Tax Avoidance vs. Tax Evasion

Karen Rogers for Demand Media writes: When it comes to your federal tax bill, you want to pay the least amount of tax possible. However, tax law is very complicated and there are many gray areas surrounding tax deductions and credits. Sometimes it's not clear if a particular transaction is tax avoidance or tax evasion. Federal income tax evasion earned Al Capone a private suite at Alcatraz. Capone failed to file his income tax returns and was found guilty of income tax evasion. Knowing what constitutes tax avoidance and tax evasion can mean the difference between legally lowering your tax bill or following in Capone’s footsteps.

TAX AVOIDANCE

Tax avoidance is the art of legally using the federal tax code to your advantage. You avoid paying more taxes than you have to by taking every credit and deduction you legally can on your tax return. In addition, you can avoid taxes by investing in tax-free securities such as municipal bonds. You can offset your capital gains with capital losses to lower or eliminate paying capital gain tax. You can use retirement and estate planning as additional tax avoidance strategies.

LEGAL TAX WRITE-OFFS

Tax credits let you write-off your taxes dollar for dollar. The IRS has a generous list of tax credits designed to lower your tax bill, including adoption tax credits, education tax credits, retirement savings tax credit, child tax credit, earned income tax credit, child and dependent care credit and the health coverage tax credit. An equally impressive list of tax deductions can further help you avoid taxes if you take the standard deduction, charitable contributions deduction, medical and dental expense deductions, mortgage interest deduction and property tax deduction. Using all the credits and deductions you qualify for can help you avoid paying thousands in taxes.

TYPES OF TAX EVASION

Taxpayers commit tax evasion by deliberately not reporting or misrepresenting information on their tax return to reduce their taxes illegally. Underreporting, concealing or failing to report your income is one type of tax evasion. Taking deductions you're not entitled to or overstating your deduction amount is considered tax evasion. If you claim non-existent dependents or take exemptions you are not qualified for, you've committed tax evasion. If you transfer assets to avoid paying capital gains tax or conceal or destroy records, substantially underpay or fail to pay your taxes, you have committed tax evasion.

TAX EVASION PENALTIES

To get a conviction for tax evasion, the IRS must prove you owed federal taxes, that your actions indicate you evaded paying your taxes and that you knew you were responsible for paying your taxes. If you're found guilty of tax evasion, the maximum penalty is serving up to five years in federal prison and a $100,000 fine. You're also still responsible for paying your unpaid taxes and the related penalties and interest.

Summer Job Tax Implications for Students and Parents

Mark Steber for the HuffPo writes: School is out for the summer, or will be shortly, and for many high school and college students, that means the start of a summer job. The U.S. Bureau of Labor Statistics reported that 19.5 million youths between the ages of 16 and 24 were employed last July, and we can expect close to the same number on payroll this year. While summer jobs and earnings have expected tax implications for the summer worker, much to the surprise of the parent, there can be an impact on their tax return too. 

Besides having some extra cash in their pocket, summer jobs are a great opportunity for young Americans to learn about income taxes and tax return responsibilities. As a parent and a tax professional, I know firsthand the importance of preparing children for financial responsibilities, and now is a great time to start that conversation -- especially for a first job or reoccurring summer employment. 

Additionally, dependent student income from a summer job, or any job, can have implications on the parent's tax return in ways that range from one more return for the family tax preparer to lost benefits such as the possible loss of an exemption and other tax deductions and credits. Having a new working member in the family is always a great thing, but there are potential implications taxpayers need to know about to avoid any surprises next tax season.
Here are 10 things every taxpayer needs to know about a first-time job or any change to the earning structure in a family:

• When to start filing a tax return: If an individual, in this case your child, has as little as $400 in self-employment income, they may be required to file an income tax return. If the individual works for someone else, they are required to file once they have more than $5,950 in income.
• What tax return to file: Taxpayers with wages, especially if taxes have been withheld, will need to file a tax return. This is true even if income is less than the filing threshold, but filing a return is actually a good thing as it's the only way for the student taxpayer to get withheld income taxes back from the IRS.
• Whose tax return to claim the income: Students who have earnings from a job, sell stock, have self-employment income, or receive pension income as a beneficiary, must file their own tax return and can't include their income and tax withholdings on a parent's tax return. But do not be fooled, having a dependent student income file a tax return does raise complexity for the parents and the student. To make sure you're making the most of both your tax situation and your newly employed child's, you may want to speak with a tax professional.
• Tax rules for claiming working dependents: Tax rules for a dependent child are different than any other type of dependent. A dependent child can have any amount of income and still be claimed as a dependent as long as the child does not provide more than half their own support. This includes gifts, entertainment, food, shelter, clothing, purchasing a vehicle, maintaining a vehicle, other forms of transportation and school expenses. Individuals who can be claimed as a dependent on another taxpayer's return (usually their parent's or legal guardian's) cannot claim their own exemption. This is true even if the other taxpayer chooses not to claim the individual as a dependent.
• Filling out a Form W-4: All employees on payroll will have taxes directly deducted from their paychecks. Employees are required to fill out a Form W-4 before beginning their employment to let their employer know how much to withhold for federal and state income taxes. A good rule of thumb for student's working part-time throughout the year, or just over the summer, is to claim zero exemptions to ensure they have enough taxes withheld so they don't owe money to the IRS come tax time. If income is low enough, the taxpayer student should get all of the taxes back and if not, having enough withholding should prevent a balance due when filing.
• Claiming the Child Tax Credit: Working dependents under the age of 17 are still eligible dependents for the Child Tax Credit. If a parent can claim a working 16-year-old as a dependent, the parent can claim the Child Tax Credit, which can be worth up to $1,000 per eligible dependent.
• More complex tax return: If your child has a large amount of investment income or self-employment income instead of, or in addition to, a job, their tax return can become very complex. It is a good idea to talk to a tax professional if your child has other types of income in addition to their job such as investment income or self-employment income.
• There are consequences for filing a tax return late: Your child not filing a tax return when it is required can create pain for you. The IRS will send notices to your address and they can start garnishing your child's wages for unpaid back taxes. While this doesn't affect you directly, it can make your life more painful while the issue is cleared up. Start a lifetime good habit now by encouraging your working dependent to file their income tax return on time.
• State tax returns: Most states have an income tax, and the rules for that tax vary from state to state. Many working students don't realize they must file two tax returns -- federal and state. Make sure your student files their state tax return when they file their federal tax return.
• Don't file on a smartphone: No matter how convenient and tempting it may be, don't prepare and file that very first tax return on a smartphone. Identity theft, lost records, need for a future copy and even errors or omitted tax benefits are just a few of the issues that can occur if you short cut the tax return preparation and filing process. Be encouraged to use technology and to electronically file a tax return, but be mindful before using a smartphone application if so inclined because "the tax return is just so easy." There are plenty of low cost and even free tax preparation services. In addition to tax software applications available from different companies, there's even IRS Free File option, but be careful about filing a tax return on a smart phone. Take that first step for filing a tax return carefully.

It can be difficult to think about how your child's summer job can affect your tax return the following year, but understanding the tax implications now can help young taxpayers make smart decisions to lower their tax expenses and possibly increase next year's income tax refund for the both of you. 

Those who tend to get the largest tax refunds are those who plan their tax strategy throughout the year, not just at tax time. Finally, as was said, remind your child to start a lifetime good habit and file their tax returns on time and make sure they are protective of their identity. Taxes are complex and they can be even more so when you have a working dependent, so get some help early on understanding which possible implications may affect you.

14 Ways to Accept Mobile Payments

 Elizabeth Palermo, BusinessNewsDaily writes: 14 Ways to Accept Mobile Payments

Accepting mobile payments whether by accepting credit cards in the field or by letting users pay on-site with smartphones is a must for businesses of all types. Figuring out which mobile payment technology is right for your business can be a challenge.
Here are the pros and cons of 14 different mobile payment services to help you sort through your options for accepting mobile payments.

Square

If you're looking for a no-frills approach to mobile credit card processing, then check out Square. With no monthly fees, no contracts and no merchant accounts, Square is a good solution for those who only occasionally need mobile payment processing.
Square links directly with your bank account and accepts payments from all major credit card companies. Its transaction fee of 2.75% is a little steep, but with no additional monthly fees, you could end up saving money with Square if you don't use it regularly.

GoPayment

At $12.95 a month, Intuit's GoPayment for iOS and Android devices is another great option for business owners looking for a mobile credit card processor.
The hardware required for swiping credit cards comes at no additional charge, and transaction fees are competitive, at 1.75% of total sales. GoPayment accepts all major credit cards and offers email receipts for customers.  If your business is already using QuickBooks or another Intuit Payment Solutions software, then GoPayment might be a great choice for you. It automatically syncs with your accounting software, helping you easily manage your books, even on the go.

ROAMpay

Voted No. 1 by TopTenReviews, ROAMpay, from Flagship Merchant Services, is a popular mobile payment solution for businesses on the go. With low transaction fees â€" 1.58% of each sale â€"and easy-to-use features, ROAMpay is the top of the crop when it comes to mobile credit card processing.

The card reader that attaches to your smartphone is free, and the total monthly access fee is $7.95, with no mandatory contract. ROAMpay accepts payments from all major credit cards and is compatible with Android, iOS and Blackberry devices.
The service also stores your customers' contact information â€"a boon for future marketing campaigns â€"and sends email receipts.

PayPal Here

Most mobile credit card processing companies only allow you to accept credit cards from customers, but PayPal Here allows business owners much more flexibility. With this app and accompanying hardware, your customers can pay using their debit cards or even their mobile PayPal account.

Card-free transactions are easy with PayPal. Customers check in with your business on their mobile PayPal app and then transfer funds to your account to settle their bill. The cost per transaction is 2.7% of the final sale, and there are no additional setup costs or monthly fees.
PayPal Here accepts all major credit cards and is a great option for businesses that want to offer their customers a variety of ways to pay for goods and services.

Google Wallet

Using near field communication (NFC), Google Wallet allows businesses to accept payments both online and in-store. This quick payment method is a great option for merchants looking to cut back on long lines or those wanting to expand their online customer base.
For in-store transactions, businesses that don't already have an NFC reader can buy or rent one from Google's partner, First Data. Customers with Android phones running the Google Wallet app will then be able to hold their device over the reader to make a payment.
Merchants pay the normal card-present fees for Google Wallet transactions, with no additional charges from Google. Your business can also link its customer loyalty cards or Google Offers to its Google Wallet merchant account to let customers redeem rewards with a single tap of the smartphone.

If your business already uses a payment-processing service online, Google Wallet can be integrated with the service for no extra cost. Or, you can use Google as your new payment processor, with transaction fees starting at 1.9%.

ISIS

The ISIS Mobile Wallet is another NFC-enabled payment method recently launched as a joint venture between Verizon, AT&T and T-Mobile. Although it's currently only available in select markets, ISIS is poised to be Google Wallet's main competition in the near future.
To get started with ISIS, your business will need an NFC reader, which you can rent or buy from your merchant services provider or one of ISIS' partners, listed here. ISIS doesn't charge additional transaction fees for merchants or customers.

PayPass

MasterCard's PayPass lets your business accept fast payments through an NFC-enabled point-of-sale (POS) terminal. Customers can tap their NFC-enabled credit card or smartphone over the terminal to make a payment.

PayPass vendors must either purchase a plug-in NFC reader from MasterCard or install a fully integrated POS system from the company. MasterCard does not charge vendors additional usage or transaction fees for the PayPass system.

Having a PayPass terminal in place at your register will allow your business to accept many forms of contactless payments, not just those made with MasterCard. Google Wallet and ISIS Mobile Wallet both can be used with PayPass readers.
MasterCard also offers a secure digital wallet the MasterPass  that your business can use to make checkout easier for customers. The service is currently free for both merchants and customers.

payWave

Much like MasterCard's PayPass, Visa's payWave allows customers to make contactless payments at a business' POS terminal.
To start accepting contactless payments, businesses can either purchase a new, NFC-enabled POS terminal from Visa, or buy a peripheral NFC reader to add to their existing terminal.
It isn't necessary for businesses to purchase multiple NFC readers from different credit card companies. Visa, MasterCard and American Express all issue NFC-enabled cards and devices that use the same radio-frequency technology.
Visa also offers a digital wallet V.me that allows customers to store all of their credit card information online for safe and simple checkouts. No information about the fees and transaction costs for vendors using V.me are currently published on Visa's website.

LevelUp

LevelUp is an app for merchants that allows them to accept mobile payments from any customer, without a credit card, regardless of whether or not they have a smartphone.
Merchants use a LevelUp terminal, which integrates with their existing POS system, to scan the quick response (QR) code on a customer's smartphone or LevelUp card.
In addition to making mobile payments quick and easy, LevelUp lets businesses create unique loyalty programs for customers. Regulars automatically receive credit to their LevelUp account when they frequent their favorite merchants. And the app gives business owners access to a range of powerful analytical tools, so they can keep track of customers and their purchases.
LevelUp's Interchange Zero payment network is free. The company doesn't charge transaction fees or charge for hardware. Instead, merchants are charged for running marketing campaigns with LevelUp. Merchants pay $0.40 for every dollar of credit redeemed by a customer.

mPowa

This cloud-based app lets businesses manage payments across multiple sites, payment types and currencies, right from their smartphones. It's a great solution for online businesses and those with customers around the globe.
mPowa's integrated-POS app enables businesses to send and receive money in more than 22 major currencies to avoid paying international transaction fees and foreign exchange fees. The company gives merchants access to hundreds of international banks and payment services.
The "chip and PIN" system is not yet available, but the company's website is allowing preregistration for the service, which is expanding into the United States. mPowa charges a 2.95% fee per transaction, plus about $77 for the chip and PIN reader.

PayToo

This company's POS app works with credit cards, debit cards, cash, e-check and coupons to allow merchants to accept payments from customers around the world, even if they don't have a bank account.
And in addition to its wide array of payment options, PayToo offers international direct-deposit services for employees, free money transfers to other PayToo users and prepaid international credit cards.
If your business needs a mobile payment solution with diverse capabilities and a global reach, PayToo might be the right option for you.

Boku

This app allows merchants to accept payments from customers using only mobile telephone numbers. Merchants can choose to add Boku as payment option on their website, mobile site or app.
Customers simply enter their mobile-phone number, and payments are added directly to their phone bill. No bank accounts or registration are required.
Boku does not publish pricing information for merchants on its website, but you can apply for a Boku account online by providing your business's basic info.

MCX

Merchant Customer Exchange (MCX) is the retail world's attempt to take mobile payments into its own hands, instead of entrusting them to the corporations behind Google Wallet, ISIS and other mobile platforms.
Details about exactly how the app will work are scarce, but MCX's press releases state that the venture will offer merchants a "mobile commerce solution that seamlessly integrates payments with a wide range of promotions and services through virtually any smartphone."
A representative of MCX said the venture is seeing interest from merchants of all sizes, so business owners should keep their eyes open for opportunities involving this novel mobile payment option.

globalVcard

This mobile-payment app from CSI Enterprises allows businesses to create virtual MasterCards for employee and operating expenses.
If your business needs a mobile solution for controlling its bottom line, globalVcard may be a great option for you. You can take full control over your expenses by issuing single-use credit cards that can be used to pay for anything.
You can even restrict how employees use the card or send a mobile payment to one of your vendors via text or email.
Image via Bill Pugliano/Getty Images

Business Accounting Goes Mobile

Curt Finch for Technorati writes: According to research firm Strategy Analytics, the number of active smartphones topped one billion in 2012, and they estimate that this number will double by 2015. Mobile devices are compact and convenient, and users increasingly rely on them for the majority of basic tasks, including professional usage. The most effective accounting software offers accessible, real-time reporting of employee work and related costs. But the definition of “accessible” is changing; soon it won’t be enough for users to access information only on company desktops. Information has to be available on-demand – by which I mean, on mobile devices.  

Several top companies already offer mobile applications for smartphones and tablets. QuickBooks, the top accounting software solution among small businesses, offers QuickBooks Mobile for the iPad, iPhone, and Android. This application allows users to easily view customer information, send professional invoices, and mark invoices as paid. The data on Mobile QuickBooks syncs back with QuickBooks on the desktop, and visa versa.  

Microsoft Office offers a similar application for the Windows Phone, allowing users to create, open, and edit Excel workbooks. And Microsoft Dynamics offers a mobile application for Dynamics CRM.  

So, how useful are these applications? First of all, it has become clear that mobile integration has its limitations. For example, Excel Mobile doesn’t support all of the functions of Microsoft Excel. Unsupported content cannot be displayed or edited, potentially limiting the application’s usability. There’s also the intrinsic limitations imposed by the smartphone’s smaller screen size, which makes viewing and editing large documents difficult and unwieldy.  

To minimize these problems, companies can center their application building on the most popular features. Most users don’t need smartphones to do complex configurations of their accounting software. Instead, the vast majority of user activity is devoted to entering employee time, approving time entered, and running reports. These basic activities can be specifically tailored for smartphones.  

Cross-platform integration is another area of consideration. For example, Microsoft Office is currently only available on the Windows Phone. Rumors have been circulating for years about Microsoft’s plans to release Office versions for other platforms, but they have yet to make an official announcement on this front. 

Similarly, QuickBooks Mobile is available on iOS and Android, but it discontinued its version for Blackberry in 2011. While QuickBooks might have thought that this was a practical decision, considering that the Android and iPhone currently make up nearly 90 percent of the U.S. smartphone market, they didn’t account for possible fluctuations in the market. With the recent debut of the Blackberry Z10 and the upcoming release of the Blackberry Q10, customers might just be returning to the platform in large numbers.  

Looking forward, it will most likely take these companies a while to work through the limitations and problems associated with mobile integration. For example, Microsoft Dynamics released its mobile application for CRM but has yet to offer mobile versions for GP, ERP, or AX. 

As the world becomes increasingly mobile, will accounting software companies that fail to release mobile applications be left behind?  

I don’t think so, at least not for the foreseeable future. Business software is usually extremely well integrated into a company’s systems, and switching to another software provider is a huge hassle. Mobile integration isn’t a looming issue for accounting software companies the way it is for other companies.  

But mobile integration cannot be ignored forever. Everyday, there are new and exciting innovations in the mobile sphere. In fact, mobile devices may soon replace wallets with “e-wallets” through NFC technology. Business accounting software companies would be well advised to start developing mobile innovations of their own.

Retiring Your Tax Bill

Arden Dale for the Wall St. Journal writes: It's getting trickier to put up your feet and sidestep taxes at the same time.  Investors getting ready to retire have long looked at state and local tax laws in deciding where to settle when their working days are over, alongside sunny weather and recreational opportunities.

But some states are becoming tighter-fisted with tax breaks for retirement income. Georgia and Michigan have imposed new limits on deductions and exemptions, and Kentucky is considering similar changes.

"As the population ages, it's going to be harder and harder for some states to keep their generous programs," said Kim Rueben, a senior fellow at the Tax Policy Center, a joint venture of two Washington think tanks, the Urban Institute and the Brookings Institution.

Luring Retirees

Other states are hoping to lure retirees by exempting more income from taxation. Missouri has expanded its tax breaks, and Wisconsin has talked about doing the same, says Karen Conway, an economics professor at the University of New Hampshire who has written about retirees and migration.

The result is a shifting landscape that is complicating what is already a difficult calculation of the financial impact of uprooting to another state.

Some states, including Florida and Texas, don't tax any personal income, including retirement income. Pennsylvania doesn't tax any retirement income, while Illinois doesn't tax most retirement income. Other states appeal to tax-conscious retirees because they have low property taxes or don't have a sales tax.

"Every state has a slightly different nuance and understanding the tax regime is even hard for financial advisers," says Ken Weingarten, a financial adviser in Lawrenceville, N.J., who manages around $35 million.

Wrestling With Taxes

The changes could also alter the debate in other states, particularly those wrestling with the issue of whether increasing taxes will compel residents to leave.

William Schooling, a demographer at the California Department of Finance, says there is limited information about whether people move based on tax concerns. But a New Jersey report linked tax rates to "small but significant effects on net out-migration from a state."

Financial advisers often discuss tax regimes with clients who are getting ready to retire. Andrew Tignanelli, president of the Financial Consulate, an advisory firm in Hunt Valley, Md., is working with a New Jersey doctor who plans to retire to Hershey, Pa., because taxes are lower there and family members also live in Pennsylvania.

Mr. Tignanelli, whose firm manages around $275 million, tells clients in Maryland to consider neighboring Delaware as well as more distant Tennessee. Delaware exempts a portion of retirement income and has no sales tax, while Tennessee taxes only dividends and interest, he says.

On the West Coast, retirees are sometimes drawn to Nevada partly because it has no income tax, says Christopher Jones, who runs Sparrow Wealth Management in Las Vegas. Mr. Jones has personal experience—he moved the firm from the East Coast two years ago, partly to be close to family and partly to save money. "I was getting killed on New York City taxes," he says.

IRS Eyes a Private-Equity Tax Move

Mark Maremont for the Wall St. Journal writes:  The Internal Revenue Service is examining the propriety of a tax practice used in some parts of the private-equity industry, in which firms convert management fees into investments that receive more favorable tax treatment, a senior IRS official said at a recent legal conference.

The practice, often called a management-fee waiver or fee-waiver conversion, has been used for years by partners at some of the nation's largest private-equity firms to reduce their taxes, and can involve significant sums.

Clifford Warren, a special counsel in the IRS's unit that covers partnerships such as private-equity firms, said during an April 30 panel discussion at a Chicago legal conference that the IRS is "studying" the issue. "We don't like what we see in all cases," he added.

The remarks were first reported by Tax Notes, an industry publication. An IRS spokeswoman confirmed that Mr. Warren made the comments.

The tax strategy came to public attention in the midst of last year's presidential campaign and after New York Attorney General Eric Schneiderman began an investigation into the issue and sent subpoenas to about a dozen firms, including Republican presidential candidate Mitt Romney's former firm, Bain Capital LLC. It is not clear where the investigation stands. A spokeswoman for Mr. Schneiderman declined to comment.

In the main strategy in question, private-equity firms or firm partners voluntarily waive annual or quarterly management fees due to them from investors. Instead, the firms often redirect that fee money to satisfy their own obligations to invest in the funds they manage. That change can turn management fees, currently taxed as ordinary income at federal rates of up to 39.6%, into investments that enjoy capital-gains treatment at lower rates, now starting at 20% for upper-income federal taxpayers.

Tax experts said Mr. Warren's remarks suggest that the agency is seriously considering the legalities of the fee-waiver practice. The IRS Office of Chief Counsel, where Mr. Warren works, doesn't typically get involved in investigations, but studies complex tax issues and often issues legal opinions that guide agency field staff.

It doesn't appear that the agency has actively engaged with the industry on the issue. John C. Hart, a tax attorney at Simpson Thacher & Bartlett LLP in New York, said none of his private-equity clients have been contacted by the agency about the matter. Two other attorneys with large private-equity practices said they weren't aware of any IRS audits or formal requests for information on the topic.

Some of the largest private-equity firms, such as Bain and Apollo Global ManagementLLC, APO -2.85% have taken advantage of this tax strategy, according to filings and documents. Apollo recently terminated a management-fee waiver program and isn't currently engaging in the practice, according to a regulatory filing and a person familiar with the matter. KKR KKR -1.19% & Co. used the strategy from 2007 until 2009, when it became a public company, according to a person familiar with the matter. Still, others, such as Blackstone Group LP, BX -0.23% Carlyle Group, CG -2.42%TPG and Madison Dearborn Partners LLC, never employed the strategy, according to people familiar with the matter.

Proponents have said the strategy is legal, that executives take on risk by redirecting the money into investments and thus should be taxed at lower rates. Some academics have called it aggressive and potentially subject to IRS challenge.

Partly at issue is whether the strategy fits within a 1993 IRS ruling, and whether it potentially triggers a separate law about partnership transactions that would require the income to be taxed at ordinary rates.

Some lawyers say private-equity firms have employed different versions of the tax strategy, along a spectrum ranging from conservative to more aggressive from a tax standpoint.

Contributing to Both IRA & Roth IRA Plans

Mark Kennan for Demand Media writes: Individual retirement accounts let you take control of your retirement savings -- you don't have to rely on an employer to set up a plan for you and you get to pick your own financial institution and investments. Assuming you're eligible, there's nothing stopping you from divvying up your retirement contributions between traditional and Roth IRA accounts.

QUALIFICATIONS

To contribute to either type of IRA, you must have compensation for the year -- income from working or taxable alimony you receive. However, just because you have compensation doesn't mean you're eligible to contribute to both types of IRAs. To add money to a traditional IRA, you also must be younger than 70 1/2. For Roth IRAs, your modified adjusted gross income must fall below the annual limits for your filing status. For example, in 2013, that means it can't exceed $127,000 if you're single or $188,000 if you're married filing jointly.

CONTRIBUTION LIMITS

The contribution limit for traditional and Roth IRAs are cumulative, which means that every dollar you contribute to one account reduces the amount you can contribute to the other. For example, in 2013, the maximum contribution is $5,500, so if you put in $3,000 for your traditional IRA, you can't deposit more than $2,500 in your Roth IRA.

EXCESS CONTRIBUTIONS

If your contributions to your traditional and Roth IRAs combined exceed your annual contribution limit, you're going to owe the IRS extra on your taxes because there's a 6 percent excess contributions penalty. For example, if your contribution limit is $5,500 and you put $4,000 in your Roth IRA and $3,000 in your traditional IRA, you're over by $1,500. Unless you correct it by taking out the excess plus any earnings on the excess before your tax filing deadline, you'll owe $90 in penalties. Plus, the penalty continues to apply every year until you correct the excess contribution.

WHICH IS BETTER?

Traditional IRAs and Roth IRAs offer opposite tax benefits. Traditional IRAs generally allow you to deduct your contributions, but tax you when you take withdrawals. Roth IRAs don't offer a deduction for contributions, but do allow you to take your money out tax-free in retirement. So, it's a good idea to allocate your contributions based on how your current tax rate compares to the rate you expect to pay when you're taking the money out. For example, if you're only in the 15 percent bracket now and you either think you're going to be making more in the future or tax rates are going up (or both), it makes more sense to put a bigger contribution in your Roth IRA.

Weighing The Obama Budget’s Impact On Estate Planning

Jonathan M Forster and Jennifer M Smith for Fa-Mag.com write: As in years past, the president’s budget for 2014 targets estate tax planning for high-net-worth individuals. Certain estate planning techniques, like grantor and dynasty trusts, are still on the chopping block and could become unavailable in the near future.

Despite the “permanent” estate tax legislation passed earlier this year, the president wants to return to the higher estate tax rates and lower exemptions that applied in 2009. Under the president’s proposal, as of 2018, the top estate, gift and GST tax rates would return to 45% (up from 40%), the estate and GST tax exemptions would revert to $3.5 million, and the gift tax exemption to $1 million (all down from $5.25 million).  None of the exemptions would be inflation-indexed, meaning more families would be subject to estate tax over the years simply due to inflation. The president, however, would keep “exemption portability” between spouses, so a surviving spouse could still benefit from a predeceased spouse’s unused gift or estate tax exemption.

• Potential Impact: The loss of exemption reunification, combined with a smaller gift tax exemption, would make lifetime gift planning far more complicated for wealthy families and closely-held business owners who want to transfer ownership to their family members during life. Direct gifts, which are relatively simple to implement, would be effectively capped at $1 million. Clients would then need to use more complex strategies (like zeroed-out GRATs and installment sales to grantor trusts) to transfer additional wealth at minimal gift tax cost. Unfortunately, this type of complexity can deter many clients from lifetime planning. 

Unlike last year’s proposal to subject all grantor trusts to transfer tax, this year’s budget would only tax property transferred to trusts through sales or similar transactions that are “disregarded” for income tax purposes under the grantor trust rules (e.g., sales to grantor trusts). Limited exceptions would apply, such as for trusts deemed grantor trusts solelybecause a trustee can use trust income to pay premiums on life insurance covering the grantor or his/her spouse (a typical provision found in many irrevocable life insurance trusts).

• Potential Impact: Even in its more restricted form, passage of this proposal would adversely affect planning with grantor trusts. Most installment sales to grantor trusts would become ineffective for estate planning because both the property sold to the trust, plus any later appreciation, would incur estate tax. The exclusion for trusts that only contain a premium paying power affords some comfort, but many advisors like to include other powers that can trigger grantor trust status (such as the grantor’s non-fiduciary power to substitutes trust assets with other assets of an equivalent value). This proposal eliminates that flexibility.

Many states allow the creation of perpetual, or “dynasty” trusts. If created as GST-exempt trusts, these dynasty trusts can perpetually shelter trust assets from estate and GST taxes, generation after generation. The Obama administration, however, wants to terminate a trust’s GST-exempt status on its 90th anniversary and subject the trust assets or subsequent distributions to GST tax.

• Potential Impact: Passage of this proposal would limit the long-term tax leverage afforded by GST exempt trusts and a family’s ability to preserve wealth over time. For example, if a trust is funded with $5.25 million and has net growth of 3% each year for 90 years, the trust would hold over $75 million. If the trust’s GST tax exemption continues, the entire $75 million will be available to the trust beneficiaries. If a 40% GST tax applies, $30 million would be lost in taxes, leaving only $45 million in the trust.

Generally, direct payments to medical care providers or for tuition for another person are gift and GST-tax exempt. HEETs are dynasty trusts that make these “qualified transfers” for the benefit of grandchildren and later generations to avoid GST tax. Meanwhile, the trust assets grow transfer tax-free. To deter the use of HEETs, the Administration would limit the availability of the GST exemption only to qualified transfers made directly by a living donor and not through trusts. 

• Potential Impact: This proposal would affect all non-exempt trusts, not just HEETs.  A trustee of a non-exempt trust could no longer use qualified transfers to limit GST tax exposure on trust distributions for grandchildren or other “skip” beneficiaries. 

The 2014 budget is only the Obama administration’s "wish list" for future tax legislation.  With Congress deeply divided over tax reform, it is impossible to predict whether any of these proposals will become law. Still, given the continued fluidity and uncertainty of the current tax situation, now could be the optimum time for planners and clients to take advantage of the targeted techniques.

How Intuit became a pioneer of 'delight'

Chris O'Brien for the LA Times writes: Say "delight" in Silicon Valley, and most people will immediately think of Apple. In a Column One story today, I note that much of the valley's current obsession with the word can be traced back to Steve Jobs' embrace of it. 

But there's another company in the valley that has also come to embody the word: Intuit. While the Mountain View maker of financial software such as TurboTax and QuickBooks hasn’t quite had Apple-like success (but then, who has?), its growth in recent years has been remarkable enough to give the delight movement a big credibility boost.

STORY: Cold, hard data meets squishy delight in Silicon Valley

In 2007, Intuit adopted "design for delight" as its product development philosophy. The process began under then-Cheif Executive Steve Bennett and accelerated under Brad Smith, who has been chief executive of Intuit since January 2008.

"A great first use experience is the front door to powering growth for a new or existing product," Smith wrote recently on a LinkedIn post. "Don't let all the hard work that goes into creating a great product be sabotaged by not putting in the time and effort of designing a delightful gateway."
In some ways, it's not surprising that Intuit would join Apple among the ranks of delight pioneers. Intuit's current board chair, Bill Campbell, was a longtime friend and confidante of Jobs. Campbell worked at Apple in the early 1980s, later served as CEO of Intuit from 1994 to 1998 and has been a board member at Apple since 1997.

Under Smith, the company has worked relentlessly to embed the concept of delight deep into its culture. That effort has been spearheaded to a large degree by Kaaren Hanson, vice president of design innovation at Intuit.

"You've got feel it," Hanson said. "It can't be in your head. It's got to be in your heart. It's got to be in your gut. And we want to put it in our products."
Smith and Hanson began delivering this message through frequent conversations with employees at all levels of the company. Smith also dramatically expanded the size of the team of innovation catalysts working under Hanson who could swoop in and help teams throughout the company work the delight concept into their product development efforts.

The tricky thing in teaching the concept, of course, is that delight is inherently subjective. It's hard to measure and quantify. You just know it when you see it. Or feel it.
Still, Hanson offers three guidelines: The benefit of a product or service should be something a customer really cares about. It should be simple. And it should evoke a positive emotion. 
Instead of marketing research or management presentations about product ideas, Intuit conducts 10,000 hours of what Smith calls "follow me homes" each year, in which employees observe customers at home or at work. The goal is to understand their pain points, their needs, things customers may not recognize themselves. 

From there, Intuit teases out ideas, rapidly prototypes and puts them into the hands of users to get feedback.
Smith and Hanson credit this approach with helping Intuit catch up quickly in the mobile and cloud computing spaces. For instance, the number of people using Intuit's online, hosted services has increased from 17 million in 2008 to 45 million in 2012.

"Design for Delight is grounded in deep customer empathy, going broad with ideas then narrowing with possible solutions and finally, rapid experimentation with customers," Smith told Forbes. "Collaboration, customer-driven innovation and Design for Delight allow us to continually reinvent ourselves to deliver for the future and provide our customers any time, anywhere access."

As I noted, delight can be hard to measure. There are "in-the-moment" ways that psychologists can measure emotions, like studying pupil dilation or moisture levels on the skin.
But Intuit also tracks something called "Net Promoter Scores" or NPS. Basically, the company asks someone how likely they are to recommend a product or service to a friend. Intuit says it is always seeking to increase that NPS across its products.

Another big shift the company has undertaken as a result is to screen prospective employees for empathy. Can they truly understand how another person is feeling? This has become particularly important for people hired into customer service areas, where the company says it's important not only to solve issues but leave the customers feeling good about the experience. 

The results, so far, have been impressive. From $21.58 in early November 2008, Intuit’s stock has climbed to $59.89 in midday trading on Friday. Annual revenue has increased from $2.978 billion in 2008 to $4.151 billion in 2012.
No wonder that so many others are looking to understand and imitate Intuit's approach.

IRS Changes Tax-Filing Requirements for Large Corporations and Partnerships

Michael Cohn for Accounting Today writes: The Internal Revenue Service said Friday that it will be making changes to the filing requirements for corporate and partnership taxpayers with assets of between $10 million and $50 million in an effort to lighten the burden.

The changes pertain to the Schedule M-3 filing requirement for taxpayers with assets between $10 million to $50 million for Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065-B.

These business taxpayers will be permitted to file Schedule M-1 in place of the Schedule M-3 Parts II and III. The changes will be effective for tax years ending on Dec. 31, 2014, and later.

However, the IRS added that no changes are currently planned to the Schedule M-3 requirements for Forms 1120-L or 1120-PC, nor for Form 1120 taxpayers filing as a mixed group.

The IRS said the reason for the changes is to reduce filing burden and to simplify reporting for these corporations and partnerships. The changes affect the filing requirements for Schedule M-3, “Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More.”

Effective for tax years ending Dec. 31, 2014 and later, corporations and partnerships with at least $10 million but less than $50 million in total assets at tax year end will be permitted to file Schedule M-1 instead of Schedule M-3, Parts II and III. Schedule M-3, Part I, lines 1-12 will continue to be required for these taxpayers. Those taxpayers electing to file Schedule M-1 must report book income on Schedule M-1, line 1, equal to the book income amount reported on Schedule M-3, Part I, line 11. Corporations and partnerships with $10 million to $50 million in total assets may voluntarily file Schedule M-3 Parts II and III rather than Schedule M-1. This change applies to corporations and partnerships filing Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065B.

Corporations and partnerships filing Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065B with $10 million to $50 million in total assets will not be required to file Form 1120 Schedule B, Form 1065 Schedule C or Form 8916-A.

The IRS’s Large Business & International Division is continuing to consider changes to Schedule M-3 and to the requirements for the book-to-tax reconciliation for corporations with $10 million to $50 million in total assets filing Form 1120-L, 1120-PC, or filing as a mixed group including the requirement that mixed groups sub-consolidate and file Form 8916, the IRS noted. In addition, the IRS LB&I Division is considering changes to Schedule M-3 and to the requirements for the book-to-tax reconciliation for corporations and partnerships with $50 million or more in total assets.

Schedule M-1 detail is currently filed electronically as four attachments, one each to Schedule M-1 lines 4, 5, 7, and 8.  This will not change, according to the IRS.

Partnerships with less than $10 million in total assets that are currently required to file Schedule M-3 (adjusted total assets of $10 million or more, total receipts for $35 million or more, or a reportable entity partner also required to file Schedule M-3) will continue to file Schedule M-3, Part I and may elect to file Schedule M-1 in place of Schedule M-3, Parts II and III.  Partnerships with less than $10 million in assets will not be required to file Form 1065 Schedule C or Form 8916-A.

Corporations and partnerships with less than $10 million in total assets that are not otherwise required to file Schedule M-3 are currently allowed to voluntarily file Schedule M-3. These taxpayers can continue to voluntarily file Schedule M-3, according to the IRS, and they may elect to file Schedule M-3 Parts I, II, and III or to file Schedule M-3 Part I and to file Schedule M-1 in place of Schedule M-3 Parts II and III. Such corporations and partnerships will not be required to file Form 1120 Schedule B, Form 1065 Schedule C, or Form 8916-A.