Turn Your Vacation Into a Tax Deduction

STS Tax Talk Blog writes: Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did--and was able to legally deduct every dime that he spent on his "vacation". Here's how he did it.

1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.

Wrong.

You must have at least one business appointment before you leave in order to establish the "prior set business purpose" required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit.

Let's say Tim is a manufacturer of green office products looking to expand his business and distribute more product. One possible way to establish business contacts--if he doesn't already have them--is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.

Example: Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.

Tip: It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.

2. Make Sure your Trip is All "Business Travel."
In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100% deductible as long as your trip is business related and you are traveling away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home.

Example: Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.

Tip: Remember: You don't need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.

3. Make sure that you deduct all of your on-the-road -expenses for each day you're away.
For every day you are on business travel, you can deduct 100% of lodging, tips, car rentals, and 50% of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50% of this amount, or $25.

Tip: The IRS doesn't require receipts for travel expense under $75 per expense--except for lodging.

Example: If Tim pays $6 for drinks on the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.

Tip: He would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation includes amount, date, place of meeting, and business reason for the expense.

Example: If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.

Tip: Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.

4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.

Example: Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.

5. Make the majority of your trip days count as business days.
The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities; otherwise, you cannot make any transportation deductions.

Example: Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?

All of them. Thursday is a business day, since it includes traveling - even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.

Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.

Consult us before you plan your next trip. We'll show you the right way to legally deduct your vacation when you combine it with business. Bon Voyage!

State Tax Snapshot: The Income Tax Consequences of Allowing Workers to Telecommute

Steven Roll for Bloomberg BNA writes: Alternative work arrangements that allow a worker to telecommute from home can offer significant benefits to both the employee and employer. For the employee, working at home can eliminate time spent commuting. For the employer, fewer onsite employees can reduce the amount of office space it must lease.

But there could be one drawback to allowing an employee to telecommute, particularly if the employee resides in a state other than where the employer operates. Most state tax departments believe that an out-of-state company could be subject to their income tax solely because of the presence of one or more employees who telecommute from a home located within the state’s borders. Nearly all of the states take this position--even if the employee’s activities are limited to back-office functions such as payroll or product development tasks such as computer coding.

This is consistent with a New Jersey ruling on the issue inTelebright Corporation Inc. v. New Jersey Director, Division of Taxation, 25 N.J. Tax 333 (N.J. Tax Ct. Mar. 24, 2010), aff'd 424 N.J. Super. 384 (March 2, 2012).  In that case, a taxpayer based in Maryland allowed an employee to telecommute from home in New Jersey on a full-time basis. The employee developed and wrote software code, sending it electronically to the taxpayer's computer in Maryland.

The New Jersey Tax Court found the employee's daily presence in New Jerseysatisfied the substantial-nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of the state's labor market. On appeal, the New JerseySuperior Court affirmed. The court reasoned that the employee's activities in the state constituted “doing business” as defined by New Jersey's statute and regulations. Due Process arguments were rejected, with the court finding that the imposition of tax was justified because the employee was working on a full-time basis in the state for the taxpayer. The court reasoned that if the employee violated the restrictive covenants in her employment contract, relief could be sought in New Jerseycourts. As a result, the taxpayer had sufficient minimum contacts with New Jersey to permit taxation.

For the Bloomberg BNA 2013 Survey of State Tax Departments, 36 states, plus the District of Columbia and New York City, said income tax nexus would result for an out-of-state corporation with employees that telecommute from homes within their jurisdiction. As in prior years, most of these states said that their position would remain the same even if the corporation had made no sales in the state or the employees telecommuted for only part of their total work time.

Most of the states (33) also said nexus would arise from a single telecommuter who performed back office administrative business functions, such as payroll, as opposed to direct customer service or other activities directly related to the employer's commercial business activities. Thirty-four jurisdictions said nexus would be triggered by a single telecommuting employee who performs product development functions, such as computer coding.

What is the tax impact of being an IRA beneficiary?

Paul Premack, For the Express-News writes:   Dear Mr. Premack: A large part of my estate, if I were to pass away now, is contained in my IRA account. My total estate would fall below the amount for federal tax exemption. Since the money in the IRA account was placed there pre-tax, would there be tax implications to the beneficiaries or the estate upon my demise? G.E.W.

Two weeks ago, I discussed the difference between testamentary and non-testamentary assets. An IRA is non-testamentary, so it is not included in the “probate estate”. The funds in the IRA will pass to the designated beneficiaries, and are not affected by any statements in the Will. An IRA is, however, included in the “taxable estate” when determining whether the decedent’s assets are subject to federal estate tax.

You say that your total estate falls below the amount for federal tax exemption. What you mean is that the value of your taxable estate is below the exemption from estate taxes; currently, any estate below $5 million is exempt from the federal estate tax. Thus, your entire estate, including the IRA, is free of estate taxes.

But what about the income tax implications to your beneficiaries upon your demise? As you say, the funds in the IRA were deposited with pre-tax dollars. During your lifetime any withdrawals you make are included as taxable income on your own 1040 tax return. When you die, your designated beneficiaries receive the account funds and become liable for the income taxes due when the funds are withdrawn.

If the beneficiary is your spouse, the IRA can be rolled-over to an IRA in your spouse’s name. Your death does not trigger a requirement that withdrawals be made; rather, your spouse can make withdrawals as though the IRA was always owned by your spouse. After age 59 ½ withdrawals can be made without penalty, but are included in taxable income. After age 70 ½ minimum distributions are required annually and are subject to income taxes. Your spouse should also, immediately, name beneficiaries who will receive the funds when your spouse dies.

If the named beneficiary is not your spouse, one of these options should be available:

1. The beneficiary can withdraw the funds and pay the income taxes over a five-year period, or

2. The beneficiary can make required annual minimum distributions over the course of the beneficiary’s statistically determined life expectancy, paying income taxes as withdrawals are made. The IRS has a chart regarding life expectancy. This option could allow a younger beneficiary to spread out the withdrawals and thus the income taxes over many years; or

3. The beneficiary can make required annual minimum distributions over the course of the decedent’s statistically determined life expectancy, paying income taxes as withdrawals are made. Even though the IRA owner has died, the decedent may have been younger than the beneficiary (for example, naming an older brother as beneficiary). In that case, the beneficiary can continue to make annual required minimum distributions as though the IRA owner was still living, based on the IRS chart; or

4. The beneficiary can withdraw all the funds immediately in one lump sum and pay all income taxes in that year. This is the least attractive option from the perspective of paying income taxes, but if the beneficiary really needs the net balance right away this is the fastest approach.

You should ask the custodian of your IRA exactly what pay-out options are available to your beneficiaries under your specific plan. Some plans do not offer all of the legally available options. Remember when making your own Will to factor in the amounts the beneficiaries will receive from your IRA so that each heir gets exactly what you want them to get and no more and no less than you intend. 

MLPs (Master Limited Partnerships) : High After-Tax Income... But Avoid A Common Mistake

Bob Rice for Forbes writes:  MLPs– Master Limited Partnerships– are back in style.  Born in the 80s to incent investment in domestic energy infrastructure, Congress showered them with impressive tax benefits. Like their contemporaries, acid washed jeans and Swatches, they were forgotten for a while, but are du jour again.

Not surprising: the strong income MLPs pay out is more valuable than ever; energy infrastructure construction is roaring as US energy independence looks within reach (this time, for real); and their very special tax benefits are extra juicy.  But be careful: it’s surprisingly easy to buy them in the wrong way; and then, shame on you for ignoring a valuable tax gift.

What are MLPs?  Well, they’re a bit like other “pass through” investment vehicles you know well: they don’t pay tax at the entity level, and are required to pay out most of their current income to investors. MLPs invest in energy assets, just as REITs focus on real estate and mutual funds on stocks.  But MLPs have two special things going for them.

First, aside from being tax exempt and publicly traded, MLPs — and only MLPs —  can carry on an active business. That distinguishes them from all other investment vehicles; not just REITs and mutual funds, but the entire alphabet soup (REOCs,ETFs, CEFs, BDCs  and a dozen others).  And that, in turn, means MLPs can constantly increase their payouts — and they’ve done so, consistently, for many years.

Even cooler is that the income you earn from an MLP investment is strongly tax advantaged.  It’s treated as a “return of capital” until you’ve gotten back the full amount of your original investment (if, that is, you buy the right way– see below).  So not only are you earning several percent a year, you’re not paying tax on it. Given the solid yields MLPs tend to sport (maybe 5%), that’s a bit like owning a municipal bond paying double the typical rate.

And there’s another huge, but less obvious, benefit of MLPs over munis. Bonds values will plummet if inflation stirs because of so-called interest rate and duration risk (for video explanations of these, see www.altanswer.com).  Any yield-oriented investment has some exposure to rising rates, but MLPs are largely protected because of the way they normally increase payouts over time; and that’s why they’ve historically outperformed fixed income instruments in periods of rising rates.

So: a traded security, issued by a tax exempt issuer that can run an active business, which pays a nice, growing, tax-advantaged income stream.  All the other investment vehicles are jealous: Congress clearly has a favorite child.

There are many kinds of MLPs, but the ones to start with are the “midstream” variety.  These build or buy facilities from “drill bits to burner tips” and then charge energy companies to use them. As a result, payments by most midstream MLPs are effectively backed by many different energy companies, not just one; and often, those companies are large and stable.  So these types of MLPs typically carry minimal credit risk.

“Upstream” MLPs are more involved in exploration and development; and the “downstream” variety focuses on processing plants.  Both require a bit more expertise than investing in midstream MLPs.

Now, how (not) to buy them?  Well, remember that “return of capital” feature is a key element in MLP economics. But it does not pass through to you from a mutual fund, ETF, or ETN investment (and worse: owning a big percentage of MLPs causes those entities to lose their own tax exempt status, so there are two extra haircuts to your yield).  So no matter how attractive the yield on a so-called “MLP” mutual fund, ETF, or ETN sounds, you can do better.

Three suggestions: First, just buy them directly into your regular brokerage account.  The only downside to that is the research you’ll have to do, plus the fact that you’ll get a “K-1” tax reporting form– annoying, but its probably worth paying an accountant (if you don’t already have one) to handle the extra burden that imposes.

Second, invest with a registered investment advisor that specializes in this space– fact is, there’s a lot to know; and, especially with a high-yielding investment, its probably worth the small management fee to get at the best choices.  Especially for upstream and downstream MLPs, I’d recommend this approach.

Third, look at one of the new “registered private” offerings that do not provide daily liquidity, but do pool investments in MLPs, remain tax free themselves, and pass through the “return of capital” benefit.  But note that these are for accredited investors only ($1 million of net worth, not counting your residence).

Like any kind of security, MLPs can get overpriced, and some analysts are worried about that right now: they’ve been on a tear for a while. But, in the search for yield, Congress’ golden child is a top candidate.

Intuit Realigns Organization to Accelerate Growth / New Structure to Advance Global Connected Services Strategy / Intuit (INTU) unveils a big restructuring a day before its FQ3 report arrives. Starting Aug.1...

Intuit (INTU) unveils a big restructuring a day before its FQ3 report arrives. Starting Aug.1 (the beginning of FY14), Intuit will be split into 6 units: 

1 Small Business Financial Solutions (QuickBooks, Intuit Payments), 

2 Small Business Management Solutions (employee management, Demandforce), 

3 Consumer Tax (TurboTax), 

4 Consumer Ecosystem (Quicken), 

5 Accounting Professionals, and 

6 Financial Services (online banking). 

Kiran Patel and Alex Lintner, currently the respective chiefs of Intuit's Small Business and Global Business units, will be leaving. (tax season results)

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Intuit Inc. INTU -1.63% today announced an organizational realignment designed to propel the company into its next phase of long-term growth.

The new structure comes as the company increases its focus on two strategic outcomes: being the world's small business operating system, and providing winning solutions to do the nations' taxes in the U.S. and Canada.

"Our mission and strategy remain unchanged," said Brad Smith, Intuit president and CEO, adding that the structure aligns with the company's refreshed "connected services" strategy unveiled in September. "This realignment provides added focus on our core businesses, enabling us to move faster to better capitalize on the long-term growth opportunities that we see in North America and around the world."

Intuit's new structure becomes effective Aug. 1 in conjunction with the company's new fiscal year. It includes six go-to-market business units reporting to the chief executive officer. The business units and leaders are:

-- Dan Wernikoff - Senior vice president and general manager of Small Business Financial Solutions, a new global division that includes financial management solutions, such as QuickBooks, Intuit Payments Solutions and the Intuit Partner Platform. With this assignment, Wernikoff adds global responsibilities to the small business leadership role he has held for the last three years. Prior to his current role, Wernikoff held a variety of management roles across Intuit's Small Business Group.

-- Dan Maurer - Senior vice president and general manager of Small Business Management Solutions, a new global division focused on a portfolio of adjacent small business services, including Employee Management Solutions and Demandforce. Maurer, who will also oversee Intuit's Quickbase business, spent the last five years as senior vice president and general manager of Intuit's Consumer Group. Prior to that, Maurer led the marketing efforts for the TurboTax business and served as Intuit's chief marketing officer.

-- Sasan Goodarzi - Senior vice president and general manager of Intuit's Consumer Tax division, which offers a suite of products and services under the TurboTax brand in the U.S. and Canada. Goodarzi has held multiple general management positions at Intuit, including senior vice president and general manager for both Intuit's Financial Services division and Intuit's ProTax division. Most recently, Goodarzi served as Intuit's chief information officer as the company successfully navigated to the cloud.

-- Barry Saik - Vice president and general manager of the Consumer Ecosystem, a new division focused on solving important consumer problems with solutions such as Quicken. Saik has led Quicken for the last year. He previously held a variety of leadership roles in the TurboTax business, and most recently served as general manager of Intuit Websites, where he led the divestiture of that business in 2012.

-- Jill Ward - Continues as senior vice president and general manager of the Accounting Professionals Division, with added global responsibilities. This organization offers products and services focused on developing a loyal base of accountants who help do North America's tax returns and also use and recommend Intuit small business offerings all around the world. Ward has led the Accounting Professionals Division for the past six of her more than 10 years with Intuit. Prior to leading this business, Ward led a portfolio of industry-specific solutions and accountant-related programs and businesses, as well as Intuit's QuickBase division.

-- Cece Morken - Remains senior vice president and general manager of Intuit Financial Services, a division focused on improving consumer and small business financial problems by offering online banking solutions for the financial institutions that serve them. Morken has led the division for the past three years after spending nine years in various sales and management roles in the business.

The company also announced that Kiran Patel, executive vice president and general manager of Intuit's Small Business Group, and Alex Lintner, senior vice president and general manager of Intuit's Global Business Division, will retire from Intuit shortly after the end of the fiscal year. The work of their respective organizations will be assimilated into the new organizational structure.

"With these changes, we celebrate the success of our departing leaders and the depth of our leadership bench," added Smith. "I am excited about the future opportunities we have as a company as we enter the next chapter of our connected services journey. Our focus is clear, and we have the structure we need to accelerate our decision making and go-to-market capabilities around the world."

Tax Deductions for Student-Loan Interest / What are the rules for deducting student-loan interest on my tax return? / A New Pay-as-You-Earn Student Loan Repayment Plan

Kimberly Lankford for Kiplinger writes:   Answer:  Up to $2,500 in student-loan interest can be tax-deductible in 2013 if your modified adjusted gross income is less than $60,000 if you’re single or $125,000 if you are married and file a joint return. The deduction is phased out at higher income levels, disappearing completely if you earn more than $75,000 if single or $155,000 if filing a joint return.

You can take the deduction regardless of whether you itemize deductions. Even if your parents pay the interest on a loan for which you are liable, you can deduct the interest, as long as you are not claimed as a dependent on your parents’ tax return. 

Ann Kates Smith for Kiplinger writes:

A New Pay-as-You-Earn Student Loan Repayment Plan

Some students may get loan relief thanks to a new repayment program that can help ease the pressure on future grads.   Adam Minsky is a Boston attorney who specializes in student loan law. Still paying off his own loans, he is enrolled in an income-based repayment plan.   

How does the new repayment plan work?

The best way to describe it is in relation to the current income-based repayment plan. The IBR plan allows federal loan borrowers who qualify based on their income in relation to their loans to pay 15% of their discretionary income (the amount by which adjusted gross income exceeds the poverty line, accounting for family size). After 25 years, any remaining balance is forgiven. The new Pay As You Earn plan cuts payments to 10% of income and cuts the payment period from 25 to 20 years. 

Are all federal loans eligible for the plan?

No, only Direct student loans, funded by the U.S. Department of Education. Direct PLUS loans made to parents and consolidation loans that repay parent PLUS loans aren't eligible. The catch with Pay As You Earn is that it doesn’t apply to every borrower. To qualify, you can't have had outstanding federal loans as of October 1, 2007, and you have to have received a new loan on or after October 1, 2011. That effectively disqualifies most people in repayment now.

What can they do?

IBR will remain available for people who qualify. So will income-contingent repayment, which, like IBR, also has a 25-year repayment period but requires payments of 20% of income. The good news is that there are a lot of helpful programs. Consolidation can make management of loans easier. Forgiveness options are available, based not just on income but also on profession—such as public service.

What about students with private loans?

 None of these programs exist for private loans. Their terms are often worse, with higher rates, longer repayment and less-generous forbearance. Private student loan problems in this country are huge.

How many students will the new program help?

It's hard to say. But anything that ensures that college grads stay afloat is helpful. The consequences of defaulting on federal loans are severe. The government can garnish wages, offset federal benefits or seize tax refunds. And there's no statute of limitations; collectors can literally pursue you to the grave.

Tax Secrets: Transferring ownership

Irv Blackman for NaplesNews.com writes:  In my real-world tax practice, the parent-to-kid business transfer is a piece of cake when compared to any other kind of transfer/succession attempts.

Let me be specific: Your business is owned by multiple owners: for example, two or more brothers (and/or sisters). Or cousins. Or aunts/uncles and nephews (or nieces). Or two or more unrelated (by blood or marriage) owners. Or any combination of the foregoing. Assume the business has prospered. So have the owners. Everyone gets along fine when it comes to growing or running the business.

But mention transfer of ownership. Or succession planning silence. Uncertainty. Fear. Can’t agree on price, terms, when, to whom to make the transfer. Exactly what to do if someone dies, retires or becomes disabled.

Why is the above scenario so true? My 50-plus years of experience in this area pinpoints one reason: The lack of a single in-charge and in-control voice. When you have a mom/dad-to-the-kids situation, everyone knows dad (or mom) is boss. So they listen.

All the other ownership situations listed above have two or more voices of ownership. Each additional voice adds to and complicates the problems. And many owners have spouses more voices.

If one of the owners dies before a comprehensive transfer/succession plan is in place, there are typically two winners: The IRS and the lawyers. Everyone else the family of the deceased and the surviving business owners loses. We recently put in a succession plan for five brothers (each owning 20 percent of Success Co.) None of the brothers, or their advisors could come up with a satisfactory succession plan. The process of how to solve the above problem may be more important than the solution. Following is the eight-step process, which we have been using for 27 years:

1. Review a package (the three items listed at the end of this article) of information from each brother.

2. Separately interview each of the brothers (by telephone) to get goals for themselves, their family and Success Co.

3. Arrange an all-day meeting so everyone (including Success Co.’s CPA and lawyer) is in the same room at the same time.

4. Draw a tight agenda crafted from what we learned in items 1 and 2.

5. Open the meeting with each brother reciting their goals to the group. With minor exceptions the goals were true to the telephone interviews.

6. Make three lists (a) items everyone agrees to (the biggest agreed-to-item was “want the business to continue in the family”); (b) Minor disagreements and (c) major disagreements. We knew (because of our advance interviews) what would be on the three lists.

7. Next, we gave a short seminar on what strategies to use and how each would fit into a comprehensive plan. The (a) items were easy. (We did them first); the (b) items (with one exception it became a (c) item) were conquered without too much difficulty; the (c) items took the rest of the day. All issues were resolved except one.

8. Finally, we implemented the plan over the next two months (signed documents) while working on the open issue, which involved the value of Success Co. It was never completely resolved, but we created a strategy to overfund (using insurance) the eventual buyout that satisfied even the brother pushing for the highest value.

Do tax preparers ever quote fees before preparing returns?

Claudia Buck for the SacBee writes:  My wife and I are both retired and have no mortgage. Because of this we use the standard deduction and have a very simple tax return. We each receive a 1099R and a SSA-1099. We also receive a consolidated form 1099 for investments. We have no other dependents or deductions.

We usually get a large refund because we choose to have taxes taken out of our monthly checks. About 6 or 7 years ago, our tax preparer charged what I felt was too much to do our taxes. Each of the following two years, I changed tax preparers. Each year the return cost a little more than the year before, with the final year being $350. None of the preparers would give us an estimation of costs prior to doing the return.

Each year I took in the previous year's return to simplify the preparer's job. I have been doing my taxes myself with tax software the last 4 years.

My question: How do you find a tax preparer who is willing to give you an estimate of the cost BEFORE you have them start your return?
Thanks for your time.
Richard
Corning, CA

Answer: In my experience, very few tax preparers give a fixed fee quote in advance of providing services. In order to find one who does, I would suggest calling tax preparers in your area to ask if they prepare returns for a fixed fee and ask for a quote in advance. Be sure to get the quote in writing.

You could also try asking your friends and other professionals, such as bankers and attorneys, who they recommend for tax preparation. Call those referrals to see if they provide fixed fee services.

Most tax preparers don't give fixed fee quotes because of the difficulty in anticipating the complexity involved in preparing a client's tax return, especially for the first time.

For example, you state that your wife is receiving required minimum distributions from her IRA. Does she have "basis" in her IRA for federal or state purposes? Many people have nondeductible contributions to IRA accounts for state purposes that can be recovered tax-free because back in the late 1970s and early 1980s the state IRA deduction was less than the federal counterpart. Additionally, for many years the IRA rules have provided for nondeductible contributions that give rise to "basis" for federal as well as state purposes.

What may appear to be a simple matter of entering the data from the 1099-R form reporting the IRA distribution becomes a lot more complicated if have to go back and review prior year returns, if they are available, to calculate basis and account for it properly.

This is just one example of how something that appears simple may contain hidden complexities that can't be fully anticipated at the start of an engagement. There are many others, too numerous to list.

Read more here: http://blogs.sacbee.com/personal-finance-ask-the-experts/2013/05/do-tax-preparers-ever-quote-fees-before-preparing-returns.html#storylink=cpy

Did portability kill the credit shelter trust?

ROBERT BLOINK AND WILLIAM H. BYRNES for LifeHealthPro writes: Historically, clients used credit shelter trusts to ensure that the estate tax exemption of the first spouse to die was maximized, thus reducing the estate tax burden of the entire martial estate. Since today’s statutory portability provisions, now made permanent, automatically allow a married couple to use their entire combined exemption ($10.5 million per couple in 2013), many clients assume the credit shelter trust is no longer a necessary planning tool.

For many clients, this is a misperception — all clients should be advised as to the non-tax benefits that can be realized, but for high-net-worth clients, the use of a credit shelter trust continues to present a viable strategy for substantial estate tax savings.

Credit shelter trust basics

Prior to the advent of portability, credit shelter trusts were essentially used by married couples to fully use their two estate tax exemptions. The deceased spouse’s assets would be placed into a trust created for the benefit of the surviving spouse, using only the deceased spouse’s exemption and keeping those assets out of the surviving spouse’s estate.

For example, without portability, if a client died with $3 million in assets and passed those assets to his spouse, who also had $3 million in assets, the $3 million bequest would not be taxed at the federal level. Despite this, the surviving spouse would be left with $6 million in assets, so would possibly incur an estate tax bill upon her death without the use of a credit shelter trust.

Portability eliminated this problem by allowing a surviving spouse to automatically use his deceased spouse’s exemption, eliminating one reason for the credit shelter trust. This view, however, may be overly simplistic in light of the many other benefits a credit shelter trust can provide.

Credit shelter trusts after portability

First, it is important to note that while a deceased spouse’s exemption is portable, it also freezes at the time of that spouse’s death. This is particularly important for your high-net-worth clients because if a couple relies on portability and a significant period of time elapses before the second spouse dies, he could miss out on significant savings.

Further, the value of the assets placed into the credit shelter trust is also frozen at the time of the first spouse’s death. If the assets placed into the trust are valued at $4 million at the time of the first spouse’s death and double in value before the second spouse dies 10 years later, the entire $8 million will be excluded from the surviving spouse’s estate even if the exemption level has not yet reached that level.

The client should also be aware of estate or inheritance tax provisions at the state level. Because portability at the state level has yet to emerge, the use of a credit shelter trust may remain relevant for clients seeking to avoid state death taxes.

Clients need to remember that avoidance of transfer taxes is not the only reason estate planning is important; the credit shelter trust can provide many non-tax benefits. While the trust is set up to provide lifetime benefits for the surviving spouse, it can still allow the deceased spouse to control the eventual distribution of the trust assets to his beneficiaries after the surviving spouse’s death. 

Conclusion

Permanent spousal portability has significantly changed the way clients look at estate planning, and the advisor’s view must change as well. High-net-worth clients, in particular, must be reminded of the continued usefulness of trust vehicles in transferring and protecting the value of their assets.

Is a 401(k) your best option?

Lee Molotsky for the Philadelphia Business Journal writes: To 40l(k) or not to 40l(k), that is today’s question.  The answer to the question of whether or not to contribute to your current 401(k) is “it depends.” It depends upon a multitude of factors.

The industry-wide normal response is “of course” you should contribute to your 401(k) because the amount of monies you contribute reduces your taxable/reportable income now, your monies grow without concern for the taxation of the growth while your monies are in your 401(k), and later in life when you go to take them out (age 59 and a half without penalty and at 70 and a half you must begin to take out based upon a factor of just shy of 4 percent) you would be in a lower tax bracket. Stop the presses!

Ask yourself, “Will I be in a lower tax bracket or a higher tax bracket 5 years from now, 10 years from now, 20 years from now, 30 years from now?” One has to think we will all be in a higher tax bracket later down the road, not a lower one.

That sort of lends one to say pay the taxes now on the income – not later when you’re in a higher tax bracket. .

Question No. 2 may have us leaning in the other direction: Does your employer match? Is it 2 percent? 3 percent? 4 percent? 6 percent? If so, in todays extremely low interest rate environment, it’s quite advantageous to start out way ahead of the curve by receiving a match. It’s basically a bonus, without a current tax liability. That bonus money is yours (to win or lose).

Question No. 3: Do I have extensive choices of what to do with my 401(k) monies within the plan? Many plans are quite limited. Some plans offer only ten funds.

Question No. 4: Do I have a variety of safe, fixed options with my 401(k)?

About 99 percent of the time, the answer is no. “I only have a choice of 10 to 15 different mutual funds.”

“I don’t have a lot of choices.”

“I’ve decided to move out of the stock funds into the bond funds to protect myself.”

Be careful if this is you. Understand how bonds function. Understand the relationship between bonds and interest rates.

Question No. 5: How high are the expenses of the funds in your 401(k)? Ask your HR department or employer to see the internal costs of your 401(k). Most times, those costs are applied directly against the return of the assets in your account. Beware of high fee 401(k) choices.

Question No.6: Review the performance of your account since 2000. How much money did you put in personally? Separate the matched dollars (if any) and then compare those monies to the current value. Even though the major indicators are at or near all-time highs, many individuals are nowhere near their high water mark. Are you?

Question No. 7: Do you know the beta of each of your funds/ETFS in your 401(k). How about the beta of just the funds you are in?

Many people have a sizable percentage of their family’s assets in their 401(k), but they don’t know what the beta of their funds/positions are. You might be taking unnecessary risk without knowing, and you might not be rewarded for the amount of risk you are taking.

Your funds might be doing well, or just ok, but to obtain those results, the funds BETA might be quite high. Do your homework. Know your beta. If your 401(k) has funds with low expenses, low BETAs, a wide variety of choices, excellent results, and matching, (6 percent preferred, or 5 percent or even 4 percent), the plan sounds like a yes – you should be participating.

If any of the factors above don’t check out to your satisfaction, especially the lack of safe options, no matching funds, and high expenses, then no is the more likely response.

If you’re unhappy with the results of the above responses, the next step is to find out if your plan allows for an “in-service” withdrawal. If not, you might consider stopping your contributions and discussing with an advisor.

There are many nonqualified, principle-protected, safe-money alternatives which don’t force you to begin taking distributions at 70 and a half, and eliminate many of the bone-chilling, roller coaster riding anxiety-filled moments that go along with being in today’s stock markets are available.

Many of these non-qualified deposits provide lifetime income guarantees and many others allow for tax-fee distributions.

Keep your eyes and ears open and protect your assets – if you covet safety and security.

Are Wealthy Fooling Themselves About Risk?

KAREN DEMASTERS for Financial Advisor writes: Many wealthy individuals do not have adequate plans for passing on their wealth and may have a false sense of financial security, according to a U.S. Trust survey released today.

In addition, wealthy individuals have not taken the costs of their family's health needs into account and have conflicting views about investment risks, according to the report.

“We need to shift the conversation about wealth management to these important topics and expand their understanding of risk,” says Keith Banks, president of U.S. Trust.

In compiling the report, U.S. Trust 2013 Insights on Wealth and Worth, U.S. Trust Bank of America Private Wealth Management surveyed 711 individuals with at least $3 million in investable assets. The sampling was evenly divided among those with $3 million to $5 million in wealth, $5 million to $10 million and $10 million and above.

Although most have a will, the survey found 72 percent of respondents do not have a comprehensive estate plan, including 84 percent of those under the age of 49, and 65 percent age 49 and older. Fifty-eight percent have not named a durable power of attorney to make financial decisions.  In addition, 55 percent have never formed a trust.

Two thirds have organized their personal and financial records in one place, but 46 percent have not informed the executor of their estate about how to access the records. At the same time, 63 percent have not established who should have access to passwords and digital accounts.

Growth Trumps Protection

Investment risk is less of a concern than it was a year ago. Sixty percent now place a higher investment priority on growing than preserving assets. This is a reversal since last year, when 58 percent were focused on preservation. But at the same time, respondents are nearly twice as likely to say that lowering risks is a higher priority than pursuing higher returns. About half say their current asset allocation accurately reflects their risk tolerance; however, only 45 percent feel they have a good understanding of their risk tolerance.

A little more than half say they have substantial amounts of funds in cash accounts, but only 6 percent say they are content to leave it there.

Health care costs, including long-term care costs, have not been fully taken into account, says U.S. Trust, and may constitute the hidden risk to family wealth. Less than half have a financial plan that accounts for long-term care needs that they and their spouse might need, and only 18 percent of those whose parents are still living have a financial plan that accounts for the long-term care cost the parents might need.

Despite some holes in the planning process, 88 percent of respondents consider themselves financially secure and 70 percent feel positive about their financial security in the future, U.S. Trust says. Nearly half feel more financially secure today than they did five years ago, while one quarter feel less secure.

It adds up to a possible false sense of security, the report's authors say.

“The message for financial advisors is that if they are dealing with clients who feel better about themselves, the advisors should probe what is beneath that optimism to see if additional planning is necessary,” says Chris Heilmann, chief fiduciary executive of U.S. Trust Bank of America Private Wealth Management.

For instance, the tax law changes are not understood by many of the wealthy, according to the survey. Fifty-seven percent of respondents say pursuing higher returns regardless of the tax impact is a higher priority than minimizing taxes. However, only 34 percent of respondents feel very well informed about the impact of the tax law changes on their portfolio.

Even among those who use a financial advisor, fewer than one half feel very well informed about the impact of taxes.

Actions Belie Words

Contradictions were also revealed about the use of financial planners. Eighty-eight percent of the parents say their children would benefit from discussions with a financial professional, but only 16 percent have provided, or have plans to provide, their children with formal financial skills training.

Eight in 10 of the wealthy use a financial planner but six in 10 say the planner talks to them about one aspect of their wealth and not all of their wealth needs.

Forty-four percent have a primary financial advisor who has never established a relationship with their spouse and 69 percent have an advisor who has not established a relationship with children or heirs.

“Advisors who are only working with one spouse should be encouraged to work with married couples as couples so that both spouses have a level of understanding about finances,” Heilmann says.

Another disconnect is shown for investing in companies that follow their beliefs, which is important to many of the wealthy investors. Nearly half say they are willing to accept lower returns in companies that have a greater positive impact on society, but only one in four has reviewed his investment portfolio to evaluate its social, political or environmental impact.