Easy Tax Planning For A Bigger Refund

If, like most people, you could use some extra money these days, consider this: Three out of four Americans get an income tax refund from the IRS, and the average direct-deposited refund has totaled more than $2,800 for the last several years. Moving the needle above that average may be done with a little tax planning.

“To see exactly where you still have opportunities to save, do a dry run of your federal tax return,” said TaxACT spokesperson Jessi Dolmage. “DIY solutions like TaxACT are already updated with tax law changes so you can estimate your taxes as early as October each year.” These hints can help you maximize your refund or lower your tax liability.

1. Remember all your above-the-line adjustments, which are amounts you can deduct from your taxable income. They include college tuition and fees, educator expenses, moving expenses, alimony paid, contributions to a traditional IRA, student loan interest, and health insurance premiums if you’re self-employed.

2. Maximize your itemized deductions. Those may include charitable gifts (cash and non-cash, such as household items), unreimbursed medical expenses, job search expenses in your present occupation, tax preparation fees, mortgage interest and points paid, qualified mortgage insurance premiums, and personal property and real estate taxes. If you’re not sure if you have enough deductions to itemize, tax software can calculate whether claiming the standard deduction or itemizing is more advantageous, with the results typically backed by a maximum refund guarantee.

3. Watch for these commonly missed tax credits, some of which are refundable: Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit and Saver’s Credit. If you have college or other higher education expenses, don’t forget the American Opportunity and Lifetime Learning Credits.

4. Review your investments to see if offsetting capital gains with losses is appropriate for you. Keep in mind that your tax rate on long-term capital gains may be lower than your rate on short-term capital gains.

5. Save more for retirement. While the tax year ends December 31 for most tax benefits, you have until April 15 to max out contributions to traditional and Roth IRAs. Contribution limits for both (as long as neither you nor your spouse was covered for any part of the year by an employer retirement plan) are the lesser of your taxable compensation (wages, commissions, self-employment income, alimony and so on) or $5,500 for 2013 if you’re under age 50 ($6,500 if you’re age 50 or over). The contribution limit is reduced at higher incomes.

When the time comes to file your return, compare tax solutions carefully. Some brands charge more for returns with tax forms for more complicated situations. On the other hand, TaxACT’s free federal solution includes all e-fileable forms for simple and complicated returns.

The program uses simple interview questions to guide you through all your deductions and credits. The amount of your refund or taxes owed updates as you go. Some solutions, including TaxACT, also provide information about the tax implications of health care reform to help you make better-informed health insurance decisions.

General Tax Tips

• Choose e-file and direct deposit for the fastest refund.

• Don’t wait until April 15 to file—rushing often leads to errors.

• In the meantime, save all receipts, statements and tax forms in one place. Centralizing your information makes tax time easier and faster.

How to Calculate ObamaCare Penalties

The Affordable Care Act, which will go into full effect in the New Year will not only change the health-care landscape, but it also promises to complicate tax laws.

As you are likely aware, beginning in 2014, individuals without health insurance for up to three consecutive months will face a penalty on their income tax return.

The monthly amount is equal to 1/12 of the greater of:

The “flat dollar amount,” the lesser of:
$695 per individual, which is the “applicable dollar amount,” for all individuals where there was a failure to meet coverage requirements but maxing out at $95 for 2014 and $325 for 2015. For anyone not yet age 18, 50% of the normal amount or
300% of the “applicable dollar amount” for the calendar year; or
An amount equal to the following percentage of the excess of household income over the amount of gross income triggering the requirement to file a return under IRC code section 6012(a)(1): 1% in 2014, 2% in 2015; and 2.5% after 2015
Good grief.

I think there are plenty of American taxpayers not to mention tax professionals, whose heads are spinning at the language, definitions and complications of deciphering the formulas. And obviously more than one formula must be used. In fact, the calculations have to be run three times. Using the term “greater than” and “less than” indicates a comparison and therefore requires the use of more than one formula to determine the correct answer.

Let’s use an example to help you determine what your penalty amount might be if you refuse to buy health insurance during 2014:

A family of six that consists of mom, dad and four kids under the age of 18 with an income that exceeds the ‘filing threshold amount’ by $30,000 could be on the hook for a couple hundred dollars. Using the “flat dollar amount” the result of using the formula in No. 1, the penalty would be calculated at $285, which is the lesser of the two formulas to determine the penalty:

$380 – 2 adults x $95 plus 4 kids x $47.50.
$285 - ($95 x 300%) or
If all we had to deal with were this formula then the penalty amount inflicted on this family would be $285 since that’s the lesser of the two calculations.

But we aren’t done.  That’s not necessarily the penalty amount that this family will be required to pay. They must compare this result to the result using the formula in #No. 2 above and between the two formulas the higher figure will be charged:

$300 (1.0% x $30,000 excess household income)

Now we have our answer: $300 - the greater of the two remaining results.

That might not sound terribly expensive. It’s cheaper than purchasing health insurance for a family of six, no doubt.  However, the variables in the formula increase as the years go on. By 2016, the $95 per person figure will be replaced with $695, and 1% variable in the formula under No. 2 will be replaced with 2.5%. Let’s see what this family will pay in 2016:

A. $2,780 (2 adults x $695 plus 4 kids x 347.50)
         B. $2,085 (300% x 695) or,

     2. $750 (2.5% x $30,000 excess household income)

The family will pay $2,085 in penalties for failing to provide health insurance.

As you know, health insurance is not cheap. I feel for families on a shoestring budget that will be severely penalized and it wouldn’t be surprising if we see an increase in the tax gap due to collection problems associated with levying these penalties

Year’s End Money Matters: Tax planning for success

As 2014 approaches, many focus on year-end tax planning strategies to reduce the taxes they’ll owe in April. This year many will find themselves paying more, so proper planning is even more critical. Let’s look at some strategies to consider.

For Individuals

Most taxpayers will find their ordinary 2013 income tax rate similar to 2012’s. However, for those with taxable income exceeding $400,000 for single filers ($450,000 if married filing jointly), the top rate will increase to 39.6 percent. Furthermore, the phaseout of itemized deductions is back.

To potentially reduce your tax exposure:

- Time the payment of expenses to make the most of your deductions.

- Pay your fourth-quarter estimated state tax or real-estate property tax in December 2013 or January 2014—whichever year provides the greatest benefit.

- If you’re planning large donations, evaluate when to make the contribution in order to receive the best deduction. Additionally, review whether other charitable planning mechanisms, such as a charitable remainder trust or donor advised fund can provide additional benefit.

Many taxpayers will be subject to the net investment income tax (NIIT) and additional Medicare tax. The NIIT adds a 3.8 percent tax on the lesser of net investment income or the amount that a taxpayer’s modified adjusted gross income exceeds $200,000 for single filers ($250,000 if married filing jointly). The 0.9 percent Medicare tax applies to FICA wages and self-employment income exceeding that same threshold.

The capital gains and dividends tax rate has also increased to 20 percent (23.8 percent with NIIT) for individuals whose taxable income exceeds $400,000 for single filers ($450,000 if married filing jointly).

To potentially reduce your exposure:

- Work with your tax adviser to evaluate your participation in business and rental activities. The NIIT applies only to income classified as “passive,” so to the extent that you materially participate in the activity, you may be able to reduce your tax exposure.

- Use like-kind exchanges or sell assets on the installment method to defer gains.

- If you’re 70 1/2 or older, make a charitable distribution from your IRA to reduce your taxable income.

- Gift income-producing assets to your children.

- If you’re an LLC member or business owner with self-employment income, elect to be taxed as an S corporation. S corporation income isn’t considered net investment income.

- Realize losses in investment portfolios.

- Donate appreciated property (i.e. stock) to get a charitable deduction. This strategy allows for a deduction at the property’s fair market value while avoiding the capital gains tax and the NIIT.

For Businesses

In 2013, the maximum Section 179 depreciation deduction is $500,000 and begins to phase out when assets placed in service during the year exceed $2 million. Up to $250,000 of Section 179 expenses may apply to real property purchases. Effective in 2014, the Section 179 deduction reverts to only $25,000, with the real property provision expiring completely.

Additionally, bonus depreciation of 50 percent of a qualifying asset’s cost can be deducted—a provision that expires at the end of 2013. Leasehold improvements may be depreciated over 15 years (in 2014 this increases to 39 years), and may also be eligible for Section 179 expensing or bonus depreciation.

In light of these dramatic changes, note the timing of your significant asset purchases (and when assets are actually placed in service).

Think Ahead

While it’s tempting to put off tax planning, now is the time to act. You can still implement many of these strategies before the year’s end to impact your tax bill. Consult a tax professional to best implement these strategies and achieve results that fit with your overall financial goals.

Real estate professionals may be exempt from 3.8 percent ‘Obamacare tax’ on rental income.

Last week the IRS issued its final regulations governing how it will implement a new “Obamacare tax” that imposes a 3.8 percent levy on unearned income.

Taxpayers are subject to the Net Investment Income (NII) tax if their adjusted gross income (AGI) for the year exceeds $200,000 for singles, or $250,000 for marrieds filing jointly ($125,000 for marrieds filing separately).

If your AGI exceeds the applicable threshold, you’ll have to pay the NII tax on the lesser of (1) your net investment income, or (2) the amount that the your AGI exceeds the $200,000/$250,000 threshold.

“Unearned income” means income from all “passive” activities, including interest, dividends, annuities, royalties and rents. It does not include income from an actively conducted business.

However, it includes income from real estate rentals, even those that qualify as businesses, because rental income is always deemed to be passive income for tax purposes. Thus, landlords with profitable rentals whose AGI exceeds the threshold will be subject to the 3.8 percent tax on their rental income.

However, there is one lucky group of landlords who can avoid the NII tax on rental income: real estate professionals. As I explained in a prior article (“It pays for landlords to qualify as ‘real estate professional‘ “), the NII law provides a special exemption for them. They are not subject to the 3.8 percent tax on rental income if they “materially participate” in the real estate activity, and the activity qualifies as a business for tax purposes.

IRS regulations have long provided clear guidance on what constitutes “material participation” in an activity. For example, you materially participate if you work more than 500 hours at the activity during the year, or work 100 hours and more than anyone else. However, there have never been any clear bright-line rules on when a real estate activity qualifies as a business rather than an investment..

Here’s where the new regulations help real estate professionals out. They establish a “safe harbor” rule for when a rental activity conducted by a real estate professional is a business: So long as a real estate professional devotes a minimum of 500 hours per year in the rental activity, it will automatically qualify as a business for these purposes and the rental income will not be subject to the NII tax.

Alternatively, if a real estate pro has participated in rental real estate activities for more than 500 hours per year in five of the last 10 tax years, the rental activity will qualify as a business. (IRS Reg. Sec. 1.469-5T.)

If you have more than one rental property, you are allowed to group your rental activities together for these purposes. This way, you can combine the time you spend working on each rental property to satisfy the material participation and 500-hour tests. You must file an election with the IRS to group your rental activities.

The 500-hour rule is a safe harbor, not a minimum requirement. Thus, you don’t absolutely have to work a minimum of 500 hours per year at your rental activity for it to qualify as a business. You can work less hours and still qualify as a business.

But, in the event of an IRS audit, whether you qualify will require a judgment call by the IRS after looking at all the circumstances involved. However, the preamble to the new regulations provides that ownership of even a single rental unit can qualify as a business. But, again, this depends on the circumstances — for example, the type of property, number of units, and the day-to-day involvement of the owner or its agent.

It should go without saying that all real estate professionals who own rental properties should be keeping careful track of the time they spend dealing with their rentals and all their other real estate-related activities.

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Small Business: Taking advantage of tax breaks

FROM NEWSDAY.COM -

Tax planning may not be on your radar as year-end approaches, but it should be.
Some key provisions are set to expire Dec. 31, and the dollar limit for the popular Section 179 deduction on new or used equipment is scheduled to drop dramatically.
So before you ring in the new year, re-evaluate your tax strategy to optimize your deductions for the coming year.
"It's a last licks approach to using some of the great tax breaks we currently have," says Barbara Weltman, a Vero Beach, Fla.-based small business tax specialist and author of "J.K. Lasser's Small Business Taxes 2014" (Wiley; $22.95). "We're unsure if Congress will extend them, especially given the current uncertainty going on in Washington."

Equipment deduction: For one, the Section 179 deduction, which allows businesses an immediate deduction of up to $500,000 of the total cost of new or used equipment in the year it's purchased, rather than depreciating it over time, will drop to $25,000 next year, says Weltman. The deduction currently has a $2-million cap on annual purchases before the deduction limit declines; the cap will be $200,000 next year unless Congress intervenes.
Larger businesses with purchases exceeding $2 million can now take advantage of a 50 percent bonus depreciation deduction up front on eligible new assets, Weltman explains. That also expires Dec. 31 unless extended, she says.

This deduction would apply to equipment, furniture, fixtures and qualified leasehold improvements, says Jill Schneider, tax director at MayerMeinberg LLP, a Syosset-based accounting firm.
You can take the bonus depreciation no matter what your income is, she explains. But you cannot take the Section 179 deduction if by doing so it creates a taxable loss for your business, she notes.
Another change is the recovery period for leasehold improvements, says Schneider. In 2013, qualified leasehold improvements are depreciable over 15 years, she says. Next year, that will jump to 39 years.
R&D, hiring provisions: Two other expiring year-end provisions: the Research and Development credit, which allows a business to write off 20 percent of qualified research expenses, and the Work Opportunity Tax Credit, which ranges from about $2,400 to $9,600 for hiring targeted groups such as veterans.
"They usually extend the R&D credit every year," says Thomas Butler, partner in charge of tax services at Grassi & Co. in Jericho, noting that in the last couple of years lawmakers have done it after the year-end.
As for the other provisions, there's no crystal ball on whether they'll be extended, he notes.
"The sunset provisions are a problem," says Butler. "Instead of making some of these permanent in the tax code, every year you have to wait and see if Congress extends them and it creates havoc in tax planning."
But there's no question that if businesses need to purchase equipment, they should take advantage of the Section 179 deduction this year, says Butler.

That's exactly what Joseph Crook, vice president at Star Communications, did. The Hauppauge-based marketing, printing and mailing company made a "high six-figure purchase" of a 10-color printing press in May, says Crook.

"We made that purchase somewhat with that [Section 179] deduction in mind," he says. "It wasn't the only reason, but it certainly got us moving."

Also, with employee bonuses coming up, you might consider giving stock instead of cash.
If you have a C-corporation involved in technology, manufacturing, wholesale or retail that issues qualified small business stock before the year-end, the shareholder would benefit from a 100 percent exclusion on any capital gain realized from its sale as long as it's held more than five years, says Weltman. That exclusion will drop to 50 percent next year.

10 Tax Law Changes You Need to Know About

Our country’s tax code is long and complex and is regularly getting changed by lawmakers, making it hard to keep up with all the updates.

This year’s major tax law changes occurred early on with the president signing into law the American Taxpayers Relief Act of 2012 on Jan.2.  The rest of the changes to the tax code this year were enactments of new laws passed in prior years and from the Affordable Care Act.

Here’s a look at the tax law changes that take effect this year, and how they may impact your return:

1. The Child Tax Credit of a maximum of $1,000 per child under age 17 is now permanent.  If your income is greater than $110,000 (married filing joint), $75,000 (single, head of household or qualifying widow(er) or $55,000 (married filing separately) the amount of the credit you can take will be limited.

The part of the Child Tax Credit that is refundable will expire in 2017. For example: you have one child and a tax liability of $300. Currently, you would receive $300 to zero out your tax liability then a refund of $700, the remainder. Beginning in 2017, you will not enjoy the $700 refund.

2. Energy credits for improvements such as insulated hot water heaters, insulation, double-paned windows, etc.  expire after 2013. If you are considering improvements in these areas, be sure to install them before year end. The items that qualify for this special tax treatment will be marked by the manufacturer.  Be sure to keep this documentation in your tax file in the event of an audit.

3. Tax-free charitable distributions directly from an IRA to a qualified nonprofit organization by persons age 70 ½ or older continues through 2013. The maximum you may contribute is $100,000. This is handy for seniors who have paid off their homes and no longer itemize deductions.

You cannot take a charitable deduction unless you itemize.  To take advantage of this tax benefit, the IRA manager makes the allocated donation from the IRA distribution and only reports to the IRS the amount of the distribution received by the recipient. For example, you normally take $12,000 per year in IRA distributions--this amount would be 100% taxable income. However, let’s say you decide you want to donate $1,000 to charity. You ask your plan manager to make the donation from your IRA account and supply you with the remainder, $11,000 for the year. You will pay taxes on only $11,000. The donation will come off the top.

4.The Supreme Court handed down a decision that affects same sex legally married couples. The IRS now recognizes this marital status, so same-sex couples can now file their tax return as married filing joint rather than as two single individuals.

5.Education credits, specifically The American Opportunity Credit, will be allowed through 2017. And the existing provisions for Coverdell Education Savings Accounts are now permanent. However, the tuition deduction expires after 2013.

6.The student loan interest deduction is now deemed permanent.

7. Employer-provided education assistance benefits are now permanent

8. The dependent care credit as it stands at its current levels and calculations are permanent.

9. The Earned Income Tax Credit, a refundable tax credit for low to moderate income workers,  is set to expire in 2017.However, I expect that it will be renewed.

10. The estate tax exemption for 2013 is set at $5,250,000 with a top tax rate of 40%. If your estate is valued at less than this amount, and you die by Dec. 31, no estate tax return needs to be filed and there will be no estate tax levied.

It’s not too late to think about income taxes

As the weather turns colder and the holidays are approaching, there is still enough time to do some year-end tax planning with an eye toward keeping as much of your money in your pocket as you can instead of shipping it off to Washington next April. Here are some tax savings techniques that may help you accomplish just that.

One simple thing to do now is to review the income that you have received year-to-date, along with the amount of taxes you have had withheld or paid as estimated payments. This review of your income versus tax payments is critical if you are a recent retiree, since you may not had enough experience in managing your taxes in retirement to achieve right mix of income and taxes payments.
Most taxpayers will avoid an under withholding penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. You can check out IRS publication 505 for further information.

Even if you haven’t paid in enough taxes yet, there is still ample time to take advantage of tax-saving strategies, such as last-minute 401(k) contributions, income deferral (if possible), charitable contributions, and prepayment of property taxes.

Here is a tax goodie you can trot out if you are way behind in your withholding/estimated payments, provided that you are older than 59 1⁄2 and have a traditional IRA: take a distribution from your IRA before year end and withhold all of the distribution in taxes. By taking this approach, you can catch up with your tax payments without any late penalties, since the IRS considers this tax payment as having been made throughout the year. Additionally, you can make one last estimated payment in January 2014 and avoid other tax penalties.

If you own stocks that are not part of a qualified plan, and if you are charitably inclined, you may want to consider gifting highly appreciated stock to your favorite charity. Your charitable deduction would be the value of the stock when you make the gift, not the price you paid for the shares when you purchased them. If you are in the highest tax bracket, this gifting strategy is of greatest value to you.
Another year-end winning strategy for the charitably inclined is to donate your required minimum distribution from your IRA custodian/trustee directly to a charity. Persons over 70 1⁄2 can transfer up to $100,000 before year end. There is a cascading effect of such a transfer, since the amount of the donated RMD is not included in one’s adjusted gross income, and this fact means that certain phase outs of other deductions that are tied to AGI might be averted.

Additionally, this IRA transfer is most valuable for those philanthropic individuals whose charitable contributions are already up against the 50 percent of AGI limit. Again, since the transferred distribution is not included in AGI, a charitable donation can be made without being included in the 50 percent of AGI limitation.

Most taxpayers will avoid an under withholding penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90 percent of the tax for the current year, or 100 percent of the tax shown on the return for the prior year, whichever is smaller. You can check out IRS publication 505 for further information.

Even if you haven’t paid in enough taxes yet, there is still time.

There is another winning tax strategy for those persons who are participants in high deductible health insurance plans that provide for contributions to Health Savings Accounts. These persons can actually invest those dollars inside the HSA and use the accumulated values for retirement and not for health care expenses. They get a deduction for these contributions; growth in the plan assets are tax deferred; and monies may be withdrawn income tax-free for qualified health care expenses at any time in the future. Withdrawals for any other purpose after age 65 are taxable.

One final note, remember that the 2013 threshold for including medical expenses in itemized deductions is now 10 percent of AGI for taxpayers under age 65. The 7.5 percent limit for those older will remain until 2017.