What Will Happen if DOMA is Struck Down? Advisors Weigh In

Amelia Granger for NerdWallet writes: If DOMA is repealed and same-sex marriages are federally recognized, personal financial advisors see the following changes on the horizon:

• Federal tax law will recognize LGBT marriages, allowing same-sex couples to reap the full benefits of itemizing deductions and have expanded ability to claim children as dependents.
• Estate planning structures put in place by same-sex couples (wills and trusts) may have to be reconsidered and potentially unwound to maximize on the default protections received through marriage.
• An end to DOMA would raise myriad legal questions about LGBT couples’ ability to seek legal remedy to regain assets they may have been deprived of in some way because of their marriage’s previous lack of legal standing.
• Advisors say LGBT couples should not be waiting on DOMA–they need to be taking proactive steps to protect themselves and their loved ones in advance of any potential legislative changes.

Marriage equality is important on a personal and societal level—but also on a financial one. Today, a host of provisions and special legal standings are conferred upon straight married couples that are withheld from LGBT couples.

In June, the Supreme Court is expected to rule on the legality of the Defense of Marriage Act, which establishes a federal definition of marriage as only between a man and a woman. The Court’s decision on DOMA could mark the end of the struggle for equal financial standing for LGBT people in the U.S.

With that in mind, NerdWallet asked financial advisors: what could the Supreme Court’s ruling mean to the marital finances of LGBT couples?

An end to double tax returns

Since federal law doesn’t recognize same-sex marriage thanks to DOMA, same-sex couples have to prepare a federal return “as if” they were married, for the purposes of preparation for filing a state return in states that recognize their union.  “This is extra work that is costly and time consuming,” commented Shawn Koch, a Portland, Ore.-based advisor. If the Supreme Court rules to strike down DOMA and recognize same-sex marriage on a federal level, that would mean an end to these tax complications.

Advisor Frank Paré explained that the same lack of recognition at the federal level means same-sex couples are in many ways limited or penalized when it comes to their filing status, number of dependents, as well as how they treat their itemized deductions. If the partners must both file as single, rather than jointly, only one can often benefit from itemizing deductions, and only in certain circumstances can both LGBT spouses claim the children they are raising together as dependents. “Ideally, if the Supreme Court broadens the federal definition of marriage to include same-sex couples and rules that same-sex marriages are therefore recognized by federal law.” Paré added. “If that were to happen, then I would expect to see same-sex marriages treated in the same manner as heterosexual marriages when it comes to federal taxes.”

Inheriting without tax pain

DOMA-related tax problems aren’t limited to income tax returns. Berkeley, CA.-based advisor David Flowers added that estate tax comes into play as well. “Today, if LGBT married couples own property together, the surviving spouse could be left with a large inheritance tax or be subject to lawsuits from family members challenging will or trust provisions intended to leave assets to the survivor,” Flowers said. “Some of these legal arrangements will need to be unwound [if DOMA is repealed] to take advantage of the default protections you receive through marriage.  If irrevocable gifts have been made, however, couples may not be able to do this and will probably end up paying more in estate taxes than they would have otherwise.”

Karl Schwartz, a consultant at Hewins Financial Advisors, said the impact on estate taxes is very significant for wealthier LGBT couples. “Right now if a wealthy LGBT couple is together and spouse A has an estate of $7 million and dies and leaves everything to spouse B, there would be an estate tax amount due because they are not able to take advantage of the marital deduction or portability of the estate tax exemption like heterosexual couples can,” Schwartz said.

San Francisco-based advisor James Dowd said that a potential end to DOMA raises many questions about the abilities of LGBT married couples to regain the assets they might have “lost” due to their marriage’s previous lack of federal legal recognition. “For instance, a gay couple was married in 2010, and in 2012 moved to a state where gay marriage is illegal,” Dowd commented. “One of the spouses died at the beginning of 2013 without a will, and the biological family of the deceased spouse inherited all of the assets. If DOMA is struck down, will the surviving spouse be able to sue, as a surviving spouse, to recover the inheritance?  If estate tax was paid because the estate was larger than $5 million, can the surviving spouse recover the estate tax?” He added these hypotheticals would take years to work their way through the courts.

Social Security extended to spouses and children of LGBT marriages

Today, many widows, widowers and orphaned children have seen Social Security benefits from their deceased family members make a huge difference in their lives – in some cases, keeping them out of poverty. But without federal recognition of same-sex marriage, family members with a deceased LGBT spouse or parent are denied that federal assistance.

“In the typical married couple setting if spouse A receives more social security benefits than spouse B and spouse A dies before B, spouse B gets an increase in social security benefits to match what spouse A was receiving,” said Karl Schwartz. “This could also come into account if a couple has been married for many years and spouse A has an earnings history and spouse B does not for whatever reason.  When spouse A starts claiming social security, spouse B is able to receive marital benefits, up to 50% of what spouse A is receiving.  In both of these situations were heterosexual married couples can take advantage of these benefits, LGBT couples cannot.” Should DOMA be repealed, it’s expected LGBT spouses would become eligible for Social Security spousal benefits.

Awareness of financial issues is key

Hilary Martin, an advisor with the Family Wealth Consulting Group, said her same-sex married clients tend to focus on end-of-life rights, because they’re read the horror stories about long-time partners being ignored by doctors in their partner’s final hours. “For my LGBT clients, their concerns are far more about being legitimized in the eyes of their larger community and having the freedom to enter into a marriage that will be respected,” Martin added. “The financial issues are definitely second tier.”

Frank Paré, who specializes in advising LBGT couples, said he tells clients not to wait on DOMA before they plan for potential estate issues, health concerns, or parenting concerns in the event something were to happen to their spouse. “Bottom line; I’m not a fan of waiting for potential legislative changes that might mitigate potential family tragedies that might occur at any given time,” Paré said. “Therefore, I suggest that all couples seek out financial and legal professionals to assist in helping them plan now irrespective of any potential legislative change (state and federal) that might benefit them in an uncertain future.”

4 reasons to amend your tax returns / The IRS allows taxpayers three years to claim additional refunds

Eva Rosenberg for MarketWatch.com writes: Earlier this month, my colleague Jonnelle Marte explained how to correct your tax filing with an amended return. As the IRS explained, sometimes you don’t have to bother amending -- the agency will essentially do it for you. But there are times you really should go out of your way to amend tax returns.

First let’s dispel a misconception held by many people: The IRS only has three years to audit your tax return after you file.

That only applies in routine cases, where the information on the tax return is, for the most part, correct. However, if you have reported far too little income, or made up way too many expenses, the IRS has up to six years to audit you. The magic number here is 25%. When you understate your tax liability or your income by 25%, you’ve just given the IRS a full 6 years to circle back.

And, if you deliberately submitted a fraudulent tax return, there is no statute of limitations on when the IRS can open your file. Of course, it’s a bit harder to prove deliberate and willful actions. But the IRS has a list of objective behaviors to draw up that can help in court.

What’s the point of all this? A major error will not just go away in three years. You’re better off correcting innocent mistakes yourself than to lose sleep for six years hoping you won’t get caught – or that your ex (spouse, best-friend, assistant, etc.) doesn’t turn you in. That’s right: The main way that the IRS catches people in this situation is via snitches.

Incidentally, although the IRS has a long window to come after you – you only have three years after filing to submit an amended tax return. After three years, you won’t be able to get a refund if the IRS owes you money.

OK, so when should you amend? There are over 100 million taxpayers in the naked country. These are just a few common stories.

1) Filing Early — You wanted your refund, so you filed your tax return before all your K-1s, 1099s or other outside information showed up in the mail. When the K-1s finally arrive, the income is much higher than you reported. Or the 1099-Bs are showing substantial securities sales. You might have had losses on all those sales. The IRS won’t know that until you tell them. The IRS computers will probably pick up the additional income. But, they won’t pick up additional losses on some of those K-1 lines that might reduce the income. Leaving this up to the IRS to revise for you, you’ll end up needlessly paying extra tax.

2) Disasters — When you filed, you were reconstructing records and data after a disaster -- fire, flood, earthquake, divorce, business split, etc. You made, what you thought were reasonable estimates of your income and expenses, but when you finally gathered all the information from clients, vendors, banks, etc., you learned that you either overstated your net profits -- or understated them substantially. Now, you have evidence to support your case.

In the case of lower profits, certainly file an amended return to claim your refund immediately. However, if your profits are higher? It’s up to your conscience whether or not you report the increased income. Ethics suggest that you should.

Incidentally, in disaster situations, you will find yourself able to reap major refunds, especially if your insurance had a substantial deductible. In the case of presidentially declared disaster areas, you may even be able to get a refund by amending the tax return for the year before the disaster. Read IRS Publication 584 for more information about Casualty Losses.

3) Protective Filings — This year, the Supreme Court will be ruling on two cases that relate to the Defense of Marriage Act. If they support same-sex marriage on the federal level, that will open the floodgates to claims for tax refunds. Same-sex couples (or survivors after the death of a partner) can file amended returns on income taxes, gift taxes, and most of all, estate taxes.

However, even before the court rules, people who are affected can file protective claimsright now.

This technique doesn’t just apply to same-sex couples or the Supreme Court. You might have a situation pending in any court. Or you might be waiting for the IRS rule on a private letter ruling. Or you’re in the middle of a nasty divorce and need documents to prove you don’t owe some tax.

You can see that you’re getting close to the three year deadline to file for a refund, without having the clear information you need. That’s a good time to file a protective claim. It tells the IRS that you want your money back – but you’re still waiting for additional proof about your right to the money. That protective filing will hold your right to that refund until you resolve the issue.

4) Losses from theft or worthless stock — Normally, you may only amend for three years to claim a refund. But theft is the only category of losses that allows you to file a claim for a refund for 7 years. Quite often, even after a robbery, you don’t notice everything that is missing immediately. You may notice the most obvious things. Then a year later, you try to use something (jewelry, a tool, whatever) that you haven’t used in years – and it’s simply not there.

Or, you made an investment and the promoter or managers have been stringing you along for years. Suddenly, you realize your investment is worthless. Nothing but smoke and mirrors behind their promises – you’ve been robbed.

In these cases, you must file a police report – or add to an original report. If you know who the culprit is, especially in securities situations, you must be willing to file criminal charges in order to get the benefit of the theft-loss rules.

Why are the theft-loss rules important for worthless securities? Because if you can prove a theft loss, you can not only amend for up to 7 years, you can also claim the loss as a casualty loss. That means you deduct the whole loss on that tax return. Any loss in excess of your income can be carried over to the next return and reduce that income. The IRS explained how to get this benefit after the Bernie Madoff debacle.

Otherwise, your loss is a capital loss. Your deduction is limited to $3,000 per year over your capital gains. It could take a long time to recover those losses via tax refunds.

Tax Day Results Are In: Which Company Did Better (Or Not As Bad): H&R Block Or Intuit?

Toby Schneider for SeekingAlpha writes: Late last week, both H&R Block (HRB) and Intuit (INTU) reported their volumes of tax filings each company did this year. Both companies admitted it was a rough tax season (Really? Because the rest of America loves tax season!) H&R Block reported .9% fewer filings than last year, at 22 million. H&R Block did report that its online filings increased by 10%, which is why Intuit's Turbo Tax saw declining numbers. Intuit had projected Turbo Tax filings to increase by 4%, but instead saw a 2% decrease. Intuit, which had similar growth in the last year to the S&P 500, saw most of its gains lost in one day as shares dropped 11% on Thursday.

On April 15, I wrote that it was probably time to dump H&R Block given its tendency to see its stock price drop this time of year, regardless of the report. Last week's news about H&R Block shouldn't be surprising, and I think that is why the stock bounced back on Friday. However, the news from Intuit is surprising, which is why it dropped so dramatically.

Take a look at the following charts. H&R Block does not display the growth and increase you want to see in sales, net income or EPS. Meanwhile over the last decade, Intuit has had steady and consistent improvements in each area.

If you bought H&R Block before January, I congratulate you. Take those gains, along with your tax refund (and the $25 gift card you got from H&R Block if you experienced delays) and enjoy yourself! As for Intuit, it may be a good time to buy on the overreaction of last week.

Comments (2)

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tomsme73Comment (1)
Your #'s are inaccurate.... Intuit had projected Turbo Tax filings to increase by 10%, but instead saw a 4% increase. (IRS Filings were down 2%).

"H&R Block did report that its online filings increased by 10%, which is why Intuit's Turbo Tax saw declining numbers"...that statement is just wrong for so many reasons...

29 Apr, 03:03 PMReply! Report AbuseLike0


Toby SchneiderComments (8)
 The #'s I listed are accurate according to the sources I linked to. I'd be happy to correct if you have the source. I don't believe that I am wrong for so many reasons as you said. Of course the HRB online and Turbo Tax are not a 1 for 1 inverse, but if HRB saw an increase, that is a major driver of why Intuit did not have the success they thought they would have.

Time to Buy This Embattled Tech Giant? Intuit (Click to view Video - The relevant video segment can be found between 8:23 and 16:17)

The following video is from Monday's MarketFoolery podcast in which host Chris Hill and analysts Jason Moser and Bill Barker discuss the top business and investing stories of the day.

Shares of Intuit (NASDAQ: INTU  ) fell 10% last week in the wake of its lowered guidance for the third quarter. Intuit makes TurboTax and other personal finance software. So what do the company's struggles mean for investors? Why is Intuit struggling during tax season when competitors like H&R Block (NYSE: HRB  ) are succeeding? In this installment ofMarketFoolery, our analysts discuss the future of Intuit.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

The relevant video segment can be found between 8:23 and 16:17.

Calculating capital gains on an inherited classic car

Karin Price Mueller/The Star-Ledgerwrites: Q. I inherited a classic car when my father passed. In the estate, four years ago, the value was $6,000. It’s now worth $50,000, and the title is in my name. Do I have to pay capital gains tax if I sell the car? I was told I’d only have to pay if the car was worth $100,000 or more. If I do have to pay, can I get around it somehow?

Answer: It seems you may have received some misinformation about the first $100,000 of capital gains potentially being excluded from your income.  Before we get to your final answer, it’s important to know a few items.  First, why did the car increase in value so significantly over four years?

If you invested money in fixing it up and restoring it, thereby increasing the car’s value, the car’s basis would not be $6,000, but $6,000 plus any improvements you made to the vehicle, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights.

"Another possibility is that the car was not appraised or valued correctly for estate tax return purposes," Maye said. "Doing so would have understated the decedent’s estate for estate tax return purposes."  But, Maye said, an estate tax return, known as a Form 706, is unfortunately not amendable like a personal income tax return is.

That means if you didn’t make improvements, the car is probably stuck with the $6,000 basis from the estate return, Maye said.  Plus, vintage cars are classified as collectibles for capital gains purposes.

"As a result, any capital gain from the sale of this vintage car is taxed at collectible capital gains rates which can be as high as 28 percent," he said. "For comparative purposes non-collectible capital gains are taxed only at zero percent, 15 percent or 20 percent, depending on the person’s level of income."

And, Maye said, assuming you live in New Jersey, you’re in for another tax bite.

"He would owe ordinary income taxes as the state has no preferential capital gains rate," he said.  Check with your tax preparer to make sure you get proper appraisals for the car before you decide to sell.  And take one more nice spin. Bet your dad would have liked it that way.

Tips for Proper Tax Planning with Jim Felton and Peter Stephan, the Tax Team on KRLA (Click To View Video)

James R Felton writes:
Brian Whitman: Now here’s a question, and I worry about this myself: If you have been contacted by the California Franchise Tax Board, and then in you go, and then you thought, you take care of business, you file with guidance from folks at the Tax Resolution Institute, you file those un-filed returns. Is that now going to trigger the IRS to come after you as well?

Peter Stephan: That’s and interesting question, Brian. The IRS does report to the state. So if you’re audited, they’ll report the results of an audit to the state. Or if you file with the IRS, the state will know. The state doesn’t always report the filing to the federal. However, if you have W2s, 1099s, sale of a residence, sale of stock, anything that would have been reported to the IRS, and you’ve only heard from the state, it’s just a matter of time that you’re going to hear from the IRS.
Remember that we talked about this in a show a couple of weeks ago. They’re not going to lose your transcripts, they’re not going to lose the records of the 1099s and W2s, and other…

Brian: So that’s no strategy, right? If your strategy, as you listen this afternoon, is maybe they’ll lose my information, bad strategy, right?

Peter: Bad strategy.

Brian: Don’t put your eggs in that basket, right, Jim?

Jim Felton: Correct. It never works to forget that the IRS may not exist. They exist.

Brian: What’s the difference, guys, between tax evasion and…

Peter: And tax avoidance?

Brian: Yes, really, Peter. What is the difference?

Peter: Well, we’re all entitled to structure our affairs to pay the least amount of tax, that’s avoidance, if you will. But evasion is the conscious effort to manipulate your situation in an illegal way to evade paying taxes. One is criminal, and one is proper tax planning. That’s the difference.

Brian: Because we hear these stories. And, of course, here we are, a month out. You’ve to file in just about a month’s time, to the day. And we all hear about Wesley Snipes and all these famous cases of these people. And then people go to jail, and you’re sitting there, maybe you haven’t filed for a few years, and you see Wesley Snipes in jail, and it scares the you-know-what out of you.

Jim: But it should, because people should file their taxes. What we do, as professionals, is give advice as to how to minimize tax, how to minimize payment to creditors, how to do it legally. But if you forget about it, or you ignore it, then the taxing authorities are going to come after you. So again, face the problem early, get professional help from people like the Tax Resolution Institute, or my firm, Greenburg and Bass. We can help you look at your financial picture and figure out how to deal with it, as opposed to ignore it.

Brian: Let’s talk about that. And I think that’s a great point you made, Jim. Let’s talk about the affordability of this type of help, and the services that you guys provide. Peter Stephan of the Tax Resolution Institute, you have people come to you whose wages are garnished, and these people don’t have a lot of cash. How do you navigate around that? Because, obviously, you’re providing a service, and, obviously, you’re paid for your service. I know people go in there, there’s a no pressure consultation, and it doesn’t cost any money for that, to find out where you stand. But you guys, by the nature of what you’re doing, you’re dealing with people who have financial problems.

Jim: That’s fair, correct.

Peter: We do have to get a reasonable down payment, or retainer, if you will, to start work, because we have very competent, and therefore, at whatever level, expensive professionals.

Brian: Right.

Peter: Lawyers, and CPAs, and so on, handling your tax resolution matters. But we’re always there to work with our clients; although, we like to get the full retainer up front, as most people do. I know with Jim, doing a chapter seven bankruptcy is required to get a full retainer, because he doesn’t want to become part of the bankruptcy.

Brian: Yes, and that’s a great point. But Jim, really the question becomes for the person listening: How much is it going to cost you if you do nothing? What’s the price you pay if you don’t do something?

Jim: The price you pay is having your creditor take away the control that you have over your assets. In a chapter seven, there are assets that you can exempt. There’s $23,000 worth of assets that you can exempt in a chapter seven in California. So it’s not that they’re going to take everything, but if you do nothing, they will take everything. They’ll go to your bank, they’ll garnish your wages, they’ll take action that you can’t control; and a chapter seven, or a chapter 13, or a chapter 11, you retain control. And you may, in fact you probably will have to pay back, in a chapter 11 or a chapter 13, some of what the business owes, or what the individual owes, but you have control over it. Someone’s not going to take it without your consent.

Tax Tip: Boat Owners May Have Federal Tax Deductions Available

• PilotMedia writes: For boat owners with a secured boat loan, mortgage interest paid on the loan may be deducted from your federal income taxes. Taxpayers may use the home mortgage interest deduction for one second home in addition to their primary home, and must itemize deductions on their returns. A boat is considered a second home for federal tax purposes if it has a galley, an installed head and sleeping berth.
• 
  
• Some members of Congress have sought to eliminate this deduction for boat owners while keeping it in place for second home and recreational vehicle owners. BoatUS lobbied aggressively for a more equitable all-or-nothing approach when applying the deduction, and boaters did not get unfairly singled out.
• 
  
• Boaters may be unaware of this potential tax benefit because not all lending institutions send borrowers an Internal Revenue Service form 1098 which reports the interest paid. Not receiving the form does not preclude taking the deduction. If a 1098 is not available, boaters should contact their lender for the amount of interest paid and should enter it on line 11 on Schedule A along with the lender’s tax ID number. If a form 1098 is sent, boaters should simply enter the amount on line 10 of Schedule A.
• 
  
• For those who fall under the Alternative Minimum Tax, most deductions are unavailable. Boaters are urged to contact a tax preparer or financial advisor for more information.
• For more details on the mortgage deduction on boats that qualify, go to www.IRS.gov and download Publication 936 or the Fact Sheets. For state tax deduction information, download Publication 600 which also includes state-by-state tax tables.

Expecting the Unexpected When It Comes to Retirement Planning

Elizabeth O'Brien for the Wall St Journal writes: Add one more item to the bucket list—this time at the urging of some financial advisers.  The latest research underscores the importance of putting retirement assets in the right places. One strategy: an "emergency bucket" to cover unexpected expenses, especially medical costs.

Fidelity Investments estimated that a 65-year-old couple retiring in 2012 would need $240,000 in savings to pay for out-of-pocket health-care costs. That estimate excludes long-term care, which can cause overall costs to surge even further: The median annual cost of private-room nursing-home care in the U.S. is $83,950, up 13% from 2009, according to Genworth's GNW +0.70% 2013 Cost of Care Survey. And if an emergency creates a need for help at home, then "it's scary how big the numbers can get," said Lisa Chapman, wealth adviser in Long Beach, Calif. at UBSUBSN.VX +6.81% Wealth Management Americas. Round-the-clock skilled nursing care in the home can run as much as $10,000 a week.

When tapping savings to pay medical bills, advisers say, top priorities should be avoiding a bigger tax bite and not selling off a stock portfolio in a down market.

Many advisers now recommend an emergency bucket that serves these goals. Thomas and Rob Fross, brothers and partners in Fross & Fross Wealth Management in The Villages, Fla., put about $50,000 of clients' money into short-term bond funds for emergency expenses. The motive is asset stability: The Frosses don't want market fluctuations in funds client might have to tap on short notice.

It is often best for tax purposes if that bucket is separate from a retiree's traditional retirement account—even more so because rates have gone up this year for some affluent retirees. Many retirees have a 401(k) or IRA drawn-down strategy that covers regular expenses, such as mortgage payments, and a bigger-than-expected withdrawal could bump them into a higher tax bracket, Ms. Chapman said.

When faced with unexpected expenses, Ms. Chapman advises clients to dip first into the assets with the lowest rates of return, such as certificates of deposit or savings accounts. In some cases, this may mean losing a bit of principal if investors haven't incurred enough interest to cover a CD's early-withdrawal penalty, notes Greg McBride, senior financial analyst at Bankrate.com.

Also worth remembering: The settlement time for many brokerage-account transactions is three business days. Truly immediate needs—say, to pay for treatment while traveling abroad—should be met from money market, checking or savings accounts, or, in a pinch, with a credit card.

Finally, the Fross brothers said, it's imperative that retirees assign power of attorney to a trusted person who can access their assets if they're unable to do so. Even spouses can't access one another's accounts without that legal document (unless the accounts are listed in both names.)