Year-end tax planning - Ameriprise's View

Ameriprise writes: As the end of the year approaches, it's time to consider strategies that can help you reduce your tax bill. But most tax tips, suggestions, and strategies are of little practical help without a good understanding of your current tax situation. This is particularly true for year-end planning. You can't know where to go next if you don't know where you are now.
So take a break from the usual fall chores and pull out last year's tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you'll need to address while there's still time.

When it comes to withholding, don't shortchange yourself

If you project that you'll owe a substantial amount when you file this year's income tax return, ask your employer to increase your federal income tax withholding amounts. If you have both wage and consulting income and are making estimated tax payments, there's an added benefit to doing this: Even though the additional withholding may need to come from your last few paychecks, it's generally treated as having been withheld evenly throughout the year. This may help you avoid paying an estimated tax penalty due to underwithholding.
Of course, if you've significantly overpaid your taxes and estimate you'll be receiving a large refund, you can reduce your withholding accordingly, putting money back in your pocket this year instead of waiting for your refund check to come next year.

Will you suffer the alternative?

Originally intended to prevent the very rich from using "loopholes" to avoid paying taxes, the alternative minimum tax (AMT) now reaches further into the ranks of middle-income taxpayers. The AMT is governed by a separate set of rules that exist in parallel to those for the regular income tax system. These rules disallow certain deductions and personal exemptions that you are allowed to include in computing your regular income tax liability, and treat specific items, such as incentive stock options, differently. As a result, AMT liability may be triggered by such items as:

• Large numbers of personal exemptions
• Large deductible medical expenses
• Large deductions for state, local, personal property, and real estate taxes
• Home equity loan interest where the financing isn't used to buy, build, or improve your home
• Exercising a large incentive stock option
• Large amounts of miscellaneous itemized deductions

So when you sit down to project your taxes, calculate your regular income tax on Form 1040, and then consider your potential AMT liability using Form 6251. If it appears you'll be subject to the AMT, you'll need to take a very different planning approach during the last few months of the year. Even some of the most basic year-end tax planning strategies can have unintended consequences under AMT rules. For example, accelerating certain deductions into this year may prove counterproductive since AMT rules may require you to add them back into your income. If you think AMT is going to be a factor, consider talking to a tax professional about your specific tax situation.

Timing is everything

The last few months of the year may be the time to consider delaying or accelerating income and deductions, taking into consideration the impact on both this year's taxes and next. If you expect to be in a different tax bracket next year, doing so may help you minimize your tax liability. For instance, if you expect to be in a lower tax bracket next year, you might want to postpone income from this year to next so that you will pay tax on it next year instead. At the same time, you may want to accelerate your deductions in order to pay less tax this year.
To delay income to the following year, you might be able to:

• Defer year-end bonuses
• Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)
• Postpone receipt of distributions (other than required minimum distributions) from retirement accounts

To accelerate deductions into this year:

• Consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction
• Prepay deductible interest
• Make alimony payments early
• Make next year's charitable contributions this year

The gifts that give back

If you itemize your deductions, consider donating money or property to charity before the end of the current tax year in order to increase the amount you can deduct on your taxes. As an aside, now is also a good time to consider making noncharitable gifts. In 2013, you may give up to $14,000 ($28,000 for a married couple) to as many individuals as you want without incurring any federal gift tax consequences. If you gift an appreciated asset, you won't have to pay tax on the gain; any tax is deferred until the recipient of your gift disposes of the property.

Postpone the inevitable

To reduce your taxable income this year, consider maximizing pretax contributions to an employer-sponsored retirement plan such as a 401(k). You won't be taxed on the contributions you make now, and you may be in a lower tax bracket when you do eventually withdraw the funds and report the income. (Note that if you take withdrawals from the plan before age 59½, you'll generally be subject to a 10 percent penalty tax in addition to any income tax due, unless an exception applies.)

If you qualify, you might also consider making either a tax-deductible contribution to a traditional IRA or an after-tax contribution to a Roth IRA. In the first instance, a current income tax deduction effectively defers income--and its taxation--to future years (as with a retirement plan, an additional 10 percent penalty tax will apply to withdrawals made prior to age 59½ in addition to any income tax due, unless an exception applies); in the second, while there's no current tax deduction allowed, qualifying distributions you take later will be tax free. You'll generally have until the due date of your federal income tax return to make these contributions.

When saving more, always think about future tax rates

Scott Burns for Dallas News writes:   About $5,000 just fell into my lap. I already have savings for a rainy day and beyond. I’m 59 1/2, so does it make good financial and tax sense for me to do a 401(k) catch-up? I would use the $5,000 windfall for living expenses while the same amount is being funneled from my paychecks into my 401(k). Am I on to something, or is this an ill-conceived notion?
J.H., Georgetown 

This is something you’ll have to work out with your tax accountant because the answer depends on your current marginal tax rate while working and your future marginal tax rate when retired.
When IRA accounts and 401(k) accounts were created, everyone presumed that savers would put the money aside and defer taxes at a high rate and would take money out later at a lower tax rate. That, however, was before the taxation of Social Security benefits pushed retirees into higher tax brackets.

Today, many upper-middle-income workers are finding it no longer works that way. The money they take out of these accounts is being taxed at the same rate as, or a higher rate than, the rate when the money was saved.

The biggest jump in marginal tax rate on the federal income tax is for middle-income taxpayers. It happens when you move from the 15 percent bracket to the 25 percent bracket. This year, that leap occurs at a taxable income of $36,250 for a single worker or $72,500 on a joint return. Your taxable income is the amount that remains after adjustments for savings to tax-deferred accounts, deductions and personal exemptions.

Another thing to consider is tax flexibility. Many workers have every dime of their savings in qualified plans. This means any money they need will create what our friends at the IRS call “a taxable event.” If you build a reserve of after-tax money in a savings account, you’ll have access to some money that won’t create a taxable event. When it comes to tax planning, flexibility is very important.

My wife and I are in our mid-60s and (mostly) retired. We have $2 million in investment assets, so why wouldn’t we simply put half of our assets in Vanguard’s Wellesley fund and the other half in Vanguard’s Wellington fund? That would result in 50 percent equities and 50 percent fixed-income — and very low expense ratios. Is this a foolish idea? Note: We are both waiting until age 70 to take Social Security.
 
J.W., Clearwater, Fla.

That’s not crazy or foolish at all. Indeed, I’ve suggested it a few times. It would get you a 50/50 portfolio of equities and fixed income in two five-star rated funds whose performance has been inside the top 10 percent over the last decade, measured against their peer funds. And you’d get management at a near index fund cost level — 0.17 percent a year for Wellington Admiral shares and 0.18 percent for Wellesley Admiral shares.

You’d also get a bit more diversification than you would with a pure Couch Potato portfolio since both funds have a small allocation to non-U.S. equities. The international allocation would average a bit more than 8 percent of the total portfolio. Except for annual rebalancing (if you get around to it), this is a set-it-and-forget-it plan.

There are fine hairs to split, however. Since both funds are mixes of stocks and bonds, you would lose the opportunity to do some tax and performance management. For instance, if you had your investments divided between a pure equity fund and a pure fixed-income fund, you could make withdrawals from the all-stock fund after really good years and make withdrawals from the fixed-income fund in years that were bad for equities.

Another fine hair is expense. While the cost of your plan is minimal, some would suggest that using two exchange-traded funds could reduce it still further, one for equities, the other for fixed income. This would save another 0.10 percent or so.

Would it be worth it? Probably not, although you could save about $2,000 per year on $2 million. To put that in compelling practical terms, the saving would almost be enough to buy about a case of Dom Perignon champagne at Costco.

Business Tax Deduction Opportunity: Capitalization of Tangible Property Costs

Boulay writes: The IRS recently released final regulations on the capitalization of tangible property costs. The final regulations provide an important opportunity — the de minimis safe harbor election — that allows eligible businesses to immediately expense certain property that would have to be capitalized otherwise. To qualify for the safe harbor, businesses must have nontax accounting procedures in place at the beginning of the year, under which they expense amounts paid for property costing less than a specified dollar amount or that have a useful life of 12 months or less.

The IRS recently released final regulations on the

capitalization of tangible property costs. The final

regulations provide an important opportunity — the

de minimis safe harbor election — that allows eligible

businesses to immediately expense certain property that

would have to be capitalized otherwise. To qualify for the

safe harbor, businesses must have nontax accounting

procedures in place at the beginning of the year, under

which they expense amounts paid for property costing less

than a specified dollar amount or that have a useful life of

12 months or less.

The amount that can be expensed under the safe-

harbor election depends on whether the business has an

Applicable Financial Statement (“AFS”), which includes:

(1) financial statements filed with the SEC or provided to a

federal or state government or agency (other than the SEC

or the IRS); and (2) certified audited financial statements

used for credit purposes, reporting to owners, or other

substantial nontax purposes.

•

Businesses with an AFS must have written accounting

procedures in place at the beginning of the tax year

to make the safe harbor election. If they do, then they

can expense property that costs up to $5,000 (per

item) if, in accordance with their written accounting

procedures, the property is expensed on their AFS.

•

Businesses without an AFS must have accounting

procedures in place at the beginning of the year. If they

do, then they can expense property costing up to $500

(per item) if, in accordance with those procedures, the

property is expensed in their books and records. The

procedures do not need to be written. However, we

strongly recommend that all businesses commit their

accounting procedures to writing.

The regulations do not define accounting procedures or

describe what the procedures should include, but the

IRS is really talking about a capitalization policy. Many

businesses establish a minimum dollar amount that must

be spent before a cost is capitalized. Otherwise, the cost

is deducted. The following is a sample capitalization policy

that can be used or modified to fit a business’s particular

needs: 

It is the business’s policy to capitalize assets that cost

$500 or more individually. All capitalized assets will be

depreciated in accordance with the business’s depreciation

policy. Assets that cost less than $500 individually will be

expensed in the period purchased. 

Note:

To take full advantage of the safe-harbor limit, a

business with an AFS would need to increase the cost

threshold to $5,000. 

Please contact us as soon as possible if you would like to

discuss this tax saving opportunity, since the accounting

procedures (capitalization policy) must be in place by the

beginning of next tax year (by 1/1/14 for calendar-year

businesses) to make the safe harbor election.

Contact Boulay here.

With Tax Break Set To Expire, Partnerships Should Consider Converting To C Corporations Before Year End

Tony Nitti for Forbes writes: Subchapter C corporations are like pit bulls or prostate exams — they carry quite the stigma,  but they’re not nearly as bad as they’re made out to be.
Long thought of as “the entity choice of last resort” — due to the corporate level tax and the resulting potential for double taxation upon distribution or liquidation — in reality, C corporations offer certain opportunities that S corporations and partnerships simply can’t match.

For example, only C corporation stock meets the definition of “qualified small business stock” under the meaning of Section 1202. And through the end of 2013 — barring an extension of the law — noncorporate taxpayers who invest in such “qualified business stock” can sell the stock after five years and exclude the entire gain from taxable income and AMT (subject to limitations, discussed below.)

Section 1202, In General 

Prior to 2010, if a noncorporate taxpayer sold “qualified small business stock” that had been issued after August 10, 1993 and held for more than five years, 50% of the gain was excluded under Section 1202.  While that sounds wonderful, the remaining 50% of the gain was subject to tax at 28%, meaning the tax rate on the total gain was 14%. This offered only a 1% benefit over the long-term capital gain rate of 15% that was in place at the time. Couple this with the fact that 7% of the gain was also treated as an AMT preference item, and Section 1202 was rendered a rather useless provision.

Two recent law changes have reincarnated Section 1202, however, providing special rules for “qualified small business stock” acquired after September 27, 2010, and before January 1, 2014.

First, for stock acquired during this period, once the stock has been held for five years, 100 percent of any gain from the sale of the stock is excluded under Section 1202(a). Sweetening the pot further, no portion of the exclusion is treated as a tax preference item for purposes of the alternative minimum tax. This presents a unique opportunity for noncorporate taxpayers to invest in Section 1202 stock for the next two weeks and enjoy the benefit of tax-free gain on a subsequent sale of the stock five years down the road.


In addition, assuming tax rates remain the same for the next five years, the 100% exclusion will be much more valuable that pre-2008 iterations of Section 1202 in that it will be offsetting tax rates that significantly exceed the 15% maximum rate on long-term capital gains that existed prior to 2013. Remember, after January 1, 2013, the maximum rate on such gains has increased to 23.8% for those taxpayers with both AGI in excess of $250,000 (if MFJ, $200,000 if single, as this makes this subject to the additional 3.8% Obamcare surtax on net investment income of Section 1411), and taxable income in excess of $450,000 (if MFJ, $200,000 if single, as this is where the maximum rate on long-term capital gains under Section 1 jumps to 20%). This obviously makes the benefit of Section 1202 more attractive, as taxpayers can now keep income taxed at 23.8% — rather than 15% — off of their tax return.

Requirements for Section 1202 Stock 

Qualified small business stock is stock that meets the following requirements:
1. It is issued by a corporation that at the date of issuance is a domestic C corporation with cash and other assets totaling $50 million or less, based on adjusted basis, at all times from August 10, 1993 to immediately after the stock is issued.

2. The shareholder acquires it in an original issue in exchange for money or other property or as compensation [certain tax-free transfers and exchanges can also qualify- see Section 1202(f) and (h).

3. It is issued by a C corporation that meets an active business requirement—at least 80% of the value of the corporation’s assets are used in a qualified trade or business during substantially all of the taxpayer’s holding period for such stock and the corporation is an eligible corporation. A qualified trade or business excludes: 1. any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, etc.; 2. banking, insurance, financing, leasing, investing, or similar business; 3. farming (including the business of raising or harvesting trees); 4. the production or extraction of products subject to percentage depletion; and 5. a hotel, motel, restaurant, or similar business.

Converting a Partnership Into a C Corporation to Take Advantage of the Section 1202 Rules
With the 100% exclusion set to expire at the end of the month, Section 1202 should clearly be given consideration by any new business forming over the next two weeks. Of course, the potential impact of Section 1202 should not drive the choice of entity decision, but it must be factored into any analysis.

Less obvious, however, is the opportunity that exists to convert an existing partnership into a C corporation with qualifying Section 1202 stock by year-end. Provided the conversion is structured in the correct manner — and provided the C corporation stock meets the requirements discussed above to qualify as Section 1202 stock — any former noncorporate partners of the converted partnership will be entitled to sell the stock after holding it for five years free from income tax (subject to limitations, once again discussed below.)

Revenue Ruling 84-111, provides three options for a partnership-to-corporation conversion:
1. “Assets Over:” the partnership contributes its assets and liabilities to the new corporation in exchange for stock in the corporation in a tax-free transaction qualifying under Section 351, followed by a liquidation of the partnership in which the stock of the corporation is distributed to the partners in a nontaxable Section 731 transaction.

2. “Assets Up:” the partnership first liquidates, followed by a transfer by the partners of the assets of the partnership to the new corporation in a nontaxable Section 351 transaction (subject to Section 357(c)).

3. “Interests Over:” The partners transfer their partnership interests to the corporation in a nontaxable Section 351 transaction. The corporation can then “liquidate” the single-member LLC or leave it as is.

It’s important to note, however, that because Revenue Ruling 84-111 gives you the choice on how to structure a partnership incorporation, the partnership will bear the consequences of its chosen alternative. To illustrate the downside of this freedom, if the partnership chooses an Assets Over form and the liabilities of the partnership exceed the tax basis of the assets deemed contributed to the new corporation, Section 357(c) will kick in and the partnership will recognize income to the extent of the excess.

Germane to Section 1202, the manner in which a partnership is incorporated shouldn’t matter; all three options should permit the partners to hold the C corporation stock as Section 1202 stock provided all the requirements are met regarding an active trade or business and the size of assets. Options 2 and 3 pose no problem, because in both cases the partners are the original recipients of the corporate stock, and thus satisfy the “original issuance” requirement.
I wrote should in italics in the paragraph above because there is some school of thought that Option 1 – Assets Over – could be problematic, because it results in the partnership rather than the partners being the original owner of the corporation stock, thus failing to satisfy the “original issuance” requirement for Section 1202 stock. That concern should be alleviated by Section 1202(h)(2)(C), however, which provides that if a partnership transfers stock to a partner, the partner is treated as having acquired the stock in the same manner as did the partnership. Stated in another way, because the partnership received the stock in the corporation’s original issuance, that fulfilled requirement for Section 1202 should be attributed to the partners receiving the stock in the deemed liquidation of the partnership. As a firm believer of the “better safe than sorry” approach to tax planning, however,  I would recommend using Options 2 or 3 to incorporating a partnership if Section 1202 qualification is your primary goal.

Computational Limitations
Importantly, Section 1202(b)(1) limits the exclusion to the greater of (1) $10 million ($5 million for married taxpayers filing separately), minus any amount excluded with respect to that corporation’s stock in prior years, or (2) ten times the aggregate basis of stock of the qualified corporation sold during the year.

The following example illustrates the operation of this limitation:
Assume that A paid $2 million for shares of qualified small business stock in 2013. In 2019, he sells the stock for $15 million, realizing a gain of $13 million. The ceiling on excluded gain is $20million (the greater of $10 million or ten times the $2 million basis). Accordingly, the entire gain is excluded from both A’s net income and his AMT computation.
If A’s basis for the stock were only $200,000, however, the gain would be $14.8 million. Ten times the taxpayer’s basis is $2 million, which is less than $10 million. Thus, the exclusion is limited to $10 million, and $4.8 million of the gain must be included in taxable income. 

Cautions:
Understand, while the exclusion exists for stock acquired in 2013, because of the five-year holding period requirement, the holder of stock won’t actually enjoy the benefits of the zero percent tax rate on a sale of the stock until 2018 at the earliest.
To benefit from Section 1202, the shareholder must eventually sell the stock of the corporation. A sale of the corporation’s assets won’t qualify. This is relevant, because most buyers prefer to purchase assets, and a buyer is likely to negotiate a lower purchase price on a stock sale than on an asset sale.

Intuit TurboTax: First Filed, First Refunded E-file with TurboTax starting Jan. 2 to be first in line for your tax refund

The Internal Revenue Service (IRS) today announced that it will begin processing tax returns on January 31, 2014. TurboTax, the nation’s No. 1 rated, best-selling online tax preparation service from Intuit Inc. (Nasdaq:INTU), is available now at www.turbotax.com and will start accepting e-filed federal tax returns on Jan. 2, 2014. Taxpayers can file early with TurboTax to be first in line for their maximum tax refund.

“More than 80 percent of taxpayers get a tax refund. Last year, federal tax refunds averaged almost $3,000. At TurboTax, we recognize how important that money is to our customers”

“More than 80 percent of taxpayers get a tax refund. Last year, federal tax refunds averaged almost $3,000. At TurboTax, we recognize how important that money is to our customers,” said David Williams, Chief Tax Officer at Intuit. “It’s why we’re encouraging people to file as soon as they can. Anyone can get started today with TurboTax. There is no faster way for taxpayers to get their tax refunds.” 

TurboTax will securely hold and then submit customers’ tax return to the IRS as soon as the agency begins accepting returns. TurboTax will process tax returns on a first-in, first-out basis. Although the IRS does not anticipate refund delays, taxpayers are encouraged to e-file and use direct deposit as the fastest way to get their refunds. As it did last year, the IRS expects to issue nine out of ten tax refunds in 21 days or less.

Federal tax filing in U.S. to start Jan. 31, delayed by shutdown

Patrick Temple-West for Reuters / Chicago Tribune writes:  - The U.S. Internal Revenue Service said on Wednesday that Americans can begin filing their 2013 individual tax returns on Jan. 31, slightly later-than-normal due to October's federal government shutdown.

Tax filing had been scheduled to start on Jan. 21, but complications from the 16-day shutdown caused a delay, the IRS said in a statement.

"The late January opening gives us enough time to get things right with our programming, testing and systems validation,"  acting IRS Commissioner Danny Werfel said in a statement.

The due date for submitting tax forms is April 15.

Investment ideas for the new year / Year-end planning

Jill Schlesinger for the Chicago Tribune writes: Before you shut down for the holidays, remember that just a few hours spent reviewing your financial life may help boost your bottom line - and put a dent in your holiday shopping bills! Here are six ideas to consider for your investment accounts before we ring in the new year.

1. Sell winners in taxable accounts. Although capital gains rates increased for individuals earning $400,000 and joint filers who earn more than $450,000, in 2013 married tax filers with taxable income up to $72,500 (singles up to $36,250) still have a zero percent tax rate on long-term capital gains and qualified dividends. If you are at the zero percent capital gains rate now, but expect your income to be higher later, you may want to realize capital gains today at the lower rate. Your taxable income includes the gain, so make sure that you factor that in when you make your decision.

2. Sell losers. If you have investment losses in a taxable account, now is the time to use those losers to your advantage. You can sell losing positions to offset gains that you have taken previously in the year to minimize your tax hit. If you have more losses than gains, you can deduct up to $3,000 of losses against ordinary income. This is particularly useful, since your ordinary income tax rate is higher than your capital gains tax rate. A $3,000 loss against ordinary income could be worth anywhere from $300 to $588 in reduced taxes. If you have more than $3,000 of losses, you can carry over that amount to future years.

3. Avoid getting soaked by a wash sale. If you are starting to clean up your non-retirement accounts to take losses, don't get soaked by the "wash sale" rule. The IRS won't let you deduct a loss if you buy a "substantially identical" investment within 30 days, which is known as a wash sale. To avoid the wash sale, wait 31 days and repurchase the stock or fund you sold, or replace the security with something that is close, but not the same as the one you sold- hopefully something cheaper, like an index fund.

4. Minimize your dividend-paying positions. Dividend income tax rates jumped this year for high wage earners. The net investment income tax levies an additional 3.8 percent on net capital gains, dividends, interest, rents and royalties. If you forgot to make the change last year, or think that your tax bracket could rise next year, consider shifting dividend-paying stocks and mutual funds into retirement accounts, where the increase will not be in effect.

5. Give appreciated stock or fund shares to charity: Get in the holiday spirit, with the help of Uncle Sam. One way to lower your tax bill in April is to donate appreciated securities, like stocks, bonds or mutual funds, to a charity. If you itemize deductions, you'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains. The low cost basis does not impact the receiving charity, as long as it is a tax-exempt organization.

One note: For 2013, the overall limit on itemized deductions was reinstated for certain taxpayers. The limitation (known as Pease limit) is applied to single filers who earn more than $250,000 and joint filers who earn more than $300,000. Be sure to factor in the change when accounting for the value of the donation.

6. Rebalance your investment accounts: The suggestions above should be part of a larger analysis of your investment accounts. The soaring stock market has probably thrown your allocation out of whack, so it's time to rebalance and get back on track. One of the best aspects of rebalancing is that it can force you to sell while the asset value is high and buy when other asset values are depressed. Compare that with the usual "buy high-sell low" cycle that can ensnare emotional investors!

Next week, I will have more year-end tips to help you save or make money.

Year-end planning, part 2  Jill Schlesinger for the Chicago Tribune writes: Last week I reviewed investment moves to make before year-end -- today, we tackle employee benefit and retirement issues, as well as other savings ideas.

Use your flex account or lose it. Some employers require employees with flexible spending accounts (pretax dollars that pay out-of-pocket medical and childcare expenses) to forfeit contributions that go unused by December 31. If you have an FSA, check your company's rules. If you have cash sitting in the account and your deadline is year-end, spend it to avoid leaving money on the table. Although the IRS has made a change that will allow you to carry over $500 of unused FSA money to the following year, most companies will not change plan documents until 2014.

Fully fund employer-sponsored retirement plan contributions. Unlike IRA's, the deadline for funding 401 (k), 403 (b) or 457 plans is December 31. This year, the limit is $17,500 per employee. If you're over the age of 50, you can make an extra $5,500 as a "catch-up contribution." The dual benefit of maxing out retirement is clear: saving for a future goal and reducing current tax liabilities.

Consider converting Traditional IRA into a Roth IRA. A conversion requires that you pay the tax due on your retirement assets now, instead of in the future. Whether or not a conversion makes sense for you depends on a number of factors, including if you can pay the tax due with non-retirement funds. If you have money available to pay the tax due, some advantages of conversion are: paying the tax at a lower tax rate, if you think that your tax bracket will rise in the future; eliminating the tax on future growth of assets; reducing future Required Minimum Distributions (RMD's); and reducing the taxable amount of Social Security benefits.

Take Required Minimum Distributions. Generally, once you turn 70 ½, you must begin withdrawing a specific amount of money from your retirement assets (there are some exceptions). The reason is that Uncle Sam wants his due! Remember, money that you contributed to these accounts bypassed taxation. RMD's ensure that the government taxes those funds. The penalty for not taking your RMD is steep -- 50 percent on the shortfall. An estimated 255,000 taxpayers failed to take required minimum distributions totaling more than $348 million, according to tax data for 2006 and 2007, cited in a 2010 report by the Treasury Inspector General for Tax Administration.

One way to sidestep the taxation on your RMD is to make a Qualified Charitable Distribution (QCD), which allows you to gift up to $100,000 directly from your IRA to a charity without having to include the distribution in your taxable income. Not only does a QCD help avoid taxation, it also means that the extra income is not included in other tax formulas for Social and Medicare Part B premiums or for the Pease limitation on itemized deductions. If you choose to make a QCD, remember that the money must go directly to the charity, not to a private foundation or a donor-advised fund, and you will NOT get a tax deduction for the charitable contribution.

Mail your checks for deductible purchases. Procrastinator alert! If you're the type of person who waits until the last minute for everything, take note: To qualify for write-offs of charitable contributions and business expenses, your payments must be postmarked by midnight December 31. The IRS says just writing "December 31" on the check does not automatically qualify you for a deduction; and pledges aren't deductible until paid. Donations made with a credit card are deductible as of the date the account is charged.

Fully, fund your college savings 529 plan. With outstanding student loan debt over $1 trillion, now's the time to get a leg up on your education savings with a 529 plan. Money saved in these programs grows tax-free and withdrawals used to pay for college sidestep taxes, too. You can invest up to $14,000 in 2013 without incurring a federal gift tax and many states offer state tax deductions for the contributions.

Does your estate tax planning still make sense?

MARGARET K. WINFIELD, Ward and Smith, P.A. for  wraltechwire.com write: Introduction
The American Taxpayer Relief Act of 2012 ("ATRA") effectively eliminated federal estate taxes for all but the wealthiest Americans. Not so long ago, planning to minimize federal estate taxes was a necessary consideration for many people. However, consistent with the immutable law of unintended consequences, your pre-ATRA tax planning may actually increase the taxes your estate may have to pay, leaving less for your family.

Tax Planning Pre-ATRA
A major goal of your estate tax planning is to reduce the tax burden on your estate to the greatest extent possible, so that more of your wealth goes to your family and other recipients you choose, rather than to Uncle Sam. Historically, your optimal estate tax planning hinged first and foremost on taking advantage of your available estate and gift tax exemption, the statutorily-defined amount of assets that you can pass at death, or give during your life, to others without incurring estate or gift taxes. 

Generally speaking, except for assets passing to your spouse or charities chosen by you, your assets in excess of your exemption amount are taxed at the highest applicable rates when you die. As recently as five years ago, your available exemption was $2,000,000 and your top estate tax rate was 45%. Ten years ago, your exemption was $1,000,000 and your top estate tax rate was 49%. At those levels of exemption, you, like many successful people, faced the real possibility that your estate would owe significant estate taxes.

Pre-ATRA, many faced with the specter of estate taxes engaged in a common estate planning technique called "credit shelter" planning (your exemption amount is conceived of in the Internal Revenue Code as a "credit" against your estate tax liability, hence the term "credit shelter" planning). The principal purpose of such planning was to allow couples to leverage both spouses' exemption amounts against estate tax, when the predeceased spouse's exemption might otherwise be lost should that spouse's estate pass directly to the surviving spouse.

In a typical credit shelter plan, the estate of the first spouse to die was divided into two shares, one equal to the exemption amount and the other being the remaining balance. The exempt share was directed to a "credit shelter trust" and the balance to a marital trust or outright to the surviving spouse. Whether the plan involved one trust or two, the surviving spouse was typically the primary beneficiary and so enjoyed the trust assets during the surviving spouse's life. At the surviving spouse's death, however, the assets of the credit shelter trust and the surviving spouse's assets, to the extent of that spouse's own exemption, passed estate tax free to the next generation. Only the amount of assets in excess of the couple's combined exemption amounts was taxed. 

However, the tax advantages of credit shelter planning came with tradeoffs. For example, such planning is complex, requiring retitling of assets between spouses to insure each spouse has sufficient assets to take advantage of his or her full exemption amount. Some assets, such as retirement benefits, are inconvenient to administer in a trust. Also, surviving spouses sometimes experience a sense of insecurity when their assets are tied up in a trust, no matter how available those assets are for their enjoyment. Finally, the full utilization of the deceased spouse's exemption amount in the credit shelter trust deprives those assets of a step-up in income tax basis for appreciated assets at the surviving spouse's death, which has the effect of increasing the capital gains tax liability when those assets are utilized by the next generation. 

Until recently, the estate tax avoidance or reduction goal trumped these countervailing considerations under the then-prevailing tax rules. 

Optimal Tax Planning Post ATRA
ATRA, which became law at the beginning of this year, brought the following changes in tax laws relevant to optimal estate planning:
● Five Million Dollar Exemption. The $5,000,000 exemption amount that had applied in 2011 and 2012, an all-time historically high amount, became permanent. Moreover, the $5,000,000 exemption amount will now be indexed for inflation on an annual basis. These annual inflation adjustments are significant. For example, with indexing for inflation, the exemption amount for 2013 is $5,250,000 and for 2014, $5,340,000.
● Portability. Portability, the ability (subject to limitations) of a surviving spouse to make use of the unused estate tax exemption of the first spouse to die, first introduced in 2010 and temporary under prior law, became permanent.
● Estate Tax Rate. The estate tax rate increased from 35% to 40%.
● Higher Marginal Income Tax Rates. The top income tax rate increased to 39.6%, starting at $400,000 of single-taxpayer income ($450,000 for a joint return). Trusts and estates are taxed at this top rate starting at just $11,950 in income.
● Higher Capital Gains and Dividend Tax Rates. The capital gains and dividend tax rates are now 20%, up from 15%.
● Medicare Surtax. The Patient Protection and Affordable Care Act, effective January 2013 (not part of ATRA), imposes a 3.8% Medicare tax on the undistributed net investment income of your estate or trust ("Medicare Surtax"). 

With a $5,000,000 individual exemption amount which, with portability, is effectively a $10,000,000 exemption amount for couples, credit shelter planning is no longer necessary for most individuals. Also, with the top income tax rate increasing to 39.6%, the capital gains rate increasing to 20%, and the addition of the Medicare Surtax, income tax has become for many people the more important tax to be addressed in their estate plans.

Post-ATRA, credit shelter planning for most people is no longer necessary to take advantage of a couple's combined exemption amount. Given the attendant increases in capital gains tax exposure and trust income tax liability at the highest rate starting at less than $12,000 in income, credit shelter planning will no longer produce the best tax results in many cases. Instead, the greatest tax efficiency in transferring your assets to your family may be achieved by passing your and your spouse's assets through the surviving spouse's estate, thereby securing a second income-tax step-up in basis in those assets at the death of the second spouse and avoiding the unfavorable marginal income tax rates for trusts.

What to Do with a "Credit Shelter" Plan?
If you have credit shelter planning in place, you should review your estate plan to determine if it still serves your estate planning objectives. You may find that, post-ATRA, you will achieve better tax results by abandoning your credit shelter planning in favor of a simpler and more flexible estate plan, with any necessary tax planning achieved through post-mortem elections and disclaimers of assets.

Conclusion
Post-ATRA, the customary tax planning of the past decade may be truly antithetical to your tax avoidance goals. A professional tax and estate planning advisor can help you understand the tax consequences of your existing estate plan and what options there are for improving it if necessary. At the end of the day, you may find yourself with a simpler, more convenient, and more flexible estate plan that is also more tax-efficient.

Tax breaks dead until Congress revives them / 55 tax deductions, credits and other tax-saving laws are set to expire Dec. 31

Kay Bell for BankRate.com writes: A whopping 55 tax deductions, tax credits and other tax-saving laws are set to expire Dec. 31, according to a tally by the congressional Joint Committee on Taxation.

This hodgepodge of individual and business tax breaks -- some of which apply to large groups of taxpayers, others that are much more specific -- has been on the books for years.
But technically these laws are temporary.

Each has a specific end date, typically the conclusion of a tax year. For the most part, Congress has extended them year after year. That's why the collective bunch is referred to as "extenders."

Individual filers have seen extenders for years on the various tax forms they file at tax time. They range from a few hundred dollars in tax savings for teachers to thousands added to IRS bills of homeowners facing tax on mortgage debt that is written off by the loan holders.

Popular individual tax breaks scheduled to expire Dec. 31, 2013
Tax benefit	Type of tax break
State and local sales taxes	Deduction
Private mortgage insurance premiums	Deduction
Educators' out-of-pocket expenses	Deduction
Higher education tuition and fees	Deduction
Residential home energy improvements	Credit
Rollover of IRA distribution to a charity	Income exemption
Mortgage debt forgiveness	Income exemption

Companies, too, are bemoaning the coming loss of several business tax breaks at the end of 2013. They include the 50 percent bonus depreciation option, a larger Section 179 write-off for some equipment, larger deductions for certain business charitable donations, research and development tax credits, and work opportunity tax credits.

Why only temporary?

A key reason behind the temporary nature of these persistent tax breaks is how they are accounted for in the federal budget. Rather than factoring in the many tax provisions' long-term costs, lawmakers opt to deal with the legislative continuances on a short-term, and therefore relatively less-expensive, basis.

Individually, many of the extenders are not that large of a cost in the overall federal budget scheme, but members of Congress regularly cite some of the more arcane tax breaks as examples of government waste.

And with recent Capitol Hill focus on the federal deficit, the costs of each tax break could be in for more scrutiny than ever before.

Retroactive laws tricky for tax planning

This year, talk of comprehensive tax reform has complicated the extenders issue. Many federal lawmakers would like to see these temporary tax benefits dealt with on a more long-term basis.
Then there is Congress' penchant for procrastination.

The House and Senate tend to let legislation pile up, often running out of time at the end of a session to complete it. In those cases, Congress can reauthorize the tax deductions and credits with a retroactive effective date.

That means that while a law might not be approved until the end of a tax year, once it is finally enacted it's as if the tax break had been in effect for the full 12 months.
On one hand, that's good. At least the tax benefit eventually is available.

However, when it comes to making effective year-round tax plans, such late laws cause headaches for taxpayers and tax professionals.

Business taxpayers contemplating any major equipment or software additions should consider making the acquisition before year's end if they have the income to offset it this year, says Janet Moore, CPA, co-manager of the tax department at the Tuscaloosa office of the Alabama accounting firm JamisonMoneyFarmer PC. "We know the deduction amounts for 2013, but there are no guarantees that these larger deductions will be available next year in 2014," she says.

2014 outlook

There is another complication when it comes to tax laws in 2014.
It is an election year. Conventional wisdom is that members of Congress seeking re-election would prefer not to have tax votes on the record that could be used against them by opponents.
On the other hand, the chairmen of the tax-writing committees -- Rep. Dave Camp, R-Mich., of the House Ways and Means Committee and Sen. Max Baucus, D-Mont., of the Senate Finance Committee -- have been traveling across the U.S. for much of 2013 seeking tax reform input from businesses and individual taxpayers. Next year is the last that Camp and Baucus will head their congressional panels, and each would like to enact some tax law change before handing over their committees' leadership reins.

Tax reform, however, is a massive undertaking. While the effort to overhaul the tax system could begin in 2014, a full rewrite of the tax code is not seen as likely in just one year.
"It may be several years before any major reform can be achieved," says Moore. "That likely means that extension of many of the temporary tax provisions that were extended for 2012 and 2013 will be delayed until very late in 2014, after tax reform efforts fail."

Acclivity Announces the Release of AccountEdge 2014 / small business accounting software used by over 100,00 small businesses around the world.

Acclivity, a leader in small business accounting software, today announced the launch of AccountEdge 2014, its premium small business accounting software for Mac and Windows used by over 100,00 small businesses around the world.

“We really had two goals in mind, when approaching the 2014 release,” said Todd Salkovitz, Product Evangelist. “First, we wanted to introduce features that continue to fuel those small businesses that require certain higher-end features, while allowing them to spend hundreds, not thousands, of dollars. Second, we wanted to launch AccountEdge Cloud, which will be a platform for future feature development.”

"AccountEdge Cloud is not intended to be AccountEdge in the Cloud or a standalone accounting web app," said Scott Davisson, Acclivity Co-Founder. "It's important to our customers that they remain in control of their critical accounting information, using AccountEdge Pro.  Instead, we want to give remote employees and non-accounting employees and contractors the ability to enter data into a web app that tightly integrates with their accounting system.”

New features in AccountEdge 2014 include:

Departmental Accounting - Setup and track departments then allocate transaction line items to one department or multiple departments. 

Product Variations - Create variations for an items and then create properties for each variation like sizes, colors, sizes etc., giving you the ability to track and sell your items with much greater detail and precision.

AccountEdge Cloud - Enables employees and sub-contractors to complete a growing list of accounting tasks that sync back to AccountEdge desktop. They can enter sales, invoices, orders and quotes and capture activity slips and time sheets from any web enabled device on any platform including Android, iOS, Mac or Windows.

Combine Items - Combine duplicate or similar items into one. Simply select an item and combine it with a second item, merging all of the item history, purchases, sales and values into one.

Improved Jobs Reporting - Filter your job reports to span fiscal years. Include financial information on job reports from the previous, current, or next fiscal year.

AccountEdge Mobile Updates - Support for larger file syncs and refreshes data faster than ever before.

Rerun Integration - Rerun gives your customers or clients an easy, online payment method for recurring subscription or membership billing and can be integrated into the best desktop accounting apps on the market, including AccountEdge.

Pricing and Availability
AccountEdge Pro is available immediately from the AccountEdge website, http://www.accountedge.com and from Apple Specialists throughout the United States, with a list retail price of $299. For more information, please visit the AccountEdge website or call 800-322-6962.