IRS data show that most taxpayers get refunds. Yes, even some filers who procrastinate will eventually get money back from the Internal Revenue Service.
As of March 18, the IRS had delivered 64.6 million refunds totalling $193 billion. That's an average refund of $2,985 per tax return.
Controlling your tax refund: Getting a tax refund is, in large part, your choice.
While the IRS is the bad guy for collecting taxes each April and throughout the year via payroll withholding, the tax agency doesn't take excess money or overcharge you. You do it to yourself by not giving your employer the most accurate withholding information.
Conventional wisdom says the tax goal is to have your withholding be as close to your actual eventual tax bill as possible.
Bu as IRS statistics indicate year after year, that's not the typical taxpayer case. Most folks have their workplaces overwithhold their income taxes. That's easy to remedy.
Instead of letting Uncle Sam have year-long, interest-free use of your money, payroll adjustments can help you can get the extra dollars as added income each pay period.
Of course, some folks just aren't good money managers. If they get a bit more each payday, they spend it. So they view overwithholding as a forced savings account.
Then there's the other option. Coming up short when you figure your final annual tax liability.
That's what I prefer. I like owing the IRS a tiny bit each year. That way the Treasury has to wait on my payment each April rather than me waiting for a refund check that might be delayed.
Some taxpayers due IRS refunds had to wait until February this filing season for their money because of late changes to the tax laws and the subsequent IRS computer upgrade catch-up.
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One proviso on underwithholding: If you short the IRS too much, you could end up owing extra because of penalties and interest.
Our tax system operates on a pay-as-you-earn basis and the tax collector has the authority to whack filers who try to essentially pay their full annual tax debts in one lump sum each April.
But a little bit of owing is OK, both with the IRS and for your financial bottom line.
State taxes, too: Accurate withholding also works for state refunds.
Again, I'm an advocate of owing a little at the state level each tax year. Residents in refund-delaying states discovered that waiting for a refund from state officials is just as frustrating as waiting for a federal refund.
When to file a new W-4: You definitely should reexamine your withholding when you have a major life change, such as getting married, buying a home of having a child.
Each of those situations could affect your ultimate tax bill. So run the withholding numbers in these cases -- the IRS has an online calculator to help you come up with the most accurate figures -- and turn in a new W-4.
But how much federal (and state) tax you have withheld from your pay is your personal tax and financial choice. Make it wisely.
If you do want to adjust your payroll tax withholding either direction, it's easy.
And you can make the changes as often as you like, or as often as you dare confront your payroll manager!
Saturday, April 30, 2011
Friday, April 29, 2011
Attention Online Sellers: How to Avoid Tax Trouble
In February of 2008, just as the recession deepened, Rob Kalin, the founder and CEO of Etsy.com, the Brooklyn-based online market place for handmade goods, showed the audience of the Martha Stewart Show some of the big sellers on this site. Among them: a “sock money soap popsicle” and knitted pussy willows. "Anyone here — if you're in school or out of school, at any age — you can start a business from home," he told the audience.
Lots of people have done just that. Etsy says more than $314 million dollars in goods were sold on the site last year up from $87.5 million in 2008. In addition to big sites like Etsy, Ebay, and Craigslist, there are plenty of newcomers, such as Zazzle.com, Artfire.com, and Cafepress.com that allow people to turn a DIY hobby into a business.
Not surprisingly, the Internal Revenue Service is figuring out ways to get its fair share. If you’re using an online auction site to unload old baby clothes or unwanted furniture for less than what you originally paid, relax, the IRS probably isn’t interested. But it’s a different story if you are handling a large number of online transactions, and selling items for more than your cost. Depending on the details, the IRS may consider your proceeds to be income and come after you for taxes. Just like anyone who is self-employed, if your business earns more than $400 in annual net profits, you’ll need to play self-employment tax.
But fiscal planning can be a little trickier for online sellers, because they typically have lower expenses and higher profit margins than traditional retailers. That means should your tea cozies made from vintage quilts suddenly be featured on Etsy’s homepage, you could wind up with an unexpected windfall. The self-employment tax can really trip people up. Last year, that was 15.3 percent of your business income. What you’re doing is paying into Social Security and Medicare for yourself. That can be a big bite from a small revenue stream.
And beginning in 2012, taxpayers who annually sell more than $20,000 worth of goods and have more than 200 transactions on sites like Etsy or Ebay will be required to send the IRS a new form, the 1099 K. Most online sellers, of course, don’t do that kind of volume, but all small businesses must report their income and expenses to the IRS. Many online sellers don’t realize that many of the fees they pay to Ebay and Paypal are deductible, as are their materials costs and shipping expenses.
The biggest mistake [Etsy sellers make] is not becoming knowledgeable about the tax law before starting their business. Every Etsy seller should have a bookkeeping system that they feel comfortable using the moment they start spending or receiving their first revenues.
Even if you have no intention of growing your online sales business into a Fortune 500 company, it’s still a good idea to keep good financial records just in case Uncle Sam comes calling. Options vary from a basic Excel spreadsheet to full-blown accounting software like Quickbooks.
Lots of people have done just that. Etsy says more than $314 million dollars in goods were sold on the site last year up from $87.5 million in 2008. In addition to big sites like Etsy, Ebay, and Craigslist, there are plenty of newcomers, such as Zazzle.com, Artfire.com, and Cafepress.com that allow people to turn a DIY hobby into a business.
Not surprisingly, the Internal Revenue Service is figuring out ways to get its fair share. If you’re using an online auction site to unload old baby clothes or unwanted furniture for less than what you originally paid, relax, the IRS probably isn’t interested. But it’s a different story if you are handling a large number of online transactions, and selling items for more than your cost. Depending on the details, the IRS may consider your proceeds to be income and come after you for taxes. Just like anyone who is self-employed, if your business earns more than $400 in annual net profits, you’ll need to play self-employment tax.
But fiscal planning can be a little trickier for online sellers, because they typically have lower expenses and higher profit margins than traditional retailers. That means should your tea cozies made from vintage quilts suddenly be featured on Etsy’s homepage, you could wind up with an unexpected windfall. The self-employment tax can really trip people up. Last year, that was 15.3 percent of your business income. What you’re doing is paying into Social Security and Medicare for yourself. That can be a big bite from a small revenue stream.
And beginning in 2012, taxpayers who annually sell more than $20,000 worth of goods and have more than 200 transactions on sites like Etsy or Ebay will be required to send the IRS a new form, the 1099 K. Most online sellers, of course, don’t do that kind of volume, but all small businesses must report their income and expenses to the IRS. Many online sellers don’t realize that many of the fees they pay to Ebay and Paypal are deductible, as are their materials costs and shipping expenses.
The biggest mistake [Etsy sellers make] is not becoming knowledgeable about the tax law before starting their business. Every Etsy seller should have a bookkeeping system that they feel comfortable using the moment they start spending or receiving their first revenues.
Even if you have no intention of growing your online sales business into a Fortune 500 company, it’s still a good idea to keep good financial records just in case Uncle Sam comes calling. Options vary from a basic Excel spreadsheet to full-blown accounting software like Quickbooks.
Thursday, April 28, 2011
Wisconsin Taxpayer Alliance Finds Trends In Wisconsin Income Tax Filings
This year’s recent tax season marked only the second in more than two decades that some state income taxpayers faced a major tax increase.
A new analysis of 2009 state income tax returns by the Wisconsin Taxpayers Alliance shows the impact of the increases that were enacted as part of the 2009 Wisconsin budget.
At or above $200,000, the average tax increased four percent to $29,980. This effect was most evident at $1 million and above, where the average tax paid rose 13.5 percent to $168,383; for filers with incomes under $200,000, the average tax declined 3.7 percent to $1,539, the report says.
These high-income groups were the only ones affected by the tax hikes, because raising the top income tax rate from 6.75 percent to 7.75 percent fell only on joint filers with more than $300,000 of income and single filers with incomes of more than $225,000, the document reads.
Similarly, the effect of halving of the state tax break for capital gains—the other major personal tax hike—likely fell on middle- and upper-income filers, those most likely to own stock or other investments.
Overall, the total number of state income tax filers fell 1.9 percent from 2.89 million in 2008 to 2.83 million in 2009. That was the lowest total since 2.76 million filers in 2006. Wisconsin Taxpayers Alliance researchers point to the recession as a main cause for the decline in filing.
However, the researchers also note that the drop in filers was greater at high-income levels: at or above $1 million in income, -15.2 percent to 2,949; between $500,000 and $1 million, -9.4 percent to 6,738; and between $200,000 and $500,000, -7.0 percent to 38,654.
The Wisconsin Taxpayers Alliance suggested several possible reasons for these declines. One theory the alliance has is that the recession probably led to scant profits or losses among small business owners and investors, pushing them out of top tax brackets. Higher income and capital gains taxes may also have had an effect, the alliance says, particularly for those contemplating once-in-a-lifetime sales of family businesses.
In other findings, the Wisconsin Taxpayers Alliance reported that about half of 2009 filers (52.1 percent) had incomes under $30,000. This group accounted for 11.7 percent of income and 4.1 percent of state income taxes paid. At the other end of the spectrum, the $100,000-and-above group accounted for 9.4 percent of all filers, reported 40.3 percent of total income, and paid 51.1 percent of total income taxes.
A new analysis of 2009 state income tax returns by the Wisconsin Taxpayers Alliance shows the impact of the increases that were enacted as part of the 2009 Wisconsin budget.
At or above $200,000, the average tax increased four percent to $29,980. This effect was most evident at $1 million and above, where the average tax paid rose 13.5 percent to $168,383; for filers with incomes under $200,000, the average tax declined 3.7 percent to $1,539, the report says.
These high-income groups were the only ones affected by the tax hikes, because raising the top income tax rate from 6.75 percent to 7.75 percent fell only on joint filers with more than $300,000 of income and single filers with incomes of more than $225,000, the document reads.
Similarly, the effect of halving of the state tax break for capital gains—the other major personal tax hike—likely fell on middle- and upper-income filers, those most likely to own stock or other investments.
Overall, the total number of state income tax filers fell 1.9 percent from 2.89 million in 2008 to 2.83 million in 2009. That was the lowest total since 2.76 million filers in 2006. Wisconsin Taxpayers Alliance researchers point to the recession as a main cause for the decline in filing.
However, the researchers also note that the drop in filers was greater at high-income levels: at or above $1 million in income, -15.2 percent to 2,949; between $500,000 and $1 million, -9.4 percent to 6,738; and between $200,000 and $500,000, -7.0 percent to 38,654.
The Wisconsin Taxpayers Alliance suggested several possible reasons for these declines. One theory the alliance has is that the recession probably led to scant profits or losses among small business owners and investors, pushing them out of top tax brackets. Higher income and capital gains taxes may also have had an effect, the alliance says, particularly for those contemplating once-in-a-lifetime sales of family businesses.
In other findings, the Wisconsin Taxpayers Alliance reported that about half of 2009 filers (52.1 percent) had incomes under $30,000. This group accounted for 11.7 percent of income and 4.1 percent of state income taxes paid. At the other end of the spectrum, the $100,000-and-above group accounted for 9.4 percent of all filers, reported 40.3 percent of total income, and paid 51.1 percent of total income taxes.
Wednesday, April 27, 2011
How to Claim the IRS Adoption Tax Credit
If you’ve adopted a child, you may be able to claim an income exclusion of $13170 from your income and a tax credit for the same amount, depending on the expenses you incurred as a result of the adoption. (You cannot, however, claim an exclusion and a credit for the same expenses, as we’ll see below.) To claim the exemption or credit, you’ll need to fill out Form 8839.
First, you should know that Form 8839 comes with certain documentation requirements. You’ll need to include some paperwork along with the form, which means that you cannot file it electronically. You must file paper returns. Along with the form, you’ll need to include the following documentation that varies with the type of adoption.
For domestic adoptions that have not been finalized, include one or more of these:
For finalized adoptions, foreign or domestic, you can include any of the following:
If your adoption expenses are relatively straightforward, all you need to fill out Form 8839 is identification information, your adoption expenses, and any amounts paid as adoption benefits by your employer. You’ll also want a copy of your tax return handy in order to figure out your modified adjusted gross income. Form 8839 will then lead you through the process of figuring out your credit and exclusion.
On the other hand, if you have adoption expenses from multiple years, you’re carrying over expenses from previous years, or you’re just a little daunted by the process, you may want to consider a tax preparation professional. What seems like a cryptic process for you is a day at the office for a tax professional. They are trained to understand the nuances of these forms, credits and deductions, and they can take a big task off of your plate.
First, you should know that Form 8839 comes with certain documentation requirements. You’ll need to include some paperwork along with the form, which means that you cannot file it electronically. You must file paper returns. Along with the form, you’ll need to include the following documentation that varies with the type of adoption.
For domestic adoptions that have not been finalized, include one or more of these:
- A taxpayer identification number obtained by the taxpayer for the child, included on you return instead of attaching a document
- A home study conducted by an authorized placement agency
- A placement agreement with an authorized agency
- A hospital document authorizing release of a newborn for adoption
- A court document with official seal approving placement of the child for adoption
For finalized adoptions, foreign or domestic, you can include any of the following:
- The adoption order or decree, with official seal
- If your adoption as governed by the Hague, you can include the Hague adoption certificate, the IH-3 visa, or a foreign adoption decree translated into English
- For foreign adoptions not governed by the Hague convention, include a foreign adoption decree translated into English, or an IR-2 or IR-3 visa.
- Adoption fees
- Attorney fees
- Court costs
- Travel expenses
- Re-adoption expenses related to the adoption of a foreign child
- Expenses for which you received funds from any state, local, or federal program
- Any expenses that violate state or federal law
- Expenses for carrying out a surrogate parenting arrangement
- Expenses for adopting a spouse’s child
- Anything paid or reimbursed by your employer or any person or organization
- Any expenses that are an allowed exemption under any other provision of federal law
If your adoption expenses are relatively straightforward, all you need to fill out Form 8839 is identification information, your adoption expenses, and any amounts paid as adoption benefits by your employer. You’ll also want a copy of your tax return handy in order to figure out your modified adjusted gross income. Form 8839 will then lead you through the process of figuring out your credit and exclusion.
On the other hand, if you have adoption expenses from multiple years, you’re carrying over expenses from previous years, or you’re just a little daunted by the process, you may want to consider a tax preparation professional. What seems like a cryptic process for you is a day at the office for a tax professional. They are trained to understand the nuances of these forms, credits and deductions, and they can take a big task off of your plate.
Tuesday, April 26, 2011
5 ways for retirees to save on future taxes
Lowering your tax bill can make all the difference in retirement.
Taking maximum advantage of tax breaks and other strategies will make savings last longer, which is critical for those living on a fixed income.
That means tax planning can't end with the annual filing deadline, however. Just as workers are becoming more self-reliant in financing their retirements, it's increasingly important for retirees to be savvy about the tax consequences of their actions.
Today's seniors have a host of decisions to make regarding managing their tax burdens — from where to live to how to take money from accounts to charitable giving.
Those decisions have the potential to reduce federal and state income taxes while also taking the impact of property, sales and other taxes into consideration.
That doesn't mean taxes should be the sole motivation behind a key move or transaction. But a bit of long-term tax planning can go a long way.
Retirees may be able to lower their annual tax liability by thousands of dollars with some modest effort.
Here are some potential ways to reduce taxes in retirement:
1. Move Consider moving to a more tax-friendly state. Your pension and 401(k) distributions, as well as dividend and interest income, generally are taxable. That could provide the financial incentive to relocate to one of the nine states with no broad-based personal income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax at all, and New Hampshire and Tennessee tax only dividends and interest.
Still, it's important not to overlook other taxes. High property and sales taxes can partially or fully offset the absence of a state income tax, as is the case in Florida.
Perhaps leaving money to your heirs is a priority. Even if your estate isn't large enough to owe money under the federal estate tax, be aware that 14 states and the District of Columbia have their own estate taxes. And eight states impose a separate inheritance tax, paid by the recipient rather than the estate. Details are at the Retirement Living Information Center site, www.retirementliving.com .
You might be able to move just a small distance to make a big difference. In the Washington, D.C., area, Maryland and the District of Columbia each have $1 million estate tax thresholds while neighboring Virginia has no estate tax. It's not uncommon for area retirees to sell their homes and move to Virginia for that reason.
2. Transfer assets Making gifts during your lifetime is one strategy for reducing estate taxes. The tax code allows tax-free annual gifts of up to $13,000, or $26,000 if made jointly with your spouse, in cash, investments or property to an unlimited number of people. This can be a great way to help your children while also reducing estate taxes.
But look before you gift. The Internal Revenue Service warns on its website that the laws on estate and gift taxes are some of the most complicated on the books.
Gifts in excess of the tax-free annual amount not only may incur a gift tax, they will reduce the amount that may be passed free of estate tax. They may also cause your children to pay substantial, and avoidable, capital gains taxes in the future.
Check with an adviser to make sure you fully understand the consequences before using any gifting strategy.
3. Convert to a Roth RMD, short for required minimum distribution, surely rivals IRS as a least favorite acronym among retirees. It refers to the minimum amount that must be withdrawn from a retirement plan account starting with the year the owner reaches age 70 1/2.
Forced distributions raise your taxable income and draw down your 401(k), pension or Individual Retirement Account. You want to take out as little as possible beyond your immediate needs.
One good way to achieve that is to convert a traditional IRA to a Roth IRA. The RMD rules don't apply to Roths while the owner is alive (though they do to beneficiaries). So you can allow your Roth to grow until you need to tap it, and even then distributions will be tax-free.
Roths don't make sense for everyone, especially if you will need the money soon to meet retirement needs. Check with a financial adviser.
4. Donate to charity You can dodge a tax hit on a withdrawal from your IRA or workplace retirement plan by steering it straight from the account to a charity.
This is an excellent tax planning vehicle because you don't have to include the distribution as taxable income. It's also been very popular since it was created in 2006.
The maximum charitable donation allowed from an IRA is $100,000 a year. But you can benefit from a donation of any size — whatever you planned on giving to charity for the year.
5. Diversify Tax diversification can stretch retirement savings. Besides potentially lowering taxable income, parking money in places with various levels of tax exposure provides the flexibility to deal with unknowns such as changing tax rates.
Investors should consider diversifying their savings into three different tax buckets for tax efficiency as they access their assets in retirementl.
Those would include tax-deferred accounts such as 401(k)s and traditional IRAs, tax-free accounts such as Roths and cash value life insurance, and taxable accounts in the form of savings and investments outside of tax-advantaged vehicles.
It's a good idea to constantly be looking at your portfolio. Retirees are not having enough corporate or municipal bonds in their portfolios. If they're in lower tax brackets in retirement, those bonds may well offer better returns after taxes than tax-free bonds.
Taking maximum advantage of tax breaks and other strategies will make savings last longer, which is critical for those living on a fixed income.
That means tax planning can't end with the annual filing deadline, however. Just as workers are becoming more self-reliant in financing their retirements, it's increasingly important for retirees to be savvy about the tax consequences of their actions.
Today's seniors have a host of decisions to make regarding managing their tax burdens — from where to live to how to take money from accounts to charitable giving.
Those decisions have the potential to reduce federal and state income taxes while also taking the impact of property, sales and other taxes into consideration.
That doesn't mean taxes should be the sole motivation behind a key move or transaction. But a bit of long-term tax planning can go a long way.
Retirees may be able to lower their annual tax liability by thousands of dollars with some modest effort.
Here are some potential ways to reduce taxes in retirement:
1. Move Consider moving to a more tax-friendly state. Your pension and 401(k) distributions, as well as dividend and interest income, generally are taxable. That could provide the financial incentive to relocate to one of the nine states with no broad-based personal income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax at all, and New Hampshire and Tennessee tax only dividends and interest.
Still, it's important not to overlook other taxes. High property and sales taxes can partially or fully offset the absence of a state income tax, as is the case in Florida.
Perhaps leaving money to your heirs is a priority. Even if your estate isn't large enough to owe money under the federal estate tax, be aware that 14 states and the District of Columbia have their own estate taxes. And eight states impose a separate inheritance tax, paid by the recipient rather than the estate. Details are at the Retirement Living Information Center site, www.retirementliving.com .
You might be able to move just a small distance to make a big difference. In the Washington, D.C., area, Maryland and the District of Columbia each have $1 million estate tax thresholds while neighboring Virginia has no estate tax. It's not uncommon for area retirees to sell their homes and move to Virginia for that reason.
2. Transfer assets Making gifts during your lifetime is one strategy for reducing estate taxes. The tax code allows tax-free annual gifts of up to $13,000, or $26,000 if made jointly with your spouse, in cash, investments or property to an unlimited number of people. This can be a great way to help your children while also reducing estate taxes.
But look before you gift. The Internal Revenue Service warns on its website that the laws on estate and gift taxes are some of the most complicated on the books.
Gifts in excess of the tax-free annual amount not only may incur a gift tax, they will reduce the amount that may be passed free of estate tax. They may also cause your children to pay substantial, and avoidable, capital gains taxes in the future.
Check with an adviser to make sure you fully understand the consequences before using any gifting strategy.
3. Convert to a Roth RMD, short for required minimum distribution, surely rivals IRS as a least favorite acronym among retirees. It refers to the minimum amount that must be withdrawn from a retirement plan account starting with the year the owner reaches age 70 1/2.
Forced distributions raise your taxable income and draw down your 401(k), pension or Individual Retirement Account. You want to take out as little as possible beyond your immediate needs.
One good way to achieve that is to convert a traditional IRA to a Roth IRA. The RMD rules don't apply to Roths while the owner is alive (though they do to beneficiaries). So you can allow your Roth to grow until you need to tap it, and even then distributions will be tax-free.
Roths don't make sense for everyone, especially if you will need the money soon to meet retirement needs. Check with a financial adviser.
4. Donate to charity You can dodge a tax hit on a withdrawal from your IRA or workplace retirement plan by steering it straight from the account to a charity.
This is an excellent tax planning vehicle because you don't have to include the distribution as taxable income. It's also been very popular since it was created in 2006.
The maximum charitable donation allowed from an IRA is $100,000 a year. But you can benefit from a donation of any size — whatever you planned on giving to charity for the year.
5. Diversify Tax diversification can stretch retirement savings. Besides potentially lowering taxable income, parking money in places with various levels of tax exposure provides the flexibility to deal with unknowns such as changing tax rates.
Investors should consider diversifying their savings into three different tax buckets for tax efficiency as they access their assets in retirementl.
Those would include tax-deferred accounts such as 401(k)s and traditional IRAs, tax-free accounts such as Roths and cash value life insurance, and taxable accounts in the form of savings and investments outside of tax-advantaged vehicles.
It's a good idea to constantly be looking at your portfolio. Retirees are not having enough corporate or municipal bonds in their portfolios. If they're in lower tax brackets in retirement, those bonds may well offer better returns after taxes than tax-free bonds.
Saturday, April 23, 2011
Tax records: Save them or shred them?
Tax day is over. Now it's time to find the top of your desk.
If you're like most people, your home office is littered with 1099s, W-2s, letters from charities and other detritus used to prepare a tax return. Most of us are terrified to dispose of these documents, and for good reason: In an IRS audit, "The dog ate my credit card receipt" is not an excuse.
It's not necessary to hang on to everything. In fact, keeping too many documents could make it difficult to find what you really need. Here's a look at what you should save and what you can shred:
Tax returns. Save your tax returns and supporting documents for at least three years. That's how long the IRS has to audit you. There are, however, exceptions. The IRS has up to six years to audit you if you under-report your income by 25% or more. There is no statute of limitations on audits of fraudulent returns.
There's also no statute of limitations on audits of taxpayers who don't file a return. Keep a record that you filed your return indefinitely. That goes for your state return, too.Taxpayers who e-file should print a copy of the e-mail acknowledging receipt of their return and keep it with their records. Those who file paper returns should send them to the IRS via certified mail and keep a copy of the receipt, she says. (This will also provide proof that you mailed your return before the deadline.)
Keep W-2s, 1099s, acknowledgments from charities and other supporting documents for as long as you keep your tax returns.
If you discuss deductions and other tax strategies with your tax preparer, keep notes of those conversations with your returns, too. They could be helpful in an audit.
Some recommend you keep copies of tax returns forever, because they provide a record of your financial history. You may need previous returns to apply for a mortgage or student loan.
Real estate records. Hold on to your closing statements, purchase and sales invoices, proof of payment and insurance records for at least four years after you sell the property.
You should also keep records of any major improvements made to your home, such as an addition or a new roof. When you sell, you can add the cost of these improvements to the amount you paid for your home, which will reduce taxes on capital gains.
Most homeowners don't have to worry about paying taxes on the sale of their homes. For singles, up to $250,000 in profit on the sale of a primary home is excluded from taxes; married couples can pocket up to $500,000 tax-free.
Still, homeowners who have owned their homes for a long time could exceed those thresholds. And there's no guarantee the tax break will last forever. Right now capital gains (on primary residences) are excluded for up to $500,000, but there was a time when that wasn't the case.
Investments. As is the case with real estate, you should hold on to documents that show the purchase price of your stocks and mutual funds until three years after you sell. You should also keep records of dividends, reinvested dividends, loads and stock splits.
These documents will show the IRS how much you paid for your investments, known as the basis. Without proof of the basis, you could be liable for taxes on the entire proceeds of a sale, even if you sell at a loss. If you claim a loss for worthless securities, hold on to the supporting documents for at least seven years after you file your return.
Financial institutions will be required to track the basis for stocks held by their customers starting this year, mutual funds in 2012, and bonds in 2013. They'll also report this info to the IRS.
However, the law doesn't require financial institutions to provide the basis for securities purchased before the effective dates. So you should keep records of securities bought before Jan. 1 (or in the case of mutual funds and bonds, before 2012 and 2013, respectively).
Bank and credit card statements. Keep credit card receipts and canceled checks that support your tax deductions on your tax return for as long as you keep the return. Statements that aren't related to your tax returns should be saved for a year then discarded, the Federal Deposit Insurance Corp. says. Canceled checks that aren't related to your taxes can be shredded after you've reconciled them with your bank statement.
Many banks don't send canceled checks to customers. But you can order copies of tax-related checks as soon as you get your bank statement, or keep the statement and order tax-related checks in the event of an audit. In general, banks that don't provide canceled checks must keep copies for seven years. You may have to pay a fee for copies more than a year old.
You don't need to kill lots of trees to maintain good records. The IRS allows electronic storage systems as long as they provide an accurate and accessible record of the data. I recommend scanning your documents onto your computer then backing them up on a CD.
For more info about IRS record-keeping rules, see Publication 552, available at www.irs.gov.
Friday, April 22, 2011
Income tax, Gift tax and Estate tax planning have taken on a new level of importance
Income tax, gift tax and estate tax planning have taken on a new level of importance due to the effects of the Tax Reform Act of 2010 ("the Act"). Because the Act sunsets on December 31, 2012, there is increased urgency to act sooner rather than later. Further, current planning should be viewed as opportunistic and short-term rather than long-term in nature. In fact, the 2012 budget proposals recently announced by the Obama Administration raise tax rates and change the lifetime gift tax exclusion amount as of January 1, 2012. Consequently, there is no assurance that the current, highly-favorable income tax and estate tax laws will be available in 2012, much less in 2013.
This significant new tax legislation was enacted on December 17, 2010. It will materially impact your tax and estate planning over the next twenty months. Under the Act, the estate tax which was phased out in 2010 returns with a lower tax rate of 35 percent (reduced from 45 percent) and a $5 million exclusion per person for years 2011 and 2012 only. Also, this exclusions amount is portable between spouses with proper planning and an affirmative election.
ESTATE PLANNING
The critical message is that all affluent individuals and high-income taxpayers should review their estate plans in 2011. The planning opportunities presented by these temporary new laws coupled with the current economic environment present, a once-in-a-lifetime opportunity, the so called "perfect storm."
The Act increased the exclusion amount for estate, gift and GST purposes, but the exclusion will drop to $1 million (somewhat higher for GST tax purposes) after 2012. Varying exclusions can result in a significant shift in wealth depending upon the timing of someone's passing. Your estate plan should be reviewed to ensure that it reflects your wishes no matter what your estate and GST exclusions are when your wealth passes to your loved ones.
In addition, the top estate, gift and GST tax rates will be capped at 35% for this year and (possibly) next year. Beginning in 2012, the rates are scheduled to increase to 55% (and 60% for some). The effective tax rate for estate and GST taxes can result in significant changes in what each of your family members receives. We think it is appropriate for you to review your plans for the disposition of your property whether the rates of tax are very high or not. Also, it is highly appropriate for taxpayers to consider using their increased gift and GST tax exclusions as soon as possible. For some, a lifetime gift of $5 million may be too large; however, a smaller gift using a part of the larger exclusion may be wise to consider in such cases. By making gifts now, the appreciation of assets will be removed from your estate and you may also avoid estate, gift and GST taxes.
This extraordinary wealth transfer opportunity is amplified by several factors including historically low interest rates, low real estate and business values, and the lowest transfer tax rates since the Great Depression.
A number of articles which have appeared in the popular press and technical journals have extolled the virtues of "portability" and claimed that portability eliminates the need or urgency for formula trust planning or estate planning, in general, for all but the most affluent Americans. These authors are misinformed and are distributing imprudent advice. For the first time under U.S. law, portability allows a surviving spouse to utilize the unused lifetime exclusion of their deceased spouse.
Reliance on this provision of the Act, however, is attended by several complexities. First, portability expires by operation of law; at the end of 2012. Consequently, we do not recommend relying on portability. Second, even if portability becomes permanent, it further complicates estate planning for married couples. Third, in the event of divorce, it is uncertain how the exclusion amount will be allocated. Finally and most importantly, the use of portability requires an affirmative tax election on the part of the executor. This election opens up the applicable statue of limitations which may otherwise avoid IRS examination of the estate of the first spouse to die. Such an examination could call into question tax positions and valuations of an otherwise closed estate. We deem this to be an unreasonable risk for our clients to take.
In addition, significant changes in the estate tax and inheritance tax regimes which exist in 22 states and the District of Columbia, warrant review of estate plans. Many of these laws have changed dramatically in recent years. The high rates of current state taxation and historically low exclusions further encourage thorough review of existing estate plans. In sum, now is the time to update, build or modify your estate plan.
GIFT TAX
One of the most significant provisions of the Act is the increase of the federal gift tax exclusion from $1 million to $5 million. The increased gift tax exclusion allows married couples to make lifetime gifts of up to $10 million without incurring gift tax. The law allows individuals who have made prior taxable gifts totaling $1 million to make additional gifts of up to $4 million during 2011 and 2012 without triggering gift tax (or couples who have made taxable gifts totaling $2 million to make additional gifts of up to $8 million).
WHAT THE CHANGES MEAN FOR YOUR ESTATE PLAN
The Act allows for increased gifting opportunities for individuals who are contemplating significant lifetime gifts to children, grandchildren or more remote descendants. However, the Act provides only temporary relief and expires on December 31, 2012, unless Congress acts before then. Beginning on January 1, 2013, the federal estate and gift tax exclusion is scheduled to decrease to $1 million and the estate tax rate will rise to 55%. Therefore, there is a window of opportunity of less than two years to maximize estate planning strategies utilizing the increased gift and GST tax exclusion of $5 million (or $10 million per couple) and the decreased 35% gift tax rate.
INCOME TAXES
The Tax Reform Act of 2010 extended President Bush's income tax rate reductions for all taxpayers for two years, through December 31, 2012. The fiscal year 2012 budget proposals, however, call for elimination of these reduced tax rates for all "High-Income Taxpayers," defined as single individuals with incomes above $200,000 and married couples filing joint returns with income over $250,000. In addition, itemized deductions would be capped at 28% for High-Income Taxpayers no matter how high their income tax rate may be. Under the proposals, the current 15% maximum rate for capital gains and dividends would be increased to 20% for all High-Income Taxpayers.
A significant tax planning opportunity exists under the current reduced income tax rates. Given the likelihood of higher federal rates coupled with fewer deductions and more prohibitions and caps, 2011 may be the ideal year in which to voluntarily recognize income. For example, existing S corporations which are cumbersome for financial and estate planning purposes may be terminated and restructured into LLCs or other entities, thus triggering income tax recognition in 2011. Similarly, income can be voluntarily accelerated into 2011 by making sales of appreciated assets or securities. Further, the urgency to consider this kind of income tax planning is increased by recent and expected state income tax rate increases resulting from large state and local government deficits, benefit shortfalls and other budget woes.
This significant new tax legislation was enacted on December 17, 2010. It will materially impact your tax and estate planning over the next twenty months. Under the Act, the estate tax which was phased out in 2010 returns with a lower tax rate of 35 percent (reduced from 45 percent) and a $5 million exclusion per person for years 2011 and 2012 only. Also, this exclusions amount is portable between spouses with proper planning and an affirmative election.
ESTATE PLANNING
The critical message is that all affluent individuals and high-income taxpayers should review their estate plans in 2011. The planning opportunities presented by these temporary new laws coupled with the current economic environment present, a once-in-a-lifetime opportunity, the so called "perfect storm."
The Act increased the exclusion amount for estate, gift and GST purposes, but the exclusion will drop to $1 million (somewhat higher for GST tax purposes) after 2012. Varying exclusions can result in a significant shift in wealth depending upon the timing of someone's passing. Your estate plan should be reviewed to ensure that it reflects your wishes no matter what your estate and GST exclusions are when your wealth passes to your loved ones.
In addition, the top estate, gift and GST tax rates will be capped at 35% for this year and (possibly) next year. Beginning in 2012, the rates are scheduled to increase to 55% (and 60% for some). The effective tax rate for estate and GST taxes can result in significant changes in what each of your family members receives. We think it is appropriate for you to review your plans for the disposition of your property whether the rates of tax are very high or not. Also, it is highly appropriate for taxpayers to consider using their increased gift and GST tax exclusions as soon as possible. For some, a lifetime gift of $5 million may be too large; however, a smaller gift using a part of the larger exclusion may be wise to consider in such cases. By making gifts now, the appreciation of assets will be removed from your estate and you may also avoid estate, gift and GST taxes.
This extraordinary wealth transfer opportunity is amplified by several factors including historically low interest rates, low real estate and business values, and the lowest transfer tax rates since the Great Depression.
A number of articles which have appeared in the popular press and technical journals have extolled the virtues of "portability" and claimed that portability eliminates the need or urgency for formula trust planning or estate planning, in general, for all but the most affluent Americans. These authors are misinformed and are distributing imprudent advice. For the first time under U.S. law, portability allows a surviving spouse to utilize the unused lifetime exclusion of their deceased spouse.
Reliance on this provision of the Act, however, is attended by several complexities. First, portability expires by operation of law; at the end of 2012. Consequently, we do not recommend relying on portability. Second, even if portability becomes permanent, it further complicates estate planning for married couples. Third, in the event of divorce, it is uncertain how the exclusion amount will be allocated. Finally and most importantly, the use of portability requires an affirmative tax election on the part of the executor. This election opens up the applicable statue of limitations which may otherwise avoid IRS examination of the estate of the first spouse to die. Such an examination could call into question tax positions and valuations of an otherwise closed estate. We deem this to be an unreasonable risk for our clients to take.
In addition, significant changes in the estate tax and inheritance tax regimes which exist in 22 states and the District of Columbia, warrant review of estate plans. Many of these laws have changed dramatically in recent years. The high rates of current state taxation and historically low exclusions further encourage thorough review of existing estate plans. In sum, now is the time to update, build or modify your estate plan.
GIFT TAX
One of the most significant provisions of the Act is the increase of the federal gift tax exclusion from $1 million to $5 million. The increased gift tax exclusion allows married couples to make lifetime gifts of up to $10 million without incurring gift tax. The law allows individuals who have made prior taxable gifts totaling $1 million to make additional gifts of up to $4 million during 2011 and 2012 without triggering gift tax (or couples who have made taxable gifts totaling $2 million to make additional gifts of up to $8 million).
WHAT THE CHANGES MEAN FOR YOUR ESTATE PLAN
The Act allows for increased gifting opportunities for individuals who are contemplating significant lifetime gifts to children, grandchildren or more remote descendants. However, the Act provides only temporary relief and expires on December 31, 2012, unless Congress acts before then. Beginning on January 1, 2013, the federal estate and gift tax exclusion is scheduled to decrease to $1 million and the estate tax rate will rise to 55%. Therefore, there is a window of opportunity of less than two years to maximize estate planning strategies utilizing the increased gift and GST tax exclusion of $5 million (or $10 million per couple) and the decreased 35% gift tax rate.
INCOME TAXES
The Tax Reform Act of 2010 extended President Bush's income tax rate reductions for all taxpayers for two years, through December 31, 2012. The fiscal year 2012 budget proposals, however, call for elimination of these reduced tax rates for all "High-Income Taxpayers," defined as single individuals with incomes above $200,000 and married couples filing joint returns with income over $250,000. In addition, itemized deductions would be capped at 28% for High-Income Taxpayers no matter how high their income tax rate may be. Under the proposals, the current 15% maximum rate for capital gains and dividends would be increased to 20% for all High-Income Taxpayers.
A significant tax planning opportunity exists under the current reduced income tax rates. Given the likelihood of higher federal rates coupled with fewer deductions and more prohibitions and caps, 2011 may be the ideal year in which to voluntarily recognize income. For example, existing S corporations which are cumbersome for financial and estate planning purposes may be terminated and restructured into LLCs or other entities, thus triggering income tax recognition in 2011. Similarly, income can be voluntarily accelerated into 2011 by making sales of appreciated assets or securities. Further, the urgency to consider this kind of income tax planning is increased by recent and expected state income tax rate increases resulting from large state and local government deficits, benefit shortfalls and other budget woes.
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