Thursday, July 4, 2013

Some e-retailers unsure how they will comply with online sales tax

TIM DEVANEY, THE WASHINGTON TIMES /CPA Practice advisor writes: As Washington considers enforcing sales tax collection for Internet purchases, a growing concern among online retailers is how to collect this tax and remit it to state governments.

These retailers complain it won't be easy to collect taxes for nearly 10,000 state and local governments around the country and keeping up with each of their unique tax rates and codes. They're afraid that it will be so complicated it could hurt their bottom line, even forcing some smaller Internet sellers out of business.
State governments which are pushing for the collection say they will provide software that is designed to take care of this problem, but retailers remain skeptical.
"They think it's really easy, 'We'll just give you the software to collect sales tax,' but it's hugely complex and burdensome for businesses to operate," said Connie Hallquist, CEO of Healthy Directions, a Potomac-based company that sells health products online.
Technically, shopping on the Internet isn't tax free, though many consumers think so. Shoppers are supposed to pay the money directly to the government each year when filing income tax returns, but most taxpayers don't realize this and the money goes uncollected.
The issue was ignored for many years, but now Washington is taking note.
In May, the Senate passed the Marketplace Fairness Act, which would require Internet retailers to collect sales tax.
The House is considering the bill.
As lawmakers get closer to finalizing the Internet tax bill, online retailers argue that the technology is not there yet for such a complicated bill.
The software may be easy enough for online shoppers to use, but behind the scenes, retailers are afraid the setup and upkeep costs of such systems would take a bite out of their profits.
Steve DelBianco, executive director of NetChoice, an advocacy group that is opposed to the Internet sales tax, says states will provide the software for free, but that doesn't necessarily mean all associated costs will be covered.
He estimates these expenses could cost businesses an additional $20,000 each year.
"Even if the software is free, there's nothing in the legislation that requires the states to pay for the integration costs, or personal training for employees to learn how to use the system, or mapping the inventory to each state's tax codes," Mr. DelBianco said.
Several software companies tout systems to collect these taxes, including Avalara, FedTax, Taxware, AccurateTax, Exactor and CCH.
They build online inventories for Internet retailers, so when a customer places an order the software can cross-check each state and local government tax code to figure out how much sales tax to charge. That tax is then added to the total price.
"A merchant can simply sell their T-shirts online," said David Campbell, CEO and co-founder of FedTax, which makes a tax calculation and remittance service called TaxCloud for Internet retailers. "They don't have to worry about collecting taxes."
Posted on 6:34 AM | Categories:

Turning A Vacation Home Into A Tax Benefit

 Jeffrey C. Newman and Thomas Kosinski for ORBA write: One of the many benefits enjoyed by wealthy individuals is the ability to own multiple residences.  Often, the second residence is located in a resort location where significant rental income may be possible.  Generally, the owner of the second residence is able to deduct the mortgage interest and the real estate taxes regardless of whether the property is rented.  However, the interest deduction may be limited because the combined mortgage balance exceeds the $1.1 million limit and the real estate taxes may be limited if the taxpayer is in the alternative minimum tax (AMT).


There is a very complex set of tax rules that govern the treatment of second residences that have both personal and rental use.  For example, if the personal use is less than the greater of 14 days or 10% of the rental days, then the personal use is ignored and the second residence is treated as a rental property, with all expenses being deducted on Schedule E.  Conversely, if the second residence is rented for less than 15 days, the rental income is ignored and the residence is treated as a personal residence with the mortgage interest and real estate taxes being treated as itemized deductions on Schedule A subject to the limitations noted above.  If the personal use and the rental use each exceed 14 days, then the property is treated as a "vacation home" and the expenses must be prorated between personal and rental.  In effect, this allows you to exceed the $1.1 million limit on personal mortgage interest deductions and the potential AMT problem with the real estate taxes.

With respect to the rental portion of the property, there are very strict ordering rules and limitations on the rental deductions.  Under the ordering rules, mortgage interest and real estate taxes are deducted first, additional expenses other than depreciation are second, and depreciation is third.  Overall, the deductions may not exceed the income in any year, but any excess deductions carry over and may be used if and when the property is sold.  An example follows:

With proper structuring, the $1 million personal mortgage interest limitation is no longer at issue and you have improved the overall economic performance of the property.
Posted on 6:28 AM | Categories:

The Case for Roth Conversions in Retirement

Mike Piper for The Oblivious Investor writes: I recently finished reading Dana Anspach’s new book Control Your Retirement Destiny (highly recommended, by the way — you can see my review here) and found the author’s ideas on Roth conversions in retirement to be quite worthy of sharing.
As a bit of background, the big question when considering a Roth conversion is, “how does my marginal tax rate right now (i.e., the tax rate I would pay on the conversion) compare to the marginal tax rate I expect to have when I’m spending this money?”
If you’re over age 59.5, it usually makes sense to do the conversion if your current marginal tax rate is less than or equal to the marginal tax rate you expect to have when you spend the money. (Exception: If you expect the IRA to be left to your heirs, the relevant question becomes how you expect your current marginal tax rate to compare to the IRA beneficiary’s marginal tax rate at the time he/she will be taking the money out of the IRA.)
In her book, Anspach makes the case that, for a few reasons, your marginal tax rate later in retirement may be higher than you might expect.

Social Security Taxation

As we’ve discussed before, the unique way in which Social Security is taxed often leads to situations in which taxpayers have marginal tax rates that are far higher than just the tax bracket they’re in. For example, it’s possible for a Social Security recipient to be in the 15% tax bracket, yet have a federal marginal tax rate of 27.75%, because each additional $100 of income not only results in $15 of regular income tax, it also causes $85 of Social Security benefits to become taxable, thereby resulting in another $12.75 of income tax.
Because of this unique tax treatment for Social Security income, it’s very often true that if you have years of retirement prior to receiving Social Security, your marginal tax rate in those years is significantly lower than the marginal tax rate you will have after you start receiving Social Security. Conclusion: Roth conversions in these years are often advantageous.

Death of a Spouse

Anspach also bring up a point that I don’t think gets nearly enough attention (and, for the record, I’m as guilty as anyone, as I don’t believe I’ve covered it in an article before): A widow/widower’s marginal tax rate in retirement is often higher than the marginal tax rate that the couple had while they were both still alive.
The reason this often happens is that a single person’s 10% and 15% tax brackets, standard deduction, and personal exemption are each half as large as those for a married couple filing jointly, yet a surviving spouse’s income will often be well above 50% of the income that the couple had — because he/she will get to keep the larger of the two Social Security benefits and because portfolio-sourced income will stay the same.
As a result, Roth conversions during retirement can sometimes make sense for married couples as a way to best prepare for the period of widowhood/widowerhood.

Medicare Premiums

Premiums for Medicare Parts B and D are a function of your modified adjusted gross income. (For these purposes, MAGI includes tax-exempt interest income.) But rather than operating on a sliding scale, they ratchet upward in steps. For example, if your MAGI exceeds $85,000 ($170,000 if married filing jointly), your monthly premium will be $40 higher than it would be if your income was below that level.
While this isn’t technically a tax, it has the same effect from a financial planning standpoint. That is, the dollars of income that put your MAGI just barely above the applicable thresholds in effect have a very high marginal tax rate. As a result, Roth conversions can sometimes make sense for retirees who are not yet eligible for Medicare, if the conversions allow them to stay just under the threshold once they are eligible for Medicare.

Do The Math

While the three points above do result in advantageous Roth conversion circumstances for many retirees, the point Anspach really hammers home in her book (a point with which I fully agree) is that you have to actually do the math with your own figures. This is not the sort of thing where a rule of thumb works very well.
Posted on 6:28 AM | Categories:

Estate Planning: As Important As Ever

Dan Moisand for Financial Advisor writes: One outcome of the tax code changes that took effect in 2013 that has garnered some attention is the new permanent transfer tax system that applies to gifts and inheritances. “Permanent” in this context means that Congress would have to pass legislation to alter the system. Changes appear unlikely, given the current makeup of our government. We are hopeful that we have entered a period of relative stability with respect to this portion of our tax code.

There is no limit to the size of a gift to one’s spouse or to qualified charities. Under the new rules, each person may gift annually up to $14,000 to as many other recipients as he or she likes. This amount is adjusted for inflation automatically from now on. Also, the sliding tax-rate scale that applies to gifts over that limit and taxable estates has been replaced with a flat 40 percent rate. Both of these developments will make planning more straightforward.

In addition, U.S. citizens can leave up to $5.25 million free of estate taxes if they pass away in 2013. This $5.25 million exemption amount is automatically adjusted for inflation each year. Plus, the portability feature that first appeared in the 2010 tax law did not lapse and is now permanent. Portability allows a surviving spouse the ability to use, in addition to his or her own exemption, any unused portion of a deceased spouse’s exemption. Married couples can leave up to $10.5 million free of estate tax. As a result, for most people, estate tax issues are no longer a concern.

This reduction in potential taxes does not reduce the need for estate planning. The goal of estate planning is to make sure assets are available to the desired parties at the desired times. Whether this happens, or not is driven by factors that exist whether a potential estate tax applies or not. Three things dictate the flow of assets in one’s estate: designations, ownership and provisions.  

Designations

Many kinds of accounts allow the account owner to name beneficiaries. Making beneficiary designations is a routine part of setting up IRA, 401(k), 403(b) and other retirement accounts. They are also a standard part of life insurance and annuity contracts. What many do not realize is that the named beneficiary of such accounts gets those funds, outside of the probate process, regardless of what the owner’s will or trust might say. For this reason, it is essential to keep your beneficiary designations up to date and aligned with your wishes. It doesn’t matter if one’s will says you want to leave everything to your daughter, if your son is named primary beneficiary, he is entitled to those funds.

Ownership

How an asset is titled controls how it is treated. Similar to how beneficiary designations dictate who inherits, assets owned “joint with rights of survivorship” become the surviving owner’s asset by operation of law upon a death regardless of what one’s will or trust may say. This can seem like a simple way to avoid probate, but putting one’s child on as a joint owner can disinherit all the other siblings. Accounts owned individually without a beneficiary designation go through probate. This makes the transfer part of the public record, subject to the terms of the deceased’s will, and exposed to the costs and delays that give probate an unflattering reputation. Many people take the time to create trusts to control the disbursement of their assets, avoid probate and make the management of their affairs easier should they become incapacitated. However, the only assets subject to such treatment are assets actually titled in the name of the trust.

Provisions

Even if assets are titled correctly, it is important to revisit the provisions in one’s will, trusts, powers of attorney, living will and health care surrogate. Often, the people named in these documents to receive funds or make decisions fall ill, die, marry, divorce, get into financial or legal trouble, make it big, become more mature, or have children and grandchildren. As life presents its twists and turns, the particular provisions of one’s estate planning documents may no longer fit the situation very well.
Posted on 6:28 AM | Categories:

6 Factors to Consider When Selecting Accounting Software for Your Small Business

Firmology writes: Managing the books for your small business is not a task you should take lightly. Good bookkeeping leads to good financial decisions. Bad bookkeeping can cause major oversights that can cost you your business. That’s why it’s so important that you use accounting software that makes it easy for you to see your business’s strengths and weaknesses. A written-out ledger or Excel spreadsheet just doesn’t cut it anymore.
Only a few years ago, accounting applications lived on the desktop of the small business owner or their accountant’s computer. The books were not accessible from another location and only one person could view them at a time. Then cloud computing took off and small business accounting software providers caught on.
Today, financial information can be securely accessed anywhere, anytime, from any computer or mobile device.
There are a number of options on the market and it can be overwhelming choosing the best one for you. However, the factors outlined below apply to the majority of small business owners and should be considered when shopping for an online accounting program.

1. Ease of use

User-friendly online accounting software presents you with a straightforward dashboard that provides a snapshot of your company’s financial health immediately upon logging in. The dashboard even highlights your key accounts so you can quickly gain insight into how your business is performing.
You should then be able to drill into the dashboard and perform basic accounting functions with only a few clicks. There is no need to spend valuable time customizing an invoice for a specific client or to get caught off-guard by a suddenly-due bill. Your software should simplify your bookkeeping so you can quickly perform essential tasks.

2. Integrates with other tools

Every business is unique and uses a plethora of tools to keep things running smoothly. It’s likely that you use different applications to manage your various business operations (perhaps an e-commerce platform, a CRM system, or job tracking). Seek out accounting software that integrates with your other business management applications.
Also, keep in mind that as your business succeeds and grows you may adopt other tools to handle the increased workload. In general, the more flexible your software is, the better.

3. Connects to your bank

Perhaps even more important than integrating with your CRM or job tracking platform is having the ability to connect your books with your bank. In the old days, you would have to manually enter bank transactions into your desktop software, but the cloud-based applications of today does this for you. Bank, credit card, and PayPal statements can be fed directly into your accounting software. All you have to do is match and reconcile bank transactions against accounting transactions. This process is much more accurate and efficient than the old-fashioned method.

4. Protects your data

When your financial data is stored in the cloud, there is no longer the possibility of vital information being lost in the event of a hard drive crash, power surge, or coffee spill. The data is backed up on external servers for you. Backup frequency varies among providers, so be sure to factor it into your decision.
With cloud-based software comes the threat of your data falling victim to malicious activity. Online banking has set a standard for security, so make sure your software meets or exceeds this standard. That means Secure Socket Layer (SSL) encryption, multi-layered firewall server protection, and routine external audits and inspection.

5. Customer Support

The ability to connect with an employee, other users, and experts is essential when learning any new software. The answer to your question will not always be in the manual or on the resources section of a website.
Software providers with large customer bases often have online communities, made up of users interacting with each other. These communities are normally monitored by employees, who chime in on discussions when necessary.
If you really want to become a bookkeeping master, you can opt for software that offers extensive training, such as video tutorials and webinars.

6. Price

Free options do exist but they come with a price, usually in terms of the number of features available. Subscribing to a SaaS accounting provider for a monthly fee is a good fit for most small businesses. These companies often offer a free trial, which is a great way to determine the best option for your small business.
Using the factors outlined, you should be able to find an accounting application that fits the specific needs of your business and makes your regular accounting tasks simple and accessible. Hopefully, your selection will give you great insight into your company’s financial situation and empower you to make sound, profitable business decisions.
Posted on 6:27 AM | Categories:

Make Way, Mutual Funds! / ETFs look to crash the 401(k) party

John Rekenthaler for Morningstar writes:  The ETF Advantage?  IndexUniverse carries an article (originally from the paywalled site ETF Report) entitled “Has Schwab Cracked [the] 401k Code For ETFs?” It's an intriguing question. Exchange-traded funds have thus far barely appeared in 401(k) plans. ETFs can't be offered to 401(k)s without being connected to a record-keeper, and they weren't built to be sold in fractional shares, which are necessary to accommodate varying employee balances. Obviously, though, ETFs are very much a force to be reckoned with. They've socked conventional mutual funds in the mouth in the retail marketplace, and they might well do so with 401(k) plans, too.

That's what Schwab(1) claims. There's a certain logic to Schwab teaming up with ETFs, as Schwab is also a low-cost, retail powerhouse that is not a 401(k) market leader. However, I can't say that I'm terribly convinced by the company's argument. Assuming that the operational challenge of fractional shares is resolved--which Schwab claims is the case--then ETFs are no worse than similarly priced mutual funds. But neither are they better.

Consider the three advantages ETFs have over mutual funds: liquidity, transparency, and (arguably) taxes. Liquidity means nothing here: Who day-trades 401(k) plans? Transparency is also beside the point. Most 401(k) participants don't know what funds they own. (Some are not even sure that they own any funds at all.) That they can see their portfolios' holdings on a real-time basis matters not-- particularly when the fund is likely an index that carries no surprises. Finally, there are no tax benefits for ETFs in 401(k) plans.

Cost is not an advantage because while ETFs tend to carry low expense ratios, they're not necessarily cheaper than index mutual funds and/or institutional share classes. Indeed, they're costlier than the very cheapest 401(k) option: separate accounts for the giant companies. (The S&P 500 Index fund for Boeing's 401(k) plan has an expense ratio of 0.01% annually, or 1 basis point.) It's true that even a relatively costly ETF looks attractively priced when compared with the expensive mutual funds that populate some small 401(k) plans, but even in those cases, switching to ETFs might not lower an employee's fees. The 401(k) provider needs to collect revenue somewhere. If not from fund expenses, then the revenue may perhaps come through plan or advice fees.

Call me neutral. I'm certainly not against the invasion of ETFs, but I don't see it as meaningfully affecting the 401(k) marketplace.
(1) Morningstar Associates LLC, a subsidiary of Morningstar Inc., recently signed a deal to be one of Schwab's advice providers for the 401(k) market.

You Don't Get What You Pay For
The Maryland Public Policy Institute and Maryland Tax Education foundation has released a study of state pension funds that examines the relationship between the amount of fees paid by the states and their investment performance. The time period is the five years from July 2007 through June 2012. So far, I've just had a quick glance.

The big and unsurprising finding is the negative correlation between costs and performance: More cost meant less performance. The 10 states that paid the most in fees had a median annualized total return of 1.34% annually, while those that paid the least had 2.38%.
Neatly, the states at the two extremes had almost identical results before expenses. Maryland gained 3.0% in gross return. After paying its modest 0.09% expense ratio, the state netted 2.9%. Meanwhile, South Carolina fared almost as well at 2.8% gross. However, a whopping 1.3% in annual fees cut its net performance almost in half, to 1.5%.

The time period could be longer, and there are always cross-currents to consider. For example, did the high-expense states have a different asset mix from the lower-cost states? I'll need to read the full study before drawing a final conclusion. However, 50 is a pretty good sample size--and it's not as if higher costs in other studies have led to higher performance (either pre- or post-expense). I suspect these results will stand.

The Doublecoin Twins
Here's an early entrant for "The Dumbest Funds of the 2010s" article that Dan Culloton and I will coauthor in early 2020. Would you buy bitcoins from these guys? I wouldn't. Nor from these fellas, either.

1-7 of 7 Comments
9 hours, 9 minutes ago
I agree generally with the author's conclusions. I have a Schwab brokerage account and I can tell you from using their platform (which is very good I might add) that they are big on ETF's. Some 401k accounts have terrible fund choices with high expenses. We had a big debate about that when this author wrote a commentary on a Frontline piece about the impending retirement crisis. The things is most of the problems with cost and transparency can be solved if they let consumers direct their 401k assets to whichever brokerage firm gives them the best deal. I would rather see that approach than trying to throw ETF's into the 401k plan offerings. The reason some 401k plan options are so expensive and opaque is because the firms selling the funds want it that way. They know they have a captive audience and so they don't feel the need to change. One way or another they are going to make sure they continue to make as much or more than before. Making ETF's available in 401k plans is not a real fix or even a band aid because it fails to address the fundamental problem with these plans....limited choice.
14 hours, 20 minutes ago
That's why I chose the Optional Retirement Plan (ORP) versus the State Pension Plan when I joined my current employer. In the self-directed plan, I have a decent set of low-ER TIAA-CREF, Vanguard, American and Blackstone OEFs to play with in allocating my 403(b) contributions and assets. Frankly for retirement accounts, I think OEFs are ideal; the once-daily pricing can a) help minimse the desire/capability to "trade" them, and b) help protect you from intraday volatility in the markets.[1]

By contrast, in the State Pension system your assets become a tiny part of a larger chunk of "Other Peoples' Money" (OPM) which is managed by someone else and generally is locked up in there until you retire. The ORP not only is self-directed but the funds are portable if I ever change jobs -- ie, not locked in the State accounts until I retire. I don't trust faceless state bureaucrats deciding which funds or investments are "appropriate" or "smart" for some of my retirement assets. ;/

To put it bluntly, if I'm going to invest (ie, RISK) *my* money in the markets I want to be the one doing it --- and thus accept the responsibility for my actions and/or errors.

(BTW I am in Maryland)

[1] Such as those days when you see 2-300 point swings but end up flat or slightly positive on the day....the nature of OEFs force you to "do nothing" when "doing nothing" very well may be the prudent course of action.
15 hours, 0 minutes ago
Re ETFs "not necessarily cheaper than index mutual funds and/or institutional share classes." John, I suppose you have a biased viewpoint, because your Morningstar 401K is probably run by people who know the first thing about investing. I think this is almost certanly the exception, rather than the rule. I have dealt with 401K plans for my three employers, as well as four others for family members. Basically, they all stink. They have very few funds; the funds are not selected at all for diversification - they may have two largecap growth funds, and no largecap value; and the fees are usually exorbitant. I think most companies don't know or care much about these plans, and allow them to be picked and managed by some aging hack from the accounting department, on his way out the door.

My current 401K has an SP500 index fund that beats the one you describe - it has expenses of only .007%. 0.7 basis points. But, so what? Even with zero expenses, it would still have 20-year annualized performance 3.2% lower than smallcap value DFSVX. 9.8% per year below emerging-mkt DFEVX, for 15 years. It is insane to offer 401K plans to people who won't need the money for more than 30 years, and then offer them only mediocre, low-yield asset classes.

Schwab's ETF plan will be valuable only if it offers participants a better menu of choices, If it is limited to a small menu of undistinguished funds, it will be no improvement.
15 hours, 44 minutes ago
Expense ratio can make a massive difference. While the lowest cost index open ended mutual funds can be indeed cheaper than a nearly identical ETF, that is not what most 401(k)s use. Mutual funds have share classes of varying expense ratios whereas ETFs only have one. Not all 401(k) slates use the cheapest share classes, if they switched to ETFs, there would only be one option. Additionally, plenty of 401(k) slates have actively managed funds which are more expensive than a passive ETF. (With ETFs, it wouldn't even be possible for South Carolina to have an expense ratio of 1.3%!)

Also, just because 401(k) owners are ignorant of their investments in practice does not mean that transparency is not useful. A lot is said about how transparency better informs the investor (which I agree, may be largely irrelevant for the long term investor in passive funds) but not much discussion has been given to how transparency affects the management of a fund (active management will probably continue to exist as a part of 401(k) slates as long as it is legal and transparency matters).
16 hours, 35 minutes ago
Ah, my fault. I initially wrote Schwab claims to be "the one." The One. Neo. The Matrix. Keanu. Get it?

Maybe not. It was a stretch to start with, and it doesn't work at all now that I changed the language of that sentence. Link removed.
16 hours, 45 minutes ago
What is this link supposedly to "Schwab(1) claims"?

http://media.animevice.com/uploads/0/9/3645-neo.jpg
17 hours, 9 minutes ago
They should have gone ahead and inculded all 57 states in the study.
Posted on 6:27 AM | Categories:

Teen jobs and tax issues

Kay Bell for BankRate.com writes: A summer job is a classic rite of passage for teenagers. But teen jobs can be a source of aggravation for young workers and their parents who aren't prepared to deal with the potential taxes.

When it comes to income, the IRS generally wants its cut regardless of the earner's age. But some special tax rules apply to young workers, based not only on age, but also on amount of money earned and even the type of job.

First, the good news: The teen worker might not owe the IRS a dime.
A youngster who is a dependent of another taxpayer generally doesn't have to file an income tax return unless the youth makes more than the standard deduction amount for a single filer.


2013 tax year standard deduction
The 2013 tax year standard deduction for single taxpayers is $6,100. A dependent youth can earn up to that much and not have to file a tax return.

If a young person doesn't expect to earn more than the threshold amount, he or she needs to note line 7 when filling out a W-4 at the summer workplace. That's where the teen might be able to claim exemption from federal income tax withholding.
In fact, novice workers should pay close attention to all employment paperwork. It could dramatically affect their tax responsibilities.

"Sometimes teens go out and work as technical employees, but are paid as contractors," says Sharon Lechter, a CPA in Paradise Valley, Ariz., and a former member of the inaugural President's Advisory Council on Financial Literacy. "So make sure the employer classifies you correctly."

Pushing the worker categorization boundaries is appealing to some companies who then don't have to deal with various tax withholdings and potential employee benefit payments. And young workers looking to pocket as much cash as possible each payday might think such an arrangement advantageous, too.

But being a contractor poses new, and costly, tax concerns.


Contractor tax complications

If paid as a contractor, which means earnings are reported to the worker and the IRS on a Form 1099-MISC rather than a W-2, the youth is for tax purposes self-employed.
That designation means that even if the young worker doesn't earn enough to owe federal income taxes, he or she could owe Uncle Sam self-employment, or SE, taxes.

This is the 15.3 percent tax on earnings that is the self-employed equivalent to Social Security and Medicare payroll taxes withheld from employees' checks and usually noted as FICA on pay stubs. That tax is required when any self-employed worker's net earnings exceed $400.
"There is no special tax treatment for teenagers running their own business," says Carol Topp, a Cincinnati CPA who is also the founder of TeensAndTaxes.com. "If you make a profit of more than $400, you must pay self-employment."

The frustrating thing about self-employment taxes is that while the income tax earnings threshold usually is adjusted each year for inflation, the $400 SE trigger is firm. And that low level often poses tax problems for young entrepreneurs, even if they don't make enough to mandate they pay income tax on their earnings.
That was the case for one of Topp's daughters. "She offered piano lessons and didn't make enough to file a tax return, but owed $80 in self-employment," says Topp.


Special rules for some teen jobs

Some young business people, however, do get a bit of a break. There are special tax rules for typical teen jobs.
Individuals who provide babysitting and lawn mowing services are viewed by the IRS as household employees. In these cases, a household employee who is younger than 18 at any time during the tax year the work was performed is not subject to Social Security and Medicare taxes.

The same SE exemption also is allowed for newspaper carriers, distributors or vendors younger than 18.


The family business

Instead of starting a new enterprise, some youths opt to go into the family business. In addition to having the inside track with the boss, this work situation might provide some tax relief for the employing parents as well as the young worker.
"If you're to employ your own child, there could be no withholding at all," says Thomas J. Casey, a Certified Financial Planner professional with Casey, Thomas & Associates, in Shelton, Conn.
When a parent's business is unincorporated (that is, it's a sole proprietorship or a partnership), the hiring mom or dad doesn't have to withhold FICA taxes if the youth is younger than 18. Federal unemployment tax payments also aren't required for the child if he or she is under age 21.

However, says Casey, parents who are generous employers will have to withhold income taxes if they pay their teenager more than the filing trigger amount.


Other income issues

Tax responsibilities also can be complicated when a youngster receives earned (work-related) and unearned (investment) income in the same tax year. When a youth receives investment income, that amount also must be added to the youngster's earned income in determining his or her federal filing requirements.
Generally, children age 18 or younger must file and pay taxes on their unearned income when it exceeds a certain amount.


Young investors' 2013 filing trigger
When a youngster's investment income exceeds a certain amount, the youth usually must file a tax return reporting those earnings. For 2013, filing is required on unearned income of more than $1,000.

If a child operates his or her own business, the young entrepreneur must track expenses in order to determine the potentially taxable earnings. The work-related costs will be reported on and subtracted from gross earnings on Schedule C.
Even if the young worker's net isn't enough to require the filing of a 1040, completion of Schedule C will make it clear whether, depending on the teen job, a Schedule SE must be filed to pay self-employment taxes.


And sometimes it pays to file a return. If a child did have withholding taken out of pay but didn't make enough to owe taxes, the only way to get that money back is to submit a Form 1040.
Finally, young business people need to be mindful of their state's tax filing demands, as well as possible sales tax requirements if the enterprise involves retail sales.
The various tax issues that the youngest workers encounter certainly can take some of the thrill out of joining the workforce. But Topp recommends that young workers look at ways the tax system can work for them.

"It's frustrating for the kid and parents to owe taxes, but it's part of being a grown-up and being a business owner," Topp says. "I tell them to plan for taxes when they set their prices."
Posted on 6:27 AM | Categories:

DOMA Ruling Cuts Both Ways for Advisers

Arden Dale for the Wall St Journal writes: For some financial advisers and their practices, the Supreme Court's ruling last week bolstering same-sex marriages creates a mixed bag of sorts.
Advisory firms that have served the gay community for decades could lose some business eventually, but others are likely to gain in the short term.
The Defense of Marriage Act, or DOMA, enacted in 1996 and rejected by the high court, had denied lawfully married homosexual couples the same federal tax breaks that heterosexual pairs get.
That inequality meant two sets of rules had to be followed, bolstering a niche for certain advisers to specialize in tax and estate plans for gays. For decades, they have helped sex-same couples reduce their taxes and ensure that their partners rightfully inherit money or property.
Now, same-sex couples in 13 states and the District of Columbia where gay marriage is legal will no longer need arrangements such as trusts and specially titled assets to put them on equal footing with heterosexuals.
"I don't think millenials will GoogleGOOG +0.47% 'gay advisers' and choose us," said Jennifer Hatch, president and managing partner at Christopher Street Financial in New York, which manages $275 million and has built a business over the past 32 years catering to gay clients.
"I think over time, it won't be the issue that differentiates the selection of an adviser," she said. "I would like it to be a nonissue that we have this specialty."
On the other hand, advisory practices that specialize in retirement or tax planning or even adoptions could win some new business now that the rules can be uniformly applied in most cases.
Emily Hecht-McGowan, director of public policy at the Family Equality Council in Washington, said advisers can now carve out a "niche for (lesbian, gay, bisexual and transgender community) planning going forward."
Advisers, she said, need to be mindful that although the law is moot, there are some gray areas that need clarity.
For example, there's been no guidance from the federal government on several same-sex tax issues. It's not clear whether a state that doesn't recognize gay marriage will have to treat same-sex spouses as married if they tied the knot in a state that does recognize it. The DOMA ruling, Ms. Hecht-McGowan said, addresses the federal estate tax but doesn't answer the question of whether same-sex spouses will get various employee benefits through their partners.
Andrew M. Katzenstein, an estate and tax attorney in the Los Angeles office of law firm Proskauer, said he foresees a "bump" of activity for firms that didn't anticipate the demise of DOMA. His firm built in the possibility the law would be struck down when it set up trusts for gay clients.
In particular, same-sex couples need to review qualified terminable interest property trusts, which are used to provide for a surviving spouse, he said. Many of these may need to be changed to reflect that a gay spouse can now inherit assets without an estate tax.
And some advisers anticipate new business simply because the end of DOMA is expected to prompt same-sex couples who've been on the fence about getting married to go ahead and tie the knot. As a result, these couples could decide to craft a financial plan just as a heterosexual pair would do, said Robert Hayden, chief wealth adviser at Total Alignment Wealth Advisors in New York and Washington. His firm serves clients with a combined net worth of $600 million--and over half his business is with gay clients, he said.
"I see this as a terrific opportunity," Mr. Hayden said.
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