Tuesday, May 14, 2013

4 Tax Traps in 2013

Rob Russell for Money/US News writes:  Now that the 2012 tax season is thankfully behind us, it's time to look towards 2013 and prepare for some of the tax land mines that Congress and the Internal Revenue Service have carefully placed before us. The American Taxpayer Relief Act of 2013, in typical Congressional fashion, fails to live up to its namesake because it provides no real relief to taxpayers due to the numerous "gotchas" buried into the code. There are several traps set forhard-working Americans and businesses; here are the top four to be aware of in 2013:


1. The Success Tax
Successful individuals and small businesses are subject to a higher income tax rate in 2013, what I term a "Success Tax." Single filers making more than $400,000 a year will be at the highest income tax bracket, 39.6 percent, while it takes a married couple making more than $450,000 a year. From a tax planning perspective, successful unmarried couples making less than $400,000 each would pay less income tax if they remain unmarried. This "marriage penalty" can be substantial for doctors, scientists, small business owners, or other higher income professionals. And while it may be painful to give nearly 40 percent to the federal government, the truth is that the "Success Tax" rate is even higher when you add in the next stealthy tax trap.

2. The Stealthy Surtax
In 2013, with the addition of the Obamacare surtax, you may be paying even more once you pass a certain income threshold. Individuals with incomes above $200,000 a year and married couples making above $250,000 will be paying another 3.8 percent to the federal government. So, if you fall within the highest income brackets (39.6 percent) you will also pay the Obamacare surtax (3.8 percent) leaving you with a federal tax bracket of 43.4 percent. If you think that's sneaky, the truth about the capital gains rate may really make you boil over.

3. The Capital Gains Lie
While the 20 percent long-term capital gains rate is what's stated under the law, it's near impossible for anyone to actually pay a 20 percent rate on long-term capital gains or dividends. The top capital gains rate is actually 23.8 percent (gain, because of the stealthy 3.8 percent Obamacare surtax) for those who supposedly face the 20 percent gains rate. In addition, if you’re subject to the 15 percent capital gains rate, your true rate is 18.8 percent for the same reason even though you won't find that rate published in the law either. Agree with it or not, a lot of our tax code is built around incentives. Deductions or credits for energy exploration, home purchases, education, charitable giving, professional service fees, etc. These incentives are designed to encourage consumer spending and economic growth, but the foundation for these benefits is quickly eroding under the latest legislation.

4. The Itemized Deduction Reduction
Successful taxpayers will again be targeted by receiving reduced deduction benefits afforded to other taxpayers. You'll find yourself within the crosshairs if you're single making $250,000 or more, or married making $300,000 or more. For each $2,500 of adjusted gross income over these thresholds, your personal exemptions are reduced by 2 percent, effectively increasing, yet again, your total effective tax rate. In total, you can lose up to 80 percent of your itemized deductions!
Posted on 5:48 AM | Categories:

Taxation of IRA withdrawals for New Jersey income tax purposes

Karin Price Mueller/The Star-Ledger for the Star Ledger writes: Q. How are IRA withdrawals handled for New Jersey income tax purposes? I have both traditional and Roth IRAs. I understand that for Federal income tax purposes, all traditional withdrawals are fully taxed, and all Roth withdrawals are tax-free. But I do not know how they are handled for New Jersey. Also, what’s the best way to take withdrawals?
— Soon to retire

A. Good question.
New Jersey conforms to all of the federal tax treatment of Roth IRAs, said Gail Rosen, a Martinsville-based certified public accountant. Traditional IRAs are different.
"Contributions to an IRA are not deductible for New Jersey purposes in the year they are made, therefore, such contributed amounts are not taxable when withdrawn from the account," Rosen said. "Interest, dividends and other earnings credited to the IRA are subject to New Jersey tax upon withdrawal.

Any contributions you made to an IRA before you moved to New Jersey are treated as if you had been living in New Jersey at the time you made the contributions, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Kiely said your IRA consists of your contributions, earnings, plus amounts, if any, rolled over from other pension plans. In general, he said, the contributions were taxed when they were made.

Interest, dividends, and other earnings credited to an IRA are subject to tax upon withdrawal, he said. In addition, any amounts that were rolled over into an IRA from a pension plan are subject to New Jersey tax when they are withdrawn.

Kiely offered some advice on the withdrawals, and investing in IRAs in general.
He said investing IRA funds in tax-exempt investments is not recommended because federal tax law says all income earned inside an IRA is taxable upon withdrawal.
However, an exception exists in New Jersey with respect to the taxability of an IRA withdrawal when the IRA funds are invested in obligations which are exempt from New Jersey income tax.

"The Gross Income Tax Act specifically excludes from gross income (1) interest received from obligations of the State of New Jersey or any of New Jersey’s political subdivisions, or (2) interest received from direct Federal obligations which are statutorily free from state or local taxation," Kiely said. "Thus, where the interest received by the taxpayer on an IRA distribution is from exempt obligations which are directly owned by the taxpayer in the IRA plan, the interest is exempt from New Jersey income tax."

Qualified distributions from a Roth IRA are excludable and do not have to be included in New Jersey gross income in the year received, whether it is a periodic distribution or a lump-sum distribution, he said.

Also consider that because Roths don’t have an RMD, it may make sense to take the RMD first from your traditional IRA, then determine the best place, and best tax scenarios, before you take any additional funds that are needed.
Posted on 5:47 AM | Categories:

Can my son claim education tax credits if I claim his dependency exemption?

Claudia Buck for the SacBee writes:  Q: I made $80,000 and TurboTax said I was disqualified from deducting the interest I paid to federal government on the parent loan and/or the tuition I paid. Out of pocket, both totaled over $20,000. I know I would only have received the tax education credit on the out of pocket tuition I paid but since I can't take it, can my son? 
Although he was a full-time student, he made about $20,000 working part time at a restaurant and singing at a church. My status is a qualified widow..because my husband died in 2011 I was able to file joint and married.. so the threshold was 160,000 ..he had been disabled and had no income it was same source of guns..seems to penalize non married people whose income is same as two married people. Anyway if I claim my son, can he take the deductions I was not able to? I assume TurboTax was correct in saying I wasn't eligible.
Teresa
Sacramento, CA

A: If you claim your son's dependency exemption, he cannot claim an education tax credit for tuition that you paid on his behalf. The rules do allow your son to claim the American Opportunity tax credit if you do not claim the deduction for his dependency exemption. But your taxes would be higher.

Since your spouse died in 2011, you may qualify to use the Married-Filing-Joint tax rates for 2012 and 2013 if you meet the following requirements:
- You are unmarried as of the end of the year;
- You maintain (pay over 50% of the costs of) a household that is your home and the "principal place of abode" of your son who is your dependent;
- You could file a joint return with your deceased spouse for the year of death.
Your home may still be your son's "principal place of abode" even if he is away at school as long as he has not established another permanent residence and he returns to your home when not away at school. If you do not claim his dependency exemption, you may not be able to qualify as a surviving spouse.
So you will have to look at which of your two options results in the lower overall tax for you and your son: claiming his dependency exemption and using the joint tax rates and losing the education tax credits, or forgoing his exemption and using the single tax rates, which would allow him to claim the applicable education tax credit.
Usually the benefit of the dependency exemption and the joint rates afforded surviving spouses outweigh the potential tax savings your son might receive from the education tax credit.

Read more here: http://blogs.sacbee.com/personal-finance-ask-the-experts/2013/05/can-my-son-claim-education-tax-credits-if-i-claim-his-dependency-exemption.html#storylink=cpy
Posted on 5:46 AM | Categories:

IRS Announces Plan to Share Tax Data with Brits and Aussies

Terri Eyden for AccountingWeb.com writes: It's not related to global warming, but countries around the world continue to turn up the heat on scofflaws hiding income from offshore accounts. In the latest development, the United States, Australia, and the United Kingdom have announced a collaborative effort to share tax information from a multitude of trusts and companies holding assets on behalf of residents from far-flung places (IR-2013-48, May 9, 2013).
According to the IRS news release, each of the three nations has acquired a substantial amount of data revealing extensive use of entities organized in various jurisdictions, including Singapore, the British Virgin Islands, the Cayman Islands, and the Cook Islands. The data not only contains the identities of the individual owners of the entities, but also the advisors who assisted in establishing these structures.
The tax collection agencies – the IRS, the Australian Taxation Office, and HM Revenue & Customs, respectively – have been working together to analyze this data. They've also pinpointed information that could be relevant to tax administrations of other jurisdictions.
"This is part of a wider effort by the IRS and other tax administrations to pursue international tax evasion," said IRS Acting Commissioner Steven Miller. "Our cooperative work with the United Kingdom and Australia reflects a bigger goal of leaving no safe haven for people trying to illegally evade taxes."
However, although the three countries have developed a plan for sharing the data as well as their preliminary analysis with other tax administrations, they haven't revealed any details on how the plan will actually work, according to Kevin Packman a partner with Holland & Knight, who was interviewed by AccountingWEB. Packman is a member of the firm's International Estate Planning Group and also chairs its Offshore Compliance Team. He believes the plan will operate similar to the approach used in tax treaties or the Foreign Account Tax Compliance Act (FATCA). Under FATCA, US taxpayers with specified foreign financial assets exceeding certain thresholds must report those assets to the IRS.
Packman is careful to point out that it's not illegal for US taxpayers to hold assets in foreign accounts. The collaborative effort is designed to ferret out only those individuals who, either purposely or unintentionally, fail to report income on a worldwide basis or don't meet filing requirements.

The noose is slowly tightening around tax evaders. "Effective January 1, all foreign institutions are required to provide information on US account holders," says Packman, referring to the extended reach of FATCA. "They will also examine look-through entities." He notes that the tax evaders may use various means, including insurance products, for dodging the full amount of tax they're legally obligated to pay.
"Another key aspect is whistleblowers," notes Packman. "Bradley Birkenfeld is probably the most notable. That actually started the process where we are today." Packman states that whistleblower activities have enabled the government to "collect $5 billion from thirty to forty thousand taxpayers."
Finally, Packman mentioned an international consortium that has collected a "treasure trove" of information about prominent individuals around the world. Not all the names on the list are tax evaders, he says, but the data is proving to be valuable in hunting down the cheaters.
US taxpayers holding assets in offshore entities are encouraged to review their tax obligations with respect to foreign holdings. When appropriate, they may participate in theIRS Offshore Voluntary Disclosure Program. Failure to do so may result in significant penalties and possible criminal prosecution. In any event, these taxpayers should seek professional guidance.
Posted on 5:46 AM | Categories:

MYOB has acquired smaller New Zealand-based rival BankLink for 136 million New Zealand dollars (US$113 million). / Takeover opens floodgate, says rival, Accounting software competitors Xero and MYOB are at odds over who will benefit from MYOB's acquisition

Gillian Tan of the Wall St. Journal writes: Bain Capital-backed accounting software maker MYOB has acquired smaller New Zealand-based rival BankLink for 136 million New Zealand dollars (US$113 million).
Bain Capital managing director Craig Boyce said in a statement that the acquisition of BankLink would provide MYOB with a competitive advantage in the space of cloud accounting. Sales of MYOB’s cloud accounting products make up a third of the firm’s new registrations, triple their contribution from this time last year.
BankLink, founded in 1986, owns services that are used by more than 320,000 small businesses and 5,000 accounting practices throughout Australia and New Zealand. It facilitates more than 13 million transactions a month between financial markets participants like banks, fund managers and credit unions.
Bain and funds advised by the buyout firm bought MYOB from a consortium including Australian private equity firm Archer Capital and international asset manager HarbourVest Partners in 2011 for around 1.2 billion Australian dollars (US$1.2 billion).
MYOB estimates that its current market share of Australia and New Zealand small-to-medium enterprises and public accountants is between 60% and 70%. Its earnings before interest, tax, depreciation and amortization, or Ebitda, for the calendar year ended Dec. 31 was A$107.5 million from A$218.1 million of revenue.


Takeover opens floodgate, says rival

TOM PULLAR-STRECKER for Stuff.Co.Nz writes: Accounting software competitors Xero and MYOB are at odds again, this time over who will benefit from MYOB's $136 million acquisition of Auckland software firm BankLink.

MYOB yesterday prevailed in its second attempt to buy BankLink from the three entrepreneurs who founded firm it 27 years ago.
MYOB sells accounting software in Australia and New Zealand, in competition with the likes of Xero, whose founder, Rod Drury, anticipates the takeover will benefit the Wellington-based firm.
customers into its arms.
"We are flipping lots of BankLink customers at the moment," Drury said, "but this really opens up the floodgates."
MYOB chief executive Tim Reed responded that the purchase was "a win" for BankLink and MYOB clients. "I can't understand how it could be seen through a different lens."
BankLink employs 150 staff and sells software that automates the provision of bank feeds, so accountants in New Zealand, Australia and Britain do not need to manually rekey the details of bank transactions when preparing accounts for their clients.
It can also automatically feed transactions into MYOB's cloud-based accounting packages, which are used by small businesses that want to put together their accounts themselves.
Reed said was a "strategic move" that would position MYOB to lead the next wave of growth in cloud accounting.
It still relied on "screen-scraping" software to input transactions from some bank account types into its cloud-based software, but this resulted in lower-quality data with a risk of duplicating transactions.
Also, if a third party was preparing the accounts, the small business would have to hand over its online banking user name and password.
"The moment a business owner gives up their user name and password, generally they have breached their online banking agreement and that puts them in danger the banks won't cover them if there is fraud," Reed said.
Drury said that was "misinformation" as Xero customers were able to directly feed bank transactions into Xero in 95 per cent of cases.
The option was available for "all major Australian and New Zealand banks", but Xero provided a screen-scraping option, which had "never been hacked", for use with smaller financial institutions, like building societies.
Xero had spent a few years matching BankLink's capabilities and although BankLink's feeds were probably slightly more comprehensive, Xero was about to leap-frog ahead, Drury said.
"We are working with most of the major banks on the next generation of banking web services which will provide much more than bank feeds. I think is one of the reasons BankLink sold. The founders ... have chosen to take the money while they can."
BankLink was principally owned by founders Malcolm MacDonald, Derek Jones and Steve Agnew. MYOB had agreed to buy its business in New Zealand and Australia, Reed said, but Jones would retain and run BankLink's British offshoot.
The Australian Financial Review reported in 2011 that MYOB's then majority owner, Australian private equity firm Archer Capital, planned to buy BankLink and fold it into MYOB. But it said the deal broke down because Archer was only willing to pay $100m.
Archer subsequently sold its stake in MYOB.
Xero shares closed down 3.5 per cent at $13.31.

Posted on 5:46 AM | Categories:

Sales Tax On Free-Item Coupon? A Supermarket Dustup / coupon-clippers, sales and use tax is calculated on the sales price net after all coupon reductions

Kevin Hunt for CTNow.com writes:  Q: If a customer has a coupon for a "free item" package of cat food or kitty litter, is there sales tax on the free item? I was unfortunately behind a woman who was arguing with the cashier that her two "free items" were absolutely free and were not subject to the state sales tax. Please clarify who is right.
Chris Anastasio, Newington

A: We'll get to the tax in a minute. The customer, says reader Anastasio, had manufacturer's coupons for free full-size bags of cat food AND litter. What a deal!
But the customer left a Newington Stop & Shop —– according to Anastasio's observations —- without the cat food or litter after arguing with the store manager over the tax.
"This caused quite a delay while I was waiting," says Anastasio. "She finally said, 'Forget it,' and rudely took her coupons back and left the items behind, muttering 'I know the law but obviously you don't!'"
As if that matters to her cat.
But it matters to the rest of us. So what's the answer? TBL used his usual combination of knowledge, logic and guesswork to presume the state would want 6.35 percent of the store's regular price for the cat food and litter. The store manager considered the items taxable, too, according to Anastasio.
The official answer:
"The customer would not owe tax," says Sarah Kaufman, a spokeswoman for the state Department of Revenue Services.
State regulations say "sales tax on dollars-off or percentage-off coupons is calculated on the sales price net of the price reduction." The sales price net, after the deduction of the free-item coupons, was zero.
"Our [cash register] system is automatically programmed so that coupons, both store coupons and manufacturers coupons, reduce the taxable base before sales tax is calculated on taxable products," says Stop & Shop spokesman Suzi Robinson. "Therefore, a free taxable product with a coupon would not be charged any Connecticut sales tax."
Memo to the cat: Tell your owner she can return to the store and use the coupons to get the food and litter free without taxation.
"As the reader who submitted the inquiry was not directly involved in the issue," says Robinson, "we cannot speculate on the exact situation that may have happened in the store. If there was a misunderstanding in the store, we apologize for any inconvenience to that customer."
So, coupon-clippers, remember this: Connecticut sales and use tax is calculated on the sales price net after all coupon reductions. If a store doubles a coupon, that amount is also deducted from the taxable amount.
Rewards programs are also treated like coupons. If a retailer issues a certificate the consumer uses for a price reduction, only the final price is taxable. If a store's scan card offers a discount, tax is only charged on the reduced price.

Posted on 5:46 AM | Categories:

How to Get a Bigger Tax Refund / Tips for families, students, homeowners and employees

The Sturgis Journal writes:  If you typically dread income tax time, remember this: Three out of four taxpayers receive a federal refund, and the average direct-deposited refund last year was $2,923.
You have almost as many tax savings opportunities as last year, thanks to the fiscal cliff-averting tax changes passed in early January. In addition to extending the lower Bush-era income tax rates for nearly all taxpayers, the American Tax Relief Act made permanent or extended dozens of tax breaks.
"This year's tax law changes included thousands of dollars in tax benefits for working families, college students and homeowners in particular," says Jessi Dolmage, TaxACT spokesperson.
When you're ready to file your 2012 federal tax return, due April 15, 2013, watch for these key tax benefits:
Families
• The child tax credit is worth up to $1,000 per eligible child, and is refundable for taxpayers with an earned income of more than $3,000.
• Parents who work or attend school and pay for child care may qualify for the child and dependent care credit. The maximum amount is $3,000 per qualifying dependent or $6,000 for two or more qualifying dependents under the age of 13.
• The earned income credit is for working taxpayers with low to moderate income. The refundable credit amount is based on filing status, number of qualifying children and income level. Families with three or more qualifying children could qualify for up to $5,891.
• The refundability of the adoption credit has expired, but the credit is still available and worth up to $12,650 in qualified expenses for 2012.
College and education
• You could deduct up to $4,000 for tuition and fees paid in 2012.
• Paying off student loans? You may be able to deduct up to $2,500 in interest paid during 2012.
• The American Opportunity Credit is worth up to $2,500 per student for post-secondary tuition, fees and course materials.
• Contributing to a Coverdell Education Savings Account? You can exempt a maximum of $2,000 per student in annual contributions.
Homeowners
• If itemizing your deductions, you may be able deduct mortgage insurance premiums paid during 2012.
• The nonbusiness energy property credit for qualified energy-efficient home improvements (insulation, exterior windows and doors, central air conditioners, water heaters and other improvements) was extended for 2012 and 2013. If you've claimed this credit on previous year tax returns after 2005, you must subtract the collective amount from the $500 available for 2012.


Employees

• Grade K-12 educators can deduct $250 in out-of-pocket expenses for classroom supplies.
• You may be able to exempt employer-provided mass transit and parking benefits from your gross income.
• If you itemize and have paid for work-related education, there's a deduction for your costs paid minus any employer reimbursed amount.
Hundreds more tax benefits are up for grabs on this year's federal returns due April 15.
When you're ready to do your taxes, use these tips to make tax time easier and faster.
1. Gather all your tax forms (W-2, 1099, 1098, etc.), receipts and a copy of last year's return first. Use TaxACT's free return checklist at www.taxact.com/checklist.
2. Don't spend too much on tax preparation. Online and downloadable software has all the guidance, forms and tools the vast majority of taxpayers need to do their own taxes. Some of the solutions are even free. "All taxpayers can file their federal tax returns free with TaxACT Free Federal Edition," says Dolmage. "TaxACT includes all e-fileable forms for simple and complex tax returns, and there's instant and personalized help available every step of the way."
3. According to the IRS, more than nine out of 10 refunds were issued in fewer than 21 days last year. You should expect the same this year. For the fastest possible refund, e-file and choose direct deposit. You can track your federal refund with "Where's My Refund" at www.irs.gov.
4. File your return by the deadline. If you need an automatic six-month extension, e-file Form 4868 and pay any taxes owed by the April 15 deadline to avoid late-filing penalties and interest fees. Finally, don't procrastinate. Rushing can lead to costly errors.
Posted on 5:45 AM | Categories:

How College Savings Can Affect Financial Aid / Make sure you’ve set up college savings in a way that minimizes your expected family contribution.

Reyna Gobel for US News.com writes: Need-based financial aid awards for college don't just depend on a family's income. Students' eligibility for such aid could be decided in part by how much families have saved for their education, including in tax-advantaged 529 plan accounts.

That's because schools use a number called the expected family contribution, or EFC, to determine how much a family can afford to contribute to their child's education.
Varying formulas are employed based on whether a school uses a number calculated according to a legally established formula, with the income and asset information provided by the student and parents, on the Free Application for Federal Student Aid, or from data in the College Scholarship Service (CSS)/Financial Aid Profile.
That figure is compared with the cost of attendance by schools to determine a student's eligibility for need-based aid. Families generally get less aid as their expected family contribution comes closer to the cost of attendance.
Fred Amrein, a Pennsylvania-based personal financial adviser, says that in a family where the parents have a gross income of $160,000, their expected contribution – based on a number of factors such as the state they live in – is $39,500.
Generally, need-based financial aid can only be awarded up to the cost of attendance. In this example, if a child plans on going to a school where the cost of attendance is $30,000, the amount of savings wouldn't matter because the family's expected contribution based on income alone is higher than the cost to attend that school, he says.
However, if the student plans on going to a private school with an annual cost of attendance of $50,000, the family's assets will matter, he says.
Take a different example. If a family's income is not enough to meet the expected cost of attendance but the parents had a lot saved for college, those savings would be a greater factor in their expected contribution.
Age matters, too. Parents' 529 plan accounts and other savings count toward the EFC on a weighted scale based on the oldest parent's age, says Amrein. The older parents are, the less these funds factor into the expected contribution.
If the parents in the first example are 48 years old and have $80,000 in countable assets, their $39,500 expected contribution would increase by $2,100. Countable assets generally are taxable assets with the exceptions of home equity, small businesses and 529 plans. Retirement accounts do not count, Amrein says.
Keep in mind that a student's income and savings play a role in the calculation as well. If the student earns less than the standard tax deduction – $6,100 in 2013 – that income would not be expected to be a part of the family's contribution to the cost of college.
If that student had $10,000 in a savings account under his or her own name, about $2,000 would be added to the expected family contribution – nearly the same amount added by the parents' $80,000 in assets. Therefore, this family would have been better off saving for college in a 529 plan or savings account under a parent's name, Amrein says.
To plan ahead, students and parents can use the FAFSA4caster tool offered by the Department of Education. This tool gives parents the opportunity to plug in different variables such as asset levels and income to see how their expected contribution changes.

Parents could see what happens to their EFC if they save more in a 529 plan or if they deposit money into their child's savings account. They can also see what will happen to their expected family contribution if one parent receives a raise at work, says a spokeswoman for the Department of Education.
But a student's total financial aid package isn't just dependent on need.
"The expected family contribution as calculated from the FAFSA data is used to award need-based financial aid," says Jim Brooks, financial aid director for the University of Oregon. "However, merit-based aid is typically awarded based on academic performance alone."
With college costs rising, families looking for ways to pay for college should explore all of their options.
"Understanding your EFC is the cornerstone of creating a college funding strategy, but only one piece of the puzzle," Amrein says.
Posted on 5:45 AM | Categories:

Duck Estate-Planning Fiascos Before it's Too Late

Sheyna Steiner for Bankrate/Fox Business writes: Dying is generally an unpredictable event, but planning for your passing can make it easier for everyone. That is, unless estate planning goes terribly wrong.  Unfortunately, unless an error or bad plan comes to light while you're still alive and kicking, it can turn into a mega-problem after it's too late.
Estate planning mistakes can be made by an expert, or they can occur if you fail to communicate your intentions and plans to everyone involved.

Estate Planning Mistakes by Professionals

Not knowing what you don't know makes a foray into the dense and specialized field of estate planning difficult for the uninitiated. If your attorney suggests something that ultimately harms the estate, how would you know?

Case in point: A lawsuit filed recently in Chicago alleges that a very high-profile estate planning attorney suggested that a client do a 60-day rollover with an inherited individual retirement account in order to satisfy taxes owed on the estate.

Anyone who deals with inherited IRAs should know this is absolutely not allowed. And the Internal Revenue Service will not allow the mistake to be remedied by a redo. Beneficiaries are on their own in seeking some sort of redress from the lawyer who gave them the bad advice in the first place -- hence the above-mentioned lawsuit.

Mistakes involving inherited IRAs typically occur after death -- after all, they can't be inherited until that point. However, plenty of estate planning mistakes occur while the testator, or the person doing the planning, is still in the pink.

Susan Wilkes of Clearwater, Fla., found that out when she hired an attorney to create a trust to protect her minor daughter. When she went to revise the trust six years later, she discovered that the pricey attorney she initially hired had made a mistake.

"She left the bulk of my trust to my minor daughter 'fee simple,' meaning that if I died, my financially irresponsible ex-husband, as my daughter's guardian, would receive a check for the large residual balance of my trust," says Wilkes.

Fee simple in this situation indicates that the inheritance would be given outright to the child. "Should the mother of the child die prior to the child becoming an adult, the father of the child, and ex-spouse, would be likely appointed as guardian of the child's inherited property until the child became an adult," says Ann Jakabcin, an attorney and principal at Stein Sperling in Rockville, Md.

Cash-Deficient Estate Plans

In the case of the mishap with the inherited IRA, things may have gone differently if the estate had the cash to settle up with the tax man without liquidating assets.

That is another common difficulty in estate planning -- particularly with the popularity of transfer-on-death accounts. Joint accounts, beneficiary designations on insurance policies and transfer-on-death provisions on bank accounts all let assets jump over the probate process and land directly into the hands of the inheritor.

"That simplifies the distributions of those assets, but it may leave the executor of the estate no liquidity to pay taxes or that final income tax bill or doctor bills when you have designated beneficiaries on all of your liquid asset accounts," says Jakabcin.

In cases where the estate does not have the liquidity to pay bills or taxes, beneficiaries or heirs may have to come up with the money themselves. "Sometimes we have to see if we can allow the recipient of the IRA to loan money to the executor to pay bills. Credit card companies may be out of luck because there may be no ability for that creditor to go after the beneficiary for unpaid credit card bills, but taxes are another situation," she says.
The IRS can come after anyone involved, from the executor to the transferee -- the person receiving the assets.

Consider All the Angles

Good estate planning should account for every contingency: What happens if the mother dies first; what happens if the father dies first; what happens if both parents die at the same time, and then the minor children die; or just one parent plus the kids die? All sorts of terrible things happen, and bad estate planning compounds the tragedy.

Do-it-yourself and store-bought wills often lack this perspective and foresight. For instance, after going through a wild time in her life, a woman had a baby with a disreputable man, a drug dealer by trade, according to the court system that convicted him. After having the baby, the woman woke up, took charge of her life and was promptly killed in a car accident. She died instantly at the accident; her son expired 12 hours later.

"Her will said, 'If I'm gone, everything goes to my son.' Not in trust, not with somebody protecting him from the assets until he was in his late 20s or so, but it all went directly to him. The problem was, she had over a $1 million wrongful-death claim on her life, filed by her family. There was another on the son, both of which paid off," says John J. Scroggin, a business, tax and estate planning attorney in Roswell, Ga.

The only intestate heir of the infant was his father. (Intestate refers to the circumstance of dying without a will.)

"For the short time the son survived the mother, by her will, all of her assets passed directly to him, including her wrongful death claim. His own wrongful death claim was added to his mother's bequeathed assets, and because there was no trust for the son, 100% of the assets passed to the drug convict," Scroggin says.

If there had been a trust in place to pass assets to the son, the mother's assets would have passed back to her family. Not so for the money from the wrongful death claim on the son's life. According to Scroggin, the father would have gotten 100% of the son's assets.
Had the mother survived the son by any amount of time, the son's wrongful death claim would have been equally split by the mother and father, and all of the mother's assets would have passed to her family members as her sole intestate heirs.
No one can divine what will happen in the future, but professionals should be able to map out a plan that accounts for nearly every possibility.

Failure to Communicate

Any estate plan of any size can go catastrophically wrong -- particularly if no one knows you've taken steps to leave something for heirs.

"We had a client whose father had a massive stroke. His kids swooped down into the town he was in, divided up all of his furniture and brought Dad back to a nursing home here in Atlanta. They didn't bother to look through any of his papers or anything else and closed down his bank account, closed down his mail and just shut everything down," says Scroggin.
Following the father's death months later, the client and siblings went through their father's papers and found a life insurance policy worth $1 million. Their first incredulous question was, "Is this worth anything?"

"We checked on it, and it had been. Dad was having his account debited every month to pay for the life insurance, and when the payment stopped because the bank account got closed, the insurance company sent a letter to the address they had. The letter got returned because there was no forwarding on the address, and they lost a million dollars," Scroggin says.

Trying to Please Everyone

Even if all the i's are dotted and t's are crossed, things can still go badly. Often, it's the little things that permanently derail plans and family relationships.
Items of sentimental value can cause serious rifts among the bereaved. Experienced estate planners recommend that the person doing the planning -- known as the testator -- communicate with heirs ahead of time to spell out what everyone will get when they die and how they can come to equitable agreements on cherished objects.

"I had two brothers one day shouting at each other in their mother's kitchen about a yellow Tweety Bird figurine that had sat in the kitchen for 50 years. And I'm going, 'Guys, I'll buy one on eBay, and I won't tell you which is the original because it is only going to cost a buck-fifty,'" says Scroggin.

Larger bequests, of course, are fraught with rivalry and envy as well. It's not at all uncommon for heirs to waste the entire value of the estate fighting over what someone else inherited. At that point, the estate and the family relationships are gone.

"It's a double-edged sword; people don't want to communicate what property is going to be given because it could cause animosity. It may cause animosity now, but you can deal with it. Later on, you have no control of it because you are gone," says attorney Senen Garcia, founder of SG Law Group in Coconut Grove, Fla.

Talking about death and dying is not something that comes naturally to most families. But communicating your plans and the intentions behind them could prevent estate planning mistakes and save everyone heartache and money.

 
Posted on 5:45 AM | Categories:

Tax Secrets: Winning the estate tax game

Irv for the Naples Daily News writes: When a reader of this column consults with me, I ask him/her to send some basic data including a copy of their current estate plan. Recently, a small parade of readers have asked me to review or give a second opinion on what I call “Johnny-one-note estate planning.”
Of the last 37 plans I have reviewed, 30 were based on a single theme. The runaway winner (really a loser in tax-saving effectiveness) is the creation of a revocable trust (RT) one for him and one for her where a married couple is involved. At best, an RT is only a good start to an estate plan.
Two other strategies that I see regularly as a Johnny-one-note are: (#1) the sale of a business to the kids by the business-owner dad (SALE) and (#2) family limited partnerships (FLIPs).
1: A SALE is often used as a strategy to sell your business to your kids. Never, but never, have I seen a SALE of a family owned business as a tax-effective way to transfer a business to the next generation. Instead, consider an intentionally defective trust (IDT), which is the best way to transfer a business tax-free from Dad/Mom to the business kids. Read it again slowly tax free! (No income tax. No capital gains tax).
On average, an IDT will save about $195,000 for every $1 million of the price. For example, if Joe wants to sell the family business to his son (Sam) for $7 million, Joe and Sam will save $1,365,000 ($195,000 X 7).
Important: If you are thinking of transferring your family business to your kids, other-shareholders or one (or more) of your employees, an IDT is a must. Call me to discuss your situation.
2: A FLIP is usually not an effective way to deal with a business, a residence, or money in an IRA, profit-sharing plan or similar plan. But, when doing your estate plan, it’s a wonderful tax-saving starting point for almost every other asset you might own (publicly traded stocks and bonds, real estate, you name it.) Properly used, you can control the assets for life, protect them from the claims of creditors, and reduce their value for estate tax purposes immediately by 30 percent to 40 percent.
For example, say your transfer $1.5 million of investment assets (stocks, bonds, real estate) to a FLIP. For estate tax purposes, (after a $500,000 discount), the assets are only worth about $1 million, resulting in estate tax savings of about $200,000.
This column over the years has covered RTs, IDTs and FLIPs in detail.
Following is a list of the seven most common strategies we use to transfer your wealth intact and eliminate estate taxes. In the parenthesis following each strategy is the type of assets your should own to consider the concept. Do you own any of those assets? Make sure you get a complete explanation from your professional advisor as to how the strategy shown can save you a bundle of taxes.
Qualified personal residence trust or QPRT (residence).
IDT (your family business).
Subtrust (if you have a total of more than $350,000 in your 401(k), profit-sharing or similar plan).
Charitable remainder trust or CRT (appreciated assets, including a family business). Briefly, a CRT eliminates the capital gains tax and estate tax.
FLIP (for all assets not list above, generally income producing investments).
Irrevocable life insurance trust or ILIT (insurance is estate tax free to you and your spouse). Use other assets to pay premiums at little or no tax cost.
Premium financing (allows you to buy insurance without paying premiums in cash.
Yes, there are many more strategies. But the above list of seven strategies does the job (eliminate estate taxes or allow you to pass your wealth to your family intact).
Posted on 5:44 AM | Categories:

Financial information services company CCH Australia launched its Xero rival iBizz in New Zealand last month at a cut-price rate of NZ$5

  • Includes automatic bank coding, contacts, invoices and statements, GST, reports.
  • $5 a month, BankLink fees for feeds extra.
  • Only sold through accounting firms.
iBizz pricingFinancial information services company CCH Australia launched its Xero rival iBizz in New Zealand last month at a cut-price rate of NZ$5 a month. iBizz lacked key Xero features such as payroll and online invoicing but included online accounting, automatic bank coding, contacts, invoices and statements, and GST and reports.
The NZ$5 a month fee for unlimited users and access the cloud accounting program undercut Xero’s cheapest retail version which cost NZ$29 a month. However, access to bank feeds in iBizz was provided by BankLink and charged separately.
iBizz was targeted at cashbook-type clients, said Russell Evans, CEO of CCH Australia. Xero sold a basic ledger version without bank feeds to accounting firms for $5 a month, with discounts for firms transferring large volumes of clients from competing programs.
CCH had moved iBizz from beta to mainstream launch and was marketing it in New Zealand in conjunction with BankLink. “We’re getting a pretty good take-up of that product. It is not just about price point, it is about visibility of their clients’ position,” Evans said.
iBizz was only sold through accounting firms and couldn’t be bought by businesses directly from CCH.
“Our decision to give an accountant iBizz at $5 a month makes it very easy for an accountant and owner to work in a connected manner,” Evans said.
CCH planned to release the program to Australian accounting firms in June. CCH planned to be first to market with its cloud-based tax program in Australia the following month.
CCH was committed to selling iBizz only through accounting firms, Evans said. The low price would increase the adoption rate of cloud accounting software within firms, he added.
“By making it $5 it becomes a very easy conversation for an accountant to have with their small business owner. For us it wasn’t about being disruptive or undercutting the market. It was about empowering them,” Evans said.
iBizz also gave accountants a view of an SMB owners’ books in real time as both owner and accountant could look at the same account online from their own offices.
“The SME doesn’t want to pay any more for looking backwards. They want a trusted adviser so they can look forwards,” Evans said.
iBizz was tightly integrated with CCH’s cloud-based practice management system, CCH iFirm, which it acquired from New Zealand company Acclipse last year.
Both programs were designed to streamline the process of producing tax returns in accounting firms.
“CCH iFirm is absolutely aimed at helping accountants make the process of tax compliance far more streamlined yet still ensuring a high degree of quality assurance,” Evans said.
“By doing that it helps the accountants free up their time to provide advisory work back to their small business clients.”
CCH had designed iFirm to work with accounting software from other vendors. Accountants had been holding back from cloud accounting because they didn’t want to be stuck with one vendor, Evans said.
“If I go with Xero and can only promote Xero, accountants are objecting to that,” he said.
Cloud software was moving out of the early adopter phase to the early majority, Evans said. Eight of 10 accountants contacted by CCH wanted to talk about the cloud tomorrow, he claimed. “A third of conversations are looking to move straight away. The rest of them are contemplating a move in the next 12 to 18 months,” Evans said.
“We’re getting towards that tipping point. We will see a quantum shift in accountants moving some of their business into the cloud.”
CCH was holding a roadshow in June and July to promote its cloud software.
Posted on 5:43 AM | Categories: