The Future of QuickBooks: Intuit’s Direction for QuickBooks Add-On Software–Online!

Charlie Russell for the Sleeter Group writes:   Let’s face it – Intuit can’t create a feature for EVERY requirement that a business will have when using QuickBooks and QuickBooks Online. To that end, they provide several programming interfaces that independent software developers can use to create products that expand the capabilities of QuickBooks. We call these “third-party add-on” products.
Intuit is changing how third-party products work with QuickBooks, and it is apparent to me that Intuit wants developers to work with QuickBooks Online. Let’s talk a bit about the direction that Intuit is taking with this…

Some Background

This is a topic that we have talked about often in QuickBooks and Beyond. It is an important topic, because many businesses rely heavily on third party add-on products to make QuickBooks fulfill their needs.  If you aren’t familiar with how third-party products work with QuickBooks, take a look at these articles:

• Evaluating QuickBooks Integration Applications by Bonnie Nagayama
• Why Use QuickBooks Add-ons? by Doug Sleeter
• What is the IPP and how does it compare to the SDK? by Chuck Vigeant

Essentially, there are two programming methods that software developers can use to work with QuickBooks, the SDK for QuickBooks Windows (QBSDK) and Intuit Anywhere (IA). If you don’t use these (or a derivative), you can’t legally access the QuickBooks database.
The QBSDK method has been around for quite a few years, and applications using this method are usually found in the Intuit Marketplace. These are mostly aimed at QuickBooks Desktop (but not the Mac), although there can be products using this for QuickBooks Online. For QuickBooks Desktop these applications are usually working with your database on your desktop or local Server.

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Receipt Wranglers / Plenty of smartphone apps let you digitize that overwhelming pile of paper receipts you need come tax season. These three go further, by organizing electronic and printed records alike

 Laura Moser for the Wall St. Journal writes: 3 Apps  let you digitize that overwhelming pile of paper receipts you need come tax season. These three go further, by organizing electronic and printed records alike

Cyber Shopaholic's Best Friend:  OneReceipt /  Like nearly all receipt-organizing apps, OneReceipt allows you to "scan" a receipt by photographing it with your smartphone camera. Its standout feature, however, is a must-have for those who do a scandalous amount of shopping online: The service pulls email receipts from a Gmail or Yahoo Mail account and arranges them into one convenient dashboard, sorted chronologically. (Warning: Scrolling through three years of Zappos.com transactions can be horrifying.) The service separates out each purchased item on both electronic and printed receipts, too. So if, say, a Target receipt includes both printer toner and gummy worms, you can easily tag one as a business expense and the other as personal. We especially appreciated the monthly spending summaries that OneReceipt emailed as well as its "return alerts," which reminded us to hurry up and decide on those sandals we ordered. Available for iOS only. Free, onereceipt.com

The Outsourced Solution:  Shoeboxed  /  True, photographing receipts with your phone is a lot easier than feeding them into a scanner. But when you're faced with a whole month (or year) of crumpled papers, even this task can be daunting. With Shoeboxed's premium plans, you can mail even your most wrinkled receipts to the service's Durham, N.C., office to have them scanned and verified by a human being. Premium plans start at $10 per month for up to 50 scans. For subscribers with a $30-per-month plan or higher, Shoeboxed will also provide a Netflix-inspired postage-paid envelope. Like OneReceipt, Shoeboxed can also process e-receipts, but you have to find the emails and forward them to a special Shoeboxed address. Although that approach isn't as convenient as OneReceipt's, it's great if you're uneasy giving a company access to your private correspondence. Available for Android and iOS. Free, shoeboxed.com

  
 Virtual Accountant:   Expensify /  Aimed primarily at businesses, Expensify goes beyond basic receipt management: It also simplifies the process of logging billable hours and, with the help of your smartphone's GPS, exact mileage for business-related travel. What's more, it helps decipher and arrange those mountains of credit-card charges at year's end. One particularly indispensable feature, "Guaranteed eReceipts," generates tamperproof and traceable electronic documentation (key for IRS auditors) of most credit-card and bank transactions under $75, once you link your accounts on Expensify's website. (The IRS doesn't require paper receipts for purchases under that amount, provided you keep "timely and accurate records.") For a small fee, Expensify will also match paper receipts with their corresponding credit-card charge to make it easier to reconcile accounts. Available for Android, BlackBerry iOS and Windows Phone. Free, expensify.com

Don't Gamble With Gift Tax Returns

Deborah L. Jacobs for Forbes writes:    In the countdown to April 15, many people rushing to prepare their individual income tax returns will overlook another key tax document that’s due the same day: Form 709, covering taxable (or potentially taxable) gifts made during the previous year. Tax pros estimate that there are more than twice as many people in this category for the current filing season (covering 2012) than for the previous one.

This is one more thing to blame on the year-end fiscal cliff frenzy. Unless you were living under a rock or have already repressed the details, you probably recall that the $5.12 million per-person exclusion from the federal estate and gift tax had been scheduled to automatically dip to $1 million on Jan. 1, with the tax on transfers above that amount rising from 35% to up to 55%.
At the urging of their financial advisors, greedy descendants or golf buddies, some wealthy folks rushed to make lifetime gifts that would pare down their estates, ruining the holiday season for their lawyers and tax advisers.

As their clients jetted off to ski chalets and beachfront properties, lawyers left to do the paperwork felt like Cinderella. Mostly their chores involved setting up trusts and funding them with the full $5.12 million per-person ($10.24 million for married couples) exemption.
The story had a happy ending at the dawn of 2013, when Congress made permanent the system that was in effect before anyone heard of the fiscal cliff, and raising the top tax rate to 40%. To cap it off, on Jan. 11 the IRS announced that, with an inflation adjustment, the estate tax exclusion amount for deaths in 2013 would be $5.25 million.

But now the lawyers have one more reason to be busy: You must report 2012 gifts on Form 709 even if you don’t owe tax. Among other things, that’s so the IRS will know how much of the $5.12 million ($5.25 million for 2013) tax-free amount you have used so far.
Do-it-yourself types can download the form as a fillable PDF plus the instructions that go with it from the IRS web site. But if you made the kind of gifts that were getting all the attention late last year, you will probably delegate this job to your tax adviser. Based on the volume of work late last year, lawyers meeting in January in Orlando at the Heckerling Institute on Estate Planning — the annual Super Bowl on the subject — were predicting that there would be twice as many gift tax returns filed for the 2012 tax year as for the previous one.
Overworked IRS?
It will be interesting to see whether statistics bear out their forecasts. For the 2011 tax year, there were 219,544 gift tax returns filed, according to IRS statistics which download here as a PDF. However, very few of them — about 3,000 – involved gifts of $1 million or more. Most related instead to using what’s called the annual exclusion. This is the amount that you are allowed to give, in cash, property or gifts, to as many people as you want each year without dipping into your lifetime exemption amount. Last year the annual exclusion was $13,000. The annual exclusion for 2013 is $14,000.

There are various reasons why you might need to report these relatively small (in the scheme of things) gifts. To come within the annual exclusion, a gift must be a present interest, meaning that the recipient can use the gift immediately. That’s certainly true with cash, but can be a different story with gifts to trusts, in which beneficiaries don’t have any rights until later. Any time you make a gift that isn’t a present interest, it must be reported, no matter how small the amount.
A popular use of the annual exclusion is to put money in Section 529 college savings plans, setting up a separate account for each family member you want to benefit.
The law also permits lump-sum deposits of as much as five times the annual exclusion (which this year is $70,000  for individuals or $140,000 for married couples), per person at once but in that case you must file a gift-tax return electing to treat the gift as if it had been spread over five years. During this five-year period, you cannot make additional annual exclusion gifts to the beneficiary of the 529 plan. If you die before the five-year period is up, part of the gift, reflecting the number of years still to go on your five-year gift, will be included as part of your estate.

Spousal advantage
Special rules also apply when spouses combine their gifts. It’s called gift-splitting. By using the annual exclusion this way they can jointly give away up to $28,000 this year to as many people as they want without dipping into the $5.25 million lifetime allotment. Ordinarily couples must then file a gift tax return and consent, on each others’ returns, to gift-split.
It’s also possible for spouses to share their $5.25 million lifetime exclusion amount. (Here too, they must file a gift-tax return and consent to gift-split.) But keep in mind that this reduces the amount available to each of them to make tax-free transfers at death to someone other than each other–for example to children. And when the first spouse dies, there will be less unused exclusion left for the survivor to carry over through portability

Timing is everything

So let’s say you need to file a gift tax return for 2012 — either for one of these run-of-the-mill reasons, or because you used all or part of your life time exclusion amount. Should you get an extension to file Form 709?
Getting one is easy enough. To request an automatic six-month extension, you can file Form 8892. If you are applying for an extension for your personal income taxes, filing the necessary paperwork for that (Form 4868) automatically extends your time to file Form 709, so you don’t need to request the extension separately. Either way, though, if you owe tax, you must pay it by April 15 (use the voucher on the Form 8892 for this) or you will owe interest and perhaps penalties.
But there’s a strategic reason for filing on time – especially this year. If the lawyers are right that there’s a deluge of gift tax returns coming, the 350 or so tax examiners typically assigned to this task will have that much less time to scrutinize your return. And if there’s any room for quibbling about the value you’ve attached to your gift, that could be a good thing.
As usual, the sooner you file, the sooner you start the statute of limitations running on your gift tax return. Under the tax law and Internal Revenue Service regulations, to start the statute of limitations running on your gift tax return, you must make “adequate disclosure” of the gift. The only way to do that is to file a gift tax return reporting the gift. So even if you’re not required to file a return, you might want to do it anyway if there’s room for debate about what your gift is worth.
Odds of an audit

Like other tax returns, gift tax returns get audited and filing one (even just to start the statute of limitations running) means you might get audited. However, when you make a transfer that’s clearly a taxable gift, the law requires you to report it. Plus, after you die, during an estate tax audit, the IRS can question–and tax–gifts you made many years earlier if you didn’t file a return reporting them.
If you didn’t file gift tax returns for past tax years, it’s not too late to correct the situation. Generally speaking you have until the IRS catches the problem. When you’re not liable for gift tax, there’s no penalty for late filing.
Since the $5.25 million lifetime exclusion from gift tax and any gift tax you pay are cumulative, you must keep the returns indefinitely. Your heirs need them to calculate the tax, if any, on your estate. And the most likely time for the IRS to flag unreported gifts or to question the value of the gifts you made is after you die. You do everyone a favor by leaving all the documentation behind.

Gift Taxes: What Your CPA Doesn't Know

Arden Dale for the Wall St. Journal writes: Taxpayers who gave substantial assets to family members last year could be in for a nasty surprise this tax season: potential errors on federal gift-tax returns that could result in donors owing taxes on gifts they thought were tax-free.

Part of the problem: Many taxpayers rushed to give during the last months of 2012, afraid that Congress would scale back the $5.12 million gift-tax exemption to $1 million at year-end—and raise the tax rate on gifts exceeding that limit to 55% from 35%. (Lawmakers decided to leave the exemption—$5.25 million for 2013—intact, and raised the rate only five percentage points, to 40%.) 

Making matters worse, Form 709, the gift-tax return, is a potential trap for many accountants, especially when the taxpayer gave something other than securities or put the gift into a trust, as many did in 2012. 

Form 709 applies to gifts exceeding $13,000 in 2012. Filing incorrectly can mean a hefty tax bill for someone who expected to pay no tax on a gift at all. And an error can saddle heirs with a surprise tax bill even decades after someone made them the gift. 

For 2012 tax returns in particular, it is important to have someone knowledgeable handle the form, says Jere Doyle, a senior wealth strategist at the Boston office of BNY Mellon Wealth Management, which oversees $179 billion. 

"The problem is, you've got to find that person," he says.

Surprisingly few accountants have experience with more complicated reporting on a gift-tax return. Most know how to report smaller, annual gifts. But gifts of real estate or business interests—which were popular last year—or anything besides stocks and bonds, are a different matter. 

Graduate accounting programs used to train accountants to report more-complicated gift transactions, but some no longer do, says Steven D. Baker, an estate lawyer and accountant in Austin, Texas. 

A big stumbling block for many professionals is that Form 709 requires an advanced knowledge of rules for two separate taxes: the gift tax and the "generation-skipping tax," which imposes levies that wouldn't otherwise be incurred when families leave assets to heirs who are more than one generation younger. Yet certain estate plans can exempt these heirs from the tax. The generation-skipping tax is considered especially complex by estate planners.

Some experts recommend that taxpayers have a lawyer review, if not prepare, the gift-tax return. "I can see the potential for hurt feelings on the CPA's side," says Roger Pine, a partner at Briaud Financial Advisors, an advisory firm in College Station, Texas, that manages $480 million. "But I think the 709 is unique in that CPAs seem to be happy to have someone else do it."

When Can I Add to an IRA for the Fiscal Year?

Anne Mathews for Demand Media writes:  You don't have to miss out on the tax advantages of an individual retirement account just because you file your taxes based on a fiscal year. The IRA deadlines are straightforward if you file on a calendar year basis. If you use a fiscal year, the same rules apply, but the deadlines shift accordingly.

Timeline

You can contribute to a traditional or Roth IRA at any time during the year, and up until the due date for filing that year's taxes, not counting any extensions. For taxpayers filing based on a calendar year, this due date is April 15. However, if you file on a fiscal-year basis, the deadline for filing your tax return -- and thus for contributing to an IRA -- is the 15th day of the fourth month after the end of your tax year. The due date is the next business day if the 15th falls on a Saturday, Sunday or holiday.

Example

If your fiscal year runs from Nov. 1, 2012, to Oct. 31, 2013, the fourth month after October is February, so your tax return is due Feb. 15, 2014. You have until Feb. 15 to contribute to an IRA for the fiscal year ending in 2013. This is true even if you file your taxes before that date and even if you have an extension allowing you to file after that date.

Tax Return Timing

You can contribute to an IRA all the way up to your filing deadline, even if you decide to file your taxes ahead of schedule. This means you could file your tax return claiming a deduction for contributing to a traditional IRA, get a tax refund and use the refund to make the IRA contribution you already claimed -- as long as you can get all that done by the deadline for filing your tax return.

Designating the Year

If you don't tell your IRA custodian otherwise, the custodian can report your IRA contribution to the Internal Revenue Service as a current-year contribution. Because most taxpayers use a calendar year, your custodian may not have experience with filing on a fiscal-year basis. You should be clear in your communications with the custodian and keep your own records of what contributions you made and for what fiscal year. This will help sort out any confusion if the IRS audits you.

 

Annuities & Taxes

TaxFactsOnline for Life Health Pro writes: Q: What is an annuity contract and what general rules govern the income taxation of payments received under annuity contracts?

 An annuity contract is a financial instrument where a premium is paid to a company (or in some cases to an individual) in return for a promise to pay a certain amount for either a specific period of time or over a person’s lifetime. There are different variations of this basic form. An immediate annuity contract is one in which regular annuity payments will commence within one year. A deferred annuity contract is one in which the annuity start date (i.e., the date when regular annuity income payments begin) is deferred until the contract’s owner elects to start payments; payments can be deferred for many years, and in today’s world many annuity owners simply maintain the contract in deferred status. Nonqualified annuities are annuities that are not held within a “qualified” retirement plan or an IRA.

The rules in IRC Section 72 govern the income taxation of all amounts received under nonqualified annuity contracts. IRC Section 72 also covers the tax treatment of policy dividends and forms of premium returns. Qualified annuity contracts are governed by the tax rules of the retirement account in which they are held.

The term “annuity” includes all periodic payments resulting from the systematic liquidation of a principal sum and refers not only to payments for a life or lives, but also to installment payments that do not involve life contingency, such as payments under a “fixed period” or a “fixed amount” settlement option.

All “amounts received” under an annuity contract are either “amounts received as an annuity” or “amounts not received as an annuity.”

“Amounts received as an annuity” (annuity payments) are taxed under the annuity rules in IRC Section 72. These rules determine what portion of each payment is excludable from gross income as a return of the purchaser’s investment and what portion is taxed as interest earned on the investment. They apply to life income and other types of installment payments received under both immediate annuity contracts, and deferred annuity contracts that have been annuitized.

Payments consisting of interest only are not annuity payments and thus are not taxed as “amounts received as an annuity.” Periodic payments on a principal amount that will be returned intact on demand are interest payments. Such payments, and all amounts taxable under IRC Section 72 other than regular annuity payments, are classed as “amounts not received as an annuity.” These include amounts actually received as policy dividends, lump sum cash settlements of cash surrender values, cash withdrawals and amounts received on partial surrender, death benefits under annuity contracts, a guaranteed refund under a refund life annuity settlement, and policy loans, as well as amounts received by imputation (annuity cash value pledged as collateral for a loan). “Amounts not received as an annuity” are taxable under general rules.

Except in the case of certain annuity contracts held by nonnatural persons, income credited on a deferred annuity contract is not currently includable in a taxpayer’s income. There is no specific IRC section granting this “tax deferral.” Instead, it is granted by implication. The increase in cash value of an annuity contract, other than by application of dividends, is neither an “amount received as an annuity” nor an “amount not received as an annuity.” As a result, an increase in cash value is not a distribution and is not includable in the taxpayer’s income, except where the IRC specifically provides otherwise.

IRC Section 72 places a penalty on “premature distributions.”
Contracts issued after January 18, 1985 have post-death distribution requirements. These post-death distribution requirements also apply to contributions made after January 18, 1985, to contracts that were issued before that date. Contracts issued before January 18, 1985, with contributions that were made before that date are not subject to post-death distribution requirements.
The income tax treatment of life insurance death proceeds is governed by IRC Section 101, not by IRC Section 72. Consequently, the annuity rules in IRC Section 72 do not apply to life income or other installment payments under optional settlements of life insurance death proceeds. However, the rules for taxing such payments are similar to the IRC Section 72 annuity rules. On the other hand, as noted earlier, death proceeds under an annuity contract (i.e., from some form of guaranteed death benefit) are taxed as amounts not received as an annuity.
Employee annuities, under both qualified and nonqualified plans, and periodic payments from qualified pension and profit sharing trusts are taxable under IRC Section 72, but because a number of special rules apply to these payments, they are treated separately.
Annuity with long-term care rider. Under the Pension Protection Act of 2006, qualified long term care insurance can be provided as a rider to an annuity contract, beginning after December 31, 2009.

Q: How are payments under a variable immediate annuity taxed?

Both fixed dollar and variable annuity payments received as an annuitized stream of income are subject to the same basic tax rule: a fixed portion of each annuity payment is excludable from gross income as a tax-free recovery of the purchaser’s investment, and the balance is taxable as ordinary income.
In the case of a variable annuity, however, the excludable portion is not determined by calculating an “exclusion ratio” as it is for a fixed dollar annuity. Because the expected return under a variable annuity is unknown, it is considered to be equal to the investment in the contract. Thus, the excludable portion of each payment is determined by dividing the investment in the contract (adjusted for any period-certain or refund guarantee) by the number of years over which it is anticipated the annuity will be paid. In practice, this means that the cost basis is simply recovered pro-rata over the expected payment period.
If payments are to be made for a fixed number of years without regard to life expectancy, the divisor is the fixed number of years. If payments are to be made for a single life, the divisor is the appropriate life expectancy multiple from Table I or Table V, whichever is applicable (depending on when the investment in the contract was made). If payments are to be made on a joint and survivor basis, based on the same number of units throughout both lifetimes, the divisor is the appropriate joint and survivor multiple from Table II or Table VI, whichever is applicable (depending on when the investment in the contract is made). IRS regulations explain the method for computing the exclusion where the number of units is to be reduced after the first death. The life expectancy multiple need not be adjusted if payments are monthly. If they are to be made less frequently (annually, semi-annually, quarterly), the multiple must be adjusted.
The amount so determined may be excluded from gross income each year for as long as the payments are received if the annuity starting date is before January 1, 1987 (even after the annuitant has outlived his or her life expectancy and has recovered his or her cost tax-free). In the case of an annuity starting date after 1986, the amount determined may be excluded from gross income only until the investment in the contract is recovered. Where payments are received for only part of a year (as for the first year if monthly payments commence after January), the exclusion is a pro-rata share of the year’s exclusion.
If an annuity settlement provides a period-certain or refund guarantee, the investment in the contract must be adjusted before being prorated over the payment period.

 Q. What are the estate tax results when a decedent has been receiving payments under an annuity contract?

If a decedent was receiving a straight life annuity, there is no property interest remaining at the decedent’s death to be included in the decedent’s gross estate.
If a contract provides a survivor benefit (as under a refund life annuity, joint and survivor annuity, or installment option), tax results depend on whether the survivor benefit is payable to a decedent’s estate or to a named beneficiary and, if payable to a named beneficiary, on who paid for the contract.
If payable to a decedent’s estate, the value of the post-death payment or payments is includable in the decedent’s gross estate under IRC Section 2033 as a property interest owned by the decedent at the time of his or her death. If payable to a named beneficiary, the provisions of IRC Section 2039(a) and IRC Section 2039(b) generally apply and inclusion in the gross estate is determined by a premium payment test. Thus, if a decedent purchased the contract (after March 3, 1931), the value of the refund or survivor benefit is includable in the decedent’s gross estate.
In the event a decedent furnished only part of the purchase price, the decedent’s gross estate includes only a proportional share of this value.
The foregoing rules do not apply to death proceeds of life insurance on the life of a decedent. In addition, special statutory provisions apply to employee annuities under qualified pension and profit-sharing plans, to certain other employee annuities and to individual retirement plans.

The advisor opportunity in tax season

Warren Hersch for Life Health Pro writes: With tax season now in full swing, you may well be looking for opportunities to convert clients' and prospects' heightened awareness of current or potential tax liabilities to solutions that will help them attain their financial goals.  You're not alone. Many life insurance and financial service professionals, observers tell NUL, generate substantial business from planning opportunities stemming from tax issues. Tax avoidance is an especially rich topic this year because of the recently enacted American Taxpayer Relief Act of 2012, which ended the long-running sunset provisions on certain levies while boosting tax rates that will most impact  the high net worth, though individuals in lower tax brackets may also be affected.

But as the 2013 tax year is already underway, advisors can do little to affect clients' 2012 year tax liabilities, apart  from serving in "reactive mode,"  observes  Richard Shakter, a CFP and principal of Financial Compass Group LLC, Wellesley, Mass. The scope of work includes, for example, reviewing documents to ensure the accuracy of items reported on this year's IRS 1040 form and determining whether tax-deductible items have been overlooked. Among them: income-producing investments that clients may have forgotten about; appreciated stock gifted to charities; debt service (interest deductions) and employee benefits (medical deductions) items.

The main business opportunities, say experts, lie in leveraging tax season to help clients plan for next year's tax filing.   
“The income tax return is an inventory of all of a client’s assets—everything one own gets reported there,” say Herbert Daroff, a CFP and principal of Baystate Financial Services, Boston, Mass. “So it’s a good idea to review the document line by line with the client in advance of tax season. As clients are thinking about paying income taxes, now is a wonderful time to tell them, ‘As you prepare for your 2012 tax filings, let's see how we can help you reduce your 2013 tax liability.” 

And, he adds, it’s a good time to identify gaps in insurance coverage. A review of interest rates and the durations of client debts, may, for example, point up the need for additional life insurance, disability income insurance or long-term care insurance to cover outstanding liabilities in the event of a loss of income.

Leveraging such tax deductions to minimize one's tax liability is good thing. The same cannot be said of tax refunds, which constitute interest-free loans to the government, money that would be better deployed elsewhere. The objective, says Daroff, should to be to maximize net income and assets after taxes, inflation and fees, then decide how to best to allocate the net after-tax income and assets.
2012 tax legislation

From an estate planning perspective, observers say, The American Taxpayers Relief Act of 2012 is a double-edged sword. Since the legislation provides significantly higher estate tax exemption levels than under the pre-2001 estate tax regime — $5 million per individual under the act versus $1 million per person under the old regime — fewer clients need life insurance to pay for estate tax. Conversely, clients looking to boost their legacy to heirs may be able to purchase additional life insurance without crossing over the estate planning threshold.
“Most Americans can now buy their life insurance with tax-deductible dollars inside qualified plans and not worry about estate tax inclusion of the death benefits,” says Daroff. “If I have a $2 million estate and want to buy life $2 million of life insurance, I'm still under $5 million. So why not buy life insurance through a qualified plan?”

Daroff adds the higher estate tax exemption levels under the Relief Act should also make certain trust planning vehicles more attractive to clients for income replacement purposes. Case in point: married couples reducing the value of their estates while retaining control of income for life by establishing a cross-spousal lifetime access trust.
To illustrate, a husband and wife can each creates a SLAT valued at $10 million ($5 million in assets plus $5 million in life insurance) for the benefit of the other. While alive, the couple generates income from the aggregate $10 million in non-insurance assets placed in the two trusts. At the death of the first spouse, $5 million in policy proceeds are paid to the surviving spouse, thereby replacing income no longer being generated from the trust established for the deceased.

The SLAT is available not only to married couples, notes Daroff. Individuals that don’t qualify for the federal marital deduction—co-habiting gays, lesbians and heterosexual couples, as well as resident aliens—can also leverage a SLAT to care for a domestic partner.

The higher tax rates on income, capital gains and dividends stipulated under the Taxpayer Relief Act, say experts, should also spur tax planning among singles and married couples earning more in annual income than $400,000 and $450,000, respectively. Those looking to defer income tax will have an even greater incentive than in past years to leverage the tax-favored treatment of life insurance and annuities.

These vehicles, market-watchers suggest, will also be more attractive to clients who in past years might have foregone tax-deferred vehicles. The reason: It was less costly to pay capital gains or dividends tax on the sale of securities than to pay income tax at the time of distribution on a life insurance policy or annuity.

“When capital gains and dividends taxes were lower, income tax deferral actually worked against the use of life insurance and annuities,” says Terry Altman, a CFP and financial planner at Global Financial Planning Group LLC, Troy, Mich. Financial professionals who invoked income tax deferral as a reason to recommend annuities or life insurance would lose an argument with a CPA opposed to these products — and justifiably so — because income tax deferral was not in the client's best interest.
“It's conceivable that going forward, income tax deferral may be as attractive as it was in the 1980s or 1990s because of the rise in income tax rates," he adds.

The case for tax-deferral offered through non-qualified deferred compensation plans funded with life insurance is particularly strong in client engagements involving C-corporations, says Altman, because of the “brutally high” taxes these companies might be subject to absent the planning. He adds Internal Revenue Code Section 409A, finalized in 2009, has eased non-qualified deferred comp planning by clarifying rules regarding the timing of deferrals and distributions.

Market-watchers also anticipate greater leveraging of income tax-deferred vehicles for individual planning, and not only in respect to life insurance and annuities. Also likely to attract greater interest are tax-qualified individuals retirement accounts, including 401(k), 403(b) and other ERISA-compliant profit-sharing plans, plus traditional IRAs and Roth IRAs.
To be sure, life insurance can also play a role in mitigating the potential tax bite for clients electing these retirement vehicles. Baystate Financial’s Daroff says that an individual desiring to convert an IRA to a Roth IRA can use life insurance to pay income tax on the conversion at death, thereby boosting the income tax-free legacy for heirs.

Enlisting the help of a CPA
Certified public accountants frequently are needed to help advisors address the tax implications of such planning. This is particularly true, say experts, in cases involving high net worth clients and small business owners who have to consider how life insurance-funded arrangements might impact other aspects of their financial plans or (in respect to a company) their balance sheets. Life insurance-funded non-qualified deferred comp plans, Section 162 executive bonus plans and split-dollar arrangements are effective vehicles for recruiting, rewarding and retaining top talent. But such arrangements may have to be jettisoned or postponed until, for example, the business is better positioned from a cash flow perspective.

Enter the CPA, who can provide the expertise needed to address such questions. Just don’t expect their services during tax season, either because they’re too busy completing clients’ tax returns; or because the life insurance professional doesn’t have a pre-existing alliance with the CPA.

“If a life insurance agent wakes up February 1 and says ‘I want to find a bunch of CPAs to work with,’ then he's about nine months too late,” says Nick Hodges, a CPA, CFP and president of NCH Wealth Advisors, Fullerton, Calif. “If you don't have a relationship with the CPA well in advance of tax season, they won't give you the time of day during tax season.”
The best time to build such partnerships, he adds, is during the second or third quarter of the calendar year, when CPAs have more time to review with the advisor entries on tax returns that might lend themselves to planning. The only topics that CPAs and insurance professions should discuss at tax time, observers say, are those questions affecting the current year’s tax return.

To be sure, says Hodges, accountants will frequently uncover planning opportunities when drafting tax returns, such as the need to adjust a client’s financial objectives or cash position because he or she is no longer employed; or because a business’s holdings of stocks and other assets are not advantageous from a tax perspective. To the extent that insurance professionals can acquaint partnering CPAs with planning opportunities in advance of next year's tax season, the more profitable such alliances will be for both professionals.
The educational outreach need not be limited to private get-togethers with CPA partners alone. Hodges notes that he recently offered to meet jointly with 10 clients of a Texas-based CPA to allow him to see the financial planning  fact-finding process in action. The meetings yielded several new clients for Hodges.

Favoring a more academic approach to alliance-building is Baystate Financial Services. Daroff says that he regularly hosts seminars for other professionals who can assist in complex planning cases — attorneys, property and casualty agents, bank advisors, in addition to CPAs — the program content focusing on trends and joint opportunities in estate planning, retirement income distribution planning and business succession planning. Result: These advisors have become a key source of the firm’s referrals to client prospects.
He adds the new business arrives not only through introductions. Many of the CPAs are also licensed to sell life insurance and securities through, respectively, Baystate’s brokerage general-agent and broker-dealer. They thus can share in insurance commissions and planning fees resulting from a sale.

Does Baystate have established sales or referrals quotas for these professionals? Daroff says “no,” observing that production goals are “old hat.” He notes, however, that Baystate’s advisors are regularly in contact with other professionals; and that splits in commissions and fees are commensurate with a partner’s contribution to the client engagement.

When determining compensation, Baystate frequently elects a formula recommended by the Million Dollar Round Table, which pays the advisor 20 percent for securing the prospect; 20 percent for fact-finding and data collection; 20 percent for designing plan recommendations; 20 percent for executing the plan; and 20 percent for servicing the client. But the compensation formula will vary; in many instances, a simple 50-50 split is used.
Much of the time, agents and planners turn to CPAs solely for their tax expertise, a knowledge base that is particularly valued in complex wealth transfer and business planning cases. Establishing relationships with outside CPAs insures ready access to such expertise in cases where, for example, the client is without an accountant.

Still better is being able to tap that expertise in-house. Prior to joining Global Financial Planning Group, Altman says that he was employed by Rehmann, a firm that specialized in developing qualified and non-qualified compensation plans for company employees. There, Altman worked closely with accountants who, serving in the firm’s corporate auditing arm, were able to deliver high-level expertise—and often on cross-border tax questions. Example: Determining the U.S. and Canadian tax treatment of income earned by Americans working in Canada, a common issue among Rehman’s Michigan-based corporate clients.

In-house tax expertise was not always a good thing, however, for it sometimes led to perceived conflicts of interest. In cases where the firm’s accountants were auditing a company’s books, says Altman, financial planning services had to be outsourced to an outside firm. The alternative, doing the planning and outsourcing the auditing, was never permitted—even in instances when it was more profitable to do so—because the auditing practice was “very protective” of its business.

Altman no longer confronts such internal conflicts of interest in his current practice. The obstacle now, he says, is to overcome biases against life insurance and annuities among partnering CPAs, a particular challenge when the accountant has a pre-existing relationship with the client.
“CPAs have a tendency to immediately bristle at the mention of life insurance and annuities because they’ve often been trained to hate the products,” says Altman. “To have a productive relationship with the accountant, you have to be ready to confront this prejudice head-on.
“You have to know your material and be able to articulate the favorable usages of insurance-related products in a way that overcomes their predisposition against using them. There are a lot of really smart CPAs who don't understand how life insurance can assist in tax planning.”

The new 2013 taxes: The good, the bad and the ugly

Robert Fishbein for Life Health Pro writes:   The American Taxpayer Relief Act of 2012 was enacted into law early in 2013 and, together with the Patient Protection and Affordable Care Act (PPACA) from 2010, impacts nearly all taxpayers, some in better ways than others. Like the old spaghetti western movie, there is good for most taxpayers, bad for almost all, and ugly for many others. The new law offers some good with more certainty for financial and retirement planning, some bad in the form of increased rates, and some ugly in increased complexity that creates traps for the unwary. 

The good: Increased certainty
On the positive side, the Taxpayer Relief Act creates greater certainty in terms of income tax rates, the application of the Alternative Minimum Tax (AMT), as well as the estate tax rules. All of these provisions are now made permanent for 2013 and beyond, which is beneficial from the perspective of trying to do financial and retirement planning. 

Since 2001, the tax law has provided for temporary income tax, capital gains, dividends and estate tax rates. Depending on what year we were in, the rates could be scheduled to go up or down, and it is hard to do financial, retirement and estate planning when you are not sure what the rates will be in the future.

The Taxpayer Relief Act eases this planning burden by making these rates permanent, which means that we now know what the rates will be a year from now and 10 years from now. Of course, new legislation, including the much discussed possibility of tax reform, could change these rates. But at least the laws in effect today do not provide for the rates to change over time.

The tax law for the past decade also provided uncertainty in terms of the application of the Alternative Minimum Tax to taxpayers. The AMT was created to catch millionaires using tax planning techniques to zero out income, but since the AMT exemption amount was not indexed for inflation it has come to impact many taxpayers, particularly in states with high income taxes and high property taxes. The so called “AMT fix” has been an almost annual Congressional action to limit the impact of the AMT by providing an increased exemption to shield many from the tax simply because of inflation increases in salary. 

The Taxpayer Relief Act fixes the AMT exemption permanently, which means that we will no longer be waiting at yearend to see if Congress acts to provide a temporary fix. By making the AMT fix permanent, individuals need not worry about the AMT exemption reverting to its original amount and increasing the burden of the alternative tax or making one subject to it in the first place. In addition, we will no longer be waiting for Congress to act each year, which has resulted in delays of the tax filing season so the IRS could reprogram its computers.
Since 2001, the estate tax exemption has increased from $1 million to over $5 million, with estate tax rates decreasing from 55 percent to 35 percent. In one year, 2010, the estate tax was entirely repealed. Consequently, during the past decade, it has really mattered in what year a person died, with significant differences in estate tax liability depending on the actual year of death. This uncertainty made estate tax planning very challenging, and was not good policy since death was effectively encouraged in some years more than others. Indeed, 2010 was sometimes referred to, with tongue in cheek, as the “throw Grandma from the train” year. But the Taxpayer Relief Act makes these rates and exemption permanent so that planning can once again occur without factoring in the specific year of death.

The Taxpayer Relief Act also makes permanent the estate exemption portability rule that allows a surviving spouse to utilize the unused portion of a deceased spouse’s estate tax exemption amount. This portability concept was introduced as a temporary provision for 2011 and 201, and making it permanent also aids the estate planning process.
Rounding out the good news from the Taxpayer Relief Act is the extension through 2013 of several provisions, such as the deduction for state and local sales taxes and the exclusion from income of up to $100,000 of required IRA distributions when given to charity. While the extenders included in the bill are temporarily prolonged and do not provide the certainty of the other changes, they do provide tax benefits for many taxpayers.

The bad: Increased taxes
As the Taxpayer Relief Act was being negotiated, the president, senators and representatives proudly pointed out that its passage avoided a tax increase on 98 percent-plus of American taxpayers. This is technically true, if you are looking at that ordinary income tax and capital gains rates scheduled to increase in 2013. But it avoids the point that the Social Security tax was scheduled to increase automatically from 4.2 percent to 6.2 percent. While this had always been viewed as a temporary rate reduction for 2011 and then 2012, the fact that Congress did not extend it means that wage earners will pay 2 percent more in taxes on income up to $113,700. Again, this was not a tax that resulted from the Relief Act, but the reality is that a wage earner making $100,000 will pay $2,000 more in taxes in 2013 than in 2012. This effective tax increase will be borne by all wage earners, which means that even with the lower tax rates being the same the average worker will have a significant tax increase in 2013.

As for the higher wage earner, there are new taxes galore. The Patient Protection and Affordable Care Act, the new health-care law enacted in 2010, created some new taxes with an effective date of January 1. First, for individuals making more than $200,000 and married couples making more than $250,000, the employee portion of the Medicare tax is increased by 0.9 percent from 1.45 percent to 2.35 percent. For self-employed individuals the rate is increased from 2.9 percent to 3.8 percent. In addition, PPACA created a new tax of 3.8 percent on investment income using the same individual and joint-filer thresholds. While the thresholds of $200,000 or $250,000 might seem high to those with more modest income levels, and perhaps not of concern, these thresholds were not indexed for inflation. This means that over a period of years, as salaries increase over time, more and more middle class taxpayers will become subject to these new taxes.

Returning to the Taxpayer Relief Act, there are two stealth taxes that apply to reduce personal exemptions and itemized deductions. The first has been referred to as the PEP, or personal exemption phase-out, rule. The PEP rule reduces the tax benefit of personal exemptions, such as for a child, by 2 percent for every $2,500 of income over $250,000 for individual filers (or $300,000 joint filers). The Pease rule, named after the Congressman who originally proposed the idea, limits itemized deductions by 3 percent of the amount of income earned over $250,000 for individual filers ($300,000 for joint filers). These taxes can effectively increase the levy one pays by around 2 percent, and they present a real tax planning challenge.
The current income tax rates are preserved for individuals who make $400,000 or less, and for joint filers who make $450,000 or less. For those who make more than those amounts there is a new ordinary income tax rate of 39.6 percent and a new capital gains rate of 20 percent. Qualified dividends, which also have enjoyed the lower capital gains rate for many years now, will also be subject to the higher 20 percent tax rate for these higher income taxpayers. Prior to the Taxpayer Relief Act, the highest ordinary income tax rate was 35 percent and the highest rate for capital gains and dividends was 15 percent.
Finally, the Taxpayer Relief Act increases the highest tax rate applicable to estates from 35 percent to 45 percent. 

Notwithstanding the political rhetoric, the reality is that starting in 2013 almost all taxpayers will be paying more in federal tax. This increased tax burden is more dramatic for the wealthy, but the middle and lower wage earners are paying more by virtue of the increase in the Social Security tax. Also, the failure to index the new 0.9 percent Medicare tax and the new 3.8 percent tax on investment earnings means that more and more middle class taxpayers will be subject to these increased taxes in the future. For those who are paying more now and those who will be paying more later, this is the bad part of the new tax law.

The ugly: Increased complexity
Simplicity is not one of the hallmarks of either the Taxpayer Relief Act or the Affordable Care Act. When viewed together taxpayers now have to keep an eye on many new tax hurdles. If you are an individual taxpayer you now need to keep in mind the dollar amounts $200,000, $250,000 and $400,000. If you are married filing jointly the dollar amounts to keep in mind are $250,000, $300,000 and $450,000.
The $200,000 or $250,000 mark, depending on whether the taxpayer is an individual or joint filer, is the amount that triggers the new additional tax of 0.9 percent on wage income and the new 3.8 percent tax on investment income. The $250,000 or $300,000 mark, for individuals or joint filers respectively, are where the taxpayer becomes subject to the so-called PEP and Pease rules. Finally, the $400,000 or $450,000 mark, for individuals and joint filers respectively, are the triggers for the new ordinary income tax rate of 39.6 percent as well as the new capital gains and dividends rate of 20 percent. 
For those taxpayers subject to these new taxes, the Relief Act may not seem to provide that much relief, and the added complexity of keeping track of these various new tax triggers will make income tax planning more challenging.

Talking taxes: Why advisors need two approaches to shatter two counterproductive client attitudes

Eric Henderson for RAIBiz.com writes: The new tax rates require new tax planning, but advisors find it's like feeding a big pill to a small dog.

Brooke’s Note: Here is a clear example of why former schooltteachers and former vacuum salesmen sometimes make better financial advisors than people with doctorates in finance. No solution is much good unless the patient can be convinced to take the pill. Eric Henderson seems to have a good grip on that dilemma and lays out some thoughts here about getting clients to think about the one thing we all seem to hide from — change.
Now that new taxes are official, you would think that investors would be rushing to their financial advisor to discuss their portfolio. Surprisingly, many are not. Why? It depends on which investor you ask.

According to a recent survey of mass-affluent investors commissioned by Nationwide Financial Services Inc., there are significant differences in the way investors from different generations are reacting to new taxes. While middle-aged survey respondents appear to be receptive to advice and education about tax advantaged solutions, they are generally passive when it comes to doing something about it. Baby boomer survey respondents, on the other hand, voiced less interest in education and more resistance to making a change.
There is at least one common denominator between the two groups: Our survey tells us that investors of all stripes are not very likely to engage an advisor to talk about new taxes. In fact, 6 in 10 respondents either said they won’t do so or are unsure if they will.   Savvy advisors who understand the potential cost of failing to prepare for new taxes are proactively reaching out to their clients. They’re likely to find that the most productive discussions happen when they tailor their approach to meet clients where they are.

Ears wide open

Let’s start with the good news from our survey: Middle-aged survey respondents (ages 35-54) appear to be more receptive to making portfolio adjustments for new taxes. They are twice as likely to consider purchasing another tax-deferred product as those 55 or older (31% vs. 14%). This group also voiced a greater receptiveness to learning more about tax-advantaged solutions. They were more likely than those 55 or older to want more education on annuities (51% vs. 37%), life insurance (23% vs. 14%) and 401(k) plans (30% vs. 17%). They also acknowledged a lower level of understanding of the tax benefits of annuities, with nearly half (44%) saying they don’t understand them very much or at all, compared with 27% of those 55 or older.

Backing into the tax talk

Members of Generation X acknowledge a desire for more education and are relatively receptive to changing their investment strategy. Unfortunately, just like their baby boomer elders, they’re unlikely to engage their advisor to talk about this topic.
Why are they so passive? Consider the primary concerns of a middle-aged investor. They are likely to be in the prime of their career with their children still living at home. In other words, these people are busy, and may be focused on other things. Their priorities likely include saving for retirement, paying for college and ensuring that an unexpected event doesn’t derail the family’s finances.
Instead of simply focusing on taxes, invite them in to talk about topics that may be higher on their priority list, such as their retirement plan, college-savings products and life insurance. It will be easy to add taxes as a discussion topic — and based on our data, they’re likely to be interested.

Know-it-all clients

Conversely, respondents older than 55 voiced more resistance to change, with nearly half (45%) saying they won’t make any portfolio adjustments as a result of new taxes, compared with about 31% of middle-aged respondents. Nearly a third (30%) of this group does not believe it’s even possible to make changes that will prepare their portfolio for new taxes.
About half (47%) of those 55 or older said they are not interested in additional education on life insurance, annuity or 401(k) products. They voiced significantly more confidence than younger respondents that they understand the tax advantages of annuities (73% vs. 56%).
How do you counsel clients who feel that they know it all? On some level, they accept that they don’t, otherwise they wouldn’t have come to you in the first place.
In fact, older investors have more confidence in their advisors than you may think. Despite a less receptive mindset, 84% of this group say they are comfortable talking to their financial advisor about taxes, and they are actually more confident than younger respondents in their financial advisor’s ability to help them prepare their portfolio for changes in the tax code (96% vs. 86%).   This may seem like a contradiction. Actually, it’s an acknowledgement that they do trust their advisors. It’s also an opportunity.

Addressing resistance

Advisors should take advantage of the receptiveness of baby boomers to at least have a conversation. Before engaging them, take a moment to walk a mile in their shoes.
Baby boomers are more likely to be empty-nesters. They are close to or in retirement and probably worry about things such as outliving their income or the costs of long-term care and health care in retirement.  Build your invitation for this conversation around these topics. Both annuities and life insurance can provide solutions for these challenges — not to mention enhance a portfolio’s tax position. This will provide a natural transition to the tax topic.

Pick up the phone!

The most important thing is not to wait for clients to call you. Many clients have no intention of initiating a discussion about taxes. Advisors should set up a meeting.
You may find that openness to change increases as you help them understand the situation and their options. If not, the effort will serve as a reminder that their advisor is looking out for their best interests. Either outcome will provide a positive long-term return on the investment of your time in the form of enhanced trust and credibility. 

Methodology: The tax study was conducted online by Harris Interactive between Sept. 28 and Oct. 5. The respondents comprised 751 adults ages 18+ having $250,000 or more in annual household income or investible assets. Figures for age, sex, race/ethnicity, education, region and household income were weighted where necessary to bring them into line with their actual proportions in the population. Propensity score weighting was also used to adjust for respondents’ propensity to be online. Since this information was collected before the presidential election, respondents were asked to respond to questions assuming both potential election outcomes. The data represented here focused on responses where respondents assumed the president would be re-elected.
Neither Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific tax questions.
Eric Henderson, FSA, MAAA is senior vice president of life insurance and annuities for Nationwide Financial.

IRS Tax Tip: The Consequences of Early Withdrawal from Retirement Plans / Taking money out early from your retirement plan can cost you an extra 10 percent in taxes.

Did you know that taking money out early from your retirement plan can cost you an extra 10 percent in taxes?  Here are five things you should know about early withdrawals from retirement plans.
 
1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59-and-a-half.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

For more information on early distributions from retirement plans, see IRS Publication 575, Pension and Annuity Income. Also, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
Both publications are available at the IRS's website or by calling 800-TAX-FORM (800-829-3676).

Time is Running Short to Claim Your 2009 Refund

If you haven’t filed your 2009 federal tax return, you may still have time to claim your tax refund. The IRS has $917 million in unclaimed refunds from an estimated 984,000 tax returns that people didn’t file for the 2009 tax year. The IRS estimates that half the potential refunds for 2009 are more than $500. Here are some things the IRS wants you to know about unclaimed refunds: 1. Not required to file. You may not have filed a 2009 tax return because you didn’t earn enough income to have a filing requirement. If you had taxes withheld from your wages or made quarterly estimated payments, you can still file a return and claim your refund. 2. Three-year window. You have three years to claim a refund. If you don’t claim your refund within three years, the money becomes property of the U.S. Treasury. For 2009 returns, the window closes on April 15, 2013. You must properly address, postmark and mail your return by that date. There is no penalty for filing a late return if you are due a refund. 3. Don’t miss the EITC. By not filing a return, you may miss an important credit — the Earned Income Tax Credit. For 2009, the credit is worth as much as $5,657. The EITC can put extra money in the pockets of individuals and families with low and moderate incomes. If you are eligible for the EITC, you must file a federal income tax return to claim the credit. This is true even if you are not otherwise required to file. 4. Some refunds applied. The IRS may hold your refund if you have not filed tax returns for 2010 and 2011. The law allows the use of your federal tax refund to pay any amounts still owed to the IRS or your state tax agency. If you have unpaid debts, such as overdue child support or student loans, your refund may be applied to pay that debt. Current and prior year tax forms and instructions are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). If you are missing Forms W-2, 1098, 1099 or 5498, you should request copies from your employer, bank or other payer. If you can’t get these forms, you can get a free transcript from the IRS showing the information you need from those forms. Order a transcript by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS, or by calling 800-829-1040.