Intuit TurboTax Comments on IRS Guidance for Couples in Legal, Same-Sex Marriages

Intuit TurboTax(R) released the following statement in response to guidance provided by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) on the U.S. Supreme Court ruling on the Defense of Marriage Act (DOMA). Under the ruling, same-sex couples will be treated as married for federal tax filing purposes.

The statement can be attributed to David Williams, Chief Tax Officer, Intuit Inc.

"This is a milestone in equality in the nation's tax system for those in same-sex marriages. It will be a significant financial benefit for some taxpayers who before could not fully take advantage of important tax deductions and credits, including the Earned Income Tax Credit, to which other married couples were already entitled.

Same-sex couples who are legally married will now be recognized by the federal government, meaning it will be easier for them to file their taxes, among many other things. A couple who previously had to file two separate federal tax returns can now file one joint federal tax return -- in most cases reducing their tax liability. This could be a federal tax savings of about $500 for a couple making a combined salary of $80,000 annually.

In addition, the court's ruling has the potential to save some people hundreds of dollars in tax preparation costs. Taxpayers who previously had to pay high fees to have someone else prepare their tax return due to the complexity of filing multiple federal and state returns can easily and accurately prepare their taxes together with tax software at a significantly lower cost."

For more information on how this impacts taxpayers, visit the Tax Break: The TurboTax Blog.

About TurboTax

TurboTax is the nation's No. 1 rated, best-selling, do-it-yourself tax preparation software. Available on desktop, online and mobile, TurboTax helped more than 25 million people last year keep more of their hard-earned money. For more information, visit the TurboTax press room, like us on Facebook at www.facebook.com/turbotax, follow us on Twitter at twitter.com/turbotax, or visit our blog, Tax Break: The TurboTax Blog, at blog.turbotax.intuit.com/.

How to Lessen the Tax Bite in Retirement / Tax rates on retirement accounts vary widely. Make sure you're being tax-efficient about your withdrawals

Sandra Block for Kiplinger writes: Once you retire, certain expenses will diminish or disappear. You won’t spend as much on dry cleaning, for example, and if you’re in good shape, you can fire the dog walker. And you’ll no longer be saving for retirement—a much bigger expense.

One expense that won’t go away is taxes. You may have $1 million in retirement savings, but the amount available for your retirement income is much less because a portion of the money will go to pay federal and state taxes. This is where having different types of retirement accounts—-taxable, tax-deferred and tax-free—-comes into play. Depending on the account you tap, along with the type of investment, your federal tax rate could range from 0% to 39.6%. You can keep your tax rate on the low end of the scale by taking tax-efficient withdrawals from your accounts.

What to tap first. Conventional wisdom has long held that retirees should take withdrawals from their taxable accounts first. That way, you can benefit from low capital gains rates while investments in your tax-deferred and tax-free retirement accounts continue to grow, unfettered by taxes.

In a taxable account, the capital gains rate on assets you’ve owned more than a year ranges from 0% for taxpayers in the 10% and 15% tax brackets to a maximum rate of 23.8% for taxpayers in the top tax bracket. To minimize taxes, use your taxable accounts for investments that qualify for long-term capital gains rates or are tax-free. The list typically includes growth stocks, tax-efficient mutual funds and exchange-traded funds, says Christine Fahlund, senior financial planner for T. Rowe Price. If you own individual municipal bonds or muni funds, they also belong in your taxable accounts. In addition, many planners recommend keeping two years’ worth of living expenses in these accounts, typically in a money market or other low-risk account.

Next in line are your tax-deferred accounts, which include traditional IRAs, 401(k)s and other retirement-savings plans. Withdrawals from these accounts will be taxed at your ordinary income tax rate (except for any after-tax contributions you made, which will be tax-free). In most cases, you’ll also pay a 10% penalty if you take withdrawals before you’re 59 ½. Use these accounts for the portion of your portfolio allocated to investments that are already taxed at your ordinary income tax rate, such as individual bonds and bond funds, real estate investment trusts, and preferred stocks. Many retirees should have stocks and stock funds in their IRA, too.

Last in the queue is your Roth IRA. You may withdraw your Roth contributions at any time, tax- and penalty-free. As long as you’re 59½ and have owned a Roth for at least five years, earnings are tax-free, too. Unlike traditional IRAs, you’re not required to take minimum withdrawals when you turn 70½. If you don’t need the money, you can leave it to your heirs, who will be able to take distributions tax-free.

Because withdrawals from a Roth aren’t taxed, Roths are suitable for a wide range of investments. Income-oriented investments are good candidates for both traditional and Roth IRAs, says Mark Bass, a financial planner in Lubbock, Tex. Fahlund recommends using your Roth for the slice of your portfolio invested in aggressive stock funds, because you’ll never be required to take withdrawals—which means you’ll have more time for the investments to grow—and you won’t have to worry about paying taxes on your profits.

Exceptions. There are a few good reasons to depart from the conventional withdrawal hierarchy: Once you turn 70½, you’ll need to take annual required minimum distributions from your traditional IRAs and other tax-deferred retirement accounts. If these accounts grow too large, the mandatory withdrawals could push you into a higher tax bracket. To avoid this problem, start taking withdrawals from your IRAs before you turn 70½. Mark Joseph, a certified financial planner with Sentinel Wealth Management, in Reston, Va., advises retired clients who aren’t yet required to take RMDs (and are likely to be in a higher tax bracket down the road) to look at their other income, such as interest and capital gains from taxable accounts, Social Security and pensions, and withdraw just enough from their tax-deferred accounts to remain within the 15% tax bracket. Additional expenses can be covered by withdrawals from the principal of their taxable accounts first, followed by withdrawals from Roth accounts, he says.

It’s also a good idea to take withdrawals for emergency expenses—say, for a new roof or long-term care—from a Roth. You’ll owe taxes on money from tax-deferred accounts, which could push you into a higher tax bracket.

Tax Report: Income Tricks Under Fire / The IRS has won another victory over a tax-cutting maneuver used by millions of small-business owners.

Laura Saunders for the Wall St Journal writes: Call it a one-two punch.The Internal Revenue Service has won its second clear victory in three years over a tax-cutting maneuver available to—and used by—millions of small-business owners.

In 2010, an Iowa federal court slapped down a popular move in which small-business owners underpay themselves in order to minimize Social Security and Medicare taxes, while taking compensation in other ways. On appeal, the Eighth Circuit affirmed the decision.

Earlier this month, the U.S. Tax Court sided with the agency in the case of Sean McAlary Ltd. Inc. v. Commissioner. It ruled that a Subchapter S firm whose sole owner was Mr. McAlary, a California real-estate broker, should have paid him $83,200 in wages for 2006. Instead, he was paid zero.

The court ruled that the firm owed nearly $13,700 in payroll and unemployment taxes, plus more than $4,300 in penalties, for that year. Although the case can't be cited as precedent, experts take such cases seriously.

Both Mr. McAlary and a spokesman for the IRS declined to comment on the case.

This issue is a perennial one, although it has become more important as payroll taxes have risen.

"There's a constant push and pull between small-business owners wanting their wages to be as low as possible and the IRS wanting them high," says Jeffrey Porter, a certified public accountant in Huntington, W.Va., with many small-business clients.

It is easy to see why the tension exists. Subchapter S is a highly popular format for closely held businesses, with over four million reported in 2010 tax returns, the most recent data available. Often such business owners also are employees—as Mr. McAlary was—and they owe both the employer's and employee's portion of Social Security and Medicare taxes on compensation for their services.

The rate for Social Security taxes is a flat 12.4% up to a preset cap ($113,700 this year, up from $94,200 in 2006). The Medicare tax is 2.9% on all wages, making the total bite as high as 15.3%. Federal unemployment tax adds a bit more.

Lowballing pay can lower these taxes. Many Subchapter S owners appear to do just that: In the 15 years ended in 2010, a period when executive compensation exploded, Subchapter S income increased by two-thirds while salaries rose only 16%, according to Martin Sullivan, chief economist at Tax Analysts, a nonprofit publisher near Washington.

What's more, the salaries of Subchapter S owners declined as a percentage of firm income, from 52% in 1995 to 43% in 2010. The average pay for a Subchapter S owner was $35,700, Mr. Sullivan said.

Subchapter S firms still owe income taxes on their earnings no matter how they are distributed. Every year net income "passes through" to the owners and is taxed on their individual returns, but only compensation is subject to payroll taxes.

So how much pay is enough? Clearly the answer isn't zero, as Mr. McAlary's 2006 tax return claimed. When challenged by the IRS, he said he meant to claim at least $24,000, but that his tax preparer had made an error.

Even that amount was too low, according to the decision. There isn't any strict rule determining proper pay, however, because the law treats each case according to its circumstances, using factors such as the nature of the employee's work, comparable pay elsewhere and prevailing economic conditions.

To prove its case, the IRS produced an expert who had studied compensation for real-estate agents in Southern California, and he said that $100,755 would be appropriate for Mr. McAlary's pay. The judge adjusted that to $83,200.

In practice, Mr. Porter says, the IRS usually doesn't challenge wages that are within shouting distance of the Social Security wage cap, such as the pay the Tax Court judge approved for Mr. McAlary.

Compensation doesn't have to equal net income. In Mr. McAlary's case, the final amount was about 35% of the firm's 2006 net income of $231,454.

Mr. Porter says his clients tend to go along with higher pay when he explains "the downside, which is that the IRS is aggressive on this issue."

Gerard Schreiber, a CPA who practices in Metairie, La., says it often is hard to escape "vicious" penalties in such cases. He also stresses another consequence to clients who want to minimize compensation: "With Social Security, people get payouts based on what they put in. They'll shortchange themselves if they become disabled or die leaving minor children."

How Will the Subsidies Work? / Health plans—and subsidies—will be available through separate marketplaces in each state.

LOUISE RADNOFSKY and 

CHRISTOPHER WEAVER for the Wall St. Journal write:

 How do I sign up?

Health plans—and subsidies—will be available through separate marketplaces in each state. In 36 states, the federal government is running or helping run these online marketplaces—or exchanges—where consumers can shop for coverage and compare plans, and apply for subsidies. Fourteen states are launching their own exchanges. Starting Oct. 1, people will be able to sign up for coverage that begins effective Jan. 1. The enrollment information for the federally operated marketplaces, including Ohio, will be available at HealthCare.gov. That site will also direct consumers in states like California, New York and Oregon that will be running their own exchanges to those states' websites.

Am I eligible for a premium subsidy?

The health law provides federal subsidies to offset the cost of health insurance for people who don't have access to coverage through their employer or government programs like Medicare or Medicaid. Those who make anywhere between the poverty level and four times that amount are eligible. That's currently between $11,490 and $45,960 for a single person, between $15,510 and $62,040 for a couple, between $19,530 and $78,120 for a family of three, and between $23,550 and $94,200 for a family of four. Wages, unemployment compensation, retirement income and Social Security disability insurance all count as income.

What's the subsidy worth?

Subsidies are based on a formula pegged in part to the price of the second-lowest-cost mid-level (Silver) plan available to a customer in his or her community. The amount varies by income, age and area of the country, and tapers down as income rises. For example, a 50-year-old single person in Toledo earning $22,000 would get a $231 monthly subsidy. If the same 50-year-old earned $40,000, the subsidy would be $23 a month.

Who gets the biggest subsidies?

Because insurers can charge their oldest customers up to three times as much as their youngest, older people can get more valuable subsidies. The second-lowest-cost silver plan for a 25-year-old in Toledo is $191 a month, for instance. A single 25-year-old earning $22,000 would get an $82 subsidy toward that premium. A single 50-year-old would have a monthly premium of $339 for that plan, which is why even though they have the same earnings as the 25-year-old, they would get a subsidy of $231.

What could affect my eligibility?

Changes in family size such as marriage, divorce, another child, or a child moving away all affect how your income is defined relative to the federal poverty level. Changes to your earnings could also affect your eligibility, such as a bonus, overtime, losing hours or a pay cut. Changes to your work benefits package might also matter, because you can't get a subsidy if your employer offers you coverage, unless the premiums for that plan would cost you more than 9.5% of your take-home pay.

How do I use the subsidy?

Subsidies can be used only for health-insurance policies bought through the new health-insurance exchanges in each state. They can be taken upfront and applied toward the cost of a premium each month, or claimed as a tax credit at the end of the year.

What if I end up making more money than I thought I would?

If you're taking your subsidy upfront and you end up making a lot more money than you expected, you'll have to pay some or all of it back when you file your taxes. Consumer groups are advising people to tell their health-insurance exchanges as soon as they have income or family changes that will affect the size of their subsidy or their eligibility for assistance. The exchanges can recalculate their subsidies for coming months. Tax preparers have also advised people who expect income changes, especially toward the end of the calendar year, to consider taking their subsidy in the form of a tax credit at the end of the year, or taking only part of it upfront, so they don't end up with a much bigger-than-expected bill.

What if I end up making less money than I thought I would?

You can get subsidies only for insurance plans bought through the exchange. Tax preparers have said some people may want to consider using the exchanges to buy their health insurance even if they don't expect to get a subsidy. That way, people can apply for subsidies if their incomes drop unexpectedly.

What if I don't buy through the exchange in my state?

It will still be possible to buy health insurance on your own without using the new insurance exchanges, and some carriers are only selling their plans outside the exchanges in 2014. Because most policies will be subject to the new rules included in the federal health law about how rates are calculated and what insurance must cover, plans sold off the exchanges will be priced similarly to plans available on the exchanges.