Mid-Year Tax Planning Tips to Do Now

Emily Driscoll for FoxBusiness writes:  While Tax Day 2014 may seem like a long way out, experts say that now is the time for consumers to get organized and be on track with new tax code regulations to avoid possibly missing out on exemptions, deductions and credits.

“A check-up can be a particularly wise move this year, given the rise in the markets since the start of 2013, and the changes that have taken effect with capital gains and other related taxes,” says Rocco Carriero, an Ameriprise financial advisor.

The major changes in the tax laws for 2013 means taxpayers, especially higher-income earners, may be in for a big surprise when it comes time to file their return in April if they’re not cognizant of the new regulations, says Anthony DeFranco, certified public accountant with Couto DeFranco.

“Before, the highest tax bracket for individuals was 35% and it’s now 39.6%,” he explains. “The good news is this [only] affects single filers with a taxable income over $400,000 and joint filers with taxable income over $450,000.”

No matter their tax bracket, all filers should understand how tax exemptions, deductions and credits can reduce the amount of taxes owed, and avoid making a mistake or potentially getting audited.

“A common mistake is putting certain expenses on the wrong schedule and making an otherwise deductible expense become not deductible,” says Mike Piershale, president of Piershale Financial Group. “Recognize that if you're not experienced at preparing a tax return, get professional help from either a CPA or a qualified tax preparer.” 

Tip 1: File for Exemptions Correctly

Taxpayers should strive to take full advantage of every eligible exemption. For instance, a married couple filing jointly would have an exemption for each spouse as well as one for each dependent.  W-2 employees should pay close attention to ensure they have the right exemptions in place. Having too much money withheld can be a misstep, preventing them from maintaining cash flow and investing it wisely to grow over time or to ward off debt, warns Carriero.

“On the other hand, having too little withheld may cause a person to have to write a check to the IRS at the end of the year,” he says.

Although declaring personal exemptions is usually fairly straightforward, DeFranco warns that it can get complex due to the change in tax law.

“If a person is not subject to alternative minimum tax, the new law for 2013 phases out personal exemptions,” he says. “Depending on a person’s income, for each $2,500 over a threshold--for joint filers that’s $300,000 and for single filers that’s $250,000--your personal exemptions are reduced by 2%.”

Tip 2: Keep Track of Deductions

Deductions reduce taxable income and the value of those deductions are based on one’s marginal tax bracket, so it’s important to make sure they are being claimed on the right form and for the accurate amount.

Taking deductions on mortgage interest and contributions to a 401(k) or other retirement vehicles will reduce adjusted gross income, says certified public accountant Michael Eisenberg, of Einsenberg Financial Advisors and spokesperson for the California Society of CPAs. 

“You will then be able to maybe avoid going over the threshold that will throw you either into a higher tax bracket or subjects your income to the surcharge for the Affordable Health Care bill,” he says.

Keeping accurate records for deductions such as charitable donations or medical expenses is essential, says Greg Stevens, CFP, Cabot Money Management.

“If you do have medical expenses, they are only deductible in excess of 7.5% of your [adjusted gross income] and keeping receipts for medical expenses is a big one, especially for older tax payers with a high level of medical care, in a nursing home or have home help aids come to them.”

To determine the best filing status, DeFranco recommends taxpayers add up all itemized deductions and compare it to the standard deduction to see which number is larger.

“The standard deduction is $12,200 for married couples and $6,100 for individuals and most people if they own a house are going to be better off with the itemized deductions because of the mortgage interest deduction and real estate tax deduction,” he says.

Tip 3: Take Advantage of All Applicable Credits

Tax credits are extremely valuable to reduce tax liability dollar for dollar and with several common credits, there are many opportunities to reduce tax burden.

“The child tax credit may apply if you have a qualifying child under age 17, [which] may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return,” Piershale says. “In 2013, the American Opportunity tax credit would give a $2,500 credit for undergraduate education for an eligible student [and] is calculated per student, not per tax return.”

Because there are so many credits available and the tax rules around them can be complex, Einsenberg recommends doing ample research and working with a qualified tax professional before claiming any credits.

“In order to take the best position for your own tax scenario, you should understand what they are and how they work,” he says. “If you think you are going to have utilization of these credits, it might be advisable to seek out a CPA to help you figure these things out because they are complicated.”

Timing is Everything When it Comes to Taxes

Bonnie Lee for Fox Business writes: Major life events usually bring changes to all aspects of people’s lives—including their taxes. Events like launching a business, marriage, divorce, or home buying all have major financial implications, and could change people’s taxable income situation.

But smaller changes could bring changes to a tax situation, pushing someone who always filed the standard deduction into the realm of itemized deductions for greater tax savings.  Here’s what you need to review as the year progresses to prepare for the next tax season.

Medical Expenses. Prior to 2013, you were allowed to deduct medical expenses in excess of 7.5% of your adjusted gross income. So if you made $100,000, you would only be able to deduct medical payments that exceed the limit of $7,500. Beginning in 2013, unless you are older than 65, the exemption goes up to $10,000. That’s a big difference so if possible, stack medical expenses into one year. For example, if you are having expensive medical work done this year and you also need a root canal, get them both done.

You are allowed to deduct the amounts you pay for health insurance, long-term care insurance (limits apply), prescriptions, naturopathic doctors, chiropractor, therapeutic massage, hearing aids, the list goes on.

According to the IRS, “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.” But remember, this is the tax code so there are plenty of exceptions, caveats, as well as surprises as to what will be allowed. So check with a tax professional or consult IRS Publication 502, which thoroughly details the topic.

Deductions Subject to the 2% Ceiling. On Schedule A, Itemized Deductions, you may list various miscellaneous deductions such as, tax preparation fees (which, by the way, include audit representation, tax planning fees, purchase of tax preparation software, etc.), employee business expenses, union dues, job search expenses, among others.

Check out List of Miscellaneous Itemized Deductions at the IRS website to make sure you take every eligible  deduction. Like medical, these write offs are limited, and you may only deduct amounts that exceed 2% of your adjusted gross income. Therefore, it is wise to also try to stack these into one taxable year in order to maximize the opportunity.

Payments by Credit Card. Good news on this front. You are allowed to deduct any payments made toward deductible expenses via credit card whether you have paid the credit card bill or not. As long as the charges are incurred during the taxable year.  So perhaps on Dec. 31, you pay for a root canal on your Master Card but don’t pay that bill until January. No matter: You are allowed to deduct the dental work for the 2013 tax year.

Property Taxes and State Income Taxes. You are allowed to deduct additional payments made on these expenses during the calendar year. So, if for example, you last estimated state income tax payment is due on Jan.  15, 2014 (for the 2013 year), and you make it on that date, you cannot take it as a deduction for 2013 because it was not paid during 2013. So make the payment by the end of December 2013 instead.

All that said, some of the items listed above are considered “preference items” for the alternative minimum tax and prepaying may not be helpful in some situations as it will trigger this additional tax. It is wise to consult a tax pro.

IRA Contributions. A lot of people wait until April 15 to make an IRA contribution for the prior year, but it’s a good idea to calculate the tax impact. Sometimes your income may shake out too low to make it a worthwhile deduction for the prior year. It may be beneficial to assign the contribution to the current tax year. So check it out. 

In any event, here’s another timing tip when it comes to IRAs: make monthly contributions instead of one year end contribution. Not only is it more easily affordable but you can play the highs and lows of the market more to your advantage.

Start Preparing for the 2013 Tax Year Now

The Lexington Leader writes: According to the Independent Bankers Association of Texas, (IBAT), now is an ideal time to begin preparing for April 15, 2014. By implementing a few strategies today, you can make the 2013 tax year less of a bother, and maybe even save yourself some money.

Reduce Your Taxable Income: Review your 401(k) or 403(b) retirement plans to ensure you are making the most of the contribution limits to your taxdeferred retirement accounts. This will reduce your taxable income. If you are over the age of 50, you may be able to take advantage of an additional $5,000 “catch-up” retirement plan contribution. See a tax advisor for additional information.

A traditional IRA is another way to reduce your taxable income and save for the future. With a traditional IRA, you get a tax deduction for the amount of savings you contribute to the account. For the 2013 tax year, IRA contributions are limited to $5,500 if you are age 49 or younger and $6,500 if you are age 50 or older. If you also make contributions to an employee-sponsored retirement plan such as a 401(k) or 403(b), your traditional IRA contributions may be fully deductible, partially deductible or not deductible at all. You can find all of the information you need about this from the IRS in its Publication 590 - Individual Retirement Accounts.

Stay Organized: A concerted organizational effort will certainly make things easier the night before your tax return deadline. If you deduct mileage and travel expenses for business or medical reasons, keep a small notebook in your vehicle or in your travel bag to record these numbers. While you may be able to deduct medical expenses next year, you will need to keep track of those expenses either way. It’s a good idea to buy a folder or a small accordion file to hold all of your potential tax deductions in 2013. If you plan to take deductions, you must have the documentation to support them and a separate “tax file” is a great way to stay organized.

Plan a Charitable Contribution: Do you have an old car that you want to get rid of? Many local organizations will take that car off your hands and give you a valuable tax deduction for it. It’s a great way to support a worthy cause and lose that old clunker!

You will need to keep written records of all charitable deductions, including the name of the organization, the date and the value or amount of your contribution. Most organizations will provide donors with a written letter or receipt for each donation, and these go in your “tax file.”

Prepare for Affordable Care Act Changes: Beginning in January 2014, every American will be required to have some form of health insurance. For taxpayers that don’t already have health insurance, they may qualify for help from the government, part of which is based on the 2012 tax year return information. If you do not buy health insurance by January 2014, you will face penalties of $95 or 1 percent of your household income, whichever is greater. The penalty amount will increase to $695 or 2.5 percent of household income in 2016. At the same time, writing off healthcare expenses other than insurance will become tougher.

Beginning with the 2013 tax year, only medical expenses in excess of 10 percent of your adjusted gross income can be deducted. A great resource for information about how the Affordable Care Act will affect you can be found at www.healthcare.gov.

While the 2013 tax year poses many challenges, preparation can help ease your burden. Time flies and before you know it, April 15, 2014 will be upon us. Start thinking about the 2013 tax year today‹while the pressure is off‹and you might be able to save yourself considerable headache and a few dollars.

The Experts: Is Creating a Personal Budget a Good Idea?

Carl Weins for the Wall St Journal writes: Are personal budgets a good idea? The Wall Street Journal put this question to The Experts, an exclusive group of industry, academic and other thought leaders who engage in in-depth online discussions of topics from the print Report. This question relates to a recent article that discussed the best ways to stick to a budget and formed the basis of a discussion in The Experts stream on Wednesday, June 12.

Gus Sauter: Pay Yourself First

The obvious first step to achieve any financial goal, whether it's retirement, buying a house or financing a child's education, is to save money. It's also probably the hardest part of building a nest egg. In other words, once you saved some money, there is a wealth of information about investing that can be applied. One example of a product that can simplify investing is target date funds that can be a one-stop solution to an effective investment strategy.

Saving is much more difficult though. We're constantly being bombarded with ways to spend, so saving requires a very strict discipline. I find that the best way to ensure that focus is to create a budget. And the very first item in the budget should be your savings. Saving shouldn't be what is left over after you're done spending. As the saying goes, pay yourself first. Then figure out how all of the other pieces of your consumption fit into the puzzle. There will almost always be trade-offs that have to be made. Say spend less on going to restaurants so you can replace an aging car. The trade-offs are difficult, but unless you make these decisions consciously, you aren't likely to reach your financial goals. And that is the major reason that America has such a low savings rate.

George U. "Gus" Sauter is a senior consultant to Vanguard Group Inc. From 2003 through 2012, Mr. Sauter served as Vanguard's chief investment officer.

Eleanor Blayney: Don't Drive Blindfolded

Budgets are essential for financial planning. Managing your financial life without one is like driving into your future blindfolded. You have no idea where you are now, where you'll be later, and the financial distance between those two points. Plus there may be some serious impacts along the way.

Personal budgets should be both realistic and aspirational. First, they should be prepared based on an accurate and comprehensive review of the money flowing in and out of the household. In today's virtual and plastic world, this can be a difficult undertaking: No longer do we use just checks or cash, but also credit and debit cards, automatic payroll deposits and deductions, online payments and PayPal accounts. But taking the time to collect all the statements necessary to create a true picture of existing money flows is imperative to taking financial control.

The budget itself is then created to take you from what is actual to what is achievable. What sources of income might be created or enhanced? What expenditures might be eliminated or decreased? New numbers are thus projected as realistic targets. The key is to create "profits" or excess cash flow that can support overall financial goals, both long-term and short-term.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

Larry Zimpleman: The Sense of Control Is Empowering

I think some form of budget makes sense for everyone. If nothing else, it's helpful to know where your money is being spent. Budgeting can help you set out the priorities that are most important to you—that should certainly include a meaningful amount for long-term savings (8%-12% of income) but might include shorter term priorities, as well, like saving for a vacation, saving for a nicer car or down payment on your first condo or home. What I find is that once people have good habits about living within their means, it creates a real sense of empowerment and positive control that is reinforcing. Even if the notion of a budget gives you a headache—try it for a few months just so you can feel the sense of self-control it can create.

Larry D. Zimpleman is chairman, president and chief executive of Principal Financial Group. PFG +1.68%

Greg McBride: The Benefits Are Clear—Yet So Many People Don't Do It

Setting a budget and tracking your spending is the first tip I give anyone trying to get a handle on their finances. Unfortunately, Bankrate.com has found that only about 60% of Americans actually adhere to a budget. But the benefits are clear—using a budget sets boundaries on your spending so you can maximize your saving and investing.

Greg McBride (@BankrateGreg) is a senior financial analyst and vice president for Bankrate.com, providing analysis and advice on personal finance.

Manisha Thakor: Budgets Are About Happiness

Absolutely! The kicker is that I think people should use budgets to maximize their joy…which isn't the typical feeling a budget evokes.

Let me explain. Back in 1992 I read "Your Money or Your Life" by Joe Dominguez and Vicki Robin. That book changed my life. It made the argument that since most of us earn money by doing some type of work, when we spend money we are in essence spending our life's energy. Viewed through this lens, the point of budgeting isn't to deprive ourselves but rather to make sure that our hard-earned dollars are going to the experiences and items that most make our hearts sing.

My recommendation when creating a budget for the first time isn't to look backward through piles of receipts and credit-card statements. Rather I suggest writing down everything you purchase—for a week or a month—on a slip of paper that you carry around in your wallet or purse. At the end of the time period, take out a highlighter and mark anything you spent money on that really put a smile on your face.

Now you are ready to start budgeting…for you can see clearly what areas of spending aren't enhancing your enjoyment of life. It may be eating out with friends you don't even like or a gym membership that you never use. Whatever the item, the point is this exercise helps highlight why you are budgeting.

After this step I find people are often much more motivated to sit down and think through what items they need to spend money on and what items they want to spend money on—and what adjustments if any need to be made to both enhance joy and increase savings to meet future goals.

Manisha Thakor (@ManishaThakor) is founder and chief executive of Santa Fe, N.M.-based MoneyZen Wealth Management LLC.

Charles Rotblut: Start Small

Anything that causes a person to be more conscious about how they spend money, including a budget, helps. It is human nature to be impulsive and not consider opportunity costs (the cost of doing something else with the resource). Having a budget can help make a person more carefully consider how he or she is spending money.

The key to any budget is to know how the money is being spent and allotting for a fudge factor. Anyone can write a budget; the problem is sticking to it. So I would advise first tracking how the money is being spent and then start making small, but gradual changes. For example, a person who goes to Starbucks every morning can start by having coffee at the office instead. I would also pay attention to what spending habits are hard to break and account for them. For example, if you have to have that grande latte at Starbucks, then factor the expense into your budget.

For those with families, get everyone involved in the budget, including the kids. Explain your goals and ask everyone what they are willing to do to reach those goals. Then regularly follow up with everybody on the family's progress. And be prepared to reward kids with something of their choosing for going along with the broader financial plan.

Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.

Terrance Odean: Build in Some Slack

Creating and adhering to a budget can help a person or household gain a sense of control over their spending and save for large purchases, emergencies and retirement. A budget can be thought of as consisting of expenses you have to make—for example, rent or mortgage payments, utilities—and expenses you'd like to make but could cut back on if necessary—for example, dinners out, movies, vacations, new clothes and savings. Some people will prefer very detailed categories, some not. When planning a budget, remember to consider seasonal expenses such as Christmas gifts, winter heating and vacations, as well as episodic expenses such as car repairs. In addition to having savings for emergencies, one should build some slack into one's budget so that one can better deal with unexpected expenses or loss of income.

Terrance Odean is the Rudd Family Foundation professor and chair of the finance group at the Haas School of Business at the University of California, Berkeley.

George Papadopoulos: Make a 'Spending Plan,' Not a Budget

I don't like the word budget. It has a restrictive connotation to it, like New Year's resolutions, which most people don't keep. I prefer the term "spending plan" as less threatening, more user-friendly, and therefore more likely for people to stick to than a budget.

I recommend that clients create a spending plan at the beginning of every engagement and when a major life change (entering retirement, buying a new home, having a baby) is approaching. I advise them to first review and identify their continuing expenses. With this knowledge, they can determine what amount from their remaining funds they can earmark for regular contributions to investment accounts.

I then advise that the agreed-upon funding target be met automatically before clients get their hands on the money. As long as they keep up their end of the deal by reaching their agreed-upon funding targets and keeping their overall financial plans on track, they are free to do what they want with their excess cash flow, always secure in the knowledge that they are maximizing their investment capital. I tell prospective clients I don't hammer them incessantly with the mantra of the latte police, "If you save the money instead of buying a latte at Starbucks you can have X dollar amount when you retire."

George Papadopoulos (@feeonlyplanner) is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families.

Michelle Perry Higgins: Track, Evaluate and Adjust

If you were to ask my clients, "Does Michelle recommend budgets?" you would hear a unanimous "YES!" I am very firm and insistent on this topic. It is unfortunate, that the word "budget" is like a four-letter word in some homes and conjures up negative emotions. I understand that many people are averse to having restrictions or a continual focus on spending within limits. However, if you are serious about improving your financial situation, then creating a budget is a must! A household budget is an exceptional tool for tracking, evaluating, and adjusting one's cash flow.

1. Tracking—Find a method of tracking expenses that works for you. There are dozens of great programs available for purchase or you can simply build a spreadsheet. The goal is to begin documenting every dollar that goes in or out. In addition, set a monthly target for each category. For ease of tracking, I would recommend only two methods of payment, i.e. cash and credit card.

2. Evaluating—This is a critical step. Once you have successfully tracked your expenses for several months, start the review process. Assess each category's goal versus the actual spending amount. Highlight the areas where you are overspending and can cut back. Also, make sure your goals are reasonable.

3. Adjustment—Now that you have tracked and evaluated, identify the categories you can modify. If you are spending $2,500 monthly for dining out but your budget is $2,000, make the necessary change and redirect the difference. The extra $500 monthly cash flow can be used to pay down debt, increase retirement, go into college savings or your emergency funds. It is important that the funds are reallocated immediately, or they may easily be funneled into another spending category.

Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.

Rafael Pardo: A Budget Is an Essential Aid to Navigation

In thinking about the importance and role of a budget, consider the analogy of the Ten Essentials—that is, the 10-category checklist that any responsible hiker uses to evaluate the contents of his or her backpack before venturing out into the backcountry. One of the categories is navigation, which prompts the hiker to verify that the backpack contains, at a minimum, a topographic map and compass. These items will increase the odds of safe travel to and from the destination. The frequency with which the hiker will use the map and compass will depend on the complexity of and familiarity with the trip. Regardless, these navigation aids can either prevent straying off course or finding the route if lost.

A budget is an indispensable tool for charting a safe and successful financial life plan. Whatever your money-management goals, in order to get from point A to point B, it is crucial to have a basic understanding of your monthly income and expenses and how they may fluctuate over time. With this knowledge, you can react intelligently to anticipated and unanticipated changes in your circumstances, thereby increasing the chances that you will ultimately achieve your goals.

Rafael Pardo is the Robert T. Thompson professor of Law at Emory University, where he specializes in bankruptcy and commercial law.

Sheryl Garrett: Set Your Expenditures on Autopilot

Budgeting is a four-letter word. It's all about deprivation and not empowerment. I seek to focus on a cash-flow spending plan that starts out with answering the question, "Can I afford to spend at the current rate and achieve the goals that I would like to achieve?" If the answer is no, we will determine how much can be spent each and every month to achieve those goals. With that kind of clarity and motivation, staying on course with a cash flow spending plan is much more likely.

I also want all the expenditures possible to be set on autopilot. All investments, savings, bills, tax payments, mortgages and so on, should all be withdrawn automatically from the paycheck or the checking account. Everything that is left over is yours to spend anyway that provides you the most enjoyment. I find this to be the most satisfying and least time-consuming way to track your discretionary expenditures, ugh, budget.

Sheryl Garrett (@SherylGarrett) is founder of the Garrett Planning Network Inc.

Rick Ferri: Track Every Dollar You Spend for a Year

I can't imagine not having a budget. I've been creating one every year since I graduated from college 35 years ago. It's the reason I was able to buy my first home, start a business, put three children through college and ensure I'll have enough money in retirement.

The key to saving is budgeting. All budgets should be cash-flow positive. If you're still working, start by paying yourself first. Save at least 10% of your pretax income each year.

So, how do you budget? Start by keeping track of every dollar you spend for one year. I know this sounds silly, but it isn't difficult and it works! You'll learn a lot about yourself.

Forecasting a budget in the years leading up to retirement is also critical. You'll want to save about 25 times your annual spending that isn't covered by Social Security, pensions and other passive income. If you stay disciplined to your budget, then it will happen.

Tax Tips and Considerations for Dads (and Dads-to-Be)

Mark Steber for the Huffpo writes: You may think that there is no way to connect tax tips with Father's Day, but you'd be mistaken. Not only are there a great many tax considerations related to fatherhood (and motherhood, too!), many of them are often overlooked. So to mark Father's Day, here are some tax-specific ways to take advantage of the unique benefits of being a dad. Consider these:

• To start, there is no better tax benefit than having a new child on your tax return. You will likely be able to claim an additional exemption amount for the child as a new dependent, but you can also claim various child-related tax credits. These credits include the Child Tax Credit, the Child and Dependent Care Credit (commonly referred to as the "daycare credit") and even the Earned Income Tax Credit, which is available for families with an income of less than $51,567.
• If this is your first Father's Day and your child was born in 2013, you may be able to claim the medical expenses you paid (anything since January 2013). Eligible expenses include costs for the birth of your child and all baby and first-time parent medical check-ups.
• What about gifts from your family this year? If you avoided getting yet another tie or pair of socks and instead received a gift card to the local home improvement store, you may be able to get a tax credit, depending on what you purchase. For example, an Energy Credit of up to $500 is available if you use that gift card to replace your hot water heater, air conditioner, furnace or windows or upgrade your insulation. The credit is available for approved energy efficient improvements and is worth up to a lifetime maximum amount of $500.
• If you are unable to claim the credit, you should still keep the receipts for any home improvements you do, such as installing new carpet, closet organizers, or even new kitchen cabinets. You can include the cost of the improvements in the basis of your home if and when you sell. This will help keep your gain below the $250,000 ($500,000 if married filing jointly) that is exempt from being taxed when you sell your main home.
• If you coach, umpire, or volunteer your services for your children's teams or activities, you may be able to claim a charitable contribution deduction. Your mileage to and from the volunteer activity is deductible at 14 cents per mile, and out-of-pocket expenses for supplies, equipment, and uniforms necessary to participate in the volunteer activities are also deductible as a charitable contribution. Keep those receipts and a mileage log for all your travel as a volunteer in youth organizations.
• Are your children under age 13? And did you send them to a day camp while you and your spouse worked this year? If so, you may be able to include your expenses for the day camp as a child care expense and then claim the related credit. You are allowed a credit of between 20 and 35 percent of your expenses up to $3,000 for one child and $6,000 for two or more children when you file your income taxes. Make sure you get a receipt from the daycare provider(s) and the day camp.
• If you are a single dad, don't forget to file with the correct filing status. You may be eligible to use the Head of Household filing status if you have physical custody of your child, are single and provide the main support of your household. This will qualify you for lower tax rates, higher credit amounts and potentially many other tax benefits.

Fatherhood is hard work that brings much personal reward, but sometimes the financial reward is less obvious. Ironic as it may seem, your tax return can be a place to pick up some of those financial benefits. Whether you are a new dad or an experienced dad, relax and enjoy your day. You've earned it!

The Skinny on Paying Estimated Taxes

Kay Bell for Bankrate/Fox Business writes:   If you have income that isn't subject to withholding taxes, then you probably should be paying estimated taxes.  It doesn't matter whether the untaxed money comes from a job, investments, alimony or prizes you've won. If Uncle Sam doesn't get his share close to the time you received the money, you could end up owing not only taxes but also penalties and interest.

Most people satisfy their tax obligations through payroll withholding. But when that doesn't happen, you have to get the money to the government yourself by filing Form 1040-ES vouchers.

The U.S. tax system is on a pay-taxes-as-you-earn goal, so the Treasury's goal is to get any estimated taxes regularly, too. The Internal Revenue Service has set up a timetable, calling for estimated tax payments four times a year. Although the payments are commonly called quarterly, they don't coincide with calendar quarters.

Estimated filing schedule
Estimated tax due For income received
April 15 Jan. 1 through March 31
June 15 April 1 through May 31
Sept. 15 June 1 through Aug. 31
Jan. 15 Sept. 1 through Dec. 31

The four estimated tax payments are generally due each year on the 15th of April, June, September and January. But if that date falls on a weekend or federal holiday, the 1040-ES filing deadline is pushed to the following business day.

There are a couple of such deadline changes in 2013.

The June estimated tax due date is Monday, June 17 because the 15th is Saturday. Similarly, Sept. 15 is a Sunday, meaning that payment is pushed to Monday, Sept. 16.

The IRS prefers you figure the total estimated tax for the entire year, divide it by four and send in equal payments according to the schedule. There's a work sheet with the Form 1040-ES package or as part of your tax software to do it.

You can send a paper check along with the Form 1040-ES voucher. Alternatively, you can file electronically with a credit card or by enrolling in the tax agency's Electronic Federal Tax Payment System, or EFTPS.

However, many times, folks who receive a financial windfall immediately spend the proceeds without any thought to the tax implications. Even people who earn a steady stream of money that isn't taxed upfront tend to put off filing estimated taxes because they need the cash and figure they'll settle things with the IRS at the annual April filing deadline.

But ignoring your estimated tax duties is not wise. If you end up owing $1,000 or more in April, you might have underpaid your tax bill. And that could result in you owing added penalties and interest, says Linda Durand, a certified public accountant with Drolet & Associates PLLC in Washington, D.C. "The IRS wants people to be paying their taxes during the year," she says.

Alternate payment options

Eva Rosenberg, an Enrolled Agent who is authorized to represent taxpayers before the IRS and offers tax advice on the TaxMama website, offers an alternative to continual calculations, as long as you expect your taxable income to be the same or higher than it was last year.  All you need is last year's tax return and statements showing current tax withholding.

Figuring estimated payments
Look at Page 2 of your last 1040, specifically the "total tax" entry. Let's say it was $10,000
From that, deduct any withholding you expect to have from any sources (wages, unemployment). For this example, let's use $3,000

That gives you the total amount to be made up by estimated tax payments $7,000
Divide the result by 4, and that's what you'd pay the IRS each quarter in this scenario: $1,750

Rosenberg's method works even if you expect to owe substantially more in taxes this year than you did the previous one. This is because the IRS considers estimated taxpayers compliant as long as they pay either 90% of their eventual tax bill or a "safe harbor" payment based on a percentage of the tax owed the previous year.

Safe harbor refers to a regulation that eliminates a person's liability as long as the party acted in good faith. In the case of income taxes, it's an amount that protects you from IRS penalties for income tax underpayment.

Many taxpayers opt to pay 100% of their prior year's tax bill because it gives them a specific number to work with. Even better, it protects them from penalties and interest, regardless of how high their upcoming final tax bill goes.

Navigating safe harbors

Still, the safe harbor payment is a little more costly if you make a lot of money.

If your previous year's adjusted gross income was more than $150,000 for married couples filing jointly and single taxpayers; $75,000 for married taxpayers filing separately, and you want to base your estimated tax payment on the prior year's amount, you'll have a higher safe harbor percentage to meet.

In these cases, the IRS expects the high-earning taxpayer to pay at least 110% of his or her previous year's tax bill. That means if your adjusted gross income on that previous return was $150,000 and you ended up with a $30,000 tax bill, the IRS expects you to pay $33,000 -- $30,000 plus 10% -- in estimated and withholding taxes to guarantee you don't encounter additional tax penalties.  "With both (partners) in a couple earning or people holding multiple jobs, the salary cap is not as out of reach as it may seem, especially if they had a good investment or sold a piece of investment property during the year," says Durand.

Paying only when you earn

Although the IRS prefers four equal payments of estimated taxes throughout the year, you don't have to pay estimated taxes until you receive untaxed income.  If most of your untaxed income comes in one quarter, such as stock dividends paid at year's end, or if you operate a business in which income fluctuates throughout the year, you might want to consider paying your estimated taxes under the annualized income system.  "The annualized method allows you to take a look at each quarter independently and pay the tax in the quarter that you earned it," says Durand. "Say your job is one where most income is in the summer, such as landscaping, rather than the winter. You want to pay the taxes when you have the money."

With this approach, your required estimated tax payment for one or more periods might be less than the amount figured using the four-equal-payments method. To find that out, you'll have to complete a work sheet found in IRS Publication 505, Tax Withholding and Estimated Tax. Sole proprietors need another work sheet found in IRS Publication 505 to determine annualized self-employment taxes that are included with the estimated payments.

And you'll need to file Form 2210 with your annual return to explain why you didn't send in the expected equal payments, Durand says. This will keep the IRS, which assumes you earned the money equally during the year, from charging you an underpayment penalty and interest for not paying enough in a particular filing quarter.

"It is a little more complicated," Durand says. "But for cash flow it's better, and it puts the tax in the quarter when it is earned."

Avoiding estimated taxes altogether

Are you already panicking at the prospect of struggling through work sheets and filing even more tax returns? You might have yet another option.  If you have wage income in addition to untaxed earnings, file a new W-4 at work and ask your boss to start taking out more payroll taxes to cover any shortfall. This strategy also works for couples who file jointly, but only one spouse has wage income subject to withholding.  Your (or your spouse's) take-home pay will be a bit lighter, but you'll be off the hook for estimated tax payments.

H&R Block's Taxing Future

Michael Lewis for TheFool.com writes:  For H&R Block (NYSE: HRB  ) , taxes aren't a pain, they're the livelihood for more than 10,000 storefronts and nearly 100,000 tax preparers. But is that going to change in coming times? The company is the world's largest provider of affordable tax and personal finance services. With the rise of nearly costless online tax services, what incentive is there for price-conscious tax filers to visit their local H&R Block? Let's take a look at recent earnings and evaluate the business to determine if this is a company headed toward trouble.

The year in reviewH&R Block recently released its fiscal 2013 earnings, which showed gains across the board yet fell short of analyst expectations.

On the top line, revenue bumped up nearly a half point to $2.9 billion, mainly on higher volume of digital filings (we'll address this in a minute). Earnings per share from continuing operations increased dramatically -- up 25% to $1.59. Management credits the company's cost-cutting efforts, which accounted for $126 million in savings for the year. The company's EBITDA margins grew substantially, up 4 points to 30%.

Assisted tax filings in the United States were down 2.7%, with the average filing price up 1.7%.

Overall, the company seemed to do well in the face of sudden changes in tax law and a delay in IRS filing services.

So, given the decent performance, why the dire opening paragraph?

As with many industries, tax prep is witnessing a period of technological disruption in the form of Web-based software. Intuit (NASDAQ: INTU  ) is the leader in the space with its Turbo Tax product. Lesser-known Blucora (NASDAQ: BCOR  ) has its hand in the game as well with TaxACT. The latter is a small but healthy business. TaxACT maintains strong margins and grows at roughly 8% to 10% annually. Currently, the company maintains around 12% of online tax-prep market share.

Turbo Tax is the gorilla in the space, with 60% of the business. For most (including myself), this is the go-to service for online tax prep. It's easy and it's relatively inexpensive. TaxACT is even more price-conscious, with filings under $10, and there is belief that as the company continues to market its product and gain stickiness among consumers, it could steal market share -- but from whom?

My guess: H&R Block's online software. The company's product is priced nearly identical to Turbo Tax's, and for the most part offers an identical experience, if slightly less polished. The company advertises that in the case of an audit, an H&R Block professional will hold your hand during the event. However, I imagine many would seek third-party assistance if truly in hot water with the IRS.

Bottom lineH&R Block was wise to jump on the online filing train, and management has proved itself capable of adapting the size of the company to address trends toward online filing. But there are two pure players in the space that offer two different products -- one premium, one entry-level -- and leave little room for H&R Block At Home to grow.

On top of that, the company trades at more than 15 times forward earnings and has an EV/EBITDA of 13.76 times. Investors are paying up for this company to continue growing substantially, even in the face of the aforementioned headwinds.

While I wouldn't recommend shorting at this time, H&R Block is by no means on my buy list.

Do 401(k) plan sponsors give too much rope? / Are sponsors liable for employees' bad behavior?

Chris Carosa for LifeHealthPro writes: We’ve all experienced it – anyone who’s ever advised a 401(k) plan. There’s always one employee who knows it all. He’s the guy (and, yes, I’m not being sexist, but it usually is a guy) who thinks he could school Warren Buffet. He is, after all, the only person who believes some obscure fund with only $100,000 in assets is about to explode. It usually does, except not “explode” as in “ever higher growth,” but “explode” as in “blow up.”

Many times, a 401(k) plan sponsor will create a special “self-directed brokerage account” to appease these employees (who may, in fact, be owners or high level executives of the firm). These plan sponsors may be under the impression that giving these employees free range both solves the problem of their vociferousness and leaves the plan sponsor off the hook in terms of liability. 

Nothing may be further from the truth, as revealed in “Is the Fiduciary Liability of Self-Directed Brokerage Options Too Great for 401(k) Plan Sponsors?” (FiduciaryNews.com, June 11, 2013). 

Consider this: At what point is a fiduciary liable for enabling bad behavior? Most believe 404(c) fully absolves the plan sponsor of any fiduciary liability because it’s the employee’s responsibility to pick the investments. But what if one of the three “materially different” investment options includes a fund that always loses money because it treats every shareholder who invests more than $2,000 from their 401(k) every year to an all-expense paid trip to the Caribbean in February. Every employee will flock to that fund. It’s a losing fund, but it essentially bribes shareholders to stay in and contribute more. The only thing it guarantees is that no shareholder will ever reach their retirement goal. 

Are 401(k) plan sponsors safe only because it’s the employee’s choice to invest in this fund? Or is the 401(k) plan sponsor guilty of offering a poor choice to employees? There’s a good chance it’s the latter because, in this case, the plan sponsor either failed to conduct proper due diligence or ignored the due diligence it did conduct. Either way, this is a bad thing and exposes the plan sponsor to a certain level of fiduciary liability. 

We must therefore conclude 404(c) alone does not protect 401(k) plan sponsors. Offering an inappropriate choice is just as damning as any other breach of fiduciary duty. 

How does a self-directed brokerage option fit in this scheme? Aside from the enormous additional fiduciary liability exposure from purely a compliance reporting standpoint (this is outlined in the above referenced article), the plan sponsor faces the undaunted prospect of a naïve employee using a self-directed option to pick a wholly inappropriate fund – one never even vetted by the plan sponsor. The plan sponsor may claim ignorance, but it cannot claim a lack of responsibility. It’s like a bartender giving care keys to a drunk patron. That’s the kind of faux pas that lands the bartender in jail as an accessory to what ensuing damage results for the drunk driving. 

In this case, the plan sponsor is giving the employee the keys to a vehicle the employee might not be able to drive. Said another way, the plan sponsor may just be giving employees enough rope to hang themselves by. 

Does this mean brokerage windows should be outlawed? Some advisors make that exact case saying, to the effect, “if you want to manage your own account, do it in your taxable account.” But what if the plan sponsor and the loud-mouthed employee is one in the same person? What if the only user of the self-directed brokerage option is also the trustee of the plan? 

Clearly, the circumstances must be examined to see if this is appropriate – and it just might be. In the case of extremely small plans – one participant who happens to be a doctor or lawyer or some other kind of highly paid virtually self-employed professional – a self-directed option might be OK. The only thing – an ERISA attorney might suggest this individual set up an SEP-IRA instead of a 401(k). The compliance reporting burden is a lot less in the IRA.