Health Care Costs And Retirement Planning

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

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

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


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

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

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

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

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

Understanding Net Investment Income Tax

As part of the controversial Affordable Care Act, known by most as Obamacare, several new taxes were enacted to help fund the program.

Among these new taxes is one that became effective on Jan. 1, 2013, the Net Investment Income Tax. This regulation imposes a 3.8 percent surtax on the net investment income of certain individuals, estates and trusts that have income above the statutory threshold amounts. The key consideration, however, is what constitutes net investment income and which taxpayers are affected.

The threshold amount for individuals is based on filing status and is not indexed for inflation.

The threshold amount is $125,000 for taxpayers filing married filing separately; $200,000 for taxpayers filing as single or head of household; and $250,000 for those with a filing status of married filing jointly or qualifying widow(er) with a dependent child.

Individuals will owe the additional net investment income tax if their modified adjusted gross income exceeds these figures. Modified adjusted gross is defined as adjusted gross income plus foreign earned income less deductions and exclusions related that foreign earned income.  

In general, investment income includes, but is not limited to the following: interest income, dividend income, capital gains income, rental and royalty income, income from non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the tax payer. Gains from the sale of stocks, bonds and mutual funds are subject to this tax.

In addition, capital gain distributions from mutual funds as well as gains from the sale of investment real estate including gains from the sale of a second home that is not a primary residence are also subject to this tax. Gains from the sales of interests in partnerships and S corporations in which the owner is not materially participation are also subject to this tax.

To determine net investment income, investment income from these categories is reduced by investment expenses such as early-withdrawal penalties, interest expense, adviser fees, directly related rental and royalty expenses, and state and local taxes allocable to items included in investment income.

Items such as wages, unemployment, social security benefits, alimony, tax-exempt interest income, self-employment income and retirement income are all examples of income exempted from this net investment income tax.  

In addition to these exemptions for income which are not investment related, the Code Section 1411 excludes non-passive trade or business income from this net investment tax.

As a result, there are renewed discussions on the definition of material participation.

In other words, dividends received from a business where you are actively involved and meet the IRS definition of material participation would be exempted from this net investment income tax. Dividends received from a company where you are an investor and do not meet the definition of material participation will be subject to the tax.

Form 8960 is used to report the net investment income tax. This form is a separate schedule that ultimately flows up into the individual income tax return, the estate return, or the trust return as applicable. The corresponding tax is paid for individuals as part of their 1040 Form, while estates and trusts include this Form 8960 as part of their 1041 return.

Many taxpayers may not be impacted by these new taxes on net investment income.

However, all taxpayers should be aware of the continuing complexity that is placed in our tax code and the tax preparation process.

Despite the ongoing rhetoric from Congress on the need for tax simplification, virtually all legislation in the area of taxes continues to be in the opposite direction.

2014 Federal Income Tax Rates

As the close of the year draws near, taxpayers grow concerned about limiting their tax liability in 2014. By understanding their incremental federal income tax rates, individuals can appreciate the benefit received from a potential deduction.

2014 Income Tax Rate Schedules

Income tax rate tables, or brackets, are published each year by the federal government through the Internal Revenue Service or IRS. These tables outline the tax owed and incremental tax rates.  These schedules can also be used to estimate a potential income tax liability in 2014.  However, more accurate estimates can be achieved by completing Form 1040.

The American Taxpayer Relief Act of 2012 added a seventh bracket (39.6%) in 2013.  The remaining six rates were unchanged.  Reading a tax rate schedule is a fairly simple process.

The first step is to calculate an individual's total federal taxable income.  Again, IRS Form 1040 can help individuals determine that value more accurately.  Once the taxable income is known, the next step involves selecting the proper rate table.

There are four schedules, depending on the individual's filing status such as Single or Married, Filing Jointly.  The instructions for Form 1040 explain the process for selecting the correct status.

2014 Unmarried Individuals: Rate Schedule X

Taxable income is over -	But not over -	The tax is:	Of the amount over -
$0	$9,075	$0 + 10%	$0
9,075	36,900	907.50 + 15%	9,075
36,900	89,350	5,081.25 + 25%	36,900
89,350	186,350	18,193.75 + 28%	89,350
186,350	405,100	45,353.75 + 33%	186,350
405,100	406,750	117,541.25 + 35%	405,100
406,750	-	118,118.75 + 39.6%	406,750

2014 Married filing jointly or Surviving Spouses: Rate Schedule Y-1

Taxable income is over -	But not over -	The tax is:	Of the amount over -
$0	$18,150	$0 + 10%	$0
18,150	73,800	1,815.00 + 15%	18,150
73,800	148,850	10,162.50 + 25%	73,800
148,850	223,050	28,925.00 + 28%	148,850
226,850	405,100	50,765.00 + 33%	226,850
405,100	457,600	109,587.50 + 35%	405,100
457,600	-	127,962.50 + 39.6%	457,600

2014 Married filing separately: Rate Schedule Y-2

Taxable income is over -	But not over -	The tax is:	Of the amount over -
$0	$9,075	$0 + 10%	$0
9,075	36,900	907.50 + 15%	9,075
36,900	74,425	5,081.25 + 25%	36,900
74,425	113,425	14,462.50 + 28%	74,425
113,425	202,550	25,382.50 + 33%	113,425
202,550	228,800	54,793.75 + 35%	202,550
228,800	-	63,981.25 + 39.6%	228,800

2014 Head of Household: Rate Schedule Z

Taxable income is over -	But not over -	The tax is:	Of the amount over -
$0	$12,950	$0 + 10%	$0
12,950	49,400	1,295.00 + 15%	12,950
49,400	127,550	6,762.50 + 25%	49,400
127,550	206,600	26,300.00 + 28%	127,550
206,600	405,100	48,434.00 + 33%	206,600
405,100	432,200	113,939.00 + 35%	405,100
432,200	-	123,434.00 + 39.6%	432,200

Tax Rate Example Calculation

We're going to run through a quick example to illustrate how the above tables are used to determine a taxpayer's incremental tax bracket in 2014.  In this example, let's say that Bill's filing status is Married Filing Jointly.  That means he will be using Schedule Y-1 above.  If Bill's federally taxable income in 2014 is $100,000, then the tax owed is calculated as follows:

Bill is going to use the third row of the Y-1 schedule because his income falls between $73,800 and $148,800.  That puts Bill in the 25% tax bracket.  Calculating the tax liability from that table:

$10,162.50 + 25% x ($100,000 - $73,800)
$10,162.50 + 0.25 x $26,200
$10,162.50 + $6,550.00 = $16,712.50

Marginal Tax Rates

Anyone that understands how to use these tables also understands why they are referred to as marginal tax rates.  Within each rate schedule it's possible to find the taxpayer's incremental tax rate, or marginal rate of tax.  This is the rate at which each incremental dollar earned is taxed.  In the above example, the marginal tax rate was 25%.

One of the more common misconceptions is that if someone earns more money, then all of the income is taxed at the higher rate.  The above tables demonstrate this is simply not true.  Individuals are taxed at an incremental rate on marginal income.  That means an individual might be taking home less pay for each additional hour worked, but they are certainly bringing home more money.

The Tax Consequences of Losing Your Job

Losing your job is hard enough without having to consider tax planning, but unfortunately, that’s exactly what needs to be done in order to help keep your finances intact.

In fact, any time you encounter a major life change, whether it’s a marriage, divorce, buying a home or starting a business, it’s important to review the tax implications and create the best strategy.

First the bad news: If your final pay check included severance pay and accumulated leave, sick, and vacation pay, it is taxable income. Hopefully, there was enough withholding to countermand the ensuing tax liability.

If you begin collecting unemployment benefits, that is also taxable income. If it makes financial sense, ask for federal income taxes to be withheld from the unemployment checks. If you don’t think you will be on unemployment for very long, or if you will be dipping into a lower tax bracket due to job loss, you may be able to max out the unemployment benefits without increasing your tax liability and having to withhold for it. Simply crunch the numbers to make sure.

If you receive gifts and loans from family and friends to help make ends meet while searching for a new job, this is not taxable income to you. It is generally the giver who may be taxed on the value of the gift if it exceeds the annual gift exclusion of $14,000.

However, if you dip into your retirement plan for a cash injection, you will be required to pay taxes on the distribution. If you are under the age of 59 1/2, you may be subject to a 10% early withdrawal penalty as well. If you are completely and totally disabled or use the funds to pay for health insurance premiums while unemployed or are simply rolling over the funds to a new retirement plan, you will not face a penalty. Check with your tax pro or read up on the topic in IRS Publication 575. Ask your plan provider to withhold the income taxes due on funds you withdraw.

If you sell stocks or bonds to supplement your income, you must report the sales on your income tax return and pay capital gains tax on any profit. Remember, you will not be required to pay tax on the full amount of the sale. You are allowed to subtract your cost basis from the sales proceeds and pay taxes on the difference. It’s possible that you will cash out stocks at a loss and therefore enjoy a capital loss on your tax return to defray other income.

Costs you incur in your new job search, such as resume preparation, employment agency fees, travel to and from job interviews are deductible as itemized deductions on Schedule A.

If you find a new job and are required to relocate, your moving expenses may be deductible. Check out IRS Publication 521 to see what is deductible and how to claim the deduction.

If you decide to don the entrepreneurial hat and open your own business, it’s a good idea to meet with a tax professional to form a tax strategy—especially if you’ve never operated a business.  Becoming a small business owner completely changes your tax picture and you do not want any unpleasant surprises come next April 15.

If you are paying off a prior year tax liability and losing your job puts you in a position that you cannot keep a roof over your head and continue the monthly IRS payments, call the agency immediately and ask to be deemed currently not collectible. IRS agents are sympathetic and cooperative. They will require a financial analysis to determine your eligibility for this program so be prepared with income and expense data when you place the call.

If you’re wondering if you can now file your 2014 income tax return now and get a refund, the answer is no. First of all, the forms and tax software are not yet available. Congress has not finished changing tax law that may or may not be retroactive to the beginning of the year. W2 forms are issued in January, even if your previous employer has gone bankrupt, they do not have access to the 2014 W2 forms and are not required to send one to you until January 2015. Make sure you keep your previous employer apprised of your current address so that you receive your W2 in a timely manner.

Why tax planning is so important

What tax planning really means

Tax planning is the art of arranging your affairs in ways that postpone or avoid taxes. By employing effective tax planning strategies, you can have more money to save and invest or more money to spend. Or both. Your choice.

Put another way, tax planning means deferring and flat out avoiding taxes by taking advantage of beneficial tax-law provisions, increasing and accelerating tax deductions and tax credits, and generally making maximum use of all applicable breaks available under our beloved Internal Revenue Code.


While the federal income tax rules are now more complicated than ever, the benefits of good tax planning are arguably more valuable than ever before.

Of course, you should not change your financial behavior solely to avoid taxes. Truly effective tax planning strategies are those that permit you to do what you want while reducing tax bills along the way.

How are tax planning and financial planning connected?

Financial planning is the art of implementing strategies that help you reach your financial goals, be they short-term or long-term. That sounds pretty simple. However, if the actual execution was simple, there would be a lot more rich folks.

Tax planning and financial planning are closely linked, because taxes are such a large expense item as you go through life. If you become really successful, taxes will probably be your single biggest expense over the long haul. So planning to reduce taxes is a critically important piece of the overall financial planning process.


Over the years as a tax pro, I have been amazed at how many people fail to get the message about tax planning until they commit a grievous blunder that costs them a bundle in otherwise avoidable taxes. Then they finally get it. The trick is to make sure you don’t have to learn this lesson the hard way. To illustrate the point, consider the following example.

Example: Josephine is a 45-year-old unmarried professional person. She considers herself to be financially astute. However, she is not well-versed on taxes. One day, Josephine meets Joe, and they quickly decide to get married. Caught up in the excitement of a whole new life, Josephine impulsively sells her home shortly before the marriage. The property is in a great area and has appreciated by $500,000 since she bought it 15 years ago. She intends to move into Joe’s home, which is a dump, but Josephine is a proven genius at remodeling, and she plans to work her usual magic on Joe’s property.

Result without tax planning: For federal income tax purposes, Josephine has a whopping $250,000 gain on the sale of her home ($500,000 profit minus the $250,000 home sale gain exclusion allowed to unmarried sellers).

Result with tax planning: If Josephine had instead kept her home and lived there with Joe for two years before selling, she could have taken advantage of the larger $500,000 home sale gain exclusion available to married joint-filers and thereby permanently avoided $250,000 of taxable gain. If necessary, Joe’s home could have been sold instead of Josephine’s. Alternatively, Joe’s property could have been retained, and the couple could have worked on remodeling it while still living in Josephine’s home for the requisite two years.

Moral of the story? By selling her home without considering the tax-smart alternative, Josephine cost herself $62,500 in taxes (completely avoidable $250,000 gain taxed at an assumed combined federal and state rate of 25%). This is a permanent difference, not just a timing difference. The point is, you cannot ignore taxes. If you do, bad things can happen, even with a seemingly intelligent transaction.

The last word

There are many other ways to commit expensive tax blunders. Like selling appreciated securities too soon when hanging on for just a little longer would have resulted in lower-taxed long-term capital gains instead of higher-taxed short-term gains; taking retirement account withdrawals before age 59½ and getting hit with the 10% premature withdrawal penalty tax; or failing to arrange for payments to an ex-spouse to qualify as deductible alimony; the list goes on and on.

The cure is to plan transactions with taxes in mind and avoid making impulsive moves. Seeking professional tax advice before pulling the trigger on significant transactions is usually money well spent. As we get closer to the end of the year, some of my columns will focus on tax planning strategies that many folks can benefit from. Please stay tuned.

It's time to get into tax-planning mode

Now that we have closed out the first half of the year, it might pay to review your tax filings. Rather than wait for the end of the year, this is the time to get in tax-planning mode.


Did you owe any tax when you filed 2013’s return? Have any problem paying the balance? What did you to not have this happen? Perhaps the following questions should be considered before making any positive plans.


Have there been any changes in your family structure? Did you get married or divorced? Remember, whatever your status is Dec/ 31,you are that for the entire year. Getting a divorce will mean you are going to file as a single person, which carries with it the highest tax rate.


If recently divorced, are you paying child support? These payments are not deductible but may allow dependents to be claimed on your return. Are you the one paying alimony or receiving it? Alimony is deductible by the payer and must be included as income by the recipient.


Getting married also changes the tax bracket you can file under. How about your dependents? Did you have any new additions to the family? Are there any stepchildren who are now part of the family unit? Did you have anyone else become part of the household? All of these items must be considered while planning for the ultimate filing.


If any of these items are going to increase your liability steps should be taken now. Are you a W-2 employee? Then a change in your exemptions can be made with the payroll department .The more exemptions you claim, the less withholding they will take out. Conversely, the opposite is true. Unless you prefer to have a large refund, then by under claiming you are in effect giving the government an interest-free loan.


How about your income? Has that changed also? Any sales of assets that resulted in a gain? Can you take any stock losses to offset that gain?


If you are retired, are you now going to be receiving Social Security along with your retirement income? How about taking a mandatory distribution from an IRA?


Are you self-employed? Has this been a good year so far? Does that trend appear to continue? Or are you having a loss year? Should you be filing estimated taxes?


These are problems that have to be addressed, as you can wind up by paying too little or too much through tax withholding or estimated tax payments. The best way to determine the answers to these and other questions is to seek out a reputable tax professional and get a positive response.
He or she would probably require a review of your prior year’s returns to give sound and competent tax advice. The fee involved would be worth it and the best part is that it would be tax deductible.
Obviously no one can predict the future, especially the work of Congress when it comes to tax legislation. Being an off-year election, would they be willing to pass something to woo voters to their side? Or will legislation occur after the election as a reward or for retribution of their party’s success or failure? They have been known to act on a moment’s notice if need be.



Crackdown on foreign bank accounts

As recently as last week, the IRS has taken punitive action against those who have had foreign bank accounts any time the past 10 years.
Those that have not been reported may face criminal charges in addition to a 25-percent penalty charge on these accounts. This should be of particular interest to those who have immigrated to this country during that period and have not addressed this issue.

How to Survive an IRS Audit

When responding to your audit notice, you should be thorough, but avoid sending the IRS superfluous information because that slows the process.

                

It's a scenario many taxpayers entertain: What would happen if I was audited?


With April 15 in the rear view mirror, some taxpayers are finding out. Still, the odds of being audited are slim: According to the Internal Revenue Service, less than 1 percent of individuals' returns were audited in 2013, and fewer audits are expected this year due to budget cuts.


High-income taxpayers and self-employed individuals have the highest chances of being audited, according to Robert McKenzie, a partner at the law firm Arnstein and Lehr LLP in Chicago who previously worked in the collection division of the IRS.


Bob Fodera, a partner with ParenteBeard, an accounting firm headquartered in Philadelphia, agrees, adding that taxpayers who have claimed inconsistent deductions over the years are more likely to be audited. And if your spouse has a small business, especially one the IRS considers more of a hobby, that, too, is often a trigger, Fodera says. "I've seen this come up with amateur photographers quite often," Fodera says.


So if you've recently received a letter or notice from the IRS informing you that you're being audited, what can you expect – and what should you do?


What to expect. If you're like Elizabeth Safran, 45, who owns a public relations company in New York City and files as a sole proprietor, you will probably feel "fear, later followed by shock," she says, when you receive the letter.


When Safran received hers in 2011, she reread it a couple of times. "It was a whole lot of text. I saw the years 2008 and 2009 and Schedule C," Safran recalls.


She struck out on her own as a public relations consultant in 2007 and the new, single mom was understandably petrified. But it was the spring of 2011, and she had until July to gather her paperwork and visit the IRS office in midtown Manhattan.


While some fear is understandable, don't let it consume you. "The first thing to do is not to be overwhelmed and shut down," says Mike Campbell, a tax partner at BDO USA LLP, a professional services organization headquartered in Chicago.


The process. According to McKenzie, there are three types of audits: correspondence, office exam and field exam.
The correspondence audit is conducted through the mail, and it’s common – McKenzie says 80 percent of individual audits are done this way.
The office exam requires face time at an IRS office, which is what Safran experienced. "It normally lasts four hours or less, and by necessity, the IRS only reviews limited issues on the return," McKenzie says.


The field exam is a comprehensive, thorough audit that strikes fear in the hearts of taxpayers. It's usually held at the taxpayer's place of business, and McKenzie says it involves "hours of intense review and verification by a revenue agent."


It’s important to be honest and respond as thoroughly as you can, Campbell says. But he adds: "It's not necessary to volunteer additional information outside of the scope of the audit, as that will only lead to new potential questions and possible expansion of the scope of the audit."
You could also end up slowing the process if you throw every bit of information and data you have at your IRS agent, he says.

When Safran went to the IRS office, she says she was pleasant and professional and had a feeling the agent appreciated it. After she met her contact, they walked back to an office and passed another office where a taxpayer was shouting, "I paid cash! I didn't pay with receipts!"


Don't be that person, Safran suggests.
But you shouldn’t be a doormat, either. Richard Houston, a Los Angeles businessman who specializes in website development, says he was audited in 1975 for tuition and related education expenses. "Even though I didn't complete the rest of the courses required for a degree, I was in total compliance with the IRS code and the appropriate regulations," he says.

Houston went to his local IRS office armed with a reference book ("U.S. Master Tax Guide," published by CCH) and showed the agent why he believed the deduction was allowable.
The agent disagreed. Houston then asked to talk to the supervisor, and after a discussion, the deductions were allowed. "Be prepared and be armed with the truth, because they aren't pushovers," Houston says.


What’s the worst that could happen? That's what everyone wants to know. If you can't show the records requested, will you go to jail?
You're probably not going to the clink. "Generally, only in extreme cases of willful negligence and tax evasion does someone end up in jail," Campbell says.
But an audit experience could be expensive. "In most audits, the worst that can happen is that the IRS would adjust your return to remove deductions you claimed and can’t substantiate or include income you may have omitted," Campbell says. "Then you would pay the tax due, plus interest from the time that tax should have been paid."
That's assuming the IRS feels you’ve been cooperative, because as Campbell says, "The IRS can also choose to assert a 20 percent accuracy-related penalty under Section 6662 if it deems even your mistakes on the return to be egregious or to represent a substantial understatement of your tax liability."
And, of course, if you have to hire an attorney or accountant to help you organize paperwork or make your case, that will also require an outlay of funds.
Above all, if the IRS comes up with a figure that you owe, don’t neglect to pay. The agency can “garnish wages and put liens against your assets and other avenues to collect the tax, interest and penalty," Campbell says.




Advice for the hopelessly disorganized. Tax experts advise keeping good records in case of an audit, but what if you haven't done that?
Michael Raanan, a former IRS revenue officer and president of Landmark Tax Group in Santa Ana, California, says you might have luck gathering records from your employer or previous employers, your bank or financial institution, the IRS (if you've lost your old tax returns), your tax preparer or bookkeeper and your mortgage lender.
Types of paperwork to gather include "sales slips, credit card receipts and other proofs of payment, invoices, canceled checks, bank statements and, of course, mileage logs," Raanan says.
The logs are very important if you've deducted a lot of miles. "Without a mileage log or a GPS record of mileage incurred, it would be difficult for the IRS to accept all of the miles claimed," Raanan says.


And, sure, spending all this time on your taxes is, well, taxing, but it’s worth it to be as prepared as possible for your audit.
That’s what Safran found. Before her audit, she faced the possibility of owing the IRS $40,000. In the midst of running her business and adjusting to motherhood, she traveled the paper trail, gathered every document she could and asked for an extra month when she realized she needed more time (the IRS obliged). After the three-hour meeting, Safran's tax bill was whittled down to $5,000 since her paperwork supported the numbers on her return.


"I think if I had had better documentation, I could have gotten it down to $3,000," Safran adds.

IRS Warns Against Including SSNs in Form 990

As the May 15 deadline approaches for tax-exempt organizations to file the Form 990, 990-EZ and 990-PF, the Internal Revenue Service is warning them not to include Social Security numbers and other personally identifiable information in their tax forms.

Filing a 990-series return is important for many groups and they are at risk of losing their tax exemption if they fail to file for three years in a row. However, they should be careful not to include Social Security numbers on Form 990 when filing the form. The IRS also cautions not to include personally identifiable information. Including unnecessary SSNs or other unrequested personal information could lead to identity theft.

Last year, a watchdog group, Public.Resource.org, found a database of tens of thousands of Social Security numbers from people who filed the tax returns for Section 527 campaign committees and other political organizations that the IRS had accidentally posted on the Internet (see IRS Accidentally Exposed Tens of Thousands of Social Security Numbers). The IRS quickly took down the database when the whistleblower group pointed out the error, but two subcommittee chairmen in Congress soon demanded information from the IRS about the security snafu (see Lawmakers Question IRS Chief about Release of Social Security Numbers).


Amid the continuing headlines about the IRS's extra scrutiny of Tea Party groups and other political organizations applying for tax exemptions, the IRS is being extra cautious this year in warning charities, not-for-profits, private foundations and other tax-exempt organizations that file Form 990-series returns to be careful about safeguarding their Social Security numbers and other personal information. The IRS has also released a video on YouTube from an IRS employee explaining the importance of keeping such information away from identity thieves, not to mention congressmen.

How to Amend Your Federal Tax Return

Here are some additional thoughts, based on reader questions and interviews with tax pros, on what to do when you discover mistakes—or even honest omissions—on a tax return you've filed. The answer varies depending on your situation and the size of the change.

Suppose you get a revised form from a brokerage house or some other financial institution changing the amount of dividend income reported for last year. Often, the change is just a few dollars. In such cases, tax pros say many clients routinely ignore it, even if the change would mean a slightly larger refund. It may not be worth the cost of paying your tax preparer to file amended returns.

But the answer would be different if you receive a notification involving a substantial amount. "You usually should file an amended tax return if you made an error claiming your filing status, income, deductions or credits on your original return," the IRS said in a "tax tip" in April. Use Form 1040X, and check on your state's rules, too. (Most states have their own income tax.)

When should you file an amended return? This can be tricky. "If you are due a refund from your original return, wait to receive that refund before filing Form 1040X to claim an additional refund," the IRS said. "Amended returns take up to 12 weeks to process." You may cash your original refund while awaiting the additional refund.

If you owe more tax because of something you just discovered, "file your Form 1040X and pay the tax as soon as possible," the IRS said. "This will reduce any interest and penalties."

How do you find out what's happening on your amended return? You can check three weeks after you file by clicking on "Where's My Amended Return?" on the IRS website (irs.gov). You can also call 866-464-2050. The IRS says you can use this to track an amended return for the current year and up to three years back.

Time to Think About Taxes, Again!

Yes, I know we're just past last year's tax season, but good tax planning works only if we start early enough for the current year. Having last year's tax return still fresh in memory gives us a great start for next year's tax planning.


Understand how your income is being taxedDo you know what your effective tax rate is? Do you have more than one income source? Do you know how each of your income sources is taxed? Income can be broadly classified as:

• Ordinary — Income from a regular job, self-employment and freelancing; interest income and non-qualified dividends.
• Capital — Qualified dividends, income from the sale of an asset (stock, real estate, etc.)
• Passive — Income from sources like real estate and business investments where participation is not required.

Each of these types of income is taxed at a different rate. A tax-savvy individual minimizes the income from the highest taxed source and moves his earnings toward the lowest taxed source. Before you dismiss this advice thinking you can't quit your job, think of other ways you can achieve the goal.

• If you have a large amount of money sitting in a savings account that you won't require for at least 5 years, can you move it to dividend-paying stocks?
• If you paid the higher rate for selling a stock too soon, can you plan better on when you buy and sell stocks to pay the capital gains rate instead of the ordinary rate?
• If you don't have more than one source of income, especially if your job is your only source of income, consider diversifying by earning income on the side.

Are you leaving any money on the table?For each deduction you took this year, is there a better way to save money?
For example, if you had dependents and paid for child care, have you looked at your employer's benefits to see if they offer a dependent care account? A lot of employers also offer discounts toward a variety of businesses. One of my past employers offered a discount and extended hours at a nearby day care, but no one knew about it because it was only mentioned in an online benefits brochure which didn't get many views.
Did you contribute at least enough to your retirement plan to get the employer match?


Can you optimize your deductions?Did you itemize or take the standard deduction? What is the difference in your return when choosing between itemized and standard deduction? If you donated to charity and the difference between your standard and itemized deductions was small, you might want to consider donating every other year. Here is an example to explain this better:
Let's say you donated $12,000 to charity in 2012 and again in 2013. Let's additionally assume that both years you opted to take itemized deductions. The total deduction for 2012 and 2013 is $24,000.
Now, instead, let's assume you set aside $1,000 each month in 2012 and donated the entire $24,000 in 2013. You take the standard deduction for 2012 ($11,900 if you are married and filing jointly) and itemized deduction for 2013 ($24,000). This makes the total deductions for 2012 and 2013 a whopping $35,900. You can deduct an extra $11,900, which, depending on your tax bracket, can be a substantial saving.
Of course, this is an over-simplified illustration; there are other deductions like state taxes and property taxes to consider. These cannot be skipped every other year, but it is definitely worth doing the calculations both ways to determine which is more beneficial.


Are you placing your investments in a tax-smart vehicle?Taxes should not be the only concern for any investment; you should evaluate your risk tolerance and do careful asset allocation. After you have made your investment decision, it is essential to choose the right vehicle to make it tax efficient. Should you invest in a taxable account or a tax-sheltered account? For example, if you are going to hold a stock for a very long time, it can be in a taxable account as it will be taxed as capital gains; but if you are going to be generating a lot of short-term gains, it might be better to place it in a tax-sheltered account.


Have a strategy in placeAfter going over your tax return with the goal of planning for next year, is there anything you can do now to make next year's return more efficient and less time-consuming? Think of all the potential expenses this year and figure out if any of them are deductible. For example, if you are planning to send your kids to summer camp, it might be a deductible expense. Knowing what you are going to deduct this year will make it easier to save the receipts and will also make sure you won't miss it due to last-minute lapses in memory.


Set up a system for next year's deductionsReceipts, receipts and more receipts. Anything that can be deducted, file it. Set up a system that works for you whether it's a folder for each month or a folder for each category or alternatively scanning the receipt and recording it in Excel. Pick a system and work on it throughout the year.


Get helpI wanted to have an accountant prepare my taxes for 2013; but I procrastinated and, by the time I contacted potential accountants, they were all too busy to take new clients. This year, I am looking for an accountant right now. Finding the right person can also be a time-consuming process. I want to get referrals, talk to the accountant, and develop a relationship. Doing it now, when the accountant is not drowning in client files, will help me find the best accountant for my situation.
What is your tax-planning strategy?

More income, more taxes - Upper-income earners face a gantlet with this year's changes

SOURCE: Detroit Free Press

Some well-to-do taxpayers won't be thrilled when they're hit with extra tax increase — which can add several hundred or several thousand dollars to the bill.

We're talking about higher tax rates for upper-income taxpayers, as well as a higher capital-gains tax rate and a new investment surtax that was included in the Affordable Care Act.

MORE TAX HELP:

See Form 8960 for the 3.8 percent tax that could apply to net investment income. The tax can apply to individuals, estates and trusts. You'd pay an additional 3.8 percent tax on the lesser of your net investment income, or the excess of modified adjusted gross income over $200,000 ($250,000 married filing jointly, $125,000 married filing separately).

• Some new tax strategies can apply because of that extra 3.8 percent surtax. For example, tax experts warn that someone in a higher-income household might think twice about making a large conversion from a traditional IRA into a Roth IRA. That's because the required inclusion of income from that conversion would drive up your adjusted gross income. Better planning over a few years could avoid triggering the tax.
• Financial planners are suggesting that investors review some strategies to help avoid or mitigate the 3.8 percent surtax. Some might ideas include reducing taxable income by contributing to 401(k) plans and IRAs; and looking into life insurance and charitable remainder trusts.

"Between the increased tax brackets that went into effect in 2013, and the new 3.8 percent Medicare surtax on net investment income, many upper-income taxpayers are seeing a significant bump in their taxes," said Patricia Bojanic, certified public accountant and tax partner at Gordon Advisors in Troy, Mich.

"It's made tax and investment planning that much more important," Bojanic said.

Some higher-income households, she said, could end up seeing an increase of 24 percent or more in the taxes on their investment income.

First, let's look at the new, little-understood 3.8 percent surtax that took effect in 2013.

Now, some taxpayers could be subject to an extra tax on net investment income. Investment income includes interest, dividends, royalties, rents, capital gains and passive activity income.

More people could be talking about the 3.8 percent surtax this season because of the relatively lower income threshold, said Bernie Kent, chairman of Schechter Investment Advisors in Birmingham, Mich.

"This is the one new tax that applies to the most people," said Kent, who has worked more than 40 years with high-net worth individuals and families.

The 3.8 percent surtax would apply to married couples when modified adjusted gross income exceeds $250,000 if filing jointly, and singles when modified adjusted gross income exceeds $200,000. The surtax would apply to married couples filing separately who individually earn more than $125,000.

On top of that, an added Medicare tax of 0.9 percent on gross income from wages and self-employment would be imposed on taxpayers earning more than $200,000 single or $250,000 for joint filers, too.

Alan Semonian, certified public accountant at Ameritax Plus in Berkley, Mich., said he has seen some higher-income households this season getting hit by the 3.8 percent surtax after receiving significant capital gains distributions from mutual funds.

One married couple, both physicians, had to report $50,000 in capital gains distributions from their mutual funds, he said. For that particular couple, the gains helped to trigger about $5,000 in extra taxes relating to the surcharge.

Mutual funds that aren't in tax-sheltered accounts, such as IRAs or 401(k)s, are required to pass profits from capital gains, interest or dividends to individual investors. You'd owe tax on that distribution, even if you did not sell off your shares in the fund.

The 3.8 percent tax does not apply to money taken out of a qualified retirement plan or IRA. It also does not apply to interest income from municipal bonds. Net investment income would not include wages, jobless benefits, Social Security benefits and alimony, either.

Though there are not many ways to reduce this 3.8 percent tax hit in 2013, a few options can exist for some people who are slightly above the $200,000 or $250,000 thresholds, Kent said.

Kent noted that someone who works for an employer who doesn't provide a 401(k) plan or other type of retirement plan, such as a traditional pension, still could contribute now through April 15 for the 2013 tax year to a deductible IRA, which would reduce taxable income. For 2013, a taxpayer could contribute up to $5,500. Or someone age 50 or older last year could contribute up to $6,500.

Someone who is self-employed could consider contributions to a Simplified Employee Pension IRA, and that could reduce 2013 taxable income.

The way the 3.8 percent surtax is calculated can be a bit confusing. For example, a single person with $225,000 in modified adjusted gross income could face an extra tax of $950 if wages were $100,000 and net investment income was $125,000. The surtax in that case is applied to $25,000 of net investment income.

For those with even higher incomes, more tax hits are taking place this year.

The highest tax rate jumps back to 39.6 percent for taxable income more than $400,000 for singles and more than $450,000 for married couples. That's up from 35 percent.

Investors in the top bracket now must pay 20 percent on long-term capital gains and dividends, instead of the 15 percent that most other taxpayers pay.

Higher-income taxpayers also face a potential phase-out of itemized deductions and personal exemptions, if their adjusted gross income is $250,000 or more if single or $300,000 or more for married couples.

James Jenkins, president of Jenkins accounting firm in Southfield, Mich., said self-employed business people are doing more planning. Many of these upper-income people, he said, "aren't accidentally rich" and they are not likely to just stand still as rates climb higher.

The real tax rate is closer to 44 percent, not 39.6 percent, for some higher-income taxpayers who have taxable income above the $450,000 threshold, Jenkins said.

"You know what a phase-out is? It's called higher tax rates," Jenkins said.

There are ways to reduce your tax bill after year’s end

If you have not finished your taxes, then join the crowd. The IRS typically receives 20 percent of all returns within the last week of the April 15 tax deadline. Given there are around 150 million individual income tax returns filed in a year, this represents almost 30 million returns.


While there are fewer opportunities to reduce your tax bill after year-end, there are some. While tax planning after the end of the year can help you reduce your tax liability, it can also make the tax-filing season cheaper and easier and give you a jump start on next year’s taxes, as well.


Some tips:
If you are not self-employed, the No. 1 tax savings opportunity after year-end is to fund an Individual Retirement Account (IRA). Without getting too in depth about the intricacies of IRAs, in general, if you have earned income from a job or self-employment and are under the age of 50, you can contribute up to $5,500 into an IRA for 2013. This contribution must be made by April 15 without extensions.


If you are over the age of 50, you can contribute an additional $1,000 via the catch-up provision associated with IRAs. If you are a non-working spouse, you can utilize the earnings of the working spouse to allow a contribution to be made in your own IRA. Whether the contribution is deductible, and thus saves you taxes, will depend upon your filing status, your adjusted gross income and whether you and/or your spouse are covered by a retirement plan at work so please check with a tax professional on this.


If you are self-employed, an even larger contribution can be made via an SEP IRA. Unlike the Traditional IRA, these contributions can be made up until the tax filing deadline, plus extensions. This is the only type of retirement account that can be set up after year-end for a self-employed person and thus is very popular with those who did not plan accordingly. In general (and not exact), to find your allowable contribution, multiply the net earnings from your business by 20 percent. If your self-employed earnings exceed $255,000, you will be limited to a maximum $51,000 SEP contribution. This is an excellent tool for those who are self-employed without employees. If you have employees, the IRS requires a contribution for the employees at the same percentage made for the owner. There are qualification rules associated with this for employees which can be found in IRS Publication 590.


In addition, make sure you are organized. Many taxpayers simply overlook deductions because they can’t find them or don’t track them very well. A good system, whether manual or via a computer program such as Quicken or Mint.com, can make a world of difference between owing taxes and getting a refund.


If you will be getting a large refund, you may wish to put this money to good use on something that will make a difference in your life. Consider paying down credit card debts; applying the refund to a long-term goal, such as education for a child; or making an extra mortgage payment on your home. But don’t simply waste it on some impulse purchase that will add no real value once you take it home. If you are receiving too big a refund or owing too much, consider changing your withholdings to prevent this and to allow your money to better work for you.


While taxes may not be your favorite activity, taking simple steps can make them much easier and less expensive for you, allow you to save money even after year-end and use any refunds wisely.


Life is a journey; plan for it.

Read more here: http://www.thestate.com/2014/04/06/3369713/your-money-there-are-ways-to-reduce.html?sp=/99/101/#storylink=cpy

Biggest urban legend in taxation - the Gift Tax

What is the biggest urban legend in the area of taxation?

If you answered “the gift tax,” score one for the home team.

The most common phone call received by tax professionals involve inquiries from parents or grandparents about whether or not they will have to pay gift tax on their monetary gifts. Adult children and grandchildren call to ask about whether they will have to pay a tax on gifts received. [Lots of hand-wringing going on]

Like the urban legends that struck fear in many of us as youngsters, the dark, scary world of gift taxes does the same to adults. One person whispers a rumor of a gift tax nightmare that some other person experienced and the urban legend grows and grows.

People fear the gift tax simply because they don’t understand how it works.

Knowledge conquers fear: Demystifying the gift tax

The gift tax is a real tax. You don’t necessarily need to pay it, but there are a number of rules surrounding this inconvenient tax.

First, any person can gift any individual up to $14,000 in 2014 and have no obligation to report it to the IRS. So mom and dad can give a combined $28,000 to their favorite child without creating any new filing requirements for themselves. But, if mom and dad gift little Johnny anything above that amount – even $28,001 -- they will need to file a gift tax return with their annual tax return.

Filing a gift tax return does not mean that these generous parents will automatically have to pay a gift tax (yes, the IRS assesses the gift tax based on the giver’s financial circumstances), but they will have to file the return. In fact, an individual owes no gift tax until he or she gives away the lifetime exclusion amount.

So what’s the lifetime exclusion amount?

For 2014, the lifetime exclusion amount is quite generous at $5,340,000! If you give away more than that, then you will owe gift tax – assessed at the whopping rate of 40 percent. This means that for the average taxpayer, fear of having to pay a gift tax represents an unfounded worry. You don’t need to add unnecessary sources of stress to your life.

Every rule has its exception (or two)

In some situations, you may not have to file a gift tax return even if you give over the annual limit.

Let’s suppose your favorite Aunt Martha is very sick and out of the goodness of your heart, you decide to pay her medical bills. No gift tax return is required, even if the amount exceeds $14,000. However this exception comes with an important caveat – you must pay the medical provider directly. If you give Aunt Martha the money and she then chooses to use it to pay her medical bills, you’ll need to file a gift tax return if the amount exceeds $14,000.

Another exception involves gifting money for higher education costs (i.e. college tuition). So, let’s say you decide to pay little Scarlet’s university tuition. You won’t need to file a gift tax return, even if the amount exceeds $14,000. But just like the example with Aunt Martha above, you’ll need to pay the money directly to the university. If you write young Scarlett a check for her tuition and the amount exceeds $14,000, you’ll need to file a gift tax return. By making payment directly to the educational institution, you can gift an unlimited amount of money with no obligation to file a gift tax return, or pay gift tax on it in the future.

Now you know the facts, so stop living in fear and embrace your desire to gift money to your loved ones. Unless you are giving away more than $5,340,000 you will not owe any gift tax.

Even so, any time you plan to give away large amounts of money, it’s wise to consider sitting down with a qualified tax professional. He or she may know of some legal ways to avoid the 40 percent rate on taxable gifts.

Revisiting the myth of tax deferral

By Tom Sedoric


I’m puzzled why there are not more discussions and articles about tax efficiency and investments, particularly when it comes to the issue of tax deferral.


Of course, tax planning is far from “sexy.” The lead story in the most recent IMCA (Investment Management Consultants Association, ) research quarterly was titled,  “Increased Tax Rates and Investment Strategy.”


Like the remarkable underestimation of the potential long-term power of compound interest in creating one’s fortune, there are too few discussions about the potential shortcomings of tax deferral and the significance of tax-efficient investment strategies.


I’ve beaten this drum for a long time. It was nearly three decades ago, when the transition to 401(k) plans was taking off, that I wrote a column that drew the ire of many of my fellow advisers and friends in the accounting profession. The abridged version goes like this: beware the myth of tax deferral. My point was to take a hard look at the long-term implications of tax-deferral plans and to recognize the potentially serious drawbacks in the future.


The future is here for some. There is often confusion about the benefits and mathematics of tax deferral, as well as pretax savings, because sometimes a tax-deferred account or investment only defers one from paying potentially more down the road. This may not always be to an investor’s advantage.


Owning a tax-deferred asset, like the stock of a good company or fund, in a taxable account is often wiser than holding the same fund or company in a tax-deferred account like an IRA or 401(k). If held in an IRA, that growth company or fund will eventually be taxed as ordinary income.  Ordinary income tax rates could be twice the level if the stock or fund had been held in a taxable account, sold, and taxed as a long-term capital gain. Remember, in investing, it is not what you make, but what you keep that matters most.
A conscious choice
Automatic savings can occur if a 401(k) is in place and can be terrific for the investor taking control of their retirement security and very profitable for mutual fund companies and insurance vendors. I think trends and events over the past three decades have given us a clearer perspective of winners and losers in the tax-deferral arrangement.


One reality has become quite apparent: People who do not create diversified tax efficiencies and who relied too much on tax-deferred investments in their long-term plans may find themselves hit with much greater tax burdens than they expected or needed to pay in later years. Individual tax rates have been largely declining for three decades, while few experts believe tax rates will be lower in the future.


The issue of tax efficiencies remains elusive because it sounds dull, dry and formidable – better left to accountants. It is anything but formidable, and I believe the matter of tax efficiencies resides in the same category as compound interest. It is considered dull and unexciting when compared to the latest investment scheme.


In truth, tax efficiencies should be an integral part of any sound investment plan.
Here’s a frequent example of mine, and it has to do with my favorite hypothetical company, XYZ:
Investor A has a $1 million investment in company XYZ, with a zero cost basis, held in a tax-deferred IRA savings account. Investor A also has $1 million directly invested in company XYZ stock in their personal trust or investment account, also with a zero cost basis.
On paper, both assets are worth the same, except for the significant difference of future tax liability. And if the client dies with a significant IRA, the tax burden on future generations may even be higher.


The obligation of the tax-deferred IRA is set at the income tax rate, which could currently be over 40 percent, or higher if ordinary income tax rates increase again. The sales of stock in a taxable account would be subject to a much lower long-term capital gains tax of barely 20 percent for even the highest-income investor.


Assuming a zero cost basis for this hypothetical example, the IRA investment could have an after-tax value of an estimated $600,000 while the stock investment in a taxable account could be worth as much as $800,000 – a $200,000 difference.


Some would call this found money, but in reality it’s a conscious choice to weigh long-term risks and benefits – and naturally unique to every investor. If investors are blinded or distracted by the allure of tax deferrals, they may miss out on the opportunity to have greater flexibility for future earnings.
I don’t believe that tax-deferred plans are inherently unhealthy, though the late Sy Syms said, “An educated consumer is our best customer,” and the same may be true in the realm of tax deferral. After all, why should people pay more taxes than they need to?

Chart Shows When To Expect Income Tax Refunds

One of the top-searched questions between mid-February and April 15 each year is, "When can I expect my income tax refund?" Well, the answer depends on a couple of things, but the good news is that there are a number of tools to help find out.


First of all, taxpayers who use a professional, such as a CPA or EA, can ask that person for an estimated date. Taxpayers who've already filed can also go to the Internal Revenue Service's website, which has a tool designed specifically for that called, "Where's My Refund?"


The tax agency will begin processing tax returns on January 31, 2014, for taxes paid/owed in 2013. In general, the IRS says that returns with refunds are processed and payments issued within 21 days. For paper filers, this can take much longer, however. The IRS and tax professionals strongly encourage electronic filing.


How quickly a taxpayer receives a refund also depends on when they file and whether they have requested a direct deposit of their refund, or a paper check. This is because during some time frames there is increased traffic, with more filers getting their forms in. The busiest time, and which can experience longer waits on refunds, is usually for those who file in the last week before the April 15 deadline.


The following chart, developed by Hot Springs Tax Services, provides a general estimate of when taxpayers can expect their refund, based on date filed and type of refund payment. The chart is also available at: http://refundschedule.com/2014-irs-e-file-chart.

IRS accepts your return (by 11:00 am) between…					Estimated Direct Deposit Sent	Estimated Paper Check Mailed
				Jan 31 2014	2/5/2014	2/7/2014
January 31		and		Feb 08 2014	2/12/2014	2/14/2014
Feb 09		and		Feb 15 2014	2/19/2014	2/21/2014
Feb 16		and		Feb 22 2014	2/26/2014	2/28/2014
Feb 23		and		Mar 01 2014	3/5/2014	3/7/2014
Mar 02		and		Mar 08 2014	3/12/2014	3/14/2014
Mar 09		and		Mar 15 2014	3/19/2014	3/21/2014
Mar 16		and		Mar 22 2014	3/26/2014	3/28/2014
Mar 23		and		Mar 29 2014	4/2/2014	4/4/2014
Mar 30		and		April 05 2014	4/9/2014	4/11/2014
April 06		and		April 12 2014	4/16/2014	4/18/2014
April 13		and		April 19 2014	4/23/2014	4/25/2014

Upper brackets will feel weight of federal tax changes

How will the major tax changes approved by Congress affect your returns?
Taxpayers will find out soon as they plug figures into their tax returns, due April 15, and see for the first time the impact of last year’s federal tax law changes.
To get an idea of what they might find, the Globe asked tax preparer H&R Block to create some tax return scenarios, calculating tax liability under both the 2012 and 2013 tax rules using the same income numbers for both years.
The result: Taxpayers who are married and filing jointly with income of $250,000 or less may be pleased to find their taxes declining a bit. Even couples making $450,000 — enough to trigger most of the thresholds for new taxes, phased-out deductions, and phased-out personal exemptions — probably won’t see a dramatic increase in their tax bill.

But as annual income rises above that level, so do tax bills. Despite all the news coverage about the new tax laws, that may still come as a surprise to many.

Moreover, the numbers will vary even among those with similar incomes, said Bob Lepson, vice president of financial planning at Braver Wealth Management in Needham. “The specific makeup of your income will make a big difference,” he said.

For example, a couple earning $1 million but with no investment income will be untouched by the new 3.8 percent tax on net investment income. That couple will also be subject to the phase-out of itemized deductions, but they’ll feel the sting more acutely if they have substantial itemized deductions such as a big home mortgage.
Taxpayer unhappiness, however, may not be directly related to any actual increase in taxes. People are often more focused on the size of the check that they have to write when they file rather than the amount of their total tax bill, said Jackie Perlman, H&R Block principal tax analyst. And the size of that check will depend largely on taxes withheld from paychecks and any estimated taxes paid in 2013.
According to H&R Block, here’s what happens to the tax bill of hypothetical couples whose salaries, investment income, property taxes, and family size are exactly the same as in 2012. In each of these scenarios, investment income is $25,000 a year while the amount of property taxes, mortgage interest, state and local taxes, and charitable contributions increases as income rises. While these scenarios are based on married couples filing jointly, the same principles apply to individual filers, but with lower thresholds.

THE $250,000 COUPLE

Married, employed, and with two dependent children, this couple doesn’t make enough to trigger any of the new tax thresholds. As such they escape:
■ The new 0.9 percent Medicare tax on earned income above $250,000 for those married filing jointly.
■ The 3.8 percent Medicare surtax on net investment income for those with modified adjusted gross income over the $250,000 married-filing-jointly threshold.
■ The phaseout of personal exemptions and itemized deductions, which is triggered when adjusted gross income exceeds $300,000 for couples filing jointly.
■ Higher tax rates, which go into effect once taxable income exceeds $450,000 for couples filing jointly. The top marginal rate jumps to 39.6 percent from 35 percent for 2012, and the top tax rate on capital gains goes to 20 percent from 15 percent.
This $250,000 couple, in fact, would experience a 1 percent decrease in taxes. The reason: Inflation indexing means personal exemptions increase to $3,900 per exemption in 2013 from $3,800 in 2012, a total increase of $400 for their family of four. As a result, this couple would pay $41,198 in taxes, which is $425 less than they paid for 2012.

THE $450,000 COUPLE

This couple makes just enough to trigger every new threshold except the higher income tax and capital gains tax rates. Under the 2013 rules, they lose their personal exemptions, get $4,500 trimmed from itemized deductions, and must pay the new Medicare and net investment income taxes.
Yet their 2013 tax bill is only $1,363 higher than it was for 2012, a 1.4 percent increase. Why so small? A “permanent patch” on the alternative minimum tax, or AMT, approved last year means this couple pays $6,844 less in AMT than they did for 2012. The AMT, originally designed to keep wealthy taxpayers from using tax loopholes to avoid taxes, was affecting a growing number of middle-class taxpayers because it didn’t automatically adjust for inflation. Last year, Congress replaced periodic annual “patches” with a permanent inflation adjustment.

UPPER-BRACKET COUPLES

Scenarios for couples with income at $750,000 and $1 million saw big jumps in their tax bills. Here couples lose their personal exemptions and see their itemized deductions trimmed more aggressively. Moreover, they feel the impact of the new 39.6 percent top-income tax rate and the 20 percent capital gains tax rate, and they owe more for the new Medicare tax and tax on net investment income.
At the $750,000 income level, the total tax bill jumps 10.6 percent, leaving the couple owing Uncle Sam $202,990 or $19,450 more in taxes. At $1 million, the couple will see a 12.8 percent increase and owe $33,105 more in taxes, bringing the total tax bill to $291,100.
Once taxpayers complete their 2013 returns, they’ll have some clearer guidelines for plotting tax-saving strategies. Those who find themselves facing big taxes on net investment income, for example, may want to make sure that income-producing investments such as taxable bonds are held in tax-advantage accounts such as IRAs and 401(k)s.
Tax-loss harvesting — selling some investments at a loss to offset capital gains — also may become an important way of reducing net investment income.
Given the complexity of today’s returns, some may want to make use of financial advisers to fine-tune portfolios to help reduce tax liabilities. Fidelity Investments is seeing growing demand for personalized portfolio services that help investors manage not only their money but also navigate the tax environment, said John Sweeney, executive vice president of planning and advisory services at the Boston-based mutual fund company.
“Investing for an after-tax return can be more complicated,” said Sweeney.

Planning for Social Security

Social Security recently announced its new figures for 2014.

Benefits for the 57 million monthly receipts will increase 1.5 per cent. The average check will be $1,294 per month.

 

People who receive the maximum benefit will receive $2,642 per month. These are people who paid in the maximum for 35 years.

 

People who receive disability payments will get an average of $1,294 per month. Cost-of-living increases are based on the consumer price index from the third quarter of 2012 through the third quarter of 2013. In the last 25 years, they have averaged 2.74 percent.

The maximum amount that can be taxed on Social Security will increase up to $117,000. That means that a worker at the top level will pay about $205 more this year. You must continue to pay the Medicare premium even above this level. In addition to that, people earning more than $200,000 have to pay an extra Obamacare tax of 0.9 percent.

Many people do not realize that you must give up some of your Social Security income if you start collecting before full retirement age.

 

For 2014, the figure is $15,480. For every $2 you earn above this amount, you must re-pay Social Security $1. There is a special rule for the year until you reach full retirement age. That year only, you can earn up to $41,400 and then you must give back one dollar for every three you earn. This only applies until the month of your birthday when you reach full retirement age.

After full retirement age you can earn any amount of income without a penalty. People often do not take this into consideration when they start Social Security at age 62.

Remember, every day 10,000 people reach retirement age. Because of all of this volume, Social Security is moving more functions online.

Many middle class taxpayers might get hit with the alternative minimum tax. This was created in 1969 to make sure that everyone paid taxes. Originally it got the very rich who maybe only owned tax-free investments such as muni-bonds. Today the rich are paying a lot more regular income taxes so that is often more than the alternative minimum. You have to pay whichever is higher. Low-income taxpayers do not earn enough to worry about the alternative minimum. This year it is estimated that some 3.9 million people or 4.2 percent will get hit with AMT. The average for individuals is $6,600. For a couple filing jointly the limit could be $80,800 and for individuals $51,900.

Whether you will be affected depends on your particular deductions. People at the most risk live in states with high local taxes, exercise stock options, report large investment options, have lots of children, use home equity loans, have many miscellaneous deductions or are claiming business depreciation.

 

People with extensive municipal bond holding also could be at risk.

If you are subject to this tax, you need to do substantial tax planning. Congress finally indexed the levels for exposure to this tax last year. That should make planning possible. Tax planning is important for all of your investment whether you are subject to this tax or not.

IRS Audit Targets

FROM ACCOUNTINGTODAY.COM


While many taxpayers look forward to filing season as the time they can get “free money” in the form of their tax refund, those with more complex returns are focused as well on avoiding situations that might lead to an audit.


“Things are different today than they used to be on audits,” observed Bradford Hall, managing director of Hall & Company CPAs. “They used to select returns based on various items on returns. They would review for anomalies, such as high charitable deductions which they would pick out of the crowd. Now it’s more of a matching process—‘Here’s what we have on you from these 1099s or 1098s, or medical deductions.’ They have information in their computer bank and they can compare it with your return.”


Of course, those whose annual earnings top $1 million are likely to be selected for audit approximately once every 10 years, Hall noted.


“But for those making less than a couple of hundred thousand, we’ve found that most audits are targeted to particular deductions or areas on the tax return,” he said. “The IRS doesn’t always tell us what it was that kicked our clients into an audit situation. But basically, they target specific areas such as auto expenses, home mortgage interest, property tax deductions or Schedule C income. Lots of times they will compare your W-2 with your bank deposits. If there are large deposits without the income to back them up, it will raise a red flag. It can be a problem for some people to remember where their deposits came from.”


“When Form 1099s come in, taxpayers need to realize that they will not get every Form 1099 that is reported to the IRS,” Hall observed. “There is a misunderstanding among taxpayers that they are only required to report amounts from the 1099s that they receive. Of course, everyone is required to report the amount of income they received throughout the year, whether they get a Form 1099 or not.”
“For every client that has a business, they’re doing at least a 14-month cash receipts test,” Hall said. “They do this for sole proprietorships, LLCs, small corporations, S corporations and general partnerships—any kind of business.”


One thing to watch out for is where a business changes its form, and receives a new federal ID number, Hall noted.


“The IRS has started to compare credit card sales to business income,” he said. “We’ve had a number of businesses where the credit card process had originally been set for a sole proprietor. The sole proprietor subsequently incorporated with a different federal ID number, and didn’t contact the credit card company to let them know that the ID number had changed. That triggered an audit, because the credit card company reported income that wasn’t on the individual tax return in the right area. Very few businesses remember to contact the credit card company and their vendors to let them know they have changed to a different entity.”


“The key to having a properly done tax return is to spend time and effort on it,” Hall said. “Most people don’t want to put in the time and the effort, and that leaves them at high risk for an audit. They should know that to the degree they spend time with their CPA the more accurate the tax return will be, and they will be able to sleep better at night knowing it’s been done properly.”

Helpful year-end tax tips

As 2013 comes to a close, there is still time to plan your year-end strategies for minimizing your 2013 tax liability. Let's consider some savvy tax-planning tactics that might apply to you.



Timing, Deductions And Credits

In order to plan, you will need a good sense of your expected 2013 income, adjusted gross income and corresponding tax bracket.

When it comes to taxes, timing can be important. By delaying income such as a year-end bonus or commissions, you can defer your taxes on that income until 2014. Or, if you expect to be in a higher tax bracket in 2014, taking that income in 2013 may be a better move. After you decide about the timing of your bonuses or commissions, you can then estimate your adjusted gross income by deducting common adjustments from your expected income, such as 401(k) and individual retirement account contributions, alimony and student loan interest payments, for example. These are adjustments you can take even if you do not itemize.

Next, you'll want to take a close look at possible deductions and tax credits. A deduction reduces your taxable income — that is, the amount of income on which your tax is calculated. How much a deduction saves you depends on your tax bracket. For example, in a 25 percent bracket, a $1,000 deduction saves $250 of tax. In a 33 percent bracket, the same deduction saves $330. Many people find that claiming itemized deductions for expenses such as mortgage interest, state and local tax, and charitable contributions provides them with a better tax result than claiming the standard deduction.

Unlike a deduction, a tax credit directly reduces your tax liability. Whatever your tax bracket, generally speaking, a $1,000 tax credit saves you $1,000 of tax. There are several tax credits you may qualify for, such as tax credits for children, child and dependent care, post-secondary education for someone in your household and even a saver's credit.



Investment Income

Investment income includes taxable interest, dividends, rents, royalties, annuities, capital gains and income from a business investment. If you have realized capital gains on investment sales this year, you can lower your tax liability by generating offsetting losses. Capital losses can be used to offset your gains, plus up to $3,000 of your ordinary income, too.

Conversely, if you have already sold some investments at a loss, you can take capital gains on appreciated stock that you may have been hesitant to sell because of tax consequences. As long as the gains aren't more than your available losses, you'll be able to take them without the tax liability.



New Medicare Tax

If you are a high-income earner, you may be subject to the new 3.8 percent tax on investment income, designed to help pay for the Medicare program. This surcharge will be imposed on taxpayers who have any amount of combined net investment income, if their adjusted gross income is greater than $200,000 for single filers, $250,000 for married filing jointly and $125,000 for married but filing separately. Working to reduce your adjusted gross income to below the appropriate threshold could help you avoid this tax.



Decisions That Work Best For You

On a final note, remember that pre-tax contributions to an employer's retirement savings plan and/or deductible contributions to an IRA can reduce your current taxes as well as help you save for retirement. If possible, try to max out your retirement plan contributions for the year.

Consulting with a tax professional can provide you clarity on how best to minimize your tax liability.

Tax-saving through gifts

This time of year is often tax-planning time for those who want to pay lower taxes overall. One tax-saving idea deals with gifts to family and friends and another uses IRA funds.

Each of us can make annual gifts of up to $14,000 per recipient to any number of individuals to reduce the future taxability of our estate and provide for family and friends now. That amount is excluded from gift taxes. In the coming years, the annual amount will be indexed for inflation.

Married couples can make a combined gift of up to $28,000 per recipient, even though only one owns the property, and the gift will escape this type of tax.

These gifts to family and friends can be in the form of cash or stocks, mutual funds or corporate bonds. When appreciated assets are transferred, the recipient will also receive the original owner's cost basis and holding period for future tax calculations.

Many who have planned wisely for retirement by putting money into IRA accounts now find that the required annual distributions are funds they do not really need after all. However, they must withdraw a certain amount or face a 50 percent federal tax penalty.

An alternative to paying the federal and state income taxes is available. Federal law currently permits anyone age 70-1/2 or older to make tax-free gifts from IRAs to their favorite charitable organizations during 2013.

Gifts up to $100,000 can be made by having the IRA manager transfer the funds directly to the nonprofit organization (private foundations, supporting organizations and donor advised accounts are excluded).

While regular IRA distributions are subject to federal and state income taxes, the charitable amounts escape federal taxes and most states, including West Virginia, also exempt the gift from taxes.

No personal benefit from the transferred amount is permitted.

An IRA gift counts toward the required minimum distribution for the year and doesn't impact or lessen the deductibility of any other charitable gifts made in 2013.

If you do not have an IRA, it may be worthwhile to discuss rolling over other tax-deferred retirement account funds into a newly established IRA to make such charitable gifts with your financial adviser.

Your hard-earned IRA funds can be a tax-free way to help your community and favorite nonprofits.

That's good planning.