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Start Tax Planning Early: 8 Great Year-End Tax Tips

Ginita Wall for Intuit writes:  When you think of the holiday season, what comes to mind? Gift exchanges? Holiday parties? Home-baked pies? Taxes?

I know you have a lot of other things to do this time of year, but the holiday season is a great time to make some last-minute tax moves before the year is over. Here are eight of my favorites:

1.  Ask for a New Year’s Bonus Instead of a Christmas Bonus

By delaying your bonus by only a week, you can push the payment of taxes on the income 15 months into the future — a year from next April.

2.   Clean Out Your Closets and Donate to Charity

You can clean out the old clothes, sporting goods, books, and other household goods that you no longer use and welcome the New Year with new space in your life, and get a quick tax deduction to boot. Document these donations by making a list of the items at the time you donate them. You can use TurboTax It’s Deductible to accurately value your donated goods.

3.  Pay Donations by Credit Card

Payments made by credit card are deductible in the year they are charged, not the year they are paid, so you can donate to your favorite charity by December 31 and not pay the bill until next year.

4. Contribute the Maximum to Your 401(k) or 403(b) Retirement Plans

Some employers will allow you to catch up on contributions by increasing your deduction on your last paychecks of the year. If you are 50 or over, don’t forget that you can contribute an additional $5,500 “catch-up” contribution in addition to the regular 401(k) or 403(b) $17,500 limit for 2013.

5.  Check the Balance in Your Flexible Spending Account

A wonderful fringe benefit, these helpful plans allow you to set aside a portion of your salary before taxes for certain purposes, such as child care or health care expenses.

These plans did work on the “use it or lose it” concept: any amount unused at the end of the year was lost, however the Treasury and IRS modified the rule and now employees may be allowed to carry over $500 of unused amounts for next year’s expenses.  Your employer may also offer the existing plan option to use unused amounts for up to two and half months following year end.

6.  Bunch your Medical Bills

Medical expenses are only deductible when they exceed 10% of your adjusted gross income (still 7.5% if you are over 65). If your income is low this year or your medical expenses are high, speed up your deductions accordingly. If you want to take the deductions this year, pay any outstanding medical bills before year-end, stock up on prescriptions, get new glasses, and pay your health insurance premiums before the end of the year.

7.  Estimate Your Taxes

You can use TurboTax TaxCaster to estimate your taxes and see if you need to make any last minute tax moves.  The IRS treats income taxes withheld from your paycheck as if they were paid in equal amounts throughout the year. So if your calculations show you’ll owe money, you can increase the withholding on your last paychecks of the year to make up the difference.

You can also try the new TurboTax MyTaxGuru to see what you can do to get a bigger tax refund when you file your taxes.

8.  Don’t Forget to Gather Your Receipts

You can deduct union dues, legal and professional fees relating to tax and investment advice, and unreimbursed employee business expenses of mileage, equipment, education, and supplies, among other things. If you pay a lot of expenses for your job or your investments, gather up the receipts and cancelled checks so you can save more money when you file your 2013 taxes.

7 Business Travel Expenses You Never Knew You Could Write Off

Madeline Stone for the Business Insider writes:  Taking an extended trip away from the office is often a necessary step in getting your business to the next level, but doing so can get expensive.

That's where expense reports come in.  

"For traveling business people, not going overboard is really good advice," says Pauline Frommer, who travels often in her role as publisher of Frommers.com. "There's nothing more embarrassing than turning in an expense report with the wrong information."  

The key is to know your company's expense policies, since they differ from business to business. But for expenses that may not be entirely covered by your company, it helps to be familiar with IRS tax code. Most business travelers know that they can write off their flights, hotels, and meals as necessary travel expenditures. 

Here are some things you might not have known were tax-deductible: 

1. Dry cleaning: Sometimes trips last longer than expected. According to the IRS, expenses for dry cleaning and laundry are tax-deductible as a business cost, so there's no excuse for not looking presentable at meetings when you're traveling. 
2. Calls and other forms of communication: It may be obvious to charge long-distance calls to your expense account, but you may not know that faxes and Internet connection fees could also be deducted. 
3. Convention travel (even on cruise ships): Travel for workshops, conferences, and seminars are deductible if you can prove that it has a direct business purpose. You can even attend a convention on a cruise ship if it takes place on a U.S.-registered vessel that doesn't make any stops outside of the country. 
4. Shipping work material: If you're traveling for a trade show and need to display your products to potential buyers, you can get a tax deduction for the cost of shipping your materials to your destination ahead of time.
5. Stenographer fees: If, for example, you'll need to hire a stenographer to transcribe legal documents or keep official records of shareholder votes, you can write off any associated fees as travel expenses. 
6. Computer rental: Things happen, and you may need to rent a computer in a hurry. Computer rental services like services like Rentacomputer.com or Rushcomputer.com will take care of it, and you can write off the cost. 
7. Business travel by RV: If you can prove that traveling by RV is ordinary and necessary for your business, any expenses associated with maintaining and owning a house trailer are tax-deductible. 

Is Xero the Hero for New Zealand Stocks? Technology Company Has Nearly Doubled in Value in Past Two Weeks

Lucy Kramer for the Wall St Journal writes: One of the Asian-Pacific region's best-performing stock markets is being driven by an unlikely source: a technology company backed by PayPal founder Peter Thiel that has yet to make a cent in profit.

A 21% increase in New Zealand's NZX-50 index so far this year reflects in large part rapid stock gains by Xero Ltd. XRO.NZ +3.56% , dubbed by broker Credit Suisse as the " AppleInc. AAPL -1.62% of accounting."

Investors are betting Xero's cloud program for small businesses to organize their finances, bill customers and keep a track record of payments will be highly profitable once the Wellington-based company slows the investment being made to build a footprint in new markets, including the U.S.

That hope has made Xero's shares a hot ticket among investors including Mr. Thiel's Valar Ventures and New York-based Matrix Capital Management. In the last two weeks, Xero has nearly doubled in value to 4.6 billion New Zealand dollars (US$3.8 billion) to become the NZX-50 index's second-largest stock after construction firm Fletcher Building Ltd. Since the end of last year, Xero shares have gained 374%.

The rapid rise in Xero's stock also has cast a light on efforts by New Zealand, a small mountainous country of 4.5 million people in the South Pacific, to become less reliant on agricultural exports such as dairy and wool for growth. Tax breaks and other incentives have turned digital products from a small contributor to the economy into a NZ$2 billion export industry, with special effects in movie blockbusters such as the Oscar-winning "Avatar" and "The Hobbit" largely produced in New Zealand. Exports of computer and information services have grown at more than 10% annually since 2002, government data show.

"We can be bigger than Fonterra," Xero founder and chief executive Rod Drury said, referring to Fonterra Cooperative Group, the world's largest dairy exporter. "The way we think about the business long term is how do we be Facebook-sized for small business. That is obviously a lot bigger than Fonterra or any New Zealand company."

Still, the sharp rise in Xero's stock is raising concerns that investors may be headed for a fall. Xero doubled its revenue in the year through March, but sales of NZ$39 million represent only a fraction of its market value. At the bottom line, it recorded a NZ$14.4 million annual net loss.

"What makes the stock worth a billion dollars more than it was three days ago?" said James Smalley, a director at Christchurch investment firm Hamilton Hindin Greene. "If you are looking at where you are going to allocate your capital then one would argue there are cheaper places with an appropriate level of risk to put that money."

Andrew Bascand, managing director of Harbour Asset Management in Wellington, pointed to a disconnect between Xero's rating and other listed technology firms such as Wynyard Group Ltd., SLI Systems Ltd. and GeoOp Ltd. Xero is trading at 70-times sales, compared with the other companies' multiples of three or four times revenue.

Xero's shares fell 9% Thursday, before clawing back much of those losses to trade at NZ$35.98 Friday. Some brokers see Thursday's decline as merely as a blip. Credit Suisse initiated coverage of the company this week with an outperform rating on the stock and a target price of NZ$45.70.

Xero's share price has been on a rapid upward trajectory since February, which analysts say is due mainly to the company's consistently meeting forecasts for revenue and customer addition.

However, it was a successful NZ$180 million fundraising in October that led local and international investors to pile in. Valar Ventures and Matrix Capital Management took part in the equity raising at NZ$18.15 a share, which secured NZ$147 million in the U.S. alone.

Valar Ventures was an early supporter of the stock—investing NZ$4 million in 2010 in return for a 3% stake in the company. Back then, Xero was operating out of cramped, no-name offices in central Wellington. Now, its head office is one of the city's most prominent buildings, next door to the New Zealand stock exchange on the city's waterfront.

Andrew McCormack, a partner at Valar Ventures, said in an email that Xero was at an "inflection point" in its efforts to accelerate growth in the U.S. and cement its position as a leader in cloud computing.

Xero, founded in 2006, has more than 211,300 customers and 600 staff in 14 offices around the world, including newly fitted out offices in San Francisco and Denver. The company also listed on the Australian Securities Exchange ASX.AU +0.22% late last year.

Making a profit "is not that important at the moment," Mr. Drury said. "We've just raised US$150 million in new capital, which investors have given us to grow a long-term business. We'd like to get to break-even as soon as we can but we have the capital to invest ahead of growth."

Milford Asset Management was one of the few local funds to participate in Xero's recent capital raising. According to Brian Gaynor, chairman of Milford's investment committee, the fund has become more enthusiastic about Xero as the software company successfully raised more and more capital.

"With a company like this you watch every announcement they make," he said. "These things can get overheated, they can have a sales figure that is more disappointing than the market anticipates and they can come back a long way. We are there but we're not unequivocally there."

The Benefits Of Starting An IRA For Your Child

Investopedia writes:  While IRAs are well-known among adult investors, they also make excellent savings vehicles for children who, because of their age, are poised to take full advantage of time – and the power of compounding. Your child – regardless of age – can contribute to an IRA provided he or she has earned income from a job. Here, we take a look at two types of IRAs for kids, the benefits these tax-advantaged investment vehicles offer, and how to open and make contributions to an IRA for kids.

Types of IRAs for Kids

There are two different types of IRAs that are suitable for children: traditional and Roth. The primary difference between traditional and Roth IRAs is when you pay taxes on the money that you contribute to the plan. With a traditional IRA, you pay taxes when you withdraw the money during retirement (at your then-applicable tax rate). A traditional IRA contains pre-tax earnings. With a Roth IRA, you pay taxes when you put the money into the account, so it contains earnings after tax. The money grows tax free while it’s in either a traditional or Roth IRA.

If you claim your child as a dependent, he may be required to file an income tax return of his own if his income exceeds a certain amount set by the IRS ($6,100 for 2013). If your child earns less than this amount, she is likely in a 0% income tax bracket and she probably won’t benefit from the up-front tax deduction associated with traditional IRAs. Because of this, it makes sense in most cases to focus on Roth IRAs. With a Roth IRA, you get no deduction when you make contributions, but years later the money – both contributions and earnings – comes out tax-free. In general, the Roth IRA is the IRA of choice for minors who have limited income and who, therefore, would not benefit from a deductible traditional IRA.

Because many kids don’t earn enough money to benefit from the up-front tax deduction associated with traditional IRAs, it makes sense in most cases to focus on Roth IRAs. With a Roth IRA, you get no deduction when you make contributions, but years later the money – both contributions and earnings – comes out tax-free. In general, the Roth IRA is the IRA of choice for minors who have limited income and who, therefore, would not benefit from a deductible traditional IRA.

Benefits of IRAs for Kids

Opening an IRA for your child provides him or her not only a head start on saving for retirement, but also valuable financial lessons. Even a small IRA (Schwab, for example, allows you to open a custodial account with just $100) can provide a platform to teach your child about taxes, retirement, compounding, and the relationship between earning, saving and spending.

While retirement income is likely to be the last thing on your young child’s mind, most kids are intrigued with the idea that a small investment today can turn into a big chunk of change later. Young children may not understand the concepts behind interest, earnings and compounding, but they are old enough to appreciate the fact that their money can grow.

A single $1,000 IRA contribution made at age 10, for example, could grow to $11,467 over 50 years, assuming a conservative 5% average annual growth rate. Contribute $50 each month, and the account might grow to $137,076 (with the initial $1,000 contribution and the same hypothetical growth rate of 5%). Or double the contribution to $100 each month and the account could reach $262,685. As children make more money and eventually become adult earners, their annual contributions are likely to be higher, and the IRA could grow correspondingly. Setting aside money each month or year for an IRA – even if the contributions are small – helps your child develop awareness and healthy financial habits.

Another benefit of IRAs is that your child may be able to tap into the account for qualified higher education expenses and up to $10,000 towards a down payment on a first home without penalty. With a Roth IRA, you can withdraw any contributions, but not the investment earnings, for any reason without tax or penalty.

IRA Accounts

If your child is a minor (under age 18 in most states; under age 19 and 21 in others), many banks, brokers and mutual funds will let you set up a custodial or guardian IRA. As thecustodian, you (the adult) control the assets in the custodial IRA until your child reaches age 18 (or 21 in some states), at which point the assets are turned over to him or her. The IRA is opened in your child’s name, and you will have to provide his or her social security number when you open the account. Keep in mind, not all firms allow minors to have IRAs. Firms that currently open accounts for minors include:

• Charles Schwab
• E*Trade
• Scottrade
• T. Rowe Price
• TD Ameritrade
• Vanguard
• 
  

Children of any age can contribute to an IRA as long as they have earned income from a job, be it babysitting, yard work or walking neighborhood dogs. For 2013, the maximum your child can contribute to an IRA (either traditional or Roth) is the lesser of $5,500 or his or her taxable earnings for the year. For example, if your son earns $3,000 this year, he could contribute up to $3,000 to an IRA; if your daughter earns $10,000, she could contribute only $5,500, the maximum contribution. If your child has no earnings, he or she cannot contribute at all.

The important thing to remember is that your child must have earned income during the year for which a contribution is made. Money from allowance or investing income does not count as earned income and, therefore, cannot be used towards contributions. Ideally, your child will receive a W-2 for work performed; otherwise, it is a good idea to keep excellent records from jobs that don’t provide a W-2: babysitting, yard work, mothers’ helpers, entrepreneurial endeavors, etc. Your records should include:

• Type of work
• When the work was done
• For whom the work was done
• How much your child was paid

You may be able to pay your child for work done around the house provided it is legitimate and the pay is at the going market rate (you probably won’t get away with paying your son $150 an hour to mow the lawn, for example). If your family has a business, you can put your child to work doing age-appropriate tasks for reasonable pay. Your business minimizes its tax liability and your child earns income that will qualify him or her to make an IRA contribution.

Many parents choose to “match” their child’s earnings and make the IRA contribution themselves. For example, if your daughter earns $3,000 at a summer job, you can let her spend her money as she wishes and you make the $3,000 IRA contribution with your own money. You might also offer to contribute a percentage of what your child earns, such as 50% (your child earns $3,000 and you contribute $1,500). Whatever approach you decide to take, the IRS doesn’t care who makes the contribution as long as it does not exceed your child’s earned income for the year. Since the contribution is made to your child’s IRA, your child – not you – receives any tax deduction.

The Bottom Line

Young people have a tremendous advantage in time: even relatively small IRA contributions can grow significantly over time due to the power of compounding. In addition to the cold hard cash building in an IRA account, your child will have the added benefit of developing healthy financial habits: many financial experts and educators believe that the earlier children begin learning about money, the better their chances for financial stability in the future.

Medicare Surtax Planning

Anthony D. Criscuolo and Melinda Kibler write: The end of 2013 is in sight. Most of us want to concentrate on holiday plans, travel and family. Tax planning is far down on the list.  Yet 2013 brings new tax regulations, and some year-end planning can alleviate future tax pain – which is an excellent holiday present to yourself.

Beginning with the 2013 tax year, a new Medicare surtax will apply to taxpayers who have net investment income (NII) and whose modified adjusted gross income (MAGI) exceeds a certain threshold. This new surtax will essentially raise the marginal income tax rate for affected taxpayers and is entirely separate from the regular income tax and alternative minimum tax. While it is called a “Medicare” surtax, the new tax actually goes toward the general revenue fund of the United States, not specifically to Medicare. The tax is often referred to as the net investment income tax (NIIT).

For individuals, trusts and estates, the surtax is a flat 3.8 percent tax imposed on the lesser of either net investment income or the excess of modified adjusted gross income for the taxable year over the threshold amount. If MAGI does not exceed the threshold amount, the net investment income will not be subject to the new tax.

The IRS defines net investment income as the sum of three “buckets” of gross income, reduced by allowable deductions. The first bucket is gross income from interest, dividends, annuities, royalties and rents (other than those derived in the ordinary course of business or those that are earned passively). Passive activity income, as defined by the IRS, makes up the second bucket. The third bucket comprises net capital gains derived from the disposition of property. Note that net investment income specifically excludes:

• Income from an active trade or business
• IRA or qualified plan distributions
• Income from self-employment
• Gain from the sale of an active interest in a partnership or S corporation
• Any amounts exempt from income under income tax law (such as tax-exempt bonds or veteran benefits)

Certain expenses can be taken as deductions to reduce your investment income; thus the term netinvestment income. Deductions include investment interest expenses, margin expenses, investment counsel and advisory fees, state income taxes allocable to your NII, attorney or accounting fees, and depreciation or amortization deductions. To be deductible, these expenses need to be related to the production of your investment income. The expenses are subject to the same limitations applied to itemized deductions as reported on your Schedule A (such as the 2 percent floor for certain miscellaneous itemized deductions and the overall limitation on itemized deductions for high-income taxpayers, also known as the Pease limitation).

The three different “buckets” of gross income are an important concept in understanding the NIIT. For example, capital losses work slightly differently under the surtax regulations than they do for regular income tax. This is because the net capital gain calculated for net investment income purposes (part of the third bucket of NII) may not be less than zero. Therefore, capital losses may only offset capital gains, not other forms of investment income such as interest or dividends. Nor may you use the up to $3,000 of excess capital losses that are generally allowed to offset other ordinary income for regular income tax purposes.

For example, assume a taxpayer’s only two sources of income were $300,000 of interest and a net capital loss of $250,000. For regular income tax purposes, you are allowed to use $3,000 of the net loss to offset other income, resulting in gross income of $297,000. The remaining capital loss of $247,000 is carried forward to future tax years. However, for purposes of calculating your NII, the capital loss (part of bucket three) may not offset any of the interest income (bucket one). This means, in our example, the taxpayer’s total NII will be the full $300,000 of interest. An easy rule to remember is that investment income may only be offset by losses from other investments within the same bucket.

Modified adjusted gross income, for purposes of calculating the NIIT, is defined as a taxpayer’s adjusted gross income modified by adding the net foreign earned income exclusion. For many taxpayers, this will be the same as their adjusted gross income.

The threshold amount for the surtax depends on your filing status. The amounts are as follows:

• Single, head of household (with qualifying person), or qualifying widow(er) with a dependent child: $200,000
• Married filing jointly: $250,000
• Married filing separately: $125,000
• Estates and trusts: based on the top tax bracket for the taxable year ($11,950 in 2013)

The threshold amount is the key factor in determining the “lesser of” formula for the purposes of calculating the surtax. Also note that this surtax is charged in addition to the regular federal income tax (and alternative minimum tax), effectively raising the marginal income tax rate for affected taxpayers.

All of this may seem overwhelming. The following examples will help you see how calculating the surtax works in practice.

Example 1: Charlie, a single taxpayer, has $100,000 of salary and $50,000 of net investment income. His MAGI totals $150,000. Because his MAGI is less than the $200,000 threshold, the surtax will not apply.

Example 2: Abigail is also a single taxpayer. She has $225,000 of net investment income, and no other income sources. Since she has passed the MAGI threshold, she owes the 3.8 percent surtax on the lesser of her net investment income or the amount by which her MAGI exceeds the threshold. In this case, she will owe the tax on $25,000, the difference between MAGI and the threshold, as it is less than the entirety of her net investment income.

Example 3: Randy, a single taxpayer, is 69 years old. His net investment income is $200,000, so he is not subject to the surtax. However, next year he will have the same investment income and an additional required minimum distribution from his IRA, totaling $125,000. This pushes his MAGI up to $325,000, though the IRA distribution does not affect his total net investment income. Since Randy’s MAGI exceeds the threshold, he will have to pay the surtax. In this case, he will owe tax on the amount the MAGI exceeds the threshold, $125,000, which is less than his total net investment income ($200,000).

Planning Strategies for the NIIT

Now that you have a basic idea of how the surtax works, we can turn to planning strategies to lessen the burden of the new tax. There are two main approaches to minimize the impact of the surtax. The first is to reduce your net investment income and the second is to reduce your MAGI.

There are a variety of tactics you could adopt to accomplish the first goal. Here are some ideas, a few of which we will cover in more depth:

• Municipal bonds
• Tax-deferred annuities
• Life insurance with cash value
• Rental real estate
• Oil and gas investments
• Choice of accounting year for an estate or trust
• Timing of estate or trust distributions

Municipal Bonds
In determining if a municipal bond is preferable to a corporate bond, one must calculate the after-tax rate of return. Income from a corporate bond would be subject to both income tax and the net investment income surtax for a taxpayer whose MAGI exceeds the NIIT’s threshold. A municipal bond would not be subject to income tax, nor would it be subject to the new surtax, regardless of the taxpayer’s MAGI. Additionally, income from a municipal bond would not be included in MAGI either, so the municipal bond will help an investor stay below the threshold amount. Generally speaking, as tax rates go up (or new taxes are imposed), the after-tax yield of taxable bonds goes down, thus making municipal bonds more attractive.

Life Insurance with Cash Value
Whole and universal life insurance policies often include an investment component in addition to the death benefit. This is generally referred to as the policy’s cash value. All gains inside the life insurance policy are tax-deferred, and thus are not included in your MAGI and NII calculations.

Consider this example: Joe, a married-filing-jointly taxpayer, paid a one-time, $250,000 premium to purchase a $2.5 million universal life insurance policy. Ten years later, Joe withdrew $40,000 from the policy, when its cash value was $400,000 ($150,000 more than Joe paid originally). Until Joe withdraws more than his initial premium, none of the policy’s earnings will be subject to the NIIT.

Obviously, a given policy’s fees and investment options will affect its attractiveness as an investment, but its tax-deferred nature makes it more desirable in a higher tax-rate environment.

Tax Shelter Investments
In general, certain investments offering non-cash deductions (such as in oil and gas investments and rental real estate) are helpful as tax shelters, and their importance will increase for those looking to minimize or eliminate their surtax obligations. Oil and gas investments often provide intangible drilling costs deductions and rental real estate has depreciation deductions, both of which reduce your NII. It is important to stress however, that one should not allow the increased tax rates to completely control the investment process. Tax efficiency should be just one of many factors you examine when selecting an investment and evaluating its merits within the context of your overall financial plan and asset allocation.

Planning for Trusts and Estates
The NIIT can hit trusts and estates particularly hard because of the low threshold amount ($11,950 in 2013). In order to reduce the tax, fiduciaries may want to consider making distributions of the trust or estate’s net investment income. Because trusts and estates receive an income distribution deduction, the income is ultimately reported by the beneficiary, and any resulting NIIT will be based on the beneficiary’s personal income tax return. Assuming that a trust or estate has beneficiaries who are not subject to the NIIT, the choice to make distributions from the trust or estate can help to minimize the overall tax burden. This strategy may not be practical, however, if the trustee or grantor did not intend for the beneficiaries to receive distributions.

One other possible solution is to create multiple trusts, or to divide a current trust into multiple trusts. Each new trust will have its own threshold amount, essentially spreading the investment income from one big trust to numerous smaller trusts. As long as the undistributed NII of each trust is below the threshold, this strategy could allow a trust to avoid the NIIT completely. Note you have to have a legitimate reason for dividing a trust, such as maintaining separate trusts for multiple beneficiaries with different investment goals or setting up trusts for different primary objectives (such as education or health). Tax avoidance is not a legitimate purpose on its own. You must also consider the additional costs associated with maintaining multiple trusts, including tax preparation fees, annual accounting fees and trustee fees, when deciding whether this strategy makes sense in your situation.

Besides reducing net investment income, the other main approach for tax planning related to the new surtax is to take steps to reduce your MAGI to less than your applicable threshold amount. There are also a variety of strategies that can help you achieve this goal, including the following:

• Roth IRA Conversion
• Charitable Remainder Trust
• Charitable Lead Trust
• Installment Sales
• Gifts

Roth IRA Conversion
Depending on your time horizon and your overall tax situation, you may want to consider a Roth IRA conversion. Converting a traditional IRA to a Roth IRA should lower your overall taxable income in the long term. In addition, Roth IRAs do not have required minimum distributions and withdrawals for beneficiaries are tax-free. If the conversion would push your income above the threshold, consider converting over the span of several years instead. To employ this strategy effectively, it is ideal to use funds from outside the IRA to cover the income tax liability created in the year, or years, of conversion.

Charitable Trusts
If you have philanthropic intentions, you might also consider a Charitable Remainder Trust (CRT) or a Charitable Lead Trust (CLT). Our colleague Eric Meermann outlined the basic structures of each trust in his article “Creative Approaches to Charitable Giving.” The trust would reduce your MAGI while, at the same time, allowing you to meet your charitable objectives.

Installment Sales
Another strategy to reduce MAGI is to structure certain dispositions of property as installment sales. An installment sale is one in which the seller exchanges an asset for a promissory note, paid over a period of time; thus the taxable gain that the seller recognizes will be partly deferred. By spreading the income over a longer period, the seller can prevent a spike in income after selling a highly appreciated asset, which would otherwise push their MAGI over the threshold in the year the sale takes place.

Gifts
Depending on your goals, you can also reduce MAGI through an outright gift. Giving assets that produce significant investment income to recipients with lower MAGI can keep you, and ideally the gift recipient, below the surtax threshold. However, there are a few caveats to keep in mind when deciding whether to give for this reason. First, one must be comfortable relinquishing control over the asset. Second, under the so-called “kiddie tax” rules, the unearned income of young children may subject their income to their parents’ tax rate, including the new surtax. A gift needs to be planned carefully if one of the intentions is reducing the burden of the NIIT.

Even with these strategies for reducing MAGI and net investment income, you may still find yourself subject to the surtax. If this is the case, it is important to note that the surtax is subject to the estimated tax provisions. Therefore, you should promptly confirm whether the surtax applies and, if so, you should pay your estimated tax or adjust your withholdings as soon as possible to avoid underpayment penalties. Because net investment income can vary greatly from year to year, many taxpayers may prefer to rely on the safe-harbor rules for estimated payments. These rules require that you pay 100 percent (or 110 percent, for high-income taxpayers) of your prior year’s tax liability.

At this time, the IRS is still considering some of the issues related to the NIIT, but the Service has stated that taxpayers can rely on the proposed regulations until final regulations are issued. For now, it makes sense to plan for the new tax based on the proposed regulations.

While this new Medicare surtax may seem complicated, the overall planning strategies are relatively simple: reduce net investment income, reduce MAGI, or both. The best way to go about these measures will depend on your individual situation, but planning ahead will allow you a happier start to 2014, especially when your tax bill comes due in April.

ETFs vs. Mutual Funds: Tax efficiency

Wiley Global Finance for Fidelity writes:  ETFs are more tax efficient compared to traditional mutual funds. Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account.

From the perspective of the Internal Revenue Service, the tax treatment of ETFs and mutual funds are the same. Both are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are minimized for the holder of the ETF and the ultimate tax bill – after the ETF is sold and capital gains tax is incurred – is less than what the investor would have paid with a similarly structured mutual fund.

In essence, there are – in the parlance of tax professionals – fewer “taxable events” in a conventional ETF structure than in a mutual fund. Here’s why:

A mutual fund manager must constantly re-balance the fund by selling securities to accommodate shareholder redemptions or to re-allocate assets. The sale of securities within the mutual fund portfolio creates capital gains for the shareholders, even for shareholders who may have an unrealized loss on the overall mutual fund investment.

In contrast, an ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets that approximate the entirety of the ETF investment exposure. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying structure.

To be fair to mutual funds, managers take advantage of carrying capital losses from prior years, tax-loss harvesting, and other tax mitigation strategies to diminish the import of annual capital gains taxes. In addition, index mutual funds are far more tax efficient than actively managed funds because of lower turnover.

ETF Capital Gains Taxes

For the most part, ETF managers are able to manage the secondary market transactions in a manner that minimizes the chances of an in-fund capital gains event. It is rare for an index-based ETF to pay out a capital gain; when it does occur it is usually due to some special unforeseen circumstance.

Of course, investors who realize a capital gain after selling an ETF are subject to the capital gains tax. Currently, the long-term capital gains tax is 15%, but it is slated to rise to 20% in 2012. The important point is that the investor incurs the tax after the ETF is sold.

Taxation of ETF Dividends

ETF dividends are taxed according to how long the investor has owned the ETF fund. If the investor has held the fund for more than 60 days before the dividend was issued, the dividend is considered a “qualified dividend” and is taxed anywhere from 5% to 15% depending on the investor’s income tax rate. If the dividend was held less than 60 days before the dividend was issued, then the dividend income is taxed at the investor’s ordinary income tax rate. This is similar to how mutual fund dividends are treated.

Exceptions to the Rules

Certain international ETFs, particularly emerging market ETFs, have the potential to be less tax efficient than domestic and developed market ETFs. Unlike most other ETFs, many emerging markets are restricted from performing in-kind deliveries of securities. Therefore, an emerging-market ETF may have to sell securities to raise cash for redemptions instead of delivering stock –which would cause a taxable event and subject investors to capital gains.

Leveraged/inverse ETFs have proven to be relatively tax-inefficient vehicles. Many of the funds have had significant capital gain distributions - on both the long and the short funds. These funds generally use derivatives - such as swaps and futures - to gain exposure to the index. Derivatives cannot be delivered in kind and must be bought or sold. Gains from these derivatives generally receive 60/40 treatment by the Internal Revenue Service (IRS), which means that 60% are considered long-term gains and 40% are considered short-term gains regardless of the contract's holding period. Historically, flows in these products have been volatile, and the daily repositioning of the portfolio in order to achieve daily index tracking triggers significant potential tax consequences for these funds.

Commodity ETPs have a similar tax treatment to leverage/inverse ETFs due to the use of derivatives and the 60/40 tax treatment. However, commodity ETPs do not have the daily index tracking requirement, use leverage/short strategies, and have less volatile cash flows simply due to the nature of the funds.

Exchange Traded Notes

The most tax efficient ETF structure are Exchange Traded Notes. ETNs are debt securities guaranteed by an issuing bank and linked to an index. Because ETNs do not hold any securities, there are no dividend or interest rate payments paid to investors while the investor owns the ETN. ETN shares reflect the total return of the underlying index; the value of the dividends is incorporated into the index's return, but are not issued regularly to the investor. Thus, unlike with many mutual funds and ETFs which regularly distribute dividends, ETN investors are not subject to short-term capital gains taxes. Like conventional ETFs, however, when the investor sells the ETN, the investor is subject to a long-term capital gains tax.

Intuit Connects Users to Certified ProAdvisors Within QuickBooks Online

AccountingTechnology writes: Intuit is now offering to connect small business users working in the new QuickBooks Online with a certified QuickBooks Online ProAdvisor from within the product.

The company claims it has more than 100,000 QuickBooks Online for Accountants users and is now looking to connect them with its QuickBooks Online paid subscribers – which it claims are currently over 500,000.  Small businesses signing up on the new QuickBooks Online can now invite their accountant or bookkeeper right from within QuickBooks Online to help them get the most out of their QuickBooks software and receive counsel regarding setup, training, payroll and consulting, among other core benefits.

In addition, if a small business doesn’t have an accounting professional, they can now use the “Find an Accountant or Bookkeeper” feature accessible directly from their new QuickBooks Online home page activity feed to find ProAdvisors in their area that are certified in QuickBooks Online.

 “With a new user joining QuickBooks Online every minute of every day, we want to help accounting professionals grow their knowledge and expertise around using our online solutions so they can more quickly grow their practices,” said Intuit chief executive Brad Smith. “Accounting professionals now have the opportunity to distinguish their practice and increase their credibility as an expert in the cloud by being a Certified QuickBooks Online ProAdvisor,” added  Luis Sanchez, director of marketing and leader of the QuickBooks ProAdvisor Program. “With a new user joining QuickBooks Online every minute of every day, we want to help accounting professionals grow their knowledge and expertise around using our online solutions so they can more quickly grow their practices.”

In August, Intuit launched a QuickBooks Cloud ProAdvisor Program, a free offering designed specifically for accountants working in the cloud or interested in moving and growing their practice online. Much like Intuit’s regular ProAdvisor program, the new cloud program offers members free access to QuickBooks Online Accountant, free training and certification, support, and marketing resources, including a listing in an online referral directory. New members also receive five free uses of Intuit Tax Online and one year free of Intuit Online Payroll for Accountants for one client.

Higher Tax Rates Give Top U.S. Earners Year-End Headaches

Margaret Collins & Richard Rubin write:  The higher tax rates passed by Congress this year have some top U.S. earners seeking last-minute strategies to lower their tax bite as year-end calculations turn up unpleasant surprises.

“There are many, many high-income taxpayers now who are finding themselves facing tax rates in excess of 50 percent,” said Suzanne Shier, a tax strategist and director of wealth planning at Chicago-based Northern Trust Corp. (NTRS) “That really gets their attention.”

High earners are seeing a combination of federal tax increases for 2013: a top marginal rate of 39.6 percent, up from 35 percent; a 20 percent tax on long-term capital gains and dividends, up from 15 percent; and a new 3.8 percent tax on investment income. Also, limits on exemptions and deductions are taking effect for this tax year.

Some top earners are only now realizing they may owe much more by April 15 because they’ve been paying quarterly estimated taxes based on their liability for 2012, which theInternal Revenue Service allows in a “safe-harbor” rule, said Elda Di Re, a partner at Ernst & Young LLP.

Others are absorbing the effects as they rush to implement strategies before Dec. 31 to limit the tax bite on earnings, market gains and stakes in businesses.

States’ Take

State taxes can push the bill higher for some high earners. InCalifornia, the top rate is 13.3 percent on income exceeding $1 million.

Investors with significant portfolios are seeing some of the biggest increases this year, said Martin Kalb, co-chairman of the global tax group at Greenberg Traurig LLP.

For wealthy taxpayers, the rate on long-term capital gains and qualified dividends now can be as much as 25 percent, including the new surtax and limits on deductions, Kalb said. That’s a 67 percent increase from 2012. The rate on other investment income such as royalties, interest and rents can exceed 43 percent.

“Clients are a little startled at the amount of additional taxes they are paying,” said Maury Cartine, a partner at Marcum LLP whose clients include private equity and hedge fund managers.

According to an analysis by Cartine, a married couple in New York with $600,000 in wages, $100,000 in qualified dividends and $300,000 in long-term capital gains -- as well as $145,000 in itemized deductions for real estate taxes, mortgage interest and state and local taxes -- would pay about 17 percent, or $37,000, more in U.S. taxes this year.

$450,000 Threshold

By comparison, a family with $600,000 in wages, no investment income and $105,000 in itemized deductions would see about a 2 percent, or $3,000 increase, he said.

Congress set the top tax rate for income above $450,000 for married couples or $400,000 for individuals, after deductions. Those are the same thresholds for the top levy on long-term capital gains and dividends.

Additionally, two new taxes to help finance the 2010 health-care law -- a 3.8 percent surtax on investment income and 0.9 percent added levy on wages -- apply to income of more than $250,000 a year for married couples and $200,000 for individuals.

Lawmakers also reinstated phaseouts of personal exemptions and itemized deductions for adjusted gross income exceeding $250,000 for individuals and $300,000 for married couples.

‘Big Surprise’

“It’s going to be a big surprise when they find out they aren’t going to be able to take all of their itemized deductions,” said Tracy Green, a vice president in tax and financial planning in the advisory unit of Wells Fargo & Co. (WFC)

With less than two months left in the tax year, advisers and accountants are focusing on clients with closely held business stakes, mutual-fund holdings, charitable donations and retirement accounts to help maneuver around higher rates.

To minimize the effect of the 3.8 percent tax, high earners are reviewing their interests in S corporations and other flow-through entities to see if they can become active rather than passive participants, said William Zatorski, a partner in PricewaterhouseCoopers LLP’s private company services practice. Business income from active participation isn’t subject to the surtax and that shift in S corporations doesn’t trigger self-employment tax, he said.

This year’s stock market rally -- the Standard & Poor’s 500 Index returned 25 percent through October -- has tax implications for many investors with mutual funds, said Green of Wells Fargo Advisors.

Capital Gains

“This year the chances of having long-term capital gain distributions are going to be pretty good,” she said.

Mutual fund companies are releasing estimates of distributions this month, which investors can use to plan, Green said. Those intending to sell a fund should do so before distributions, while investors seeking to buy shares should wait until after, she said.

Some high earners may have to shift their usual year-end strategies because the new top rate means they are no longer subject to the alternative minimum tax, or AMT, said Di Re of Ernst & Young. Taxpayers not subject to the minimum tax can pre-pay state income or real estate taxes before Dec. 31 to lower their taxable income, Zatorski of PwC said.

Bumping up charitable donations is another strategy, Kalb of Greenberg Traurig said. Taxpayers with gains in publicly traded stocks can donate them to a public charity or their own private foundation. They’d be eligible for a charitable deduction equal to the fair value of the security, and would avoid the long-term capital gains rates, he said.

Retirement Plans

Individuals age 70 1/2 or older should consider giving as much as $100,000 to a qualified charity directly from an individual retirement account, Wells Fargo’s Green said. The donation can meet all or a portion of the annual required minimum distribution for IRA owners and isn’t recognized as income.

Also, high earners can maximize contributions to tax-advantaged retirement plans and realize some losses to offset capital gains, Green said.

Another recommended strategy is to defer income by investing in private-placement life insurance and private annuities. These are designed for high net-worth individuals, Kalb said.

Looking Ahead

Beyond 2013, high-income investors can add tax-exempt bonds or convert some retirement savings to Roth accounts, Green said. When savers put money into Roth IRAs and Roth 401(k)s, they pay taxes on the money upfront in exchange for tax-free withdrawals later.

Funds that capture losses throughout the year to offset gains will be especially attractive to investors because the strategy can reduce net income reported on tax returns at year-end, Shier of Northern Trust said.

Once high earners figure out this year’s strategy, advisers are saying they should keep an eye on moves in Congress that could change their future tax picture.

House and Senate panels are considering making the biggest changes to the U.S. tax code since 1986. Representative Dave Camp, chairman of the House Ways and Means Committee, wants to lower the top individual rate to 25 percent in a way that would require eliminating or curbing many tax breaks. Camp, a Michigan Republican, has said he will release a plan this year.

Passage of any revisions would be difficult and wouldn’t happen until sometime in 2014, at the earliest.

The possibility of more tax changes has some high earners taking advantage while they can of breaks such as the sales tax deduction, Kalb said. That benefit, which allows deducting sales tax instead of state income tax, is set to expire Dec. 31 along with some other breaks.

“A lot of my clients are looking to buy very expensive assets that will pay a lot of sales tax, especially in Florida,” which doesn’t have a personal income tax, Kalb said. “If someone buys a $2 million boat this year they can get the deduction for sales taxes.”