Gift card as a tax refund: a good idea? TurboTax has an offer that lets you accept your tax refund in the form of an Amazon gift card. Should you do it?

Trent Hamm for the Christian Science Monitor writes:  Recently, I was using TurboTax to do my taxes for the year. For the last several years, I’ve been paying in a bit each year rather than receiving a return because I’m self-employed, which means I have to handle my own personal taxes and I usually make my quarterly tax payments on the lower end of what’s reasonable.

Anyway, one of the things I usually do with TurboTax is that once my taxes are actually finished, I’ll play around with scenarios a bit. What would things look like if I made $10,000 less this year? Would I get a refund? What if we gave more to charity? How would that have affected things? It’s essentially a big personal finance calculator that’s already set up with all of our data, so it’s really useful for looking at things like that. 

As I was doing this, I discovered something interesting. TurboTax has an offer embedded in it that will give you an Amazon.com gift card in lieu of your tax return. If you accept that, they’ll add an additional 5% to the balance of that card.

This isn’t the first time I’ve seen this type of “gift card as payment” offer. Coinstar kiosks usually offer this type of arrangement, where you’ll get more “value” in the form of a gift card than if you simply receive cash. A few banks, such as SmartyPig, also have options where you can receive the balance of your account in the form of a gift card with an additional “bonus” added to the value of that card.

It’s an interesting offer, both for the institution making the offer and for the customer.

For the institution, they’re able to acquire gift cards from Amazon at a slight discount of their face value. Then, they pass along some of that value to the customer (keeping some of that difference

For the customer, it offers an additional option when receiving your payment, and choice is usually a good thing. The question really boils down to whether or not receiving a gift card as payment is really worth it for the customer.

The only time that you should consider a gift card as payment is if there’s significant additional value placed on the gift card and you’re actually going to use the card in the near future andyou’re using the card for something reasonable.

Let’s break down these three elements.

First, is the gift card giving you additional value? If your choice is between cash and a gift card with the same face value, take the cash every single time. That’s obvious. The only time a gift card should be under consideration is if the face value of the gift card is higher than the cash option.

Most of the time, your gift card option will have a higher face value than the cash option. Most companies realize that most customers won’t go for the gift card without some incentive, so this aspect is almost a given.

Second, are you actually going to use the gift card in the near future? It’s very easy to put a gift card aside and forget about using it until you find it two years later (at which point, it might be expired). A forgotten gift card can easily be lost or thrown away on accident.

The best gift card is one you’re going to use quite quickly while it’s still fresh in your mind. Will you actually use that card in the near future? Or are you at risk of misplacing that card?

Finally, are you going to use the card for something reasonable? An Amazon gift card isn’t just an excuse to go buy random things. If you’re going to just blow the money on trivial things, it really doesn’t matter whether you choose the gift card or not.

If the presence of the gift card is tempting you to spend it on something purely useless, while the cash might be put to better use in your life, get the cash. If you can actually use the gift card for something worthwhile, such as buying household supplies or picking up a gift for someone, the card is probably a good choice.

If you’re not saying “yes” to all three of these criteria, you should be getting your payment in the form of cash, not in the form of a gift card.

3 New Ways Getting Married Can Raise Your Taxes

Dan Caplinger for Fool.com writes: One peculiar aspect of American tax law is that getting married can dramatically affect a couple's total tax bill. Many couples, especially those in which one person earns the vast majority of the couple's income, benefit from the tax treatment on married couples. But many others, especially two-income families where each spouse's earnings are roughly equivalent, can end up paying a whole lot more in tax -- a phenomenon known as the marriage penalty.

The tax compromise that lawmakers agreed to at the beginning of 2013 made several substantial changes to the tax laws, and a few of those changes actually made the marriage penalty worse for some couples, especially high-income couples where both spouses work and have considerable income. Let's look at these three provisions and how much they'll boost the marriage penalty's impact in 2013 and beyond.

1. The new Obamacare tax.Obamacare created two new taxes: a 0.9% tax on wages and other earned income for high-income earners, and a 3.8% tax on investment income. For both taxes, the threshold is $200,000 for single filers and $250,000 for married couples.

So if two single people each earned $200,000, they wouldn't be subject to the Obamacare tax at all. But if they got married, then $150,000 of their total income of $400,000 would get taxed, with an additional tax liability of $1,350. Similar situations with investment income could lead to a much larger marriage penalty, as the investment tax rate is more than quadruple the rate for wages. Investors in dividend-oriented ETFs Vanguard High Dividend Yield(NYSEMKT: VYM  ) , SPDR S&P Dividend (NYSEMKT: SDY  ) , and iShares DJ Select Dividend (NYSEMKT: DVY  ) should therefore take care to consider tax-favored investment vehicles for their investments.

2. New high-income tax brackets.The marriage penalty has existed in tax brackets for a long time. The bottom two tax brackets don't include a marriage penalty, as they're designed so that the amount of income married couples can earn is exactly twice what singles can earn to stay within a given bracket. But for the 25% tax brackets and above, the married brackets kick in at far less than twice the single amounts, with the 35% bracket kicking in at exactly the same amount for singles and couples.

The tax compromise created a new 39.6% bracket that kicks in for high-income taxpayers. The way the law was drafted, that 39.6% rate applies to single filers making more than $400,000 and joint filers with income above $450,000. What that means is that if two unmarried people each make $400,000, they won't be subject to the new provision, with taxes topping out at 35%. But if those two people get married, then an additional $350,000 in income will get taxed at the higher rate. In this example, a couple would pay more than $16,000 in additional taxes solely because of the marriage penalty in the tax brackets.

Similar provisions affect capital gains tax rates, with a higher 20% maximum rate applying above the income threshold compared with 15% below it. With the S&P 500 (SNPINDEX:^GSPC  ) having set record highs during the past week, capital gains could be substantial for those selling off or rebalancing holdings in their portfolios.

3. Reductions in itemized deductions and personal exemptions.The tax compromise brings back provisions that reduce the amount that high-income taxpayers can deduct for personal exemption allowances and on itemized deductions. Again, the thresholds at which these provisions kick in include a marriage penalty, with singles above $250,000 of adjusted gross income and couples over $300,000 not being able to reduce their taxable income by the full amount of their exemptions and deductions.

Here, the impact of the marriage penalty could mean that every penny of personal exemptions is taken away, even if none of them would be removed if the couple remained unmarried. Similarly, reductions in itemized deductions could increase their tax bill by more than $2,375 at top rates.

Why a marriage penalty?The policy reason put forth for allowing a marriage penalty tends to be that couples can live more cheaply than singles. But with no rules preventing unmarried taxpayers from living together and reaping the same living-cost savings, it'll be interesting to see how many couples choose not to tie the knot in order to save on their tax bills going forward.

5 Ways to Move up to $80,000 a year into Tax-Advantaged Investments

Terry Weaver for ChiefExecutiveBlog.com writes: Most Americans and many business owners fail to take full advantage if the array of tax-advantaged investment choices available to them. Sure, people know about IRAs and 401(k)s, but few actually take full advantage of even those. Here's a checklist of tax-advantaged investment options available to most business owners. How many of these are you using? 

1. 401(k) -- The 2013 maximum employee contribution is $17,000, with a "catch-up" provision of an additional $5,500 for those over 50 -- a total of $22,500 annually. Perhaps your contributions have been limited by "top heavy" provisions in your plan -- here's an article on some ideas to fix that.
   
   Additionally, your own contributions are eligible for a pretax company "match", which could be worth several thousand dollars more in tax-free (and payroll tax-free) investments. Consider also the Roth 401(k) option - instead of rolling up a future tax bill from tax deferral now, you can choose tax-free for life.
   
   Potential benefit - up to $25,000 in tax-advantaged savings ($50,000 for a working couple), including the company match.
      
2. Roth IRA -- Most business owners' higher income limits or eliminates their eligibility for a Roth IRA -- or does it?  If you (or your spouse) do not have a self-directed or rollover conventional (pretax) IRA, here's a strategy for converting up to $13,000 per year between you (if you're over 50) to a tax-free investment for not only your lifetime, but the lifetimes of your heirs, as well. It's now being referred to as the "Back Door Roth IRA": http://www.chiefexecutiveboards.com/briefings/briefing297.htm
   
   Potential benefit -- up to $13,000 per year, tax free for decades.
     
3. HSA Health Care Plans -- Many companies have chosen health care cost reduction strategies that include Health Savings Accounts (HSAs). This is just a "freebie" waiting for you to do the paperwork. By taking maximum advantage of these plans, you can avoid both State and Federal Income taxes on $6,450 of income for a family -- $7,450 if you're over 50. You can spend this tax free money on any health care expense, including deductibles, Dental, Orthodontia, Optometry, and a host of other costs not covered by your health insurance. And you can roll over that money for years, if you don't use it right away. HSA Bank and others offer long-term investment options just like an IRA.
      
   Potential benefit - $7,450 off the top of both Federal and State income.
    
4. 529 College Savings Plans -- Actually, they're educational savings plans - you can use the money for anyone's educational expenses, including yourself or your spouse. In most states, your contribution is deductible from your state tax return. That's an immediate ROI of the state tax rate (up to 7%) in year 1, and the investment growth and income is tax free, as long as it's eventually used for educational expenses.
   
   Some states limit that deduction. Ohio is particularly interesting - limiting the state tax deduction to $2,000 per year per beneficiary. Yes, that means you could set up accounts for all your kids, nieces, nephews and neighbor kids and take a $2,000 deduction for each. Later, you could re-name the beneficiaries of those accounts to anyone you want (you own the accounts). Peculiar, but that's the game Ohio set up.
   
   Potential Benefit -- Unlimited, depending on state tax deduction rules. Say, at least $10,000 per year in state tax deductions, practically.
       
5. Private Pension Plans -- The strategies above allow you to move a lot of money into tax-advantaged plans every year. Potentially:
    
   • $50,000 ($25,000 each) for yourself and your spouse to a 401(k), including the company match.
   • $13,000 ($6,500 each) into a Roth IRA.
   • $7,450 into an HSA.
   • At least $10,000 into some combination of 529 plans (unlimited state tax deduction in some states).
     .
   So, if $80,000 or so a year isn't enough, you can set up a Private Pension Plan within your company that greatly favors yourself. Now we're talking some meaningful expense, but if your income warrants it, Google "Private Pension Plan" and read up on the idea

One strategy you didn't see mentioned above?   Cash-Value Insurance or Annuities -- Ask anyone who's seen the back side of one of these products (tried to get the money back out), and they'll tell you these are very expensive, illiquid products constructed for the benefit of the company and the agent selling the products.   If you need life insurance, buy term insurance.  Building wealth is not only figuring out how to earn a lot of money. It's about figuring out how to keep most of it out of the hands of tax collectors - legally. If you have some additional tax-advantaged investment strategies, 

Major differences exist between state and federal taxes / New Jersey does not allow for numerous deductions the Federal Government does allow....

Kurt Rossi/For The Times of Trenton writes: With the tax-filing deadline upon us, taxpayers are putting the finishing touches on their returns. While most filers make every attempt to complete their returns by April 15, millions of taxpayers are forced to file extensions each year. Why the delays?

Although there are many reasons for taxpayers to request a six-month extension, the complexity of our tax code is often the major culprit. Additionally, federal taxes and state tax requirements differ and add another layer of complexity for taxpayers to deal with.

So what are the most common differences that taxpayers should be unaware of? For starters: retirement plan contributions.

Many taxpayers assume that their contributions toward retirement plans will be deductible on their federal and state income tax returns. Unfortunately this is not the case with all plans.

According to the New Jersey Division of Taxation, unlike the federal government, New Jersey does not allow you to exclude from wages amounts you contribute to deferred compensation and retirement plans, other than 401(k) plans. This means IRA plans and Keogh plans are not deductible on your New Jersey return, leading to higher taxable wages than your Federal return.

Mortgage interest can be a helpful deduction on your federal taxes. The Brookings Institution reports that the tax deductibility of mortgage interest is expected to save taxpayers about $101 billion on their federal taxes in 2013. Regrettably, the state of New Jersey does not offer a mortgage interest deduction. However up to $10,000 of property tax deductions are available, which provides some relief to taxpayers.

Charitable contributions are yet another category where discrepancies can be found. Unlike your federal tax return, which allows for charitable deductions against income, the state of New Jersey does not allow you to write off these contributions, leading again to higher taxable wages.

Medical expenses can have an adverse effect on taxpayers and are deductible on federal and state returns. However, many filers inaccurately assume that the thresholds for deductibility are the same.

One of the most commonly missed deductions on a New Jersey tax return is for medical expenses, said Craig Johnson, a certified public accountant. “People often miss the fact that the medical deduction for the state of New Jersey tax return is the amount in excess of 2 percent of income versus the 7.5 percent threshold for their federal return. Many times they won’t even bother to accumulate their medical costs because they are unaware of this fact.”

The lower 2 percent threshold can prove beneficial for New Jersey filers faced with the challenges of higher medical expenses.

According to the Bureau of Labor Statistics, the unemployment rate in New Jersey is 9.3 percent. While unemployment benefits are included as taxable income for your federal return, they are not taxable on your New Jersey return. With so many New Jersey residents collecting benefits, this helps to reduce the tax liability to those who are unemployed and need to maximize their benefits.

Unfortunately many taxpayers have had to restructure their finances as a result of the economy. While debt that has been discharged or forgiven is not taxable by the New Jersey, it may be required to be included as taxable income on your federal return.

According to the IRS, “In general, if you are liable for a debt that is canceled, forgiven, or discharged, you will receive a Form 1099-C, Cancellation of Debt, and must include the canceled amount in gross income unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt, then the debt has not been cancelled and you do not have taxable cancellation of debt income.”

Exceptions to this rule include, but are not limited to, debt canceled in a Title 11 bankruptcy case, debt canceled during insolvency, cancellation of qualified farm indebtedness, cancellation of qualified real property business indebtedness and cancellation of qualified principal residence indebtedness.

The exclusion for “qualified principal residence indebtedness” provides tax relief on canceled debt for many homeowners involved in the mortgage foreclosure crisis. Review IRS “Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments” for additional information.

It can be challenging enough to get a handle on your federal return, let alone the New Jersey state requirements. The discrepancies noted can create confusion, leading to errors on your returns.

Because everyone’s situation is unique, consult your tax, legal and financial adviser to ensure that you are properly accounting for these differences and implementing the most appropriate approach for you.

Tax Free MLP (Master Limited Partnership) Distributions Are Misunderstood

Kraken for Seeking Alpha writes: Many income investors are always searching to find a decent yield in a low rate environment such as this. MLPs are great way to receive tax-free income, but their complex tax structure can turn investors away.

It's important to note that many distributions normally consist of return of capital. They do this to provide a tax shield for unitholders. However, there is much more to the story, and investors should understand if they are comfortable with this sort of investing.

MLPs are typically great investments for a number of reasons. They provide a nice stream of income to unitholders. However, the tax complications arise when typically selling your units. If an MLP is distributing mainly a return of capital, then your cost basis will decrease to reflect that amount.

Here is an example:

In 2012, Kinder Morgan Energy Partners (KMP) paid $4.85 in distributions to unitholders. To make our example simple, lets assume you acquired the units at the beginning of the 2012 and that the entire distribution was a return of capital.

(click to enlarge)

So a unitholder initially starts with a cost basis of $84.46 per unit. This unitholder will continue to hold shares through 2012. So while doing this, the unitholder has collected $4.85 in tax-free return of capital. However, since this is a return of capital, your initial cost basis of $84.46 per unit will now be $79.61. So you will only have a tax liability when you sell your units above your new cost basis.

Distributions may not always be completely a return of capital. Often, it can be a mix of taxable income and return of capital. So knowing this, should you invest in MLPs?

I think the answer depends on the personality of the investor. In the example, if the investor chose to sell his or her units after receiving all the 2012 distributions, then they would now be on the hook for taxes. If you plan on investing and holding for a long time, then MLPs are great investments. The tax deferred treatment is really only a benefit if you hold long-term.

Think about it like time value of money. If the government gave you the option of deferring taxes for several years, wouldn't you do it? You could use the money saved from deferring taxes and reinvest it into an asset that generates a moderate return.

The type of investor qho should look into MLPs is someone that plans to hold for a long time. More importantly, it should be someone who reinvests the distributions to take advantage of their tax-free status. Eventually, you will have to pay taxes when you sell your units. Everyone has to pay taxes at some point, but by deferring it, you can use the savings to generate a higher return for your portfolio.

There are many great names out there in the MLP space with some strong yields. Breitburn Energy Partners (BBEP) has a yield over 9%. Energy Transfer Partners (ETP) yields over 7%. Boardwalk Pipeline Partners (BWP) has a yield over 7%. Enbridge Energy Partners (EEP) also has a yield over 7%.

Both Breitburn and Energy Transfer Partners recently announced secondary offerings. The offerings will help significantly clean up the balance sheet for the companies. They are likely to use remaining cash for accretive acquisitions.

Boardwalk recently formed a joint venture with Williams Companies for developing a pipeline from the Marcellus Shale to the Gulf Coast. The pipeline is eventually expected to transfer 400k barrels a day. Boardwalk has focused on pipeline projects in key industrial markets. Enbridge has also signed a three year deal with Phillips 66 to increase oil deliveries to refineries. The deal means that Enbridge will help transfer 40,000 barrels a day by end of the year. Long-term shareholders are likely to reap the benefits as oil delivery volume grows.

These are all great stocks that have strong tax-free distribution yields.

These 7 States Tax You the Hardest

Dan Caplinger for Fool.com writes: There's nowhere you can go in the United States to escape taxes entirely. But where you live can make a big difference in when you can declare independence from your tax burden every year.

Tax Freedom Day is an easy-to-understand concept that the nonprofit Tax Foundation has developed to help people understand just how much they have to pay in federal, state, and local taxes. By taking the total amount of taxes that people have to pay and then dividing it by their income, you can figure out what percentage of the year you spend working for Uncle Sam and your state and local tax authorities.

This year, Tax Freedom Day for the nation as a whole falls on April 18. But people in some states will have to wait quite a while longer before they've paid off their tax burden for 2013. Here are the seven most heavily taxed states in the U.S., along with a brief explanation of what makes their taxes so much higher than the rest of the country.

7. Minnesota, April 23Minnesota has a relatively high combination of individual income and sales taxes, with a top income tax rate of 7.85% and a 6.875% sales tax. But its corporate income tax of 9.8% is especially high, despite the fact that top private employer Target (NYSE: TGT  ) is headquartered in Minneapolis. Even relatively low property taxes averaging just over $1,400 aren't enough to give residents much relief.

6. California, April 24California is notorious for having retroactively raised its income tax rates on high-income taxpayers last year, imposing a top rate of 13.3%, the highest of any state. State sales taxes of 7.5% and a fairly high corporate income tax rate also add to Californians' tax burden, even though it hasn't stopped many high-profile technology companies from calling the state home. Limitations on property tax increases have kept many residents from bearing the full burden of skyrocketing property values during the housing boom.

4 (tie). Massachusetts, April 25Massachusetts has a relatively low flat income tax of 5.25%, but a recent increase in its sales tax to 6.25% boosted overall revenue. With property taxes averaging nearly $2,000, homeowners get a triple tax burden, although many financial companies maintain a strong presence in the state.

4 (tie). Illinois, April 25Illinois closely resembles its peer Massachusetts, with a 5% flat income tax rate and the same 6.25% sales tax. A higher corporate rate offsets slightly lower property taxes, although corporate taxes didn't stop Boeing (NYSE: BA  ) from relocating its corporate headquarters to the state from Seattle more than a decade ago. A gasoline tax that's in the top five in the country helps push its overall burden higher.

3. New Jersey, May 4As we get to the three most heavily taxed states, rates for various taxes go up considerably. New Jersey boasts a top income tax rate of nearly 9%, sales taxes of 7%, and property taxes averaging more than $2,800. In addition, with a high concentration of businesses, corporate tax collections are also among the highest in the nation.

2. New York, May 6New York's tax rates are actually lower than New Jersey's, with a top rate of about 8.8% and a 4% sales tax. Yet because of the high average income of New Yorkers, the state collects more in income tax revenue than any other state. Most cities tack on an average of nearly 4.5% in additional sales taxes, and with plenty of high-income businesses calling New York home, including Wall Street's most profitable institutions, the state's corporate tax brings in the second most revenue of any state.

1. Connecticut, May 13Again, tax rates don't tell the whole story for Connecticut, with a modest 6.7% top income tax rate and just over $2,500 in property taxes. But high gasoline taxes combined with the 6.35% sales tax, as well as high average incomes resulting from its proximity to the New York City metropolitan area, make Connecticut the costliest state in the U.S. for taxes. The state is a center for the insurance industry, with Hartford Financial (NYSE: HIG  ) among the leading employers, and defense-related companies United Technologies (NYSE: UTX  ) and General Dynamics (NYSE: GD  ) also have substantial operations there.

Think twice about where you liveIt's important to remember that the Tax Foundation's calculations are all based on aggregate measures, and they won't necessarily reflect your personal Tax Freedom Day. But as a general rule, choosing where to live can make a big impact on your total tax liability, and while taxes aren't necessarily the most important factor in making that choice, they definitely deserve at least some consideration.

We’d like to start a college savings plan, read about ESA plans now understand are called Coverdell IRAs. We know one drawback is the $2,000 limit on the contributions you can deduct, but we can’t afford to save any more than that amount anyway. What do you think of thee plans?

Holly Nicholson for the Newsobserver.com writes:There is an annual limit of $2,000 per beneficiary that can be contributed to what’s now called a Coverdell Education Savings Account. The IRA may have been dropped from the name. It was misleading, since there is no tax deduction for contributions. The ability to contribute to a Coverdell is phased out for modified adjusted gross income (AGI) of $190,000 to $220,000 if you are married and file jointly and $95,000 to $110,000 if you are single. The maximum contribution of $2,000 is gradually reduced if your income is between the phase-out limits, and no contribution is permitted if your modified AGI is above the upper phase-out limit. 

Anyone can make the contribution as long as the $2,000 per beneficiary is not exceeded. If your income level is too high but your child’s grandparents qualify, they could make the contribution. If they cannot afford or are not inclined to use their money to fund your children’s education, you could gift them the money with the understanding that they will use it to make the Coverdell contributions.

Funds in a Coverdell must be used for the child’s qualified education needs. Qualified education expenses include elementary and secondary education expenses as well as higher education expenses. Coverdell funds can be used for a wide variety of education expenses, including: tuition, fees, books, supplies, equipment, academic tutoring, the purchase of computer technology or equipment (even internet access), room and board, uniforms, transportation and supplementary items such as extended day programs as required or provided by the school.

Contributions are nondeductible, growth on the money is tax-free, and Coverdell withdrawals are tax-free up to the beneficiary’s qualified expenses. Any amounts over that will be included in income for the beneficiary and subject to a 10 percent penalty. Any balance left must be distributed within 30 days after a beneficiary reaches age 30. The beneficiary is then taxed on the earnings portion of the distribution. If you are planning on federal financial aid, the Coverdell can be a disadvantage. The account is considered an asset of the student, not the parent. Before you fund a Coverdell; consider funding a Roth IRA or a 529 plan. Brief explanations of these follow.

Roth IRA

You can contribute up to $5,500 ($6,500 if age 50 or over) to a Roth IRA. The ability to contribute to a Roth IRA is phased out for modified adjusted gross income (AGI) of $178,000 to $189,000 if you are married and file jointly and $112,000 to $127,000 if you are single. The maximum contribution is gradually reduced if your income is between the phase-out limits, and no contribution is permitted if your modified AGI is above the upper phase-out limit. Contributions are not tax-deductible, but the investments grow tax deferred and are tax free when taken out at age 59 ½ or after. Your contributions can be taken out at any age without a 10 percent early withdrawal penalty or income tax. If needed, you could use your contributions for your son’s education. If not needed, you are that much more prepared for retirement. The Roth IRA funds will not impact your ability to receive financial aid.

529 plans

The 529 plan doesn’t have any income limitations; you can contribute to these plans regardless of your income level. The amounts you can contribute vary by state, but they are very high. Withdrawals are tax-free if used for qualified education expenses for students in a post secondary degree program. The 529 qualified expenses are limited to tuition, fees, books, supplies, equipment and room and board. Distributions not used for qualified higher education expenses are subject to income tax and a 10 percent penalty. Currently, assets in a 529 plan are considered assets of the parent for financial aid purposes.

Read more here: http://www.newsobserver.com/2013/04/13/2819292/families-considering-an-education.html#storylink=cpy

Your Finances: Contributions to cut your tax bill next year

Laura Medigovich for Recordonline.com writes: As the 2012 tax season draws to a close, many taxpayers are still smarting from the pain of writing large checks to pay for their federal and state tax bills.  If you are one of those people, and you are looking for ways to reduce your tax liability for 2013, then you might consider these tips for reducing future tax bills.

Contribute to a state 529 college-savings plan

New York state's 529 plan allows New York taxpayers who are account owners up to a $5,000 state tax deduction on annual contributions. Married couples filing jointly in New York can deduct up to $10,000 of contributions annually.

The money grows tax deferred. Withdrawals for qualified education expenses are free from federal tax (New York state 529 plans also provide qualified withdrawals state tax free).

Withdrawals of earnings that are not used for qualified education expenses are subject to federal and state taxes and carry a 10 percent penalty. Go to nysaves.com for more information.

Contribute to your employer-sponsored retirement plan

Contributions to your 401(k) or 403(b) lower your taxable income. Every dollar you contribute to your 401(k) reduces your tax liability.

For the 2013 tax year, individuals can contribute up to $17,500 to an employer-sponsored retirement plan. Employees 50 years or older can make additional catch-up contribution of $5,500.

Money invested in a 401(k) grows tax-deferred, so you won't pay taxes on the funds until you withdraw them. When the money is withdrawn in retirement, it is subject to federal and state income taxes.

Since this account is intended for retirement, withdrawals prior to age 59½ usually carry a 10 percent penalty.

Contribute to a tax-deductible traditional IRA

Similar to employer-sponsored accounts, contributions to tax-deductible traditional IRAs also lower your taxable income. The money also grows tax deferred.

For the 2013 tax year, individuals can contribute up to $5,500 to a traditional IRA. Taxpayers 50 or older can make additional catch-up contributions of $1,000.

Since this account is intended for retirement, withdrawals prior to age 59½ usually carry a 10 percent penalty.

When the money is withdrawn in retirement, it is subject to federal and state income taxes.

All of these accounts were designed to provide tax savings and tax-deferred growth of your investments. Each has its own set of tax rules that govern withdrawals and tax-deductibility, which is beyond the scope of this article. That is why it is always a good idea to seek professional guidance from your tax adviser regarding your specific situation.

Triple Net Leases: Safe, 6-9% Cash Yields With Tax Advantages? (Investments)

Mike the PhD for Seeking Alpha writes: One problem facing investors today is that there is simply too much cash out there. The flood of money coming from a recovering economy and flowing out of savings accounts and into investment assets has driven the prices on assets of all sorts to multi-year highs. Even alternative "investments" like stamps and old cars have risen dramatically in value according to a recent CNBC report. Given that the objective of any investor is to find assets where the resulting future cash flows justify the current purchase price, this flood of money has made life very unpleasant for cautious investors.

In times of "high sentiment" like today, economics researchers have found that less liquid investments tend to be slower to appreciate in price because capital flows are slower into these assets; in subsequent periods however, these low liquidity assets tend to outperform higher liquidity assets. Translation: assets that are less liquid should do better on average in the next few years because their prices haven't run up as much.

With that in mind, I went through a list of various types of assets looking for those that had the lowest levels of price appreciation while still offering direct cash returns (e.g. Twinkies don't count as an investment - granted they are illiquid, but they don't pay investors anything to hold them). One asset class in particular stood out to me: Triple Net Leases.

Triple Net Leases are a form of real estate investment that basically works as follows: An investor buys an existing commercial property, let's say a Walgreen store. That Walgreen store has a long term lease in place when the investor buys it under which Walgreen agrees to continue to lease the store for a specific period of time (say 25 years), at a given rate per year with periodic rent increases built into the lease (say a 5% rent increase every 5 years). Now most sensible investors would almost immediately say 'Wait a minute, I don't want to be responsible for maintenance, taxes, and utilities on a Walgreen store!' However, with triple net leases, the store owner is not responsible for any of these things. The rent the owner collects is net of all expenses for the store including maintenance & upkeep, property taxes, and utilities (thus the triple net in triple net leases).

What's more, while many investors are understandably concerned about investing in fixed rate debt, because triple net leases frequently have rate adjustment clauses, and the investor owns the property after the long term lease is complete, the securities can offer significant protection from inflation and rising rates.

Further, triple net leases offer investors significant tax advantages just as traditional rental real estate properties do. This is particularly true if the individual has significant assets such as a house or business that they are selling for a large gain. (In these circumstances, triple net leases can be used in a 1031 tax free exchange to avoid capital gains taxes.) And while real estate rental property has become a hot investment in the last couple of years and is recommended by my investment commentators, triple net leases are still below the radar by and large.

Triple net leases are highly illiquid just like most real estate property, and the buildings frequently cost several million dollars to buy. As a result, the markets are very thinly traded which has made prices slow to rise. That's the downside of holding these investments. But the upside is that while the properties are illiquid, the leases are usually many years, and they are frequently held by very safe companies; Walgreen, Kohls, Advanced Auto, Walmart, even the US Post Office. OK… perhaps given the recent decline in mailing, that last one might not be as safe as it once was, but all of these companies sign extremely restrictive lease agreements on these properties which makes defaulting on the rent very, very difficult for the company.

Cap rates, as the yields are called on triple net leases, currently run from around 5-6% for very safe tenants like Walgreen to upwards of 9% for riskier tenants and private companies. Further, given the tax advantages from depreciating the building over time, much of this income is tax free on the front end of the lease.

Again though, these properties cost several million dollars, so while they are great for high net worth individual investors, what is the more typical retail investor supposed to do? Well, you could buy into a company that specializes in holding triple net leases like National Retail Properties (NNN) or American Retail Capital Properties (ARCP). But these stocks are liquid and easy to invest in, so like most of the other stocks out there, over the last year, their price has run up tremendously, turning once attractive opportunities into more hum-drum investments that are not overly appealing. One alternative to this is for investors to sit out on the sidelines in cash and hope for a better entry point eventually. That alternative lacks appeal for a variety of reasons. But there is another choice: Non-traded REITS.

Non-traded REITS are companies that are not listed on exchanges, but their shares are traded in private markets by some brokers occasionally. The result of this lack of liquidity is that the price on these REITs is much less transparent than on exchange listed REITs. This can lead to either a good deal or a bad deal for an investor depending on how well informed the buyer and the seller each are. In many respects, investing in non-traded REITs is a lot like investing in individual bonds - the lack of liquidity can lead to significant give and take in price negotiations between buyers and sellers. Not all non-traded REITs invest in triple net leases of course, but there are several that do.

One such non-traded REIT that has been in the news lately is Cole Credit Property Trust. The firm was the subject of an acquisition attempt by American Realty Capital Properties recently, but the Cole board declined the offer. Cole's shares and similar non-traded REIT firms can offer investors a good deal and easy access to the otherwise very expensive triple net lease market, but investors will probably need to check with several local brokers to find one that has suitable non-traded REIT shares for sale at an appropriate price.

Since the purpose of this article is educational rather than to recommend specific brokers of triple net lease properties, and non-traded REITs, I won't give specific recommendations on where you should buy these types of investments. However, there are many firms out there that specialize in these alternative investments, and a simple internet search should bring up several that are close to you.

Personal Planning Can Help Private Equity Pros Save On Taxes

Bradley M Van Buren for Holland & Knight writes: When private equity or venture capital fund principals and managing partners look to roll out a new fund, in addition to reconciling general fund formation issues, they should consider the personal-planning opportunities available to each principal.

Potential Tax Savings and Creditor Protection

Personal planning should not be overlooked during the fund formation process. With appropriate structuring, principals may generate considerable tax savings and creditor protection without, in many cases, entirely losing their access to the carried interest performance. This type of personal tax planning is nuanced and complicated, and requires professional advisers who are acutely aware of the structural and tax issues associated with such strategies.

Changes in the Taxation Landscape

As a result of the recently enacted American Taxpayer Relief Act of 2012 (ATRA), the long-term capital gains tax has reset to its pre-2001 rate of 20 percent for taxable income of $450,000 for joint filers and $400,000 for single filers in 2013. Beginning in 2013, the Patient Protection and Affordable Care Act also imposes a Medicare surtax of 3.8 percent on net investment income (e.g., capital gains, including carried interest) for taxable income of $250,000 for joint filers and $200,000 for single filers in 2013. Further, ATRA sustained the applicable exemption amounts for federal estate, gift and generation-skipping transfer (GST) tax at $5 million per person (indexed for inflation) but increased the applicable tax rates to 45 percent from 35 percent. In 2013, the exemption amount for each tax is $5.25 million.

Absent from ATRA is a re-characterization of carried interest that will alter its current capital gain treatment and subject it to ordinary income tax rates — although debate over this issue is likely to continue.

Gift or Sale of a "Vertical Slice"

Optimizing tax savings often involves implementing one or more strategies as part of the fund structuring. Such strategies are focused on the transfer of some or all of a principal's carried interest allocation in a fund to an irrevocable trust for the benefit of the principal's children and further descendants. Having the economic performance of the carried interest inure to the trust, the assets of which will not be subject to estate tax at the principal's death (or in many cases for generations to come), preserves the full return of the carried interest for the principal's family. Under current tax law, it is generally advisable that a principal transfer the same portion of his or her capital interest in the fund (the proportionate amount commonly referred to as a "vertical slice"). Most frequently, this is accomplished by the principal transferring the same proportion of all his or her economic interests in the general partner entity of the fund. The most common methods for the transfer of a vertical slice in a fund are outright gifts and financed sales to irrevocable trusts.

An outright gift of a vertical slice to a principal's irrevocable trust would result in a taxable gift, which would use a portion of the principal's remaining gift tax exemption amount, as well as his or her GST exemption amount if the irrevocable trust is designed to benefit multiple generations.

A financed sale by the principal of a vertical slice in the fund entails a purchase of such interests by the irrevocable trust in exchange for some combination of cash (or other marketable assets) and a promissory note. The note bears interest at the applicable federal rate determined by the Internal Revenue Service (IRS) and is collateralized with the purchased vertical slice. The trust would pay interest annually and principal would be due in a balloon payment at the end of the term, but could be prepaid at any time without penalty.

To effectuate a gift or sale of a vertical slice to the principal's irrevocable trust, he or she would enter into a transfer agreement with the trust or have the trust be an initial signatory to the fund general partner operating agreement (and any other relevant entity operating agreement). Under the terms of the agreement, the principal would assign a portion of his or her carried interest and capital interest(s) to the trust and the trust would agree to meet the obligations associated with such interests (e.g., capital commitment). The economic viability needed by the trust to meet its capital call obligations generally is provided by the principal via additional gifts or loans to the trust. A financed sale would also include the execution of a purchase and sale agreement, security agreement and a promissory note.

An outright gift or sale of a vertical slice will need to be disclosed on a gift tax return to start the gift tax statute of limitations. Once the statute of limitations is initiated, the IRS may only contest the reported value of the transferred vertical slice for a three-year period, generally beginning on the date the return is filed. As part of the gift tax return filing, a qualified appraisal must be attached to substantiate the value purported on the return. Unlike an income tax valuation, which is based on a liquidation value at the time the carried interest is granted and often has no value for a newly created fund, the gift tax valuation methodology takes into consideration projected economic results of the fund, the likelihood of achieving such results and the mechanics of the fund waterfall distribution provision. As a result, the carried interest will always have some value.

Benefitting from Creditor Protection

The transfer of a vertical slice by a principal to his or her irrevocable trust may provide an element of creditor protection for those who are concerned about potential personal liability claims arising from the principal's activities with the fund (e.g., serving as a director on a portfolio company's board). Stated differently, any claim asserted against a principal personally will not likely extend to the assets of his or her trust. In some jurisdictions, such as Delaware, asset protection may be achieved with the use of a self-settled trust (a trust in which the principal is also a discretionary beneficiary). A principal who does not already reside in such a jurisdiction, however, must find a resident of the jurisdiction to serve as trustee of the trust in order to qualify under the laws of that jurisdiction. This type of arrangement creates an additional annual expense if a commercial trustee is needed. However, in other jurisdictions, self-settled trusts will not provide the desired creditor protection. In these jurisdictions, a principal would not be a named beneficiary of the trust, but his or her spouse may be included without jeopardizing the creditor protection status of the trust. In either case, the trust may be designed to provide the desired creditor protection while also maintaining the possibility of accessing the trust principal via the discretion of an independent trustee — yet another desirable component of personal planning that is attractive to many principals.

Charitable Giving with Carried Interest

With the recent increase to the capital gain rate and implementation of the Medicare surtax, charitable giving with carried interest has become an increasingly popular area of interest. In reaction to this trend, many donor-advised funds have become considerably more flexible in accepting carried interest and other alternative investment interests. Should the income taxation of carried interests be re-characterized as ordinary income, this will likely become an even more attractive consideration.

Want to Save Money On Your Taxes? Try ValueAppeal / property tax appeal service developed to ensure that homeowners are not overpaying their property taxes

Kelly Clay for Forbes writes: If you’re like me, there’s one thing your mind this weekend: Taxes. With the deadline to file Federal taxes looming, many across the country are scrambling for ways to find deductions to save a few bucks. (That is, of course, unless you are owed a refund.)

Federal income taxes are not the only taxes many across the U.S. have to pay every year. Property taxes are yet another burden homeowners face, but unlike with Federal income taxes (which can often be adjusted by digging through possible deductions), a homeowner can actually appeal their property tax. The problem is that this process is very confusing, and while 20-25% of U.S. homeowners are likely to be overpaying their property taxes each year, many don’t know that they can either can even appeal the tax, let alone know how.

A new company called ValueAppeal is a pioneering property tax appeal service developed to ensure that homeowners are not overpaying their property taxes. For free, any homeowner can simply type in their address at ValueAppeal.comto see if they are a homeowner overpaying, and ValueAppeal’s technology instantly analyzes a property address and identifies, based on comparable sales data and other localized criteria, whether the homeowner is likely to be overpaying. If ValueAppeal determines that the homeowner is not likely to be overpaying, it will not allow them to proceed with developing an appeal, which protects customer interests while also saving local assessor’s offices from having to deal with frivolous appeals. For those homeowners identified as likely to be overpaying, ValueAppeal provides an easy-to-use service to develop a complete tax appeal online in minutes, eliminating the many hours or even days that a more complicated ‘traditional’ appeal process requires.

Charlie Walsh, ValueAppeal founder and CEO, says that “There are more than 3,000 counties and 14,000 property tax jurisdictions in the U.S. Almost all have very different and specific rules and regulations when it comes to property tax appeals that need to be followed exactly. We’ve spent the past four years baking all of these considerations into ValueAppeal’s algorithm to provide users with the most accurate data and indications as to whether or not they’re overpaying.”

Walsh explained that “From a user-experience standpoint, we developed ValueAppeal to do in minutes what used to take many hours or even days for the average homeowner to do on their own. Perhaps our most appreciated offer is that for free, any homeowner can type in their property address at ValueAppeal.com to get an immediate analysis as to whether or not they’re likely to be overpaying their property taxes. For the 75-80% of homeowners who are not overpaying, we provide peace of-mind and save them from spending time and money on filing an appeal that is unlikely to be successful.” He added, “We’ve found that roughly 25% of homeowners in the US are overpaying their property taxes, 50% are about right, and 25% are actually underpaying. There is huge variance by jurisdiction, as some areas may only have 5% or less overpaying and others can be at more than 40% of homeowners overpaying.”

The average homeowner who has used ValueAppeal so far has saved $1,346 and, the company says that results for appeals that were filed during the first half of 2012 indicated even greater savings. And while this may not necessarily help with the taxes you owe on Monday, ValueAppeal may just help you save on those other taxes you owe later this year.

A ‘Genius’ Way to Avoid Taxes / Nobel Prize laureates are avoiding heavy taxes on their prize money via a loophole that benefits charities — at the expense of the IRS.

Aparna Mathur for The American writes: President Reagan is best remembered for his policies based on the theory of supply-side economics. The Reagan White House claimed that its 1986 tax reform cut taxes for four out of five taxpayers. However, the reform also contained a much less publicized rule, aimed at increasing the “perceived and actual fairness of the tax system,” that imposed a tax on academic, scientific, or other prizes and awards, including the Nobel Prize.

Within a single year, the marginal tax rate on Nobel Prize winnings, which had traditionally been excluded from income for tax purposes, shot up from zero to almost 30 percent — the top marginal rate faced by millionaires at that time. This was a watershed moment for prize winners in the United States, which, even today, is the only country that imposes such a tax on prize money. In a sharply worded letter directed to Congress and printed in the New York Times in January 1988, the American Nobel Committee spoke out against the new law:

Everywhere we see evidence of conflict of values. The wealthy are able to acquire more wealth with low tax liabilities in the pursuit of nothing more than making money. Once in a lifetime our bravest and brightest achieve a moment of world recognition and financial award, and we snatch away a portion of their lifetime achievement through a punitive tax. Almost all of the Nobelists are salaried researchers at labs or universities. They pay their taxes since they have no means of sheltering their incomes the way investors do. They have few write-offs and share all the woes of the average taxpayer. With the new tax law, they do not even have the modifying opportunity of income averaging to reduce their tax on the prize money.

The tax on prize money remains a cause of gloom among some Nobel winners. In an NPR interview, the 2008 Nobel Prize Winner in Chemistry Martin Chalfie remarked, “the lion's share of the prize money, since the Reagan presidency, when the tax codes were changed, has gone to the government. Because before Reagan, the rule was if you won an international prize, you kept the money. It was tax-free. Now, it's taxed. So 50 percent of it went immediately to the city, the state, and the federal government. The rest of it is going to help put my daughter through college.”

For some laureates, more than 40 percent of their income will be paid out in taxes just because they won the prize.

Over the years, however, anecdotal evidence suggests that prize winners have figured out ways to either avoid the tax entirely or at least reduce its burden.

Nobel laureates can try to minimize their tax liability by giving the prize money to a charitable organization. Many laureates choose to donate a portion of their prize to organizations that have assisted in their accomplishments or that will further their work. However, the law only allows taxpayers to deduct charitable contributions that are 50 percent or less of adjusted gross income. That means that while the entire $1.4 million is given away, prize winners still need to pay tax on a big chunk of it.

Also, because the money pushes most laureates into a higher tax bracket, they are likely to lose deductions and personal exemptions that they would have been entitled to otherwise. For some, this means that more than 40 percent of their income will be paid out in taxes just because they won the prize.

But there is a loophole. IRS Publication 74(b) allows laureates to completely avoid the tax by assigning the prize money to a charity before they actually receive it. This is exactly what President Obama and former Vice President Al Gore did with their prize money. Gore donated 100 percent of the proceeds of the award to the nonprofit Alliance for Climate Protection. President Obama similarly asked the Nobel Committee to transfer the money directly to designated charities, so that the award never showed up in his tax return. Many recipients of the prize donate all the proceeds from their award to charity, and since Obama and Gore were wealthy even before their winnings, it is unlikely that their contributions were driven solely by a desire to avoid tax liability. That these charities were designated prior to the receipt of the awards does suggest, however, that both men had knowledge of the relevant tax code that allowed the award money to be tax exempt.

Did the 1986 tax law cause Nobel laureates to become more charitable? It is tough to say, given the volume of data and rigorous statistical analysis required to make such a claim. According to Michael Sohlman, executive director of the Nobel Foundation, “since many scientists already have a solid financial situation, they often give it [the money] away to charitable organizations.”

Some scientists give the money to universities or institutions where they have worked, as a token of gratitude. For example, neuroscientist Paul Greengard gave his 2000 Nobel Prize money to Rockefeller University, where he has been a professor since 1983. Physicist George Smoot of the University of California-Berkeley donated the money from his 2006 physics prize to a foundation that matched the funds to support scholarships and fellowships. Smoot said, “This was effective, as if I had taken the prize, the United States and California would have taxed away half of it … This way much more funds went to young people in a way that may change their lives in a major way to the good.” John Mather, who shared the prize with Smoot, donated his portion of the winnings to his John and Jane Mather Foundation for Science and the Arts.

‘Once in a lifetime our bravest and brightest achieve a moment of world recognition and financial award, and we snatch away a portion of their lifetime achievement through a punitive tax.’

Of course, many laureates simply use the money for personal purchases, mortgage payments, or to pay for their children’s education. British biochemist Richard Roberts reportedly built himself a croquet lawn with his 1993 prize money. In 1965, when physicist Richard Feynman won the award and was asked how he would spend the money, he said, “I’ll use it to pay my income tax for the next years, so that my income is tax-free.”

When Albert Einstein was divorced in 1919, he famously left all his Nobel money to his ex-wife and their two sons, despite the fact that this was two years prior to actually receiving the prize in 1921. In 1903, Marie Curie, the first female Nobel laureate, poured the money into her own research, yielding huge payoffs, as her daughter and son-in-law won a joint Nobel in 1935 and Curie herself won a second prize in 1911.

Alexander Fleming won the 1945 Nobel Prize for his discovery of penicillin. There is no mention of how he used the prize money, but when he later toured the United States, American chemical firms collected $100,000 and presented it to him in gratitude for his contribution to medical science; he used the funds for research at St. Mary’s Hospital Medical School.

It is certainly easier to find examples of charitable giving today than for the early part of the 20th century, but whether these differences are significant in any statistical sense is impossible to say. Further, whether differences are driven by tax rates or other factors, such as poor documentation, is even harder to pin down. However, anecdotal evidence does suggest that Nobel laureates behave as economists would predict. A 2011 paper by Jon Bakija and Bradley Heim suggests that charitable giving responds to changes in the tax price, with a negative elasticity of 0.7. In other words, when the tax benefit to charitable giving goes up, people engage in more giving. For Nobel laureates, the tax is unlikely to impact their decision to work, since their research and activities are motivated by more than just money or even fame. The award represents a recognition of a lifetime of work and confers significant prestige on the winners. However, the tax consequences could generate behavior that has real revenue impacts for the IRS.

The larger question is whether we really want to tax prizes awarded to this select group of thinkers, scientists, and innovators. In the words of the American Nobel Committee’s 1988 letter, “If America is ever to regain economic stability in the world market, it will need to encourage all the innovators it can. To advise our creative talent that when they achieve a lifetime recognition of the Nobel Prize that one third of it will be taken away sends a confusing message.”