Section 529 Plans: Estate Tax and Income Tax Advantages

The $5 million exemption from federal estate tax eliminates the need for many to do complex estate planning. Because the exemption amount is indexed for inflation, a married couple’s assets must exceed $10,680,000, before estate tax would apply, and then only at the second of their deaths.

So in contrast to prior years, when many taxpayers were encouraged to make lifetime gifts to reduce a 55% federal estate tax, now the advice for all but the very wealthy is to retain your assets to ensure there is enough to live on for your lifetime. Passing assets at death has a second advantage: the recipient of the assets obtains a "step up" in the assets' basis to fair market value, thereby avoiding income tax on the sale.

When is gifting appropriate for tax purposes? Certainly taking advantage of 529 plans makes sense for grandparents and parents seeking to accumulate funds for run-away college tuition costs. Contributions to a 529 plan are treated as gifts for tax purposes. The contributions qualify for the $14,000 annual gift tax exclusion (also indexed for inflation). Also, contributions can be pre-funded for five years, meaning $70,000 per parent (or $140,000 for a married couple). Thus, funds in the 529 are removed from the donor’s estate faster than if contributions were made each year. The donor must survive the five years, or a portion of the gift is retained to the taxable estate.

For federal income tax purposes, the investment grows tax-free, and distributions to pay for the beneficiary's college costs come out　tax-free. State law can affect the state income tax treatment.

There are other advantages, such as the donor controls the funds in the 529. Contrast the donor’s control over a 529, with the donor’s lack of control (1) in a custodial account, where the recipient receives the funds at either age 18 or 21; or (2) with other gift strategies, where typically control is lost in order to receive the benefit of estate tax exclusion. Perhaps the only disadvantage for 529’s is if you are relying on financial aid, the 529 can be considered an asset, depending on who set up the plan, such as a parent or grandparent.

Even though many gifts no longer make tax sense, 529 plans remain viable options for both estate tax exclusion and income tax reduction, without much complexity and cost.

Tax Breaks, Pitfalls of Renting Your Second Home

FROM FOXBUSINESS.COM

Owning a vacation home can be a wonderful thing, providing you and your family a private getaway with all the comforts of home.

It also could net you some extra money if you rent it when you're not there.

But if you're not careful, it also could cause you some tax troubles.

"If you have a vacation home, it can make a tax difference as to whether it was used as personal residence or not used at all by the owners," says Mark Luscombe, principal federal tax analyst at CCH in Riverwoods, Illinois, a provider of tax information and services.

Basically, the amount of time you personally spend at your second home determines how much tax you might owe on rent, as well as deductions you can claim against the property.

There are three basic second-home tax situations.

You rent the property to others most of the year.
You rent the property to others for a very short time.
You use the property yourself and rent it when you're not there.
Here's a closer look at the tax implications of these scenarios.

Second Home as Full-Time Rental

You used to enjoy spending all your free time at your beach house, but now that the kids are grown and gone, you and your spouse have found other ways to vacation. So you've decided to lease out the vacation home more than you use it.

Of course, since taxes are involved, you must meet some specific requirements to take tax advantage of your rental vacation property. If you limit your personal use of your second home to 14 or fewer days, or 10 percent of the time it's rented, you've essentially turned your second home into an investment.

And for many, it's an investment that can pay off.

"Nearly half of the people who finance their vacation homes are able to cover 75 percent or more of their mortgage by renting it out to travelers," says Jon Gray, senior vice president, Americas, at HomeAway, an online vacation rental marketplace.

HomeAway's 2013 Customer Satisfaction Survey found that second-home owners rent their properties to travelers 18 weeks a year and bring in more than $28,000 in annual rental income. "That's not an insignificant amount of money," says Gray.

Of course, that rental income is taxable. But you also can deduct many costs associated with your rented second home.

Common Rental Expenses

The Internal Revenue Service says the most common rental expenses are:

Advertising.
Auto and travel expenses.
Cleaning and maintenance.
Commissions.
Depreciation.
Insurance.
Interest.
Legal and other professional fees.
Local transportation expenses.
Management fees.
Mortgage interest.
Points.
Property management fees.
Rental payments.
Repairs.
Taxes.
Utilities.
When your deductible rental expenses exceed your rental income, you could wipe out any possible taxable income and even record losses that could help additionally at tax time.

Passive activity pitfalls
Your rental losses, however, could be limited. The IRS usually considers rental real estate as a passive activity; that is, you get income mainly for the use of property rather than for services provided.

And the tax code's passive activity rules mean that generally you can only use passive losses to offset passive income, not ordinary income such as wages. Any excess passive losses are carried forward to the next tax year.

There is one way to get around passive activity rules. If you are an active participant in your rental vacation home, says Luscombe, up to $25,000 of the home's expenses beyond the rental income could be deductible. There are income restrictions and a phaseout of this amount. If you make more than $100,000 ($50,000 if married filing separately), your deductible allowance is limited.

What constitutes active participation? You're deemed to have materially participated in a rental property if you (or your spouse) were involved in its operations on a regular, continuous and substantial basis during the tax year. This includes such things as personally maintaining the property and lining up renters, says Luscombe.

Short-Term Rental Advantages

When you or your family spend time at your second-home retreat as well as rent it for part of the year, the tax rules change. But exactly how much depends on the precise breakdown of the days you and renters are in the house.

The best tax deal is for short-term rentals. These are situations where your property is rented for 14 or fewer days. Money received for two-week-or-less rentals is tax-free.

"This issue comes up every time there is a special event," says Luscombe. Residents head out of town to avoid the increased congestion caused by special events such as the Super Bowl or music festivals, lease their homes to visitors coming in for the festivities, and pocket the payments without any worry about reporting the income.

It doesn't matter if you got $20,000 for the week those football fans leased your condo near the stadium. The IRS isn't entitled to a cent.

Even better, this short-term rental income tax break isn't limited to second homes. If you rent your primary residence for two weeks or less, that income doesn't have to be reported on your tax return.

Hybrid Home Tax Calculations

Tax rules are a bit trickier when you use your vacation home yourself for more than two weeks and also rent it out for a substantial part of the year. As with everything tax, meticulous record keeping is key.

To reduce taxes on any rent you collect, you'll want to deduct eligible expenses. But because the home has shared personal and rental use, you must allocate the costs.

For example, you spent 60 days last year during ski season at your mountain cabin. The hillside hideaway was rented for 180 days the rest of the year. You can deduct 75 percent of your vacation home's qualifying rental expenses against rent you collect: 180 rental days divided by 240 total days of property use.

But you can't claim rental losses in this situation -- only zero out your rental income.

And you'll report the personal portion of your expenses, including mortgage interest and property taxes on your second home, as usual on your Schedule A itemized deductions.

Don't Forget Local Taxes

Finally, don't overlook any state and local taxes that might be assessed on the rental of your home, whether a primary residence or a second home.

"Generally, any short-term rentals, typically called transient rentals, even just for a weekend, have a state and local tax obligation," says Rob Stephens, co-founder of HotSpot Tax Services, a Greenwood Village, Colorado, company that files state and local sales and lodging taxes for owners of vacation rental properties.

In Texas, if you rent your home for fewer than 30 days, you're subject to the state's hotel occupancy tax. It's called the transient occupancy tax in California. Florida counties collect a tourist impact tax on all rentals.

"As a practical matter, it gets very difficult for local jurisdictions to track and monitor this type of rental, so historically, we've seen a pretty high level of noncompliance," says Stephens.

But with state and local governments seeking every possible penny, tax revenue from such rentals is getting more attention. And the same technology that helps folks find short-term vacation home occupants also offers tax collectors a view of who's making potentially taxable residential rental income.

Mid-Year Tax Planning Checklist

All too often, taxpayers wait until after the close of the tax year to worry about their taxes and miss opportunities that could reduce their tax liability or financially assist them. Mid-year is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them.

Did you get married, divorced, or become widowed?
Did you change jobs or has your spouse started working?
Did you have a substantial increase or decrease in income?
Did you have a substantial gain from the sale of stocks or bonds?
Did you buy or sell a rental?
Did you start, acquire, or sell a business?
Did you buy or sell a home?
Did you retire this year?
Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?
Did you refinance your home or take out a second home mortgage this year?
Were you the beneficiary of an inheritance this year?
Did you have a child? Time to consider a tax-advantaged savings plan!
Are you taking advantage of tax-advantaged retirement savings?
Have you made any significant equipment purchases for your business?
Are you planning to purchase a new business vehicle and dispose of the old one? It makes a significant difference whether you sell or trade-in the old vehicle.
Are your cash and non-cash charitable contributions adequately documented?
Are you keeping up with your estimated tax payments or do they need adjusting?
Did you purchase your health insurance through a government insurance exchange and qualify for an insurance subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy.
Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments.
Did you make any unplanned withdrawals from an IRA or pension plan?
Have you stayed abreast of every new tax law change?

If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to consult with this office, preferably before the event, and definitely before the end of the year.

Compare traditional and Roth IRA when building your nest egg

Saving enough money for retirement is the first step toward building your nest egg, but just as important is where you invest that money.

When it comes to investing your retirement dollars, consider not only your asset allocation, but also asset location. Should you put your money in a taxable or nontaxable account? Should you set up a traditional or Roth IRA?

Millions of Americans use IRAs to save for retirement. While the majority of retirement savers have traditional IRAs, Roth IRAs — only available since 1998 — have grown in popularity. New research shows savers contribute more readily to Roth IRAs than traditional IRAs, with more than 7 in 10 new Roth IRAs opened exclusively with contributions.

In contrast, traditional IRAs are largely created through rollovers from employer-sponsored retirement plans, according to new data from the Investment Company Institute.

Still many Americans may not understand the differences between traditional and Roth IRAs to determine which accounts may be best for them. Here are some key points to keep in mind:

Differences between traditional and Roth IRAs

Traditional IRAs offer the benefit of tax deferred growth since contributions are generally made with before-tax dollars and you don't pay taxes on that money until you take it out. Contributions are deductible, unless you are covered under an employer-retirement-plan and your income exceeds certain limits, but anyone can make a nondeductible IRA contribution. You're taxed at your ordinary income tax rate on the money when you take the money out. Distributions of nondeductible contributions are not taxable.

Roth IRAs are another terrific way to save and invest for retirement. But they work a bit differently. The benefit to a Roth is tax-free growth. You make after-tax contributions and earnings grow tax-free. Unlike regular IRAs, your contributions can be withdrawn tax free at any time. Earnings from a Roth account can also be withdrawn tax-free after age 59½, as long as you have held a Roth IRA for five years. You an also withdraw up to $10,000 for a first time home purchase before age 59½.

Income and contribution limits

Contributions to traditional and Roth IRAs are the same: $5,500 this year or $6,500 for those 50 or older.

Anyone under age 70½ with eligible compensation, such as wages, can contribute to a traditional IRA, but there are income limits if you are covered under an employer retirement plan and you want to take a tax deduction on your contributions. For married couples filing jointly, the income limits for deductible IRA contributions start at $96,000 (for a fully deductible IRA) and ends at $116,000 (for a partial deduction); for single filers it's $60,000 to $70,000. The closer you get to the end of the range, the lower the amount you are able to deduct.

"There is no age limit on Roth IRA contributions. You can contribute as long as you have eligible compensation, and your income does not exceed certain amounts," notes retirement expert Denise Appleby. The income limits for Roth IRAs are much higher, making them attractive to many higher income savers. Individuals filing as single and making less than $114,000 this year and married couples who make less than $181,000 and file taxes jointly are eligible to contribute the full amount to a Roth IRA. "The eligible contribution is reduced as the income gets closer to $129,000 for single filers and $191,000 for married-filing jointly. No contribution is allowed if income exceeds these amounts," Appleby said.

Why contribute to a Roth IRA

If you're deciding between contributing to a deductible IRA and Roth IRA, there a several things to keep in mind.

Roth IRAs are a great location for the assets of many savers, particularly if you think you may need to tap into those funds at some point before retirement because you can withdraw contributions from a Roth IRA tax-free at any time.

But even if you plan to keep your money earmarked for retirement, there are several reasons why Roth IRAs make sense. If you think you'll be in a higher tax bracket when you retire, especially if you're a younger worker and have yet to reach your peak earning years, then a Roth IRA is better than a traditional IRA from a tax standpoint. Also, you don't have to take required minimum distributions from a Roth IRA at age 70½ like you do from a traditional IRA. A Roth IRA is also a great estate planning tool, since you can leave the account to your heirs and stretch out distributions tax free.

On the other hand, if you think your income tax bracket will be much lower when you retire than it is now, you may be better off taking the upfront tax deduction of a traditional IRA. If you think your income tax bracket will be the same when you retire, then it's almost a wash for income tax purposes. 

4 Mid-Year Tax Tips That Could Save You Big Bucks

Here are four steps you can take to help prepare your 2014 taxes:

- Manage your taxable income. For 2014, the top income tax rate of 39.6 percent will apply to individuals with taxable income over $406,751, or $457,601 for joint filers. If you expect your 2014 income to be near that threshold, start thinking of ways to reduce your taxable income by deferring income, contributing to pre-tax investments including to a retirement account, or shifting income to family members in lower tax brackets by giving them income-producing investments. “You want to manage your bracket,” said Rice. “It can translate into real savings.”

High-income earners subject to the alternative minimum tax should also pay close attention to their taxable income and in some cases, they may want to accelerate income. As always, your accountant should offer concrete strategies.

- Generate investment losses. The stock market has had a strong run so far in 2014 and chances are, you’ve realized some gains. With the capital gains rate for taxpayers in the top bracket at 20 percent, you should keep track of how much capital gains you’ve realized or plan to realize, and consider selling some depreciated investments to generate losses and offset those gains. You can always repurchase these investments if you wait at least 31 days.

- Contribute to retirement. It will help reduce your taxable income, as mentioned above, in addition to help you plan for the future. You can contribute to traditional IRAs, which will be tax deductible. Pretax deferrals to employer-sponsored retirement plans such as 401(k)s also help save taxes. “You pay no tax as long as the funds are in the account, which reduces your taxes for years to come,” Rice said. “Plus, tax-deferred compounding can help your investments grow more quickly.”

- Plan for medical expenses. As of 2013, the threshold for deducting medical expenses increased from 7.5 percent of your adjusted gross income to 10 percent. You can deduct only expenses that exceed that floor. If they don’t, you can save by contributing to a tax-advantaged health care account such as a health savings account, HSA, or a flexible spending account, FSA. While contributions are pretax or tax-deductible and withdrawals are tax free, some rules and limits apply as to what types of medical expenses qualify. Another change for 2014 you can plan for now is the addition of a 3.8 percent Medicare tax, one of the main consequences of Obamacare for most taxpayers. That tax will kick in for married people making over $250,000.

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.

5 Tax Planning Tips for Your Small Business

We’re more than half way through 2014: Where does your business stand in terms of taxes?
Last week, a client of mine had an ugly surprise when I finished his tax return and disclosed he owed a lot of money to the IRS. His first reaction was to be mad at the messenger. However, upon careful reflection, he stated, “Well, I should have come to see you last year when my new product took off the way it did. I knew I was making a lot more money.”




He’s right. Whenever there is a substantial change to your business’s bottom line (in either red or black), it’s time for a visit to your tax pro. In fact, anyone who owns a small business should take advantage of the mid-year off season to sit down with a tax pro to discuss their financial statements and potential tax liabilities.


It’s infinitely easier to strategize and put a plan in place now than to run around at year end upending pails of water on all the little fires that have been brewing all year.


Here are some tips to discuss with your tax pro to improve your tax situation and hopefully keep working capital in your bank account rather than in Uncle Sam’s pocket:
Start a retirement plan. If you’re finally a few bucks ahead and don’t have a retirement fund, now’s the time to start one. Here’s the bonus: it’s deductible!


Consult with a bona fide financial advisor or a representative from your bank to determine whatkind of plan best suits your needs. There are a wide range of vehicles from Individual 401(k) plans to SEP IRAs to SIMPLE plans that may or may not require you to include employees in the plan.
If a plan requires employee participation, do not automatically dismiss it. Opening a retirement plan for your employees could be a meaningful way to give raises that don’t require the additional cost of employer paid payroll taxes. Read IRS Publication 560 for more information.


Analyze your legal structure. Take the time to evaluate whether your business is operating optimally in its existing entity structure. You may have started out as a sole proprietorship and have outgrown it. It is especially important to analyze entity structure if your business is now netting more than $100,000 per year.


Keep in mind that if you incorporate, you will now be required to take money out of the business via payroll rather than simple draws. There is a lot more paperwork involved under this status, but the tax benefits and protection that a corporation offers may prove more beneficial. Always discuss these options with your attorney and tax pro before making a decision.


Provide employee benefits. Employees are our most valuable business asset and should be treated accordingly. There are many employee benefits that are not taxable to either the employee or the business. Check out IRS Publication 15-B, Guide to Fringe Benefits for more information on this topic. You will save money in payroll taxes while you create a happier working environment for your people.


Purchase furniture and equipment. The IRS has always rewarded outlays for capital assets by providing the Section 179 Deduction. This special deduction allows the immediate expensing of capital assets rather than depreciating them over their useful lives. Be warned however. This year, the threshold for purchases decreased from $500,000 to $25,000. However, Congress will be looking at extending that ceiling probably sometime during fourth quarter. You can begin putting money aside for the purchases now.


Perform projections. Take a good look at your financial statements. Run a profit and loss and compare it to the prior year profit and loss through June 30. Are there significant changes? Are you anticipating an increase or decrease in sales and/or expenses through the end of the year? It’s a simple matter to export your data from QuickBooks into Excel where you can play with the numbers to determine what your yearend bottom line will be. Share that information with your tax pro to find out if you must adjust your estimated tax payments accordingly.

Your Retirement: Navigating the Social Security ‘Tax Trap’

If you haven’t discovered it already, up to 85 percent of your Social Security benefits could be taxed.

As financial advisors, we are often surprised by the number of prospective retirees who come to us for planning and are shocked that they have to pay taxes on their Social Security when they retire.

In fact, in 2012, Social Security beneficiaries paid a total of $45.9 billion in income taxes on their benefits. That’s right!

Sadly, for many people this taxation could be avoided or at the very least, significantly reduced.  You have to plan ahead for it – and that means understanding how taxes work in retirement.

So here’s how it works: First, to determine the taxability of your Social Security, you must take into consideration your combined income, also known as provisional income, which is arrived at by taking 50 percent of your Social Security benefits and adding that figure to all the other taxable and tax-free interest income you receive in retirement. Yes, even municipal bonds are considered in this equation.

If you file as an individual and your combined income is below $25,000, your benefits won’t be taxed at all. If your income is between $25,000 and $34,000, up to 50 percent of your benefits may be subject to tax. For income of more than $34,000, up to 85 percent of your benefits may be considered taxable income.

If you and your spouse file a joint return with combined income below $32,000, your benefits are safe. For income between $32,000 and $44,000, up to 50 percent of benefits may be subject to taxation, and up to 85 percent if combined income exceeds $44,000.

It is possible to have income in excess of these thresholds while keeping your benefits out of the hands of Uncle Sam. Let’s look at a case to see how this plays out.

Case Study:

A married couple, Jerry and Linda, are both 62 and have recently decided to retire. They’re income need is $62,000 per year. As it stands currently, they have $38,000 of income. So they will have to make up the shortfall of $24,000 ($62,000 - $38,000 = $24,000) from their investment assets.

Jerry and Linda have done a good job accumulating assets to make up for the shortfall between their fixed income resources and their desired income need. However, we want to distribute the assets in the most tax-efficient manner. After all, a dollar paid out in taxes is a dollar that never returns!

Current Income:

Interest and Dividends Income..$2,000

Social Security Income.........$18,000

Pension Income.................$18,000

Total Income...................$38,000

Current Assets:

Bank Accounts....$150,000

Mutual Funds.....$300,000

IRA..............$250,000

401K.............$300,000

Total Assets.....$1,000,000

Jerry and Linda obviously could draw $24,000 from any one of the accounts listed above. However, what option would allow them to access it without causing their Social Security benefits to become taxable?  Through our analysis, we found that they could distribute $15,000 from the mutual funds of which only $2,942 is taxable as a gain. The remaining $12,058 would be consider principal and is not taxable.

They could also distribute $9,000 from their bank accounts, which again would be non-taxable. Any interest accrued on the bank accounts is taxed as interest and dividends and is already accounted for in the combined income above.

So as you can see, we devised an income plan that allows them to attain their $62,000 income goal.  But does it muster up to our “tax free” goal? Let’s work through the calculation:

Interest and Dividends Income..........$2,000

50 percent of Social Security Income...$9,000

Pension Income.........................$18,000

Mutual Funds capital gain..............$2,942

Bank Accounts..........................$0    

Combined Income Total..................$31,942

It sure does with $58 to spare! You see, with proper planning Jerry and Linda were able to produce an income of $62,000 without causing one cent of their Social Security to become taxable. Had they made a different choice they could have had a combined income of $53,000 rather than $31,942, causing 85 percent of their Social Security to become taxable.

A fundamental part of any financial plan is the need for a strategy to help prevent or minimize the effect of income taxes on your wealth. If you do not have such a plan, you can lose significant amounts of money that you may never be able to recapture. There are numerous income-tax savings concepts at your disposal. Unfortunately, most people don’t use any, and many use the wrong ones.

To learn more about this and other critical strategies to help make the most out of your Social Security benefits, consider reserving your seat at Shope & Associates’ upcoming Social Security Seminar.  For more information, call Shope & Associates at 734-479-1400.

This is for illustrative purposes only and may not be indicative of your situation.  This is also for informational purposes only and should not be construed as tax advice.  Consult your tax advisor regarding your specific situation.

Why Small Business Owners Should Avoid the Trap of A Single Demanding Client

In a great blog post on the subject, Dave Schneider related the case of a business idea he had that went afoul because of the picky nature of his major client. Within this anecdote, there is a real lesson to be learned for small business owners, and that lesson is that, no matter how much they can potentially stand to gain from a client, if they are running their business into the ground trying to please them, then they should step back and compare the value the client has brought them to the negative value of their difficult nature.

Are you constantly going over your budget or time-frame in order to please your client? The profit that your client brings you is not actually profit if it is constantly being eaten into by extra hours and resources. There is a big difference between being nice to a major client by throwing in something extra from time to time in order to keep them satisfied and putting in extra work on every single project they give you because they are never satisfied.

Are they stopping you from working with other clients because of their demands? If the growth of your business is being stymied by the time it takes you to satisfy your one picky customer, you should think to yourself if it makes rational sense for you to continue bending over backwards. If in the time it takes you to work for them you could satisfy two or three other clients, then the money side of the argument for sticking with them may not hold water either.

Lastly, are they constantly asking you to change your product or processes to better suit them? If the product that you are offering is not lining up with the expectations and demands of your client and they are requesting that you modify it, then you should probably not be working with them, since what you offer and what they want are two different things. Simply because there is money to be made, that does not mean that the relationship has the potential to be profitable in the long term

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?

Strategic Mid-Year Business Tax Tips

Traditionally, tax planning is targeted to individual taxpayers, but small business owners can also benefit from such tax-saving techniques. Instead of waiting until the very end of the year to pitch ideas to clients, present them with the following ten strategies at midyear.

Stock up on depreciable equipment. Under current law, the maximum Section 179 deduction for business equipment is limited to only $25,000, while 50% bonus depreciation generally isn’t allowed anymore this year. Nevertheless, don’t hesitate to buy needed equipment if the price is right. At tax return time, you can maximize deductions, including any retroactive extensions of favorable provisions ultimately approved by Congress.

Sweeten your retirement pot. Whether you’re an employee or self-employed, you can salt away money within generous limits through a qualified retirement plan.  For instance, you may defer up to $17,500 of salary to a 401(k) plan ($23,000 if age 50 or over) or contribute the lesser of 25% of compensation or $52,000 ($57,500 if age 50 or over) to a SEP in 2014. It’s easier to increase contributions throughout the year than it is to fork over most or all of a paycheck at year-end.

Add vacation time to business trips. Generally speaking, you can deduct travel expenses – including airfare, lodging, ground transportation and 50% of meal costs – if the primary purpose of the trip is business-related. As long as you spend more days on business than pleasure, you should be in the clear. However, note that expenses that are strictly personal, such as a sightseeing jaunt, are nondeductible.

Fete your business customers. If a taxpayer entertains a business customer preceding or following a “substantial business discussion,” 50% of the entertainment and meal expenses are deductible. The entertainment can take place the day before or after for an out-of-town customer. What’s more, spouses or significant others can tag along when the situation calls for it.

Celebrate with your staff. Normally, deductions for business entertainment are limited to 50% of the cost. However, under a special tax law exception, you can write off 100% of a company party, like a July 4th or Labor Day picnic or barbecue, as long as the entire workforce is invited.

Turn a passion into business. Frequently, an activity that starts out as a hobby turns into a bona fide business. However, to deduct a loss, you must show that you're engaging in the activity to generate a profit. Otherwise, the write-off is limited to the amount of income from the activity under the "hobby loss" rules. Be  sure that your records can stand up to an IRS challenge.

Make minor repairs to the premises. The tax law generally permits you to currently deduct minor repairs (e.g., fixing a broken lock) while the cost of major improvements must be capitalized. Have repairs made throughout the year when they are needed. Conversely, if they are part of a major overhaul, the IRS may treat the entire cost, including the repairs, as a capital improvement.

Salvage S corporation losses. An S corporation’s losses are deductible by the shareholders up to the amount of their basis in the stock. If your S corp expects to show a loss for the year, ensure that you have sufficient basis in your stock to absorb the loss deduction. If necessary, you might increase your basis by adding capital or lending money to the S corporation.

Business vehicles are limited by the “luxury car rules.” But there’s a special exception for certain vehicles – including many sports utility vehicles (SUVs) – weighing 6,000 pounds or less. In this case, the maximum Section 179 deduction is capped at $25,000, much higher than the luxury car limits. Congress has threatened to repeal this tax break, so act soon.

Start up a new business. If you getting a new business venture off the ground, you’re permitted to currently deduct up to $5,000 of qualified start-up expenses. Any remainder must be amortized over 180 months. But you must officially be ”open for business” to qualify for this tax break.  Give yourself plenty of time before year-end to commence operations.

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

Questions Every Tax Pro Gets Asked in Filing Season

Our tax code is long and complex. Even tax professionals have to work to stay informed and up to date about all the changes.

Over my nearly three decades as a tax professional, there is a core set of questions that I undoubtedly will get asked every year as April 15 approaches.

Question: Can I write off my business suits? I only wear them to work. What about my haircuts?

I’ve seen professional tax preparers take deductions for clothing and haircuts on tax returns—and they shouldn’t. General grooming is not a deductible expense.

I understand that most of us have to look nice for work; and believe me, if work clothes were tax deductible, I’d be filling my closest with Manolo Blahnik shoes and Gucci apparel. The tax savings alone would be comparable to buying the items on sale. But Uncle Sam doesn’t allow professional attire as a write off.

However, there are some exceptions:  When it comes to clothing, costumes that are used in the normal course of your business, but are not suitable for street wear are deductible. This generally applies to performers and musicians. Also deductible are protective gear, uniforms, and clothing emblazoned with the name of your company.

A carpenter may write off his steel-toed boots, his “Bob’s Construction” T-shirt, and any tool bags. He cannot take a deduction for the cost of his blue jeans – even if he wears them only for work. I once encountered an auditor who told me he actually allowed the blue jeans expense for a contractor because he “felt sorry for the guy.” There are so many shades of gray in the tax code it often depends on the mood of the auditor you come up against and his/her perspective and interpretation of the tax code. But don’t count on it. Rules are rules.

I recently (for the first time) took a deduction for a client for a haircut. He’s a lieutenant in the navy and the buzz cut is a “requirement of his employer.” This form of intent supports this as an appropriate employee business deduction. Whether or not it would fly in audit remains to be seen.

Question: Can I deduct the federal income tax I pay every year?

No, you cannot deduct federal income tax. But if you itemize deductions, you are allowed to write off the amounts you pay in state income taxes. This includes state income tax withheld from wages, state disability premiums withheld from your pay, estimated tax payments made during the tax year as well as state income tax payments for the prior year income tax return or any other prior years.

For example, come April 15, 2013, you may have had to pay a state income tax liability for your 2012 tax return due that day. You may list this as a deduction for 2013. And in January of 2013 you may have paid installment 4 of your 2012 state income tax. This is also a deduction for 2013. You may also have been audited for 2010 and owe the state an additional tax liability which you paid during 2013. Take this as a deduction as well.

I find the taxes section of Schedule A to be the most omitted when clients dig for their deductions. I would estimate close to 75% of my clients fail to bring me their vehicle registration fees and some forget all about their property taxes. Did you know that if you own property in a foreign country you can write off the property taxes you pay there?

Question: I’m thinking about buying a house this year but I will have to pay private mortgage insurance (PMI). Is that deductible?

This particular deduction has come and gone a few times over the years. For 2013, PMI is a write off. However, this is one of the 55 tax provisions that expired at the end of 2013 and has yet to be renewed by Congress.

Even if your PMI is not deductible, run the numbers to determine if buying a house will save you tax dollars in the long run. Most of the time owning a home is a wise investment from a tax-planning point of view. Then if the deduction is renewed, you will be all that much better off.

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