Tuesday, October 3, 2017

What’s better done in fall than spring? Often, the answer is taxes

Fall is upon us and it’s a good idea to start thinking about your 2017 tax return now.
While most people wait until March or April to file, there can be advantages to filing early. Some deductions may be lost if you don’t act by Dec. 31.
It’s wise to engage your CPA in these planning strategies now and early in 2018 when they typically have more time to assist.
Congress is currently considering tax legislation. Some parts of the bill could be “retroactive,” meaning they will go in effect for the 2017 tax year. We should monitor this situation and its potential effect on this year’s tax return.

Year-end tax considerations

It’s a good idea to estimate what your capital gains distributions will be for the year. Most mutual fund companies will tell shareholders ahead of time what they plan to distribute to shareholders and when.
It’s possible for an investor to avoid these gains in some circumstances. It’s also a good idea to determine if any capital gains losses are available and if so, if it would be wise to sell before the end of the year to “harvest” these losses and reduce capital gains taxes for 2017.
To lower taxable income, be sure to maximize contributions to 401K and other retirement accounts.
While 2017 IRA and Roth IRA contributions can be made until April of 2018, employer sponsored retirement plans typically have a contribution deadline of the end of the calendar year.
Determine if there is money left in your Flexible Spending Account.
Will it be lost at the end of the year? Deposits to Health Savings Accounts and 529 Savings Plans can be valuable ways to save for health care and education expenses while reducing current income, but their contribution deadlines are Dec. 31.
Be sure to make any charitable contributions by the end of the calendar year and don’t forget to save receipts for “non-cash” contributions to organization like the Goodwill and Salvation Army.

Estimate income for this year and next

Understand your probable income before the end of the year. Will your income be significantly higher or lower this year or next?
If your income is higher than normal this year, consider paying certain 2018 deductible expenses — like property taxes, business expenses, or mortgage payments — early so you can deduct them in 2017. But remember you won’t be able to take these deductions again in 2018.
It’s possible you may have less income this year than you would expect in 2018. If that’s the case, you can delay certain payments until January so they are deductible in 2018 when the benefit of the deduction is greater.
You may also consider selling investment positions now and generating capital gains in 2017 or converting a traditional IRA to a Roth IRA if you are in a lower tax bracket this year as opposed to next year.

Consider filing early

After you have a good tax planning strategy in place, get organized and file early in 2018. While many 1099s are not required to be sent to you until mid-February, you can gather receipts and other tax filing documents while you are waiting.
The Equifax data breach may have exposed your Social Security number to hackers who sell your information. Filing early is a good way to thwart thieves who file fake tax returns using your Social Security number.
Above all, be sure to file your tax return and pay your taxes. Because tax prison is still prison!

Sunday, October 1, 2017

Year-End Tax Planning Strategies


The fourth quarter of the year, when individuals are typically planning for the holidays, is also a great time for financial advisors to revisit the plans they’ve created for their clients. Year-end is a time when advisors must confirm if their clients satisfied their required minimum distributions and maxed out their retirement contributions, as well as rebalance portfolios and consider tax strategies. Below we look at the different tax strategies, investment vehicles and top managers that provide tax efficiencies.

One doesn’t have to search long for a reason why investors want to reduce their tax liabilities as much as possible, when you consider the tax ramifications of investing. Investment returns could be reduced by as much as 40 percent in any given year when factoring in federal income and capital gains, state and local taxes, and the alternative minimum tax. Helping reduce your clients’ tax liability is instrumental to growing their assets and helping them achieve their financial goals.

Tax Strategies to Consider

It’s important to understand what type of investment is most appropriate for each specific type of account. For example, due to their high taxable yields, high-yield bonds are more appropriate to be in tax-deferred or tax-exempt accounts versus taxable accounts. Conversely, equity securities that are intended to be held for a long time period are more suitable for taxable accounts, as their gains are taxed at long-term capital gains rates.

Tax-loss harvesting is a great strategy to help reduce your client’s taxable gains. Tax-loss harvesting allows your clients to offset their investment gains with their realized investment losses. We are currently in the midst of the second longest bull market in history, so it may be difficult to locate investment losses, but if your clients do have any, the timing might be right to sell them to offset the recent gains. An investor can use any remaining losses to offset up to $3,000 of ordinary income each year.


Rebalancing your client’s portfolio is vital to keeping the allocations in line with your client’s risk tolerance, however, rebalancing a portfolio can also cause taxable capital gains. There are different thoughts on how often one should rebalance a portfolio, typically, annual rebalancing provides greater potential long-term performance, less trading fees and more tax efficiencies.

Investment Vehicles to Consider

Mutual funds are required to distribute at least 90 percent of net investment income and 98 percent of net capital gains every year, which can be a tax liability for investors. Due to their low trading activity and minimal annual distributions, passive investments such as Index funds and ETFs have gained in popularity for the tax-conscious investor.

Separately managed accounts (SMA) should be considered by financial advisors when looking for a tax-efficient investment. One of the baked-in benefits of investing in an SMA is that the investor is the registered owner of the individual underlying securities, which provides additional flexibility for investors and their ability to participate in additional tax strategies. For example, harvesting losses can be easier when the investor holds the individual securities versus a pooled mutual fund.

Below are some of the top strategies listed in the PSN Global Manager Neighborhood database that might help financial advisors construct a tax-efficient portfolio for their clients.

When looking for tax-efficient investments, municipal bonds are first to come to mind. Municipal bonds typically provide income that is exempt from federal taxes; additionally, if your client holds municipals specific to their state of residence, these bonds provide state tax-exempt income. Municipals provide a lower yield compared to most taxable fixed income products, so it’s important to look at the taxable-equivalent yield when comparing yields. Below are some of the top municipal bond strategies found within the PSN Global Manager Neighborhood database.


A strategy’s turnover ratio is a good indicator if the strategy is tax efficient due to its reduced trading of the underlying securities, which reduces the potential for taxable distributions. Below are some of the strategies in the PSN Global Manager Neighborhood who stand out with low turnover.

Some managed products’ investment objectives are to be tax efficient, while being actively managed. These products are managed in ways to reduce their taxable distributions. Some of the strategies these managers employ include reducing turnover, investing in non-dividend paying stocks, and selling less attractive stocks at a loss. These strategies provide additional options for financial advisors when constructing a well-diversified, tax-efficient portfolio. Below are some tax-managed strategies listed in the PSN Global Manager Neighborhood database.

Selling an investment for tax considerations is important, but one must balance the tax benefits of selling to the market opportunity of potentially selling low. When implementing tax strategies to help reduce your client’s tax liabilities, it is important to keep your client’s investment objectives in mind, and prepare a plan that best fits the needs of your client.

Monday, February 27, 2017

5 Retirement Income Mistakes to Avoid

Congratulations! You feel you are in a position to retire. But then you feel a chill and the hair on the back of your neck rises up as the reality of producing a monthly "paycheck" from your various investment accounts starts to scare you. How in the world can you make this happen?
Most of us will retire with various accounts...retirement accounts like 401(k)s and IRAs, non-qualified accounts (which are accounts that are simply owned in your name or you and a partner). If retiring, your goal is, in its simplest form, to create a recurring deposit into your checking account from your pile of investments. This seems like a daunting task and in reality it is not easy. Which account do you tap first? Should you convert all of your investments into an income stream? What about tax considerations? All of these questions are important.
Allow me to share the five most common retirement income mistakes that I have seen.
1. Making things too complicated. If you are an engineer this one may hurt a little. Spreadsheets with multiple tabs, year by year analysis and projections, tax rate variables, expense variables, Presidential cycle assumptions, and more can be overkill. As a financial professional, we actually do an in depth analysis of our client's retirement period for many good reasons. However, setting up an income stream usually boils down to a very simple strategy. Noting that every situation is different, in many cases simply taking a proportionate amount of income from each type of account that you own is a good way to create income. For example, let's say that 60% of your wealth is in IRAs and 40% is in an individual/joint account. If you are old enough to not have to worry about premature distribution penalties, consider simply setting up a distribution that is about 60/40 that satisfies your monthly income need. Yes, it could be that simple.
2. Making things too simple. Many people have the urge to cash in all of their investments and convert the balance to a monthly income stream. You may also call this the "annuity" strategy. Once again, every situation is different, however, in most cases there are valid reasons to not follow this approach. I won't get into the reasons that I don't like this strategy today, just understand that this is most likely not the path that you need to take.
3. Create your income by tapping only your non-IRA assets (also called non-qualified). If you ask your CPA, they will most likely advise you to create all of your retirement income by taking money out of your non-qualified assets. Why? This will most likely produce the lowest tax bill thus allowing you to keep more of your assets intact. Sounds good, right? To start it will be. I have two issues with this strategy. First, it may put you in a position down the road, when you have reduced the balance of your non IRA assets, where are forced to turn to your IRA for any expense need that you may have. Once you use up all of your non-qualified assets you may limit your tax options by forcing all distributions to come out of the IRA. Second, it could set you up for a bad tax surprise at age 70 ½ (see mistake number 4).
4. Forget to plan for your Required Minimum Distributions. The IRS likes for you to pay taxes and in that light they have a rule that most call Required Minimum Distributions or RMD for short. In summary, when one turns 70 ½ the IRS will require you to pull out a set amount of money from your IRA each year. The amount is calculated using the account value, your age, assumed growth rate and your life expectancy. Basically, they want you to withdraw all of the money over your projected lifetime and of course pay the tax on those distributions. Let's say you follow your gut and spend years taking money out of your non IRA assets (like mistake number 3) while your IRA balance just keeps getting bigger and bigger. A larger IRA balance can mean a larger required distribution when you hit 70 ½. I once saw someone who did not plan for this that ended up having to withdraw about $600,000 per year when they only needed about $200,000 to live on. In my book they ended up having to pay income taxes on $400,000 of income that they did not need. Poor tax planning indeed.
5. Failing to think about your ultimate beneficiaries. I am talking about your kids or grandkids that will eventually get the remainder of your wealth. Most of you reading this will still have money at the end of your life. Where do you want this to go? Yes, your family. Why not think about which assets will pass with the least tax consequence to those deserving...or undeserving...kids? Some assets, like a Roth IRA, may be able to pass to your children or grandchildren with no tax consequence. In other words, they get 100% of the money. Other assets, like your IRA, most likely will be treated as taxable income when your family withdraws the money at whatever tax bracket they may be in at the time of withdrawal. They may not get all of the money that you so kindly gifted to them.
The bottom line is that income planning may actually be a little complicated but with careful planning and some thoughtful foresight about what may happen 15 to 20 years down the road, you can not only set up a good income stream for you but also think about those that you benefit from the legacy that you leave.

Friday, February 24, 2017

Business Tax Planning: 4 Moves For The Coming Year

Yeah, I know. You’re probably just trying to get through the current tax season.
However, one of the best things you can do for your business is to plan ahead for the new year. You should be engaged in tax planning year-round, not just at the beginning of the year as you frantically try to figure out what you can deduct.
Instead, you should be thinking ahead and making sure that you are
Business tax planning can help you save money in the long run. Here are four moves to consider for the coming year:

1. Buy Equipment

Have you been looking to buy equipment? If you need something, plan to buy it this coming year. You can claim a tax deduction when you purchase equipment specifically for use with your business.
If you have been making do with sub-par equipment, or if you’re trying to expand your business and you need more supplies, now might be the time.
It’s a simple thing, but my office chair has finally broken down. I’m ready for a new one, and part of my tax planning for this year is buying a new chair.
Whether it’s getting a new computer or whether you need to get new stations for your employees, buying new equipment can be a solid tax planning move. Just make sure you keep good records and save the receipts.

2. Donate to Charity

Are you in a position where you want to give back? Donating to charity can be a great way to do good for a cause you believe in and build your reputation in the community. Plus, you can also receive a tax break.
Make sure that the charity is a 501(3)(c) organization and tax-deductible. You can donate to other organizations, but you might not get the tax deduction. It can still be worth it to give to a cause that isn’t tax-deductible, but it won’t be part of your business tax planning.

3. Retirement

Don’t forget about retirement contributions. This is not just about good business tax planning now; it can also make a big difference in your long-term financial security. You don’t want to neglect your retirement. Make contributions, and you can get a tax deduction.
That also include when you set up a benefits program for your employees. Your company’s contributions come with a tax break. Talk with a professional who can help you figure out how to offer benefits to your employees for a tax break.
This is a great way to invest in your business because you are more likely to attract high-quality people when you offer benefits.

4. Grow Your Business

Finally, put some money into activities that will help grow your business. Put money into advertising and marketing. Consider outsourcing some of your mundane tasks.
Think about some of the things you do that could be done by someone else or that will ultimately help you get more eyeballs in front of your business.
When you spend money on business activities, you can take a tax deduction. Plus, your return on investment can be very high when you grow your business this way. You spend a little money to make a lot more later.
Look at different ways you can grow your business with a little infusion of cash. You’ll reap big rewards in the future and get a jump on your business tax planning now.

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Thursday, February 23, 2017

You or an accountant? Prepping for tax time

FROM http://www.nj.com

Q. How can I decide if I need someone else to do my tax returns?


A. As you start to gather all your documents to prepare your tax returns, this is the perfect time to ask.

It all has to do with your personal situation and how comfortable you are with the tax law, its quirks

If your tax returns are not too complex, then you may be able to do your tax returns on your own, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence.

"If you have a W-2 and not too many other sources of income or deductions, then it is possible," Daquila said. "However, there are many complexities in the income tax law may benefit you to have a tax professional prepare your returns."

Daquila said there are several factors that you should consider.

The first factor is your knowledge of the current tax law?

A tax professional such as a Certified Public Accountant (CPA) is licensed and certified by the state, Daquila said. CPAs must have a college degree and pass a national exam.

In addition, they need to complete continuing professional education (CPE) to keep their license active, she said. Specifically in New Jersey, a CPA has to complete 120 hours of CPE every three years to renew their license.

"A CPA who specializes in tax preparation is experienced and should know the current tax laws," she said. "A CPA can prepare your returns accurately and take advantage of deductions and credits of which you may not be aware."

The second factor is time.

Do you have the time to not only gather all of your tax information, but then assemble it, prepare your tax returns, and review them?

The third factor is technology. Are you knowledgeable about using a computer?

"There are many computer software programs that are on the market to aid in the preparation of your tax return," she said. "However, you would need to know how to install the program and input the information."

You would also need to review your tax returns after they are completed, Daquila said, noting that most tax professionals now electronically transmit their tax returns to the IRS, resulting in quicker refunds of overpayments.

The fourth factor is the cost. Do you have the money to pay a professional to prepare your tax return?

"The cost can vary based on the professional that you hire," she said. "It is always recommended to ask for an estimate before engaging a professional."

In the end, Daquila said, ask yourself this question: "If you had a pipe break in your home, would you fix the pipe yourself or would you hire a professional plumber?"

A tax professional is trained, experienced and licensed in the area of taxation, she said.

Wednesday, February 22, 2017

Preparing For Tax Time - 5 Frequently Asked Questions

Question: Should I use tax software or a CPA to prepare my income tax return?

Answer: Deciding on self-preparing or having a CPA prepare your income tax return can be critical.  Make an informed decision.   There are certain factors you should consider:

1.    Complexity of your tax return- You don't know what you don't know!  Tax professionals or CPA's can help you navigate through complex tax law and ensure you are claiming all the deductions you are eligible for.  Tax software interviews can sometimes be difficult to understand and may not have adequate guidance for complex situations.  Taxpayers often lack the expertise to interpret and answer the questions posed within the interview within the tax software.


2.    Cost- Preparing your taxes on your own may result in lower tax preparation costs in the short run.  But working with a trusted tax professional or CPA can help you get your entire refund.  According to everydollar.com, research shows that a tax professional gets you on average approximately $800 more in refund from the IRS.   The average refund for taxpayers who used tax software was $1,824.  While, the average refund for taxpayers who used a paid tax professional was $2,615.

3.    Time- Self-Preparing may result in many hours of preparation time, confusion, and stress depending upon your tax situation.  After preparation, you still may be uncertain if you have prepared the income tax return accurately.  Working with a reputable experienced tax professional or CPA can ease your anxiety with knowing your return has been properly prepared and can address all of your tax concerns and issues.  You will also spend a fraction of the time working with a tax professional.

Question: How do I reduce my income tax liability?

Answer:  Starting a side business might help reduce your tax liability.  If you have a talent that you want to actively turn into a money making venture, starting a business might be an option for you.  Say for instance your business does not make a profit, this might be counterintuitive to the reason you started the business, but is typically the case with most startups.  The IRS will allow you to deduct the loss incurred in your business from the other salary and income you earned.  This results in you paying less in taxes.


You should be aware that you must establish the business with the intention of making a profit.  The IRS is clear on the specific activities that determine if your business is engaged for profit or simply a hobby.  The general rule is that if you have not made a profit in the last three out of five years, the IRS will classify your business as a hobby.  This may be extended to profit made in the last two out of seven years for horse trading, breeding or racing.

If the IRS classifies your business as a hobby, you won’t be permitted to deduct losses.  However, in certain situations you may be able to use hobby expenses to reduce your taxes.

For instance, personal expenses such as home mortgage deduction, which could also be claimed as hobby loss expenses, are deducted in full.  Other expenses such as depreciation or amortization, wages, advertising, and insurance premiums may be permitted.  However, you must have hobby income in order to deduct those expenses.

Question: How many years of tax returns should I retain?

Answer: The IRS has guidelines on tax return record retention.  You can visit irs.gov for further details.  To be on the safe side you should "Keep your records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.

Keep records for 6 years if you do not report income that you should report, and it is more than 25 percent of the gross income shown on your return.  Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.”

Question: Can I deduct mileage for a second job?

Answer: You may deduct the expenses associated with traveling between the jobs only on the days you work both jobs.  The travel from your house to the first job and from your second job to your house in addition to the travel to and from work on the days you work one job only are considered commuting.  Commuting expenses are not deductible.

Question: Can I claim head of household although I am married?

Answer: As a married individual, there are typically two filing statuses you can choose and that is Married Filing Jointly or Married Filing Separately.

You may be able to file as head of household if you meet all of the following criteria:

1.    Your spouse did not live in your home during the last 6 months of the tax year.

2.    You provided more than 50 percent of the cost of taking care of a home for the year.

3.    A qualifying person lived with you for more than half the year.  A qualifying person is a child, relative, or parent.  Parents do not have to live with you to be considered a qualifying person.

Monday, February 20, 2017

New bucket list: create wise tax strategies

FROM https://www.abqjournal.com

“Don’t let the tax tail wag the investment dog” is a quirky saying that has been a mainstay for financial advisers for many years. It means to not let tax issues override smart investment decisions. However, smart tax planning is essential for smart investing.

The key with tax planning is to be proactive, and a good place to start is with a tax diversification strategy. I recommend that my clients have three tax buckets for their investments. This strategy can lead to tax savings now or in the future, and it also provides flexibility when taking withdrawals during retirement.

Bucket 1 is for tax-deferred assets, such as retirement accounts like traditional IRAs, 401(k)s, or 403(b)s. Typically, the money you invest in a traditional retirement account is deducted from your income in the year of the contribution. Taxes are not due until the money is withdrawn, and whatever amount is withdrawn (after age 59½ to avoid a penalty) is considered taxable income. IRAs have been available since 1974, and are a common way to save for retirement.

Having all of your invest-ments in Bucket 1 is a wise strategy if you expect your tax rate to be significantly lower in retirement. However, many people find this is not the case. Income from pensions and Social Security, combined with the income taxes triggered by withdrawals from Bucket 1, can keep the tax rate high.



Bucket 2 is for taxable accounts. Many people do not realize that saving and investing in a taxable account is always wise. The gains on the investments are not tax-deferred, but they are taxed at a preferential tax rate on capital gains and qualified dividends. This tax rate is often 15 percent, but it can be as low as 0 (for people in the 10 percent or 15 percent marginal tax bracket) or as high as 23.8 percent for people with very high incomes.

Bucket 3 is the newest tax bucket, and it contains tax-free accounts, such as Roth IRAs and Roth 401(k)s. Roth IRAs only became available in 1998, and many employers began offering Roth 401(k)s and Roth 401(b)s. Investors often do not have a Bucket 3. Money invested in these accounts is not deducted from income in the year of the contribution, so there are no tax benefits on the front end. However, the beauty of Roth IRAs and Roth 401(k)s is that they provide tax-free growth for the future.

In my view, tax-free growth surpasses tax-deferred growth (in traditional IRAs and 401(k)s), and I encourage you to open a Roth IRA or a Roth 401(k) and start funding it. Studies have shown that millennials are opening Roth IRAs more than any other age group.

The benefits

Why am I encouraging everyone to have three tax buckets for their investments? The benefits are significant.

You can choose where to withdraw money during retirement. Many investors have most of their money in tax-deferred IRAs (Bucket 1). Every time they need to take a withdrawal during retirement, it triggers income taxes. This is not tax-efficient. The higher taxes from IRA withdrawals can also cause Social Security benefits to be taxed at a higher rate, and Medicare Part B (which is withheld from Social Security benefits) to cost more each month. Drawing from Bucket 2 will trigger capital gains taxes (only on the gains/not the entire amount withdrawn), but they are typically less than income taxes. And drawing from Bucket 3 can be tax-free.

Three tax buckets can allow you to delay drawing Social Security benefits. By starting later, Social Security benefits accrue and increase. Taxes will be managed (and reduced) by having the variety of tax buckets, rather than only Bucket 1. Delaying Social Security can also open a window of opportunity to convert a portion of a traditional IRA to a Roth IRA during the years after retirement but before starting Social Security. These years often have a low tax rate, making them attractive for Roth conversions.

Converting a significant amount of a traditional IRA to a Roth IRA can reduce required withdrawals from the traditional IRA that must begin at age 70½. Roth IRAs do not have required minimum distributions, so the money can remain invested in the Roth IRA, growing tax-free for many years.


Roth IRAs are excellent investment accounts for teenagers and young adults. Although the gains have limitations as to when you can access them (which encourages investors to leave them for retirement), the contributions are always accessible with no penalty or taxes. This makes the Roth IRA a great option for funding the purchase of a first home or for college expenses.

Roth IRAs provide estate planning benefits. When a person inherits a Roth IRA, annual withdrawals are required, but the withdrawals are tax-free. When a person inherits a traditional IRA, annual withdrawals are required, but the beneficiary pays income taxes on the withdrawal.


Sunday, February 19, 2017

When an inherited IRA becomes a tax nightmare

FROM https://www.financial-planning.com

Individual retirement accounts are great financial products that carry valuable tax advantages, and they are an important part of many clients’ portfolios. When IRAs are part of an estate, however, they are subject to rules that are highly inflexible. When survivors receive advice that does not address these rules adequately, there can be disastrous financial consequences.

A ruling handed down in U.S. Tax Court in December provides one such tax horror story, and it could easily have been avoided. It is worth recounting in detail to uncover lessons that could help advisers in creating estate plans that include IRAs.

The case involved the estate of a Florida man, Thomas W. Ozimkoski Sr., who died in August 2006. Just seven months before his death, Ozimkoski executed a will that left the bulk of his property to his wife, Suzanne D. Oster Ozimkoski, and named her as personal representative of his estate. At the time of his death, Ozimkoski had a traditional IRA at Wachovia and a 1967 Harley Davidson motorcycle.

He also had a son, Thomas Jr., who was unhappy about the will. The son went to probate court and faced off against Suzanne, his stepmother. The IRA custodian, Wachovia Securities, froze the funds in the IRA pending the outcome of the litigation.

When the dust settled, a settlement had been reached. Suzanne would pay Junior the sum of $110,000 and transfer title of Senior’s motorcycle to him. The settlement provided that the payment would be made within 30 days of the date on which Senior’s IRA was unfrozen by Wachovia. The settlement also said that “all payments shall be net payments free of any tax.”

CARRYING OUT THE SETTLEMENT
The motorcycle transfer seems to have gone smoothly, but the same was not true of the payment of the IRA funds.

On July 2, 2008, Wachovia transferred $235,495 from the deceased’s IRA to an IRA set up in Suzanne’s name. Suzanne took a distribution from her IRA and wrote a personal check for $110,000 to Junior to make the payment required under the settlement agreement. She also took other distributions from her IRA in 2008 for a total of $174,597.

Wachovia issued a 2008 Form 1099-R showing taxable distributions of $174,597 to Suzanne in 2008. The distributions were coded as early distributions because Suzanne took them from her own IRA and she was under age 59½.

Suzanne filed her 2008 federal income tax return late and reported only her wage income from the Boys and Girls Club, just under $15,000. She did not report any of the IRA distributions as income.

The IRS subsequently issued a notice of deficiency to Suzanne for 2008. The IRS said she owed $62,185 in taxes and a 10% penalty on the IRA distributions. It also hit her with an accuracy-related penalty of $12,437. Suzanne disagreed and brought her case to the Tax Court, representing herself.

The Tax Court held that Suzanne owed income taxes, the 10% early distribution penalty and part of the accuracy penalty. The court did not buy Suzanne’s argument that the IRA distributions should not be included in her income because Junior was entitled to $110,000 of the IRA under the settlement agreement. Instead, the court agreed with the IRS that the distributions were taxable to Suzanne because they were from her own IRA.

WHO IS THE BENEFICIARY?
The Tax Court began its decision by tackling the important issue of exactly who was the beneficiary of Senior’s IRA. Generally, the beneficiary of an IRA is whoever is named on the IRA beneficiary designation form. However, there was a problem. Wells Fargo, the successor to Wachovia, did not have Senior's IRA beneficiary designation form. It is unclear whether the form had never been filled out or somehow went missing.

In the absence of the form, the estate became the beneficiary by default. Because Suzanne inherited through the estate, the IRA became a probate asset, which can be subject to a will contest. If the beneficiary is named on IRA beneficiary form, however, the account bypasses probate and goes directly to her.

Because the estate, not Suzanne, was the beneficiary of the IRA, Wachovia “incorrectly” rolled it over to her IRA, according to the court. What Wachovia should have done, the court said, was distribute the IRA assets to Senior’s estate rather than to Suzanne’s IRA. The court said it had no jurisdiction to fix that mistake.

The court expressed sympathy for Suzanne, noting that her attorney during the probate litigation clearly failed to counsel her on the tax ramifications of paying Junior from her own IRA. However, the court said it could not change the fact that the distributions she received were from her own IRA and, therefore, taxable income.

The court also said Suzanne owed the 10% early distribution penalty on the funds taken from her IRA. There is such a thing as an exception to the penalty for distributions due to death, but that did not apply to her. This is because a spouse beneficiary may no longer claim the exception if she rolls over the funds from her deceased spouse's IRA into her own IRA and then withdraws the funds from her IRA.

The court gave Suzanne a break on the accuracy penalty. The court said that in light of all the circumstances, including her limited experience, knowledge and education, she had acted in good faith with respect to the portion of her underpayment attributable to her failure to include in her taxable income the $110,000 she paid to Junior. However, she was still liable for the penalty on the other IRA distributions she took.

LESSONS LEARNED
This case offers a number of lessons for advisers and their clients:

The importance of beneficiary forms. It’s easy to imagine another, much happier, outcome in this case. When Thomas Ozimkoski Sr. updated his will to leave everything to his wife, he should also have updated his IRA beneficiary designation form. If he had, the IRA would have passed directly to her and never became part of the disputed probate estate.

A competent adviser would have realized that any payment coming from an IRA will be taxable. If one party is not paying the tax, then someone else is.
The need for competent advisers. One thing that Suzanne Ozimkoski lacked in this case was advisers who understood the IRA rules. She needed a knowledgeable attorney who could have advised her better on the outcome of her settlement agreement.

A competent adviser would have realized that any payment coming from an IRA will be taxable. If Junior is not paying the tax, then someone else is. A competent adviser would have realized Wachovia’s error and had the custodian reverse the transaction and retitle the inherited IRA properly.

Naming a spouse on the beneficiary designation form allows her to roll over the funds to her own IRA. This avoids the result in this case, where the estate was the beneficiary and the rollover was “incorrect.”
Avoid “incorrect” rollovers. Naming a spouse on the beneficiary designation form allows her to roll over the funds to her own IRA. This avoids the result in this case, where the estate was the beneficiary and the rollover was “incorrect.”

With proper advice, the spouse could have elected to remain a beneficiary rather than do a spousal rollover. By remaining a beneficiary here, the spouse could have taken distributions she needed and avoided the 10% early distribution penalty.

Time in one court may be irrelevant for tax purposes. The settlement agreement said that all payments to Junior shall be net payments, free of any tax, and the widow was under the impression that she owed no taxes. But tax rules did not allow this outcome. During the settlement process, someone should have advised her that there was no way to avoid the tax on the IRA distribution.

After the mistaken rollover, the Tax Court could not unwind that transaction and instead had to decide the widow’s tax liability based on the erroneous transfer of the IRA assets to her own account and her subsequent distributions.

How the death exception to the 10% penalty actually works. This exception to the penalty is for beneficiaries, but does not apply when the spouse rolls the retirement funds over to his or her own IRA. Once a spousal rollover occurs, the spouse is then the IRA owner and not a beneficiary.

Saturday, February 18, 2017

5 tax planning considerations during the Trump administration

There is a lot of speculation about how tax law may change with the new administration being very vocal about the need for tax reduction. Most agree that changes are coming, the question is if any changes will take effect retroactively to cover the 2017 year, or if 2018 would be the target start date.
With the proposed tax cuts, traditional wisdom of accelerating deductions and deferring income still makes sense. Push your income into the next year wherever possible, with the hope that the promised tax cuts materialize. The proposed changes would indeed lower tax rates across the board and potentially repeal the 3.8% tax on Net Investment Income (part of the Affordable Care Act).  There is more to the picture and there are a few key items to consider for tax planning.
1.Capping Itemized Deductions
Itemize deductions would be capped at $100,000 for single and $200,000 for married filers. For high net worth individuals, this change could be significant. One of the major deductions for higher income taxpayers is the charitable contribution deduction.  Many have charity that would push them over these proposed limits. Would they still be as charitable if the tax benefit were limited in this way?  Maybe.  Many will continue to give since their main motivation is not the tax benefit, but it may give others pause.
Those who are subject to Required Minimum Distributions (RMD) from their IRA accounts have another option, in that they can make qualified charitable contributions directly from their IRA accounts. These contributions do not get counted as a deduction on your personal tax return, thus lessening the chance itemized deductions will be over the new proposed threshold. In addition, charity paid from an IRA will count toward the taxpayer’s RMD for the year, thus reducing the amount required to be distributed and counted in income during that year.
The state income tax deduction could also be an issue if these new limits are set in place. In high tax states, such as California and New York, the state income tax paid and deducted is often a sizable portion of itemized deductions, making it more likely taxpayers in these high tax states will be above the proposed thresholds.
2.Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was originally meant to ensure the wealthy pay their fair share of tax. In recent years, this tax has become common in middle-income households, which was not the original intent. Current proposals call for eliminating AMT.
The National Taxpayer Advocate office has been calling for repeal of the AMT for several years, stating on their website “The AMT is complicated and burdensome and it does not achieve its intended goal.”
3.Capital Gains/Dividends
Long term capital gains and qualified dividends would retain favorable tax treatment under the proposed plans. They are currently taxed at a maximum 20% rate, but could also be subjected to the 3.8% Net Investment Income Tax, bringing that rate to 23.8%. The current proposals call for eliminating the Net Investment Income Tax.
Short term gains would still be taxed at normal ordinary income rates. Currently, taxpayers in the top bracket are taxed at 39.6%, plus would be subjected to the 3.8% Net Investment Income Tax, for a total of 43.4%. The new proposals call for a maximum tax rate of 33% and eliminate the Net Investment Income Tax.  The savings could be substantial.
4.Head of Household Filing Status
Head of Household filing status would be eliminated under the proposed plans. Current Head of Household filers would file as either Single or as Married Filing Separately, depending on their situation. Currently, both of those statuses have higher tax rates than the Head of Household status.
5.Tax Rates
Current proposals call for collapsing the current seven tax brackets into three, with a top rate of 33%. This is down from the current top rate of 39.6%.
Proposed Individual Rates
Rate      Joint filers                          Single filers
12%        up to $75,000                     up to $37,500
25%        $75,000 – $225,000          $36,500 – $112,500
33%        above $225,000                 above $112,500

This is just a broad overview of only some points in the draft proposals. While it is not certain that these proposals will become law, it does seem clear that there will be a push to implement change, and that any change would focus on tax cuts.
There are also proposed changes that would encompass taxes for businesses, and an overhaul of estate tax laws. Your tax professional can help you plan for potential changes and keep you informed as these proposals work their way through congress.

Friday, February 17, 2017

Reducing investment taxes in 2017

FROM http://www.journalofaccountancy.com

There's a popular saying in personal finance: "It's not what you earn, it's what you keep." For many taxpayers, the end of 2016 was a reminder of this wisdom. Those with investments in taxable accounts are now receiving Forms 1099, and some taxpayers may be surprised when they're hit with a high tax bill.  
As CPAs, we know that one drag on investment performance is taxes, and this year will undoubtedly result in several instances of clients asking: "How can I reduce my taxes?" Your clients may have taken advantage of the surprising 2016 bull market and sold some of their winning positions. Others may have owned mutual funds or exchange-traded funds (ETFs) that paid out higher than normal capital gain distributions and dividends in the fourth quarter of 2016. While year end has come and gone, the start of a new year allows clients to take a fresh look at their investment strategy and find opportunities to reduce their tax bill in 2017.

Proactive planning steps

You can discuss several planning strategies with clients. All of these have the same overall objective: minimizing taxes. With all of these strategies, it's important to keep in mind another popular saying in the investment community: "Don't let the tax tail wag the investment dog." In other words, minimizing taxes at the expense of after-tax financial gain is not a prudent course of action. All of these strategies should be considered net of taxes and transaction fees.
With that caveat in mind, here are some of the best planning strategies for your clients to consider:
  1. Asset location optimization: One of the most effective ways to reduce your client's tax bill is to implement a tax-efficient investment strategy. This strategy is particularly successful when clients have both taxable and tax-advantaged accounts (e.g., a traditional IRA and a Roth IRA). The first step is to identify the tax efficiency of each holding, which depends on a variety of factors such as fund turnover, dividend yield, and growth assumptions. Tax-efficient assets such as total market index funds should be placed in taxable accounts while tax-inefficient assets such as real estate investment trusts or high-turnover active funds should be placed in tax-advantaged accounts to shelter the capital gain and dividend distributions from current taxes. Over time, this strategy can help your clients generate higher after-tax investment returns.
  2. Tax-managed mutual funds, ETFs, and tax-favored assets: If your clients are committed to their particular investment strategy, it's advisable to explore more tax-efficient means of obtaining similar investment exposure. For example, some mutual funds have tax-managed versions of the same fund created with the mandate of limiting the shareholder's tax burden by lessening the number of sales and other taxable events. In other cases, when a client owns a mutual fund that attempts to mimic the performance of a stock or bond index (often referred to as index funds), consider whether there is an ETF alternative. ETFs have historically been more tax-efficient, due to their creation and redemption mechanism, which allows them to wash out capital gains without requiring distributions. Finally, if a client is in a high tax bracket and has significant taxable interest income, it may make sense to purchase tax-favored assets such as tax-exempt municipal bonds. Walking through a tax-equivalent yield calculation will help determine if there is an open window to benefit from this approach.
  3. Minimize (or even avoid) short-term gains: When reviewing a client's Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, do you see a large amount of short-term gains realized where the timing of the gain was within your client's control? Explain to the client that short-term gains are taxed at ordinary income tax rates, which can be as high as 39.6%, plus potentially an additional 3.8% net investment income tax on high-income taxpayers and state and local taxes. Were any assets sold a few weeks (or months) before the end of the calendar year? If so, now may be an opportunity to discuss how to avoid this practice in the new year.
  4. Rebalancing in tax-advantaged accounts: The main advantage of rebalancing a portfolio is to control for its risk and return characteristics. Because of the run-up in the stock market in 2016, many client portfolios were shifted back to target allocations to rebalance their investment mix, which may have resulted in gains or income being realized in taxable accounts. You can help your clients alleviate the tax impact of rebalancing by looking at the overall picture, not just specific accounts. Consider using assets held in tax-advantaged accounts (such as IRAs or 401(k) accounts) for the reallocation of funds to help minimize taxes generated by investment activity.  
  5. Timing of mutual fund purchases and sales: Clients may need to purchase or sell funds near year end for a variety of reasons. You should educate clients on the mechanics behind mutual funds, which allow for distribution of capital gains (and losses) to their shareholders regardless of how long the fund has been held. When given a choice, it is often best to avoid purchasing new mutual funds shortly before they are expected to make large year-end capital gain distributions. Without this foresight, your clients could be taxed on gains a fund makes before they receive the benefit of the fund's investment returns, which is essentially the equivalent of "buying a tax liability." The opposite generally holds true for selling; if clients need to sell, they may want to do so before the distribution date. Helping clients estimate and anticipate mutual fund capital gain distributions should be an integral part of your year-end tax planning process.
  6. Tax-loss harvesting: Tax-loss harvesting should not be reserved solely for year-end planning. You can help clients review their investments quarterly and look for opportunities to harvest losses throughout the year. These losses can be used to offset year-end capital gains and up to $3,000 of ordinary income. Your clients will be happy to see you proactively working with them to reduce their tax bill on a consistent basis.

Call to action

For many clients, the CPA is their most trusted adviser. You have insight into their entire financial life, which provides for an abundance of opportunities to add value and remind them why you're an integral part of their team.
If you're unsure where to begin, start by reviewing your clients' tax returns with a renewed sense of curiosity. A checklist created by the AICPA Personal Financial Planning Division is a great resource to help initiate conversations about tax-savvy investing.
Sometimes, all it takes is asking the right questions. Once, while reviewing a client's prior-year tax return, I noticed an exceptionally high number of capital gain transactions spanning many pages. I explained to my client that he paid transaction fees each time the securities were bought and sold and that he was incurring short-term capital gains, which are subject to unfavorable tax rates. It quickly became clear that the investment adviser's strategy was not appropriate for my client. I helped him find a new adviser who could implement a strategy more aligned with his goals of tax efficiency and simplicity. Ever since, this client tells his friends that I saved his life! While it's an exaggerated statement, I'll take those endorsements anytime a client hands them out.
While it's generally understood that no one can control or predict the direction of markets, clients can control taxes, costs, and fees to some extent. This topic makes for a great springboard into other areas where you can add value as their CPA.   
Use the start of a new year to be proactive and ask good questions. Your clients will be pleased with what they learn, and they may even save some money along the way.

Thursday, February 16, 2017

The 7 Life-Changing Events Where Tax Planning Pays Off

FROM FOXBUSINESS.COM

Few people enjoy tax planning. But everyone goes through major life changes, and many of them have substantial tax consequences. Knowing about them and planning your taxes around them can help you avoid unpleasant surprises and sometimes can produce huge savings on your tax bill. Here are seven key situations where it pays to do some basic tax planning.
1. Getting ready to go to college
The tax laws include a number of tax breaks for education Opens a New Window. . For instance, using 529 plans and Coverdell Education Savings Accounts can give you tax-free growth in your investments when you use the money for qualified educational expenses. Moreover, educational tax credits Opens a New Window. apply to students of all ages, with undergraduates getting a particularly valuable credit that can put money back in your pocket even if you wouldn't ordinarily owe any tax. By knowing income limitations and other restrictions on these provisions, you can plan accordingly to take full advantage.

2. Getting your first job
Starting work involves many tax-related issues. Right away, filing Form W-4 Opens a New Window. to set up tax withholding makes a big difference in whether you get a refund or owe tax at the end of the year. Also, setting up things like a 401(k) automatic contribution as well as a flexible spending account Opens a New Window. can reduce your taxable income and let you use pre-tax money to fund your retirement, healthcare, and dependent care needs. Planning well for those breaks can boost your take-home pay.

3. Getting married
Couples often find that their tax situation changes dramatically when they tie the knot. Some receive a marriage bonus Opens a New Window. , while others have to pay the marriage penalty that can come with compressed income brackets. Moreover, specialized laws in some states can have impacts not just on taxes but also on ownership of property. If you know about these things before you get married, there are actions you can take to time their impact while also taking full advantage of the provisions that produce tax savings for you in your particular situation.

4. Buying a home
Purchasing a home gives you a large number of housing-related tax breaks Opens a New Window. , ranging from deductions on mortgage interest, property taxes, and other items to exclusions of capital gains tax on any increase in your home's value when you sell it. Structuring a mortgage loan to take advantage of these provisions is crucial, and there are mistakes you can make that will leave money on the table for the IRS to take. With smart planning, though, you can set up a real estate deal that will maximizing any tax savings you can achieve.

5. Having children
Having children opens up a whole new realm of favorable tax provisions Opens a New Window. . Dependent exemptions, the child credit, credits for child care expenses, and larger eligible amounts for key provisions like the earned income tax credit are just a few of the ways that tax laws favor families with children. Given how expensive it is to raise a child, you can't afford to miss out on any help the IRS will give you.

6. Getting divorced
Just like getting married, getting a divorce results in a change in filing status for your tax return. Yet that's just the tip of the iceberg, because how you structure key elements like alimony and child support can affect the taxes of both ex-spouses going forward Opens a New Window. . To make sure that your tax bill doesn't introduce any new tension in the post-divorce relationship, plan for the future during the divorce process, and realize how integral it can be to your finances going forward.

7. Retiring
When you retire, you have to change gears and start using your other income sources, including Social Security and your personal savings. Both have tax implications, with some Social Security benefits being taxable Opens a New Window. if your income is high enough, and retirement account withdrawals can be even more taxing. On the other hand, senior tax breaks are available Opens a New Window. that can cut your bill, so getting the full scoop is more important than ever.

Going through these major events is part of life. By being aware of the tax ramifications of these things before they happen, you'll be better prepared to save on taxes where you can while paying as little extra in tax as you can get away with throughout your lifetime.

Wednesday, February 15, 2017

Real Estate Cost Segregation is More Valuable in 2016

It may have been one of the most hotly contested, controversial campaigns in living memory, but there can be no denying the result of the US 2016 election is generally friendly for business. President Donald Trump and the Republican Party both agree that tax reform is a top priority to help stimulate the economy. An effort of this magnitude is no simple task and requires significant consideration of which areas of the tax code should be modified. While it's still not clear exactly which tax laws will be repealed or replaced, the most probable change will be a lowering of business and individual tax rates.
Deductions are more valuable when tax rates are higher, so carefully planning the timing of deductions can create significant permanent tax savings. Accelerating deductions into the 2016 tax year lowers current tax liabilities while effectively shifting income into future years when tax rates drop. Taxpayers should consider all opportunities to accelerate deductions into the 2016 tax year.
Cost segregation is one of the most common tax planning tools for taxpayers that own real estate. IRS rules allow taxpayers to apply a cost segregation study any time after the building is placed in service, providing a unique opportunity to plan which tax year depreciation deductions are realized. Taxpayers who have opted to not perform a cost segregation study in the past because it only represented a timing difference in cash flow, should reconsider for 2016, so they do not miss permanent tax savings realized when rates fall.
Case Study: ABC, LLC owns a building that was purchased in 2014 for $1 million. This year, ABC has a cost segregation study performed on their building and applies it to their 2016 tax return. The cost segregation study accelerates $100,000 of future depreciation deductions into the 2016 tax year where Federal income tax rates are 39%, creating an immediate tax savings of $39,000. Assuming tax rates drop in 2017 to 30%, ABC now realizes a $9,000 permanent tax savings ($39,000 - $30,000) on top of the traditional benefits of accelerated cash flow generated by a cost segregation study.

Tuesday, February 14, 2017

How much will it cost to do your own taxes? A look at five major tax prep services


FROM  Washington Post
It’s that time of year again. Your W-2, 1099s and other forms probably have landed in your mailbox. Now all you have to do is figure out the best way to file.
There are many tax-software companies out there trying to win your business and take the intimidation out of the filing process. We compiled the fees for five major online tax-preparation services. Here’s a look at what you might pay to file your taxes online, based on the complexity of your tax return. Prices are as of Feb. 2.
Basic federal return (1040)
Cost: Free, most of the time.
If you have a straightforward return in which you only have to file a 1040 and are claiming the standard deduction, you may be able to file your federal taxes free. The Internal Revenue Service’s Free File program is for taxpayers earning $64,000 or less. Financially savvy taxpayers who want to work the math out themselves without software can do so and enter the results into the free fileable forms the IRS offers online.
Many of the major tax-software providers also offer free options for people with simple tax needs. But those taxpayers who want an extra service, such as the ability to store returns online for several years or to import data from a previous tax year, may need to pay a fee. (Some companies will import tax data from a competitor free.)
TurboTax: Lets customers import W-2 forms free. Customers who want to import last year’s tax return from TurboTax need to pay $34.99 for the deluxe version.
H&R Block: Taxpayers can file free federal returns including the 1040EZ, 1040A and 1040 with a Schedule A, meaning they are itemizing their deductions.
Jackson Hewitt: Customers can file free federal returns if they have simple tax needs and a free state return for most states. People who want to file the earned income tax credit or the student loan interest deduction have to pay $19.95 for the basic edition. Jackson Hewitt lets customers import W-2 forms and from last year’s tax returns free.
TaxAct: Taxpayers can import W-2 forms free, but returning customers looking to import TaxAct returns from last year will need to pay $10.
TaxSlayer: Taxpayers can file a 1040EZ and one free state tax return free. Those who want to update W-2 data or last year’s tax data may need to pay $17 for the classic edition.
State return
Cost: Zero to $37 per state on top of cost for basic software.
Taxpayers who are able to file their federal tax returns free also may qualify for a free state tax return. These fees generally are charged per state on top of whatever package the company requires for the rest of the tax return, although some companies include the service for their more expensive packages.
TurboTax: Offers free state returns for people who qualify for free federal returns, but all other customers will pay $36.99 per state.
H&R Block: Customers who qualify for free federal returns can receive one free state return. All other customers are charged $36.99 per state return.
Jackson Hewitt: No charge for people using the free edition. All other users pay $36.95 for each state return.
TaxAct: No cost for people using the free version. Charges $33 for customers using the plus and premium software.
TaxSlayer: For people using the free-file service, the first state return is free and additional state returns cost $22. People using the classic edition may be charged $22 per state return, although final fees are set at the time of filing.
Schedule A for itemized deductions
Cost: Zero to $35.
Taxpayers who want to take common deductions for medical expenses, charitable contributions and mortgage interest will need to itemize those deductions on the Schedule A tax form instead of taking the standard deduction. But most of the companies require those taxpayers to upgrade and pay a little more for more-comprehensive software offered in the “deluxe edition.”
TurboTax: Included in deluxe edition, $34.99
H&R Block: Some taxpayers with simple federal returns can itemize free. Service also included starting with the deluxe version, $34.99.
Jackson Hewitt: Included in deluxe edition, $34.95
TaxAct: Included in the plus edition, $27
TaxSlayer: Included in the classic edition, $17
Schedule C for business and self-employment deductions.
Cost: $35 to $90
Online costs generally will be highest for taxpayers claiming business-related deductions.
TurboTax: Included in home and business package for online software, $89.99.
H&R Block: Sole proprietors and others filing the Schedule C-EZ can use the deluxe service, costing $34.99. Others filing the Schedule C can use the premium package, $54.99.
Jackson Hewitt: Sole proprietors and others filing the Schedule C-EZ can use the basic service starting at $19.95. Other self-employed people and business owners may need to buy the premium package for $54.95.
TaxAct: Included in the premium package, $37.
TaxSlayer: Included in the classic edition, $17
Schedule D for capital gains and losses
Cost: $27 to $55.
Taxpayers who sold real estate, stocks, mutual funds or other investments may need to file this form.
TurboTax: Included in premier package for online software, $54.99.
H&R Block: Included in deluxe edition, $54.99.
Jackson Hewitt: Included in deluxe edition, $34.95.
TaxAct: Included starting with plus software, $27.
TaxSlayer: Included in the classic edition, $17.