August Is Time for a Financial Reboot / It's a Good Time for Year-End Financial Planning

• ANDREA COOMBES  for the Wall St. Journal writes: August. You could call it the nap-time of personal-finance planning. Many workers find this month is a quiet time at the office. For families, it's a time to amble back from vacation and start gearing up for the school year. But its very calm makes August a stellar time to work on your finances.

"August is a good time to start your year-end planning, and plan for next year, because once the holidays hit, you don't want to think about that," says Beth Lynch, a certified financial planner with Schneider Downs Wealth Management Advisors in Pittsburgh.
Ready for a personal-finance reboot? Here are six steps:

1 Get ready for upcoming college costs
Is your child in high school? Plan now for college scholarships.
Robert Weinerman, senior director, college finance, at consulting firm College Coach in Watertown, Mass., says the summer before 10th grade is the time to start.
"Look for five or six scholarships you'd like to win as a senior, and spend the next three years making yourself the perfect candidate," he says. (One search tool he likes is Scholarships.com.)

Another task for high-school parents: Use the College Board's calculator to get a sense of how much your expected family contribution will be for need-based financial aid.
"If they discover that the costs are higher than they thought, they need to be sure their kid applies to school where scholarships are more likely," Mr. Weinerman says. (Go to BigFuture.CollegeBoard.org. On the "pay for college" drop-down menu, click "tools and calculators" and go to "EFC calculator.")

Also, talk with your student. "The adults in the household should decide what they can and can't afford and then have a frank discussion with the future student so everybody is looking for a school that comes in at that level," Mr. Weinerman says.
And, if your college savings are invested in equities and that college bill comes due in the next year or two, start shifting to more conservative investments.

2 Prepare for workplace health-care and Medicare open enrollment
Come October, people who enjoy workplace benefits, and Medicare beneficiaries, too, generally can choose among the various plans available to them. Now's a good time to start recording all of the drug and other medical costs you incur so you can choose the best plan for you.
That homework can pay off. For example, Medicare Part D participants overpaid an average of $368 a year—and a fifth of them overpaid by $500 a year—because they failed to choose the drug plan most suitable for their situation, according to a 2012 report by University of Pittsburgh's Graduate School of Public Health.
"Start a list of those medications and which doctors you see. Is there an eye doctor, hearing doctor, any other specialist? That's a great list to have when you're trying to figure out which plan to go into," Ms. Lynch says.

3 Assess whether you need to rebalance investments
The Dow Jones Industrial Average (DJIA) is up about 19% year-to-date. That means the equity portion of your portfolio could be bigger than you realize, and that could hurt when the market reverses.
"If your risk tolerance is 60% equities, and we've had a nice run and you're up at 70%, you're not going to be happy if the market turns and you didn't take care of that," Ms. Lynch says.
Shift money from your top-performing assets into those that haven't done as well, but be wary of taxes. Tax-qualified accounts such as 401(k)s don't pose a problem, but in a taxable account, one tax-smart way to rebalance is to use new contributions to increase underweighted assets.

4 Revisit your budget
With seven months of spending behind you, "it's a good time to see how you're doing, especially if you're trying to be better about budgeting," says Lea Ann Knight, a certified financial planner with Garrison/Knight Financial Planning in Waltham, Mass.
Is it time to trim some costs, maybe eat out less? Are there forgotten charges you're neglecting? I'm currently paying about $16 a month for a Netflix account that allows for streaming videos online and receiving DVDs by mail. But I haven't requested a DVD in ages. By reducing the service to streaming only, I'll save $8 a month. Why waste $96 a year?
While you're budgeting, plan now for the rest of the year. Parents should account for back-to-school items, including clothes and books.
"That's not always budgeted for," Ms. Knight says. "It's not necessarily a big cost, but they do tend to be things that you only spend money on once a year. And then Thanksgiving, Christmas, Hanukkah—those can involve travel and gifts so you want to plan for that as well."

5 Set a course toward your goals
Do you have dreams of buying a house, getting going on college savings, or ramping up your retirement savings? Take the time this month to draw up a plan to meet those goals.
Your first step is to track where your money is going, and see whether you can trim any expenses to divert that money toward your stated goals.
Clients often say, "Oh, I can't save," Ms. Lynch says. "Well, let's take a look and see where we can cut. That's where they become amazed at how much it costs to go out to eat."
It's important to write down your goals, including a time frame for reaching them. "You're more likely to hold yourself accountable," she says. "Otherwise, it's out of sight, out of mind."

6 Plan for your next tax bill
August is usually a slow time for accountants and other tax experts—that makes it a good time for tax planning.
"People don't want to think about their taxes until they're getting ready to file, but it's often too late then," Ms. Knight says. Meet with your accountant to ask what steps you might take before year-end to reduce your 2013 tax bill.
"It may be as simple as making sure you've done everything you can to max out your 401(k)," she says.
If you use tax software, then visit that company's website—many offer planning tools. For example, TurboTax has its TaxCaster and H&R Block offers a Tax Estimator.
But be careful. These calculators are often set to the previous year's tax laws, which may change.

Adds Ms. Knight: "These types of sites don't really provide the tax-planning piece one could get from sitting down with a CPA."
Consider consulting with a certified financial planner who offers hourly planning—and limit the conversation to tax strategies, she says. "Many hourly CFPs offer real-time planning sessions for an hour or two on a specific topic."

Lessons for the Rest of Us From an Actor's Estate Plan / Some experts have criticized the late James Gandolfini's estate plan for exposing much of his legacy to taxes. Are they right?

Kelly Greene for the Wall St. Journal writes: Tony Soprano, the mafia boss played so memorably by James Gandolfini, presumably knew how to dodge taxes.

But after the actor died in June at age 51, some lawyers took his estate plan to task for needlessly exposing his fortune—estimated at $70 million—to estate taxes instead of shielding it better by making more extensive use of trusts.

of the trust," says Mr. Hood. The trust protector could be given the power to replace the trustee or simply to oversee the trustee's actions, he says.

• Leaving children a home together.
Mr. Gandolfini's will leaves his Italian estate to his two children together, and says that his hope was that they would hold on to it, though they are allowed to sell it after they both turn 25 years old.
To give that dream any sort of chance, there needs to be a cash pot set aside with money to maintain it, experts say.

Ms. Bouchard encountered a similar situation in which a married couple wanted to leave a mountain property, where the family took ski trips, to four different children: two from their own marriage and two from the husband's previous marriage.
"Are all four supposed to pay equally to maintain it, even though they're in very different stages of their lives? If you're not having these conversations up front, it creates these emotional land mines," she says.

In addition to convening a family meeting to discuss such plans, parents wanting to leave vacation homes should set up a separate account to fund their continuing expenses. They can make the trust holding the house the beneficiary of that account, says Bruce Steiner, an estate-planning lawyer at Kleinberg Kaplan Wolff & Cohen in New York.

• Leaving young adults a lot of money outright.
Mr. Gandolfini's infant daughter gets control of her share of his residual estate when she turns 21 years old.

"That's really too young to get a bunch of money," Mr. Steiner says. "She's the daughter of a celebrity, and people know who she is. A trust would protect against the fact that 21-year-olds are kind of vulnerable."

Even if she were mature beyond her years, "she could run over somebody and get sued. She could get divorced. She could go to medical school and not want the money in her own name, because she wants to protect it" against malpractice claims, he says.

One option for families who want to leave young children money without being beholden to their mothers and aunts throughout their lives: making the child a trustee at one age, and then giving the child control at a later point, Mr. Steiner says.

Estate Tax Portability - Making the Portability Election in General

Lewis Saret, for Forbes writes: In our last post (SEE BELOW) we discussed what estate tax portability, made permanent by the American Tax Relief Act of 2012, does.  This post gives an overview of what executors must do in order to elect portability.   Below are the 2 previous entries from Lewis Saret for Forbes on Estate Planning.

In order to take advantage of estate tax portability,  temporary regulations issued by the Treasury Department, require executors who want to make a portability election, to make such election on a timely filed and properly prepared estate tax return.

Comment:            The conventional wisdom regarding portability has always been that it would greatly simplify estate planning for married couples.  However, the requirement that an estate tax return be filed in order to elect portability significantly reduces such benefits because estate tax returns are complicated and expensive to prepare. Unfortunately, it appears that the alternatives available to the government are limited due to the need for certain types of information that are required for tax administration purposes.

When must the election be made?  For the purposes of making the portability election, the executor must file an estate tax return by the due date of the estate tax return (i.e., nine months after the date of the decedent’s death), including extensions actually granted.

Post filing changes.   The temporary regulations issued by the Treasury Department provide that the last estate tax return that is filed by the due date of the estate tax return, including extensions granted, will supersede any previously-filed return. As a result, an executor may supersede a previously-filed portability election on a subsequent timely-filed estate tax return if the executor satisfies the requirements set forth in the temporary regulations, which generally set forth how to affirmatively elect out of portability.

Note.            The temporary regulations provide guidance when contrary elections are made by more than one person who is permitted to make the portability election under the temporary regulations.

Caution.            The temporary regulations provide that a portability election is irrevocable once the due date, as extended, of the return has passed.
This posts discusses the basics of how to make the portability election. Future posts will discuss several issues that the temporary portability regulations raise.
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Estate Tax Portability - New Paradigm For Estate Planning

On January 1, 2013, Congress passed the American Tax Relief Act of 2012 (“ATRA”), which President Obama signed on January 2, 2013.
One of the key provisions of ATRA is to make permanent the so-called portability of the applicable exclusion amount between spouses, which was enacted by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
This post will begin a discussion of the portability rules, which greatly impacts estate planning.
The first issue regarding portability is what does portability do?
The answer is that portability allows the first spouse to die to transfer his/her unused estate tax applicable exclusion amount to the surviving spouse, who can then use it for his/her gift or estate tax purposes.
More specifically, if the estate of the first spouse to die makes the appropriate portability election, the surviving spouse’s applicable exclusion amount may be calculated as follows:

+	Surviving spouse’s basic applicable exclusion amount.
+	Aggregate DSUE amount.
—-	——————————–
=	Applicable exclusion amount

Example.            George and Barbara are married. George dies in 2011 and his estate makes the portability election. Assume the DSUE amount from George’s estate is $4 million. In 2013, when the basic applicable exclusion amount equals $5.25 million, Barbara dies.  Here, the applicable exclusion amount available to Barbara’s estate equals $9.25 million, which is calculated as follows:

+	$5,250,000	Surviving spouse’s basic applicable exclusion amount.
+	$4,000,000	Aggregate DSUE amount.
—-		——————————–
=	$9,250,000	Applicable exclusion amount

Any applicable exclusion amount of the first spouse to die that is used to reduce the estate tax liability of that spouse’s estate tax reduces the amount of the excess applicable exclusion amount that carries over to the surviving spouse in the form of the “deceased spousal unused exclusion amount” or DSUE amount.
In this regard, the DSUE equals the lesser of the following two items:

• The basic exclusion amount; or
• The excess of (a) the applicable exclusion amount of the last such deceased spouse, over (b) the amount with respect to which the tentative tax is determined under Code Sec. 2001(b)(1) on the estate of that deceased spouse.

So, this post discusses what portability is and what it does.  However, portability raises several issues.  One of the most important issues is is how to elect portability, which will be the subject of our  next post.
----

ATRA: An Unexpected Plus To Your Estate Planning -- )Lewis Saret, for Forbes

This past spring, Congress passed a number of important tax provisions that will impact how taxpayers manage their assets and estates.  One of particular significance is the American Tax Relief Act of 2012, or “ATRA”.  Encompassed within ATRA are a number of new tax provisions that can have a substantial impact on estate planning strategies.  Fortunately, many of these provisions are very beneficial for your estate planning going forward.  In this and the next few posts, we will explore the impact of ATRA on estate and gift planning, and strategies for planning under the new rules.

First, a little history on the enactment of ATRA.  At the start of 2013, Congress and President Obama signed into law ATRA, which basically makes permanent many of the tax reduction or deduction provisions originally enacted in 2001 as part of the Economic Growth and Tax Relief Reconciliation Act or “EGTRRA”.  This means ATRA has no built-in sunset provision and, pending other legislation, will not expire.  Since EGTRRA included a sunset provision that set its expiration for Dec. 31, 2010, these estate tax reduction and deduction provisions were extended in 2010 under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or “TRA 2010” with a new sunset provision set to expire on Dec. 31, 2012.  Under EGTRRA and then TRA 2010, when wealthy taxpayers with large estates passed away, the decedents could pass on up to $5 million, indexed for inflation from 2011, of their estate free of tax.  In addition, the maximum federal estate tax rate was 35%.  If TRA 2010 were to expire without being replaced by a similar new tax provision, these amounts would revert back to their pre-EGTRRA levels.  In order to enact new estate and gift tax provisions and prevent these provisions among others from expiring again, Congress passed ATRA.

So how does ATRA impact you and your estate planning strategies?  Below are some important provisions under EGTRRA and TRA 2010 that have been encompassed in ATRA that may impact you.

Gift and Estate Tax Rates & Exemption Amounts.  Under ATRA, the maximum estate, gift and GST tax rate is permanently set at 40% which occurs on amounts of taxable estate above $5,250,000.  In addition, instead of setting the tax-exempted amount for decedents’ estates at EGTRRA’s limit of $1 million, ATRA permanently set the excluded amount at $5 million indexed for inflation from 2011.  This amounts to $5.25 million exempt for gifts made from decedents’ estates for 2013.

Portability. Congress also permanently extended TRA 2010’s ‘portability’ provision, allowing spouses to transfer any unused estate tax applicable exclusion amount to the surviving spouse after one spouse passes away.  This unused amount is called the ‘Deceased Spouse’s Unused Exemption’ or “DSUE”.  Many taxpayers and planners may not have necessarily placed too much emphasis on the portability provision since it was subject to the two year sunset provision in TRA 2010, but now since this provision is permanent, portability could significantly change estate planning strategies for married couples.

Stepped Up Basis of Property Valuation. Before the enactment of EGTRRA, properties acquired from a decedent took an income tax basis, commonly referred to as the stepped up basis, equivalent to the fair market value of the property at the date of passing of the decedent.    Although provision under EGTRRA adopted a carryover tax basis for 2010 only, ATRA allowed that provision to expire and permanently reinstated the stepped up basis of property valuation.

GST Tax Changes.  Like estate and gift tax provisions, ATRA also made many EGTRRA GST tax provisions permanent, which can have a substantial impact in planning for the GST tax.  Some of these include elections in and out of a deemed and retroactive allocation of GST exemption under Code Sec. 2632 amended by EGTRRA, as well as elections for qualified severance of a trust for GST tax purposes and rules concerning late GST elections.

Although on the surface it may not seem like ATRA will have a great impact since it only extends provisions already in place under EGTRRA and TRA 2010, the permanence of tax provisions in ATRA gives the tax bill a unique quality.  It is because of its permanence that ATRA could substantially change estate planning strategies for the future and maybe even for the better.  Stay tuned as we explore in depth specific tax provisions extended by ATRA and how best to plan around this new tax law.

There are tax breaks for working parents

Kurt Rossi/For The Times of Trenton  writes:  The summer months present scheduling challenges for many working parents, as arrangements are made for child care while school is out. From daycare to day camp, child-care costs can be staggering. 

In fact, according to a recent report from the child-care advocate Child Care Aware of America, the average cost of child care can range from $4,600 to as much as $15,000 per year. However, a proactive approach to tax planning may help offset and reduce a portion of the expenses associated with caring for your children while you work.

If you are paying child-care or dependent-care expenses so that you and your spouse (if you are married), can work or go to school on a full-time basis, a child-care credit from 20 to 35 percent of eligible expenses may be available. Sounds good, so what’s the catch? 

First, the care must be provided to one or more qualifying persons who are defined by the IRS as being a dependent child age 12 or younger when the care was provided, or other certain individuals who are physically or mentally incapable of self-care. You may use up to $3,000 in expenses for one child or up to $6,000 for two or more children per year. 

The maximum credit of 35 percent is only available to taxpayers with adjusted gross income (AGI) of $15,000 or less and the credit gradually declines to 20 percent for taxpayers with AGI greater than $43,000. However, unlike many other tax credits that phase-out completely due to higher levels of income, the 20 percent child-care or dependent-care tax credit is available to even higher-income taxpayers.

Child-care expenses that you might have overlooked also may be eligible for the credit.
According to Lee Boss, certified public accountant and managing director for The Mercadien Group in Princeton, “Payments made by the taxpayer for before- or after-school care of a child in kindergarten or a higher grade-level, as well as day camps for children under the age of 13, may qualify for the child-care credit as long as such costs allow the taxpayer to work or seek employment. The credit is often overlooked but results in real tax savings.”

While there are many qualifying care expenses, there also are a few circumstances where you will not receive the deduction. 

The payments for care cannot be paid to your spouse, to the parent of your qualifying person or to someone you can claim as your dependent on your return. Also keep in mind that qualifying expenses will be reduced by any dependent-care benefits provided by your employer that you deduct or exclude from income. Additional rules may apply so consider reviewing IRS Publication 503, Child and Dependent Care Expenses at www.irs.gov or by calling (800) TAX-FORM.
For some, a dependent-care flexible spending account may be a better option.

If made available by your employer, a flexible spending account allows a married couple to save up to $5,000 ($2,500 for married filing jointly) in pre-tax dollars to pay for child-care costs. Since these funds can be saved without having to pay federal, Medicare and Social Security tax, significant savings can be realized. 

While an FSA can provide tax savings, parents need to be careful not to overfund their plan because any unused money will be forfeited back to your employer. 

For example, if you save $5,000 in you FSA but only have $4,000 in eligible expenses during the year, $1,000 will go back to your employer — ouch! Despite forfeiture provisions, the tax savings can be significant so be sure to consult with your employee benefits department to determine if an FSA is available to you. 

Determining the most advantageous option for you is generally dependent upon income — the higher the income, the more tax savings that may be realized from the FSA, if your employer makes it available. 

Lower-income households generally will benefit more from the tax credit. While you can’t claim the same child-care expenses for the dependent care FSA and child-care credit, you may be able to take advantage of both options depending on your circumstances.

As with all tax matters, be careful to maintain proper documentation.
Boss adds this: “You must identify and provide a Social Security number or (federal) employer identification number for all persons or organizations that provide care for your child or dependent on your tax return and keep records of payments made to care providers to substantiate such payments.”
Proper tax planning may help to reduce some of the costs associated with providing care for your children. Since everyone’s situation is unique, consider speaking to your tax adviser to determine the best approach for you.

Little-Known Tax Deductions You Need to Know About

Nearly everyone looks around for available tax deductions to help them save money. Here is a list of 10 unusual overlooked tax deductions that you may be eligible to claim. 

1. Your work uniform: Believe it or not, the cost of your work clothing could be deductible on your return. The IRS allows taxpayers to write off the expenses for any required work uniform or clothing. The catch is that your employer must require the clothing for your job, and you can only use the clothing for work purposes.

2. Fees for a weight loss support group: If you've been diagnosed with a weight-related illness such as obesity or Type 2 diabetes, the fees you pay to attend regular weight loss support meetings may be deductible. You must submit proof to claim your medical condition as a tax deduction.

3. Food for your pets: While you can't write off the cost of food for a typical household pet, you can deduct pet food expenses for seeing-eye dogs or guard dogs for your company.

4. College tuition: The IRS allows taxpayers who pay college tuition out-of-pocket to write off up to $2,000 of these qualified expenses. The expenses may include costs of tuition, fees, or textbooks.

5. Gambling losses: The money you spend while trying to hit the lottery jackpot might be an eligible tax deduction. Gambling losses qualify as a tax break if you are involved in legal gambling, and you've also won money or prizes from gambling in that same tax year. If you decide to write off your losses, you can only deduct an amount that is less than or equal to the amount you won from gambling.

6. Paint removal: If your home has lead paint, and one of your children has suffered from lead poisoning, you may be able to write off the cost of removing the paint.

7. Retirement fund contributions: You will get a tax break for retirement When you contribute funds from your paycheck to your retirement fund. Just make sure that you abide by the annual contribution limits to get the most tax benefit without losing too much of your take-home pay.

8. Sheltering a foreign exchange student: If you agree to house a foreign exchange student for at least 15 days out of the month, you can write off up to $50 for each month he or she lives with you.

9. State and local mortgage help: If you qualify for a mortgage credit certificate from your state or local government, you can write it off on your taxes and get a credit of up to $2,000.

10. Plastic surgery: In some cases, the IRS allows reconstructive plastic surgery as an eligible medical deduction. This is typically allowed when a taxpayer undergoes a mastectomy and has reconstructive surgery afterward. The taxpayer must show that the surgery was a result of a medical condition.

These 10 little-known tax breaks can save you a bundle on your annual tax liability. If you're unsure about claiming them, talk to a qualified tax professional.

America Is a Tax Haven…and That’s a Very Good Thing

Daniel J Mitchell writes: He’d get no argument from Kevin Packman, chairman of the Offshore Tax Compliance Team at the Holland & Knight international law firm. “There are a number of countries that have said the U.S. is the biggest tax haven in the world,” Packman said. “There’s something to be said for that view.” He noted there are many countries where people are rightly concerned about government moves to impose confiscatory taxes or seize assets. They view the United States as more respectful of property rights and therefore look for ways to move investments into the U.S., including by setting up Delaware or other corporations, and parking money in U.S. banks.

I’ve already noted that Delaware is one of the world’s best tax havens because of its attractive incorporation policies, but we also have very attractive federal tax rules.
Dennis Kleinfeld adds his analysis in an article for Money News.

Tax havens serve two vitally important purposes to everyone lucky enough to have private investment capital. First, they are a source by which foreign capital can be routed into the United States or other countries with tax efficiency.  Second, they represent a safe haven where investors’ private capital can flee from overbearing governments of all kinds — democratic, republic, dictatorship, monarchy and just plain thugs and despots — and with a comfortable level of privacy, confidentiality and secrecy. What is the world’s largest tax haven? …the United States can lay claim to that title.  …the United States would not be able to maintain its economy without large inflows of foreign capital. Foreign investors can invest in the United States virtually tax free — in structures that are legally protected from risks and, currently, with secrecy. With fairly simple planning, a foreign investor can avoid tax on interest as well as gains from sale of securities — all protected by the legal system… As for secrecy, Delaware or Nevada are quite accommodating. In these states, a foreign company or individuals can form a limited liability company and open a bank account, but if the investor does its or his business outside the United States, there is no U.S. tax or reporting.

Just as important, Dennis explains that tax havens are not only good for the American economy, but also for individuals seeking to protect themselves from rapacious government.

There are no investors — the people who actually create investment capital — who have any complaint against offshore tax-haven financial centers. …To politicians, your capital is their means to advance their political goals. Notwithstanding their propaganda of serving the American people, the needs of the people are always subservient to the voracious needs of political advancement.  How can private investors protect themselves from becoming the spoils of war from the marauding armies of politicians fighting for power? For that, investors need tax havens.

By the way, leftists also agree that the United States is a tax haven for non-Americans, so that’s not in dispute.

But there is a big argument about whether it’s good for America to have these policies. I’ve argued over and over again in favor of tax havens as a general principle (I recommend my New York Times piece if you want a good short summary), but it’s also worth noting that America’s tax haven policies have helped to attract trillions of dollars to the U.S. economy.

By the way, I suppose it’s time to confess that I lost my recent debate on tax havens for the Costco Connection. Though I argued last month that the magazine phrased the question in a very misleading way, so the fact that the margin was only 51-49 could be an indication that I was actually somewhat persuasive. 

And maybe some late-reporting precincts could still turn the tide, so feel free to add your opinion if you still haven’t voted.

But I’m digressing. Let’s conclude by assessing where we stand. Tax experts on the right and left agree that the United States is a tax haven for foreigners who need a safe place to invest their money.

There’s also no doubt that foreigners take advantage of these policies in ways that attract huge amounts of money to the American economy – more than $25 trillion according to the Commerce Department!

P.S. You won’t be surprised to learn that hypocritical leftists love using tax havens to protect their money even though they want to deny that freedom to the rest of us.
P.P.S. I’m such an avid defender of tax havens that I almost wound up in a Mexican jail. That’s dedication.