How to Avoid Taxes on Your Social Security Income

Joe Udo for USNews.com writes:   The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012. That’s about $15,000 of income for the year. If you are receiving Social Security benefits, this means that you worked and paid taxes for at least 10 years. Wouldn’t it be nice to avoid paying tax on your Social Security benefits while in retirement? By planning ahead, you can avoid paying tax on your Social Security income and your effective tax rate will be very low.

If Social Security is your only income, then you probably won’t have to pay any taxes on it at all. Even if you have more income from your pension or IRA distribution, you still might not have to pay tax on your Social Security income. Here’s a look at how your Social Security benefit is taxed:

First, you need to figure out your “combined income.” This is your adjusted gross income plus non-taxable interest plus half of your Social Security benefit.

• If your combined income is under $25,000 for singles ($32,000 for couples filing jointly), then your benefits aren’t taxable.
• If your combined income is between $25,000 and $34,000 for singles ($32,000 to $44,000 for couples), then you will have to pay income tax on up to 50 percent of your benefit.
• If your combined income is over $34,000 for singles ($44,000 for couples), then you will have to pay income tax on up to 85 percent of your benefit.

The good news is you won’t ever have to pay income tax on 100 percent of your Social Security income. But there are still steps you can take to reduce taxes on your Social Security income.
If you want to minimize tax, then you should try to keep your combined income at around $25,000. For example, let’s assume you received the average Social Security benefit of $15,000 in 2012. If you withdraw $17,500 from your IRA, your combined income will be right at $25,000. Your real income would be $32,500. That’s $17,500 from the IRA and $15,000 from Social Security. (In this example your combined income is $17,500 plus half of $15,000 which equals $25,000.)
If you take the standard deduction ($5,950) and standard exemption ($3,800), then you’ll only have to pay $778 in tax on an income of $32,000. That’s a 2 percent effective tax rate.

Diversify your retirement income. It’s nice to pay only 2 percent tax, but what if $32,500 isn’t enough to live on? This is why you need to diversify your retirement income. For example, you can withdraw $5,000 from a Roth IRA and it won’t change any of the calculations above. You can also withdraw from your savings accounts or CDs, and you won’t have to pay tax on this income either.

Minimize expenses. The easiest way to minimize combined income is to keep your expenses low after retirement. This is a major reason it’s a good idea to pay off your mortgage before you retire. A mortgage payment is the biggest monthly expense for many households. If you can eliminate that bill, then it will be much easier to live on $32,500 per year.
Around this time of the year, no one likes the word “tax”. The tax code is incredibly complicated, and it’s a huge headache to deal with. However, if you plan it right, you won’t have to pay much tax at all in retirement. It is a great feeling to be able to keep more of your money when you need it the most.

Is your tax life keeping up with your real life? If you got married or divorced, took in an elderly parent, lost your job or adopted a child, you may need to adjust your tax planning.

Laura Saunders of the Wall St. Journal for MSN Money writes: Sometimes life's biggest changes can save you a bundle in taxes — if you know how to take advantage of them.

What was new in your life last year? Did you get married or divorced, or adopt a child? Did your parents move in — or your adult child? Did you lose a house to a storm?

These and other major events often have tax consequences people are unaware of — precisely because they are unusual, unlike, say, deducting donations. And with big tax increases taking effect this year, it is all the more important for taxpayers to seize any break they can.

Still, many overlook big potential savings.

"People come to us ready to discuss energy credits, but we have to ask if they're caring for a dependent parent," says Mark Steber, chief tax officer at Jackson Hewitt Tax Service. "The IRS seldom has a safety net for missed deductions."

For example, if you paid tuition for a special-needs child in 2012, thousands of dollars could be deductible as a medical expense. If you provided more than half an adult child's or parent's support, you might qualify for an extra $3,800 personal exemption.

Such big life changes happen with surprising regularity. Every year about 40% of taxpayers have a major life event such as marriage, job loss or retirement, according to data collected by Intuit, which sells the tax-prep software TurboTax.

Awareness can lead to smarter tax planning as well. Douglas Stives, a CPA who directs the MBA program at Monmouth University in New Jersey, says he had a client whose mother entered a nursing home. She wasn't wealthy, but she had enough money to pay the annual cost of about $100,000 for several years. The son was her only heir and had power of attorney.

The mother's nursing-home bill was fully deductible as a medical expense, but it exceeded her income. After consulting a lawyer, her son — who intended to pay his mother's costs if she ran out of money — transferred her assets to himself. He filed a gift-tax return on the transfer and paid her bill.

As a result, the son was able to take a medical deduction of more than $90,000 for his mother's nursing-home costs, and deduct his own medical expenses not covered by insurance. (Without his mother's expenses, they wouldn't have been large enough to qualify.) In addition, the client used the deduction to shelter income generated by converting part of his individual retirement account to a more tax-favored Roth IRA.

The point, Stives says, is that when deductions are greater than income, "it's important to look for tax opportunities."

To be sure, not all life changes bring tax savings. Newlyweds can face marriage-tax penalties. Unemployment benefits are taxable, even if there is no withholding.

Here are some often-overlooked tax effects of major life changes. Perhaps they will lower your tax bill for 2012 or 2013.

Marriage
A long-standing tax-code quirk means that couples earning widely different incomes often pay lower total taxes after marriage, while those earning closer to the same amount often pay more — the so-called marriage penalty. The Tax Policy Center, a nonpartisan research group, offers a useful calculator to help you see where you fall.

Couples married on the last day of the year are considered married for the whole year, so some couples who will owe more should adjust their withholding to avoid penalties.
Have you changed your name? It needs to be registered with the Social Security Administration before you file a tax return.

Divorce
During divorce negotiations, be sure to determine who will claim the dependent exemption for children, as only one per child is allowed. In past years, the higher-earning spouse often got more benefit from the exemptions. But starting in 2013, the personal exemption phases out for single filers starting at $250,000 of adjusted gross income, so sometimes the lower-earning spouse will derive more benefit.

If you are contemplating divorce and worried your partner is a tax cheat, avoid filing a joint return. That might raise your tax, but it will release you from liability for the year and, perhaps, trouble later on. Each spouse signing a joint return is usually fully liable.

Birth and adoption
Parents must obtain Social Security numbers for children in order to claim tax exemptions for them.

If you plan to take the child-care credit for children age 12 and under — which apples to expenses up to $3,000 for one child or $6,000 for two or more — caretakers must supply their Social Security numbers. If a person cares for the child in your home, you could have "nanny tax" issues.

Adoptive parents can qualify for a tax credit of up to $12,650 per child for 2012 ($12,970 for 2013) but should keep careful records. In recent years the IRS has challenged up to 70% of adoption credits, according to National Taxpayer Advocate Nina Olson.

Because the credit for 2012 and 2013 is less open to abuse, the IRS is likely to issue fewer challenges, experts say.

Change of employment
Workers who have lost their jobs could be in for an additional burden: a surprise tax bill. Severance and pay for unused vacation or sick days are taxable, but the employer might withhold taxes at a lower rate than before, says Gil Charney, an expert at H&R Block's Tax Institute.

Unemployment compensation also is taxable, and there is no automatic withholding. Recipients can file Form W-4V to have a flat 10% withheld.

Conversely, payments for extended health coverage often are tax-deductible as medical expenses. With a lower income, it can be easier to qualify for the deduction.

Workers employed for part of a year might have income low enough to qualify for credits and deductions they formerly earned too much to take, Charney says.

One of the most generous is the earned-income credit, a dollar-for-dollar tax offset that can be worth more than $5,000 to couples with children who earn little income. Workers planning to return to school should see IRS Publication 970 for a list of education benefits.

A year with a lower tax rate also can be a good time to convert a portion of an IRA to a more tax-favored Roth IRA, because the conversion tax can be lower as well.

If you are thinking of selling assets in 2013, the rate on long-term capital gains for couples with less than $72,500 ($36,250 for singles) of taxable income is attractive: 0%.

Did you find a job after losing one earlier in the year, or did you have multiple employers? You can adjust your income-tax withholding to free up cash, but employers must withhold full payroll taxes, even if that puts you over the limit. Be sure to claim a refund on your tax return, says Charney.

A new business
Too many people starting businesses overlook the importance of getting good advice at the outset, small-business tax experts say. In particular, new owners often don't know they must keep detailed records in order to deduct many costs, including payments for meals, travel, automobiles, health care, equipment and retirement plans.

"The IRS often wants to see proof, especially for meals and entertainment expenses," says Lewis Taub, a tax director at McGladrey in New York.

Do you work from home? Recently, the IRS offered taxpayers a simplified option for claiming up to a $1,500 home-office deduction for 2013. (See IRS Revenue Procedure 2013-13 and Publication 587.)

Disasters
Tax deductions for casualty losses aren't generous. What's more, Congress hasn't granted victims of superstorm Sandy the expanded tax benefits it gave to Katrina victims.

Still, the IRS has extended until next Oct. 15 the deadline for deciding whether to take allowable storm losses against 2011 or 2012 taxes for Sandy victims. (See IRS Notice 2013-21.)

Should the allowed losses wipe out your taxable income, they can be carried back up to two years and carried forward up to 20, another help.

Change of household
For 2012, the exemption for each dependent is $3,800. But figuring out who your dependents are can be hard.

The assessment begins with whether you supplied more than half of someone else's support — even if that person isn't related to or living with you. In addition, adult dependents often can't have more than $3,800 of income. For all the rules, including for disabled dependents, see IRS Publication 501.

Note: Even if a support provider can't claim an exemption because the recipient's income is too high, the provider can deduct medical payments as long as he pays more than half the recipient's support. An example would be a daughter who pays $50,000 toward her father's nursing home, while the father himself has income of $20,000. In that case, the daughter's payment could be deductible, an IRS spokesman says.

Medical expenses
For 2012, taxpayers can deduct expenses exceeding 7.5% of adjusted gross income (or 10% if you owe alternative minimum tax). For 2013 the hurdle rises to 10% unless you're 65 or older.

Note that the IRS's definition of "qualified expenses" is often far broader than what insurers reimburse. It can include payments for insurance premiums, contact-lens solution, a doctor-prescribed wig, tuition for special education, skilled-nursing care and even some assisted-living care.

Taxpayers who surmount the 7.5% hurdle should scrutinize the list in IRS Publication 502 to see other expenses they can deduct.

Retirement
A common mistake is to take a bonus or pension lump sum before moving from a high-tax state to one with lower taxes. Don't be quick to withdraw from your retirement plans, either. "Try to let your tax rate relax first," says Monmouth's Stives.

Recent retirees who have taken an income hit should consider converting some or all of a regular IRA to a Roth IRA, says Vanguard Group tax expert Joel Dickson. Withdrawals from Roth accounts don't raise Medicare premiums or taxes on Social Security payments, nor do they help trigger the new 3.8% tax on other investment income.

Owners of regular IRAs must begin taking required withdrawals the year they turn 70½, though they have until the following April 1 to take the first payout.

Death
With the estate-tax exemption now more than $5 million per individual — and indexed for inflation — many executors of estates under the limit might skip filing an estate-tax return. But it is important to file after one spouse dies to preserve any unused exemption for the partner.

Here's why: Say a man died last year, leaving a $500,000 estate. Filing a proper estate return preserves his remaining exemption for his wife. Says estate-tax lawyer Howard Zaritsky of Rapidan, Va., "People can make, win, inherit or marry money. It's best to be optimistic."

Preparing Your Taxes In The Year Of Divorce

Kathleen B. Connell for The Blog /  HuffPo writes:   As if taxes aren't complicated enough, it can get worse during a divorce or separation. There are certain things that individuals going through the divorce process -- or who are recently divorced -- should keep in mind when preparing their taxes.

First, you are going to need to consider your filing status (i.e. "Married Filing Jointly," "Married Filing Single,'' "Head of Household," etc.) The IRS only cares about one day in terms of whether you are married or not, and that is December 31. If you are married on December 31, then it is as if you are married for the whole year -- whether you married on New Year's Eve, or 20 years prior. Likewise, if you get divorced by December 31, it is as if you are divorced for the whole year. So, if your divorce was final by December 31, 2012, then you do not have the option of filing as a married person for your 2012 taxes. Your filing status options are "Head of Household" or "Single."

Typically, "Head of Household" is going to provide a slight tax advantage over "Married Filing Single" or "Single." However, one should make sure that the requirements to file as "Head of Household" are met:

• Whether the taxpayer paid more than one-half of the housing costs during the year;
• Whether the taxpayer lived apart from his or her spouse during the second half of the tax year in question; and
• Whether dependent child(ren) lived in the home for at least one-half of the year.

Another important consideration for the newly or soon-to-be divorced taxpayer is which spouse will claim the child(ren) as the dependant(s). The IRS regulations are clear that the parent with whom the child spends more time may claim the child as his/her dependent. That means that if you look at the custody schedule, and one parent has greater than 50 percent of the year with the child(ren) (even if it is only one day), that particular parent may claim the child as his/her dependent. However, taxpayers can negotiate and contract around this requirement. In other words, the parent with more than 50 percent of the custodial time may elect to let the other parent claim the child as his/her dependent, but must do so in writing and must execute the required IRS form (Form 8332). If the parents did not negotiate or otherwise come to an agreement on who would claim the child as a dependent, then both parents must file the IRS regulations using "time with the child" as the decision-maker.

What about paying support (child or spousal)? Regularly, my clients ask about the deductibility of child support. I hate to break it to them, but the IRS will not accept a deduction for paying for the support of one's own children. In the agency's eyes, it is a parent's legal obligation to financially support his/her child. However, under many circumstances, alimony -- or, spousal support -- is tax deductible to the paying spouse and taxable to the receiving spouse. There are certain clawbacks to look out for and a laundry list of requirements, so consult your licensed CPA, but there is potential for a tax deduction and/or the creation of taxable income related to alimony or spousal support that should be investigated.

The transfer of property from one spouse to the other -- whether it is real estate, an investment account, a retirement account, cash, or personal propert -- if made pursuant to a divorce, is not a taxable event. This also includes gift taxes. As the law sees it, you are not making a gift to your spouse or former spouse, you are simply giving him/her their share of the marital estate. The property transferred will retain its original basis for tax purposes so that when it is sold, cashed in, or otherwise disposed of at some point in the future, the tax basis is the same as it was with the spouse who originally held title to that asset. For example, if a husband transfers one-half of his brokerage account to his wife, pursuant to a divorce, the initial transfer is not a taxable event for either individual. However, if the wife starts to liquidate the investments down the road, she will have to pay taxes on those investments based on the original basis in the stocks, bonds or other investments just as if the husband had sold them himself.

Any loss carried forward that the taxpayers have been utilizing will remain available to the taxpayer who held title to the asset. In the event the loss was a result of a jointly titled asset, the IRS presumes that each party gets one-half of any remaining loss carry forward.

Taxes can be complicated in any year, but in the year of divorce -- and even subsequent years -- when marital assets are sold or otherwise disposed of or alimony is paid or/received, the tax consequences can be more complicated. Any person who is divorced or thinking about getting divorced should certainly consult with a CPA to ensure that the tax affect related to marital assets and support is taken into account.

Tips for Business Tax Extensions

Kathryn Tuggle for The Street writes: Millions of Americans think of April 15 as a day they'd rather stay in bed -- submitting taxes is on no one's short list for a good time. But for thousands of small-business owners, the looming deadline can be almost impossible to meet -- with 24-hour-a-day commitments to daily operations and employees, many companies will be unable to wrangle the appropriate documents in the next few weeks.

If you're thinking of filing for an extension on your taxes, experts say there's still time to get your things in order, but now's the time to get to work. Our tax gurus tackle the five most frequently asked questions for filing a small-business extension. 

How do you know if you really need an extension or if you should just push on through and try to file by April 15?
"Business tax return filing is a complex and time-consuming undertaking, and, while being prepared to file on the original due date may seem ideal, there are many scenarios where businesses simply won't be able to file by that deadline," says Matt Becker, tax partner at BDO USA in Greater Grand Rapids, Mich. 

For example, some businesses may be extremely busy during the first quarter and may run into situations where additional research and documentation is required, says Deborah Sweeney, chief executive of MyCorporation.com.
 
"In those cases, filing for an extension can be a great way to buy additional time," she says.
Some cases that may legitimately require additional time could include the need for documentation of charitable deductions or new employee paperwork.
"Some tax return positions require that you have contemporaneous supporting documentation, such as an appraisal that supports a charitable contribution deduction," says Carolyn Linkov, a principal in Parente Beard's tax department. "If you don't have this documentation, you should extend the time for filing your return."

Once you know you need a corporate tax extension, what should be your first steps?

Most businesses will be eligible for either a six-month or five-month extension, depending on how the business is organized. Becker says. 

"There is one major caveat that should be kept in mind while filing for an extension, however. The taxpayer will have to estimate how much, if any amount, is owed in taxes and pay this amount at the time of the extension request. If you fail to take this critical step, the IRS may invalidate the extension," he says.
Corporations should start evaluating their tax liability as soon as the decision is made to file for an extensions, Becker says. 

"It will be imperative for you to consider all recent tax law changes as well as this year's gross income, taxable income, deductions and credits. One advantage of filing for an extension is that a business can spend more time analyzing its tax posture, making sure all available tax benefits have been realized," he says. 

With the deadline looming, who should you talk with or meet first?
Business owners should at least correspond with their accountant, if not meet in person, Sweeney says.  "Many accountants are far more e-savvy and they'll respond to email more expeditiously than in the past, so email communication can work in some instances. When it relates to confidential information, however, some things may be better discussed in person," she says. 

Before you sit down for any chats, have your important documents on hand, including those pertaining to revenue and expenses, banking and investments.
"This can be a lot of information for a business, so they elect to file the extension with the thought that they will reap additional benefits from write-offs or deductions they may have missed," she says.  Also, if you anticipate owing federal income tax for 2012, make sure you sit down with leaders in your company.  "Meet with your company's controller or CFO or treasurer to make sure that there are enough company funds to pay the tax liability," Linkov says. 

Typically, should small businesses do their taxes themselves, or should they seek the advice of a professional?
"Small businesses may find that the cost of hiring a professional is quickly offset by the discovery of write-offs and deductions they may not otherwise know," Sweeney says. "Even if the small-business owner hires an accountant one year and thinks they can go it alone the following year because they already know all the deductions, the laws frequently change."
Keep in mind that professional tax preparers can help guide you through some "sticky situations," Linkov says. 

"Compliance with the federal tax law requires more than the filing of a tax return for a business. It also requires a small business to know which of its workers to treat as employees vs. independent contractors and what types of issues, transactions and industries the IRS may be focusing its attention on, through an increase in audits or other measures designed to increase transparency in tax reporting. All of these items a tax professional can identify and assess as part of a broader relationship," she says.

Once you file for an extension, what should you look to accomplish in the extra time you've been given?

"After filing an extension, it's important to meet with your accountant and organize your records," Sweeney says. "Organized records will help you identify the sources of your income. You need this information to separate business from non-business income and taxable from nontaxable income. You will also need records to help you remember all of your expenses." 

To get a head start on what's required of you over the next few months, Linkov advises treating your six-month extension "as if it is a much shorter period of time."
"Just because you have another few months to file your return, that doesn't mean you have to wait until the last day. So make a concerted effort to obtain the documentation or other missing information as soon as possible," she says. 

Once your 2012 tax return is ready to be filed, you can use the extra time to start planning for the 2013 filing season -- and taking a hard look at what might have gone wrong this year.
"Identify and address areas of your tax compliance and function that resulted in the need for you to file an extension," Linkov says.

Pay your best estimate to IRS / When am I required to make estimated tax payments to the IRS?

BostonHerald.com writes:  Tax season is upon us and the Herald’s TaxSmart experts are here every Friday to help.  Today, Jonathan Gorski of Boston-based Edelstein & Co. discusses estimated tax payments to the Internal Revenue Service.   Individuals are required to make estimated tax payments to the IRS if the amount of tax they pay through withholding on wages and other payments will not adequately cover their tax liability for the year.

To avoid interest and penalties on an underpayment of tax, individuals, in the current year, are required to pay the lower of a) 90 percent of their current year tax; or b) 100 percent of the prior year tax.  If the taxpayer’s adjusted gross income (AGI) for the prior year was more than $150,000 ($75,000 if the taxpayer’s current year filing status is married filing separately), substitute 110 percent for 100 percent in the previous sentence.

Taxpayers typically make estimated tax payments on a quarterly basis. There are special rules for farmers and fishermen. Planning tip: The IRS requires you to pay your taxes “as you go” throughout the year.  This is essentially the purposes of federal withholdings as they are treated as payments made evenly throughout the year.

If you become aware that your withholdings and estimated tax payments aren’t enough to cover your income tax liability and/or interest and penalties from an estimated tax underpayment for the year, speak to your tax advisor about remitting additional amounts of federal income taxes through withholdings.  Taxpayers are usually able to withhold extra amounts on their W-2 wages and required minimum distributions (RMD’s) from their retirement plans.

Roth conversion can create a tax trap

Stewart Welch for AL.com writes: Tax time often brings a lot of solid questions from folks pondering their investment strategy, considering retirement, or expressing concerns about their overall financial future. Here are a few scenarios I've run across in recent months and answers that can be informative for a wide range of investors. 

Reader question: 

I plan to retire in the next 5-8 years at 58 years old and expect to have approximately $800,000 in my 401K plan.  I originally planned to move my 401K plan into a traditional IRA so I could have more control and more investment options.  However, I do not expect to need it at all.  Between my husband’s retirement annuity and my retirement annuity (and social security), our income will be $225,000 with annual adjustments.  Therefore, upon retirement, I am thinking about transferring my 401K from a traditional IRA to a Roth IRA.  This would require me to pay immediate taxes on $800,000.  But $800,000 invested for 30 years at 5% would be $3.5 million that my heirs would eventually have to pay tax on (when they reach retirement age).  So, should I transfer my 401K to a Roth IRA upon retirement if I don’t need the money during retirement?  D.J.

Answer: 

First, congratulations on doing a great job of preparing for your retirement!  The first rule of converting a traditional IRA to a Roth IRA is that you must be able to pay the income taxes from funds outside of your retirement accounts.  If this is not the case, generally, you are better off holding onto the IRA.  This is because when your heirs (presumably children) inherit your traditional IRA, they are allowed to ‘stretch’ the income tax liability over their life expectancy which may extend the tax payments over additional decades.  If you do have personal money from which to pay the taxes on a Roth conversion, you’ll likely be better off, tax wise, spreading the conversion over a number of years.  You want to avoid being drawn into the new higher income tax bracket (39.6%) that applies to couples with adjusted gross incomes exceeding $450,000.  I encourage you to work closely with your CPA to devise the most tax efficient strategy.

Reader question:  

I am fifty-two years old; have just changed jobs; and I have $20,000 in my old employer’s 401k.  My new employer provides a 100% match for up to 4% of annual contributions.   Should I roll my old 401k into my new employer’s plan or roll over into an IRA?  I was also told that if I need some of that money for a mortgage to buy a home, I can do so without penalties.  Is that correct?  A.G.

Answer:  

The main advantage of rolling your old 401k into your new employer’s plan (if they allow this) is that it consolidates your retirement money into one place.  If, instead, you roll over into an IRA, you’ll significantly increase your investment options.  Generally, my preference is more investment options.  You can withdraw up to $10,000 from an IRA penalty free for a home purchase if you are a first-time home buyer. This withdrawal will be treated as income for income tax purposes.  To qualify as a first-time homebuyer, neither you nor your spouse can have owned an interest in a home for the past two years. With your 401k, some employers allow you to take a loan of up to 50% of your vested balance or $50,000 whichever is less. My recommendation is to find another way to finance the purchase of your home.

Small Business / Single Most-Common Error Made on Start-up Tax Returns

James Markham for Inc. writes: An Ernst & Young partner explains why you don't want a do-it-yourself approach to tax return prep this year (even if you're bootstrapping).

In my discussions with the Internal Revenue Service, I hear time and again that the most common error in start-up company tax returns is in the reporting of start-up expenses. Most start-up filers make mistakes on what counts as a start-up expense, what is deductible to reduce the amount of taxable income--or when it is deductible.

What's a Start-up Expense?

Start-up expenses are the costs of getting started in business before you actually begin doing business. Start-up costs may include expenses for advertising, supplies, travel, communications, utilities, repairs, or employee wages. These expenses are often the same kinds of costs that can be deducted when they occur after you open for business. Pre-operating costs also include what you pay for investigating a prospective business before you get it started.

For example, they may include:

• A market review of potential business opportunities
• An analysis of open office spaces, or labor potential in your community
• Marketing and advertising to open shop
• Salaries and wages for employees who are being trained, and their instructors
• Travel and other necessary costs for signing up prospective distributors, suppliers, or customers
• Salaries and fees for executives and consultants or for other professional services

That said, start-up costs do not include deductible interest, taxes, or research and experimental costs.

What's Deductible to Reduce Taxable Income?

The deductibility of your start-up expenses depends on when you begin active trade or business. If you do go into business, start-up expenses of a trade or business are not deductible unless you elect to deduct them.

If you choose to do so, here's how you determine the deductible portion:

1. The amount of start-up expenditures for the active trade or business; or

2. $5,000 reduced (but not below zero) by the amount by which the start-up expenditures exceed $50,000

Any remaining start-up expenditures are to be claimed as a deduction spread over a 15-year period.

All start-up expenditures related to a particular trade or business are considered in determining whether the cumulative cost of start-up expenditures exceeds $50,000.

Based on this quick summary of the start up expenses rules, you can see why the IRS finds this a ripe area for adjustment.  

Word to the wise, get professional help. As the saying goes, you don't want to be penny wise and pound foolish.

Trust, But Verify Your Estate Tax Planning

Roger Russell for OnWallSreet.com writes: In the world of trust and estate administration, where tax planning typically involves special attention to federal tax law compliance, it’s easy to lose focus on state income taxation issues.   And while some states do not tax income related to trusts, states that do tax trust income have a variety of rules and criteria for which trusts are subject to tax.

Since CPAs can enter the picture both as trust advisors and as trustees, and as preparers of the trust income tax return, they need to be aware of what characteristics may result in a trust being subject to a state’s income tax, according to Christine Albright, a partner with Holland & Knight.  “Part of the problem we’re faced with is that the 51 jurisdictions that we’re dealing with don’t play by the same rules,” she said.

“Some have no income tax at all, some base their tax on where the person who created the trust resided at the time the trust was created or at the time it became irrevocable, others look to the state where the trust is being administered, or where a trustee resides, or where a beneficiary reside,” said Albright. “Depending on the answer to these types of questions, different states take the position that they have nexus over the trust, and if they have that, then they can tax some portion or all of the income.”
An example of the complexity of the issue is when a trustee changes residency to a different state, Albright noted. “In some situations a trustee’s move has the potential to trigger state income tax on the trust in the new state in which the trustee now resides,” she said. “But often the impact of such a move may not be understood and therefore go unreported for a number of years. This in turn could result not just in unpaid taxes, but the resulting interest and penalties.”

And things can change over time, creating a trap for the unwary, Albright observed. “For example, I live in Florida and set up a trust in Florida for my children, who also live in Florida. But I name my brother-in-law or best friend who happens to reside in Georgia, California, Arizona, Kentucky, New Mexico, North Dakota, Oregon or Virginia as the trustee. And based on the fact that the trustee lives in one of those states, all of a sudden the trust is subject to tax in one of those states.”

To complicate matters further, the state where a trust is taxable can move based on where the trustee resides, where the beneficiaries reside, or where the trust is administered. “There could be a trustee in Georgia and one in Arizona, and you may be taxed in both states,” she said. “The existence of a credit [for taxes paid to another state] is determined on a state by state basis, and very often, even with the credit, you might end up paying more than if you weren’t taxed in multiple states.”
Albright believes that many states are not aware that a trustee resides in the state, making the trust taxable in the state.

“How would, say, California or Arizona know that someone who moves to their state is a trustee?” she said. “The trustees don’t know they have to file, and the state has no reason to know.” There could be a problem for successor trustees who take over for someone who rendered the trust liable for tax but did not file. “They have to understand that they may be getting the trust in further trouble with interest and penalties if they find out and do nothing,” she cautioned. “Clients, beneficiaries and trustees don’t stay where we put them. For accountants preparing income tax returns, every year, I worry whether they realize that a trustee might have retired and moved to Arizona.”

“Even with a small trust, if a beneficiary moves to the wrong state, it can trigger tax liability that the accountant just doesn’t think of,” she said. “They have blinders and are focused on their own state rules rather than tracking where all the other possible triggers are located.”
Albright recommends that a trustee should arrange for periodic reviews of the trust regarding various state income tax laws, and develop a system for tracking state requirements as well as other factors that could trigger state income taxes.

6 questions to ask at tax time

Money-Rates.com for Nasdaq writes: As April 15 approaches, many Americans are still scrambling to get their tax returns together. But while meeting the tax deadline is important, this is also a good time to be thinking about next year's taxes.  As the 2012 tax season fades in the rear-view mirror, now is the time to make a meaningful difference to your 2013 taxes. Here are six tax-time questions to prompt you to explore the possibilities.

1. Are you maximizing your tax-advantaged savings opportunities?

For the 2013 tax year, the maximum amount you can contribute to an IRA rises from $5,000 to $5,500. Plus, if you are over 50, you can contribute an extra $1,000. Contribution limits on 401(k) accounts rise from $17,000 to $17,500, and some plans allow people over 50 to make an additional "catch-up" contribution of $5,500. So, even if you've been making regular contributions to your retirement plans , you have the opportunity to boost those contributions -- especially if you turn 50 this year.

2. Have you prioritized your retirement contributions?

People often can't afford to maximize their 401(k) and IRA contributions, so you'll want to make sure they are properly prioritized. In particular, if your employer makes any kind of a matching contribution on the 401(k) plan, you'll want to make sure you contribute enough to that plan to get the maximum matching amount available before you direct anything to your IRA.

3. Are your taxable investments and tax strategy well coordinated?

In completing your 2013 tax returns, did you find your investment strategy yielded a high proportion of short-term gains? If so, you may be in a high-turnover, trading type of strategy that isn't always best for a taxable account. Tax considerations should rarely interfere with specific investment decisions (the investment consequences generally outweigh the tax impact), but the strategy in general should be suitable for a taxable account.

4. Do you have an effective record-keeping system?

If you spent time scrambling to find records and receipts so you could do your 2012 taxes, resolve to make it easier next year. Whether it's putting paper copies in a designated folder or scanning records into a mobile device, things will go much more smoothly if you put things in the right place as they come in.

5. Do your payroll deductions line up well with your tax liability?

Conventional wisdom is that you should avoid having a tax refund, but with savings account rates near zero, this is less of a consideration. The main thing is that neither your tax refund nor tax liability should be particularly large. If either was too big this year, check your deduction assumptions for 2013, and watch the monitoring points (such as your investment gains and losses, savings account interest, etc.) that may indicate whether your tax liabilities are on on track with your assumptions throughout the year.

6. Are you paying the right amount for tax preparation?

Shop around a bit. Given what's at stake, cheapest isn't always best, but it is a competitive business that has been made more efficient by technology. Make sure you are paying a competitive rate for a service you respect.
A little thinking ahead might not only make your tax bill more manageable, but also reduce the time and expense of getting your tax returns prepared next year.

International Tax Expert Explains How Cyprus Became Such A Big Offshore Tax Haven

Hale Stewart, The Bonddad Blog  writes: Last weekend, I called NDD about something related to the blog.  During the call, he informed me that Cyprus was now an EU hot spot.  He gave me the 30,000 foot view, which I followed up on after the call.  However, not really explained very well in this story is how Cyprus became so important to international finance.  So, below is an explanation that comes from my day job: international tax planning (among other things).
First, let's classify countries geographically.  If you look at a map of the world and then look at the tax rates of most countries, the small countries -- typically islands -- have low to non-existent tax rates.  The reason is actually pretty simple: they have small populations and small geographic areas.  Hence, their need for tax revenue is greatly reduced (they don't have a social safety net to pay for and they don't have a great deal of infrastructure needs).  This is why the islands in the Caribbean have become tax havens -- a development made far easier because of electronic banking.  And when low tax rates are combined with bank-secrecy laws, an entire industry is now born -- offshore banking.

The creation of these tax havens led to a new type of international tax structure utilized by most major multi-national companies: the hub and spoke system.  The "hub" is typically a company incorporated on one of these island nations which receives incoming payments and stores them in bank accounts.  The "spokes" are payments from higher tax countries to these small islands, usually in the form of dividend payments, interest payments, royalty payments or payments based on some type of transfer pricing structure.
However, this structure can run into trouble when it comes to cross-border payments -- payments that move from one country to the other.  Typically, the country where the payment is coming from has a fairly hefty tax at the border, largely because this is the last time that jurisdiction will get a bite at the apple.  Hence, companies look for ways to lower the tax bite on these cross-border payments.

This is where the concept of tax treaties comes in.  A tax treaty is signed  by two countries for several reasons, one of which is to provide a maximum rate of taxation on cross border tax flows.  For example, a tax treaty between two countries will state that the most country X can tax a cross border dividend payment is 5%.  The purpose of signing these treaties is to create certainty for taxpayers (they have a fairly clear idea up front of what the tax rates will be) while increasing cross border transactions (lower taxes can increase capital flows).  The first model tax treaty was written by the OECD and published in 1963.  Several revisions have followed.  The US also has a model tax treaty as does the UN.  However, there are really very few meaningful differences between the three; the OECD is still considered the model treaty from an international planning perspective.  (If you're interested, I have a power point presentation on tax treaties here and a video presentation on tax treaties here). 
Now --suppose the following:

• we could form a small island country 
• with a small population 
• that had an extensive tax treaty network (to make cross border transfer payment easier), 
• a low rate of corporate taxation (10%), 
• a first world governmental structure (for political stability), and 
• that was located next to a large region that was also one of the most populated areas with a high standard of living? 

You'd get both Ireland and Cyprus.

And that is how Cyprus became an international banking center.

5 Things You Didn’t Know About QuickBooks (Introductory Level)

Leslie Capachietti for Concur.com writes:    In light of our launch of the Concur Connector for QuickBooks – an integrated expense solution that pulls your Concur expense data into QuickBooks with one click – we’ve teamed up with QuickBooks expert and author Leslie Capachietti to provide some tips and tricks to getting the most out of this popular small business accounting software.

1. Version selection matters
QuickBooks is no longer just a one size fits all solution. It’s easy to get overwhelmed, as there are now several versions available to fit your business type and growth stage.
When choosing the edition of QuickBooks best suited to your business, consider the following:

• Your industry, e.g. Retail, Construction, Professional Services, Manufacturing or Distribution. QuickBooks tailors their offerings to vertical markets and many come pre-loaded with the accounts, forms and reports you’ll need.
• Do you need to manage inventory? If so, does that inventory need to be tracked at multiple locations? If so, the QuickBooks Enterprise Edition comes with an optional Advanced Inventory module that lets you track inventory through multiple locations down to the bin location level using barcode scanning.
• Do you and your staff need anywhere/anytime access to QuickBooks to enter information or run reports? Consider the Online Edition.

2. Integration with other business applications
Many small businesses use various desktop or cloud based applications to manage critical parts of their business operations such as sales lead management, expense management or a shopping cart application for a web store. What’s more, they want an easy and affordable way to get the data into QuickBooks.
There are now literally hundreds of business critical applications that offer built-in integration with QuickBooks. Check out the QuickBooks App Center or the Intuit Developer Network to find a solution for your business.

3. QuickBooks Mobile App
Downloading this free app will enable your employees to take customer payments at the point of service. Employees can now:

• View and edit customer information
• Send invoices, create estimates, and record sales receipts
• Accept credit card payments from a mobile device

Basically, your employees can do business on the go, while you control how often you want sales and payment information to sync with your QuickBooks file back in the office.

4. Batch Invoicing
Suppose you manage a landscape company and you charge the same monthly maintenance fee to multiple customers. Batch Invoicing, one of QuickBooks’ most underutilized features, gives you an efficient way to:

• Create a single invoice that can be issued to multiple customers
• Create multiple Billing Groups for customers and easily invoice them for the same items and amounts
• Implement a price increase by issuing an updated invoice to everyone at once

5. Local support
Setting up and making the most of your QuickBooks software can be challenging. Let’s face it, managing your company’s finances is not always easy – especially if your accounting needs involve more than simply keeping track of money in and money out.  There’s an extensive nationwide network of Intuit Certified QuickBooks experts available to you. Some are accountants or CPAs while others are software consultants – but all have been certified by Intuit on their knowledge of the software. You can find a local expert by visiting the QuickBooks ProAdvisor website.
What’s your favorite QuickBooks feature? Please share in the comment section.

Second Tax Extensions Don't Go to Just Anyone

Elizabeth Rosen for The Street writes: Up until tax year 2005, a taxpayer could file IRS Tax Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) and get a four-month automatic tax extension. An additional two-month tax extension could be obtained by completing Tax Form 2688. Then the Internal Revenue Service (modified Tax Form 4868) to allow for an automatic six-month extension of the original April 15 filing deadline.

With a tax extension, income tax returns are due on or before Oct. 15 of the same year.

Once you request a tax extension successfully, remember that you must file your tax return by the new extended deadline. If you miss the Oct. 15 due date, you will be subject to late fees, penalties and interest. It is also important to note that you will not be allowed to request further extensions.

The IRS does not grant second or additional tax extensions, with the exception of the following special instances: 

Members of the U.S. military. Members of the Armed Forces serving in a combat zone or contingency operation are eligible for additional tax extensions of up to six months. The tax extension begins once their deployment ends. Refer to IRS Publication 3 (Armed Forces' Tax Guide) for information about requesting extensions and filing returns. 

Taxpayers living outside the U.S. Taxpayers who are U.S. citizens or residents living outside the United States (and Puerto Rico) may qualify for a second tax extension if they meet certain requirements. The taxpayer falling into this classification must send a letter by the first tax extension deadline (Oct. 15) to request an additional two-month tax extension for filing their federal income tax return.

Tax extension forms

Additional types of tax extensions can be requested using the following tax forms, all which are available on the IRS website:
Tax Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns) is used to request a five- or six-month extension for a business tax return.
Tax Form 1138 (Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback)
Tax Form 2350 (Application for Extension of Time to File U. S. Income Tax Return) is designed for U.S. citizens and resident aliens abroad who expect to qualify for special tax treatment.
Tax Form 4768 (Application for Extension of Time to File a Return and/or Pay U. S. Estate (and Generation-Skipping Transfer) Taxes)
Tax Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns)
Tax Form 8809 (Application for Extension of Time to File Information Returns -- For Forms W-2, W-2G, 1042-S, 1097, 1098, 1099, 3921, 3922, 5498, and 8027)
Tax Form 8868 (Application for Extension of Time to File an Exempt Organization Return)
Tax Form 8892 (Application for Automation for Extension of Time to File Tax Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax)
For information on tax extensions and the various tax forms required, consult your tax preparer or accountant, or contact the IRS.