Getting Around 'Double Taxation

Arden Dale for the Wall St. Journal writes: It isn't really "double taxation," but it can feel like it.  Retirees pay taxes on dividends, interest and retirement-account distributions. If they plow the money back into the market, they then will owe taxes on any future dividends and capital gains.

To be sure, the sense of being taxed twice is more psychological than financial. But many retirees, loath to pay the tax man twice on what feels like the same money, might want to find ways to manage their cash flow so that they can use the capital for living expenses or for gifts to family or charity instead, financial advisers say.
The place to start is with a master plan that encompasses cash flow, living expenses and any giving goals.
As people age, their sources of income change, which makes it important to adjust lest they end up with too much or too little cash.

For example, when individual retirement account holders reach age 70½, they must begin taking annual required minimum distributions, which can amount to a lot of money if the account is large.
"Clients that are already paying taxes on such amounts should consider using it as part of their cash flow," says Laura Sundquist, a financial planner and accountant at Sage Financial Design in Simsbury, Conn.
Ms. Sundquist says retirees should figure out how much they need to live on a monthly basis. With that figured, the investor, or his financial planner, can calculate how much to draw from various sources, such as dividends, interest and retirement accounts, while keeping taxes in mind.

They will be glad they did. Changes in federal tax rates this year raised the top rate on qualified dividends to 20% from 15%. Interest and retirement account income is taxed as ordinary income, with a new top rate of 39.6%.

Beginning this year, investment income will be taxed an additional 3.8% for singles whose adjusted gross income exceeds $200,000, or $250,000 for couples, to help fund the health-care overhaul.
Retirees should update the plan annually, mapping out cash flow for the next year, says Thomas Zimmerman, a financial planner in Evanston, Ill., who manages about $190 million.
Though most of Mr. Zimmerman's clients have a net worth of between $3 million and $5 million, many of them still rely on required minimum distributions to help cover living expenses, he says. Whatever is left, they could reinvest.

Retirees who want to give to charity may find it tax-efficient to roll part or all of a required minimum distribution to a favorite cause, advisers say. For taxpayers 70½ and older, the law allows a direct rollover of up to $100,000. 

The strategy works especially well when a charitable contribution brings a taxpayer's adjusted gross income below the thresholds for the new 3.8% investment-income surtax, says Larry Maddox, president of Horizon Advisors, a Houston firm with $205 million under management.
When giving goals are centered around family, gifts to family can be a good way to avoid being taxed twice, advisers say. A person this year can give unlimited tax-free gifts of up to $14,000 per recipient.

Building a Tax-Efficient Investment Portfolio

Miranda Marquit for  TaxDebtHelp.com writes: You know that "nothing is certain except death and taxes," as Benjamin Franklin once said.

This is true whether you have earned income from a job, or whether your income is the result of financial investments.

The good news is that investment income can be more efficient than earned income in some cases -- if you plan ahead and you are careful about building a tax-efficient portfolio.

Long-Term Capital Gains

Many people invest with the idea that some day their portfolios will grow. They can sell investments for more than they paid, and the difference can provide a comfortable income.

If this is your approach, one of the best options is to use long-term capital gains. Stock trading frequently, and harvesting profits on short-term gains isn't very efficient. If you have held an investment for less than a year, you will have to pay income taxes on the gain at your regular rate.

On the other hand, if you keep the investment for more than a year, it's considered a long-term asset, and the current highest rate you will pay is 20% -- and that's only if you make $400,000 a year as a single filer, or $450,000 as a joint filer. At other income levels, your long-term capital gains tax is either 0% or 15%. If you are in the 10% or 15% tax bracket, you won't pay taxes at all on your long-term capital gains. Keep this in mind as you build your portfolio.

Tax-Advantaged Accounts

One of the best ways to build a tax-efficient portfolio is to make use of tax-advantaged retirement accounts. You can grow your money in a tax-deferred account, like a Traditional IRA or a Traditional 401(k). More of your money goes in right now, and you don't pay taxes on it until you withdraw it. If you think that your tax rate will be lower during retirement, a tax-deferred account can help you avoid paying taxes now, and pay less later.

A Roth account does a little better. If you qualify for a Roth IRA or a Roth 401(k), you pay taxes now, but your money grows tax-free. This means that when it comes time to withdraw, you won't pay taxes. If you think that taxes will go up between now and your retirement, a Roth can be a good choice.
Roth accounts are also popular for many normally tax-inefficient assets. Stocks can be held in these accounts and improve their efficiency. Many investors like to keep US Treasuries and dividend stocks in Roth accounts, since you don't have to pay taxes on the income. The dividends earned on stocks held in a Roth account aren't federally taxed later, and you can reinvest them and receive an even greater benefit.

Another option is to use a Health Savings Account if you qualify. Not only do you receive a tax deduction for your contribution, but the money grows tax-free as long as you use it for qualified health care expenses. You can hold a variety of investments in your HSA, and reap the benefits of tax-free growth as you build up an account for medical costs. Once you reach age 59 ½. the HSA operates as a Traditional IRA if you decide to withdraw for non-medical expenses.

Finally, realize that some assets are already tax-efficient on a federal level. Interest on municipal bonds is not taxed by the federal government, so it's a waste to hold them in tax-advantaged account. Instead, maximize your contribution dollars by adding less efficient assets to your tax-advantaged accounts.

What Tax Outsourcing Looks Like Today & Sureprep is Hosting a Free Webinar : UltraTax Source Doc Processing vs. 1040SCAN Competitive Analysis & Roundtable Discussion

Sureprep is hosting a Free Webinar, UltraTax Source Doc Processing vs. 1040SCAN Competitive Analysis & Roundtable Discussion, Free Webinar on Jun 6 2013 11:00 AM - 12:30 PM (PDT)  

What UltraTax Source Doc Processing vs. 1040SCAN Competitive Analysis & Roundtable Discussion When Jun 6 2013 11:00 AM - 12:30 PM (PDT)

Tax document automation saves time. If you're using UltraTax for tax prep and/or UltraTax Source Doc Processing or you plan to evaluate your Scan-and-Organize or Scan-and-Populate options for this coming tax season this complimentary competitive analysis webinar is a "must attend" event. In this 90 minute session we will take a detailed look at how 1040SCAN and UltraTax Source Doc Processing differ in 5 key areas: Efficiency and automation Accuracy SPbinder vs. Adobe Acrobat Additional Services Total cost of ownership We will also speak with 3 UltraTax users who benefitted from 1040SCAN this last tax season. In a roundtable discussion format we will ask our panelists what steps they took to evaluate tax document automation solutions, what efficiencies they gained and what suggestions they might have for firms thinking about implementing this technology. "The decision to center our workflow process around SurePrep will prove to be one of the most important choices in the history of our firm." All webinar attendees will be entered into a random drawing for a Fujitsu fi-6130(winner will be announced at the conclusion of the webinar)

1040SCAN Summary: Leveraging the most comprehensive document coverage list in the industry including more than 320 brokerage statements, 1040SCAN saves you time by automatically bookmarking and organizing thousands of tax documents and exporting tax data to Lacerte. Tax returns are then prepared and reviewed using SurePrep's advanced workflow and paperless workpaper system, SPbinder. SPbinder is cloud-based, integrates with Microsoft Excel, Word, Outlook and PDF and is included at no additional cost with all versions of 1040SCAN. All webinar attendees will receive: Free 1040SCAN units Evaluation Guide PDF to walk you step by step through the testing process using a sample tax return Sample tax data and sample documents (or use your own data and documents for testing) Support (phone, live chat and email) Special pricing on purchased units Read what other people are saying about 1040SCAN: Highest rating by the CPA Practice Advisor SurePrep wins 2 K2 Quality Awards: Tax Technology and Customer Satisfaction Rated #1 - CPA Practice Advisor's Readers Choice Awards

Not familiar with Sureprep?   Read On...

Dave Wiley with CPA Practice Advisor writes: Over the last decade, accounting firms ranging in size from small local firms to large international ones have embraced tax outsourcing as a way to improve efficiency, client service, and staff retention. This article will provide an overview of those benefits as well as discuss the workflow, security, and regulatory issues surrounding the business process.

Tax outsourcing improves efficiency in at least three ways. First, it increases the annual billable hours per tax professional by enabling firms to staff for off-season rather than peak-season workload. Second, tax outsourcing moves firms toward a paperless tax workflow which streamlines and standardizes the preparation and review process. Third, when offshore tax outsourcing is used, firms can significantly reduce costs due to the wage differential between U.S. and offshore preparers.

Tax outsourcing improves client service in at least two ways. First, with most tax outsourcing vendors providing a one to three day turn-around time, firms can get tax returns back to their clients days if not weeks earlier. Second, by eliminating mundane data entry and file organization tasks outsourcing enables tax professionals to focus on higher level, value-added client services.

Finally, firms say that tax outsourcing improves their ability to attract and retain qualified staff by “taking the edge” off tax season. Long busy season hours drive many people out of the profession. Tax outsourcing enables firms to get the work done while providing staff some semblance of a normal life during tax season.

Tax outsourcing is enabled by paperless workflow technology that connects a CPA firm with its tax outsourcing service provider. When taxpayer source documents are received, the CPA firm scans and uploads them to the tax outsourcer’s website along with a copy of the proforma tax software file. The tax outsourcer then preparers the tax return along with an organized, indexed, and annotated set of digital workpapers that make review more efficient.

If corrections are needed, CPA firms can either have the outsourcer make them or do it themselves if the work required is small.

Along with quality, the top concern of most CPA firms that outsource is maintaining the security and privacy of taxpayer information. Firms must adequately vet their service providers to ensure data security is maintained. To do this, firms should consider the security of the location where the work is performed (the service center), the security of the hardware where the data resides (the data center), the security of the software used to provide the service, and the security of the data while in transit.

SurePrep’s onshore and offshore service centers, for example, are designed to prevent its tax preparers from removing taxpayer data from the facility. To start with, no hardware in the service center contains taxpayer data. SurePrep preparers work from virtual machines located in world class data centers. So theft of hardware from the service center would not cause a breach of taxpayer data security. Furthermore, SurePrep preparers do not have the ability to send taxpayer data out of the service center via email or the internet.

Because SurePrep maintains a paperless environment there’s no ability to print or write taxpayer data on paper that could be removed from the premises. SurePrep preparers are prohibited from using cell phones at their workstations so that data cannot be removed verbally, by texting, or digital photography. And closed circuit cameras record all work areas to ensure compliance with these security procedures.

Most people that visit their tax outsourcer’s service center comment that the security is beyond that of any CPA firm. In addition to preventing the unauthorized removal of data from the service center, the servers where the data resides need to be physically secure from theft or intrusion. To achieve this, tax outsourcers should maintain servers at data centers with SAS70 Type 2 and SSAE-16 certifications.

Even if the servers are physically secure, firms need to have confidence that outsourcers’ servers cannot be hacked into over the internet. To provide this level of assurance, SurePrep hires a company to try to hack into its systems every year. Vulnerabilities found are remediated after which the security consultant provides its unqualified opinion as to the security of the software. Finally, data must be safe while in motion. This can be achieved by ensuring all data transfers between the CPA firm and outsourcing provider are done over an encrypted connection.

Tax outsourcing services can be performed onshore or offshore. Using offshore resources reduces costs but requires the CPA firm to obtain a signed and dated Section 7216 consent letter from the taxpayer before tax return information is disclosed to an offshore tax preparer.

Section 7216 consent letters must include the name of the taxpayer, the name of the tax return preparer, the name of the recipient, the intended purpose of the disclosure, and the specific tax return information to be disclosed. The letter may specify the duration of the consent (e.g., 10 years) eliminating the need to get it signed every year. Every firm we know that has requested 7216 consents from their clients has received them without issue enabling them to enjoy cost advantages over most other firms.

Summer is a great time to test tax outsourcing and see if the process can benefit your firm. In addition to the above considerations, firms will want to ensure the tax outsourcer has the experience necessary to prepare high quality returns, and has technology that can add value beyond the tax outsourcing service. SurePrep, for example, streamlines the onscreen preparation and review of tax returns with its SPbinder paperless tax binder.

SPbinder is a workpaper system that integrates PDF, Excel, Word and e-mail documents into a single electronic tax binder. SPbinder provides a common set of tools that allow workpapers of every format to be cross-referenced, tickmarked, annotated, and signed off. SPbinder tracks open items, review notes, and automatically determines missing documents. And SPbinder enables each worksheet or page in a file to be organized separately, providing the same organizational flexibility as with paper (something that can’t be done with any other document management or workpaper system). Each tax outsourcer provides its own flavor of value-added technology. It is up to firms to decide which will provide the most benefit.

David Wyle is the President and CEO of SurePrep, a leading provider of tax productivity solutions to U.S. public accounting firms. Prior to founding SurePrep, Mr. Wyle founded and was CEO of ePace! Software, creator of the industry leading paperless engagement.

Know More About Tax Efficient Life Insurance

Alan Starc for the MoTaxGuy.com writes:   So, you have started up a new company and you have less than five employees. In a situation like this, you have two ways to arrange a life insurance policy -

a) General and
b) Tax efficient life insurance.
In case of the normal policies, you need to make a contract with your employees and you will be making the payments on behalf of them. What happens with this type of policy is that the employees become liable for both income tax and National Insurance contributions. On the contrary, if you go for tax-saving life insurance, you can make the payments without making any payment contract with your employees. Here are certain essential facts about this type of cover; please read on if you want to know more about this.
You are suitable for a tax-efficient life insurance policies, if -

1. You are the director of a company and want the company to pay for your life coverage and you also want to save on corporation taxes.
2. You have a very small business with a limited number of employees and they are not eligible enough for a group insurance policy. You can also cover all of your workers with one single policy.
3. You are a director or an employee with a hefty remuneration and enjoy a big pension fund and if you don’t want these benefits to be included in your lifetime allowances.
4. You are a one-person agency and want to buy a life insurance policy. If you do it on your own, you have to pay the premium on your own, whereas if you purchase a tax-efficient policy, the money is spent by the company, and, that too, in a tax-exempt manner.

Well, having mentioned people for whom this type of cover is an ideal solution, now let us look at the key benefits of tax efficient life insurance:
a) The benefit of this cover is not included in an employee’s lifetime pension allowances.
b) The premiums that the employer pays are not usually considered as a benefit in kind for the employee, and so, are not subject to income tax.
c) The benefits that are paid by the employer are not considered as a part of the employee’s annual allowance.
d) The amount of the premium is not usually taken into consideration for National Insurance contributions and this is applicable both for the employer and the employee.