Year-end tax planning should be easier this year than last. Thanks to the new law enacted in January, you won't have to wait to see whether Congress will reinstate popular breaks that have expired.
But don't break out the bubbly just yet. If you're a high-income taxpayer, there's a good chance you're going to owe more for 2013, and that makes year-end planning more important than ever.
1. Feed Your 401(k)
A good place to start is with your 401(k) or similar employer-based retirement plan. Money you contribute to your plan (if it's not a Roth) is excluded from your income, lowering your tax bill.
If you're not yet on track to max out your contributions by year-end, you can direct some extra dollars to your retirement plan during your last few pay periods -- or, if you get a year-end bonus, use it to fatten your savings.
This year, workers can contribute up to $17,500 to employer-based plans. Workers 50 and older can contribute up to $23,000.
2. Safeguard Your Refund (By Shrinking It)
When you file your tax return each year, the amount of tax withheld from your paycheck or submitted through estimated quarterly tax payments ideally should match the amount of tax you owe. In reality, that seldom happens.
The majority of Americans are addicted to refunds. More than 75% of U.S. taxpayers give Uncle Sam an interest-free loan year after year, with an average refund of about $3,000 -- that's $250 per month. Wouldn't you rather get your money when you earn it instead of waiting a year for a refund? What's more, that fat refund represents a security risk -- identity thieves have been filing fraudulent returns and stealing the refund.
There's an easy fix. Just file a revised Form W-4 with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld.
If your current financial situation is similar to last year's, just use our Tax Withholding Calculator . Answer three simple questions (you'll find the answers on your 2012 tax return), and we'll estimate how many additional allowances you deserve -- and how much your take-home pay could rise.
However, this tool won't be much help if your tax situation has changed since last year because, for example, you got married, had a baby or switched jobs. In that case, you might want to give the more-complicated IRS online withholding calculator a whirl.
3. Penalty-Proof Your Return
If you expect that you'll owe money when you file your 2013 tax return next spring, you can avoid an underpayment penalty by boosting your withholding now.
You needn't pay every penny of the tax you expect to owe. As long as you prepay 90% of this year's tax bill, you're off the hook for the penalty. Or you can escape its reach, in most cases, by prepaying 100% of last year's tax liability. However, note that if your 2012 adjusted gross income topped $150,000, you'll have to prepay 110% of last year's tax liability to avoid a penalty.
Taking these steps to boost your withholding at year-end will shield you from an underpayment penalty on your 2013 return, no matter how much you actually owe when you file your return.
If you have both wage and consulting income and expect to owe money on your tax return, you'll do better by boosting the taxes withheld from your last few paychecks rather than trying to make up the shortfall with your final estimated quarterly payment, due January 15, 2014.
Taxes that are withheld are treated as if they were spread out evenly throughout the year, so that approach sidesteps an underpayment penalty; the estimated-tax-payment approach does not.
4. Plan Your Itemized Deductions
If you expect your income to drop next year -- you plan to retire, for example -- deductions will probably be more valuable this year.
You may want to pay other deductible expenses before year-end, such as your January mortgage, 2014 real estate taxes and fourth-quarter estimated state income taxes. Be careful, though: If you're a candidate for the Alternative Minimum Tax, some of those deductions could be disallowed.
On the other hand, if you expect your income to increase next year, you'll want to defer charitable gifts and other deductible expenses because they'll be more valuable.
5. Review Your Portfolio
Allowing taxes to dictate your investment strategy is rarely a good idea. But if you're already considering selling appreciated securities or other assets -- even if you don't have losses to offset them -- cutting them loose by year-end could save you money (you can harvest losses to offset investment gains, plus shield up to $3,000 of ordinary income from taxes).
Offsetting gains is particularly important to taxpayers in the 39.6% tax bracket (income over $400,000 for singles; $450,000 for married couples), because they face taxes of up to 23.8% on dividends and long-term capital gains, not the 15% rate that applies to most investors.
If you're in the 15% tax bracket, you'll pay 0% on long-term capital gains. In 2013, you're eligible for the 0% capital-gains rate if your taxable income is $36,250 or less if you are single, or $72,500 or less if you are married filing jointly.
If you think your tax rate is going to rise sometime in the future, converting to a Roth makes a lot of sense. Withdrawals from traditional IRAs are taxed at your ordinary income tax rate, while all withdrawals from Roths are tax-free and penalty-free as long as you're at least 59½ and the converted account has been open at least five years. You do have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert.
Worried about not being able to pay the tax bill? Don't be. When you convert to a Roth, you can change your mind. You have until October 15, 2014, to undo the conversion and turn your Roth back into a regular IRA.
7. Beware End-of-Year mutual fund purchases
Sometime in December, many funds pay out dividends and capital gains that have built up during the year, and the payout goes to investors who own shares on what's known as the ex-dividend date. It might sound like a savvy move to buy just before that day so you get a whole year's worth of income.
That's not how it works, though. Yes, you'd get the payout, but at the time of the payout, the share price falls by exactly the same amount. If you get $2 a share in dividends, for example, the share price drops by two bucks. In effect, the fund is simply refunding part of your purchase price.
But the IRS doesn't see it that way. You have to report the payouts as income on your 2013 return -- and pay taxes on them -- even if the money is automatically reinvested in extra shares. (The tax threat does not apply to mutual funds held in 401(k) plans or other tax-deferred retirement accounts.)
Before you buy shares for a nonretirement account in December, check the fund company's Web site to find out exactly when the dividend will be paid.
8. Give to Charity
This is a great time of year to clean out your closets and garage, but you can write off donations to a charitable organization only if you itemize deductions. A few bags full of gently used clothes and household items can add up to hundreds of dollars in tax deductions, but valuing those donations can be difficult. (Try Turbo Tax's free tool ).
If you donate a used car worth more than $500 to charity, your deduction will be limited to the amount the organization receives when it sells it. But you may be able to claim a bigger deduction based on the vehicle's fair-market value if the charity uses it to deliver meals, for example, or gives it to a needy individual. The charity will list the vehicle's sale price, or whether an exception allowing a higher deduction applies, on Form 1098-C, which you must attach to your tax return. Because of previous abuses, donations of used cars and other noncash items may attract extra scrutiny from the IRS. So keep scrupulous records.
Send cash donations to your favorite charity by December 31 and hang on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you'll also need an acknowledgment from the charity.
9. Give Really Big to Charity
If you plan to make a significant gift to charity this year, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year. Doing so boosts the savings on your tax return. Your charitable-contribution deduction is the fair-market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit.
Individuals age 70½ can make a tax-free distribution of up to $100,000 from their IRAs directly to charity. The IRA-to-charity strategy is particularly helpful for people who have accumulated a lot of money in their IRAs but don't need the money to live on -- and would have to pay a big tax bill when they take their required withdrawals. The charitable transfer lets you give the money to charity and count it as a required minimum distribution but avoid taxes on the withdrawal. Not including RMD in adjusted gross income can also help you stay under the income cutoffs for the Medicare Part B and Part D high-income surcharge or taxable Social Security benefits. This tax break is scheduled to expire on Dec. 31, 2013, although Congress has extended it several times in the past.
10. Give to Your Family (Or Other Lucky People)
You can give up to $14,000 to as many individuals as you like before Dec. 31 without filing a gift-tax return. If you're married, you and your spouse can give up to $28,000 per recipient.
The case for using the annual gift-tax exclusion for transferring wealth to adult children (or other lucky recipients) isn't as strong this year as it has been in the past. The estate-tax exemption is now $5.25 million (and twice that for married couples), indexed to inflation. Only a handful of ultra-wealthy families need to worry about the estate tax at that level. But 21 states and the District of Columbia impose some type of estate or inheritance tax , and most come with much lower exemptions. Rhode Island, for example, taxes estates valued at more than $910,725 at a maximum rate of 16%.
If you're feeling really generous, you could do it all over again on January 1, 2014, when you can give up to $14,000 per person.
11. Give the Gift of Securities
If your adult children or parents are in the 10% or 15% tax bracket (taxable income of up to $36,250 for singles, $72,500 for married couples), they qualify for the 0% tax rate on long-term capital gains. When they sell the securities, profit that would have been taxed at a rate as high as 23.8% on your return will be tax-free on theirs. Children under 18 and full-time students under age 24 are subject to the "kiddie" tax. Investment income that exceeds $2,000 will be taxed at the parent's higher rate.
To qualify for the special rate for capital gains, the securities must have been held for at least 12 months. For securities given as gifts, though, the holding period includes the time you owned them.
12. Spend Down your Flex Plan (If You Need to)
The Treasury Department and IRS changed the rules so employers can allow people to carry over up to $500 in their accounts from one year to the next. Companies can choose to make this change before the end of 2013, but they're not required to do it.
If your employer won't make the change by year-end and doesn't offer a grace period, it's time to clean out your account. Remember that you can no longer use flex funds to pay for over-the-counter medicines, such as aspirin, ibuprofen or allergy meds, without a prescription (except for insulin). But that restriction does not apply to other nonprescription medical items, such as crutches, contact-lens solution or bandages. (For a list of what is allowed by law, see IRS Publication 502 .) The same rules on eligible purchases apply to health savings accounts.
Saturday, November 30, 2013
Friday, November 29, 2013
138 shopping days until April 15
You will want to do some tax planning right now so that you can not only prevent a big surprise but prepare for it if need be.
You need to sit down and project your income and income tax withholding to year-end. Then if you used tax software to prepare your returns, you can enter this information and any other anticipated taxable transactions into the tax software along with your new filing status to see if you will owe or not.
Better yet, visit a tax professional with your projections and a copy of your 2012 income tax return and get an assessment – there may be factors that play in that you are not aware of. After all, the tax code is 73,000 pages long and incomprehensible to the average lay person. Plus a tax professional may guide you to some tax saving transactions that you can implement before year-end.
Listed below are tax-impacting situations that require the help of a professional:
Change in marital status. If you divorced this year or have a divorce that will be final by December 31, 2013, you will transition from the advantageous married filing jointly tax status to single or perhaps head of household if you have dependents or others who will qualify you for that filling status. You may end up owing, so it’s a good idea to find out now so you can adjust your withholdings or otherwise plan for the liability. If you got married this year, you will want to analyze the impact of joint finances on your tax liability. It’s a good idea to combine your finances in a spreadsheet then visit your tax pro to determine if there will be a liability or a refund. Take along your copies of your prior year tax return.
Buying or selling a home. Many folks think that they can write off the down payment, or take deductions for improvements made to their primary residence. Not so. However, if you go from being a renter to being a homeowner, you will enjoy a deduction for property taxes and mortgage interest. So rather than taking the standard deduction, you will be allowed to itemize deductions which will allow for additional write offs such as charitable contributions, DMV fees, state income taxes paid, investment expenses, employee business expenses, and medical, to name a few.
If you sell your home, part of your profit may be taxable. Consult with a tax professional to determine if you will end up owing due to a home sale. Bear in mind that the first $250,000 (single) or $500,000 (married filing joint) of profit is not includable in income for tax purposes. If you went from being a homeowner to a renter, you will likely lose the advantage of itemized deductions and may need to adjust your withholdings accordingly.
Job change. If you change jobs, you will be required to complete Form W4 to declare the number of exemptions you will claim. Depending upon whether there are other financial changes and if you are substantially increasing or decreasing your income, you may want to do some projections to see where you will stand next April 15. Your tax pro can help you determine how many exemptions to claim in order to align your withholdings to your liability.
Retirement. Many baby boomers are retiring and that generally changes their tax picture completely. Running the new numbers will help retirees determine how much should be saved toward taxes and whether or not to have withholdings on their retirement pay or social security benefits.
So before the holiday season hits and you get busy partying, think about and plan for your 2013 tax liability. Come next April you will be glad you did.
You need to sit down and project your income and income tax withholding to year-end. Then if you used tax software to prepare your returns, you can enter this information and any other anticipated taxable transactions into the tax software along with your new filing status to see if you will owe or not.
Better yet, visit a tax professional with your projections and a copy of your 2012 income tax return and get an assessment – there may be factors that play in that you are not aware of. After all, the tax code is 73,000 pages long and incomprehensible to the average lay person. Plus a tax professional may guide you to some tax saving transactions that you can implement before year-end.
Listed below are tax-impacting situations that require the help of a professional:
Change in marital status. If you divorced this year or have a divorce that will be final by December 31, 2013, you will transition from the advantageous married filing jointly tax status to single or perhaps head of household if you have dependents or others who will qualify you for that filling status. You may end up owing, so it’s a good idea to find out now so you can adjust your withholdings or otherwise plan for the liability. If you got married this year, you will want to analyze the impact of joint finances on your tax liability. It’s a good idea to combine your finances in a spreadsheet then visit your tax pro to determine if there will be a liability or a refund. Take along your copies of your prior year tax return.
Buying or selling a home. Many folks think that they can write off the down payment, or take deductions for improvements made to their primary residence. Not so. However, if you go from being a renter to being a homeowner, you will enjoy a deduction for property taxes and mortgage interest. So rather than taking the standard deduction, you will be allowed to itemize deductions which will allow for additional write offs such as charitable contributions, DMV fees, state income taxes paid, investment expenses, employee business expenses, and medical, to name a few.
If you sell your home, part of your profit may be taxable. Consult with a tax professional to determine if you will end up owing due to a home sale. Bear in mind that the first $250,000 (single) or $500,000 (married filing joint) of profit is not includable in income for tax purposes. If you went from being a homeowner to a renter, you will likely lose the advantage of itemized deductions and may need to adjust your withholdings accordingly.
Job change. If you change jobs, you will be required to complete Form W4 to declare the number of exemptions you will claim. Depending upon whether there are other financial changes and if you are substantially increasing or decreasing your income, you may want to do some projections to see where you will stand next April 15. Your tax pro can help you determine how many exemptions to claim in order to align your withholdings to your liability.
Retirement. Many baby boomers are retiring and that generally changes their tax picture completely. Running the new numbers will help retirees determine how much should be saved toward taxes and whether or not to have withholdings on their retirement pay or social security benefits.
So before the holiday season hits and you get busy partying, think about and plan for your 2013 tax liability. Come next April you will be glad you did.
Thursday, November 28, 2013
Year-end financial planning checklist
Happy Thanksgiving. Today is a special day to enjoy with family and friends and reflect on how fortunate we all are to have what we have and to live in a country where we can enjoy life, liberty, and the pursuit of happiness.
Thanksgiving is also a reminder that we are entering the hustle and bustle of the Christmas holiday season with less than five weeks left in 2013. That leaves very little time to wrap up year-end financial matters. So here is my annual checklist, updated as usual for current tax law.
1. If you are a high income taxpayer, be ready to pay more tax. If you read my recent columns you are already aware of the new Net Investment Income Tax, the higher rates on capital gains and dividends, the phase-out of itemized deductions, and the Medicare earned income surtax.
2. If you were 71 or older in 2013, make sure you take the required minimum distribution (RMD) from your individual retirement account (IRA) before Dec. 31. If you don't, the IRS can penalize you 50 percent of the amount you should have withdrawn.
3. If you inherited an IRA in 2013 from someone who was taking required distributions, make sure that person took their RMD before they died. If not, then you must take it for them or pay the 50 percent penalty. And you must start taking distributions based upon your own life expectancy next year.
4. If you turned 70½ in 2013, you can wait until April 1 to take your 2013 RMD. You must still take your RMD for 2014, so it may not be tax-wise to wait.
5. If you are self-employed, review your retirement plan options and year-to-date contributions. Your choices include simple IRAs, SEP-IRAs, individual 401(k)s, and defined-benefit plans. Some plans must be in place by the end of the year. Check with your tax or financial adviser.
6. Examine your investments. If needed, rebalance your portfolio. If you have mutual funds or stocks that you want to sell or replace, look for losses to offset the gains.
7. Make your charitable donations now. If you own an IRA and are over 70½ you can instruct your IRA custodian to make a tax-free charitable contribution directly from your IRA using what the IRS refers to as a qualified charitable distribution.
8. You can give as much as $14,000 this year and next year to another person without filing a gift tax return. A married couple can give up to $28,000 per person. If you give by check, encourage the recipient to cash the check before Jan. 1 so you can prove the gift was made in 2013.
9. Set up a college savings (529) plan for your grandchild, niece, or nephew. You can contribute up to five years' worth of $14,000 annual exclusions all at once. That $70,000 is not taxable as a gift, does not count against your lifetime gift tax exclusion, and will not be included in your estate if you live for five years.
10. Ask your tax professional if you should pay your state estimated income tax before Jan. 1 so you can deduct the payment on your 2013 federal income tax return.
Thanksgiving is also a reminder that we are entering the hustle and bustle of the Christmas holiday season with less than five weeks left in 2013. That leaves very little time to wrap up year-end financial matters. So here is my annual checklist, updated as usual for current tax law.
1. If you are a high income taxpayer, be ready to pay more tax. If you read my recent columns you are already aware of the new Net Investment Income Tax, the higher rates on capital gains and dividends, the phase-out of itemized deductions, and the Medicare earned income surtax.
2. If you were 71 or older in 2013, make sure you take the required minimum distribution (RMD) from your individual retirement account (IRA) before Dec. 31. If you don't, the IRS can penalize you 50 percent of the amount you should have withdrawn.
3. If you inherited an IRA in 2013 from someone who was taking required distributions, make sure that person took their RMD before they died. If not, then you must take it for them or pay the 50 percent penalty. And you must start taking distributions based upon your own life expectancy next year.
4. If you turned 70½ in 2013, you can wait until April 1 to take your 2013 RMD. You must still take your RMD for 2014, so it may not be tax-wise to wait.
5. If you are self-employed, review your retirement plan options and year-to-date contributions. Your choices include simple IRAs, SEP-IRAs, individual 401(k)s, and defined-benefit plans. Some plans must be in place by the end of the year. Check with your tax or financial adviser.
6. Examine your investments. If needed, rebalance your portfolio. If you have mutual funds or stocks that you want to sell or replace, look for losses to offset the gains.
7. Make your charitable donations now. If you own an IRA and are over 70½ you can instruct your IRA custodian to make a tax-free charitable contribution directly from your IRA using what the IRS refers to as a qualified charitable distribution.
8. You can give as much as $14,000 this year and next year to another person without filing a gift tax return. A married couple can give up to $28,000 per person. If you give by check, encourage the recipient to cash the check before Jan. 1 so you can prove the gift was made in 2013.
9. Set up a college savings (529) plan for your grandchild, niece, or nephew. You can contribute up to five years' worth of $14,000 annual exclusions all at once. That $70,000 is not taxable as a gift, does not count against your lifetime gift tax exclusion, and will not be included in your estate if you live for five years.
10. Ask your tax professional if you should pay your state estimated income tax before Jan. 1 so you can deduct the payment on your 2013 federal income tax return.
Wednesday, November 27, 2013
Helpful year-end tax tips
As 2013 comes to a close, there is still time to plan your year-end strategies for minimizing your 2013 tax liability. Let's consider some savvy tax-planning tactics that might apply to you.
Timing, Deductions And Credits
In order to plan, you will need a good sense of your expected 2013 income, adjusted gross income and corresponding tax bracket.
When it comes to taxes, timing can be important. By delaying income such as a year-end bonus or commissions, you can defer your taxes on that income until 2014. Or, if you expect to be in a higher tax bracket in 2014, taking that income in 2013 may be a better move. After you decide about the timing of your bonuses or commissions, you can then estimate your adjusted gross income by deducting common adjustments from your expected income, such as 401(k) and individual retirement account contributions, alimony and student loan interest payments, for example. These are adjustments you can take even if you do not itemize.
Next, you'll want to take a close look at possible deductions and tax credits. A deduction reduces your taxable income — that is, the amount of income on which your tax is calculated. How much a deduction saves you depends on your tax bracket. For example, in a 25 percent bracket, a $1,000 deduction saves $250 of tax. In a 33 percent bracket, the same deduction saves $330. Many people find that claiming itemized deductions for expenses such as mortgage interest, state and local tax, and charitable contributions provides them with a better tax result than claiming the standard deduction.
Unlike a deduction, a tax credit directly reduces your tax liability. Whatever your tax bracket, generally speaking, a $1,000 tax credit saves you $1,000 of tax. There are several tax credits you may qualify for, such as tax credits for children, child and dependent care, post-secondary education for someone in your household and even a saver's credit.
Investment Income
Investment income includes taxable interest, dividends, rents, royalties, annuities, capital gains and income from a business investment. If you have realized capital gains on investment sales this year, you can lower your tax liability by generating offsetting losses. Capital losses can be used to offset your gains, plus up to $3,000 of your ordinary income, too.
Conversely, if you have already sold some investments at a loss, you can take capital gains on appreciated stock that you may have been hesitant to sell because of tax consequences. As long as the gains aren't more than your available losses, you'll be able to take them without the tax liability.
New Medicare Tax
If you are a high-income earner, you may be subject to the new 3.8 percent tax on investment income, designed to help pay for the Medicare program. This surcharge will be imposed on taxpayers who have any amount of combined net investment income, if their adjusted gross income is greater than $200,000 for single filers, $250,000 for married filing jointly and $125,000 for married but filing separately. Working to reduce your adjusted gross income to below the appropriate threshold could help you avoid this tax.
Decisions That Work Best For You
On a final note, remember that pre-tax contributions to an employer's retirement savings plan and/or deductible contributions to an IRA can reduce your current taxes as well as help you save for retirement. If possible, try to max out your retirement plan contributions for the year.
Consulting with a tax professional can provide you clarity on how best to minimize your tax liability.
Timing, Deductions And Credits
In order to plan, you will need a good sense of your expected 2013 income, adjusted gross income and corresponding tax bracket.
When it comes to taxes, timing can be important. By delaying income such as a year-end bonus or commissions, you can defer your taxes on that income until 2014. Or, if you expect to be in a higher tax bracket in 2014, taking that income in 2013 may be a better move. After you decide about the timing of your bonuses or commissions, you can then estimate your adjusted gross income by deducting common adjustments from your expected income, such as 401(k) and individual retirement account contributions, alimony and student loan interest payments, for example. These are adjustments you can take even if you do not itemize.
Next, you'll want to take a close look at possible deductions and tax credits. A deduction reduces your taxable income — that is, the amount of income on which your tax is calculated. How much a deduction saves you depends on your tax bracket. For example, in a 25 percent bracket, a $1,000 deduction saves $250 of tax. In a 33 percent bracket, the same deduction saves $330. Many people find that claiming itemized deductions for expenses such as mortgage interest, state and local tax, and charitable contributions provides them with a better tax result than claiming the standard deduction.
Unlike a deduction, a tax credit directly reduces your tax liability. Whatever your tax bracket, generally speaking, a $1,000 tax credit saves you $1,000 of tax. There are several tax credits you may qualify for, such as tax credits for children, child and dependent care, post-secondary education for someone in your household and even a saver's credit.
Investment Income
Investment income includes taxable interest, dividends, rents, royalties, annuities, capital gains and income from a business investment. If you have realized capital gains on investment sales this year, you can lower your tax liability by generating offsetting losses. Capital losses can be used to offset your gains, plus up to $3,000 of your ordinary income, too.
Conversely, if you have already sold some investments at a loss, you can take capital gains on appreciated stock that you may have been hesitant to sell because of tax consequences. As long as the gains aren't more than your available losses, you'll be able to take them without the tax liability.
New Medicare Tax
If you are a high-income earner, you may be subject to the new 3.8 percent tax on investment income, designed to help pay for the Medicare program. This surcharge will be imposed on taxpayers who have any amount of combined net investment income, if their adjusted gross income is greater than $200,000 for single filers, $250,000 for married filing jointly and $125,000 for married but filing separately. Working to reduce your adjusted gross income to below the appropriate threshold could help you avoid this tax.
Decisions That Work Best For You
On a final note, remember that pre-tax contributions to an employer's retirement savings plan and/or deductible contributions to an IRA can reduce your current taxes as well as help you save for retirement. If possible, try to max out your retirement plan contributions for the year.
Consulting with a tax professional can provide you clarity on how best to minimize your tax liability.
Tuesday, November 26, 2013
Year-end planning that will help lower your tax bill
You don't have much time if you are interested in cutting your income taxes for 2013.
Some people can pay less income tax or get a bigger tax refund by using powerful, and totally legal, tax strategies by December 31st. No strategy, obviously, applies to all individuals and all situations. But let's do a little last-minute tax planning for those who might benefit.
Start by postponing or receiving income to 2014 if you think you'll be in a "lower tax bracket" for that year. Accelerate income into 2013 if entering an expected "higher tax bracket" in 2014. Maximize the value of tax deductions, too. Remember that a tax deduction usually saves you more taxes in a year with higher tax rates.
Up for a fat year-end bonus at work? Arrange to receive bonuses in January if your taxes will be lower next year. Self-employed taxpayers may defer income by waiting until 2014 to send invoices, under the cash basis of accounting, to customers. Accelerate payments, on the other hand, if you think your taxes will be lower in 2013. Other timing issues to mull over:
• Determine holding or selling appreciated assets, like real estate or securities.
• Evaluate postponing or completing a Roth IRA Conversion.
• Tap retirement distributions in a year with lower taxes.
Push Tax Deductions to a Year You Take Itemized Deductions: Use your standard deduction, a base income that isn't subject to tax, in a year that your in
come isn't high enough to itemize. Some itemized deductions may be limited or not fully allowed on a 2014 Schedule A.
Medical deductions have changed for 2013. Now you can only deduct medical expenses such as doctors, prescriptions, health insurance, and hospital stays if they exceed 10% of your Adjusted Gross Income, if you are younger than age 65.
Also think about:
• Purchasing a new car might allow you to add sales tax paid on the car to sales tax amounts from the IRS Optional Tables.
• Evaluating your Adjusted Gross Income, gross income, deductions and credits.
• Considering which bills, such as charitable and medical, to pay this year or postpone until next.
Review Stock Portfolio for Tax Losses by Year-end: Think about selling an under-performing investment to offset taxable capital gains from investment sales and capital gains passed through by your mutual funds. Watch wash sale rules, though. You're not allowed to deduct a current loss for identical securities purchased within 30 days of sale.
Usually holding capital assets for at least 12 months is the way to go, unless you have lots of capital loss to offset your gains. Beware, next year AFTRA has increased the highest rate for capital gains and dividends to 20 percent for many affluent taxpayers.
Also ponder:
Maximizing Energy Credits: Take the $500 maximum lifetime credit for qualified energy efficiency improvements to your principal home. Contemplate making an appropriate purchase by December 31, 2013, if you haven't utilized this deduction, before this lucrative tax credit expires.
Avoiding Alternative Minimum Tax Trap: Think you might be subject to the Alternative Minimum Tax in 2013? Consider paying state and local income taxes, real estate taxes, and miscellaneous itemized deductions in 2014 because they may increase your taxes next year if you get hit with AMT.
Smart Charitable Giving: Give appreciated assets such as stocks, subject to long-term gain, to an IRS approved charity. Get a tax deduction for the full value of the securities, not just what you paid. If you donate the shares before selling the stock, this helps you avoid the capital gains tax.
Some people can pay less income tax or get a bigger tax refund by using powerful, and totally legal, tax strategies by December 31st. No strategy, obviously, applies to all individuals and all situations. But let's do a little last-minute tax planning for those who might benefit.
Start by postponing or receiving income to 2014 if you think you'll be in a "lower tax bracket" for that year. Accelerate income into 2013 if entering an expected "higher tax bracket" in 2014. Maximize the value of tax deductions, too. Remember that a tax deduction usually saves you more taxes in a year with higher tax rates.
Up for a fat year-end bonus at work? Arrange to receive bonuses in January if your taxes will be lower next year. Self-employed taxpayers may defer income by waiting until 2014 to send invoices, under the cash basis of accounting, to customers. Accelerate payments, on the other hand, if you think your taxes will be lower in 2013. Other timing issues to mull over:
• Determine holding or selling appreciated assets, like real estate or securities.
• Evaluate postponing or completing a Roth IRA Conversion.
• Tap retirement distributions in a year with lower taxes.
Push Tax Deductions to a Year You Take Itemized Deductions: Use your standard deduction, a base income that isn't subject to tax, in a year that your in
come isn't high enough to itemize. Some itemized deductions may be limited or not fully allowed on a 2014 Schedule A.
Medical deductions have changed for 2013. Now you can only deduct medical expenses such as doctors, prescriptions, health insurance, and hospital stays if they exceed 10% of your Adjusted Gross Income, if you are younger than age 65.
Also think about:
• Purchasing a new car might allow you to add sales tax paid on the car to sales tax amounts from the IRS Optional Tables.
• Evaluating your Adjusted Gross Income, gross income, deductions and credits.
• Considering which bills, such as charitable and medical, to pay this year or postpone until next.
Review Stock Portfolio for Tax Losses by Year-end: Think about selling an under-performing investment to offset taxable capital gains from investment sales and capital gains passed through by your mutual funds. Watch wash sale rules, though. You're not allowed to deduct a current loss for identical securities purchased within 30 days of sale.
Usually holding capital assets for at least 12 months is the way to go, unless you have lots of capital loss to offset your gains. Beware, next year AFTRA has increased the highest rate for capital gains and dividends to 20 percent for many affluent taxpayers.
Also ponder:
Maximizing Energy Credits: Take the $500 maximum lifetime credit for qualified energy efficiency improvements to your principal home. Contemplate making an appropriate purchase by December 31, 2013, if you haven't utilized this deduction, before this lucrative tax credit expires.
Avoiding Alternative Minimum Tax Trap: Think you might be subject to the Alternative Minimum Tax in 2013? Consider paying state and local income taxes, real estate taxes, and miscellaneous itemized deductions in 2014 because they may increase your taxes next year if you get hit with AMT.
Smart Charitable Giving: Give appreciated assets such as stocks, subject to long-term gain, to an IRS approved charity. Get a tax deduction for the full value of the securities, not just what you paid. If you donate the shares before selling the stock, this helps you avoid the capital gains tax.
Monday, November 25, 2013
Year-end tax suggestions for businesses
It’s not too late to make moves to reduce your 2013 taxes if you are a business owner.
• Use the new “streamlined” home-office rules. Many self-employed taxpayers declined to claim the home-office deduction because it was so complicated to compute. For 2013, the deduction is streamlined, allowing for a deduction of $5 per square foot, up to a maximum of 300 square feet or $1,500.
• Create a retirement plan. It’s not too late to create a retirement plan for yourself and your employees if you have them. The plans can be simple to set up and administer, such as a Simplified Employee Pension (SEP) plan. A 401(k) plan could be established even for a one-person business. While some of these plans must be established by the end of the year, most can be funded up to the extended due date of the tax return.
• Purchase business equipment. Up to $500,000 (scheduled to be reduced significantly to $25,000 in 2014) in business equipment purchases can be expensed this year, rather than being expensed over a number of years. Additionally, there is also a 50 percent bonus depreciation allowance (that will not be available in 2014) if your purchases exceed the $500,000 limit. 2013 might be the last year to maximize your equipment purchase deductions to such an extent.
• Deduct health insurance. If you are self-employed, you are allowed to claim 100 percent of the amount paid for health insurance for yourself, your spouse, and your dependents as long as you follow certain conditions.
• Consider credit card purchases. If you want to purchase equipment or supplies for your business before the end of the year, but you are cash-strapped, consider using your credit card. Your deduction occurs this year when the purchase is made, not next year when the credit card charges are paid.
For guidance with year-end tax planning for your business, contact our office.
• Use the new “streamlined” home-office rules. Many self-employed taxpayers declined to claim the home-office deduction because it was so complicated to compute. For 2013, the deduction is streamlined, allowing for a deduction of $5 per square foot, up to a maximum of 300 square feet or $1,500.
• Create a retirement plan. It’s not too late to create a retirement plan for yourself and your employees if you have them. The plans can be simple to set up and administer, such as a Simplified Employee Pension (SEP) plan. A 401(k) plan could be established even for a one-person business. While some of these plans must be established by the end of the year, most can be funded up to the extended due date of the tax return.
• Purchase business equipment. Up to $500,000 (scheduled to be reduced significantly to $25,000 in 2014) in business equipment purchases can be expensed this year, rather than being expensed over a number of years. Additionally, there is also a 50 percent bonus depreciation allowance (that will not be available in 2014) if your purchases exceed the $500,000 limit. 2013 might be the last year to maximize your equipment purchase deductions to such an extent.
• Deduct health insurance. If you are self-employed, you are allowed to claim 100 percent of the amount paid for health insurance for yourself, your spouse, and your dependents as long as you follow certain conditions.
• Consider credit card purchases. If you want to purchase equipment or supplies for your business before the end of the year, but you are cash-strapped, consider using your credit card. Your deduction occurs this year when the purchase is made, not next year when the credit card charges are paid.
For guidance with year-end tax planning for your business, contact our office.
Saturday, November 23, 2013
Top 10 Estate Planning Considerations to Complete Before Year-End
FROM DIGITALJOURNAL.COM-
With the proposed tax reforms listed in President Obama's budget, certain planning strategies are in the crosshairs and may not be around for long. McManus & Associates, an estate planning law firm based in the Tri-State Area, today released the latest chapter, "Top 10 Estate Planning Considerations to Complete before Year-End," in its free Educational Focus Series. During a client conference call, the firm's Founding Principal and top AV-rated Attorney John O. McManus highlighted effective financial tactics to use now, as well as maintenance items required to ensure one's family wealth remains protected. To review the top estate planning tips that should be applied before 2014, go to the firm's website at http://mcmanuslegal.com/2013/11/conference-call-top-10-estate-planning-considerations-to-complete-before-year-end/.
"Although legislation next year could be made retroactive to January 1st, acting before the end of this year will ensure that any changes in 2014 won't affect your planning," explained McManus. "Get inside the castle walls before year-end; in instances when Congress has passed rules retroactively, the laws are made retroactive to the beginning of the calendar year, but not to the prior year."
1. Laws will change, but not before year-end.
a. President Obama continues to publically call for a reduction in the lifetime gift and Federal estate tax exemption amounts. With deficit negotiations upcoming next year, there could be potential for a reduction in the exemption amount, precluding clients from taking advantage of the current unprecedented exemption amount.
b. Grantor trusts are intentionally defective for income tax purposes, meaning that the grantor pays any income tax on income earned by the trust assets. In this way the grantor can preserve the assets and accelerate the growth of the trust. The powers that the grantor retains cause it to be a "grantor trust."
c. Even if you have an estate plan in place, it may not reflect the current legislation to best employ the exemption amounts and tax rates.
2. Your partnership is validly created, but is it validly maintained?
a. Family Limited Partnerships and LLCs provide tremendous opportunities for estate planning, taking advantage of discounted values for assets gifted to trust, and provide a further level of asset protection for your family.
b. Such entities must be run, however, as legitimate businesses, which means shareholders' meetings, etc. No personal use assets owned by the LLC/FLPs should own multiple assets (investment properties, business interests, liquid and illiquid financial instruments).
c. Have annual review meetings to review your partnership and asset performance.
3. You are making gifts to your loved ones -- be careful not to exceed your exemption amount.
a. First, keep close track of all your gifts. Timely filing of a gift tax return allows the donor to elect how he or she wants to deploy the Generation Skipping Tax Exemption and start the clock running on the statute of limitations.
b. Gifts made to life insurance trusts to cover premium payments, for example, may not apply to gifts that a grantor would want to have use up his exemption amount.
c. Such gifts to life insurance trusts require Crummey notices be sent to each beneficiary of the gift to notify them that such gift has been made to this trust.
d. Consider naming people other than your children when making gifts to a life insurance trust -- this way the client can still make annual exclusion gifts to his children through other means (such as in trust).
e. Are your trustees monitoring the performance of insurance policies in the ILIT?
4. You have done great estate planning -- do you know the current two hottest strategies?
a. As opposed to trusts with language that reads, "one fractional portion at 30, the next at 35, the final piece at 40" consider creating a trust for children for their lifetime.
b. Lifetime trusts provide a practical vehicle to preserve assets, yet allow children the power to appoint and remove trustees and even the ability to serve as trustee of the trust at a certain age. If the child works to build her own life and never needs to touch the assets in trust, they can continue to grow and pass on free of tax. Standards for distributions are described in four terms: health, education, maintenance and support.
c. A limited power of appointment allows a person the ability to decide who will receive the assets in the trust within a class of individuals as defined in the trust document, decided upon by the grantor. Such limited power does not grant the holder of such a limited power to transfer the property to his/her creditors.
5. Income tax deductions can be powerful -- here are three useful deductions to take:
a. For clients who itemize deductions, it may be most tax-efficient to accelerate certain payments if it will result in higher write-offs for 2013.
b. Accelerating a January house payment due in January adds a 13th month of deductible interest. Prepayment of state, local and property taxes due early in 2014 can reduce a client's federal tax bill. Miscellaneous and medical deductions can only be taken if they exceed 10% or 2% of a client's AGI, respectively. Consider prepaying college tuition, or if you live in a state with no personal income tax, you might consider making a major year-end purchase to write off sales tax.
c. WARNING: Prepayment is not always the right answer. This strategy will not work if you will pay the alternative minimum tax (AMT). Ask your accountants about how to best proceed.
6. Your adult children continue to love and respect you, but the law prohibits you from making decisions on their behalf. Do the fiduciaries and guardians named in your documents still reflect your current wishes?
a. In today's litigious society, it is critical to immediately move forward to create health care documents, name powers of attorney, and execute a living will.
b. Marriage, divorce, new children, or any major life change -- either personally or in assets owned -- should lead you to revisit your planning to ensure that your family is protected as you intend and that all fiduciaries named are still reflective of your current wishes.
c. If it has been more than 5 years since the execution of a power of attorney, it may be wise to re-execute. Certain states and institutions will want to see a more current power of attorney.
7. You love to make year-end gifts to charity. Here are two critical strategies:
a. As we enter the holiday season and are reminded of all the people in our lives for whom we are grateful, we also can pause to reflect on how richly blessed we have been over the past year. In this moment of thanksgiving, have you considered donations to charitable causes that are close to the mission of your family?
b. Make charitable gifts with appreciated stock so that you get the full deduction for the value of the donation without liquidating the stock and the realizing capital gains.
c. Establishing your own foundation can be a wonderfully unique way to bring the family to talk about values, assets, and how to best match personal passions and resources to help find solutions to problems in the world.
8. Surprise! You now have to make withdrawals from your IRA. Here's a strategy to avoid tax payment and fully benefit your charity.
a. The IRS allows up to $100,000 in cash donations from an IRA to charities for clients who have reached age 70 1/2. Such donation does count for the required minimum distribution from the IRA and can help prevent possible loss of itemized tax deductions, phase-out of personal exemptions or credits, etc.
9. Given the current interest rates, should you consider a GRAT or QPRT?
a. With current interest rates low, as set by IRC 7520, the interest hurdle to make the creation of a GRAT profitable is rather low. This device allows the grantor to gift assets to children in an irrevocable trust for a term of years. Over that term the grantor is entitled to receive back an annuity stream equal to the value of the gift plus the federal interest rate. For assets that a client expects to appreciate significantly over the next few years, this can be a valuable vehicle for removal of growth from the estate.
b. Conversely, if interest rates rise, consider creation of a QPRT. The higher the interest rate, the greater the discount that you enjoy from the actual fair market value of the gifted residence.
10. How should you consider harvesting capital gains, timing long-term losses?
a. If you own investments that have dropped in value since you acquired them, now might be a good time to sell off part or all of them to cut your tax bill. Direct your advisor to sell only those positions within the portfolio that have realized losses, namely the highest basis shares. You can deduct capital losses up to the amount of any capital gains that you'll have for the year.
b. The preferential long-term capital gains rates are only applicable to securities owned for over one year. Therefore, holding appreciated securities for over a year before selling makes great tax sense. There is of course market risk that stock prices could plummet during that year. That said, now may be a great time to cash in some long-term winners to benefit from the 20% tax rate.
"Before a year comes to a close, there are some very important tax planning strategies that you can take advantage of that just end and each year they are non-accretive," commented McManus. "If you don't do them by year-end, you may or may not get to do them in the New Year -- even if you do, you lost the opportunity to do them in the previous year."
With the proposed tax reforms listed in President Obama's budget, certain planning strategies are in the crosshairs and may not be around for long. McManus & Associates, an estate planning law firm based in the Tri-State Area, today released the latest chapter, "Top 10 Estate Planning Considerations to Complete before Year-End," in its free Educational Focus Series. During a client conference call, the firm's Founding Principal and top AV-rated Attorney John O. McManus highlighted effective financial tactics to use now, as well as maintenance items required to ensure one's family wealth remains protected. To review the top estate planning tips that should be applied before 2014, go to the firm's website at http://mcmanuslegal.com/2013/11/conference-call-top-10-estate-planning-considerations-to-complete-before-year-end/.
"Although legislation next year could be made retroactive to January 1st, acting before the end of this year will ensure that any changes in 2014 won't affect your planning," explained McManus. "Get inside the castle walls before year-end; in instances when Congress has passed rules retroactively, the laws are made retroactive to the beginning of the calendar year, but not to the prior year."
1. Laws will change, but not before year-end.
a. President Obama continues to publically call for a reduction in the lifetime gift and Federal estate tax exemption amounts. With deficit negotiations upcoming next year, there could be potential for a reduction in the exemption amount, precluding clients from taking advantage of the current unprecedented exemption amount.
b. Grantor trusts are intentionally defective for income tax purposes, meaning that the grantor pays any income tax on income earned by the trust assets. In this way the grantor can preserve the assets and accelerate the growth of the trust. The powers that the grantor retains cause it to be a "grantor trust."
c. Even if you have an estate plan in place, it may not reflect the current legislation to best employ the exemption amounts and tax rates.
2. Your partnership is validly created, but is it validly maintained?
a. Family Limited Partnerships and LLCs provide tremendous opportunities for estate planning, taking advantage of discounted values for assets gifted to trust, and provide a further level of asset protection for your family.
b. Such entities must be run, however, as legitimate businesses, which means shareholders' meetings, etc. No personal use assets owned by the LLC/FLPs should own multiple assets (investment properties, business interests, liquid and illiquid financial instruments).
c. Have annual review meetings to review your partnership and asset performance.
3. You are making gifts to your loved ones -- be careful not to exceed your exemption amount.
a. First, keep close track of all your gifts. Timely filing of a gift tax return allows the donor to elect how he or she wants to deploy the Generation Skipping Tax Exemption and start the clock running on the statute of limitations.
b. Gifts made to life insurance trusts to cover premium payments, for example, may not apply to gifts that a grantor would want to have use up his exemption amount.
c. Such gifts to life insurance trusts require Crummey notices be sent to each beneficiary of the gift to notify them that such gift has been made to this trust.
d. Consider naming people other than your children when making gifts to a life insurance trust -- this way the client can still make annual exclusion gifts to his children through other means (such as in trust).
e. Are your trustees monitoring the performance of insurance policies in the ILIT?
4. You have done great estate planning -- do you know the current two hottest strategies?
a. As opposed to trusts with language that reads, "one fractional portion at 30, the next at 35, the final piece at 40" consider creating a trust for children for their lifetime.
b. Lifetime trusts provide a practical vehicle to preserve assets, yet allow children the power to appoint and remove trustees and even the ability to serve as trustee of the trust at a certain age. If the child works to build her own life and never needs to touch the assets in trust, they can continue to grow and pass on free of tax. Standards for distributions are described in four terms: health, education, maintenance and support.
c. A limited power of appointment allows a person the ability to decide who will receive the assets in the trust within a class of individuals as defined in the trust document, decided upon by the grantor. Such limited power does not grant the holder of such a limited power to transfer the property to his/her creditors.
5. Income tax deductions can be powerful -- here are three useful deductions to take:
a. For clients who itemize deductions, it may be most tax-efficient to accelerate certain payments if it will result in higher write-offs for 2013.
b. Accelerating a January house payment due in January adds a 13th month of deductible interest. Prepayment of state, local and property taxes due early in 2014 can reduce a client's federal tax bill. Miscellaneous and medical deductions can only be taken if they exceed 10% or 2% of a client's AGI, respectively. Consider prepaying college tuition, or if you live in a state with no personal income tax, you might consider making a major year-end purchase to write off sales tax.
c. WARNING: Prepayment is not always the right answer. This strategy will not work if you will pay the alternative minimum tax (AMT). Ask your accountants about how to best proceed.
6. Your adult children continue to love and respect you, but the law prohibits you from making decisions on their behalf. Do the fiduciaries and guardians named in your documents still reflect your current wishes?
a. In today's litigious society, it is critical to immediately move forward to create health care documents, name powers of attorney, and execute a living will.
b. Marriage, divorce, new children, or any major life change -- either personally or in assets owned -- should lead you to revisit your planning to ensure that your family is protected as you intend and that all fiduciaries named are still reflective of your current wishes.
c. If it has been more than 5 years since the execution of a power of attorney, it may be wise to re-execute. Certain states and institutions will want to see a more current power of attorney.
7. You love to make year-end gifts to charity. Here are two critical strategies:
a. As we enter the holiday season and are reminded of all the people in our lives for whom we are grateful, we also can pause to reflect on how richly blessed we have been over the past year. In this moment of thanksgiving, have you considered donations to charitable causes that are close to the mission of your family?
b. Make charitable gifts with appreciated stock so that you get the full deduction for the value of the donation without liquidating the stock and the realizing capital gains.
c. Establishing your own foundation can be a wonderfully unique way to bring the family to talk about values, assets, and how to best match personal passions and resources to help find solutions to problems in the world.
8. Surprise! You now have to make withdrawals from your IRA. Here's a strategy to avoid tax payment and fully benefit your charity.
a. The IRS allows up to $100,000 in cash donations from an IRA to charities for clients who have reached age 70 1/2. Such donation does count for the required minimum distribution from the IRA and can help prevent possible loss of itemized tax deductions, phase-out of personal exemptions or credits, etc.
9. Given the current interest rates, should you consider a GRAT or QPRT?
a. With current interest rates low, as set by IRC 7520, the interest hurdle to make the creation of a GRAT profitable is rather low. This device allows the grantor to gift assets to children in an irrevocable trust for a term of years. Over that term the grantor is entitled to receive back an annuity stream equal to the value of the gift plus the federal interest rate. For assets that a client expects to appreciate significantly over the next few years, this can be a valuable vehicle for removal of growth from the estate.
b. Conversely, if interest rates rise, consider creation of a QPRT. The higher the interest rate, the greater the discount that you enjoy from the actual fair market value of the gifted residence.
10. How should you consider harvesting capital gains, timing long-term losses?
a. If you own investments that have dropped in value since you acquired them, now might be a good time to sell off part or all of them to cut your tax bill. Direct your advisor to sell only those positions within the portfolio that have realized losses, namely the highest basis shares. You can deduct capital losses up to the amount of any capital gains that you'll have for the year.
b. The preferential long-term capital gains rates are only applicable to securities owned for over one year. Therefore, holding appreciated securities for over a year before selling makes great tax sense. There is of course market risk that stock prices could plummet during that year. That said, now may be a great time to cash in some long-term winners to benefit from the 20% tax rate.
"Before a year comes to a close, there are some very important tax planning strategies that you can take advantage of that just end and each year they are non-accretive," commented McManus. "If you don't do them by year-end, you may or may not get to do them in the New Year -- even if you do, you lost the opportunity to do them in the previous year."
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