How Bad Does a 401(k) Have to Be Before It Makes Sense to Skip It?

Mike Piper The Oblivous Investor writes: A reader writes in, asking:

“The 401K at my new job doesn’t have a single fund with an expense ratio below 1.4%. How bad does a 401K have to be before it makes sense to skip it entirely?”

As you might expect, the answer is, “it depends.” In addition to looking at the costs of the funds (and to what extent you can minimize the costs you pay by sticking to the cheapest options and picking up other parts of your allocation elsewhere), you have to consider:

• Whether or not there is a matching contribution,
• What you would do with the money if you did not put it into your 401(k),
• How long you plan to stay with the employer in question, and
• Your current and future marginal tax rates.

Is There a Match?

If your employer offers a matching contribution, that weighs very heavily in favor of contributing to the 401(k) – though perhaps contributing no more than necessary in order to get the maximum match offered – even if the investment options are very poor. It takes many years of subpar investment performance to overwhelm a risk-free 100% return right off the bat.

What’s the Alternative?

If there is no matching contribution being offered (or you have already gotten the maximum match), then it’s time to consider what you would be doing with this money if you don’t put it into your 401(k).

• Do you have any high-interest debt to pay down?
• Can you contribute the money to an IRA, or have you already maxed out IRA contributions for the year?
• Is there available room for contributions in your spouse’s retirement plan at work? And if so, are the investment options in that plan better than the options in your plan?

If any of the three options above are available to you, it’s often a good idea take advantage of them rather than investing in an especially crummy 401(k).

If none of those options are available, however, the decision typically comes down to contributing to the high-cost 401(k) as opposed to investing in low-cost funds in a taxable brokerage account. If that’s the case, there are two more factors to consider.

How Long Will You Work There?

The reason high-cost mutual funds are so undesirable is that they typically lead to a lower rate of compounding for your savings, which, over a long period of time, causes you to accumulate a much smaller sum than you would otherwise accumulate.

But the expense ratios of the funds in your 401(k) are only relevant for as long as you have the money in the plan. And once you leave your job, you can roll your 401(k) assets into an IRA, where you can choose low-cost funds. In other words, you’ll only have to pay the high costs of the funds in your 401(k) for as long as you’re with the employer in question.

As a result, if you anticipate leaving the employer within the next several years, even an absurdly high expense ratio is likely to be overwhelmed by the tax savings you get from investing in a tax-sheltered account.

Looking at Tax Rates

But what if there is no employer match, you have nothing else especially attractive to do with the money (such as pay down high-interest debt), and you expect to stay with your employer for many years? Then does it make sense to invest in a taxable brokerage account rather than contribute to a 401(k) with high-cost funds?

In this case, the question comes down to weighing:

• The improvement in performance you expect to obtain from using less expensive funds (in a taxable account) against
• The additional taxes you would have to pay because your money is in a taxable account rather than a tax-sheltered account.

Unfortunately, this is one of those things that’s not so much a simple math problem as it is a set of several guesses, which you can then use to do a math problem if you so choose.

But, generally speaking, the lower your current tax rate (for ordinary income), the lower the tax rate you expect to pay on qualified dividends and long-term capital gains, the higher the costs of the funds in the 401(k), and the longer you expect to be with your employer, the more likely it is that the taxable brokerage account makes sense.

IRS Introduces New Method to Make Calculating Home Office Deduction Simple

Mark Steber for the HuffPo writes: Over the past few years, millions of taxpayers have lost their jobs due to the recent economic slowdown, and many of them started a business working in their homes. In addition, an increasing number of employers are encouraging telecommuting as a way to reduce overhead and meet the global demands of today's business world. In either case, the home office deduction has always been a good consideration to lower your taxes and keep more of the money you earn. However, due to complexity and taxpayer fears including misinformation from the urban myth that if you take a home office deduction you jump to the top of the "IRS Audit List," millions of otherwise qualifying taxpayers did not take the home office deduction. The number of qualifying taxpayers is likely going up each year meaning even more taxpayers miss out on a much-needed tax benefit.

Well listen closely, and I do not say this very often, the IRS has come to the rescue. One of the biggest tax law changes this year is a new method for computing the Home Office Deduction. So if you set up shop at home, you'll want to read on.

New starting in tax year 2013, the IRS has developed a safe-harbor method that will make it easier for taxpayers to compute and claim the home office deduction. It is important to note that the rules concerning how to qualify for the deduction have not changed, instead an alternative way to compute the deduction will make it easier for taxpayers who qualify to claim the deduction.

As I noted, the basic qualification rules for the home office deduction have NOT changed, so a brief overview and understanding of them is important. Volumes of tax information and literature and guidance are written on the home office deduction, but basically, a tax deduction is allowed for expenses associated with the portion of the home that is used as an office on a regular basis. For self-employed persons, the office is the part of the home that is (1) the principal place of business of the taxpayer or (2) a place of business that is used by patients, clients, or customers in meeting with or dealing with the self-employed taxpayer in the normal course of business. For an employee to qualify, the home office use must also be for the convenience of their employer. There are many other considerations that range from separate dwelling locations to occasional or incidental use and defining principal use, but the bottom line is simply this: If you have a location or room in your home that you use specifically for business, either as a self-employed taxpayer or an employee, then you should qualify for the home office tax deduction. Qualifying used to be the easy part. The harder part was capturing the costs, computing the deductions, and providing the documentation necessary to support the deduction. This was difficult and time-consuming and consequently why many taxpayers would otherwise omit taking the tax deduction. That has now changed.

Calculating the home office deduction can still be done the old-fashioned way -- namely documentation and calculation of the actual expenses related to the business portion of your home. Alternatively, taxpayers now have the option to use the new safe-harbor method, under which the deduction amount is determined by a simple formula based on the square footage used as a home office.

To use the safe-harbor method, taxpayers must meet the qualifications for a home office including the requirement that the space be used specifically for business. Under the new method, the home office deduction is calculated by multiplying the business area square footage, not to exceed 300 square feet, by five dollars. Simple as that. Use the total square feet of the home office or 300, whichever is less, times five dollars -- that is it! Unlike the traditional method of calculating the deduction, the safe harbor method is limited to $1,500.

There are other rules for where the deduction goes, such as the Schedule C if self-employed or Schedule A for employees, but the new rules do make the home office deduction much easier to claim. The new method should allow many more taxpayers, who in the past were either intimidated by the complexity of the rules or the record keeping or fear of IRS "home office" audit to now take advantage of the very pro taxpayer rules. If you're still unsure, be sure to talk to a tax professional who can assist you.

Tax planning for working-age youths

Tim Grant for TheRepublic.com writes: Teenagers often get their first taste of financial independence by earning a paycheck from summer jobs or working for an employer after school — waiting tables, running cash registers or washing dishes in a restaurant.

While children of legal working age may not always be prepared for the responsibilities of reporting their income to Uncle Sam, the good news is that in most cases they are not likely to make enough money to owe any federal income tax.

"For 2013, children can make up to $6,100 without owing federal taxes, because that amount is equal to the standard deduction they can take," said Howard Davis, president of the Davis, Davis & Associates accounting firm in Pittsburgh.

. He said when young workers fill out their W-4 form for a new job, they also should tell their employers not to withhold any federal taxes.

"If you don't have any federal income taxes withheld to begin with, the child does not have to go through the trouble of filling out a federal tax return to get it back and the child gets the use of the money during the year," Davis said.

Tax consultant William Richardson said parents should encourage children to use at least part of their earnings to open and fund a Roth IRA where it can grow tax-free for many decades to come.

"There's a big difference between savings that grows tax-deferred, like a 401(k), and something that grows tax-free, like a Roth IRA," Richardson said. "If you have a child age 18 who made $2,000 over the summer, they are allowed to fund a Roth IRA for 2013 to the lesser of their earned income or the Roth IRA contribution limit, which is $5,500.

"If the parents or the child have the ability economically to fund the IRA with that $2,000 and keep the money in the account until retirement age for 50 years, can you image through compounding how much tax-free income you can accumulate with just that one contribution?"

Teenagers don't always earn money working for someone else.

With the job market being as tight as it is, many youngsters are more often working for themselves as babysitters, lawn maintenance workers or even designing websites on a freelance basis. But even that money must be reported on tax returns if the earnings exceed $400, according to the Internal Revenue Service.

"You may not earn enough money from your summer job to owe income tax, but you will probably have to pay Social Security and Medicare taxes," according to the IRS website. "Your employer usually must withhold these taxes from your paycheck.

"Or, if you are self-employed, you may have to pay self-employment taxes. Your payment of these taxes contributes to your coverage under the Social Security system."

For federal tax purposes, a person is treated as self-employed: if he or she is in the business of delivering newspapers, if the majority of income stems from sales rather than the number of hours worked, or if a person works under a written contract stating that the employer will not treat him or her as an employee for federal tax purposes.

If children do not meet these conditions and are under age 18, they are usually exempt from Social Security and Medicare tax.

Accountant Alex Kindler said teenagers who work during the summer or after school also should save their pay stubs.

"It's not uncommon for employers to forget to send them a W-2 at the end of the year," Kindler said.

Also, teenagers who work for tips should remember that tips are taxable.

"The simplest way to keep track of tips is to maintain a daily tip log," he said. "Typically a tip log is sufficient documentation for the IRS. But it's highly unusual for students to maintain one. It's usually out of ignorance. They just don't know any better."

Changing a Financial Plan Post-DOMA

 V.L. HARTMANN for the Wall St Journal writes: The 65-year-old man was planning several big changes with his same-sex partner, who was also 65 and already retired.

He wanted to sell his house and relocate to a different city, and to help with the transition his partner intended to claim his Social Security benefits. Once they were settled in a new home, the couple planned to get married.

Although the client was eager to make the move, his adviser, Sean Cauvel, saw compelling reasons for them to adjust their schedule: The Supreme Court's decision that struck down the Defense of Marriage Act in June meant that delaying major financial transactions until after they were married would allow them to take advantage of spousal benefits that could save them thousands of dollars.

"I advised them to hold off on the relocation until after they get married, which they plan to do this fall," says Mr. Cauvel, director of financial planning and senior portfolio manager at Los Angeles-based Westmount Asset Management, which has $1.6 billion under management for 850 clients.

The adviser laid out his case for changing their schedule. For starters, Mr. Cauvel knew that his client had a considerable amount of equity in his house and faced a $470,000 gain on the property. As a single individual, the client was only eligible for a $250,000 exclusion; if he were married, that exclusion would increase to $500,000. Mr. Cauvel crunched the numbers and showed that the couple would save approximately $74,000 in state and federal taxes by selling the house after their marriage.

"That was eye-opening to them," Mr. Cauvel says. "Since they were going to get married anyway, all they'd have to do was wait and that would save them a big chunk on their tax bill."

Mr. Cauvel next explained that they also should wait to get married before claiming any Social Security benefits. After marriage, they could take advantage of the "file and suspend" strategy that husbands and wives have long used to increase the value of their collective Social Security benefits over their lifetimes.

If the client's partner had filed for benefits before they were married, he would have received a maximum monthly benefit of just over $2,500. However, if they waited one year until after they were married and had both reached their full retirement age of 66, the client could file for Social Security and immediately suspend those benefits. But his spouse would be eligible for roughly $1,300 a month in spousal benefits--enough to help cushion their transition to a new city.

An even bigger benefit would come later: If both men defer their benefits after age 66, they can receive an additional 8% per year up to age 70. By doing so, the client and his spouse could each increase their monthly benefits to $3,200 in the future.

Although the client and his partner were eager to start the next phase of their life, they realized that delaying their plans until after their marriage was too big a financial opportunity to pass up. "Showing them the numbers--it was a no brainer," Mr. Cauvel says.

Mr. Cauvel encourages other advisers to be proactive about discussing new financial planning options available to same-sex couples now that DOMA has been struck down.

"They shouldn't make any decisions until they've run it by their advisers, because you may be able to help them save money and increase their benefits in the process," he says.

Advisers Focus on 2013 Tax Plans

Arden Dale for the Wall St. Journal writes:  As summer winds down, financial advisers are making tax planning a top priority to prevent a slate of new tax rules from saddling their clients with higher-than-expected taxes for 2013.

For advisers, managing taxes will require more work this year than most. To begin with, the usual approach to estimating taxes--based on what one paid the year before--won't be enough in many cases. New rates and brackets, a 3.8% surtax on investment income and other changes complicate the planning process.

"Using last year's figures may give advisers a base to start with, but for higher income clients, estimating their 2013 tax liability is going to be more of a challenge," said Todd Perry, an adviser at Vintage Financial Services, an Ann Arbor, Mich., firm with around $275 million under management.

Most taxpayers know about the changes Congress made to the tax code starting this year, but few grasp the practical realities, advisers say. A couple with an adjusted gross income over $250,000, for example, may not realize that they will owe the 3.8% tax on top of capital gains and other investment income.

Advisers want their clients to understand the basics: Adjusted gross income of $200,000 ($250,000 for joint filers) triggers the 3.8% surtax--which is mandated under the Affordable Care Act to help fund Medicare. Taxable income over $400,000 ($450,000 for joint filers) gets the new top rate of 39.6% for ordinary income. And deductions also are limited for those with adjusted gross incomes over $250,000.

Paula Hogan, an adviser in Milwaukee, Wis., who owns her own practice with around $200 million under management, said she is getting ready to resend a client bulletin on the new tax regime she originally sent right after Congress approved it in January.

For most clients, she said now is a good time to adjust estimated taxes--either by selling stock or making a charitable deduction. She recommends clients ask their financial advisers to "tee up" conversations with an accountant or they should reach out to one on their own.

Recently, Ms. Hogan performed some fairly detailed tax planning for a couple whose daughter plans to be married in the spring of 2014. The pair decided to wait until next year to draw money from their portfolio to help pay for the event. Doing it this year would put them into a higher tax bracket.

Mr. Perry of Vintage Financial said he has prepared a number of mock tax returns for clients with severance packages or big capital gains. Most of them have been surprised at how many changes there are this year.

Some clients, he said, have tried to integrate the rule changes into their tax planning on their own, but come to see they need help. A bank executive and his wife, for example, brought Mr. Perry a rough estimate they had done of their 2013 taxes using standard software. A job change and a new salary along with stock sales had made the year eventful for them from a tax standpoint.

"He's heard about some of the changes, and I think was being a bit more proactive," said Mr. Perry, who did a detailed analysis that found the couple will have to pay more in taxes because of a sizeable capital gain from the stock sales that puts them into the top bracket.

Even accountants and other tax professionals have a challenge to keep up with all of the changes.

For example, Bill Fleming, a managing director at PricewaterhouseCoopers Private Company Services practice, said tax professionals still are awaiting guidance from the Internal Revenue Service on exactly how to apply the 3.8% tax to individuals who own their own businesses.

"How do we actually calculate the 3.8%? It's a whole new standalone tax," he said.

StartUp AccountingSuite to Sponsor "Future of Accounting" Event in San Francisco's SOMA District

AccountingSuite will be sponsoring the "Future of Accounting" event

When: Thursday August 22nd, 2013 from 6:30-8:30

Where: 156 2nd Street in the WeWork-SOMA building located at the heart San Francisco's bustling SOMA/Financial District.

This event will be hosted by Danetha Doe from EmeryCloud, a progressive cloud accounting firm. This event will be a great opportunity for cloud accountants and other financial professionals to meet each other and discuss new technologies in the accounting space.

OpenCoin, a Google Ventures backed company in San Francisco, will be sharing their knowledge about virtual currency. OpenCoin has created the Ripple network which is a peer-to-peer network to pay anyone with any currency type with no bank fees.

About AccountingSuite:

AccountingSuite is a San Francisco startup funded by parent company 1C LLC, an international enterprise software group with more than 1 million business customers in Asia and Europe.

Our mission is to provide easy-to-use, no-nonsense business software for startups, entrepreneurs, and established businesses to manage their finances and day-to-day operations.

New Home-Office Deduction Rules Revealed

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Jim Blankenship  Nuwireinvestor.com writes: The Internal Revenue Service is offering business owners with home offices a new way to calculate their home-office deduction, but experts say the old way may work just as well or better for many people. The new method, called the “safe harbor” option, complicates the value depreciation method while simplifying the overall deduction, which is reduced to a flat rate of $5 per square feet of office space for up to 300 feet. While that may benefit some people, those who are moving or who use more space than that will clearly want to think about sticking to the old rules. For more on this continue reading the following article from TheStreet. 

This year, the Internal Revenue Service allows a new method of deducting expenses for home offices. You can still deduct for home office space using the old method -- and this new "safe harbor" option, which the IRS calls "simplified," has calculation wrinkles that may not be for everyone.

The new method allows you to deduct a flat $5 per square foot of dedicated office space in your home, up to a maximum of 300 square feet. Three reasons this might be for you:

1. If you are just starting to take the home office deduction, you can forget about depreciation recapture, a required adjustment when you sell your home. If you took the old home office deduction, including depreciation of your home office space, you still need to keep records of the depreciation claimed in earlier years and recapture that depreciation when you sell your home. Note that you also need to maintain these records even if you start taking the safe harbor amount, since you're permitted to switch between deduction methods from tax year to tax year.

2. In the past when calculating the home office deduction, you gathered utility bills, mortgage interest, real estate taxes, repair bills and other documents to determine the amount attributable to the home office. This isn't needed under the new rule.

3. Under the old method, any amount for real estate taxes and mortgage interest claimed under the home office deduction gets subtracted from those expenses for use on your Schedule A tax form for itemized deductions. Again, this is no longer required under the safe harbor rule.

Depending on your situation, you might want to stick with the old rules, however. For one, the new provision's 300-square-foot deduction limit may be plenty for some home office workers but there are likely many exceptions. A dedicated waiting area, for example, could easily push your square footage beyond this allowable maximum.

Also, if your home office expenses exceed your gross income less business expenses, the new method, unlike the old, forbids you to carry over the excess to future years. If you switch to the safe harbor method, you also lose any prior year's carryover.

An added wrinkle: If you switch later to the old deduction method, you must account for the prior depreciation although only as basis for depreciation. That means, according to the IRS, you multiply the cost or other basis of the property by the percentage of business/investment use and then subtract any credits and deductions allocable to the property.

Rather than simplify, this complicates the depreciation calculation: You must skip the years when depreciation isn't charged to determine basis for the current year, but account for those years when determining which year's depreciation to deduct.

Finally, once you've filed with one choice, you cannot amend the return to change the method of deduction. If you have more than one home and you intend to take the home office deduction for offices in each home, you are also limited to using the safe harbor for only one of the offices in any one year.

You're not required to use the safe harbor rule for any of the offices - a choice some will clearly make despite this IRS stab at simplification.

Ways Professional Traders Can Save Big At Tax Time

Robert A. Green for Forbes writes: Trader tax laws and benefits are complex and nuanced. Far too many traders and tax preparers don’t know the laws or misapply them on tax returns. Why pay tens of thousands of tax dollars more than you should?

It’s wise to educate yourself before risking your capital and it’s wise to do the same before planning and filing tax returns. To help with the latter, I’ve assembled a list of the most common mistakes made by traders and tax preparers.

Big picture items

1. Not claiming trader tax status, business expense treatment. (Or claiming this status when not entitled to it.) Business traders can save an average of $5,000 or more using business expense treatment. Business expenses are 100% deductible from gross income, whereas investment expenses are considered miscellaneous itemized deductions and are only deductible “below the line” in excess of 2% of adjusted gross income (AGI) and added back for the Alternative Minimum Tax (AMT), also known as the nasty second tax regime. Business expenses allow home-office deductions, education expenses, and startup costs, whereas investment expenses do not. Also, traders may claim trader tax status after the fact, including on amended tax return filings for the past three open tax years.

2. Not filing the Section 475 MTM ordinary loss election on securities and getting stuck with the puny $3,000 capital loss limitation, wash sale loss headaches, and extra tax costs. Many traders and accountants mishandle the Section 475 election statement (due by April 15 of the current tax year for existing individuals and partnerships) or they botch perfecting the election on a Form 3115 filing. One mix up can jeopardize ordinary gain or loss treatment. The biggest pitfall for traders is not deducting trading losses when they otherwise could. Section 475 does not apply to segregated investments or Section 1256 contracts when elected on securities only.

Unfortunately, you can’t fix a missed or botched Section 475 election; you need to focus on climbing out of the capital loss carryover hole you dug. You can form a new entity and use the “new taxpayer” exception allowing an internal Section 475 election within 75 days of inception.

3. Making the wrong decision about the forex Section 988 opt-out election and reporting forex incorrectly. Spot and forward forex receives Section 988 ordinary gain or loss treatment (which generally is better than a capital loss limitation). At any time during the tax year, traders are entitled to file an internal “contemporaneous” opt-out election to have capital gains treatment instead. That’s helpful if you have capital loss carryovers. If you trade in major forex currencies and don’t “take or make delivery” of the underlying currency, the opt-out election subjects forex forwards — and we make a case for spot forex too — to the lower Section 1256(g) 60/40 tax rates. That reduces the highest tax rates by 12%!

Forex reporting depends on whether you file the Section 988 opt-out election and whether you qualify for trader tax status. Section 988 without trader tax status is line 21 of Form 1040, and with that status its Form 4797 Part II. Section 988 losses over $50,000 require “tax shelter” Form 8886. Many IRS agents are confused over tax treatment for spot forex, plus forex brokers aren’t supposed to issue 1099-Bs for spot forex. Make sure to read brokers’ tax reports correctly. For example, rollover interest is part of trading gain or loss. If you opt-out of Section 988 and choose Section 1256(g), use mark-to-market at year-end on Form 6781. Thankfully, summary reporting applies on forex.

4. Business traders not forming a trading entity to unlock AGI deductions for retirement plans and health insurance premiums. These AGI deductions can save $2,000 to $17,000 or more in taxes, but sole proprietor retail traders can’t get them in connection with trading gains. By forming a simple pass-through entity like a partnership, LLC, or S-Corp, business traders can take advantage of these deductions.

Tax reporting errors and compliance headaches

5. Reporting trading gains and losses on Schedule C, almost guaranteeing an IRS notice or exam. Items must be reported in the correct place. While business expenses are reported on Schedule C, trading gains and losses are reported on other tax forms like 8949, 6781, and 4797.

6. Using our transfer-of-income strategy incorrectly, or not using it at all. The transfer is executed differently for sole proprietors vs. entities. You need this transfer to unlock the home-office deduction, Section 179 depreciation, and AGI deductions, and to reduce the IRS red flag factors on Schedule C and entities.

7. Using the wrong solution for securities trade accounting and calculating gains and losses incorrectly, especially wash sales. Many traders and preparers botch IRS cost-basis reporting on Form 8949 and the reconciliation with Form 1099-B. Some traders fail to report non-1099-B items like stock options on Form 8949. We recommend TradeLog software to handle this after downloading actual trades, rather than inputting 1099-B information.

8. Botching tax treatment between securities, Section 1256 contracts, forex, ETFs, options, precious metals, foreign futures, and more.

9. Misreporting Section 1256 contracts such as securities on Form 8949 rather than on Form 6781, thereby losing lower 60/40 treatment. Not all brokers report Section 1256 contracts correctly, especially instruments that aren’t clearly designated as such including some E-mini indexes and options on those indexes.

10. Misreporting ETFs and ETF options and not adding Schedule K-1 pass-through income to cost basis. ETFs and ETF options are generally taxed as securities, and commodity ETFs often pass through Section 1256 income or loss on a K-1. Options on commodity ETFs can be considered Section 1256 contracts. It’s a pain to deal with numerous ETF K-1s at tax time.

11. Not filing a 1099-Misc for fees paid to service providers, including you for administration. Sole proprietors or entities paying service providers $600 or more by check or cash must issue a Form 1099-Misc. It’s better to file a 1099-Misc. late subject to a penalty of $50 rather than encourage the IRS to catch you and assess much higher penalties.

12. Misreporting education expenses. Pre-business education expenses — including seminars, trade shows, and travel — are generally not allowed as investment expenses. Education is allowed as a business expense but only if incurred after qualifying for trader tax status. Try to squeeze a reasonable amount of pre-business education into Section 195 startup costs to expense once you achieve trader tax status. Don’t fall prey to those promising better results using dual entity schemes including a C-Corp.

13. Not filing a tax return due to negative income and trading losses. Expect a “jeopardy” (made up) tax assessment notice from the IRS. If you trade securities, the IRS doesn’t see the full picture, even with new cost-basis reporting. The IRS may think you made a lot of money and will hit you with a huge tax bill. Not filing can cause you to lose capital loss carryovers for previous years. With 1099s filed by brokers, there is no place to hide.

14. Mishandling tax notices and IRS exams. Generally, IRS and state agents don’t understand a trading business. It’s not a passive loss activity or hobby loss activity, and various items are reported in different areas with complex and nuanced tax treatment and elections. State tax rules for entities usually make exceptions for trading businesses, but that is not always apparent. Before a tax exam gets out of control, consult with a trader tax expert to get it on the right path.

15. Being non-compliant on FBAR and other foreign tax reportingsuch as Form 8938 (foreign financial assets). Congress and the IRS are very concerned about tax cheats using offshore bank accounts, structures, and schemes. Not filing foreign bank account reports (FBAR) on time or correctly can be costly: Back taxes, penalties, interest, and even criminal proceedings could be the result. Consider the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). (Note that this program is NOT amnesty; in some cases, it’s a mistake to enter OVDI when there’s a better way to come clean.) Generally, opening offshore entities doesn’t help reduce taxes as they are treated as disregarded entities or they are subject to passive foreign investment company rules. Avoiding the Commodity Futures Trading Commission’s rules for retail forex trading by using offshore accounts or entities doesn’t work.

Entities and retirement plans

16. Forming the wrong type of entity, and in the wrong state. If you live, work, and trade in your home state and want to form a pass-through entity, it’s best to form it there. Don’t fall prey to promoters in Nevada harping on the benefits of corporations formed in Nevada. If you don’t register that Nevada entity in your home state, you won’t have asset protection in your home state. A Nevada LLC filing as a partnership passes through its income to your home state.

17. Tapping into IRA and other retirement funds incorrectly, causing IRS penalties and trouble. Don’t get busted by the IRS for misusing your retirement funds. See our recent blog “Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments” for more on this topic.

18. Triggering wash sale losses in IRAs which are permanently lost. Far too many traders make this tragic mistake. When you buy back a “substantially identical” security position in any of your IRAs 30 days before or after selling it for a loss in any of your taxable accounts, you can kiss that tax loss goodbye forever. It applies across husband and wife individual and joint accounts. Normally, wash sales are only a deferral problem, but in this case it’s a permanent problem. Abstain from trading substantially identical positions in your IRA accounts or house your active trading in an entity, which is a different taxpayer for purposes of the wash sale rules. A Section 475 election also solves this problem.

19. Choosing the wrong type of retirement plan. The Individual 401(k) plan for business traders is best. It combines a 100% deductible 401(k) elective deferral — where the biggest tax savings lies — with a 20% deductible profit sharing plan. Don’t forget to open this plan before year-end, even with no money contributed.

20. Paying self-employment (SE) taxes on trading gains. Only full members of futures exchanges owe SE taxes on futures trading gains. Too many traders pay SE taxes on these gains and the IRS doesn’t challenge it. Watch out for the new Affordable Care Act’s 3.8% Medicare surtax on unearned income starting in 2013.

Bottom line
Common mistakes cost traders tens of thousands of dollars per year on their tax returns. Don’t be penny wise and pound foolish. Spend a few dollars to buy premium tr

ader tax guides to learn how to avoid these mistakes. Consider engaging a trader tax expert to help with your tax return elections, planning, and preparation. Use the right trade accounting software for securities. Some mistakes you can fix on tax returns on extension or on amended tax return filings. Other mistakes can’t be fixed, and you should focus on tax strategies to dig out of that hole.

KASHOO Accounting, all-in on the iPad. / The small business accounting space is crowded and loud. You have offerings that are free, some are web-based; some desktop. But from our perspective being “iPad-first” is our differentiation.

From Tab Times we read: We all know the tablet data. Apple sold nearly 20 million iPads in 2Q2013 alone. iPad growth over first 12 quarters is three times that of what the iPhone was.

Mary Meeker’s recent Internet Trends report was unabashedly tablets, tablets, tablets. And it’s likely these trends will keep hockey-sticking as more and more population segments - from sales professionals to elementary school teachers - continue to adopt the tablet as a primary device. Work and life as we know it continue to migrate towards anytime, anywhere. Always connected, always on.

Given this scenario, we, a startup that builds simple cloud accounting software for small business, are all-in on tablets, specifically the iPad. We’ve made the conscious decision to make the web app the companion to the iPad app, not the other way around as is the norm.
So in a way, you could say we’ve bet the farm on it (aka, convinced investors that “mobile first,” albeit hard, is the right decision). How is that possible, you might be asking? Just what is the rationale? Let me explain...

First of all, it was hard

Convincing a team - let alone a board - that staking our future on a brand new platform (we started iPad app development one month after the device was unveiled) was no easy task. Why not the iPhone? Why a native iPad app versus, say, an HTML5 app? Why prioritize an iPad app over the already revenue-generating web app?

These are just a small percentage of the questions that we had to answer. On top of that, going “iPad first” doesn’t mean we simply had to move the web app to a tablet. It took a complete redesign and a new way of thinking about the user experience.

But at the end of the day, we felt bullish that that’s where our target customer, the small business owners of the world, was headed. We also felt bullish on the international distribution and new monetization models afforded by the App Store. Once we navigated that decision map, we were all in. And that’s an important point: for a company out there trying to figure out your primary platform, don’t just define your customer. You need to anticipate the evolution of their needs.

For us, we saw small business owners adopt smartphones at breakneck speeds. That was a key indicator that the iPad, a device that lends itself to “bigger” small business tasks thanks to features like location awareness, new UI model gestures and powerful cameras, would experience the same adoption, if not more so. We’re we sure? No. But can you ever be?

Perma-connectivity

Let’s stick with this idea of anticipating future customer need. Aside from the fact that tablets are making exponential inroads into the small business community, it’s their always-on connectivity that is changing the way small business owners live and work. It’s the “and” there that’s important. The idea of the 9-to-5 small business owner is antiquated. Work and personal are increasingly merged. And we say that’s a good thing as it affords balance and productivity provided there’s discipline.

Tablets - and the cloud-based apps that can run core business functions - are making this possible. Need to invoice but are on vacation? A few taps on your accounting app and you’re back to reading Flipboard poolside in minutes. Need to tune in to an online meeting while packing lunches in the morning? Thoroughly doable with a tablet. A tablet’s smaller screen makes the user focus on specific tasks. And therein lies the solution one of small business software’s eternal problems: making it easy to get data in the system.

It is this ever-growing perma-connectivity and the greying of work and personal that tablet app developers should pay attention. We see it happening in our customer base - and we anticipate more of it. We also see them migrating away from the stationary desktop (and its even more stationary software). That’s part of why we’re hitching our wagon to the iPad. Which tees up the next point...

Differentiation

The small business accounting space is crowded and loud. You have offerings that are free (with ads). Some are web-based; some desktop. The list goes on. But from our perspective (as you’ve probably gauged by now), being “iPad-first” is our differentiation. That’s what where we’ve planted our flag - and we did so early. In fact, we made this bet on a rather unknown platform: we started building the Kashoo iPad app one month after the device was unveiled.

But that’s just our “all in on the iPad” story. There are bound to be other “how we chose our primary platform” stories out there - tablet or not. Share yours in the comments.

Jim Secord is the CEO of Kashoo - a simple cloud-based accounting app.

Five strategies for tax-efficient investing

Bruce Hemmings writes: One area of investing that is easy to overlook is the effect of taxes on a portfolio. Yet most investors can improve a portfolio’s bottom line by employing a few simple tax-efficient investment strategies.

With higher top tax rates now in effect, it may be time to ask yourself: Are you doing everything possible to improve your portfolio’s bottom line through tax-efficient investing? Here are five tried-and-true strategies to help lower your tax bill while improving your net return.

Take Advantage of Tax-Sheltered Accounts

To encourage Americans to save for retirement, Uncle Sam offers tax incentives in the form of IRAs, 401(k)s, 403(b)s and other qualified retirement savings plans. These accounts provide the opportunity to defer paying tax on contributions and earnings, or to avoid paying taxes altogether on earnings, depending on the type of vehicle you choose.

By contributing as much as possible to these accounts, you can realize significant savings over time. For instance, contributing $400 per month to a traditional IRA will save you nearly $22,000 in taxes over 20 years, assuming a 5% annual return and 25% tax rate.1 (Taxes, however, will be due on distributions at the time you make withdrawals.)
- See more at: http://www.realaspen.com/community-content/1415/Five-strategies-for-tax-efficient-investing#sthash.V8sV414v.dpuf

For 2013, you can contribute up to $5,500 to a traditional or Roth IRA. And if you’re over 50, you can contribute an extra $1,000. For employer-sponsored retirement savings vehicles such as 401(k) or 403(b) plans, you can contribute up to $17,500 in 2013 and an additional $5,500 if you’re over 50.

But keep in mind that most withdrawals prior to age 59½ from a qualified retirement plan or IRA may be subject to a 10% federal penalty in addition to any taxes owed on contributions and accumulated earnings.

Turn to Municipal Bonds for After-Tax Yield

In today’s low-rate environment, finding yield can be a challenge. Rates on high-quality corporate bonds have hovered at historical lows, and the yield on US Treasuries has not topped 4% since 2008. While municipal bonds, or “munis,” are no exception, they carry one significant advantage: Interest paid by muni bonds is generally exempt from federal and, in some cases, state and local taxes.

Consider this: A municipal bond yielding 4% translates to a tax-equivalent yield of 5.33%, assuming a 25% tax rate. In other words, you would need to earn 5.33% on a taxable bond to receive the same after-tax yield as a 4% municipal bond.

Remember, however, that any capital gains arising from the sale of municipal bonds are still taxable (at capital gains rates), and that income from some municipal bonds may be taxable under alternative minimum tax rules.

Avoid Short-Term Gains

Before you sell an investment, check to see when you purchased it. If it was less than one year ago, any profit will be considered a short-term gain. If it was more than one year ago, the profit will be considered a long-term gain. That’s important because long-term capital gains are taxed at significantly lower rates than short-term capital gains, especially if you’re in a high tax bracket.

• Short-term capital gains are taxed at ordinary income rates which can be as high as 39.6%.
• Long-term capital gains are taxed at a maximum rate of 20% in 2013.2
Considering those different rates, it can pay to look at the calendar before you sell a profitable investment. Selling just a day or two early could mean that you’ll incur significantly higher taxes.

Make the Most of Losses

As most taxpayers know, the IRS lets you use long-term capital losses to offset long-term gains. In any given year, you can minimize your capital gains tax by timing your losses to correspond with gains. What’s more, you can carry forward unused losses to future years, and use them to offset future gains, subject to certain limitations.
You can also offset up to $3,000 of unused capital losses per year against ordinary income. So before taking a long-term capital loss, consider the timing of gains as well as ordinary income.

Get a Professional’s Perspective

Keeping an eye on taxes is a prudent way to try to enhance your investment returns over time. However, tax laws are complex, subject to change and may have implications you haven’t considered.

Footnotes/Disclaimers
1. Example assumes monthly pre-tax contributions of $400 over a 20-year period, a 5% annual rate of return, compounded monthly, and a marginal tax rate of 25%. Example is hypothetical. Your results will differ.
2. Does not take into consideration Medicare tax on certain unearned net investment income or state or local taxes, which will vary.
- See more at: http://www.realaspen.com/community-content/1415/Five-strategies-for-tax-efficient-investing#sthash.V8sV414v.dpuf

Shoebooks Online Accounting Software Announces White Label Solution / White label solutions for Accountants, bookkeeper and software vendors

With the increase in activity from cloud accounting vendors specifically targeting accountants and bookkeepers to become advocates of their software, Shoebooks, due to it’s broader set of features, ability to custom a solution to a business or franchise plus provide support in integrating with existing platforms, is now providing a “White Label Solution for their partners.

“We are getting a lot of feedback from accountants, bookkeepers and software vendors that they are wanting more control over the client relationship, and having their own branded cloud accounting solution provides them with the ability to add greater value to clients and maintain their own brand” said Andrew Oldham, Shoebooks’ national sales manager.

Vinod Sharma, managing director of A-Plus CPA, began using Shoebooks several months ago. Sharma disliked Xero and Saasu because he felt a lack of control over the clients’ experience.

When a client uses Xero or Saasu, “it’s not related back to your accounting firm. You need something that tells your clients they are dealing with an accounting office and that their data has been looked after by someone professional,” Sharma said.

Shoebooks’ through it’s recent partnership with the Franchise Council of Australia, is now making in roads to the franchise community, helping automate and standardised the back office of a franchise system, including white labelling, automating franchise fee calculations, KPI reporting across the systems and a ready to go online accounting platform for new franchisees.

“Our experience in the medium enterprise side of town is that you can’t fit everyone in one box. We can walk into a business and look at whether it requires additional features, custom screens and reports. We ask what is going to make your business really efficient and then custom build it for them,” Oldham said. 

Shoebooks is establishing a network of partners, which it provides with support, training, and leads for bookkeeping and accounting services. 

About Shoebooks

Shoebooks, which is owned and securely hosted in Australia, offers services and cloud accounting software typically for small to mid-size companies with turnovers up to $50M. 

Shoebooks includes general ledger, payroll, job and project costing, divisions, inventory, time sheets, calendar and automated processes of sending invoices, statements and debtor follow ups. Prices ranged from $29 a month to $59 a month wit unlimited users and transactions.

For more information is available at www.shoebooks.com.au

Gay Or Straight, Married Filing Jointly May Not Be Such A Good Deal

Robert W.Wood for Forbes writes: Whether you are new to marriage or have decades under your belt, it pays to think about your tax filing status. With same sex marriages, much of the discussion these days is about joint return filing and when the IRS will issue guidance making the rules clear. See Gay Married Couples Lacking IRS Guidance Risk Paying More. There should be parity, and in some cases there will be a significant dollar impact from joint returns.

But the knee-jerk “file jointly” reaction many couples have is worth reconsidering. Many people don’t consider which box to check at the top of their return. If we’re married, we file jointly; if not, we file single. That can be shortsighted.

Five Choices. There are five choices: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. The Head of Household status may be the one most often claimed in error. In Tax Tip 2013-13, the IRS lists pointers about filing status options.

1. Last day of the year. This one is easy. Your marital status on the last day of the year determines your marital status for the entire year. So to beeligible to file a married filing joint return, you must be married on December 31st.

2. Legal Separation. If you are legally separated under state law you can file single. Of course, if you are legally divorced you can also file single. But if you are still married on December 31st and not legally separated, you’ll need to file married (presumably filing separate), not single.

3. Doubling Up. If more than one filing status applies, you can pick the one giving you the lowest tax. You and your spouse may pay lower taxes by filing married filing joint. But sometimes even if you would pay less that way, it is worth considering filing separately.

4. Innocent Spouse? By filing jointly, each of you is 100% liable regardless of who had the income. What if you learn that your spouse had unreported income? You are also on the hook. See IRS Tougher On “Innocent” Spouse Relief and When An Innocent Spouse Seeks Tax Relief. If you’re worried about your spouse’s tax debts, get some advice. See Innocent Spouse Tax Relief Eligibility Explorer.

If you file jointly and later face joint liabilities, you may be able to claim innocent spouse relief. See More Timing Disputes Over Innocent Spouse Relief. Recently, the IRS announced more liberal rules. See IRS Proposes To Permanently Ease Restrictions For Innocent Spouse Relief. Yet, you can avoid these issues entirely by filing married filing separate. See Married Filing Jointly, or Separate? How to Decide.

5. Death of Spouse. If your spouse died and you did not remarry during that year, you usually can still file a joint return for that year.

6. Head of Household? This status generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for yourself and a qualifying person.

7. Qualifying Widow(er) with Dependent Child. You may be able to choose this as your filing status if your spouse died, you have a dependent child, and you meet certain other conditions.

Get More: Most people don’t devote any thought to their filing status. That can be a mistake. Many same sex couples understandably want the benefits of joint filing. But same sex or not, run the numbers and consider if joint or separate returns are better for you.

Don’t merely consider the marginal tax dollars. Even if you’ll pay less in taxes by filing jointly, weigh the pros and cons. It can be worthwhile to keep returns separate, especially if one spouse has past credit, tax or legal problems or any of these problems seem likely in the future. Separate filings help keep assets from being co-mingled too, which can make divorce less consequential.

To learn more, check out IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. You can also use the Interactive Tax Assistant (ITA) on the IRS website to determine your filing status. The ITA tool takes you through a series of questions and provides you with responses. The IRS needs to address same same sex marriage. Even so, every married couple should think through what is best for them and should avoid the automatic joint filing reaction.