Tuesday, October 29, 2013

Top 10 list of personal tax strategies

BusinessManagementDaily.com writes: For most taxpayers, year-end tax planning usually means accelerating deductions into the current year while postponing taxable income to the next year. And then you do the same thing the following year.
Alert: This conventional strategy may still work for you, but it’s not so cut-and-dried in 2013. Due mainly to ATRA, you may be inclined to do the exact opposite, especially if you expect to be in a higher tax bracket next year than this year.
For starters, there are several changes taking effect in 2013 that could affect year-end tax planning for individuals (see box below). Therefore, you should assess where you are this year and where you figure you’ll be next year. Keeping that in mind, here’s a list of 10 top year-end tax strategies for individuals.
1. Harvest capital gains or losses. Traditionally, investors look to realize capital losses from securities sales at the end of the year. The losses can offset capital gains plus up to $3,000 of ordinary income. Any excess loss is carried over to the next year.
But you may harvest long-term capital gains instead this year if the gains will be taxed at only a 15% federal rate. At higher income levels, the maximum federal rate on long-term gains is 20% for 2013 and thereafter. Similarly, you might postpone long-term losses that would offset some long-term gains if you expect your long-term gains to be taxed at 20% in 2014 but only 15% this year.
2. Do the AMT math. The alternative minimum tax (AMT) system runs on a track next to the regular tax system. After calculating AMT liability based on certain adjustments, “tax preference items” and subtracting an exemption amount, you effectively pay the higher of the two taxes.
Despite increases in the exemption amounts by ATRA, you still might have to pay the AMT.  Possibly, you might avoid the AMT by postponing tax preference items. Alternatively, if you’re an annual AMT payer, extra income accelerated into 2013 will be taxed at an AMT rate no higher then 28% (26% for AMT income up to $179,500).
3. Give tax-wise gifts to charity. Generally, you can deduct the full amount of monetary donations made to qualified charities if you meet substantiation requirements. Plus, you may be able to deduct the fair market value of donated long-term capital gain property such as stocks you've held longer than a year.
In fact, you can currently deduct a donation charged by credit card in 2013, even if you don’t pay off the charge until 2014. But be aware that the charitable deduction is one of the itemized deductions reduced for upper-income taxpayers (see box below). Consider the best year for deducting large gifts in your situation.  
4. Shift income within the family. If you’re in a high tax bracket in 2013, you may decide to transfer income-producing property to other family members, like young children or grandchildren, who are in much lower brackets. For instance, with a tax rate differential of 29.6% between the top bracket of 39.6% and the lowest bracket of 10%, a family may save $2,960 in tax on $10,000 of earnings.
But don’t forget about the “kiddie tax.” Unearned income received by a dependent child under age 19 or a full-time student under age 24 is generally taxed at the parents’ top tax rate to the extent it exceeds an annual threshold ($2,000 in 2013).  
5. Get tax cure for medical expenses. Medical expense deductions aren’t affected by the reduction in itemized deductions, but they already have a built-in floor. For 2013, the floor is 10% of AGI for most individuals (up from 7.5% of AGI in 2012). It remains 7.5% of AGI for taxpayers age 65 or older.
When possible, schedule nonemergency physician and dentist visits in 2013 if you will qualify for a deduction. Otherwise, you might as well postpone expenses to 2014 and take your best shot next year.
6. Speed up retirement distributions. Generally, you must take annual “required minimum distributions” (RMDs) from IRAs and qualified retirement plans, like a 401(k), after you reach age 70½. RMDs are taxed at ordinary income rates.
If you must take a RMD this year and expect to be in a lower marginal tax bracket this year than in future years, consider increasing the amount you withdraw in 2013 by taking out more than the mandatory minimum amount. 
7. Generate residential energy credits. Under ATRA, you may still qualify for a residential energy credit if you install qualified property in your home. The credit is generally equal to 10% of qualified expenses, up to a lifetime maximum credit of $500, although other special limits may apply. The residential energy credit is now scheduled to expire after 2013, but it has already been extended several times in the past. If you were going to buy the energy-saving property anyway, you might as well do it this year.
8. Bolster your sales tax deduction. ATRA reinstates the tax law provision allowing taxpayers to choose between a deduction for state and local income taxes, and a deduction for general state and local sales taxes. The sales tax deduction may be based on actual receipts or, more conveniently, an amount listed in a state-by-state table.
If you elect to deduct sales tax, be aware that certain “big-ticket items,” like cars and boats, can be added to the table amount. Thus, a year-end purchase of a big-ticket item can significantly boost the total deduction.
9. Add a dependency exemption. Generally, you can claim a dependency exemption deduction of $3,900 for each dependent child who is under age 19 or a full-time student under age 24. But you have to provide more than 50% of the child’s support to qualify for the exemption. If it’s a close call, give some extra support to seal the deal.
Remember that personal exemptions phase out for high-income taxpayers. Nevertheless, if an exemption is still available for an older child in 2013, grab it.
10. Go to the head of tax class. Eligible parents can either claim a tuition deduction or one of two tax credits—the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC)—for higher education expenses paid or incurred in 2013. But the tax benefits phase out for high-income taxpayers.
Generally, the AOTC is preferable, because it provides a maximum $2,500 credit per student, as opposed to a maximum LLC credit of $2,000 per family. Either credit is available in 2013 for tuition paid this year for academic periods that begin in the first three months of 2014.
Tip: Coordinate individual tax strategies to best suit your personal situation.
Posted on 9:17 AM | Categories:

QuickBooks Online holds approximately an 85%- 90% share of the online accounting market

We're not sure what research the Editor of CPA Practice Advisor (Isaac O'Bannon) is referencing....but he did catch our attention in publishing that statement.  Isaac O'Bannon for CPA Practice Advisor writes: Kim Hogan has joined the Intuit Accountant and Advisor Group, effective immediately. She joins David Bergstein, CPA.CITP, and the two will be working under longtime accounting marketing expert Ray Barlow. Intuit announced the additions of Barlow and Bergstein earlier this month.
Intuit's Accountant & Advisory team works with accounting firms to assist them with the process of bringing their clients from desktop to cloud accounting systems, specifically QuickBooks Online, the most popular and widely-used online accounting system for small businesses. According to market research, QuickBooks Online holds approximately an 85-90 percent share of the online accounting market.
"I couldn't be more excited to join such an established organization at such a critical time in the profession, as so many eyes are on the battle over online accounting solutions," Hogan said. "I'm confident that Intuit has identified a roadmap for success, and is delivering a superior product, putting together the right team of people, and will be formalizing the processes to come out on top."
"We'll be working with firms as a partner rather than in a sales function to help them through identifying which clients are ready now, which clients need training, which clients need convincing, etc. Intuit is looking at this as a big picture/ long term strategy to work hand in hand with these large firms who are struggling with clients who desperately need Cloud technology. By providing them with resources and training to help them through this transition, it will make moving from desktop to the Cloud significantly less painful for everyone involved – and give both accountants and their clients the confidence that they can no longer 'outgrow' QuickBooks."
Prior to joining Intuit, Hogan was the Director of West Coast Operations for XCM Solutions, LLC, and before that was a business development manager for Fujitsu's ScanSnap line of scanners. She is a graduate of Chapman University's Argyros School of Business and Economics.
Posted on 9:16 AM | Categories:

What's New for Federal Income Taxes for 2013?

Robert D Flach for MainStreet writes: Here are some tax facts and figures for 2013 that you will need to know when doing year-end tax planning:
SAME SEX MARRIAGES
The Supreme Court overturned the Defense of Marriage Act (DOMA). The Court decided that the federal government has no right to deny benefits to same-sex individuals who have married and reside in a state that has legalized same-sex marriage.
As a result of the decision, same-sex couples, who are legally married and reside in states that permit same-sex marriage, will be able to prepare their federal and state tax returns as a married couple, using married person tax law, same as any other married couple.
THE STANDARD DEDUCTION
  • Single/Married Filing Separate = $6,100
  • Married/Qualifying Widow(er) = $12,200
  • Head of Household = $8,950
The Standard Deduction for a dependent is the greater of (1) $1,000, or (2) the sum of $350 and the individual's earned income (up to $6,100).
The additional Standard Deduction amount for the age 65 or older or blind is $1,200 for married individuals and $1,500 for Single and Head of Household.
PERSONAL EXEMPTION
The personal exemption is $3,900.
THE PEP REDUCTION OF PERSONAL EXEMPTIONS
Personal exemptions are reduced by 2% for each $2,500 ($1,250 if Married Filing Separate), or portion thereof, that a taxpayer's AGI exceeds $250,000 for Single filers, $275,000 for Head of Household, $300,000 for Married Filing Joint and $150,000 for Married Filing Separate.
ALLOWABLE MEDICAL DEDUCTIONS
For taxpayers under age 65, medical expensesare deductible on Schedule A only to the extent that the total allowable expenses exceed 10% of Adjusted Gross Income. The exclusion remains at 7.5% of AGI for taxpayers under age 65.
LONG-TERM CARE INSURANCE PREMIUM AGE-BASED DEDUCTION LIMITS
  • Age 40 or less = $360
  • Age 41-50 = $680
  • Age 51-60 = $1,360
  • Age 61-70 = $3,640
  • Age 71 + older = $4,550
THE STANDARD MILEAGE ALLOWANCE
  • Business Mileage = 56.5 cents per mile
  • Medical and Moving Mileage = 24 cents per mile
  • Charitable Mileage = 14 cents per mile
THE PEASE REDUCTION OF ITEMIZED DEDUCTIONS
Itemized deductions are reduced by 3% of the amount a taxpayer's AGI exceeds $250,000 for Single filers, $275,000 for Head of Household, $300,000 for Married Filing Joint and $150,000 for Married Filing Separate. The reduction cannot exceed 80% of total itemized deductions (not including any deductions for medical expenses, investment interest, and casualty, theft or gambling losses).
CONTRIBUTION LIMITS FOR TAX-DEFERRED PENSION PLANS
  • IRA = $5,500
  • IRA Catch-Up Contributions at age 50 and older = $1,000
  • SIMPLE Plan = $12,000
  • SIMPLE Catch-Up Contributions at age 50 and older = $2,500
  • 401(k), 403(b), Profit Sharing Plans = $17,500
  • 401(k), 403(b), Profit Sharing Plans Catch-Up Contributions at age 50 and older = $5,500
TAX RATE SCHEDULES
Tax Rate Single
  • 10% Up to $8,925
  • 15% $8,926–$36,250
  • 25% $36,251–$87,850
  • 28% $87,851–$183,250
  • 33% $183,251–$398,350
  • 35% $398,351–$400,000
  • 39.6% Over $400,000
Tax Rate Married Filing Joint Qualifying Widow(er)
  • 10% Up to $17,850
  • 15% $17,851–$72,500
  • 25% $72,501–$146,400
  • 28% $146,401–$223,050
  • 33% $223,051–$398,350
  • 35% $398,351–$450,000
  • 39.6% Over $450,000
Tax Rate Married Filing Separate
  • 10% Up to $8,925
  • 15% $8,926–$36,250
  • 25% $36,251–$73,200
  • 28% $73,201–$111,525
  • 33% $111,526–$199,175
  • 35% $199,176–$225,000
  • 39.6% Over $225,000
Tax Rate Head of Household
  • 10% Up to $12,750
  • 15% $12,751–$48,600
  • 25% $48,601–$125,450
  • 28% $125,451–$203,150
  • 33% $203,151–$398,350
  • 35% $398,351–$425,000
  • 39.6% Over $425,000
CAPITAL GAINS TAX RATES
The special tax rates for long term capital gains and qualified dividends are –
  • 0% = 10% and 15% tax brackets,
  • 15% = 25%, 28%, 33%, or 35% tax brackets,
  • 20% = 39.6% tax bracket.
NET INVESTMENT INCOME SURTAX
Taxpayers with an AGI over $200,000 for Single and Head of Household filers, $250,000 for joint filers and $125,000 for married couples filing separately will pay an 3.8% surtax on net investment income, which includes interest, dividends, capital gains, annuities, royalties, rents and pass-through income from passive S-corporations and partnerships less related investment expense deductions from Schedule A.
THE ALTERNATIVE MINIMUM TAX
The AMT exemption amount is –
  • $51,900 - Single and Head of Household
  • $80,800 - Married Filing Joint and Qualifying Widow(er)
  • $40,400 - Married Filing Separate
For the first the AMT exemption phase-out thresholds have been indexed for inflation. The AMT exemption is reduced as Alternative Minimum Taxable Income exceeds –
  • $115,400 – Single and Head of Household
  • $153,900 – Married Filing Joint and Qualifying Widow(er)
  • $ 76,950 – Married Filing Separately
The 28% AMT tax rate kicks in at AMT net taxable income (after the exemption allowed) of $179,500 ($89,750 for Married Filing Separate).
SOCIAL SECURITY WAGE BASE
The maximum amount of wages subject to the 6.2% Social Security tax is $113,700. The maximum Social Security tax withholding is $7,049.40.
This maximum wage base also applies to the Self Employment Tax.
One final year-end tip before I go –
If you changed your name during the year due to marriage or divorce, make sure to report the change to the Social Security Administration. The IRS is very picky about matching names to Social Security numbers. If a number on your return does not match exactly the name in the files of Social Security, the IRS will delay or reduce your refund. Be sure to notify Social Security of the change by requesting a new Social Security card ASAP at www.ssa.gov.
Posted on 9:16 AM | Categories:

QuickBooks Solves Tax Audits; QuickBooks Ruins Tax Audits

Robert W. Wood for Forbes writes: Actually, QuickBooks can help prevent audits too, but like so much else, it all depends. No one wants to wind up in a tax dispute. You want to file your returns, every income item to match up, every claimed deduction or credit to be approved, and every schedule to pass muster. And you’re willing to do everything you can to avoid an audit.
Still, some tax returns will be examined, although the nature and scope of audits is changing. Traditionally, some audits were full-on office or field audits. Today, the vast majority of audits are by correspondence, considerably less threatening and considerably less interactive.
You don’t have an unlimited number of chances to explain and justify what you’ve claimed before the proposed adjustments are written up and shipped off to the next level of the IRS. You want to provide timely responses and targeted responses. You don’t want to go to court over whether the IRS can get access to certain documents.
Most audits are handled informally through Information Document Requests (IDRs) issued by the IRS that looks like memos. You don’t legally have to comply, but if you don’t, the IRS will issue a formal summons that could land you in court. Provide receipts and other supporting information if the IRS asks.
What if the IRS asks for an electronic copy of your accounting software, say QuickBooks or something equivalent? Why make it easy for the IRS to mine your own data? In examining the returns of small businesses, the IRS is increasingly requesting electronic files for accounting programs like QuickBooks.
You may need professional advice about your situation. So far, the law says they can ask and, in general, you should comply. But advisers debate the nuances. In particular, you want to make sure that you are providing no more of your data than a request reasonably covers.
Even something like multiple years can be a potential problem. In general, the IRS instructs its examiners to request electronic copies of accounting records for the tax year under examination. Sometimes, they will request records of other years when needed to verify a current-year item from prior- or subsequent-year accounting.
Privilege issues—including attorney client privilege or work product doctrine—require special handling. Work-product protection is different from attorney-client privilege. Attorney-client privilege protects communications between clients and their lawyers, whether or not dealing with anticipated litigation. Discussions with lawyers are privileged, but discussions with accountants are not, unless the accountants are subcontractors of the lawyers.
What if you have customer lists, personnel data and more embedded in your software? In some cases you may be able to redact materials, but be careful how and what you address in this way. You want to cooperate, but you don’t want to turn over data that hurts your business or provokes inquiries into other areas the IRS isn’t already considering.
If you express concern to the IRS that your off-the-shelf software has lots in it you aren’t comfortable disclosing, the IRS can choose to issue a summons. That could mean you can fight about it in court. There’s nothing new about the IRS wanting electronic data.
Yet traditionally such inquiries involved big businesses. Small businesses are defined as those with assets less than $10 million, and they often use off-the-shelf software such as QuickBooks. In contrast, big businesses usually have customized accounting systems that facilitate providing the IRS only with what they want.
The American Institute of CPAs AICPA proposed allowing companies to redact software to release only relevant data, but the IRS rejected the request. The IRS suggests that small businesses should back-up at year end, limiting IRS access to one year at a time. The IRS also said it would allow businesses to reduce the detail for years not under audit.
Yet fears remain. Electronic records are a larger part of audits today. Plan ahead.
Posted on 9:16 AM | Categories:

Tax Traps and Pitfalls in the Affordable Care Act

Gail Buckner for Fox Business writes: The glitches plaguing the Affordable Care Act's health insurance website has prevented many Americans from signing up for coverage, but that doesn't mean other parts of the health-care legislation aren't in full swing or are going to be delayed. The two new taxes introduced to fund ObamaCare kicked in back on Jan. 1, and if you fall into an income bracket that makes you susceptible to these, you won’t appreciate the full impact until you start filling out your 2013 tax return.
In fact, you could be in for a rude awakening.
As I wrote last week, the 0.9% Medicare surtax starts taking a bite out of your paychecks once your gross wages exceed $200,000. The problem is that if you have two jobs, or both you and your spouse work, you could inadvertently end up getting hit with a penalty for underpayment of your taxes. 
Instead of applying to income earned from a job, the other new health-care tax affects the profit you make on investments. This includes things such as stock dividends, interest on bank accounts, royalties, rent (1) and income from passive activity(2). The tax also applies to capital gains from the sale of assets, including the sale of your home.(3)
This 3.8% tax is essentially another surtax: It is added to the regular tax you would pay on investment income after all expenses (such as commissions) are deducted. Thus the name: Net Investment Income Tax (NIIT).
The NIIT is based on your tax filing status and your adjusted gross income (AGI). It only applies if you hit one of the following thresholds:
Filing StatusAGI
Unmarried or Head of Household$200,000
Married, filing Joint$250,000
Married, filing Separately$125,000
Jack and Jill, a married couple with an AGI of $251,000- $1,000 over the threshold, would have to pay an additional 3.8% NIIT on the dividends and capital gains they received this year. 
However, according to the tax experts at Thomson Reuters, they would not necessarily pay this additional tax on the entire amount. That’s because the 3.8% surtax applies to either: a) the full amount of your net investment income, or b) the amount by which your AGI exceeds the threshold--whichever is less.
For instance, let’s assume that $100,000 of the AGI reported by the couple is due to the fact that they made of profit of $600,000 when they sold their home. After subtracting the $500,000 exclusion, $100,000 must be reported as a long-term capital gain. According to Thompson Reuters senior analyst Harris Abrams, since their AGI exceeds the threshold by $1,000, which is less than the $100,000 in net investment income they received, “the 3.8% only hits the lesser amount. That is, $1,000.”
In this case, the couple would pay 18.8% on $1,000 of the gain on the sale of their home: the regular 15% tax on long-term capital gains plus the 3.8% surtax.
Keep in mind, however, that legislation passed back in January to avoid the “fiscal cliff” raised the regular tax rate on dividends and long-term capital gains. Those who fall into the new 39.6% income tax bracket will now pay 20% on dividends and capital gains. As a result, these taxpayers could pay as much as 23.8% (20% + 3.8%) thanks to the NIIT. (4)  
What’s confusing about the two new taxes is that, while the income triggers are the same, each tax is based on a different definition of “income.” 
For purposes of the 0.9% Medicare surtax, “income” has nothing to do with your AGI. Instead, it means gross wages from a job. “In general, it’s your W-2 income,” explains Michael Sonnenblick, a tax analyst at Thomson Reuters. (It also includes self-employment income, if you have any.) If you’re not married, this surtax is applied once your wages hit $200,000. In the case of a married couple, you have to consider the combined wages of both spouses. If this exceeds $250,000, you’ll pay an additional 0.9% on the amount above the threshold.
On the other hand, AGI, which determines whether you are liable for the 3.8% NIIT is the number on the last line of page 1 on your 1040 tax return form. This is higher than your “taxable income” because it does not have personal exemptions and standard or itemized deductions subtracted from it. (These adjustments are made on page 2.)
If you want to avoid triggering the NIIT, the key is to manage your income to the extent possible in order so that your AGI doesn’t exceed the threshold. Or, to the extent possible, minimize the excess amount. “Think twice before converting a traditional IRA to a Roth,” advises Abrams. That’s because some or all of the amount you convert will increase your AGI.
Talk with your financial advisor about re-allocating your investments to potentially avoid getting hit with the tax. For instance, to reduce your exposure to the NIIT you might be better off owning dividend-paying stocks and mutual funds inside tax-deferred accounts such as IRAs or annuities. The 3.8% surtax makes municipal bonds more attractive because the interest they pay is not taxable. As a result, it won’t push you closer to the threshold and it isn’t included in “investment income.”
However, Thompson Reuters points out that “increasing your itemized deductions, such as charitable contributions, will not reduce NIIT.” That’s because your AGI is calculated before itemized deductions are subtracted.


1. Unless the “active trade or business” is met.
2. A trade or business in which you contribute less than 500 hours/year.
3. A portion of the profit you earn from selling your primary residence is excluded from gross income and would not be subject to NIIT. If you are unmarried, up to $250,000 of gain is tax-free. The amount for a married couple is $500,000. However, your entire profit on the sale of a second home is taxable. 
4. Short-term capital gains would be taxed at 43.4% (39.6%+3.8%).
Posted on 9:16 AM | Categories:

Net Investment Income Tax / "Obamacare"

Moira A. Jabir for Moritt, Hock & Hamroff  writes: "Obamacare" tax on net investment income came into effect on January 1, 2013. The net investment income tax affects income tax returns of individuals, estate and trusts filed in or after 2013. It does not impact returns filed in 2013 for tax years 2012 and earlier.

First and foremost ‐ what is this new tax? Basically, taxpayers must add an additional 3.8% tax on the lesser of their net investment income or their modified adjusted gross income less the applicable threshold. HUH? Exactly. Let us get some definitions under our belt.

Net Investment Income is (1) interest, dividends, capital gains, rent and royalty income and non‐qualified annuities; (2) income and gains from passive activities; (3) income and gains from businesses involved in the trading of financial instruments and commodities; and (4) gains from the sale of interests in partnerships and S‐corporations to the extent the taxpayer is a passive owner. Of course, if any of the income set forth in items (1) – (4) are derived in an active trade or business (see below), then it is not Net Investment Income.
Net Investment Income also DOES NOT include (1) active trade or business income; (2) distributions from IRAs or other qualified retirement plans; and (3) income taken into account for self‐employment tax purposes.

Modified Adjusted Gross Income (MAGI) is your adjusted gross income plus any net foreign earned income.
The Applicable Threshold is $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; $200,000 for all other taxpayers and $11,950 for trusts and estates.

Example 1: Joe and Jane Smith earned $350,000 in compensation and $40,000 in net investment income. The "Obamacare" tax applies to the lesser of their net investment income ($40,000) or their MAGI ($390,000) less the applicable threshold ($250,000). The net investment income tax (NIIT) due is $1520 ($40,000 multiplied by 3.8%).
Example 2: The XYZ Trust may pay income and principal as needed to its beneficiary, a single individual who has additional income. In 2013, the trust has dividend and interest income of $100,000, and net capital gain of $200,000. The trust makes no distributions and has adjusted gross income of $300,000. Because the highest tax bracket for a trust is $11,950 in 2013, the net investment income subject to the "Obamacare" tax is $288,050 ($300,000 ‐ $11,950). The NIIT due is $10,945.90 ($288,050 multiplied by 3.8%).

As demonstrated in example 2 above, estates and certain trusts1 are not immune to this new tax and the applicable threshold is low. And while this tax does not apply to charitable remainder trusts it does apply to net investment income paid to a non‐charitable beneficiary. In order to reduce the 3.8% tax, estates and electing trusts must take care in selecting the proper year end for income tax purposes. For example, for any decedent who died in November 2012, by electing a year end of November 30, 2013, the application of the NIIT is delayed for eleven months.

Another interesting twist in this new tax occurs for the taxpayer who owns a sole proprietorship, a single member LLC that is taxed as a sole proprietorship or an interest in a partnership or S corporation, as the income or gain generated will be net investment income UNLESS:
  • The activity generating the income or gain is from an active trade or business; and
  • The income generated is derived from the ordinary course of that trade or business; and
  • The activity is not passive activity to the taxpayer per Section 469; and
  • The activity is not trading in financial commodities or instruments.
Keep in mind that all four exceptions must be met in order for the income or gain to avoid being treated as net investment income. And under Section 469, rental activities are always treated as passive income, so unless the taxpayer meets the definition of "real estate professional," (think material participation and 750 hours in the taxable year), the "Obamacare" tax will apply. The IRS, feeling generous, is giving taxpayers a one‐time opportunity in the first year beginning after 12/31/13 in which the taxpayer meets the applicable threshold and has net investment income, to change their activity groupings2, making it easier to achieve or avoid material participation and thus treat income and losses as passive or non‐passive income.
Footnotes
1. Non grantor trusts, electing small business trusts, pooled income trust, cemetery perpetual care funds, qualified funeral trusts, Alaska Native Settlement Trusts and foreign trusts with U.S. beneficiaries.
2. Consistency rule for activity grouping under regulation Section 1‐469‐4(e) generally prohibits regrouping of activity unless original grouping was clearly inappropriate or there was a change in facts and circumstances rendering original grouping clearly inappropriate.
Posted on 9:15 AM | Categories:

A clearer look at maximizing medical tax deductions

Kay Bell for Don't Mess with Taxes writes: As you get older, you end up at the doctor's office a lot more. Most of the time it's for routine things, such as a cold you just can't shake like you did when you were younger.
Other times, though, it's for more complex and costly treatments.
I've been discovering this inevitable truth over the last few years. Today, in fact, I spent the morning at an out-patient surgery center where my ophthalmologist removed a cataract.
My doctor says I'm supposed to be resting my eyes this afternoon, both the just operated on right one as well as the now over-used left one, on which I had this same procedure last year. But I couldn't resist the opportunity to blog about the obvious connection of my lovely eye guard and medical tax deductions.
So I'll make this post on how to make the tax-saving most of your medical costs quick.
Itemize: The first thing to note about deductible medical costs is that you much itemize instead of claiming the standard deduction.
Ease is obviously a major reason why folks don't file Schedule A. No receipts to track. No extra paperwork on April 15.
But the standard deduction is also popular because over the years it has become more generous, thanks to tax law changes and annual inflation adjustments.
For 2013 taxes, the standard deduction amounts are:
  • $6,100 for single or married filing separately taxpayers,
  • $8,950 for heads of households, and
  • $12,200 for married couples filing a joint return or surviving spouses.
If you don't have enough medical and other itemized costs to claim on Schedule A to exceed the standard amount for your filing status, there's no need to worry about hanging onto doctor's or other receipts.
More than 10 percent tax requirement: You also need to know what your adjusted gross income (AGI) will be. You can't deduct medical costs on Schedule A unless they are more than 10 percent of AGI.
Take special notice of the "more than" requirement. If your AGI is $30,000 you must have IRS acceptable medical expenses of more than $3,000. And then you can only claim the amount in excess of that percentage.
That means if your AGI is our hypothetical $30,000 and you have $3,100 in medical expenses, you can only count $100 on your Schedule A.
Clearing the medical deduction hurdle: There are, however, many ways to clear the 10 percent of AGI medical deduction hurdle.
There are the easy costs, such as co-pays for prescriptions and doctor's office visits. But don't overlook other medical treatments you can add up on your Schedule A. They include:
  • Travel costs to get to and from medical treatments and even to pick up doctor's ordered medications at your local pharmacy,
  • Insurance payments from already-taxed income, including a portion of long-term care premiums,
  • Alcohol- or drug-abuse treatments,
  • Laser vision (or cataract) corrective surgery,
  • False teeth, hearing aids, crutches, wheelchairs and guide dogs for the blind or deaf, and
  • Weight loss programs that a physician deems medically necessary.
Other less common but medically necessary expenses also count. This includes, for example, your doctor telling you that you need to add a humidifier to your home's central air system to ease your child's asthma. In that case, the cost could be at least partially deductible.
Some disability related home improvements also could count, such as adding ramps and widening doors for wheelchair access.
Just don't go renovation crazy. Structural changes that qualify as deductible medical costs do so only to the extent that they don't add value to your home. When that happens, the home improvements aren't immediately deductible as medical expenses, but since they add to your home's basis they could pay off on your taxes when you sell.
And while vanity cosmetic surgery doesn't generally count, some nips and tucks needed to correct a medical condition can be deducted.
So as the year winds down, take a look at the medical costs you've incurred so far. If you need other treatments that could get you past the 10 percent of AGI requirement and make overall itemizing worthwhile, set up appointments with your doctor(s) and dentist and get the treatments by Dec. 31.
Posted on 9:15 AM | Categories:

10 Things You Need To Know About Getting Married & Taxes

Kelly Philips Erb for Forbes writes: When I was a little girl, I had very definite ideas about falling in love and getting married. My generation was the one that got up at the crack of dawn to watch Princess Diana walking down the aisle. I grew up believing in fairy tale weddings, princes and happily ever after. I never stopped to contemplate what it would be like when all of that was over. You know, when reality stepped in.
Unfortunately, I think that is true of my generation as a whole – and maybe even the one that followed. We’ve been fed a steady diet of poufy white dresses, fantastic layer cakes and dreamy proposals. All of those reality shows that focused on the big moments never bothered to show what life is like in the more real moments… the ones when you’re hunched over a desk trying to make sense of the bank balances and forms W-2.
Interestingly, worries and fights over finances areconsistently cited as top reasons for divorce. Perhaps instead of focusing on the search for the perfect dress, we should encourage potential brides and grooms to search for the perfect accountant. And instead of worrying about putting our stamp on the perfect invitation, we should think about what it means to sign a tax return (or a mortgage or a car loan or other financial documents).
I’ve thought about that a lot today. You see, it’s my anniversary. Thirteen years ago today, I giggled through my vows in a little church in rural Pennsylvania. I married the blue-eyed boy from law school that I remember passing notes about in torts class. As different as we were – he, the Yankee Catholic who had lived and worked abroad in Germany and me, the Southern Baptist girl who spent most of her life in the same town – we shared the same values (with some important exceptions, like the value of country music). And while marriage doesn’t have to be about making the same kinds of choices all of the time, you do need to be on the same page when it comes to certain things – and chief among them: finances. You see, even if you never care about how your spouse makes and spends his or her money, the Internal Revenue Service does. And when you put your signature on a joint tax return, the IRS will hold you to it – even if your spouse doesn’t
So, on a day that I will spend thinking a lot about marriage, I thought it would be appropriate to post ten things you need to know about getting married and taxes:
  1. Your marital status is determined as of the last day of the tax year (for individual taxpayers, this is inevitably the last day of the calendar year). It doesn’t matter if you get married on December 31 – you’re married for the whole tax year so far as the IRS is concerned. Similarly, if you get divorced in July, you’re no longer married for the tax year. The one exception is for widows and widowers: the IRS still allows you to file as married (this is typically favorable for most taxpayers).
  2. Same sex couples who are married under state law are considered married for federal purposes. This includes not only income taxes but also gift and estate taxes. Registered domestic partnerships, civil unions, or similar formal relationships recognized under state law are not recognized for federal purposes.
  3. The so-called marriage penalty used to be attributable to the fact that the standard deduction for married couples was less than the deduction of two single taxpayers. That changed under the Economic Growth and Tax Relief Reconciliation Act of 2001For 2013, the standard deduction for individual taxpayers is $6,100 and the standard deduction for married taxpayers is exactly twice that amount: $12,200.
  4. Also double? The capital gains tax exclusion that applies to selling your home. If you owned your home for at least two out of the past five years and it served as your primary residence for two of the past five years, you can exclude up to $500,000 from income subject to capital gains when you sell your home. Single taxpayers may only exclude up to $250,000. Here’s a quick example: let’s assume you bought your home for $100,000 (assuming no capital improvements or other adjustments to basis) and you are selling it for $600,000. If you are single, you can exclude $250,000 of the $500,000, so that you pay capital gains tax on the remaining $250,000. In the same example, a married couple would exclude $500,000 – and pay no tax. For purposes of the exclusion, only one spouse has to own the house for two of the past five years but both have to live in the house for at least two years (though you may count time that you were living together in sin, as Mom would say).
  5. You don’t inherit your spouse’s tax liability when you get married. If your spouse has outstanding tax liabilities before you tie the knot, those don’t become yours. Ditto for child support and student loan defaults. That doesn’t mean that it won’t be a headache: filing jointly may still subject you to having your refund seized. You’ll have to notify the IRS that you want your refund split; this is referred to as an “Injured Spouse” allocation.
  6. You don’t have to file jointly when you’re married but you may not file as Single. If you want to file a separate return, the correct marital status is Married Filing Separate. If you elect to file as Married Filing Separate, both spouses must make the same election. Similarly, if you choose to itemize your deductions, both spouses must itemize; if you opt for the standard deduction, both spouses must claim thestandard deduction.
  7. Your spouse is never your dependent. The correct term is “personal exemption” – and if you are filing a joint tax return, you may claim one exemption for yourself and one for your spouse.
  8. Once you get married, your parents cannot claim you as a dependent if you file a joint return with your spouse (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid). It doesn’t matter if mom and dad are still paying the bills for you and/or your spouse or if they otherwise support you. Additionally, if you are filing a joint return and your spouse can be claimed as a dependent by someone else, you and your spouse cannot claim any dependents on your joint return.
  9. If you aren’t working, you can still benefit from an individual retirement account (IRA). One of the often overlooked perks of filing jointly is that you and your spouse can each make tax deductible IRA contributions even if only one of you is earning money. For 2013, the maximum you can contribute to all of your traditional and Roth IRAs – including for a spousal IRA – to qualify for the deduction is the smaller of $5,500 ($6,500 if you’re age 50 or older), or your combined taxable compensation for the year.
  10. Your signature on that return means something. You might cheat on your husband or your wife and get away with lying about it but you don’t want to cheat on the IRS. When you sign that return, you are acknowledging to the IRS that you know what’s in the return and that you agree with it. Specifically, you swear under penalty of perjury “that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” Unlike an argument at your house, the IRS doesn’t care who said what and when. Unless you meet very narrow criteria (usually related to fraud or abuse) to qualify for Innocent Spouse relief, your signature on a joint return binds you to the consequences of that return – that includes civil and criminal penalties.
It’s a lot to contemplate. But getting right is important… Worrying about money and taxes can take a toll on a relationship. Throw in job stress, in-laws, owning a home, and a few kids – it’s quite a lot to sort out. Don’t put off talking about money and finances. Hire a good accountant. And be prepared. Years from now, you’ll be glad you did.
Posted on 9:15 AM | Categories:

3 tax breaks most employees squander / How to sign up for tax-saving benefits at work

Bill Bischoff for Market Watch writes: For most of us, the economy is still less than great and conserving cash remains a high priority.  One easy way to keep more in your pocket is by taking full advantage of tax-saving opportunities at your job. It’s almost time to sign up for open enrollment for 2014. Here’s what you need to know to about three options that can painlessly increase your monthly cash flow by reducing your taxes.

Health care flexible spending account

Under an employer-sponsored health care flexible spending account (FSA) plan, you make an election this year to contribute a designated amount of next year’s salary to your personal FSA, up to a maximum of $2,500. The contribution is withheld in installments from your 2014 paychecks and you can then use the FSA money to reimburse yourself for uninsured medical expenses (insurance deductibles and co-payments, prescriptions, dental and vision care, and so forth).
The total amount withheld from your paychecks is treated as a salary reduction for federal income tax, Social Security tax, and Medicare tax purposes (and usually for state income tax purposes too). Reimbursements from the FSA are tax-free.
The health care FSA allows you to pay for all or a portion of your 2014 out-of-pocket medical costs with pretax dollars. That’s the same as getting an income-tax deduction combined with a reduction in your Social Security and Medicare tax withholding. The tax savings are permanent — not just a timing difference. But you must enroll in your company’s FSA plan to benefit, and the deadline to sign up for 2014 will be here soon.
The only downside of FSA is the “use-it-or-lose-it” rule. If you fail to incur enough qualified health care expenses to use up all of your health care FSA each year, any leftover balance reverts to your employer. In other words, you cannot carry over unused 2014 FSA contributions to cover 2015 expenses. However, your company’s plan may allow a 2½-month grace period to ease this concern. If so, you will have until March 15, 2015 to incur enough expenses to use up your 2014 contribution. In any case, you should carefully estimate your expected health care expenditures before deciding how much to contribute for 2014.

Dependent care flexible spending account

Many FSA plans are also set up to reimburse employees for qualified dependent care expenses, which means costs to care for an under-age-13 dependent child, a disabled spouse, or a disabled person for whom you provide over half the support. The dependent care expenses must be necessary in order for you to work, or for both you and your spouse to work if you are married. The annual FSA contribution cap for dependent care expenses is $5,000 (or $2,500 if you are married and file separately from your spouse). If you are married and file jointly, the $5,000 cap represents a combined maximum for both you and your spouse.
The total amount of dependent care FSA contributions withheld from your paychecks for the year is treated as a salary reduction for federal income tax, Social Security tax, and Medicare tax purposes (and usually for state income tax purposes as well). Reimbursements from the FSA are tax-free. So, once again, this benefit allows you to pay expenses with pretax dollars, which puts extra cash in your pocket. Also once again, the tax savings are permanent, but you must sign up during the upcoming open enrollment period to benefit.
Note that the “use-it-or-lose-it” rule also applies to dependent care FSAs, so make sure you don’t contribute more than the qualified expenses you expect to incur.

Transportation expenses

Finally, your employer may also allow you to sign up to reduce your 2014 salary to pay for transit passes, van pooling, and parking to get to and from work.
• The maximum monthly amount you can set aside in 2014 for transit passes and van pooling (separately or together) is currently $130, but there is a good chance that Congress will increase the monthly limit to $250. Stay tuned.
• The maximum monthly amount for parking in 2014 is $250, and that amount is for certain.
• If you sign up for both deals (say for the train to go to and from work and for parking at a park-and-ride lot near your home), you can combine the two limits and set aside up to $380 per month, or up to $500 if Congress increases the allowance for transit passes and van pooling.
As with the FSA, the total amount withheld from your 2014 paychecks will be treated as a salary reduction for federal income tax, Social Security tax, and Medicare tax purposes (and usually for state income tax purposes as well). So this deal allows you to pay expenses with pretax dollars, which puts extra cash in your pocket every month.

The bottom line

Surveys repeatedly show that most folks fail to participate in these employer-sponsored tax-saving arrangements, often because they figure the tax savings don’t really add up to that much. This is not true.
For example, if your combined federal and state income tax rate for 2014 will be 33%, and you sign up to reduce next year’s salary by a total of $12,060 ($2,500 for healthcare FSA contributions, $5,000 for dependent care FSA contributions, and $4,560 for monthly transit passes and parking). Your income tax savings would be $3,980 ($12,060 x 33%), and your Social Security and Medicare tax savings could be as much as $923 ($12,060 x 7.65%). So that works out to an extra $4,903 in your pocket, which amounts to $409 a month, just for filling out the enrollment forms. Be smart. Sign up to participate. It’s worth the small effort. 
Posted on 9:15 AM | Categories: