Advisers Bolster Same-Sex Estate, Tax Planning

Arden Dale for the Wall St. Journal writes:  It's becoming a busy time for financial advisers with same-sex clients.  As more states recognize gay marriage and the U.S. Supreme Court gets ready to weigh in next month in a case that involves the federal tax rules for gay spouses, many same-sex couples want to change their tax and estate plans to keep pace.   For many advisers, a starting point is to review insurance policies and trusts in client estate plans. Some are even amending federal income, gift and estate tax returns for certain clients. 

"It's all a bit confusing now for same-sex couples," said Joshua T. Hatfield Charles, a financial planner in Rockville, Md., who manages around $125 million and speaks on behalf of the Certified Financial Planner Board of Standards on  same-sex issues. 

Many same-sex couples have lived together for some time and have long shared property and other assets, even if not in a legally recognized way. Their financial affairs can be more tangled than those of heterosexual couples who haven't had to wait to marry.
But as legalized gay marriage becomes more common across the U.S., it's crucial for gay couples and their advisers to start making tax and estate plans--or changes to existing plans to reflect the new laws, advisers say. 

Often, a place to start is a will that specifically names the spouse as heir of a property or other assets. Without that, property may pass to family members against the wishes of the owner, rather than a surviving spouse. 

This month, Delaware, Minnesota and Rhode Island all recognized gay marriage, bringing to 12 the number of states that now allow same-sex unions. 

And the high court is expected to decide in June on United States v. Windsor--which involves a suit by Edie Windsor, a gay woman who owes $363,000 in federal taxes on the estate of a woman she lived with for 44 years. It challenges the 1996 Defense of Marriage Act, or DOMA, which, among other things, denies same-sex couples federal tax breaks available to heterosexual couples. 

Recently, Mr. Charles advised a pair in Maryland--which recognized gay marriage in early 2013--they might get better access to tax and medical benefits by tying the knot now instead of waiting for the outcome of the Windsor case. The pair, for example, might be able to better protect their assets through joint titling which is now available only to married couples.
Jennifer Hatch, an adviser in New York, also encourages gay couples to move forward and start making marriage plans in states that have recently allowed same-sex unions.
"Get married, and don't move to a state that doesn't recognize your relationship until we have full marriage equality," said Ms. Hatch, managing partner of Christopher Street Financial, an advisory firm that manages about $275 million. 

Ms. Hatch is reviewing any life insurance policies her clients hold for estate tax purposes. Life insurance is commonly used to pay for estate taxes, both federal and state. But gay couples in states that recently recognized gay marriage may no longer need such policies if the state allows an estate to exempt both spouses from the estate tax. 

Some gay advocates, including Emily Hecht-McGowan, director of public policy at the Family Equality Council in Washington, D.C., expect the Supreme Court to side with Ms. Windsor and declare DOMA unconstitutional. 

Indeed, some tax advisers are making contingency plans in case that happens. New York attorney Ken Weissenberg has filed what he calls "protective" amended returns for a number of clients. These claim federal tax refunds going back several years if the court declares DOMA unconstitutional. 

On the other hand, for example, some gay couples who have not yet filed joint tax returns for 2012 don't need to rush, he said. 

"They should wait and see what the court says," said Mr. Weissenberg, a partner in the New York office of EisnerAmper, an accounting and financial advisory firm.

The Progressive Accountant Interview with Kashoo Online Accounting (Click To View)

Roth IRAs and the New Tax Law

Bob Carlson for Investing Daily writes:   Tax planning is less of a guessing game these days with the tax law settled, at least until Congress decides to push some kind of tax reform.

In the wake of the American Taxpayer Relief Act of 2012, we need to revise and rethink some strategies about Roth IRAs, especially about converting traditional IRAs to Roth IRAs.

There are a number of factors to consider when deciding whether or not to convert a traditional IRA to a Roth IRA. I’ve discussed these in detail in the past. Detailed discussions also are in my books, Personal Finance for Seniors for Dummies and The New Rules of Retirement. Conversions have a trade-off. You pay income taxes on the converted amount today. In return, future distributions of compounded income and gains (after a five-year waiting period) are tax free.

Important factors in deciding whether to convert an IRA include the difference between today’s tax rates and future rates; how long the IRA will compound before you take distributions; whether you can use cash from outside the IRA to pay the conversion taxes; the expected investment return from the converted IRA; and whether in the conversion year you’ll be pushed into a higher tax bracket, have itemized deductions reduced, or incur other costs.

The American Taxpayer Relief Act of 2012 didn’t increase taxes on as many people as initially projected. But higher-income taxpayers saw their top rate increase from 35% to 39.6%. In addition, there is the new 3.8% tax on investment income for joint filers with adjusted gross income above $250,000. The law also resurrected the phase out of personal exemptions and the reduction of itemized deductions for higher income taxpayers.

There was a rush to IRA conversions in late 2012 because of fears that tax rates would be increased more substantially than they were. People who converted in 2012 should review that decision. You have until October 2013 to recharacterize, or reverse, that conversion.

Some people who did conversions in 2012 anticipating higher income tax rates have found that the new, higher rates don’t affect them. They should consider recharacterizing part of their 2012 conversions if they converted entire IRAs. Instead of paying all those conversion taxes in one year, they might prefer to convert a portion of the IRA each year and pay the taxes over time. Also, the serial conversions might be structured so the amount converted each year isn’t high enough to push you into a higher tax bracket. When those scenarios appeal to you, recharacterize a large portion of the 2012 conversion and instead convert that amount over several years.

For those who haven’t converted their IRAs, the new tax law makes serial or installment conversions more attractive. With tax rates apparently stabilized for a while, the long-term picture can dictate conversion decisions. You don’t have to attempt to guess where the tax law is headed.

With stable tax rates, there’s less reason to lump the conversion of an entire IRA in one year. Instead, you can convert an amount each year that avoids pushing you into the next tax bracket and convert the entire IRA over time. Or you can decide you want only part of the IRA converted.

Even so, there are potential extra costs to this strategy to beware of. Including a conversion amount in income each year could trigger other taxes or penalties. The higher income could lead to the phase out of personal exemptions, a reduction in itemized deductions, including Social Security benefits in gross income, the surtax on Medicare premiums, and more. You have to consider all the potential tax triggers when toting up the cost of a conversion and determining the amount to convert.

Taxpayers who now are in the top tax bracket or who would be moved into it by conversion amounts also need to consider the long-term view. It still could make sense for them to convert at least part of an IRA and pay taxes today to ensure a 0% tax rate on a portion of their investment income in the future. The conversion might be especially attractive when assets from taxable accounts are used to pay the conversion taxes, and income from those assets would have been subject to the new 3.8% tax on investment income in addition to regular taxes.

The new tax rules put some wrinkles in the IRA conversion decision. Don’t jump to a quick conclusion about the effects. There are several new factors to consider, not one. Analyze how all the factors affect you. There are so many factors to consider that it often makes sense to work with a financial planner or tax accountant who has some experience analyzing the trade offs.

I’ve long encouraged readers to have some tax diversification. None of us can be sure what the tax law will be in the future. Don’t assume it will move in one direction, because you’re likely to be hurt badly if it is something different. Instead, have all the different types of accounts: traditional IRA or 401(k), Roth IRA, taxable account, and perhaps an annuity or investment life insurance. That way, you’re likely to benefit from some tax changes and be hurt by others but not be hurt badly by under most scenarios.

Munis and high-income senior tax planning

Rich White for BenefitsPro writes: The municipal bond industry is concerned about a proposal to cap the value of tax-exempt municipal bond interest to 28 percent for high-income taxpayers.

The proposal has appeared in the past two (FY 2013 and 2014) Obama budgets, although in somewhat different form. The 2013 budget proposed the cap only for joint filers reporting taxable income above $250,000 or single-filers above $200,000. The 2014 proposal would affect any taxpayer in a bracket above 28 percent (currently 33 percent, 35percent and 39.6 percent).  Actually, the proposal helps to demonstrate who is facing the highest marginal tax impacts in America – high-income seniors.

Recently, the group Municipal Bonds for America estimated that about 59 percent of muni interest goes to investors age 65 and over. Their statement against the proposal, delivered to the House Ways and Means Working Group, is available to read.
For a 35-percent bracket senior who invests in munis, enacting the proposal would add about 7percent to the marginal rate – on top of current income taxes, the new 3.8 percent UIMCT, the impact of deduction and exemption phase-outs, and the Medicare Part B premium surcharge.

In total, it potentially creates a 55-60 percent marginal rate.  Fortunately, many high-income seniors have the flexibility to plan ahead and adjust reported taxable incomes. 
Now is the time to emphasize tax planning and tax-managed investment solutions to your high-income senior clients. Read the Bond Buyer’s analysis of the proposed 28 percent tax-exempt cap.

H&R Block Launches Remote Service, Augments In-Office Tax Prep for U.S. Citizens Living, Working Abroad

The United States is the only developed country that levies income taxes based on citizenship versus just residency. For the more than 6 million "expats" -- Americans living abroad -- the world's largest tax preparation company launched a new remote service to help these taxpayers comply with their federal tax obligations. H&R Block (NYSE: HRB) is the only company that can serve this unique taxpayer in an office abroad or via a new remote service by their June 17 filing deadline. 

H&R Block also launched a microsite for expats that answers many questions and outlines the filing responsibilities for those with dual citizenship and those who are working or retired abroad. 

"Taxes can be confusing enough. Throw in the additional complexity of residing or working abroad and the simplest of tax situations can become more complicated," said Kathy Pickering, executive director of The Tax Institute at H&R Block. "Whether the taxpayer has dual citizenship, works abroad or has retired to a tropical island paradise, H&R Block and its new microsite are here to help in-person and online." 

Expats can have their U.S. tax returns completed by H&R Block tax experts in an H&R Block office in more than 14 countries and U.S. territories. In addition, they can now work with a tax professional, using the company's remote service. The remote service is a secure option that includes a customized interview to ensure an accurate return is prepared. Plus, all the benefits of an H&R Block office experience are available, including accuracy guarantees and the opportunity for free Second Look® reviews of past returns. 

Know the filing requirementsU.S. citizens who meet the minimum income requirement -- $19,500 for married filing jointly and $9,750 for single filers -- are required to file a federal tax return regardless of where they live, even if all of their income was earned in a foreign country. Some taxpayers working abroad may be able to exclude some foreign income and claim a credit for foreign taxes paid on their U.S. tax return, which could offset any taxes owed to the United States.
Many expats also may have foreign bank or retirement accounts. The IRS recently announced it is working closely with United Kingdom and Australian officials to identify accounts held by Americans who may have a reporting requirement. The foreign bank account reporting form (FBAR) must be submitted to the Department of Treasury by June 30, but the information also may need to be included with the tax return on Form 8938, which is due earlier in the month. 

"H&R Block's expat tax experts have deep knowledge of the U.S. tax code in addition to the filing needs of this unique taxpayer," said Kevin Mobley, director of international marketing at H&R Block. "We are bringing this expertise to the front door of every expat via our remote service." 

Taxpayers working abroad who are not able to file an accurate return by June 17 can submit a tax filing extension to make their filing deadline Oct. 15. While penalties are not assessed, interest accrues on any balance due from the April 15 filing deadline.
To find an international H&R Block office, visit expats.hrblock.com or call 800-HRBLOCK.

About H&R BlockH&R Block, Inc. (NYSE: HRB) is the world's largest tax services provider. More than 600 million tax returns have been prepared worldwide by and through H&R Block since 1955. In fiscal 2012, H&R Block had annual revenues of $2.9 billion with 25.6 million tax returns prepared worldwide. Tax return preparation services are provided in company-owned and franchise retail tax offices by approximately 90,000 professional tax preparers, and through H&R Block At Home™ digital products. H&R Block Bank provides affordable banking products and services. For more information, visit the H&R Block Online Press Center. 

About The Tax Institute at H&R Block
The Tax Institute at H&R Block is the go-to source for objective insights about federal and state tax laws affecting the individual. It provides nonpartisan information and analysis about the real world implications of tax policies and proposals to policymakers, journalists, experts and tax preparers. The Institute's experts include CPAs, Enrolled Agents, tax attorneys and former IRS agents. Building off more than 10 years of research and analysis from a specialized tax research group at H&R Block, the company launched The Tax Institute in 2007.

ETFs for Investors Who Buy and Hold / The basics are the best picks for long-term investors

ANDREA COOMBES for the Wall St Journal writes: Investors are gaining access to a growing number of exchange-traded funds, but financial planners don't always agree about whether that's good news for buy-and-hold investors. Many advisers say the profusion of narrowly focused ETFs runs counter to one of the central ideas of conservative investing: building a simple diversified portfolio with funds that each cover a broad market swath. "The slicing and dicing that is happening in the ETF arena is totally getting out of hand," says George Papadopoulos, a fee-only financial planner in Novi, Mich. He notes that there's an agriculture ETF focused solely on corn futures. These types of funds, Mr. Papadopoulos says, "are not diversified enough, and they are enticing consumers to play the market." Dan Goldie, president of Dan Goldie Financial Services LLC, in Menlo Park, Calif., says investors should favor ETFs with "hundreds or thousands of stocks, not narrowed down to just technology or just financials or just gold." 

For example, he says, that might be an ETF that offers exposure to small-cap stocks by tracking the Russell 2000 index. Still, some advisers say there are plenty of ETFs, including newer ones, that are good building blocks for buy-and-holders. The characteristics to look for, they say, should be the same ones used to shop for index mutual funds: products with broad coverage and low cost. BlackRock Inc.'s BLK -0.53% iShares unit in October launched what it calls its Core portfolio: a collection of 10 ETFs—four new and six existing products—aimed squarely at people who are investing for the long haul rather than trading frequently. The offering represents additional low-cost options in the broad-based ETF space—including one ETF tracking the total U.S. stock market and another for the total international stock realm—not unlike products offered by Vanguard Group, Charles Schwab Corp. SCHW +0.10% and other providers. Jim Wiandt, founder and chief executive of IndexUniverse LLC, says he likes the new iShares Core MSCI Emerging Markets ETF, IEMG -1.00% because it offers individual investors greater access to small-cap companies. The new fund tracks the MSCI Emerging Markets Investable Market Index, composed of about 2,600 companies—substantially more than iShares MSCI Emerging Markets, EEM -1.06% launched a decade earlier. That fund tracks the MSCI Emerging Markets Index, with about 820 companies. The new product also has a lower expense ratio: 0.18% compared with 0.69% for the iShares MSCI Emerging Markets ETF. "I like the small-cap exposure—that's interesting," Mr. Wiandt says, adding that more choice for investors is "a good thing." But do buy-and-hold investors need ETFs at all? Mr. Goldie says: Not so much. Rick Ferri, founder of Portfolio Solutions LLC, an investment-management company in Troy, Mich., agrees, noting there are risks to watch for. ETFs may offer tax benefits and some have lower costs than traditional index funds, Mr. Ferri says, but "there's a learning curve" for investors who aren't used to them. For instance, he says, a buy-and-hold investor putting in an order to rebalance a portfolio of ETFs "could get caught in a lot of things," including volatile intraday trading. During the flash crash in May 2010, for example, the Dow Jones Industrial Average fell about 1,000 points before quickly rebounding. 

Plus there are times when the prices of ETFs veer away from the value of the underlying holdings, which can eat into or add to an investor's return. By contrast, with a traditional index mutual fund, "you're always buying at the net asset value," Mr. Goldie notes. For buy-and-hold investors who are confident they can navigate the world of ETF trading, the choice between such products and traditional index funds may come down, simply, to the type of investment vehicle. If your money is in a 401(k), you're less likely to have access to ETFs. If you're investing through a brokerage firm that offers commission-free trades on some ETFs, your cheapest option may be ETFs. But even comparing costs can get complicated: A commission-free ETF may cost more, over time, than a similar fund that requires paying a commission but has a lower expense ratio, notes Joel Dickson, senior investment strategist at Vanguard Group.

College Savings Plans Start To Welcome Low-Cost ETFs & the Tax Benefits

PAUL KATZEFF, INVESTOR'S BUSINESS DAILY writes: Mutual funds still hold bragging rights when it comes to favorite investment vehicle in 529 savings plans.

But ETFs are giving it the ol' college try in terms of closing the gap.
There are 92 plans in 50 states and the District of Columbia, according to AKF Consulting, an adviser to state administrators of 529 plans.  Of the 92, 15 offer ETFs. That's up from 10 offering ETFs among the 94 plans that existed in February 2012.

The growth of ETFs in 529s is mainly due to interest from financial advisers, says Andrea Feirstein, managing director of AKF Consulting.
Roughly one-third — 31 plans — of all 529s sell accounts only through advisers. Nine of those 31 offer ETFs.

Among the 61 direct-sold 529s, only six offer ETFs.
"Advisers like them because ETFs give them very specialized investment options," Feirstein said. "And ETFs tend to be lower cost. So an adviser who puts an ETF into a client's account is lowering the investment expense, which should give them better performance (than a mutual fund that invests the same way)."

At least that's the theory. Actual results sometimes deviate from that.
This year through April 30, stock mutual funds have averaged a 10.08% gain vs. 8.60% for stock ETFs, according to Morningstar Inc. Over the past five years mutual funds' average annual gain was 3.63% vs. 3.36% for ETFs.

That outperformance was despite an average annual expense ratio of 1.36%, nearly triple the 0.5% of stock ETFs.

U.S. stock ETFs outperformed U.S. stock mutual funds in both time periods.

Tax Benefits
One of the key attractions of ETFs is dampened by 529-plan rules. Unlike mutual funds, which are priced once daily after the end of trading, ETFs trade and are priced throughout the day. But 529 rules bar account owners from trading an account more than once a year. Underlying investments, whether mutual funds or ETFs, trade whenever they like. Still, index-oriented funds of either stripe tend to rebalance infrequently anyway.

Tax advantages are a large part of the appeal of 529 plans.

Investment earnings grow on a federal tax-deferred basis. Withdrawals used for qualified college costs are tax free. And some states also allow income-tax deductions for contributions.
The rise of ETFs inside 529s reflects the overall growth of ETFs.
ETFs had $1.5 trillion in assets as of April 30. That was up 144% from $610 billion five years earlier.
Mutual fund assets hit $10.1 trillion, up 31% from $7.7 trillion.

Steve Coyle, head of the U.S. subadvisory group at State Street Global Advisors, which runs the SPDR line of ETFs, says that ETFs let 529 investors build a diversified portfolio with low-cost funds.
"It's a marriage between the sophistication of an institutional portfolio and the college savings needs of individual investors," Coyle said.

Investors who don't want to make their own investment decisions as their child approaches college can use ETFs that become increasingly conservative over time, like target-date mutual funds, he says.

Accounting In The Cloud - Web Based Access To Your Financial Management Information

Smith & Williamson writes: What is cloud accounting?

Cloud accounting is a hot topic in the accountancy world at present. Traditionally, a business would purchase accounting software as a 'product' and install this onto their computer systems.  With cloud accounting, you are purchasing the use of accounting software via an online service provider, therefore purchasing Software As A Service (SAAS). The accounting information is therefore accessed via the internet.

What are the benefits?

• No initial capital expenditure as paid by monthly fee.
• Accessed online and therefore the software is Mac or PC compatible.
• Unlimited data storage as the accounting information is not held on your internal network (i.e. you are not constrained to the storage memory on your computer as data is held in the cloud).
• Access anywhere provides convenience and enhanced business agility; you just need an internet connection.
• No upgrade fees are incurred as the service is continuous, which means you are always operating on the latest version of the software with access to the most up to date features.

Security

The most common concern with accounting in the cloud is security. You are effectively outsourcing the security of your accounting data. However, you should bear in mind:

• security levels are scaled when using a cloud accounting software provider. Instead of the basic level of protection you would normally purchase for your internal PC, an external provider would be providing security to a much higher level. They also have the cumulative effect of providing security to a higher number of end users
• cloud software providers must meet the requirements of ISO 27001, being the International Standard for Data Security. Their business reputation is at risk if they do not maintain the expected security standards automatic data back-ups are performed regularly by cloud software providers, something that may be forgotten when the responsibility is held by you internally.

Cloud accounting suppliers

• Sage One - software aimed at freelancers and individuals with basic functionality.
• Xero - software aimed at small businesses with basic functionality.
• Sage 50 accounts - hosted version of full software.
• Quickbooks online - three levels of software are available for different sizes of business.
• Bright Pearl - software particularly compatible for retail and wholesale businesses and also online retailers.
• Liquid Accounts - scaleable solution for growth businesses.

Cloud accounting top tips

• Try before you buy - most providers offer a 30 day trial of the software to enable you to test 'real data'.
• Look for free conversions - some providers will offer to convert data held on your traditional software and upload this into the cloud version.
• Purchase a service that meets your needs - there are a variety of service providers available, however, do not be tempted to purchase the most expensive versions if you won't be using all of the functionality.

IRS Accepting Applications for Low Income Taxpayer Clinic Grants

The Internal Revenue Service today announced the opening of the 2014 Low Income Taxpayer Clinic (LITC) grant application process.

The LITC grant program is a federal program administered by the Office of the Taxpayer Advocate at the IRS, led by National Taxpayer Advocate Nina E. Olson. The LITC program awards matching grants of up to $100,000 per year to qualifying organizations to develop, expand, or maintain a low income taxpayer clinic. The LITC program funds organizations that serve low income individuals who have a tax dispute with the IRS (i.e., a “controversy clinic”) and organizations that provide education and outreach to taxpayers who speak English as a second language (an “ESL clinic”). Applicants may apply as either type of organization, or both. Although LITCs receive partial funding from the IRS, LITCs, their employees, and their volunteers operate independently from the IRS. Examples of qualifying organizations include:

• Clinical programs at accredited law, business or accounting schools whose students represent low income taxpayers in tax disputes with the IRS; and
• Organizations exempt from tax under Internal Revenue Code Section 501(a) that represent low income taxpayers in tax disputes with the IRS or refer those taxpayers to qualified representatives, or that provide outreach and education for ESL taxpayers.

The IRS welcomes all applications and will ensure that each application receives full consideration. The IRS is particularly interested in receiving applications from organizations that will operate in areas that are currently underserved.

Currently underserved areas are as follows:

Identified States for New or Existing Clinics
CONTROVERSY		ESL
Alaska, Alabama, Kansas, North Dakota, South Dakota		Alabama, Colorado, Connecticut, Georgia, Louisiana, Montana, New Mexico, North Dakota, South Dakota
Identified Metropolitan Areas for New Clinic Applications
Los Angeles, California, including the following counties:	Los Angeles, Kern, Riverside, Ventura
Sacramento, California,           including the following counties:	El Dorado, Placer, Sacramento, San Joaquin, Stanislaus
Philadelphia, Pennsylvania, including the following counties:	Berks, Delaware, Philadelphia
St. Louis, Missouri,                     including the following counties:	Cape Girardeau, Jefferson, St. Francois, St. Louis

Copies of the 2014 Grant Application Package and Guidelines, IRS Publication 3319, can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

The IRS is authorized to award a multi-year grant not to exceed three years. For a new clinic or a clinic applying for the first year of a three-year grant, the clinic must submit the application electronically at www.grants.gov. For an existing clinic requesting funding for the second or third year of a multi-year grant, the clinic must submit the application electronically 

atwww.grantsolutions.gov. All applicants must use the funding number of TREAS-GRANTS-052014-001 and applications must be submitted electronically by July 12, 2013.

Questions about the LITC Program or grant application process can be addressed to the LITC Program Office at 202-622-4711 (not a toll-free call) or by email at 

LITCProgramOffice@irs.gov.

For more information about the organizations receiving funding in 2013, see Publication 4134, Low Income Taxpayer Clinic List. This publication is also available by calling 800-TAX-FORM (800-829-3676), or can be found at your local IRS office.