Sunday, July 31, 2016

Is it time to revisit Roth IRAs?


Once again, tax planning emphasis appears to have shifted from focusing on minimizing the estate subject to tax and focusing on the reduction of current taxable income. The main reason for this shift is that only a few estates may actually be taxed because, to incur the tax, the taxable estate must exceed $5,450,000. There is an investment strategy that permits a buildup of value without income tax and then when that untaxed increment is withdrawn, it is not subject to income tax.

The strategy referred to is Roth Individual Retirement Account (Roth IRA). The traditional IRA may provide up to a $5,500 income tax deduction and the fund that is invested compounds free of income taxes until it is withdrawn.

There are a number of rules restricting when a taxpayer can make a deductible IRA, such as income levels and participation in employer plans. Then, like retirement plans generally, the taxpayer must start taking distributions at age 70½, but if a distribution is taken before age 59½ there is a severe penalty.
Whatever has accumulated up to the taxpayer’s death is then subject to estate tax if the estate overall is large enough, but when withdrawn it is still taxable income to the heir but hopefully at a lower rate than when it was deducted by the deceased.

Remember, with the large estate tax exclusion, a taxpayer can accumulate a significant IRA balance with good investment advice and planning. However, it still generates taxable income to whomever withdraws the money.

Can we improve on this? Possibly, provided a number of factors fall into line, some of which can be controlled and a few which cannot be controlled. Like all investment options, there are tax consequences, and ultimately the decision revolves around the risks with which a taxpayer is comfortable.
The Roth IRA presents an investment vehicle that may satisfy some but not all the risks. Roth contribution limits are similar to those of regular IRAs, as are the income level restrictions, but participation in an employer’s plan is not a problem. However, the contribution is not deductible. Why then discuss it?
When a withdrawal is made after the end of the fifth year from the beginning of the first tax year in which the Roth contribution was made, then that withdrawal is completely free of income tax. Whatever earnings have accrued in that five-year period and are part of the distribution escape income tax entirely.

Certainly, age is a factor to consider since the compounding factor is a crucial benefit. Investment options are critical. Income tax rates are a must consideration, both in the year of contribution when there is no tax deduction benefit and in the year of projected withdrawal.

In addition to the possible non-taxable distributions, Roth IRAs are not subject to a required minimum distribution. Unlike regular IRAs, Roth contributions can be made at any age, even after 70½, which is another benefit as people live longer.

The tax free compounding offers such an enticing possibility that under proper investment projections, the decision to convert or “rollover” a regular IRA or other retirement plan into a Roth IRA is something to consider, even though that transaction is fully taxable now.

Certainly, the Roth IRA is not for everybody, but with the increased emphasis on reducing income taxes without the overriding worry of increasing wealth, the Roth IRA option is another possible investment alternative to discuss with your advisors. Naturally, like all tax alternatives, there are many rules to observe.

Saturday, July 30, 2016

Keep Your Money Goals on Track With a Midyear Financial Checkup


Fantasizing about reaching your financial goals is easy. Actually accomplishing them is more difficult.

More than one-third of Americans considered a financial resolution for 2016, according to a telephone survey of more than 2,000 Americans by Fidelity Investments. Top goals included saving more, spending less and paying down debt. For these goal-setters, summer is a great time to gauge progress made toward those objectives, experts say.

"I do think a midyear financial checkup is a great idea because, hopefully, Americans are slowing down a bit," says Pamela Sandy, a certified financial planner and president of the Financial Planning Association.

Not only is summertime a good halfway point between New Year's money resolutions and year-end tax planning, it'll also be easier to contact financial experts, tax planners, human resources representatives and other advisors, who are less swamped in the off-season.

The warmer months also mark a good time to make new financial goals if you aren't currently working toward any, says Mary Deshong-Kinkelaar, a certified financial planner practitioner based in Akron, Ohio. "It's sometimes better not to get hung up on New Year's resolutions and find time when it's quieter for you," she says.

Here are the financial categories to examine during your midyear financial checkup.


During the summer months, "most people are going to have a pretty good idea of what's happening in their tax situation and can start to plan things better instead of scrambling in December," says Deshong-Kinkelaar.

Take a moment to tally up any major life changes you've undergone in the past six months and include those in your tax strategy. Got married? Had a kid? Bought a house? "Those types of things that are transitions in your life mean a transition in your tax situation," says Deshong-Kinkelaar.

Plus, if you earned a hefty refund in April, or paid a large tax bill, it might make sense to request a W-4 from your employer and tweak your withholding.

The summer months are also prime time to examine whether you're making the most of workplace tax benefits, like your flexible spending accounts and retirement contributions, maximizing tax-saving strategies before the year-end free-for-all.


Planning for the future requires having a roadmap in place for the worst-case scenarios, which can wreak havoc on your financial life.

Experts recommend using the summer months to examine whether your insurance plans are still meeting your needs.

Since employers often hold open enrollment for health insurance and other benefits in late fall, summer is a time to think about your employer health benefits and whether your current situation is meeting your needs before the late-fall melee.

Estate Planning

If you don't have a plan in place for when you're gone or incapacitated, get the wheels in motion. "When I have a planning engagement, we talk about documents you should have in place, making sure your beneficiary designations are appropriate," says Keith Rauschenberger, an independent fee-only financial advisor and president of Rauschenberger Financial Advisors in Elgin, Illinois.

In fact, 64 percent of Americans don't have a will, according to a 2015 survey from Rocket Lawyer, an online legal resource.

Make sure that you have the basic forms, including an up-to-date will, power of attorney forms and health care directives, enabling a person to make medical decisions for you if you cannot make them for yourself.

Estate planning might include a visit to a pro, such as an estate attorney or accountant.

Emergency Fund

Take a moment to check in with your emergency fund. Was it depleted during summer vacation? Has a change in employment made it necessary to beef it up?

Experts typically advise keeping three to six months' worth of living expenses readily available, depending on your job security. Start working on building your rainy day fund by funneling a percentage of your paycheck into a savings account each month, experts suggest. If you don't ever see the money in a checking account, you won't miss it as much.

The Long Term

Summer vacation is a good time to think about where you'd like to see your life in five, 10 or 25 years – and enact the financial strategies that will help you reach those goals.

You might be lounging on the beach in California and decide that you want your retirement to look similar. Or you might be ready to grow your family and realize that you need a bigger home. Says Rauschenberger: "Sit back when you're on holiday or whatever and think about ... 'What am I happy about? What do I want to do in 10 years?'"

Friday, July 29, 2016

10 Things That Could Give You Peace of Mind on Your Next Vacation

Given the recent horrendous acts of terrorism in Nice, Brussels, Paris, Orlando and elsewhere, many travelers are concerned about becoming victims themselves. Although the chances are extraordinarily slim that it could happen to you, the truth is that thousands of people are injured and die every year while on vacation.

Therefore, here are some travel-planning steps to consider taking that could increase your peace of mind when you leave on your next vacation.

1. Write a Will or Establish a Living Trust

A large majority of Americans have no will. This estate planning document allows you to determine what will happen to your assets should you die because you get hit by a cab in London or fall overboard during your cruise around the Greek Islands. Without a will, your state of residence decides “who gets what” according to its intestate law. And as a result, the individuals who inherit your assets may not be the people you would have chosen if you had written a will. Dying without a will may also result in higher legal fees and taxes for your estate.

For some of you, setting up a living trust may be a better option than a will because a trust not only allows you to decide what happens to your property when you die, it also allows your estate to avoid probate, among other advantages.

Whether you write a will or set up a living trust, be sure to prepare a Durable Power of Attorney as well. This document is essential in case you become incapacitated and need someone to manage your affairs.

A good estate-planning lawyer can explain the differences between a will and a living trust and help you decide which one is best for you. (Full disclosure: I am one.) Also, if you already have an estate plan, make sure it is up to date – reflects your current wishes, for example – and double-check that the right people are in place to make decisions for you if you become incapacitated or for any minor children you may have.

2. Prepare Health Care Documents

Most accidents don’t result in death, but you may need to be hospitalized while you are on vacation, and if you can’t make your own medical decisions, you will need someone with legal authority to make them for you. A Medical Power of Attorney and a Living Will (sometimes both are called Advanced Health Care Directives) allow you to legally appoint the person you most trust to make medical decisions on your behalf, and to terminate life support according to your wishes. Should you become incapacitated without these documents in place, a court will determine which of your family members can make these decisions on your behalf and it’s possible that the court will appoint someone you would not want in control of your medical care.

It’s also critically important that you have a HIPAA (Health Insurance Portability and Accountability Act) Release form. By completing it, you give your health care providers permission to talk with your family. Without it, the details of your medical condition remain “private” and those providers cannot share any information about it with anyone.

3. Purchase a Pre-Paid Funeral Plan

I know, this sounds morbid, but dying overseas will create extremely complex and expensive problems for your loved ones. They include following the specific rules of the airline that will fly your remains back home, obtaining a foreign death certificate and sometimes a statement from a physician that the death was not caused by a communicable disease. Your local funeral director can help you purchase insurance that will make the process easier for them. Also, the Neptune Society, a paid cremation service provider, will cremate your body anywhere in the world and return the ashes to your family.

4. Draft an Itinerary

Give your family peace of mind when you are traveling by providing them with a written itinerary for your trip. The itinerary should list the name, address and phone numbers of the hotels where you’ll be staying so that it will be easier for them to locate you if you’re out of cell phone range or if your phone gets lost or stolen. Include your airline and flight numbers too so they can track your travels. You can share your itinerary with everyone who might need to find you, in case of a terrorist attack or should there be an emergency back home that you need to know about.

5. Prepare a List of Your Important Financial Information

More than likely, you (and your spouse) are the only ones who know where you bank, who your financial adviser is and what your usernames and passwords are. Creating a way for a trusted friend or family member to access this critical information may mean the difference in someone being able or not able to pay your bills and other expenses if you can’t. Be sure to share the location of this information with the people designated to act for you in your Medical and Financial Powers of Attorney. Refrain, of course, from sharing it casually with a less-than-trustworthy person.

6. Have an Emergency Call List

Most of us don’t live next door to our extended family members. Therefore, having a list of who should be notified if worse-comes-to-worst, will make it much easier to contact everyone who needs to help handle your affairs because you are involved in a serious accident or even die while you are traveling. At a minimum, you should include on this list the members of your family, your significant friends, your doctor, lawyer and financial adviser together with their phone numbers, mailing and email addresses. Entrust this to at least two people who are not going on the trip with you.

7. Consider Buying Travel Life Insurance

This kind of insurance is very inexpensive because it only covers you for a limited time. Even so, research your options before you purchase a policy so you know what is covered and what is excluded.

8. Purchase an Overseas Emergency Evacuation Plan

Several companies sell plans that will cover you as well as any family members who are traveling with you if the need arises for more than basic health care while you are abroad. Some of these companies, like AirMed will fly you back to the U.S. if you are seriously hurt or become very ill while on your trip. Buying such a plan could be a wise investment.

9. Consider Buying Supplemental Health Insurance

Health insurance in the U.S. rarely covers illnesses and injuries incurred outside of the country. Even Medicare generally only pays claims incurred in the U.S. Health insurance is available for foreign travel and it is typically low cost due to the short duration of most vacations. Medicare recipients may be able to purchase a MediGap policy that would provide at least basic coverage while they are out of the country

10. Have Fun, But Be Smart

Traveling outside of the U.S. can be lots of fun, but you want to be smart about it and remember the Boy Scout motto: Be Prepared. Being ready for any sort of emergency will allow you to embark on your travels with greater peace of mind, which means of course that your vacation can be all the more enjoyable and care-free.

Thursday, July 28, 2016

Is it Time to Move Your Accounting Software to the Cloud?

Up until a few years ago, most business owners were not all that impressed with QuickBooks Online (QBO) and, frankly, neither was our accounting firm.  18 months ago, we only had 1 client using QBO. Today, we support many more clients on QBO and the number grows weekly.

Intuit has invested millions of dollars in the QBO product, and the investment is paying off.  Any limitations on functionality are more than offset by the following benefits:

* QBO gives you 24/7 access to real-time financial information from anywhere and any device with an internet connection.

* You can sleep better at night knowing your sensitive financial data is always secure and backed-up automatically.

* No system downtime because all software upgrades are automatically installed.  This worry-free maintenance saves you time and hassle.

* It reduces your accounting fees because it makes it easier for your accountant to organize year-end accounts, and

* You can provide your accountant with access to your data 24/7.  For our accounting firm, this access and insight allows us to partner with our business clients to help them run and grow their business in real time, rather than just adding up the numbers after the fact.

We have helped dozens of clients move from the desktop version of QuickBooks to QBO.  We can provide full setup, data migration, feeds to your bank and credit card accounts and integration with third-party applications such as inventory, POS and payroll.

If you are ready to stop dreaming of clouds, and start moving to the Cloud, QuickBooks is ready for you.

Wednesday, July 27, 2016

How to Vet a Financial Advisor

You’ll make a handful of major decisions in life. One of those is selecting the professional who will manage your savings and handle your investments. This choice will impact everything in your life, including sending your child to college, buying a house and living comfortably in retirement. Here are seven criteria for vetting a financial or investment professional:

Type of Professional

Determine what you need. Generally, a planner handles your overall financial picture, including estate planning, tax planning, investment planning and retirement. A certified financial planner is licensed and regulated, and required to pass a test on personal finance by the Certified Financial Planner Board of Standards. A financial adviser (or full-service broker) typically focuses on investment decisions. Ask an adviser what licenses and additional designations or education trainings he or she has obtained or undergone. Money managers generally hold the Chartered Financial Analyst designation and focus on managing investment portfolios on behalf of their clients according to an agreed-upon strategy.


Ask upfront if any conflicts of interest exist. An investment adviser should be objective while providing solutions for your financial planning needs, says Rashida Lilani, a CFP and principal of Lilani Wealth Management in Roseville: “Will that professional be working for you, or for someone else?”


Ensure the professional is completely transparent. For instance, ask the adviser to disclose the manner in which she is compensated — is there an hourly charge or fee for services? “If an adviser cannot clearly and articulately explain their background, educational credentials, experience, compensation and why they’re making recommendations — those are absolutely red flags,” says Jason Bell, a CFA for Wells Fargo Private Bank in Roseville.


Use BrokerCheck on the Financial Industry Regulatory Authority’s website ( to check whether your adviser has any disciplinary actions in her professional background.


Expect your adviser to be accessible and responsive, says Lilani: “Whether it’s email, phone call or in-person meetings, you should be able to communicate with her in an ongoing manner, usually every three to six months, depending on the depth of services you need.” A client should feel empowered to ask tough questions. “What would be their recommendation — their plan to get you from point A to point B?” Bell says. “They should be able to articulate that and lay that plan out.”

Objective review

Request periodic reviews. As life changes, so do our objectives. “A diligent adviser will make sure that your investments and financial plan reflect your current goals and risk tolerance,” Lilani says. Clients should be able to answer one question: What do I want this person to do for me? “You should be able to articulate what you want out of the relationship,” Bell says.

Gut Check

Ask yourself if you feel comfortable with this person. “These are typically long-term relationships where you build trust with someone over time, and you want to know they are making decisions in your best interest,” Bell says. Trust your instincts.

Monday, July 25, 2016

When does it make sense to add a trust to your estate plan?

When thinking of the hierarchy of estate planning documents, the two that are likely to be on top are wills and trusts. A will is a more basic document that outlines who will receive your assets when you die and may name guardians if you have young children.
Trusts are more sophisticated legal documents that hold assets on behalf of a beneficiary or beneficiaries. How do you know when it makes sense to add a trust to your estate plan? The following four considerations will help you determine whether one is advantageous for you.
If you only have a will, a portion of your estate is likely to go through probate. Probate is the process of distributing your assets after you pass, and it can be both expensive and time-consuming. Additionally, probate is a public process, meaning that anyone can go to the courthouse and look at the assets that you had.
If you have a lot of assets that would be subject to probate (assets with payable on death/transfer on death designations, jointly owned assets and assets with beneficiary designations are usually exempt from probate), putting them inside of a trust can preserve your privacy.
Owning Property in Multiple States
Let's say you own a home in Minnesota, have a cabin in Wisconsin and own hunting land in South Dakota. Situations like these can become complex when your estate is administered. Without a trust, you'll likely have to go through probate in each state where the real estate is held, which isn't ideal.
Greater Control
Implementing a trust can allow you to set rules regarding how and when your heirs receive their inheritance. These rules can take a couple of different forms. One option may be to designate specific purposes that trustees can use assets (e.g., for college or for a home). You can also make age-based rules (e.g., a trustee will receive 25 percent of their inheritance at age 30, 25 percent at age 40 and the remaining 50 percent at age 50). This helps you to better ensure that your legacy is utilized in a way that reflects your vision for it.
Philanthropic Wishes
Many people would like to leave a portion of their estate to a charity or charities. Trusts can help you give to charity in a more efficient manner. One option, the charitable remainder trust (CRT), is funded while you are still alive. During your lifetime, the CRT provides you or a specified beneficiary with an annual income stream. After a fixed amount of time or once you pass, the remainder of the trust goes to a charity of your choice. This allows you to get an immediate tax deduction today, receive a stream of income from the trust during your lifetime and ensure you'll leave behind a philanthropic legacy.
Trusts are more expensive than wills to set up, and they can be an administrative hassle. But if you found yourself desiring any of the four considerations we laid out, then you'll probably find those costs to be a small price to pay for the ultimate value the trust will provide you and your loved ones.

Sunday, July 24, 2016

New FAFSA Rules Give New Options

Let’s take a look at some recent changes to Federal Student Financial Aid and the Free Application for Federal Student Aid (FAFSA) for the upcoming academic year, and how those changes may impact our planning process.
First, the rates have changed. Federal Direct Student Loans (subsidized and unsubsidized) to undergraduates with a first disbursement date between July 1, 2016, and June 30, 2017, carry a 3.76 percent interest rate, down from 4.29 percent last year. Direct unsubsidized loans for graduate students issued during the same time frame are fixed at 5.31 percent, down from 5.84 percent; and interest rates on Direct PLUS loans for parents of undergraduate or graduate students, have also dropped, down to 6.31 percent.
Secondly, you can now file your FAFSA in October, prior to the next school year. The FAFSA collects information relative to a student’s assets and income and the student’s parents’ assets and income. A percentage of “countable” assets and income is used to calculate the student’s Expected Family Contribution (EFC) and to put it simply, a higher EFC usually means less financial aid. If your child will attend college starting in the fall of 2017, you can now file as early as October 1 of this year. Also, you will be required to use your 2015 income information. Going forward, students and parents, as appropriate, will be required to use the income information/tax return from the tax year two years prior to the first disbursement of financial aid. Anyone who filed for a child attending school this fall, knows that 2015 tax returns were used for this year as well, so the same information will be used again during this transition year to the new system.
Previously, families used to file the FAFSA on January 1, or close thereto, simply estimating their tax returns, and then would need to update it when they had their real numbers, after their tax returns were filed. The new system allows for faster and more accurate figures for families to plan accordingly.
You might think that your student won’t qualify for federal student aid, but it’s wise to file anyway, as this filing is often a requirement before a student can receive any aid from their chosen institution.
So, with this in mind, how do these changes affect strategies commonly used to reduce the financial stress of paying for college?
Well, one major consideration when planning for financial aid is the timing of income. Remember that a percentage of parental income is “counted” in determining that EFC. Since parents will now be using the tax returns from a year earlier, they need only wait to raise cash (if need be), whether it be by selling appreciated securities or taking a distribution from a tax-deferred retirement account, until the tax year that the student is starting his or her junior year. Previously, it was advised to wait until the tax year that the student was starting his or her senior year before doing anything that would result in increased taxable income. If parents wait until the tax year of the student’s start of their junior year, those earnings will not “hit” their parents’ tax returns until the student’s senior year and won’t be accounted for in any FAFSA filing.
When FAFSA is calculated, the parents’ assets are given much less weight, just 5.64 percent, compared to any assets belonging to the student, 20 percent of which are considered in the calculation of the EFC. This comes into play with 529 plans, since plans belonging to the student or the parent are calculated using the parent’s weight of 5.64 percent. On the other hand, if a 529 plan is owned by a grandparent, it is not a “countable” asset. However, it is important to know that if that 529 plan is owned by a grandparent, any distributions from the plan to the student can be included in the student’s income, which can be counted up to 50 percent. Knowing that there is a two-year delay in countable income for purposes of FAFSA, it can be better to use 529 distributions from parents or student-owned accounts in the first two years, and distributions from 529 plans owned by grandparents in the junior and senior years, to keep the “student” income as low as possible until it is no longer used in the calculation of the EFC.
One last thing to consider is using gift opportunities in a way that won’t factor into the FAFSA equation. As discussed above, grandparents have some options in the last two years of the student’s schooling (again, in the years that income won’t be counted on the FAFSA). Additionally, federal tax law allows unlimited gifts to pay for tuition (even if the gift exceeds the annual gift tax exclusion) if the money is paid directly to the college (other education-related expenses do not qualify for this treatment). However, such a gift may affect a financial aid package offered by the school, so it is important to check on any potential impact before making a gift directly to the school. This strategy can help a student without affecting the EFC calculation and can also be an effective way to transfer wealth by reducing the overall taxable estate without triggering a gift tax.
Another way that grandparents can help, more often with graduate students than undergraduate students, is to gift an appreciated asset, rather than proceeds from the sale of an appreciated asset, to a student who is 24 years old or older. If that student is in a low enough tax bracket (which we expect from students), he or she will not need to pay capital gains taxes on any gains recognized by the sale of such assets. By gifting the appreciated asset, rather than cash, more funds will be available to help the student than if the grandparent sold the asset and had to pay capital gains tax on the proceeds. If the student is under 24, however, the “kiddie tax” will cause those assets to be taxed, based on his or her parents’ tax rates.
Look, college is expensive, and it’s not getting any cheaper, but having a financial plan that incorporates college funding can help minimize the impact of that expense on your future and your kids’ futures. Make sure that your money is working smarter, not harder.

Saturday, July 23, 2016

Midyear Tax Planning: Miscellaneous

School vacations are tough on working parents. Especially finding affordable alternative childcare. The Child and Dependent Care Credit is available for expenses incurred during these lazy days of summer as well as throughout the rest of the year.

The cost of day camp can count as an expense towards the child and dependent care credit
A sitter in your home qualifies
Expenses for overnight camps do not qualify
Summer school tutoring does not qualify

Medical Deductions

To qualify for a medical deduction this year your unreimbursed medical expenses must exceed 10% of your adjusted gross income. For taxpayers 65 and older, the threshold will at remain at 7.5% through 2016. This deduction can only be used for expenses that exceed those thresholds.

If you are a senior, in addition to items such as hearing aids and eyeglasses, you can deduct a portion of premiums for long-term-care insurance. Make sure you keep track of all qualifying expenses in your tax file. And don’t forget to keep track of the mileage and travel costs for medical services.

Check Your Withholding

High earning taxpayers will owe an additional 0.9% Medicare tax on earned income of more than $200,000 for single filers or $250,000 for married couples who file jointly.

For example, if you’re single and earn $230,000 this year, your employer will be required to withhold 1.45% on the first $200,000 and 2.35% on the next $30,000. A total of $3,605 in Medicare taxes.

These income limits will not be adjusted for inflation so they will include more taxpayers every year.

Tax Brackets

The highest tax bracket for individuals is 39.6%. It will affect single taxpayers with a taxable income over $415,051 and taxpayers filing jointly with taxable income over $466,951.

Taxpayers in this bracket are also hit with a higher tax rate of 20% on dividends and long-term capital gains.

Adoption Credit

For this year, the maximum adoption credit is $13,460. The credit will begin to phase out for families with modified adjusted gross incomes above $201,920, and the credit will go away completely for those with incomes above $241,920.

If you adopt a child with special needs, you are entitled to claim the full amount of the adoption credit, even if your out-of-pocket expenses are less than the tax credit amount. For example, you incur no expenses to adopt a special needs child, you are still entitled to the full credit.

Friday, July 22, 2016

Immediate and Long-Term Tax Strategies for Windfalls


Individuals may have financial windfalls because of a variety of occurrences. Some windfalls result from good fortune, such as winning the lottery or selling a business, while others result from bad fortune, such as medical malpractice or an inheritance. Either way, there are tax consequences to consider. Some consequences are immediate, while others have a long-term impact.

Immediate Tax Consequences

The receipt of a windfall may be taxable or tax-free. The general rule is that income from whatever source derived is includible in gross income (Code Sec. 61). However, there are various exclusions that transform some recoveries into tax-free income.
Damages. Damages from lawsuits, settlements, and awards are taxable unless they are payable for a personal physical injury or sickness (Code Sec. 104(a)(2)). Thus, damages received for a non-physical personal injury, such as defamation or discrimination, are taxable. So too are punitive damages and damages for back pay and other taxable compensation. Interest paid on a judgment usually is taxable.
When an attorney agrees to represent an individual on a contingency basis and there is a recovery, the individual is taxed on the entire award (Banks II, S.Ct., 543 U.S. 426 (2005)). This is so even though the individual does not actually receive the entire award because one-third (or whatever portion was agreed upon) is disbursed directly to the attorney.
Damages for a wrongful death claim typically are comprised of compensatory damages for physical and mental injury as well as punitive damages for reckless, malicious, or reprehensible conduct by the wrongdoer. The portion for compensatory damages is tax-free while the portion for punitive damages is taxable. However, if a wrongful death claim is made under a state statute that treats all of the recovery as punitive damages (i.e., precludes compensatory damages), the recovery is fully excludable for federal income tax purposes (Code Sec. 104(c)).
Damages for emotional distress resulting from a nonphysical personal injury, such as job discrimination, are excludible only to the extent used for medical costs. “Soft injuries,” such as headaches, insomnia, and weight loss, usually are treated as emotional distress, and allocable damages are not tax-free. For example, in one recent case a postal worker could not exclude damages for these soft injuries arising from her discrimination action; the discrimination did not cause any physical injuries (Barbato, TC Memo 2016-23).
Damages received to compensate for property losses may be tax-free if the recovery does not exceed the individual’s basis in the property. The recovery is treated as a tax-free return of capital (Code Sec. 1001).
As a general rule, legal fees to recover tax-free damages are not deductible while legal fees to recover taxable damages are deductible. Deductible legal fees related to personal injury usually are treated as miscellaneous itemized deductions, which can be written off only to the extent total miscellaneous itemized deductions exceed two percent of adjusted gross income (Code Sec. 67(a)). Miscellaneous itemized deductions are not deductible for purposes of the alternative minimum tax (Code Sec. 56(b)(1)(A)(i)). However, legal fees for certain discrimination actions can be deducted as an adjustment to gross income (Code Sec. 62(a)(20)).
Gifts and Inheritances. The receipt of gifts and inheritances are tax-free, regardless of amount (Code Sec. 102). However, recipients of income in respect of a decedent must include it in their gross income when received (Code Sec. 691(a)). Thus, a person who inherits a $1 million IRA is not taxed on the inheritance of the IRA. However, when distributions are taken from the IRA, they are taxed to this beneficiary.
A person reporting income in respect of a decedent can take a deduction for federal estate tax allocable to income when the income is includible (Code Sec. 691(c)).
Lotteries, Gambling, and Prizes. Good luck can translate into millions of dollars. In January 2016, three winners split a Powerball jackpot of $1.6 billion, and in May 2016, one lucky winner hit the $429.6 million Powerball jackpot. These measures of good luck are fully taxable. In the case of lottery winnings, the only question is when the winnings are taken into income.
If a lottery winner opts for the lump sum, it is fully taxable in the year of the drawing (Code Sec. 451(a)). If the winner opts for the payment in installments, the winner is taxed only when installments are received (Code Sec. 451(h)).
Business IPO and Buyouts. Entrepreneurs may make it very big, taking their companies public or selling to new owners. While not necessarily thought of as a windfall because it may be years in the making, the resulting money from the deal presents similar challenges to these individuals.
Going public does not result in any immediate tax consequences for the owner. His or her holdings merely become more valuable. The sale of a business usually results in capital gains for the owner. However, asset sales (as opposed to stock sales) may trigger some ordinary income; ordinary income results from the sale of ordinary income property (e.g., inventory).
Whistleblower Awards. The government pays for information that leads to recoveries for fraud in Medicaid, government contracting, banking, taxes, public securities, and more. For example, there are two types of whistleblower awards from the IRS (Some of these are whistleblower awards where the government pursues information provided by individuals and then shares the recovery. Others are qui tam awards for private persons who bring an action on behalf of the government.
These awards can be in the millions of dollars. For example, an SEC award to an individual in June 2016 was more than $17 million ( Individuals receiving these awards have argued that they are capital gains, but the courts have routinely treated them as ordinary income (see, e.g.,Patrick, 142 TC 142 (2014), aff’d 2015-2 USTC ¶50,454 (7th Cir.)), where the courts rejected the taxpayer’s argument that he sold information and that his recovery was a capital gain).
Attorney fees relating to whistleblower awards are deductible from gross income (Code Sec. 62(a)(21)).

Offsetting Windfall Income

If a windfall is taxable, there are steps that can be taken to minimize taxes.
Income-Splitting. Income-splitting is a strategy in which income is shared so that it is taxed among several people. For example, if there is a winning lottery ticket, reporting multiple owners of the ticket spreads the resulting income accordingly. However, when trying to spread income in the family, the person holding the winning ticket must be able to show there was an agreement or arrangement in place to share the prize before the winning number was picked; otherwise, it is only an attempt by the winner to shift some of the tax burden to others.
In the spirit of shifting income, an individual may give cash or property to a family member so that resulting income is taxed to the recipient. For example, an individual who is providing support to a parent may give dividend-paying stock to the parent so the parent collects the dividends and then uses them for his/her support. There are two considerations here: (1) federal gift tax rules that may influence the size of the gift and (2) the tax situation of the recipient. Income-shifting, for example, will not work well for a child who is subject to the kiddie tax because such income is effectively taxed to the child at the parent’s marginal rate (i.e., no tax savings for the family).
Charitable Contributions. Someone receiving a windfall is in a position to give generously and take a charitable contribution deduction (Code Sec. 170). With large windfalls, setting up a charitable foundation may make sense to enable the person to obtain sizable tax deductions up front and oversee the disbursement of the funds for favored charitable purposes.
Withholding and Estimated Taxes. Some windfalls (e.g., gambling winnings, lotteries) are subject to automatic withholding. Most others are not. It is up to the individual to ensure that sufficient estimated taxes are paid on a taxable windfall to avoid estimated tax penalties.

Long-Term Impact

When an individual receives a windfall, likely there is a need for comprehensive financial and estate planning. Here are some tax-wise considerations:
• What investments should be made with the windfall? Some windfalls may need to be invested safely in liquid assets (e.g., a windfall needed for future medical costs). In other cases, an individual may want to invest for growth or tax-free income. For example, municipal bond holdings may be more attractive than taxable investments because the windfall recipient has been pushed into a higher tax bracket.
• Is there a concern about death taxes? For example a windfall can mean that the person’s gross estate will be larger than the federal exemption amount ($5.45 million in 2016) and subject to estate tax; the tax can be minimized or avoided with estate tax planning. State death tax exemptions must also be factored into estate planning.


Practitioners who have clients that receive windfalls can provide valued advice on handling the new-found wealth. Consider not only federal income tax implications, but also state and local taxes.

Thursday, July 21, 2016

Investors, start planning now for the NIIT - Net Investment Income Tax

Year’s end may seem a long way off. But if you’re an investor, you’d be smart to start projecting your income for the rest of the year right now. Why? In a word, taxes — namely, the net investment income tax (NIIT).
The Affordable Care Act of 2010 created two additional taxes under Medicare to help offset the act’s costs. One was an additional 0.9 percent tax on wages and self-employment income that exceed specified thresholds. For the purposes of this article, let’s focus on the other: the NIIT, a 3.8 percent tax on net investment income to the extent a taxpayer’s modified adjusted gross income (MAGI) exceeds certain thresholds.
Those thresholds are $200,000 for single filers and taxpayers filing as heads of household, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately. For most people, MAGI is equal to AGI. One notable exception, though, is for certain U.S. citizens or residents who live abroad and have foreign earned income. Note that these thresholds may, in effect, impose a “marriage penalty” on certain couples by imposing the NIIT where it wouldn’t apply if they were unmarried individuals.
“Investment income” can mean a variety of things. It includes, in general, gross income from interest, dividends, annuities, rents and royalties. The term can also apply to net capital gains. Also qualifying is trade or business income that is derived from either a “passive activity” under IRS rules or trading in financial instruments or commodities.
Investment income doesn’t include distributions from IRAs, pensions, 401(k) plans or other qualified retirement plans — but distributions from these plans can trigger additional Medicare taxes on net investment income by increasing your MAGI.
Once your total investment income is determined, deductible investment expenses are subtracted to arrive at net investment income. There are, however, several potential strategies you can implement to reduce or eliminate the 3.8 percent tax on net investment income.
First, you might execute a Roth conversion. If you have substantial balances in a traditional IRA, 401(k) or other qualified retirement plan and you’re considering a Roth conversion, now may be the time to do it. While doing a conversion and increasing your 2016 income may mean that you’re subject to the NIIT this year, future distributions from the Roth IRA are excluded from MAGI, reducing your exposure to the 3.8 percent tax in those years.
Remember, too, that the conversion amount will be included in your gross income this year and subject to tax, but not the 10 percent early withdrawal penalty. Also keep in mind that you’ll have to wait the requisite five years after the conversion to distribute the converted funds or you’ll face a 10 percent penalty.
If you have highly appreciated securities that you’d like to divest, consider the NIIT implications. Perhaps selling all at once this year is advisable because, even with the sale, you won’t be subject to the NIIT. Then again, waiting until next year, or selling some this year and some next year, may better reduce or avoid the NIIT. Whatever you decide, be mindful of the investment risk associated with holding an asset.
Installment sales can also help mitigate the NIIT’s impact. For sales of appreciated assets, consider using the installment method to spread the gain over several years. Depending on your situation, this may allow you to keep your MAGI below the threshold and avoid the 3.8 percent tax or at least minimize your exposure.
Also look into harvesting losses. In years in which you recognize large capital gains, you might want to sell assets in which you have losses. You can use the losses to offset the gains, reducing your investment income and your MAGI.
The good news is that because the threshold for the NIIT is based on MAGI, strategies that reduce your MAGI could also help you avoid or reduce NIIT liability. Making retirement plan contributions is one example.
This has been a general discussion and is not intended as advice. Tax matters can be complex so seek the advice of a qualified professional before making decisions.

Wednesday, July 20, 2016

How Much is the Child Tax Credit?

The child tax credit is worth up to $1,000 per child that is under 17. To be eligible to claim this credit your child or dependent must first pass all of the following tests:

Must be 16 or younger on the last day of the year
Must be a US citizen, US national, or a resident alien
Must be claimed by you as a dependent
Must be related to you by blood, or step relationship, or legally adopted child/foster child
Must have resided with you for more than half of the year (special rules apply for special circumstances such as divorce)
You must have provided them with more than half of their support
Child tax credit What is the Child Tax Credit Maximum?

The credit is worth a maximum of $1,000 per child
Until 2017, the Child Tax Credit is partially refundable if your earned income was more than $3,000.
The Child Tax Credit decreases if you have an AGI of $75,000 ($110,000 for married filers and $55,000 for separate filers).
You must include foreign income exclusions when calculating your income for this specific credit.

The Additional Child Tax Credit

The Additional Child Tax Credit (ACTC) is a refundable credit that taxpayers who receive a larger child tax credit than their income owned receive if their earned income is greater than $3,000.

Form 1040 (Schedule 8812) helps determine if you qualify and the amount of the credit that you will receive. If you e-file your return the software will do all of the math for you.

Dependents on Multiple Returns

Only one taxpayer or couple can claim the child for the Child Tax Credit and ACTC. If more than one person tries to claim the child, the IRS will determine who gets to claim the child using the tiebreaker rules.

Child Related Tax SavingsOther Child Related Tax Savings

Exemptions – Receive the standard exemption for each child that qualifies.
Child and Dependent Care Credit – You could deduct up to $3,000 for one dependent, or up to $6,000 for more than one with this credit.
Adoption Tax Credit – If you have already adopted or are in the process, you may qualify for this credit.
Filing Status – If you are unwed and your child resided with you for more than half of the year, you could qualify for a higher standard deduction and lower tax rates with the Head of Household filing status.

Claiming the Child Tax Credit

When you eFile with a service such as Turbo Tax, you automatically are asked the right questions to determine if you qualify for the Child Tax Credit.

Tuesday, July 19, 2016

4 Questions to Ask Before Passing Down the Vacation Home to Your Kids


First step: Make sure your heirs actually want it.

As you’re basking on the deck at your lake house this summer, or tossing a Frisbee in front of your beach condo with your grandkids, you may start to consider: Will my family continue to enjoy this getaway after I’m gone?

If you want to keep your vacation house in the family for future generations to use, it’s time to start planning. Failing to take the right steps to ensure a home’s future ownership — ideally as part of an overall estate plan — can lead to painful family disagreements.

Ask yourself the following questions to ensure you’re making the best decision for your family.

Who Actually Wants It?

A long-held second home can hold strong sentimental value; many couples want to leave vacation homes to their children (or other family members) as a way to preserve the associated memories. Perhaps that’s why many overlook one critical step: finding out whether family members actually want to own it.

For heirs, practical issues could include how far they’ll have to travel to visit the home and whether their income can support upkeep, taxes, and other costs. Then there’s another factor: If that ski condo would make up the bulk of their inheritance, some of your kids might actually prefer, or require, a more liquid asset.

What’s the Best Form of Ownership?

There are different ways to leave a vacation home to your children or family members. One of the simplest methods is to leave the vacation home outright in your will to the particular children or family members you wish to inherit it. Your estate would transfer the deed to your children, and each of the people you cite will own an equal portion.

But what’s simple for you may bring added complexities for your heirs — and, in some cases, cause disagreements and resentment. Equal ownership means all owners would have a say in all decisions concerning the home — when each can use it, whether to rent it out, whether to sell it and for what price, and what projects to invest in to fix it up, for instance. And each owner would bear an equal responsibility to pay for all associated costs.

Another option is to pass down your vacation home through a trust, which can help alleviate some of the tension caused by outright ownership. You’d select a trustee to be in charge of all decisions concerning the home, and your heirs would become the trust’s beneficiaries.

What that means, in practice: They’d have the right to receive rents (if the home were rented) and be able to use the home according to the terms you specify. But the trustee would make the ultimate decisions concerning the property, and be empowered to referee any disputes, helping bring them to a civil conclusion.

The cost of setting up such a trust can vary, but budget at least $2,000 to $3,000. The trustee may also be entitled to annual compensation once he or she takes over, although the amount can vary widely, based on experience and state law.

Who’ll Pay for Upkeep?

Vacation homes can be costly, and your children or other heirs might not be able — or willing to cover house expenses with their own money. So one key question to consider is whether to set aside additional money to cover the home’s ongoing costs. After all: If your kids will need to rent the house in order to afford it, they probably won’t be able to use it during prime vacation times.

That’s why many families who set up a trust leave extra money to cover operating costs. If you can manage that, add up how much it will cost to operate the vacation home for a year; include things like real estate taxes, insurance, and utility bills. Multiply that by the number of years you would like the trust to be able to support the home. Most people pay for at least five years’ worth of expenses — enough to pay for the home in the short term, during which time the children can determine if they actually want to keep it, and which really want it.

What’s the End Game?

Even if you’d like the vacation home to stay in your family for years, it may not be possible. As time passes, your heirs’ families may grow, leaving more people to share the home — many of will be related to each other only distantly — and less time per descendant.

If this seems like a problem your family might face, you can draft your trust so that a sale of the house can be “forced” upon the occurrence of a certain event. For example, let’s say a majority of the trust beneficiaries want the vacation home to be sold. In that case, the trust could give each beneficiary the right of first refusal to purchase the house for its appraised fair market value. And if no child wishes to purchase the home, the trust can require that the home must be sold to a third party, and the net proceeds divided among your descendants as you wish.

Owning a family vacation home is a great privilege, and planning to pass it on to your family is a great way to ensure that generations to come have the opportunity to enjoy it. However, before you do so, it’s important to take steps to assess whether it is in fact the right thing for your family to inherit, and how it would be cared for over the years.

Monday, July 18, 2016

Financial midyear planning tips for small businesses

Even with half of the year in the books, many small business owners wait until the end of the year to assess their business and identify ways to improve on their financial performance. Yet making time for a mid-year check-in — when you have a good idea of your business’s needs — may be one of the best times to help your business save time and money and operate more efficiently in the long run. From preparing for quarterly taxes, to managing cash flow and revising business plans, every business owner can benefit from a financial refresh. The following are three financial tips to help you stay on track the rest of the year.
Every small business should have a formal written business plan to help with business decisions and strategic planning. If you don’t have one, or if your plan hasn’t been updated in a long time, now is a great time to consider writing or updating your business plan. The process of putting your goals in writing help you focus on long-term business objectives and the steps needed to achieve them. Business planning also can help identify current or future obstacles so you can better anticipate and avoid potential risks. In addition, a business plan may be helpful for obtaining business financing. For example, for an SBA loan and some larger business loans and lines of credit, lenders may require a formal business plan before extending credit. 
Estimate Taxes
As a small business owner, you’re responsible for filing your business taxes on a quarterly basis. If you don’t already, establish a separate bank account and use it to set aside a monthly amount toward estimated taxes. Also, keeping business checking and credit accounts separate from personal accounts can help you maintain accurate and complete records of all business-related income and expenses, and can help you plan accordingly for when tax payments are due. If you’re unsure about your estimated tax obligations, it’s wise to consult a tax specialist. They can also help you to properly track and record your earnings and deductions.
Recharge your Cash Flow
Business owners know there are two essentials to keep a business running: profits and available cash. One best practice is to check your business cash flow every week. Focus on the timing of income and expenses to identify potential gaps and plan ahead to determine how much cash you’ll need to cover potential challenges. Nearly every small business faces a time when it needs more cash than it has on hand. You may want to consider a business line of credit to help bridge any gaps your business encounters in cash flow. For instance, when taxes are due, you may want to use a line of credit to help keep your cash flow constant and cover ongoing expenses, while paying down your tax debts. Consider making time to meet with your banker for a financial review that includes an assessment of your credit needs. A banker can walk you through the available options, and help you choose the right business financing options that make sense. Remember: the more you talk about your business, your needs, and your goals, the better guidance you’ll receive.
Whether summer is your busiest time of year or your slow season, it’s a good idea to conduct a mid-year financial review. Taking time now can help you stay ahead of the curve and make the most of the remainder of the year.

Saturday, July 9, 2016

Midyear Strategies to Cut Your 2016 Tax Bill


Okay, the pain of tax-return time should be subsiding. And it’s months before you need to start thinking about year-end maneuvering to give yourself the upper hand over Uncle Sam next spring. But rather than dream of a lazy summertime snooze in a hammock, get revved up about the financial rewards you can reap with some down-and-dirty tax planning.

Close the books on 2015. First things first: If you filed for an extension to complete your 2015 tax return, shake off the notion that you’ll wait until mid-October to finish the job. The extended deadline this year is October 17 because the 15th falls on a Saturday, but that’s no reason to procrastinate. By now, you should have received late K-1s showing partnership income as well as any corrected 1099s. No more excuses.

The IRS’s free-file program, which gives taxpayers free access to commercial return-preparation software, is still available for 2015 returns. If your adjusted gross income is $62,000 or less, check it out at

If you have a refund coming, the sooner you file, the quicker you’ll get your money. If you owe more than you paid with your extension request, settling the debt now will limit the interest and penalties demanded by the IRS.

Before you pay any failure to file or failure to pay penalty, check to see if you qualify for “first-time abatement” relief. The IRS can waive the penalties if you filed and paid on time for the previous three years and have paid, or arranged to pay, the taxes due for 2015.

Speaking of your 2015 return, consider whether the bottom line is sending an action memo to you. If you got a big refund, maybe you should adjust your withholding, if you’re still working, or your estimated tax payments for 2016 if you’re paying on investment and retirement income. The average refund so far this year is $2,732, just a bit above last year’s. That’s about $225 a month. If your financial situation is similar, you could be racking up a big refund for next spring.

Wouldn’t you rather have your money as you earn it? If so, file a new W-4 form with your employer to claim one or more extra allowances. That will cut withholding. Our easy-to-use tax withholding calculator can help you set the appropriate number. Conversely, if you owed a bundle when you filed your tax return, you may need to cut withholding or bump up the estimated payments figured on Form 1040-ES.

Boost retirement savings. The maximum contribution for 401(k) and 403(b) plans remains the same as last year: $24,000 for those age 50 and older at the end of the year and $18,000 for younger workers. If you’re not maxing out, consider whether you can afford to save more.

If you opt for a traditional, pretax account, boosting your contribution won’t put a dollar-for-dollar dent in your take-home pay. If you’re in the 28% bracket, for example, adding an extra $500 a month to your 401(k) will cut your take-home by just $360.

If your company offers the Roth option, contributing after-tax dollars would cost you the full $500 in this example . . . but the payoff would be tax-free withdrawals of both contributions and earnings in retirement (see: When It’s Time to Tap a Roth 401(k) for more).

If you’re at the limit for your company plan, don’t forget that you can contribute to an IRA as long as you’re still working. You can contribute $6,500 ($5,500 if you’re under 50) to either a traditional or Roth IRA, or a combination of the two. Contributions to traditional accounts are fully or partially deductible, unless you’re covered by a company plan and your adjusted gross income exceeds $71,000 on a single return or $118,000 on a joint return. Note, though, that deposits to traditional IRAs are not permitted beginning in the year you turn age 70 1/2.

There are no age restrictions for nondeductible contributions to Roth IRAs, but there are income limits. The right to contribute to a Roth is phased out as income rises between $117,000 and $132,000 on a single return and from $184,000 to $194,000 on a joint return.

Although you generally must have earned income to contribute to an IRA, if your spouse isn’t working, you can make a deposit to a spousal IRA for him or her, as long as you have enough income to cover the contribution.

Deal with RMDs. The first baby boomers reach age 70 this year, which means hundreds of thousands more IRA owners will need to take required minimum distributions for 2016. Regardless of whether it’s your first distribution or not, the RMD is based on the balance in your IRAs at the end of 2015. The total is divided by a factor provided by the IRS in Publication 590-B. (For most IRA owners, the divisor is 27.4 for someone who turns 70 this year, for example, and 18.7 for someone who turns 80.)

The later in the year you take your required payout, the longer your money gets to grow in the tax-sheltered environment. If 2016 will be your first RMD, you can postpone the withdrawal to as late as April 1 of next year; otherwise, December 31 is the deadline. If you can choose between this year and next, consider your expected tax brackets in each year and how adding the RMD to your taxable income might affect the taxation of your Social Security benefits and your Medicare premiums.

Two points about RMDs: First, you don’t have to spend the money; you can transfer it to a taxable account. Second, you can always take more than the RMD if you need to.

Or you can give it away. Congress has made permanent the provision that permits IRA owners age 70 and older to transfer up to $100,000 from their IRA directly to a charity. Such transfers count as your RMD, but the money does not show up in your taxable income. In the past, such gifts were usually made at year-end because Congress habitually let this break lapse and revived it at the end of the year. Now, you don’t have to wait. If such generosity is in your plans, contact the charity to arrange the gift.

Make the most of generosity. Giving away an RMD isn’t the only potentially savvy way to make a donation. If you are planning a significant gift to your church, synagogue, alma mater or other charity, don’t automatically reach for your checkbook. Turn to your portfolio instead.

The law has a special rule to encourage gifts of appreciated property, such as stocks, mutual fund shares or real estate. As long as you have owned the asset for more than a year, you can deduct its full market value rather than just what you paid for it. And neither you nor the charity have to pay tax on the appreciation while you owned it.

Because it can take a while to arrange for the transfer of ownership, now is a better time to plan such gifts than as part of a year-end tax-planning frenzy. (Never give away property that has declined in value. You’re better off selling, claiming the capital loss on your tax return and then donating the proceeds of the sale for your charitable write-off.)

Make gifts to the family. You can give up to $14,000 this year to any number of individuals without having to worry about the federal gift tax. If you and your spouse join in the gift, the limit rises to $28,000 per person . . . or $56,000 to a couple. If you are planning significant gifts to children or grandchildren, consider using appreciated assets rather than cash.

Let’s say you and your husband want to give your son and his wife $50,000 for the down payment on a house. Because that’s under $56,000, you wouldn’t even have to file a gift tax return. But instead of cash, let’s say you give the children $50,000 worth of stock that you paid just $30,000 for years ago. If you sold the stock, you’d owe capital-gains tax on $20,000.

But by giving the shares away, you also give away that tax bill. Your tax basis transfers to the children and, if they’re in a lower tax bracket when they sell the shares, the extended family saves some money on the $20,000 profit. If the children are in the 10% or 15% bracket, in fact, at least part of the gain would be taxed at 0%.

Beware, though, that the kiddie tax can put the kibosh on these savings if you’re making gifts to grandchildren. For children under age 19 (or under 24 if they are full-time students), investment income in excess of $2,100 this year will be taxed at their parents’ rate, not their own.

Move to a new state? If this summer brings a move to a new state, brace yourself for a slew of tax changes. Sure, Uncle Sam’s rulebook stays the same, but state income, sales and property taxes vary widely. Differences can be particularly surprising when it comes to how states tax retirement income and special property tax breaks for retirees. Study the estate and inheritance tax landscape, too.

Friday, July 8, 2016

Anatomy of an IRS Phone Scam

Tax day has come and gone — a huge relief to millions across the country. But for an ever-expanding group of Americans, the reprieve may be short-lived. Most of us remain in the crosshairs of a highly charged campaign to collect back taxes. If your clients have not yet received one of the menacing telephone calls threatening heavy fines and jail time (or deportation), they are likely to get one soon. The problem is, it is not the federal government that has been or will be calling. It is a collection of criminals masquerading as IRS agents trying to dupe honest taxpayers into paying money they do not owe.
It is a scam the IRS has continually tried to shut down and warn against, to no avail. The calls keep coming. The fraudsters getting more bold and crafty. The register of victims growing longer and longer — the IRS estimates more than 5,000 since 2013 doling out roughly $30 million in bogus claims. Not to mention the legions of people savvy enough to sidestep the swindle but not before suffering through the threats and bullying so central to the scheme. 
According to IRS Commissioner John Koskinen in one of the many Consumer Alerts the agency has released on the subject, "these schemes touch people in every part of the country and in every walk of life. It’s a growing list of people who’ve encountered these. I’ve even gotten these calls myself." 
The calls are frightening to say the least, preying on the common fear that hell hath no fury like the mighty Taxman scorned. The fake IRS agents will say and threaten to do just about anything to accomplish their dastardly deed. NPR recently released the full audio from one of these calls as part of its own investigation to hunt down these indefatigable thugs. It suggests the typical scam has five distinct stages, if the victim allows it to proceed that far.
1.  IRS calling. First, the caller claims to be from an IRS call center, pronouncing that the victim owes the IRS a significant sum in back taxes. The amount allegedly owed is usually kept under $2,000, a threshold amount calculated to result in the strongest likelihood of payment without undue investigation. In the NPR call, the alleged debt is a very realistic $1,986.73 accompanied by a threat of five years in jail if the victim refuses to pay.
2.  Mum's the word. Second, the caller warns the victim to keep quiet about the alleged debt, exploiting the universal disquiet of being perceived as a tax cheat or deadbeat. It is a dread particularly acute these days with background checks and social media sweeps increasingly part of the job application process. 
3.  Checks not accepted. Third, the caller details how payment should be made. Apparently, they do not take checks or credit. Too easy to trace. Only prepaid debit cards or wire transfers will due. The fraudster recorded by NPR demanded money sent by Western Union or Moneygram, or from a Wal-Mart store.
4.  Making it personal. Fourth, perhaps emboldened they have made it this far into the scheme, the caller identifies a particular individual — not the federal government — as the recipient of the transferred funds. On the NPR call, it was a "Gabriel Porter" in Boston to whom the funds were to be sent. Presumably the name and location changes frequently to avoid detection. 
5.  By any means. Finally, the caller will employ whatever additional means are necessary to seal the deal and keep the victim from speaking out. It can get nasty. In the NPR call, for example, the victim's request for a receipt following payment was met with a verbal harangue of inappropriate suggestions about where she could find the sought-after receipt. 
This mix of bullying and cajoling is obviously calculated to intimidate victims into complying with the demands without asking too many questions. But they should also be a clear indication the call is a hoax. In warning against these scams, the IRS has underscored it will never: (i) call to demand immediate payment; (ii) call or email to verify personal or financial information; (iii) demand payment without an opportunity to question or appeal; (iv) require a specific payment method; (v) ask for credit or debit card numbers over the phone or e-mail; or (vi) threaten immediate arrest for not paying. According to the IRS, any one of these things "is a tell-tale sign of a scam."
The bottom line in all this. Don't let your clients be fooled. Unless they owe the IRS taxes or have reason to think they do, the IRS will not come calling (or emailing for that matter). As Commissioner Koskinen so succinctly puts it, "if you are surprised to be hearing from us, then you're not hearing from us." So the best advice is to just hang up the phone. It is as simple as that. 

Thursday, July 7, 2016

5 Simple Steps to Decrease Your Estate Costs


Like so many undertakings in life, leaving loose ends when it comes to your estate planning can lead to lost opportunities, stressful last-minute fixes or, ultimately, failure to achieve the desired end result—more money left to your family, friends or choice charities. It can cost your estate dearly, and sometimes no amount of time or money can rectify the problems left by half-hearted efforts.

Here are some steps you can take to minimize your future estate costs. And if your estate attorney never discussed these topics, it might be time for a legal checkup or a second opinion.

1. Update your beneficiaries.

At the time of your death, a lot of your estate may not pass by your will. With retirement plans, life insurance and transfer on death (TOD) accounts, you can name a beneficiary to receive these accounts once you pass away.

Remember that a will is only used when we cannot otherwise determine what should happen to an asset when you pass away. If you name your cousin as the TOD beneficiary of your bank account, all he needs to do is provide the bank with your death certificate, and the funds will be transferred to him—no probate needed. Same goes for you IRA or life insurance policy. Naming responsible people as account beneficiaries (meaning people with no debts or disabilities) is a great way to avoid probate and its associated court costs and attorney fees.

And you must be sure to keep your beneficiary forms up to date. Especially if you have been working at a job for more than a decade, you may forget to change your beneficiaries even after the named people pass away. If there is no proper beneficiary named to receive these accounts, your executor must now begin a probate that could have been avoided.

The issue is that many attorneys are not very good with filling in beneficiary designation forms. In addition, many estate planners charge a flat fee for their services, so they have no incentive to go the extra mile, and it is easier for them to draft your legal documents and then say, "My job is done; now you change your account beneficiaries on your own."

2. Cash in physical bonds and stock certificates.

Physical securities are yesterday's news, and tomorrow's problems. Government bonds can be easily lost and are often forgotten, left already mature and not paying out more income. Stock certificates can be even worse, since the stock may have split or paid dividends that were never collected properly. And for some Murphy's Law of estate planning, these assets usually appear after a probate has been settled. This means that an attorney may have to reopen your estate. Turn in those stock certificates to your brokerage account and keep them in electronic format. Find a bank that will accept those old EE or II bonds and deposit them; and if you are worried that realizing the taxes on these bonds will eat into your assets, believe me when I tell you the legal fees your estate shall eventually have to pay will make those tax dollars look like a light dessert after a voracious meal.

3. Check your deeds.

You have just paid thousands of dollars to have an attorney draft you a trust, but the deed to your real estate is not changed to be owned by that trust. In most states, this means the real estate does not pass through your trust, and instead passes through your will and probate when you die.

This outcome can be very costly: Whereas a trustee can list the house for sale within hours of your passing, an executor of your will must first collect documents and procure family signatures to begin the probate process, apply to the court and, in some states, even get court permission to sell the house. In the end, you'll have wasted thousands of dollars paying for real estate taxes, utilities and other carrying costs.

4. Consider consolidating your accounts.

Having too many accounts means more work and more legal fees. Having multiple beneficiaries means more work and more legal fees. Every account, whether it holds $1,000 or $1,000,000, requires a certain amount of work to collect it so consider keeping fewer, larger accounts. (Plus, smaller accounts are easier to miss during the initial collection period.) Leaving a distant nephew a $500 bequest in your will is going to cost you more than $500 to deliver it to him. Keep fewer, larger bequests in your will; better to use TOD accounts for smaller bequests.

5. Keep track of family.

Ask my mom, and she will tell you: I have lived in a lot of places during my life and have not always kept as close contact as she may have wanted at certain times. This can be a real problem if she dies and her retirement plan that named me as beneficiary still has the address where I lived in 2004.

People in small families should name all of their nearest relatives since most states require a listing of heirs under a will even if certain family members are receiving nothing. For example, I have one client whose parents, husband and seven siblings are deceased. She has no children, but has more than 20 nieces and nephews living throughout the country, who all have to be found if she leaves any property to be distributed under probate. The costs for finding these people would practically eat up all of her estate if she had not provided me with their information.

Keeping a secure catalogue of family members and accounts will allow your estate to avoid paying private investigators, genealogists, forensic accountants and attorneys