Teens and taxes: What you need to know

If your teen has a job this summer, you’re probably thankful. No more begging for money! Uncle Sam is happy, too. While summer jobs have expected tax implications for the working teen, parents may bear a surprise impact on their tax returns. Let’s look at some questions you may run into.

Can I claim their income on my tax return? If your teen is working or receiving income other than interest, dividends and capital gains, they must file their own tax return. The taxes on their wages or self-employment income are based on their own low tax rate.

What age do you have to start filing a tax return? There is no minimum age to start filing a tax return, but there is a minimum filing requirement. Generally, a dependent child must file a tax return if their unearned income exceeds $1,000 or gross income tops $6,300. However, if your teen earns as little as $400 in self-employment income, they may be required to file an income tax return.

Can I still claim my working teen as a dependent? Tax rules for a dependent child are different than any other type of dependent. If your dependent child is under age 19 or is a full-time student under age 24, your child can have any amount of income and still be claimed as your dependent as long as they do not provide more than half their own support. This includes gifts, food, shelter, clothing and school expenses to name a few. Note that if your teen can be claimed as a dependency exemption on your tax return, they cannot claim their own exemption. Additional rules apply for divorced parents.

What is the kiddie tax and does it affect me? The “kiddie tax” can wreak havoc on unprepared taxpayers. This tax is designed to prevent parents from shifting investment income to their kids to take advantage of lower tax brackets. The kiddie tax applies to children under 19 years of age and qualifying dependent children ages 19 to 23 who are full-time students. Under the kiddie tax, children pay tax at their own tax rate on unearned income they receive up to $2,100. Here’s the hitch – all unearned income kids receive above the threshold amount is taxed at their parent’s highest income tax rate. Unearned income comes from investments such as interest, dividends and capital gains. Any salary or wages that a child earns through employment are not subject to the kiddie tax rules – that income is taxed at the child’s tax rate.

Can I still claim the child tax credit? Each dependent child under the age of 17 can qualify you for the $1,000 per child tax credit. The credit is available even if your child is working and files a tax return. Your filing status and income may reduce or eliminate the credit.

Why would you file if there is no requirement? Sometimes a young earner should file a return to retrieve income taxes withheld, even when there’s no filing requirement. If you don’t expect annual earnings to exceed the filing requirement, note “exempt” on line 7 of form W-4, instead.

Can I file on a smartphone? No matter how convenient, do not prepare and file a tax return on a smartphone. Identity theft, lost records and errors are common issues if you cut corners on tax return preparation and filing. Steer clear of using smartphone applications.

Bottom line: Taxes are complex and even more so when you have a working dependent. Seek the advice of a tax professional to understand which tax implications may affect you.

Your money: Wealthy or not, you need an estate plan

Many people believe that they're not "rich enough" to have an estate plan, but this couldn't be further from the truth. We believe that estate planning isn't necessarily about how much money you have; it's about reducing the burdens on your heirs. The real focus of an estate plan should be to help ensure that your assets are distributed in precisely the manner you wish.

We contend that everyone should have an estate plan. Here are four tips to help you get started:

1. Don't assume that a will is all you need to make wishes known. A will is merely one part of an estate plan, and in many cases, it's actually not the most important piece. You may also have durable powers of attorney, health care directives, life insurance policies and trusts. In fact, many retirement savings accounts, such as 401(k) plans and IRAs, have beneficiary designations assigned to them, and these supersede what's in your will. An estate plan will help to ensure your beneficiary designations are up-to-date and in alignment with what's in your will to avoid any confusion.

2. Choose a personal representative -- and do so wisely. When you die without having named a personal representative (called an executor in some states), a court-appointed person will typically helm the charge of meting out your assets. This could be a good thing or a bad thing, but why leave it to chance? Having a personal representative allows you to ensure that all stipulations in your estate plan are met.
The person you choose needs to know that they'll assume this role upon your passing and you must make sure they're up to the task.

3. Understand the consequences of NOT having an estate plan. If you die without a will or estate plan, your estate will be turned over to the state probate process. This can be time-consuming and very expensive -- the taxes and fees involved can absorb a large portion of the assets you had intended to leave to your heirs. In fact, they may have to sell off additional portions of your estate just to pay for these taxes and fees. Aside from the costly probate process, dying without a will or estate plan also means your estate may be left to someone whom you would have not preferred to receive your assets.

4. Review your estate plan on a regular basis. While you likely don't need to review the entirety of your plan every year, it's important to check in every three to five years, or when you experience a major life event (birth, death, marriage, divorce, etc.).

Aside from these basic tips, there are additional ways that working with a professional tax adviser and estate planning attorney may help you reduce taxes and address fees associated with passing down an estate. After all, when your heirs are coping with the emotional stress of your passing, the last thing you'd want them to deal with is a financial burden.

Estate planning for business owners

Many business owners are so consumed with day-to-day operations they don’t feel they have time to consider estate planning, particularly since it can raise emotionally charged issues. Estate planning for a business owner requires thinking about business succession planning. Will the business be sold when the owner is ready to retire, or will a spouse or one or more of the children continue to run the business after the owner’s retirement or death? If the business is to continue, who will own it and will those who are expected to run the business have the necessary knowledge and ability to do so successfully? If there are multiple owners/partners, is there a mechanism in place to allow a deceased owner’s estate to be paid a fair price by the surviving owners for the deceased owner’s interest?

Unfortunately, only a small percentage of family-owned businesses are successfully transferred to the next generation. Attempted transfers fail for many reasons. The next generation may not have the necessary skills to keep the business going. If ownership of the business is divided equally among the owner’s children but not all of the children work in the business, this can lead to disputes among the co-owners that can scuttle the enterprise. If the owner’s estate is large enough to trigger an estate tax, there may not be sufficient cash to pay the tax without a forced sale of the business.

One important planning tool where the business has more than one owner is a buy-sell agreement that will allow a retiring owner, or a deceased owner’s estate, to receive fair value for his or her ownership share. This agreement can provide for a fair market purchase by a promissory note at a reasonable rate of interest when one owner retires, or it can be funded by life insurance policies on each owner that will allow the policy proceeds to be used to buy out a deceased owner’s share, in both cases without forcing the liquidation of the business.

A business owner who hopes to pass his or her business to the next generation needs to think and plan carefully. If possible, the best plan may be to give the ownership of the business to the child or children working in the business who will take over its management, and to leave other assets of equal value to the non-participating children. Where the business comprises the bulk of the owner’s estate, this may not be possible. In that case, the owner might consider purchasing life insurance to provide cash to give to the non-participating children, if this is an economically viable option.

Another option might be to structure the transfer of ownership so that the children actively involved in the operation of the business end up with complete control over the management of the enterprise and the non-participating children receive their interests in a form that allows them to receive their share of the net profits of the business but without the ability to control or interfere with the control of the business.

If the business comprises more than 35% of the owner’s estate, after the owner’s death the estate may qualify (under Internal Revenue Code Section 6166) for a deferral of the estate tax attributable to the business and elect to pay the tax in installments over as many as 15 years. This election is intended to avoid the forced liquidation of the business and to allow future profits to be used to pay the estate tax.

In short, business owners have unique estate planning issues and planning early, while the owner is still hearty, is the best way to improve the odds that the company will thrive after the owner is gone.

Tax Secrets: Why do the rich buy so much life insurance?

FROM NAPLESNEWS.COM

The answer: Favorable tax law makes life insurance tax-free. This law gives everyone, but mostly the rich — who are always in the highest income tax and estate tax brackets — an easy way to create more wealth. Tax-free. No risk. Guaranteed!

Is $1 million a lot of money?

Can you guess how many dollars you must earn to leave your family $1 million?

Try this:

• You must earn $2.78 million.
• Less income tax (state/federal) on $2.78 million at 40 percent: $1.11 million.
• Balance: $1.67 million
• Less estate tax on $1.67 million at 40 percent: $.67 million
• Balance to family $1 million

A lousy deal: The tax collector gets $1.78 million (64 percent) and your family only $1 million (36 percent).

The tax law allows you to perform magic tax tricks

1. Insurance premiums are deductible for estate tax purposes

For example, suppose you pay a total of $500,000 in premiums on a $2 million dollar policy. The $500,000 is gone, it can’t be taxed by the estate tax monster. Result: For a net $300,000 cost ($500,000 premium less $200,000 of estate tax saved) your family gets $2 million tax-free (guaranteed) — a great tax-advantaged investment.

2. At death

A. So we have a $2 million death benefit, with a premium cost of $500,000, leaving an excess of $1.5 million, which is a clear profit. Yes, this profit is tax-free; no income tax.

B. The $2 million death benefit is structured (easy to do) to be estate tax-free.

3. And even after death

Say you die with a $10 million policy on your life owned by an irrevocable life insurance trust (ILIT) and your wife is beneficiary. No estate tax at your death.

Your wife dies many years later — the amount in the ILIT has grown to $12 million. Every penny of that $12 million will pass to her heirs (probably your kids and grandkids) tax-free. No estate tax. No income tax.

Three little-known strategies to enrich your heirs, while avoiding the estate tax monster.

Following are three (actual cases from my private client files) strategies used many times in real life. Read carefully. Chances are you’ll see an opportunity.

1. Funds in a qualified plan (like a 401(k) or IRA)

Sadly, funds in a qualified plan are double taxed (income and estate tax). This strategy, Retirement Plan Rescue (RPR), turns the tables on the IRS.

Example: Sam, married to Sue, has $900,000 in an IRA. Using a RPR to purchase a $5 million second-to-die policy avoids every penny of the estate tax. WOW! $900,000 (only $324,000 after the double tax) turns into $5 million (tax-free).

2. Existing life insurance policies with a cash surrender (CSV)

Frank had a second-to-die policy (insuring him and his wife Faye and owned by an ILIT), acquired in 1996 with a current CSV of $850,000 and a death benefit of $1.53 million. We did a tax-free exchange raising the death benefit to $3.48 million. No out-of-pocket cost to Frank, Faye or the ILIT. Do you have a CSV policy that is 8 years old or older? You must take a look at this strategy.

3. The annuity strategy

This two-step real-life example is a jaw dropper.

Step No. 1. Matt (married to May) bought an immediate joint life annuity for $1 million (will pay $43,843 every year for as long as either Matt or May is alive).

Step No. 2. The after-tax amount of the annuity will pay the premium on a $5.68 million second-to-die policy on their life. Everything — the annuity and death benefit — is guaranteed.

Remember the after-estate tax-value of $1 million is only $600,000. So Matt turned $600,000 into $5.68 million — guaranteed. And tax-free. Smart planning, Matt!

Getting Married this Summer? Tax Planning!

If you’re preparing for summer nuptials, make sure you do some tax planning as well. A few steps taken now can make tax time easier next year. Here are some tips from the IRS to help keep tax issues that may arise from your marriage to a minimum:

• Change of name. All the names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. The easiest way for you to get the form is to download and print it on SSA.gov. You can also call SSA at 800-772-1213 to order the form, or get it from your local SSA office.

• Change tax withholding. When you get married, you should consider a change of income tax withholding. To do that, give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. The withholding rate for married people is lower than for those who are single. Some married people find that they do not have enough tax withheld at the married rate. For example, this can happen if you and your spouse both work. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information. You can get IRS forms and publications on IRS.gov/forms at any time.

• Changes in circumstances. If you receive advance payments of the premium tax credit you should report changes in circumstances, such as your marriage, to your Health Insurance Marketplace. Other changes that you should report include a change in your income or family size. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes in circumstances will allow the Marketplace to adjust your advance credit payments. This adjustment will help you avoid getting a smaller refund or owing money that you did not expect to owe on your federal tax return.

• Change of address. Let the IRS know if you move. To do that, file Form 8822, Change of Address, with the IRS. You should also notify the U.S. Postal Service. You can change your address online at USPS.com, or report the change at your local post office.

• Change in filing status. If you are married as of Dec. 31, that is your marital status for the entire year for tax purposes. You and your spouse can choose to file your federal tax return jointly or separately each year. It is a good idea to figure the tax both ways so you can choose the status that results in the least tax.

6 Tips for Acquiring a Company

If you ever dreamed of starting a business, then you probably thought you had to start from scratch. But, did you know that that's not always the case? You can also look into purchasing an existing company, which has its own list of pros and cons.

1. Do Your Research and Due Diligence

If you're purchasing an existing business, then you should do plenty of research prior to making an offer. SBA.gov suggests you "conduct a thorough, objective investigation" by using the following list:

• Letter of Intent - this includes purposed price, the terms of the purchase and the conditions for the sale of the business.
• Confidentiality Agreement - you will not share the seller's information.
• Contracts and Leases - does the location of the business have a lease?
• Financial Statements - review financial statements of the last three to five years of the business with a CPA.
• Tax Returns - also review from the last three to five years.
• Important Documents - this includes employee contracts, customer lists, sales includes.
• Professional Help - have an attorney review the legal documents, and an accountant look over financial records.

Also remember that you'll have to do your due diligence by making sure that all licenses and permits are in order, as well as zoning requirements and any environmental concerns.

2. Assemble a Dream Team

As Carolyn M. Brown states on Inc., you should assemble "an internal working team made up of representatives from finance, sales and marketing, and operations," as well as outside advisors like lawyers, accountants, investment bankers, and valuation experts. For a smooth acquisition, make sure each member has clearly defined representatives, as well as "cohesive thinking and constant communication among team members."

3. Respect Prior Products, Services and Customers

Ben T. Smith, IV has a great point on Business 2 Community, "you must respect what that team built in terms of product and customer relationships," no matter if you are just acquiring the talent or keeping the business intact. Remember, "if you upset their customers or dismiss their product through a lack of respect, you are going to end up with a lot of very frustrated engineers on your hands."

4. Secure Digital Rights

With so much going on, it's incredibly easy to overlook locking up the digital rights of a company. This includes passwords, web domains, and social media and email accounts. As Annette Giacomazzi, owner of CastCoverZ, informs the Wall Street Journal, "Some will try to compete with you as an established brand. A few will be negative and trash the brand. Some will just purchase and hold them, to extort a purchase price."

Additionally, don't forget to have the email accounts from customers, clients, vendors, etc. transferred to you so that can inform them of the acquisitions. If not, your email could end up as spam.

5. Reduce the Purchase Price

If you're looking for ways to reduce the price of the business, then you may want to start by looking for indicators of a distressed sale. Mark Toohey explains on Adroit Lawyers that these indicators could include:

• Business owner is retiring
• Poor financial position
• Urgent sale schedule
• Been on the market for a long time
• Sale price has been repeatedly lowered
• Disputes between the owners
• Changing legislative conditions
• Changing market conditions

Another explanation of the lower price could be performance factors, such as: declining sales, diminished profit margins, poor financial record keeping, or poor administrative or legal record keeping.

Finally, make sure that there aren't any shoddy management practices, like:

• Low returns on investment
• Bad administrative practices
• Bad employment practices
• Threatened or actual litigation
• High number of customer complaints
• High refund or repair claims
• Continual discounting
• Poor marketing results

6. Seek Alternatives to Cash

If you need to acquire a company ASAP but don't have the cash at the moment, then look for funding elsewhere. According to Entrepreneur's How to Buy a Business you can use the following alternatives to finance your acquisition:

• Use the seller's assets. Make a list of all the assets you're buying (along with any attached liabilities), and use it to approach banks, finance companies and factors (companies that buy accounts receivable).

• Buy co-op. If you can't afford the business yourself, try buying with someone else.

• Use an Employee Stock Ownership Plan (ESOP). ESOPs offer you a way to get capital immediately by selling stock in the business to employees. If you sell only non-voting shares of stock, you still retain control. By offering to set up an ESOP plan, you may be able to get a business for as little as 10 percent of the purchase price.

• Lease with an option to buy. Some sellers will let you lease a business with an option to buy. You make a down payment, become a minority stockholder and operate the business is if it were your own.

• Assume liabilities or decline receivables. Reduce the sales price by either assuming the business's liabilities or having the seller keep the receivables.

Something else that I do after I purchase any company is I ask the former owner what his bottom line was. I do this after we concluded everything so he has nothing to lose. I'm very honest with him about what I would have gone up to. This helps me to become a better negotiator in the future. I highly recommend it!

Trusts and income taxes

It has become apparent that in the last few years an increasing number of families have become involved with trusts as an integral part of their estate and financial planning.

It is of particular concern taxpayers understand that whatever income is generated by the trust, tax on that income must be paid by somebody, usually either the beneficiaries or the trust.

Because a trust is a separate entity apart from its grantor, trustee, or beneficiary, the trust must acquire its own identification number, or FEIN, and file its own income tax return.

If the trust terms require the trustee to distribute all income, the income is taxed to the beneficiaries, whether distributed or not, in what is called a “Simple Trust.”

If the terms of the trust do anything else but require income to be distributed, then income will be taxed to any beneficiary who receives a discretionary distribution, or if retained in the trust, the income will be taxed at the trust level. This type of trust is referred to as a “Complex Trust.”

Who is the ultimate taxpayer is a question that can be important because of different income tax rate schedules for trusts versus individuals.

On a taxable income base of $12,150, a trust is paying $3,140 and 39.6 percent of any taxable income in excess of that amount.

On the other hand, beneficiaries pay a graduated rate that rises much more slowly. Thus, in most circumstances, the same amount of taxable income would generate much lower income tax to the beneficiary than to the trust.

Except for the Simple Trust, in order for the income to be taxed to the beneficiary, the income must be distributed to the beneficiary during that year. Because of delays in data processing by income payers, the government has ruled that a distribution in the first 65 days of the year can qualify as made during the previous year.

When trust property is sold at a gain, there is a capital gain which, unless specifically directed by the trust to be distributed, will remain in the trust and be taxed at the trust level.

Most trusts’ capital gains are taxed to the trust because, absent any specific directions in the trust, state law requires the gain stay in the trust. The tax rate for a trust’s capital gain is the same as the individual capital gain rate.

It would appear from the above that timely and full distribution of income, if required or discretionary, should be a procedure followed in almost all trust situations.

Because a specific trust designer or existence of a particular fact situation may require a provision not falling in the choices mentioned above, it is imperative that those of you who have a trust in your estate structure – or are planning to have a trust – review them. The income distribution provisions particularly need to be reviewed, so you may be assured your trust’s income is receiving the most favorable tax outcome.