardless of whether you plan to reinvest them right away or keep them around as downside protection. Furthermore, good tax planning brings benefits on the personal side, too, particularly for taxpayers in the upper brackets, many of whom now must pay the net investment income tax on top of increased tax rates on regular income and capital gains. Our tax code isn’t getting any simpler, so it’s important you know what your planning options are and what strategies are available to you if you hope to make the best of things.
So what are some of the strategies you should consider for holding onto more of your gains? Let’s look at six of the best ways you can reduce how much tax you and your real estate firm are required to pay.

Cost Segregation
Cost segregation is a tax deferral strategy that front-loads depreciation deductions into the early years of ownership. Segregating the cost components of a building into the proper asset classifications and recovery periods for federal and state income tax purposes results in significantly shorter tax lives. Rather than the standard 27.5-year and 39-year depreciation periods, assets depreciate over a five-, seven- or 15-year period. In other words, you’re able to defer taxes, putting more cash in your pocket today.
Whether you’re building, remodeling, expanding or purchasing a facility, a cost segregation study can help increase your cash flow. Many property owners don’t take advantage of these provisions, and as a result, they end up paying federal and state income taxes sooner than they need to.

Tangible Asset Incentives
Since you’ll likely need to review your compliance with the IRS’s new tangible property regulations, take the opportunity to examine your assets for potential write-offs and losses, as well. This is especially relevant now, because 2014 is the only year you can look back to prior years to claim write-offs and losses. If you’ve extended your return, you still have time to examine these additional opportunities. If you’ve already filed, there are still opportunities to claim write-offs and losses moving forward.
Real estate companies in particular that don’t take advantage of the opportunity to claim partial disposition losses could be forfeiting significant tax savings opportunity, depending on the scope of their business and holdings. To put it in concrete terms, take the following example: A firm that spent $500,000 to improve a building in 2008 (assuming the original building was placed into service in 2006) might be expected to uncover as much as $400,000 in losses—reducing its tax liability by $158,000 at the 39.6 percent tax rate.

Passive Activity Rules and the Net Investment Income Tax
The IRS is increasingly auditing taxpayers with rental real estate activities in an attempt to reclassify their associated losses as passive, which can generally be used to offset only passive income. If you’re faced with an audit and your losses are recategorized as passive, you won’t be able to offset as much of your active income, which could lead to a large resulting tax bill. Certain taxpayers can avoid this treatment if they qualify as a real estate professional. Be sure you understand what participation levels are required of a real estate professional and carefully consider the one-time activity grouping options to improve your tax outcome.
Deducting losses isn’t the only reason to take a hard look at the real estate professional and passive activity regulations. They’re also applicable to the new 3.8 percent net investment income tax, which is imposed on income from a “passive” business and is in effect as of the 2013 tax year. These regulations are a minefield for the average taxpayer, so use caution when implementing a strategy to reduce your exposure to this tax.

Section 1031 Planning
This technique allows investors to trade one qualified property for another and defer capital gains tax on the transaction. Involving your tax professional early on in this kind of transaction is the best way to generate the outcome you’re looking for.

Land Banking
If done properly, a land banking strategy will generate long-term capital gains on the appreciation of real property before development occurs. This strategy can save a lot of money, but it has to be done right. In a nutshell, it works like this:
• The taxpayer holds appreciated raw land on which development has not yet begun but that the taxpayer wishes to develop.
• The taxpayer sells the land to a related S corporation, recognizing a long-term capital gain on the predevelopment appreciation.
• The S corporation develops the land and sells the finished plots to customers, recognizing ordinary income on any subsequent appreciation.
Structuring an arrangement like this generally involves a time frame of several years, and since there are some unique rules surrounding it, it’s important to work with a CPA firm experienced in the real estate industry to make sure you don’t run afoul of the regulations.

Property Tax
Contrary to what many businesses may think, property tax isn’t a fixed operating expense. For owners (and often renters) of real estate, if the assessed value is higher than current fair market value, there are ways to challenge and mitigate property tax assessments, which can help you ease your overall tax burden.
Yet many companies with significant investments in real and personal property often lack the internal resources to take charge of their property tax assessments. This can result in overpayment of tax liabilities as well as penalties and interest. Note, for example, that the requirements and category definitions for reporting on real and personal property tax differ from the definitions used for federal income tax. This discrepancy in definitions and requirements often results in overreported costs, duplicate assessments and assessments on property that should be exempt.

Estate Planning For Single People

FROM FORBES.COM

While discussions for estate planning often focus on married couples, estate planning for a single person is equally as important. In many instances, a single person may need to do things differently and the consequences of not having a well-coordinated plan can create real problems.

Most single people own assets in their names individually and may also own some assets as a joint tenant with right of survivorship. Other assets, such as life insurance or retirement assets, will be distributed at death according to the terms of their beneficiary designations.

How these varying assets are titled and how the beneficiary designations are prepared will directly impact who will get control of the assets and how they’ll be distributed at the individual’s death.


If an individual dies without a will (known as intestate), possessions are distributed according to the default laws of his or her state. Under these state laws, a married individual’s assets typically go to their spouse or children. For a single person, however, the default under state law usually provides that assets are passed on to their closest relatives (e.g. children, parents, siblings). If there are no relatives alive, assets may go to the state.

To avoid having the state decide the fate of your assets, it is imperative that you put an estate plan in order to ensure your wishes are carried out:

Estate Planning Essentials

Here is a brief guide to preparing essential estate plan documents providing direction on how your estate should be distributed and who should be responsible for making important decisions on your behalf — if you become mentally or physically incapacitated or for your estate following your death.

A will: Your will is the centerpiece of your estate plan and allows you to distribute assets as you see fit; name guardians for minor children and assign an executor to guide your estate through probate, the court-supervised process of accounting for your assets.

The executor you name should be someone trustworthy and not easily swayed; if you don’t have close relatives, choose a close friend or an objective third-party, such as an attorney.


When preparing your will, give some thought to how your home or personal property should be distributed. Investments are easily divided between beneficiaries, but a single person may have very specific wishes about who should inherit his or her home or personal property with special sentimental value.

Durable power of attorney: This document lets you appoint someone to manage your day-to-day financial and personal affairs even if you become unable to do so for yourself. A married person often names a spouse for this role; a single person should select a trusted friend or family member with strong financial acumen.

Medical provisions: A health care directive speaks to your medical wishes if you are unable to communicate them yourself. A medical power of attorney names an individual who is authorized to discuss and make decisions on your treatment and care. When selecting someone for this role, remember that it doesn’t have to be the same person as your financial power of attorney. Take care to choose a trusted individual who knows you well and who will respect your wishes regarding medical care and life-support decisions.

Updated beneficiary designations: These will determine who will receive your benefits including life insurance and retirement plan assets. So be certain the designation forms are up-to-date, coordinated with your estate planning documents and best reflect your wishes.

Estate Taxes

Typically, federal estate taxes don’t apply to a single person until the value of your estate exceeds the federal estate tax exclusion. In 2015, that’s $5.43 million minus any taxable gifts you’ve made during your lifetime. If you are widowed, your federal exclusion amount may include the unused estate tax exclusion of your deceased spouse (if your spouse died after 2010 and this is indicated in his or her estate tax return).

Recently, the federal estate tax exemption has been rising (and it’s now indexed for inflation so the exclusion amount will increase each year). As a result, for many single individuals, estate tax planning has shifted to the state side. Roughly half of the states now impose a state-level estate tax. Consequently, it’s important to speak to an estate planning attorney to determine if a state estate tax would apply to you.

Advice for Transferring Assets

When planning for the distribution of your estate, there are important tools to keep in mind, such as a trust, which holds assets for the benefit of a third-party beneficiary. Since a single person determines the right tools to use for effectively creating an estate plan to properly dispose of his or her assets, it’s important that you also coordinate that planning with the way your assets are titled and the way your beneficiary designations are prepared.

Speak to an Estate Attorney and Financial Adviser

If you don’t have an estate plan that speaks to asset transfer; business and financial decisions and health care directives, meet with an estate planning attorney and financial adviser. These professionals will help you craft a comprehensive plan tailored to your situation to ensure that your assets will be distributed the way you intend.

Catch The Company Stock Tax Break While You Can

FROM FORBES.COM

Do you have employer stock sitting in your current 401(k)? Have you left behind an old 401(k) that holds your ex-employer’s stock? Pay attention. The window could be closing on a chance to save a lot of taxes on the appreciation of those shares.

Whereas most withdrawals from a pretax 401(k) are taxed as ordinary income, at a current top rate of 39.6%, appreciation on employer stock can be taxed as capital gain, at a top rate of just 20%. Financial advisors call this the “net unrealized appreciation,” or NUA break. To use it, you move the stock out of the 401(k) into a regular taxable brokerage account, at which point you pay taxes at the ordinary rate on only the stock’s initial value when it was put into the 401(k). You can then hold the shares as long as you like, paying capital gains taxes on appreciation only when you sell.

Why the rush to grab NUA now? The percentage of employers offering company stock in their 401(k) plans has been gradually declining since the implosion of Enron in 2001. But the trend accelerated after the Supreme Court last year rejected the presumption that it’s prudent for an employer to offer its own stock, raising the legal risk to those companies that continue to do so. A March survey by Towers Watson found a quarter of employers that still offered stock were planning to eliminate it or considering doing so. Even cable giant Comcast, whose founder, Ralph Roberts, was a true believer in employee stock ownership, just notified workers it is banishing company stock from its 401(k) effective Jan. 1, 2017.

Typically, if 401(k) participants don’t get rid of their company shares by such a deadline, their holdings are liquidated for them, with the money put in the plan’s default investment option–usually a “target date” mutual fund where the asset allocation is based on your age.

If you’ve left a 401(k) with company stock at a former employer–and some workers purposely leave these behind to preserve the NUA break–now might be the time to act. At the least, watch closely for notices from the plan. (Any additional appreciation after you move the shares out of the retirement plan is subject to the 3.8% Net Investment Income T ax, which hits couples with more than $250,000 in income and singles above $200,000. Appreciation before you move isn’t subject to that tax, so there is some advantage in not rolling the shares until you have to.)

If your plan has good records, you can even cherry-pick, moving only the most highly appreciated shares into a nonretirement account, says Chris Zander, a partner with Evercore Wealth Management in New York. You’ll owe ordinary income taxes–and, if you’re not yet 55, a 10% early withdrawal penalty–on the initial value of those shares. But if the stock has gained enough, the cost can be worth paying.

Minneapolis financial planner Benjamin Wheeler recently helped a 44-year-old woman laid off from General Mills pull out stock worth $100,000, with an initial value of just $12,000, from her 401(k) plan. At the same time she rolled over $570,000 to an IRA, including $40,000 of higher-cost-basis company stock. “The 10% penalty was a drop in the bucket compared to the savings on the NUA,” Wheeler says.

What if your current employer is dropping the company stock option? If you’re older than 59 ½, you may be in luck, says Diane Morgenthaler, an employee benefits lawyer with McDermott Will & Emery. While they may not advertise it, 92% of large employers (according to an Aon Hewitt survey) allow older workers to take “in-service nonhardship” lump-sum distributions–you move your employer stock to a brokerage account and the rest of your 401(k) holdings to an IRA. Don’t worry–after the move you can still make new contributions to your 401(k) and get employer-match dollars.

2015 Mid-year Tax Planning

Tax planning for 2015 is a venture in uncertainty.

Last December, Congress passed legislation extending a number of expired tax provisions. Unfortunately, they were extended only until Dec. 31, 2014. At this point, we don’t know their status for 2015 and beyond.

There has been a great deal of talk about tax simplification, but currently, it appears to be all talk with no substance and little momentum for achieving true reform.

On April 16, the U.S. House of Representatives voted to repeal the estate tax, but this was seen as a largely symbolic gesture because the U.S. Senate does not appear to have enough votes to pass the legislation. Even if the bill were to survive the Senate, President Obama is likely to veto it. The House is apparently attempting to keep the issue in the forefront with an eye to repeal in 2017.

Rules regarding IRA rollovers have changed. As of 2015, taxpayers may make only one IRA-to-IRA rollover per year. This does not limit direct rollovers from trustee to trustee.


It should also be pointed out that the penalty for failure to maintain qualifying health insurance takes a big leap in 2015. The penalty is the greater of $325 for each adult and $162.50 for each child (but no more than $975) or 2% of household income minus the amount of the taxpayer’s tax-filing threshold.

Dealing with the IRS has become more difficult as a result of budget cuts that make it difficult to reach IRS personnel by phone or in person at most offices. On the flip side, the chances of being audited by the IRS are at the lowest they have been for years. However, the IRS remains quite proficient at sending out computer-generated notices, usually from document-matching processes.

Inflation Adjustments

As usual, there are some adjustments to a number of tax-related amounts for 2015.

The personal and dependency exemptions were increased by $50 per individual. The standard deduction for all filing statuses increased between $100 and $200, while the additional standard deduction for taxpayers who are age 65 and over or blind increased $50 for both married statuses but did not increase for head-of-household or single filers.

Tax brackets, along with phase-out ranges for itemized deductions, personal exemptions, the AMT exemption, IRAs, and several credits, were increased slightly for inflation.

The personal exemption and itemized deduction phase-out threshold for married filing jointly is now an adjusted gross income of $309,900. For single filers, it is $258,250.

The itemized-deduction phase-out reduces otherwise-allowable itemized deductions by 3% of the itemized deductions exceeding the threshold amount. The reduction cannot reduce itemized deductions below 80% of the otherwise deductible amount.

Certain itemized deductions are not subject to the phase-out — medical expenses, investment-interest expense, casualty and theft losses, and gambling losses.

Business mileage increased Jan. 14 to 57.5 cents a mile, while the deduction for medical or moving mileage dropped by a half-cent to 23 cents. The deduction for charitable mileage remains unchanged at 14 cents.



Timing of Deductions

As the standard deduction continues to increase each year, fewer and fewer taxpayers are finding that they can itemize deductions.

Statistically, only about one-third of all taxpayers use Schedule A, Itemized Deductions. In addition to the inflation factor, some other influences make itemizing a less attractive option.

First is the increase in the threshold for deducting medical expenses. This threshold had remained at 7.5% of adjusted gross income for a number of years. However, for most taxpayers, the threshold has increased to 10% under the Affordable Care Act.

Another factor affecting itemizing is the decrease in interest rates. As interest rates have declined, so has the amount of interest taxpayers are paying. As a result, the mortgage-interest deduction has declined. Many taxpayers are now finding they no longer have enough deductions to itemize.

When taxpayers find themselves in a situation where they are close to the itemization threshold, they can often decrease their tax liability through the timing of their deductions. This strategy simply involves speeding up or delaying certain deductions, bunching them as much as possible in a particular year.

For example, in a year in which the taxpayer has enough medical expenses to deduct, a good strategy is to pay as many of these bills as possible in that year to take advantage of greater medical deductions.

Another area open to the timing of the deduction is charitable contributions. By delaying or speeding up such contributions, taxpayers can bunch them into one year for maximum benefit. While regarding charitable giving, do not overlook the tax benefit to be derived from non-cash charitable contributions.

Depending on the local property tax laws, it may be possible to pay two years of property tax bills in one calendar year to get maximum benefit from the deduction. However, be aware of early-payment discounts and late-payment penalties that would wipe out the benefits from taking the itemized deduction.

Another related strategy is to consider if you are in the itemized-deduction phase-out area for the current year. If you have an unusually large amount of income in the current year, it may be beneficial to maximize itemized deductions in the following year, when you are not subject to the phase-out.

Keep in mind that the items in question can be deducted only in the year in which they are considered paid. You cannot choose which year to deduct the item if it has been paid.

Bills paid with a credit card can be deducted in the year in which the credit card is charged, not when the amount is paid to the credit-card company. If the provider of the goods or services has been paid, you may take the amount as an itemized deduction.

Non-cash Contributions Can Be Money in Your Pocket

We live in a throwaway society. We buy something, use it, and then discard it when it no longer suits our needs.

Frequently, these items are in good condition and can be useful to others. Making a contribution of these items to a qualified tax-exempt charitable organization is a win-win-win situation. The organization benefits from the revenues generated by the contribution, the donor gets a tax deduction, and someone gets a usable item at a good price.

The accompanying table illustrates the process of deducting the contribution on Form 1040. It is a fairly simple reporting model, with increasing requirements as the dollar value of the contribution increases.NonCashCharitableContributions

If the contribution exceeds $5,000 in value, an appraisal must be obtained. The cost of this appraisal is deductible as a miscellaneous itemized deduction subject to the 2% limitation. The appraisal requirement does not apply to registered securities.

If the donated item is a vehicle, boat, or airplane, the recipient organization is required to issue the donor a Form 1098-C, and the deduction amount will be the proceeds the organization received from the sale of the vehicle or the Blue Book value if it was retained for use in the organization.

Securities and certain other capital assets that have been held for more than 12 months can be donated, and the donor can take a deduction for the fair market value of the asset instead of the donor’s basis. This can yield a large deduction at little cost for assets that have significantly increased in value.

When donating household items, many people have a tendency to stuff their goods into a large garbage bag and tell the tax preparer that they donated “three bags of clothing and household goods, and here’s my receipt from the organization.” This haphazard approach will not stand up to an IRS audit. The taxpayer is required to have an itemized list of the items donated.

Valuing the items that are donated can be a problem and somewhat time-consuming. But a little time can pay significant rewards. Both the Salvation Army and Goodwill publish a valuation guide for donated items, which may be downloaded for free from their respective websites.

Another approach is to use computer programs. Intuit offers It’s Deductible, which is free online at www.itsdeductible.com.

There is also a mobile app for Apple. You simply input information about the charity, proceed to list your donated items, and let the program value them for you. The IRS generally accepts the values assigned by these guides or programs.

Using one of the above methods, a simple spreadsheet or some other system will help keep your donation records up to date and simplify your document gathering at tax time. An organized list may mean a larger deduction for you.

Capital-gain Rates and Net Investment Income Tax

If someone were to ask, “what is the capital-gain tax rate?” the best answer would have to be: “it depends.”

First, you should determine whether the sale is subject to taxation at the ordinary income rate or at the preferred capital-gain rate. A capital asset must be held for more than 12 months to qualify for capital-gain treatment. Otherwise, it is taxed at ordinary income rates, which vary from 10% to 39.6%.

Even if the sale of the asset meets the criteria for capital-gain treatment, the rate can be zero, 15%, 20%, 25%, or 28%. Then there may be an additional 3.8% net investment income tax levied on top of those rates.

It should be noted that the capital-gain rate is a rate that substitutes for the ordinary income rate. The sale is not subject to both regular income tax and the capital-gain tax.

Generally, a capital gain arises from the sale of investment property or real estate. In addition to gains from the sale of capital assets being subject to the capital-gain rate, qualified dividends are taxed at that rate but are not capital gains. The highest capital-gain rate is 28%, levied on gains from the sale of collectibles or qualified small-business stock. Next would be the tax on unrecaptured Section 1250 gains at 25%.

This brings us to the more common capital-gain rates, which are applied to most capital asset sales. This rate varies.

Taxpayers in the 39.6% (highest) bracket will be subject to a 20% capital-gain rate. Those not in the highest bracket but in the 25% or higher bracket must pay at the 15% rate. Taxpayers in the 10% or 15% brackets have a zero capital-gain rate applied.

These rates can be somewhat misleading since some taxpayers will be subject to the 3.8% net investment income tax. This is a surtax on taxpayers whose modified adjusted gross income exceeds $250,000 for married couples filing jointly ($125,000 for married filing single and $200,000 for everyone else).

Estates and trusts are subject to this tax, which can be significant. They will be subject to this tax on the lesser of:

• Undistributed net investment income; or
• Adjusted gross income over the amount at which the highest tax bracket for a trust or an estate begins (currently $12,300).

This tax makes the effective capital gain rate as high as 23.8%.

However, estates and trusts can avoid the tax by making income distributions to the beneficiaries. Since the threshold subject to the tax is significantly higher for individuals, this option could eliminate the tax altogether.

The net investment income tax is levied on income in addition to capital gains. Net investment income includes most dividends, interest, annuities, royalties, rents, and the taxable portion of gains from the sale of property. The regulations defining net investment income take 159 pages to define the term, so consult with your CPA regarding your liability for this tax.

A separate tax was enacted as a part of the Affordable Care Act that also applies to individuals with high incomes. The 0.9% additional Medicare tax is levied on earned income in excess of certain threshold amounts. The thresholds are the same as the ones for the net investment income tax.

However, collecting the tax is somewhat complex. If an individual has wages in excess of $200,000, the employer is required to withhold the tax on earnings in excess of that amount. If neither spouse exceeds the $200,000 threshold but they have a combined earned income in excess of $250,000, they must pay the tax when they file their Form 1040.

As with the additional Medicare tax, taxpayers are advised to consult with their CPA to take steps to mitigate this tax — or at least to be prepared for it.

Home-office Safe Harbor

If your business operates out of your home, the IRS will allow you to take a tax deduction for your home office.

To qualify for the deduction, you are required to:

• Have an area in your home that is exclusively and regularly used as a home office; and
• Use the home as your principal place of business.

If you are an employee, you are subject to these same two criteria. In addition, your home office must be for the convenience of the employer. An employee cannot rent a portion of the home to the employer, use the rented portion to perform services as an employee for that employer, and take a home-office deduction.

The home-office deduction is based on the portion of the home that is used for business. A percentage of many home expenditures can be allocated to the cost of the office. In addition, a depreciation deduction may be included in the cost.

The IRS now offers a simplified safe-harbor option for deducting home-office expenses. Rather than determining the actual expenses incurred in the home, taxpayers may simply deduct $5 per square foot used as an office for the deduction. Keep in mind that using the safe-harbor method means there will be no depreciation recapture when the home is sold.

A taxpayer may choose either deduction method each year. The election is made by filing the return using the method of choice for that year.

Home-office Deduction for a Corporation

The home-office deduction is designed for a sole proprietorship filing a Schedule C. Business owners who choose to incorporate their businesses will lose the advantage of deducting the expenses of a home office because the corporation and the taxpayer become two separate, distinct entities at the time of incorporation.

Three alternatives can be chosen that would allow a home-office deduction in these situations. First, assuming that corporation owners are also employees of their corporations, they could take the employee home-office deduction on their Schedule A as a miscellaneous itemized deduction.

However, this approach has two disadvantages. First, the deduction is subject to the 2% limitation on miscellaneous itemized deductions, potentially eliminating some or all of the deduction. Secondly, taxpayers who do not itemize cannot obtain a home-office deduction.

The second choice is for corporations to pay rent to their owners for use of a home office. This rent is deductible by the corporations, and the owners must report the rent on their Form 1040, Schedule E.

However, an owner can set the amount of rent equal to the expenses associated with the home office and show no gain or loss on the rental activity on the Form 1040. Using this method, the owner can create some personal cash flow since deducting depreciation on the office is an allowable expense.

The third alternative is to have the corporation pay the owner for any out-of-pocket costs of a home office under an accountable plan. Reimbursed expenses must be actual job-related expenses that the owner must substantiate by providing the corporation with receipts or other documentation.

These expenses can include a portion of mortgage interest, property taxes, utilities, insurance, security service, and repairs. They would be reimbursed based on the percentage of the home that is represented by the office area.

These last two methods require some rigorous record keeping. But the bottom line is that either of these approaches can yield benefits to the taxpayer and the corporation.

Tangible Property Regulations

New tangible property regulations went into effect on Jan. 1, 2014. These regulations are far-reaching and designed to guide taxpayers in determining whether an expenditure can be classified as an expense or must be capitalized and depreciated.

In many cases, the answer is clear. Routine ‘ordinary and necessary’ business expenses are normally expensed. These include supplies, payroll, purchased inventory (when sold), small tools, insurance, licenses and fees, and routine maintenance.

At the other extreme are items that are clearly long-lived assets and must be capitalized and depreciated — vehicles, machinery and equipment, buildings, etc. Companies may use a de minimis safe-harbor election to simplify accounting records. This amount is $5,000 if the company has an applicable financial statement (AFS), and $500 otherwise. Expenditures below these amounts may be expensed. An AFS is generally an audited statement filed with the SEC or with a government agency.

Where the major issues come into play is in considering whether a repair can be classified as an improvement to the asset. Under IRS regulations, property is improved if it undergoes a betterment, an adaptation, or a restoration. If it is an improvement, it should be depreciated.

Betterment:
• Fixes a ‘material condition or defect’ in the property that existed before acquisition of the asset;
• Results in a material addition to the property; or
• Results in a material increase in the property’s capacity.

Restoration:
• Returns a property to its normal, efficient operating condition after falling into disrepair;
• Rebuilds the property to like-new condition after the end of its economic life;
• Replaces a major component or substantial structural part of the property;
• Replaces a component of the property for which the owner has taken a loss; or
• Repairs damage to the property for which the owner has taken a basis adjustment for a casualty loss.

Adaptation:
• Fits a unit of property to a new or different use.

The definition of the unit of property (UOP) is critical. It helps determine whether an expenditure should be capitalized or expensed.

For example, a building may be defined as a UOP, or each of the enumerated building systems may be defined as a UOP. For non-buildings, the UOP is defined by the IRS as all components that are functionally interdependent, unless the taxpayer used a different depreciation method or recovery period for a component at the time it was placed into service.

There are two additional safe harbors — an election for small taxpayers and a routine-maintenance safe harbor.

Conclusion

Tax laws change at an amazing pace. It is estimated that more than 5,000 changes to federal tax laws have been made since 2001. That’s an average of more than one change per day. The Internal Revenue Code was 73,954 pages in 2013, which makes War and Peace look like a short story.

The information contained in this article was current at the time it was published. However, it is by no means certain that it will remain current for the rest of 2015.

Why bring this up? Simply to emphasize how incredibly complex our tax laws have become. Tax planning is necessary in today’s complex world so that you can stay on the right side of the IRS and minimize your tax liability.

Saving for College? 529 Plans Make Sense for Many

The cost of higher education is a key part of the financial-planning picture for just about any family with kids. Millions of U.S. families are saving for college in the state-sponsored plans known as 529 plans, named for the section of the federal tax code that authorizes them. Here are a few important things to know about 529 plans.

Who can save money in a 529 plan?

Any U.S. citizen or resident alien age 18 or older can open an account in a 529 plan to save for higher education costs for a child, grandchild, godchild, younger relative or even him- or herself. Each state operates its own 529 plan, but you aren’t necessarily limited to investing in the plan in the state where you live. (Investing in your own state’s plan, however, may produce state tax benefits.) Money you put into a 529 can be invested only in the mutual funds or other options offered within that plan, which may be rather limited.

Can a non-U.S. citizen open a 529?

State 529 plan applications usually ask for the Social Security numbers of both the account owner (the person setting up the account) and the beneficiary. If you don’t have a Social Security number, contact the administrator of the 529 plan prior to establishing the account.

Some 529 plans may have residency requirements, such as mandating that either the owner or the beneficiary be a resident of the state offering the plan. In such cases, provided that the beneficiary is a resident, you may still be able to establish an account even if you’re not a U.S. citizen or resident.

How are these plans taxed?

Account owners don’t get a deduction on their federal income tax return for contributions to 529 plans. However, earnings on investments in the plan accumulate tax-free. Distributions from the plan are untaxed as long as the money is used to pay qualified higher education expenses. If it’s used for something else, you’ll pay tax on the earnings, plus a 10% penalty. States may offer additional tax benefits to residents who invest in their 529 plans.

What can the money be used for?

Money from 529 accounts can be used to cover tuition, fees and other expenses, such as room and board, at accredited colleges and universities in the U.S. and abroad. (The beneficiary is not required to attend a school in the state where the 529 plan is established.) Refer to the federal student aid website to determine which international institutions qualify.

Carefully review the requirements of the 529 plan to ensure that the particular educational institution that you or your beneficiary is considering is still an eligible institution. If funds are withdrawn from the plan to use at a non-eligible institution, investors must pay income tax and a 10% penalty on any earnings withdrawn.

Approved uses of 529 money are often referred to as “qualified withdrawals” and vary slightly from plan to plan. If contributions are used for non-qualified withdrawals, you may have to repay any state tax benefits you received, and additional taxes or penalties may be assessed.

As always, consider the state tax benefits, investment options, fees and expenses associated with 529 plans prior to making any investment decisions.

What is a Roth 401k Plan and How Does It Differ from A Traditional 401k Plan?

While saving for retirement is hard, the government has taken steps to make it easier -- or, at least, a little cheaper. 

Nearly 10 years ago, companies were granted the ability to offer a second type of 401(k) plan to their employees. Known as a Roth 401(k), it offers a number of pros and cons vis-a-vis the traditional 401(k) plans that you're probably more familiar with.

Which option is best for you? Read on to find out.

The basics
Roth 401(k) plans allow employees to set aside part of their paycheck for retirement while providing unique tax advantages that allow more of that money to remain in your wallet throughout retirement.

In short, contributions to a Roth 401(k) plan are made with after-tax money, and, given that employees pay the tax on those contributions upfront, distributions from a Roth 401(k) plan are typically tax free -- this is assuming that the plan is at least five years old and that the owner is at least 59.5 years old.

Contributions to a traditional 401(k), on the other hand, are made with pre-tax dollars. This lowers your tax bill now, but the downside is that, unlike a Roth 401(k), withdrawals are typically taxed as ordinary income. Thus, the greatest deciding factor between the two is whether you should pay taxes on the underlying income today or in retirement.

Regardless of which type of plan you choose, however, the contribution limits for 2015 are the same. Employees can contribute up to $18,000 in income to either plan ($24,000 if you're over age 50) this year.

The pros and cons
The pros and cons of a Roth 401(k) plan relative to a traditional 401(k) plan are similar to the pros and cons of a Roth IRA relative to a traditional IRA.

In both instances, the Roth option makes sense if your income, and therefore your tax rate, is likely to be higher in retirement than it is during your working years. Alternatively, if your tax rate is more likely to fall in retirement or stay the same, then, holding all else equal, a traditional IRA may make more sense because you'll be able to use tax savings now to generate gains that are taxed at a lower rate later.

Another advantage that Roth 401(k) plans offer over traditional 401(k) plans is tied to estate planning. If you're saving money to pass along to your heirs rather than to generate income in retirement, then a Roth 401(k) plan could be the better choice. That's because traditional 401(k) plans require investors to take minimum distributions beginning at age 70.5, while Roth 401(k)'s don't. Consequently, since you're not forced to take distributions from your Roth 401(k), and withdrawals therefrom are after-tax, you could conceivably pass along more money to your heirs by using one.

Oh, and another thing
Regardless of whether you decide on a Roth 401(k) or a traditional 401(k), what matters most is that you pick one and contribute as much as possible to it every year.

Thanks to the compounding of interest, the more money that you invest early on, the bigger the impact on your financial future. Consider this point. If you were to invest $200 per month for 40 years and earn a hypothetical 8.5% return per year, then you'd end up with a portfolio worth $709,664. Invest that same amount over 30 years and your portfolio would be worth just $298,126 -- less than half of what it would've been worth if you'd started 10 years earlier. That makes for a pretty compelling argument to take advantage of these plans as soon as you can.

Why You Should See Your CPA More Than Once A Year

Many people have the view that you only see your CPA once a year – at tax time. However, with that approach people are typically leaving money on the table. While keeping clients in compliance is a key role of a CPA firm, a bigger driver of value is the delivery of tax savings to clients. That can marginally be done during the crazy tax season months of February through April, but is better approached during additional annual, biannual or quarterly meetings. We offer all our tax season clients a Growing Forward document that highlights key points and high-level ways that they can save on taxes. It also includes important information on any upcoming tax law changes that could impact them. 

However, detailed tax planning typically requires a more thorough dive into expectations and assumptions for the current year, and is best approached in the middle to latter part of the year, when more of the current year is known. With that approach, a competent CPA firm should be able to deliver tax savings that are greater than the cost of a tax planning engagement.

We need to note that tax planning is not going to be of value to everyone. For some people, there is simply nothing that can be done. We recommend tax planning for business owners, individuals with a variety of investments or rental properties, and for people with unusual tax events or changes in their individual situations.

What does tax planning involve?

There are several steps to the tax-planning process. They include:

• Gathering historical data on which to base or compare assumptions.
• Gathering current year financial data and assumptions.
• Taking the information and generating projections for the current (and potentially) future years.  This is the base as-is-expected scenario.
• Performing a thorough analysis of the projections and known information and making recommendations.
• Using the recommendation to create alternative projections to illustrate tax savings.
• Documenting the recommendations and results.
• Reviewing the results with the client and identifying the necessary course of action for the remainder of the year.

 
What are the expected results? 

• To have a better idea of what the current and future tax year will look like. At a minimum, the process should remove any unnecessary surprise of tax balances due. In addition, it's helpful in determining if the taxpayer needs to make additional estimated tax payments for the year.
• To get a recommended course of action to reduce the expected tax burden for the current year.
• To get a better understanding of how various financial pieces interact and affect the overall tax picture.

My goal today was to expose more people to the concept of tax planning. I encourage you to take a look at it and to consider a tax planning engagement with a CPA firm to take a more proactive approach to taxes.

Retirement Plan Options for The Self-Employed

Self-employed individuals have to juggle the many responsibilities that come with being their own bosses. Planning for retirement can get lost in the shuffle.

Americans have a hard time saving, even when most have ready access to retirement plans at work. In 2013, the National Institute on Retirement Security released a report titled “The Retirement Savings Crisis,” which estimated that about 45 percent of U.S. households had no assets in retirement savings accounts. Of those that did, most fell short of the amount needed, with a median balance of only $3,000.

That same year, TD Ameritrade conducted a survey of the savings habits of self-employed people and traditional employees, which painted just as bleak a picture. Only 36 percent of traditionally employed individuals polled responded that they were saving regularly for retirement or were doing so to the extent that they would like. Thirty-one percent of selfemployed respondents reported that they were saving regularly.

While these statistics show that most U.S. households are struggling to save adequately for retirement, self-employed individuals are finding it even more difficult. This is likely because they have to do much more work to get started. Not only do they have to think about how much to save in a particular retirement plan, but they also have to establish and maintain that plan. When you consider that income for self-employed people can be very unpredictable, putting away money for retirement can seem even more daunting. While the plans outlined below won’t ease the challenges of unpredictable earnings, they do provide a blueprint for how to save when the opportunity arises.

Traditional And Roth IRAs

Traditional and Roth IRAs are probably the two most popular accounts for people saving outside of employer-sponsored plans. Both require very little effort to establish and virtually no ongoing reporting requirements or maintenance. In 2015, individuals can contribute a maximum of $5,500 to their accounts. The Internal Revenue Service allows those 50 and over to contribute up to $6,500.

The main difference between a traditional IRA and a Roth IRA is that traditional IRA contributions are tax-deductible (subject to income phaseouts), while contributions to a Roth IRA do not reduce a participant’s taxable income. However, assets in a Roth IRA grow tax-free and qualified distributions are not taxable, while distributions from a traditional IRA are subject to income tax. Another difference is that a Roth IRA does not require individuals to take distributions, while a traditional IRA has minimum distribution requirements once participants reach age 70 1/2.

The deduction for traditional IRA contributions is limited for participants who are covered by retirement plans at work (presumably not the case if self-employment is their sole occupation) or if their spouses are covered by a plan at work. For participants who have spouses covered by retirement plans at work during 2015, the deduction begins to be reduced at a modified adjusted gross income (MAGI) of $183,000 and is completely phased out for those with MAGI of $193,000 or more. The phaseout for Roth IRA contributions occurs for single taxpayers with MAGI of between $116,000 and $131,000 and for married taxpayers with MAGI of between $183,000 and $193,000.

Whether individuals contribute to traditional or Roth IRAs will depend on how much they expect their tax situations to change. Conventional wisdom says that if they expect to be in higher tax brackets in the future, Roth IRAs make more sense. That’s because it is generally better to forgo the tax deduction for contributing to traditional IRAs when their tax burdens are relatively low in order to withdraw money tax-free when they are in higher tax brackets in the future.

Both traditional and Roth IRAs impose an additional 10 percent penalty on distributions made before age 59 1/2. In addition, borrowing from the accounts is not allowed. This may deter some self-employed professionals. The IRS does waive the 10 percent penalty for distributions in certain situations, including to cover higher education expenses, unreimbursed medical expenses in excess of certain adjusted gross income thresholds and first-time home purchase expenses (up to $10,000), and if the owner becomes disabled or dies. Note that with traditional IRAs, income tax is still owed on the distributions. Those with Roth IRAs can avoid paying tax on the earnings of the distribution if the distribution occurs after five years from January 1 of the taxable year for which the contribution was made.

The IRS has outlined specific ordering rules for distributions from Roth IRAs that provide the accounts with a major advantage over traditional IRAs for those who are uncertain if they will need to withdraw money. Amounts distributed from a Roth IRA are treated as coming out in this order: regular contributions, conversion contributions and earnings.

The significance of this ordering is that withdrawals can be made from a Roth IRA up to the amount of prior contributions at any point without incurring taxes or penalties. While I don’t recommend tapping retirement accounts as a matter of routine, this feature can come in handy in emergencies. It should also help relieve some of the anxiety of not being able to access funds in the IRA without incurring additional costs.

The major disadvantage of having traditional and Roth IRAs serve as main retirement savings vehicles is the low contribution thresholds. Most people will need to save more than the prescribed limits to meet their needs. The next option solves this problem.

Simplified Employee Pension (SEP-IRA)

SEP-IRAs have the same characteristics as traditional IRAs, but they allow self-employed professionals to save on a much larger scale. The current contribution limits for self-employed professionals in 2014 and 2015 are the lesser of 20 percent of net business income or $52,000 ($53,000 for 2015). Contributions to SEP-IRAs are discretionary, so someone having a lower-income year is not forced to contribute for the year.

The maximum amount of income that can be considered for the contribution is $260,000 for 2014 and $265,000 for 2015. The 2014 contribution limits are still relevant because SEP-IRAs can be established until the taxpayer’s tax-filing deadline, including a six-month extension. This is another advantage over traditional and Roth IRAs, which must be funded by the April filing deadline.

Establishing a SEP-IRA is relatively straightforward. The IRS requires a formal written agreement to establish the plan by completing Form 5305-SEP; an approved prototype plan document offered by a bank, insurance company or approved financial institution; or an individually designed SEP document. Most financial institutions will have their own approved plans that can be adopted to open accounts.

SEP-IRA contributions are considered to come from the business, not the individual. This is an important distinction, because it allows a plan participant to contribute to a Roth IRA in the same year he or she makes a SEP-IRA contribution. Therefore, the participant can take advantage of the tax-free growth of Roth IRAs and increase the tax diversification of retirement savings. Having retirement funds in tax-deferred and tax-free accounts creates additional flexibility to deal with changing tax situations when the funds are being distributed.

Solo 401(k)

As the name implies, the Solo 401(k) is for self-employed professionals who do not have outside employees (although a spouse can contribute to the plan if he or she is employed by the business). The plan works just like a 401(k) operated by a large corporation. It can be structured as a traditional 401(k) or as a Roth 401(k). The 2015 contribution limits are:

• Annual employee deferral – $18,000 ($24,000 if 50 or older), up to 100 percent of compensation or earned income for a self-employed individual.
• Employer discretionary contribution – up to 25 percent of compensation as defined by the plan or 20 percent of earned income for a self-employed individual.
• Total maximum contribution – $53,000 ($59,000 for those 50 and above)

In some cases, a participant may be able to contribute more to a Solo 401(k) than to a SEP-IRA because it allows deferral of up to 100 percent of compensation or earnings. The Solo 401(k) can also be more attractive than the Roth IRA, since it allows for more savings on a tax-free basis. Unlike with IRAs, participants can borrow from 401(k)s, the lesser of $50,000 or 50 percent of the account balance. However, if 50 percent of the balance is less than $10,000, a participant may borrow up to $10,000. Generally, the loan has to be paid back within five years. However, the loan’s repayment period can be extended to up to 15 years if it is used to purchase a primary residence.

Solo 401(k)s require more administration than IRAs do. Specifically, plans that have more than $250,000 in assets must file Form 5500-series returns each year. In addition, if the plans allow participants to take loans, those loans will need to be administered to ensure that they comply with regulations. Despite the increased administrative burden, Solo 401(k)s are attractive options for self-employed professionals.

The plans discussed above can help bridge the retirement savings gap plaguing America. While self-employed professionals have other options, these offer the most flexibility and the least administrative burden.

Marginal Tax Rates—Beware

Butch and Teresa, each age 58, recently stumbled into early retirement. Teresa never worked outside the home, and Butch was laid off from his position at a chemical company. They, like many boomers, found themselves at the doorstep of retirement, without a great deal of retirement planning and absolutely no thought whatsoever about tax planning for their retirement years. This all changed when Teresa observed that her brokerage account was simply not growing as fast as her husband’s 401(k) was growing. She thought it probably had something to do with them needing to withdraw about $10,000 per year from her brokerage account to pay income taxes!

A solid retirement plan includes three things: investment planning, income planning and advanced tax planning. That last piece, tax planning, is often the most overlooked of the trio, but Butch and Teresa’s story is a testament to the fact that tax planning should be an integral part of a well-designed retirement plan.

Like many of us, Butch and Teresa accumulated savings in a tax-deferred retirement account; Butch’s 401(k) is now worth about $500,000. Butch invested his portfolio in stocks and bonds, which had an average growth rate of about 6 percent per year. (Unlike many of us, Butch also was given a wonderful pension of about $75,000 per year, but this is only scheduled to continue until he and Teresa turn on their Social Security at age 66.) In addition, Teresa inherited about $500,000 from her mother and placed the money into a brokerage account. The couple’s stock broker invested the funds in Teresa’s brokerage account in preferred stocks and interest-bearing corporate bonds. Butch and Teresa were making about $30,000 per year from each account, and assumed that meant a return of return of about 6 percent.

Unfortunately, Butch and Teresa have learned that, without proper planning, investment income is typically taxed at ordinary income tax rates, which is less favorable than long-term capital gains tax rates. For this reason, it is imperative to understand and determine our “after-tax” rate of return in order to evaluate the performance of our investment portfolios and make proper planning adjustments. Of course, Teresa quickly determined that the after-tax rate of return of her husband’s 401(k) was 6 percent, because this account was growing tax-deferred. Not true for Teresa’s brokerage account.

When Butch and Teresa’s stock broker recommended the investments for their brokerage account, he advised them that their income tax rate was only about 13 percent. He based this conclusion on the fact that the previous year, the couple paid about $13,000 of federal and state income taxes on their income, which totaled about $100,000. He and the couple concluded that taxes would not significantly affect the growth of the account. They reasoned that the after-tax rate of return would be about 5.2 percent, 6 percent less .8 percent in taxes (13 percent average tax rate multiplied by 6 percent growth). Teresa was both confused and frustrated. She saw checks being written from her brokerage account that were much more than 13 percent of her growth! In fact, the checks were almost $10,000 per year—33 percent of her growth. So, what gives?

The answer lies in marginal tax rates. More specifically, as our taxable income grows, our tax rate actually increases. Thus, we must always know and understand what our marginal tax rate is, because this is the rate at which dividend and interest income will be taxed. In Butch and Teresa’s case, their marginal tax rate is about 33 percent not 13 percent! Let me explain.

Our tax system is based on progressive tax rates . . . the more you make, the more you pay. If you look at the tax tables, you see that taxpayers who are married and filing jointly with more than $74,900 of income will pay $10,312.50 plus 25 percent in federal income taxes on any amount of income over $74,900. Don’t forget, however, that those taxpayers are also required to pay state income taxes. Because Butch and Teresa’s taxable income increased by about $30,000 (the dividend and interest income paid out from Teresa’s taxable brokerage account), that additional income was taxed at their marginal tax rate. In other words, that investment income was subject to combined federal and state income taxes of about 30 percent.

Now we are getting somewhere. Teresa could finally calculate her after-tax rate of return and she determined it was only 4 percent. Let’s do the math. The tax cost is calculated by multiplying the combined federal and state tax rates, 30 percent, by the return of 6 percent, which totals 1.8 percent. Thus, the after-tax rate of return is the 6 percent growth less the tax cost of 1.8 percent, or, a 4.2 percent after-tax rate of return. About one-third of the growth in Teresa’s taxable account was going to the IRS! Now the picture comes into focus . . . Butch’s 401(k) was growing at 6 percent, doubling every 12 years, while Teresa’s account was growing at only 4.2 percent, doubling every 17 years. If we look at this calculation over 36 years, then Butch’s account could be worth about $4 million when he turns 94, while Teresa’s account could only be worth about $2 million! That is a huge difference.

Having a handle on the problem, Butch and Teresa can now start making wise investment and planning choices. For example, they can analyze investments while understanding the impact of taxes and can choose from taxable, tax-deferred and tax-exempt investments. More specifically, the funds in Teresa’s brokerage account could be invested in tax-exempt municipal bonds for tax-free income; or high dividend yielding stocks that would pay qualified dividends, that is, dividends that are qualified for a reduced tax rate. On the other hand, the couple could invest in tax-deferred vehicles, like a “no commission” variable insurance trust, that would defer the taxes on their stocks and bonds, much like Butch’s 401(k).

Problem solved. Butch and Teresa are now on the path to an enlightened retirement, thanks to a little old-fashioned tax and investment planning.

Be vigilant and stay alert, because you deserve more.

Learn From Your Tax Filing Mistakes

Did you end up owing a boatload of money to the IRS at tax time without having the money to pay for it, or did you receive a large refund? While the former is a lot more unpleasant than the latter, they are both symptoms of bad tax planning. A big refund feels good until you realize that refund represents an interest-free loan that you gave the government.

Those are just a couple of examples of tax filing mishaps. Maybe you had other issues — you ended up filing your taxes late because of bad organization or mistakes on your form, or you simply waited too long to get started. In any case, your tax filing experience was less than pleasant.

Regardless of why your 2014 tax year filing did not go as planned, you can take some steps now to insure 2015 is not equally difficult. Consider these helpful hints:

Organize Your Records – Keep all of your potentially relevant tax information organized throughout the year, instead of shuffling through a shoebox full of crumpled receipts on April 15th. Develop an organizer that allows you to file and categorize receipts when they arrive. Do not let things pile up.

Consider Itemizing Deductions/Taking Credits – People often do not bother to itemize because they do not take the time to look over the list of deductions, or keep the receipts necessary to prove the deductions. Taking the advice above solves the second issue, and the first one can be resolved by checking the itemized deductions athttp://www.irs.gov/Credits-&-Deductions. Look them over early in the year so that you know which receipts to save.

While you are at it, look over the tax credits on the same page and see if you will qualify for any of them over the next year. Tax credits are preferable to deductions because they subtract directly from your tax bill. Deductions reduce your income and therefore only subtract the amount based on your tax bracket — in other words, in the 25% tax bracket your taxes are reduced $25 by a $100 deduction and $100 by a $100 tax credit.

Reduce Your AGI – Adjusted Gross Income (AGI) is the basis on which your taxes are calculated. Reducing your AGI can have an added effect on reducing your taxes, as they also form the threshold values for many different deductions.

All of the "above-the-line" deductions on your 1040 form (lines 23-35) reduce your AGI and you can take those deductions whether you itemize or not. They include health savings account (HSA) deductions, self-employment health insurance, certain moving expenses, IRA deductions and student loan interest deductions.

You can also reduce your AGI by maxing out your contributions to 401(k) plans and other employment-based retirement plans. Your money is tax-deferred and your retirement funds are increased — a win-win situation.

Adjust Withholding – Generally, to make the most of your money, you should adjust your withholding amount to leave you with no refund and a small tax payment. Consider adjusting the withholding on your W-4 form with your employer. You may also need to adjust mid-year, based on any life changes such as marriage or the birth of a child. A withholding calculator may be found on the IRS website through http://www.irs.gov/Individuals/IRS-Withholding-Calculator.

W-4 changes take effect on the next payroll period after the change, so make any necessary changes early in the tax year.

One final tip that is related to 2016 — start early. As soon as you get all of your W-2s, 1099s and other relevant tax information, get your taxes filled out early. You do not have to pay early — but taking the time to do your taxes early will relieve stress and reduce the likelihood of mistakes. If you thrive on the adrenaline rush of filing your taxes at 11:59 pm on April 15th, we suggest finding a less risky method of getting your kicks.