A Tax Deduction for Breastfeeding Supplies

Heidi Murkoff @ What to Expect writes: Question:  

"A friend just told me that my breast pump is tax deductible. Is this true? Are there other tax deductions for newborns?"

Believe it or not, it’s time to show the Internal Revenue Service some love. A recent rule change means nursing mamas can now thank the IRS for doing its part to keep their precious babies healthier and save the family some cash by putting breast pumps on the list of tax-deductible items. The 2010 decision came after years of pressure from the American Academy of Pediatrics and other breastfeeding advocates to define breast pumps and other breastfeeding supplies as medical devices — the same standard that applies to other health-related gear like eyeglasses, diabetes monitors, and hearing aids. The reason:Breastfeeding provides reams of health benefits for baby (fewer infections, reduced risk of asthma and obesity, to name a few) and mom (lower cancer and type 2 diabetes risks).

Before 2010, the IRS lumped pumps in with other nondeductible “feeding devices” like blenders and dishware. By making breast pumps tax deductible, new families can offset some of the cost, which can run as much as $500 to $1,000 a year once you factor in the pump and all its accessories. And the breast pump tax deduction is the same whether you buy a pump or rent one. For some moms, this tax break may be even more incentive to start breastfeeding — and to continue nursing if they return to work.

So how can you take advantage of the new tax deduction for breastfeeding? Here’s the deal:

Tap into pre-tax dollars. If you work, the easiest way to save is to set aside money in your flexible spending account (FSA) to cover your pump and all the extra breastfeeding supplies — pump attachments, nipple cream, bottles and storage bags, pads, and the like. The IRS doesn’t provide a specific list of approved items beyond the pump itself, but if the product was used for a medical reason (e.g., cream on your cracked nipples), it will likely qualify as a tax-deductible item. Don’t have an FSA? Submit the expenses through your partner’s plan. One thing to be aware of: Not every FSA plan covers every IRS-approved item (for the complete list of medical tax deductions, visit irs.gov/publications/p502). Plus, your company can choose to limit the number of eligible deductions, so always check with your benefits department first if you’re unsure.

Itemize your expenses. If neither you nor your partner has an FSA, you may still be able to take advantage of the tax deduction for breastfeeding supplies if your total medical expenses for the year exceed 7.5% of your income. If your pregnancy costs were particularly high this past year, it may be worth your while (or your partner’s) to fill out the longer tax form in which each medical expense is accounted for — instead of filling out the standard tax form.

Take advantage of other tax-deductible items. As new parents, you’re now eligible for a whole host of family-related tax benefits. There’s the child-tax credit, which provides an extra $1,000 deduction for each child under the age of 17. You may also qualify for the dependent-care credit that pays for child care, after-school care, and even day camp so that parents can work or go to school. Need help figuring out what you can claim? Go to the IRS site, or talk to someone in your company’s benefits department or an accountant. Even if you’re able to use just one of these deductions, you’ll probably see a drop in your tax bill this year, which is great news for any family!

The Ten Tax Commandments

Lynn Ebel for H & R Block writes: The Tax Code has been around 100 years and spans nearly 74,000 pages. Although there are many nuances to consider, there are also several overarching rules every taxpayer should know. While the IRS Commissioner isn’t Moses, we will think of these rules as the 10 Tax Commandments.

1. Your income shall be taxed when received.

Most people are “cash-basis” taxpayers. Under the cash-basis method, taxpayers must include, in their gross income, all items of income that are actually or constructively received during the tax year. For example, if you actually received advance rental income for the next five years in this year, it is all taxable now. Or, if your boss allows you to pick up a check on December 31 of this year, it will be still be reported as taxable on your W-2 for 2013. You constructively received this income in 2013 even if you don’t actually cash the check until January 2014.

2. You shall not deduct what you don’t pay.

One myth many people believe is that someone ought to get an itemized deduction for an expense they did not pay. On a jointly-owned property, the taxpayers get to pick which person takes the mortgage and real estate deductions on their personal returns, right? Wrong. If you didn’t pay it, you generally can’t deduct it.

3. You shall honor the last day of the year.

December 31 is an important day for your taxes. Midnight on this day establishes your marital status, which your tax return filing status is based on. You could be unmarried for almost all of 2013 but, if you get hitched on the last day, you could file Married Filing Jointly with your spouse for the whole of 2013.

This day is your very last day to make changes to your return that impact the tax year. Prepaying January expenses (such as Spring tuition or making a mortgage payment) before the end of the year may be beneficial to your 2013 taxes.

December 31 is the also cutoff for many age-sensitive rules. For example, under the Affordable Care Act (ACA), a health insurance plan that provides coverage for a taxpayer’s dependent children is required to continue to offer the coverage to the taxpayer’s adult children who are less than 26 years old as of the last day of the year. Additionally, the qualifying child age test for claiming a dependency exemption (under 19 or under 24 and a full-time student or disabled) is also established on the last day of the year.

4. You shall file timely or you may be punished.

Due to the government shutdown, tax season will begin Jan. 31. But this does not give you additional time to file your taxes. The April 15 deadline is established by law and remains fixed. Interest will accrue on a tax balance due after the April 15 deadline, and there are penalties that could apply.

The IRS charges interest on unpaid tax from the due date of the return until the date of payment, even if you were granted an extension of time to file your return.

If you don’t file timely, the IRS may assess a late filing penalty (also referred to as a failure to file penalty). The penalty is equal to 5% of the balance due on the return, per month (or part of a month), up to a maximum of 25%.

But interest and the failure to file penalty are not the only punishments. A late payment penalty will be applied if you fail to timely pay the balance of tax due reported on the original return by the due date. The penalty rate is 1/2 of 1% per month (or part of a month), up to a maximum of 25% of the tax due.

Basically, if you will owe taxes on your 2013 return, you will want to pay your taxes by April 15 to avoid penalties and interest, even if you file for an extension. The best advice to avoid penalties and interest altogether is to file timely, and, if you owe, pay as quickly as possible.

5. You shall honor past years’ returns.

Do not depend on the IRS to keep copies of your tax returns for you. To get an exact copy of one previously filed return you will need to pay $50 and the IRS will take 75 days to process your request. Even if you can wait that long and pay that much, you are limited to the last 7 years before the IRS is required by law to destroy your returns.

This means these records are your responsibility. Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your tax return should also be kept at least until the statute of limitations expires for that return (generally three years from the date the return was filed).

But some records should be kept indefinitely, such as property records, since they may be needed to prove your basis in the property and determine the amount of gain or loss if your property is sold. You may be kicking yourself later for overzealously cleaning out a filing cabinet if there is an IRS letter in the mail next year with your name on it.

6. You shall not ignore the signature line.

This one seems to be self-explanatory. However, your tax return is not a valid one unless you declare under penalties of perjury that you have examined the return and accompanying schedules and statements, and, to the best of your knowledge and belief, they are all true, correct, and complete. The way you do that is to sign it.

If you don’t sign your return, you have not filed a valid return for that year in the eyes of the IRS. In the absence of a valid return, the statute of limitations never starts to run, and the IRS may audit that return at any time. In addition, you could be subject to the failure to file penalty discussed above. Note: If you e-file, there is a way for you electronically sign your return to make the declaration under penalties of perjury without physically signing your tax return.

7. You shall take credit only when credit is due.

The biggest tax credit is generally the earned income credit (EIC). If you have the right adjusted gross income, three or more children, the right filing status, and meet certain requirements, this could mean a check from the IRS in the amount of $6,044.

But the “certain requirements” are super important and won’t apply to all taxpayers who think that they qualify. If the IRS determines that your EIC claim was due to reckless or intentional disregard of the EIC rules, you won’t be able to claim this credit for the next two years, even if you do qualify in those years. If the IRS determines your claim was due to fraud, those two years without the EIC become ten. Of course, interest and penalties could also apply to the incorrectly claimed tax credit. Diligently review the EIC rules in IRS Publication 596.

8. You shall not ignore income.

The United States is one of the two countries in the world to tax by citizenship, not by residence. If you are a U.S. citizen or resident, all of your world-wide income may be taxable on a U.S. tax return, even if it was earned abroad or you didn’t receive a reporting document for it. If you did receive a reporting document, the easiest and fastest way for the IRS to have your return flagged for audit is to have the machines run a comparison of your tax return with third party reporting documents, such as Forms 1099, and find something is missing.

9. Not all income is taxed equally.

Tax rates could depend upon the type of income, your filing status, how long you owned the property you sold, and how much total income you have. The U.S. income tax is a graduated tax, designed so that individuals pay an increasing rate as their income rises through progressive tax brackets. There are seven tax brackets for ordinary income like wages: these different brackets impose taxes at rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 39.6% tax bracket is new this year.

But capital gain tax rates (for gain on the sale of property such as stocks or your home) depend on whether they are long term or short term. If owned long term (usually one year or longer), there are different rates that apply rather than the seven tax brackets above. In fact, there are only three brackets, depending upon your total income: 0%, 15%, and 20%.

Collectibles, such as antiques or a work of art, could have a maximum tax rate of 28%. Additionally in 2013, there begins a new, additional 3.8% Medicare tax on certain types of income for high-income taxpayers.

10. There is opportunity for forgiveness.

Most people choose assistance from a tax preparer for help in complying with all the rules in filing their returns. But if you discover you made a mistake, such as some of the common tax sins mentioned above, it can probably be corrected with an amended return, which is filed using Form 1040X. Talk to a tax advisor about your specific needs.

The IRS Just Won a Tuition-Deduction Case Against an MBA. Are You Next?

Patrick Clark for Bloomberg BusinessWeek writes: Last week, the U.S. Tax Court ruled that a Rollins College MBA named Adam Hart owes the U.S. Internal Revenue Service more than $2,500 in back taxes after he improperly deducted more than $17,000 in tuition expenses from his 2009 tax return. Accountants says that it’s unusual for the IRS to challenge tuition deductions. Still, if you’re an MBA thinking about getting creative with your taxes, you’ll want to take note of a case that could embolden the IRS to go after more students.

The rules for deducting educational expenses sound simple enough: Tuition is deductible when it pays for coursework that enhances skills necessary for an established job or business, as well as any courses required by an employer. That’s about it. What doesn’t make the grade? Enrolling in business school because you’re in the market for a career switch or because you think a mastery of data analysis is going to make you a more complete person.

Even simple rules can get sticky. Does an investment banking analyst who leaves Wall Street for business school after two years to further her career qualify as having an established trade? Is a tax accountant who attends to b-school to become a chief financial officer pursuing a new career or furthering an existing one? “There isn’t a bright line distinction that says, if you’ve worked so many years, making a certain salary, you can claim the deduction,” says David Young, a partner at Young and Co. in Rochester, N.Y.

Hart’s case was decided on the question of whether he was “carrying on a trade or business” before enrolling. Now a sales rep at drug wholesaler McKesson (MCK), Hart cited a four-month stint “promoting sales at Priority Healthcare Distribution as an oncology account specialty” and two months working as “an oncology account manager” at ADP Totalsource (ADP), according to the tax court ruling (PDF). Judge Kathleen Kerrigan decided that this wasn’t enough to define Hart as established in the field. Hart told Reuters that he hopes to present new evidence at a future hearing.

What else should MBAs know about tuition deductions?

Young says that if an auditor challenges the deduction, it falls on the taxpayer to show that an MBA is a business expense. That can be tricky, given the lack of a clear definition, though the tax court has ruled for MBA candidates who claimed tuition deductions in the past.says Jackie Perlman, principal tax analyst at the Tax Institute, the research and analysis division of tax prep company H&R Block (HRB). Other good advice: Consult an expert. If you’re wading into a gray area, ask yourself if you’re making a good-faith effort to comply with the rules.

Two more reasons to take care: The Hart ruling may embolden auditors to pursue cases. “Every time the IRS get a case like this, they become more self-assured,” says Bob Charron, a partner at Friedman in New York. Meanwhile, taxpayers who are seen to have intentionally flouted rules generally face stiffer penalties. As a business school student, it’s going to be hard to claim financial illiteracy.

Estate Tax Portability - How To Opt Out Of The Portability Election And Who Is Responsible For Making The Election

Lewis Saret for Forbes writes: Opting out of the Portability Election.  There are two ways to opt out of the portability election.

First, the temporary regulations require the executor of an estate of a decedent with a surviving spouse who is filing an estate tax return to make an affirmative statement on the return signifying the decision to have the portability election not apply.

Second, if no estate tax return is required for a decedent’s estate under the Internal Revenue Code (“Code”) Sec. 6018(a), then the fact that a return was not timely filed will serve as an affirmative statement to the Service signifying the decision not to make a portability election.

Caution. It may be possible for an executor to elect out of the portability election when filing an estate tax return even if the return is not complete or properly prepared.  The words “complete and properly prepared” are omitted from the section of the regulations dealing with opting out of the portability election by filing an estate tax return. Thus, it can be argued that an incomplete or improperly prepared estate tax return could still validly affirm to have the portability election not apply.

The Executor Responsible for Making the Portability Election.

When making a valid portability election, Code Sec. 2010(c)(5) permits only the executor of the decedent’s estate to file an estate tax return and make the portability election.

Issue. One issue that the Service considered was whether to permit a surviving spouse to file an estate tax return on behalf of a decedent independently of an appointed executor. In this scenario, the appointed executor does not file a return, and the surviving spouse would have to notify the executor of his/her intention to file.

Rule. The preamble to the temporary portability regulations notes that the Code permits only the executor of the decedent’s estate to file the estate tax return and make the portability election. Consequently, the surviving spouse may not make the portability election unless he/she is the executor of the decedent’s estate.

Code Sec. 2203 defines “executor” to mean “the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent.”

This provision creates two types of executors with the authority to file an estate tax return to elect portability or opt to have the portability election not apply.  The temporary regulations define the first type, an “appointed executor,” as the executor or administrator that is appointed, qualified, and acting within the United States for the decedent’s estate. If there is no appointed executor, then the second type of executor, a “nonappointed executor” is responsible for making or opting out of the portability election. A “nonappointed executor” is any person in actual or constructive possession of any property of the decedent.

Caution. The temporary regulations provide that a portability election made by a nonappointed executor cannot be superseded by a contrary election made by another nonappointed executor of the same decedent’s estate.

Caution. To make a positive portability election, a nonappointed executor must properly prepare and timely file an estate tax return. It may be difficult for a nonappointed executor to obtain the requisite information to properly prepare the estate tax return due to the lack of court appointment.

This post discusses how to opt out of the portability election as well as who has the responsibility to make or opt out of the election. Future posts will discuss how to compute the applicable exclusion amount that can be “ported” from the deceased spouse to the surviving spouse.

Written with assistance from Allaya Lloyd.

QuickBooks for Mac 2014 review: Full of small updates, still no Windows file compatibility

Jeffery Battersby for MacWorld writes: If this is your first look at the new QuickBooks for Mac 2014 you’re likely to think it represents little more than a change of paint on an app that is substantially the same as its predecessor. While that’s not entirely true, it’s also not too far from wrong. But QuickBooks’ new paint job isn’t the only thing that’s changed about the app. QuickBooks for Mac offers a number of small new improvements that should help enhance the application’s value and give you a better clue as to how your business is doing.

QuickBooks for Mac's new income tracker provides an excellent overview of your business' financial health.

I know the question you’re going to ask first and the answer is, “no.” There is no file level compatibility between the Mac and Windows versions of QuickBooks and, after asking this question of Intuit for more years than I care to count, I’ll be surprised if the answer will ever be, “yes.” That said, Intuit has made it easier to send data to and update data from your accountant.

Earlier versions of the app required that you use QuickBooks’ Roundtrip feature to create a backup of your Mac data file that could be restored in the Windows version of QuickBooks. Unfortunately, while your accountant worked on your file you couldn’t make any changes to the data on your Mac. Now QuickBooks for Mac allows you to import journal entries, which is essentially the debit and credit information for every transaction you create. This lets your accountant make changes to your data while you continue using QuickBooks. When your accountant is done updating your data you simply import the journal information.

While this new feature makes having your accountant update your company data far less onerous than the roundtrip method, finding information on how to perform the task was challenging and, in the end, requires that your accountant own a copy of QuickBooks for Accounts.

QuickBooks for Mac’s Home Page is a flowchart interface that has been around for some time now. While it has a new, lighter color, the tools it offers are exactly the same as what you’ll find in the last few versions of the app. But there is now a new Snapshot feature that is part of the Home Page that I found to be quite useful.

The Snapshot aggregates all your company information in a single view, giving you a clear overview of your business’ current financial health. A small, colored header at the top of the Snapshot displays a list of your current open estimates, un-billed time, open invoices, overdue invoices, and info on invoices that have been paid in the last 90 days. Below this bar appear graphs and other detail information about your account balances, income and expense breakdowns, accounts payable and year-over-year income and expenses comparisons. Double-click any Snapshot item and you drill down into the data driving the information you see.

Some text in some of QuickBooks for Mac's graphs isn't as clear as it should be.

While I found the Snapshot extremely useful—I often find myself using QuickBooks Online’s version of the same feature—I’m not happy with some of the design decisions made for the tool. For example, because of small text size and a mottled background, text used in the graphs appears to be blurred.

One other new feature I found useful in QuickBooks for Mac is a tool called Set Up and Go, which provides helpful video overviews of how to get started with QuickBooks’ most-used features.

Bottom line

As has been the case for the last several years, there’s not too much that’s too different about the latest version of QuickBooks for Mac, which isn’t necessarily a bad thing. QuickBooks remains a solid business accounting application that will help you keep an eye on your business. Nope, there’s still no cross platform compatibility with the Windows version of the app, so if that’s something you need you’ll need to look elsewhere for your accounting needs. Otherwise, QuickBooks for Mac 2014 should help your business stay on solid financial ground.

You can reach the writer: Jeffery Battersby @ http://www.reyespoint.com/

QuickBooks for Mac 2014

• GET IT FOR $250.00

At a Glance

QuickBooks remains a solid business accounting application that will help you keep an eye on your business, though it's still doesn't have cross-compatibility with the Windows version.

Price when rated:	$250 per user

Pros

• New journal import feature makes it easier for your accountant to update your company data
• Snapshot view provides an easy to understand view of your company's financial health
• Set Up and Go feature provides excellent overview of how to use the application

Cons

• No file level compatibility with Windows version of QuickBooks
• Journal import feature requires that your accountant own a copy of QuickBooks for Accountants
• Some text blurred text in Snapshot view

On the Rise: Tax Preparers Hiking Fees

JEFF STIMPSON for accounting today writes:  While a recent survey found that tax preparers across the country intend to universally raise rates for this coming season, why they’re raising them -- and by how much -- varies widely depending on a range of factors.

The survey by the National Society of Accountants revealed that preparers plan to charge an average of $261 for an itemized Form 1040 with Schedule A and a state tax return, compared with the $246 reported in last year’s survey.

“I’ll be raising my prices 5 percent,” said Stephen DeFilippis, an Enrolled Agent with DeFilippis Financial Group in Wheaton, Ill. “Costs to operate my business have increased and I raise my prices to keep up.”

The fee for non-itemized return will also rise, to $152 for a Form 1040 and state return, against $143 last year, according to the survey of veteran owners, principals and partners of local tax-prep and accounting firms.

They also plan to charge $218 for a Schedule C, $590 for a 1065 (partnership) and $806 for a Form 1120 (corporation), among other fees reported.

Most preparers are considering at least a 5 percent hike – some considerably more.

“We normally increase fees 3 percent to 5 percent each year,” said Brian Thompson, a CPA with Bailey & Thompson Tax & Accounting, in Little Rock, Ark. “This year we expect clients to [have] questions regarding health insurance and the Affordable Care Act. In light of the additional time it may take, we’re considering a 10 percent to 15 percent fee increase.”

Marion, Iowa-based EA Joel Grandon is considering an additional separate charge for any forms required by Obamacare, citing “increased responsibility placed on tax professionals by federal and state legislation” for what he predicts will be “a minimum” 15 percent price jump.  

Reasons vary

Preparers hike fees for many reasons beyond developments in Washington and the cost of living. Bruce McFarland, a senior tax specialist in Belton, Mo., contacted clients weeks before he raised prices in mid-October. “The reasons for the increase were explained in part as a cost-of-living adjustment. We don’t raise our prices every year -- I hold off as long as I can and our prices have been the same for the past three seasons.”

“The second part of the explanation for the new pricing schedule was explained as an effort to maintain consistency with other professionals in my area,” he added.

“We continue to raise our minimums as a way to weed out price shoppers and those that are not a good fit with our target market and services,” said preparer Kathryn Eaton in Knoxville, Tenn.

Other preparers have specific reasons for not raising fees. “Clients who are very organized and give me the information I need from the start won’t see any increases,” said Austin, Texas-based EA Mickey Mann. “Disorganized clients who waste a lot of my time by not reading my organizer and initial emails will pay more this year than last year, anywhere from an additional $50 to $100.”

T. R. Miller of TR’s Income Tax, Accounting & Payroll, in Rising Sun, Md., plans less of an increase this year due to Congress “screwing up” last season and his software provider “picking the wrong year to rewrite their program. I’ll include an explanation [to clients] of why the increase is less than normal,” Miller added, “in addition to normal explanation of why an increase is necessary at all.”

Planning After ATRA / American Taxpayer Relief Act (ATRA)

Day Pitney LLP writes:  After years of flux, the federal estate, gift and generation-skipping transfer (GST) tax laws have finally settled into a "permanent" state. With the enactment of the American Taxpayer Relief Act of 2012 (ATRA) as of January 2013, for the first time in over a decade, the federal estate tax statutes do not have built-in expiration dates and the uncertainty that came with the scheduled changes.

Now that the $5,250,000 federal estate, gift and GST tax exemptions are permanent and will continue to increase based on automatic annual inflation adjustments, the decision-making process for making significant gifts has changed for many individuals. The "use it or lose it" atmosphere that influenced planning decisions to capture larger exemptions (and thus accelerated the gifting process for many individuals) is gone.

The stability in the transfer tax laws, however, does not change the opportunities for making gift transfers. For example, maximizing the use of annual exclusion gifts, now permitting gifts of $14,000 per donee, will always be a strategic way to benefit family members. In addition, we continue to be in a period of historically low interest rates, which make transactions permitting the transfer of wealth using little or no gift tax exemption very appealing. A brief summary of some planning techniques that take advantage of the low interest rate environment follows.

• Grantor Retained Annuity Trusts (GRATs). GRATs are designed to transfer future appreciation without any gift or estate tax charged on that growth. The trustee of the GRAT annually pays to the person setting up the trust (the grantor) a designated percentage of the initial fair market value of the trust for the term of the trust, say two years. That percentage is based on the prevailing federal interest rate for the month that the GRAT is funded. The assets originally transferred to the trust, plus interest, are thus returned to the grantor. Any growth in excess of the applicable annual interest rate is accumulated in the trust and, so long as the grantor is living at the end of the trust term, passes to children(or other beneficiaries) free of tax. GRATs offer the potential for transfers to the next generation without tax cost because they can be "zeroed out" for gift tax purposes. More important, they offer that potential with no significant tax risk, because they have been specifically approved by the IRS.
• Sales or Loans to Grantor Trusts. Similar to a GRAT, a sale or loan to a grantor trust (a trust, the grantor of which is treated as the owner for tax purposes, i.e., all items of trust income and deduction will be reported on the grantor's personal income tax returns) allows the future appreciation of an asset to escape estate tax. The transaction is not subject to gift tax, because the trust is paying fair market value for the asset or repaying a loan from the grantor. In addition, because the trust is a grantor trust for income tax purposes, any income tax payments the grantor makes on behalf of the trust are essentially tax-free gifts that serve to reduce the grantor's estate. In the sale scenario, the grantor sells an asset to a trust for a specified price in a commercially reasonable way, generally taking back an installment note. The trust repays the grantor in whole or in part out of the earnings of the purchased asset. If the asset sold to the trust appreciates in value at a rate in excess of the combined interest rate and purchase price, the appreciation is removed from the grantor's estate. Similarly, cash can be the subject of an installment sale in the form of a loan. If the borrower-trust invests the cash in an asset that produces income in excess of the interest charged on the loan, the income and appreciation accrue in the trust tax-free and not in the seller's estate.
• Intrafamily Loans. An intrafamily loan can provide a significant benefit to a junior generation family member with relatively modest tax implications to the senior generation family member. These intrafamily loans may be made without gift tax implications as long as the lender charges interest at a rate no less than the "applicable federal rate." The applicable federal rates are determined and published by the IRS on a monthly basis and are based on the average market yield on outstanding marketable U.S. government obligations of varying lengths. The applicable federal rates for December 2013 are 0.25% for a loan term less than three years, 1.65% for a loan term between three and nine years, and 3.32% for a loan term longer than nine years. In addition, the payment terms can be designed to fit the specific needs and resources of the borrower. Balloon notes that require only the payment of interest at the outset provide an attractive way to provide liquidity for a child or grandchild without the immediate burden of substantial loan payments.

Please let us know if you would like to discuss any of these ideas to see whether they might be beneficial to you and your family.

INFLATION ADJUSTMENTS

Each year, certain estate, gift and generation-skipping transfer (GST) tax figures are subject to inflation adjustments. For 2014, the annual exclusion amount for gifts remains at $14,000. The estate, gift and GST tax exemption amounts for estates of decedents dying in 2014 and gifts made in 2014 are increased to $5,340,000. Finally, the annual exclusion amount for gifts made to a noncitizen spouse in 2014 is increased to $145,000.

IRS RESPONSE TO WINDSOR DECISION

Earlier this year, in United States v. Windsor, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act, which defined "marriage" as exclusively a union between a man and a woman under federal law. Since the Supreme Court's decision, the Internal Revenue Service (IRS) has clarified that a same-sex couple will now be recognized as legally married for federal tax purposes if the marriage was valid in the state or country where the marriage was performed, even if the couple lives in a state that does not recognize same-sex marriages. Thus, taxpayers in a same-sex marriage must be sure to file their 2013 federal income tax return using the "married filing jointly" or "married filing separately" status. Couples may (but are not required to) amend prior returns within the applicable statute of limitations (generally three years) to reflect a same-sex marriage, using the IRS's new form 1040-X. The IRS has also announced, however, that "marriage" does not include other forms of unions for federal tax purposes, such as registered domestic partnerships, civil unions or other similar relationships that are not termed "marriage" under the laws of the state.

The IRS has declared that post-Windsor guidance is a top priority. Nevertheless, many issues remain unresolved, such as whether a legally married same-sex couple who lives in a state that does not recognize same-sex marriage can jointly file their state income tax return or claim a marital deduction with respect to a separate state estate tax. As this area of the law continues to develop, it is important for those affected to consult with their advisors about their particular circumstances.

REPORTING FOREIGN BANK ACCOUNTS

U.S. taxpayers with a financial interest in or signature authority over foreign financial accounts are required to report them if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year.

This foreign bank account reporting is separate from the filing of the federal tax return, Form 1040, and also should not beconfused with the new Form 8938, Statement of Specified Foreign Financial Assets, which is required to be filed with Form 1040.

The required foreign bank account reporting, or "FBAR" for short, was previously accomplished by completing the informational return, Form TD F90-22.1, Report of Foreign Bank and Financial Accounts, and mailing that form to the Department of the Treasury in Detroit by June 30, following the calendar year in respect of which it was required. As of July 1, 2013, however, changes went into effect, and going forward all filing (including late filings and amended filings) must be done electronically. The Financial Crimes Enforcement Network (aka FinCEN), a division of the Department of the Treasury, has established the BSA E-Filing System for the electronic filing.

FinCEN has also updated and revised Form TD F90-22.1, changing its designation to Form 114. It also developed Form 114a, Record of Authorization to Electronically File FBARs, which is to be used to obtain permission from clients to file an FBAR on their behalf.

Day Pitney is now a registered BSA e-filer and can accomplish the filing of an FBAR (Form 114) for you. Please let us know if we can help you meet the current filing requirements for a foreign bank account.

DIGITAL ASSETS

There has been increasing discussion in the mainstream media and the planning community about how to account for so-called "digital assets." The term "digital assets" comprises several different categories of data that most of us already possess and continue to acquire at an accelerating pace. For example, "digital assets" may refer to digital photos or e-mails. It encompasses downloaded music files, e-books, online subscriptions, airline miles and credit card reward points, any of which may have significant monetary value. Finally, "digital assets" can describe traditional assets that we access through digital means, such as automatic bill-pay accounts or brokerage accounts.

You may have strong preferences for how you would want those assets handled in the event of your incapacity or death. You may feel strongly that some photos or e-mails should be saved, others deleted. And you may want family members to have access to your online accounts. Planning for digital assets, however, poses unique challenges. For example:

• the class of "digital assets" evolves continuously;
• digital assets may exist in any number of locations and formats, including off-site (cloud) storage, making them difficult to locate;
• digital assets are often password-protected, making them difficult to access; and
• state and federal legislators have been slow to address these issues, leading to a tangle of inconsistent user agreements governing your online accounts.

Careful planning and organization increase the likelihood that your digital assets are not lost forever (assuming you would like them to be found) and are handled in a manner consistent with your wishes. As the law continues to catch up with the reality of our lives, it is worth reflecting on your digital assets and how those assets can (or should) be accessed in the event you are unable to access them yourself.

Getting a jumpstart on 2014 tax planning / Advisers should recommend statutory shelters to ease clients' tax bite

Darla Mercado for InvestmentNews.com writes:  It's probably too late to do any significant planning for the 2013 tax year, but right now is the perfect time to get a jumpstart on 2014.  Tax gurus note that the top earners — singles with taxable income over $400,000 and married joint filers with income over $450,000 — will be in for a nasty surprise when they confront the 2013 federal tax bills they'll pay in April. They face a top marginal income tax rate of 39.6% and a top marginal tax rate of 20% on long-term capital gains.

The American Taxpayer Relief Act of 2012, enacted close to a year ago, put in place the net investment income tax of 3.8% on annuity income, royalties, dividends and other sources of investment income, as well as the additional Medicare tax of 0.9%. Those levies will affect individuals making upward of $200,000 in modified adjusted gross income and married joint filers with over $250,000 in income.

There have also been phaseouts on personal exemptions and itemized deductions: The so-called PEP and Pease. 

“The filing of these 2013 tax returns is going to be an eye-opening experience for many of these clients,” said Gavin Morrissey, vice president of wealth management at Commonwealth Financial Network
It's all the more reason to start laying the groundwork for 2014.

First and foremost, there's the net investment income tax: the 3.8% levy that applies to the amount by which the taxpayer's modified adjusted gross income exceeds $200,000 (if single) or the taxpayer's net investment income — whichever is lesser. 

“This 3.8% surtax needs a lot of attention. That means placing more emphasis on portfolio design,” said Robert Keebler, a partner with Keebler & Associates. Kick off the new year by looking at clients' portfolio holdings. Advisers should aim to reduce turnover and look into using statutory shelters, such as life insurance, real estate and master limited partnerships to minimize the tax hit.

Roth conversions will still be in vogue during the 2013 tax season. These conversions require an upfront tax payment, but income from the Roth IRA will be tax-free in the future. “You can still jump on that right out the gates in 2014,” Mr. Keebler said. In fact, jumping on that conversion right away makes sense because the client is maximizing the amount of time for the market to do its work. You have until Oct. 15, 2015, to undo the Roth conversion, which means the client has a year and ten months to watch the market, Mr. Keebler said. 

High-net-worth clients who make significant charitable donations may want to consider front-loading a donor-advised fund in the new year. Given the new steep capital gains taxes and the fact that the market appreciated considerably over the course of last year, making a sizable gift of appreciated stock in January will give the client a considerable charitable deduction. 

“Let's say you give $5,000 a year to a charity and you have a stock position with a basis of $25,000 — but it's now worth $50,000 because of the appreciation over the last two years,” said Mr. Morrissey. “If you put in the $50,000 in appreciated stock into a donor-advised fund, you're frontloading it for the next 10 years, and you have a nice income tax deduction that you can use today.”

Finally, certain high earners might want to manage their income stream in order to keep themselves from drifting into higher tax brackets. Mr. Morrissey noted that if someone gets paid in stock options, perhaps they can defer them into later years when their income won't be as high. This might make sense if the individual projects that he or she will have a big income year and can have control over when and how that income is received.

“These clients might be getting close to retirement and don't want to trigger all this income at the same time, so they're looking for ways to defer income and stay below their thresholds,” Mr. Morrissey added.

It's An App World: Intuit Launches Intuit Apps.com

Taija Jenkins for CPA Practice Advisor writes: Long gone are the days where small business owners used one product from one vendor and griped about the numerous headaches it caused. With the changing technology and implementation of mobile devices and the Cloud, business owners now have more options when it comes to running their business. However, with more options come more questions and confusion.

In efforts to help small business owners navigate through the various apps and add-ons available to them, Intuit has introduced its new and redesigned app depot, Intuit Apps.com. The new website is designed to help current QuickBooks users identify the right apps to maximize their QuickBooks Desktop or Online experience. Accessible both in a web browser and in QuickBooks, Apps.com features apps for various tasks, as well as articles written by subject matter experts and customers.

“Apps.com will help owners run their business better by helping them perform company management better. There are apps available that help customers perform financial management and other tasks related to running a business, such as client management. These apps leverage the information that QuickBooks already tracks, allowing users to perform additional tasks beyond the capabilities of QuickBooks,” said Ronny Tey, Group Marketing Manager, Small Business Financial Solutions.

Utilizing apps found on Apps.com provides business owners with even greater security for sensitive data. Employees and staff who use integrated apps now have access to just the information they need instead of full access to QuickBooks data that is beyond their job scope.

In addition to showcasing various apps that integrate within QuickBooks, Apps.com also features tips and best practice advice for business owners. Users can navigate through numerous articles that explain what apps are and how to best use them. Written by subject matter experts and other Intuit customers, the articles also cover topics such as practice management and how to navigate through payment issues.
“Our goal with Apps.com is to generate content and create a community for small business owners to help each other better understand what apps are available to them, how these apps will improve their business and what they need to consider in order to make an informed decision when managing their business,” said Tey.

Apps.com isn’t Intuit’s first attempt at providing apps for its customers. The provider of business and financial management solutions previously owned the Intuit Apps Center, which simply showed apps that integrated with QuickBooks. Unlike the previous version, Apps.com organizes the apps by category and ranks them according to customer views. Apps with the highest number of quality reviews are shown first. In addition, Intuit reached out to subject matter experts to provide articles and best practices to customers.

“The old app center displayed a carousel of apps when the user first logged in. However, our small business customers said they needed more from us. They needed to make sure an app integrated correctly with QuickBooks and performed well before they purchased it. Essentially, they needed us to do more than tell them what was available to them; they needed us to provide the necessary tools so they could decide which apps were best for their business,” said Tey.

Intuit vets every app before it appears on Apps.com so their customers don’t have to sift through every app on the market. Before apps are approved, they must undergo an extensive review process, which includes two technical reviews and one marketing review. During the first technical check, apps are checked for compatibility to ensure everything works correctly. The second technical check is a security review performed by a third-party company. Before an app is granted access to QuickBooks’ data, it must have the proper controls to secure its data. Lastly, Intuit’s marketing team reviews marketing materials and existing product information to market the app on Apps.com.

“We are really committed to making Apps.com a valuable resource for small business owners. Even if a small business is not currently in the market for apps, the articles on the website are still useful. Business owners can learn how to run their business better and get advice on issues that matter to them, like making sure their customers pay,” said Tey.

In addition to introducing the new Apps.com, Intuit also announced changes to its open platform strategy, making it easier for developers to integrate their apps with QuickBooks. Previously, vendors were charged a connection fee for each company that used their app. The updated QBO API now eliminates those fees and allows developers to build applications that integrate across U.S. and global markets, reaching more than 516,000 QBO subscribers.

“We are taking our platform to the next level, making it faster and making more API’s available. This will open our platform to global integration. We officially dropped the integration fee last year, removing a significant barrier for developers. Now, it’s free for their apps to connect to our data. This is just one more way we’re working to empower small businesses,” said Tey.

Savvy New Year's Resolutions IRS Hopes You Won't Keep

Robert W. Wood for Forbes writes: Making and keeping New Year’s resolutions is tough. Yet some resolutions about taxes aren’t hard to keep and could fatten your wallet in 2014. They could even have a spillover effect into the future. Here are 9 to consider:

1. I Will Read Tax Documents Before Signing. Don’t Robo-Sign Tax Returns. You sign tax returns under the penalties of perjury, so be careful.

2. I Will Pay Attention to Each Form 1099. It’s almost time for these little tax reports to show up in your mail, so get ready. Each one bears your Social Security Number and will be matched to your tax return. Pay attention to them—the IRS sure does.

3. I Will Consider Taxes Before Signing Agreements. Leases, purchase agreements, settlement agreements, employment agreements, independent contractor agreements, and more. You name it, they have tax consequences. They needn’t be mega-transactions for the tax dollars to be significant. Consider taxes before signing, since that’s when you can still affect changes.

4. I Will Defer Income and Taxes. Timing matters. A fundamental idea of tax planning is to defer income into the future, delay paying taxes when possible, and to accelerate deductions. Tax payments should normally not be prepaid. There are situations in which it’s appropriate to break this resolution, but keep it as a general rule.

5. I Will Keep Good Records. Few people like keeping tax records, and playing catch up is the worst. Keep a copy of each signed contract, lease, invoice and receipt, checks, and the like. Good records make tax compliance and tax controversies vastly easier.

6. I Won’t Fight Over Pennies. We all like to be right, but consider whether it makes sense to argue over small amounts with the IRS. Everyone has a different threshold for what amount is inconsequential. Don’t invest time when inconsequential money is at stake. In some cases you can risk other issues arising.

7. I’ll Deal With Notices Promptly. Many tax lawyers and accountants make more money because clients tend not to deal with things promptly. Often, tax professionals could achieve a better result if they were brought in earlier. For example, if you fail to respond to an IRS 90 day letter, it’s no longer possible to go to Tax Court. Instead, you’ll need to file a refund claim and then go to District Court or Claims Court.

8. I Will Keep Proof of Filing/Mailing. If timing is important—and it usually is—keep proof of mailing. If you need to be able to prove you mailed or filed something, send it certified, FedEx or other approved provider that proves timely mailing and receipt.

9. I Will Run Numbers.  Just because you can claim a deduction doesn’t mean you should. There may be no way to know if you’re getting a tax benefit from a deduction without running numbers, whether you do your own return or have a preparer. Running multiple scenarios is especially helpful with AMT.
Whatever resolutions you make, have a great year.

13 Dramatic Year End Tax Strategies For 2013

Kelly Phillips Erb for Forbes writes: The clock is ticking. 2013 is almost over which means that year end tax strategies are on the minds of many taxpayers. By now, we all know the most common tips (pay mortgages and taxes in advance, make contributions to retirement accounts, donate to charities) but there has to be something else, right? It’s true that you can engage in life changing behaviors with a resulting tax savings. Whether those are worth it to you is another story. But here, for your last minute consideration, are thirteen dramatic – and potentially risky – year end tax strategies for 2013:

1. Move. A move across the border in some states can save you thousands of dollars in property taxes, income taxes, excise taxes and – let’s not forget – sales taxes. Seven states impose no income tax at the state level (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) and two states tax only interest and dividends (Tennessee and New Hampshire). Five states do not have general sales taxes (Alaska, Delaware, New Hampshire, Montana and Oregon). And you can fill up for a lot less in Alaska, Wyoming, New Jersey, South Carolina and Oklahoma than in most other states, as state taxes on fuel remain relatively low. Lighting up in most southern states will cost you a lot less in tobacco taxes than over the Mason-Dixon line. In terms of state and local tax burdens, your best bets for the lowest combined rates are (in order, as determined and reported by the Tax Foundation and MSN Money): Wyoming, South Dakota, Nevada, Alaska and Florida. Of course, lower tax rates don’t always translate into a better quality of life. While it’s true that some low tax states have great things to offer, others may suffer from high rates of infant mortality and low high school graduation rates. Also? Not always garden spots and often, a bunch of cringe-worthy sports teams (sorry, Dolphins fans but losing to the Jets?).
2. Play the odds. To be honest, I never win anything. Ever. Cards, pick ‘em tourneys and definitely not the lottery. I’m bad at all of it. Okay, I did win at slots once but my self-imposed $10 limit tends to necessarily mean that even my total winnings are pretty meager. If, however, you play the odds, don’t just keep track of your winnings. Remember to report what you lose, too, since at tax time, being a loser can be a good thing. You can deduct your losses on a Schedule A as an itemized deduction to the extent of your winnings. Don’t go too crazy at the casino, though: you cannot deduct more in losses than you report in winnings. And must be able to document your losses by type of loss, date, name and location of the gambling establishment and amount.
3. Have an operation. When you’re adding up those medical expenses, you probably already know to include your run of the mill expenses like prescriptions, doctor’s visits and health insurance premiums. But don’t forget that other expenses – like that operation you’ve been putting off – would be deductible as well. In terms of timing, the deduction is available in the tax year in which the bill was paid, not when services were rendered. The surgery doesn’t have to be for a life threatening condition to be considered medically necessary; this includes anything from cataract removal to treatment for gender identity disorder. Surgeries and expenses related to treatment in foreign countries may also be deductible, not that I’m necessarily recommending it. And this year, the more expenses the better: as part of Obamacare, the threshold for claiming medical expenses jumped up to 10% of your adjusted gross income (AGI) – as opposed to 7.5% of your AGI for 2012 – which means that fewer taxpayers will be able to meet the criteria for claiming the medical expense deduction. That doesn’t mean you should overdo it and remember that elective surgery for purely cosmetic purposes isn’t tax deductible (you could end up looking like that creepy cat lady – Google it).
4. Start a business. With unemployment rates still relatively high, many taxpayers are searching for ways to create more income. Starting your own business requires some thoughtfulness: it can be rewarding (and sooooo job creating) but it can also be financially draining. Assuming you know what you’re getting into and accepting that half of all small businesses fail in the first two years, starting a business can result in tax benefits. It may be easier to start small. Really small. As in turning your existing hobby into a business. If you earn income in the pursuit of a hobby, it’s taxable. While you can offset the income with deductions, you cannot claim deductions that exceed your income – there’s no loss for a hobby. You can, however, claim business losses in excess of your business income. It’s still lost income so don’t get too excited but at least it’s deductible.
5. Go to graduate school. Maybe starting a business isn’t your thing. If you’re still searching for a way to up your employment potential, consider graduate school. If you go to school in order to improve your job skills in the same vocation, you might be able to claim the related costs as business expenses. If you’re simply going to school to get an additional degree, brace yourself for the cost: the annual costs associated with secondary education are staggering. Most students take out loans to cover the costs. Plus side: student loan interest is generally deductible (just the interest, not the principal) on your tax return as an above the line deduction – this means that you don’t have to itemize in order to claim the deduction. Negative side: you may be paying back those loans for the rest of your life. You may also hate it – which is why one attorney is offering you money to go anywhere but law school.
6. Buy a yacht. Or better yet, buy your tax attorney a yacht. In January, as part of the fiscal cliff deal, the option to deduct state and local sales taxes in place of state and local income taxes was extended for a year, but only a  year. That means, for 2013, taxpayers who paid out big sales tax dollars compared to state and local income tax dollars (particularly affecting those taxpayers in states where there are no state and local income taxes) would get a tax advantage. Congress didn’t renew the sales tax deduction for 2014, so if you’re planning to buy big, buy now.
7. Walk away from your underwater home. Homeowners in the U.S. were underwater by a startling $805 billion as of the end of third quarter of 2013. For those homeowners that renegotiated their mortgages, faced a short sale or suffered a foreclosure, the potential tax consequence as a result of forgiven debt was mitigated when Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. The Act offered an exception to the debt as taxable income rule for qualifying homeowners and was intended to be a temporary fix. But temporary became not so temporary as the Act was extended over and over. Now, with the deadline for the exception looming at year end, Congress hasn’t acted. If Congress remains silent, it could become a lot more expensive to be underwater in 2014.
8. Get married. I’m sure my husband can tell you all of the reasons why getting married totally isn’t worth it… And from a tax perspective, he may be right since both we both work (the so-called marriage penalty tends to hit couples hardest when both spouses work). But that’s not true for everyone. In some cases, it is tax advantageous to get married. And now, there are fewer obstacles than ever to getting married: the Supreme Court has decided that states – not the feds – can regulate same sex marriages and the IRS has ruled that all legal same sex marriages will be recognized for federal tax purposes. So, gay married isn’t gay married anymore, it’s just married. And all married folks are treated the same. And since marital status for federal tax purposes is determined as of December 31, it doesn’t matter what you’ve done all year long: today is the only day that matters. 
9. Buy a cow. You’ve heard the whispers about the so-called “dairy cliff” and threats of $7/gallon milk. Congress has yet to settle on a farm bill which means that milk prices could be on the rise. This is because of a provision that would cause farm policy to revert back to a mandate forcing the government to pay more to dairy producers – a problem that we haven’t grappled with for decades. Higher prices for the government mean higher prices in the cart. It would seem a no-brainer to just fix the bill, right? Here’s the problem: the farm bill is tied to food stamps. Congress can’t seem to agree on what to do with those which means that while they fight, the cost of your milkshake is slowly creeping up.
10. Sign up for health insurance. Or move to Canada. Beginning in 2014, individuals are required to have health insurance. If you don’t have at least “minimum coverage” for your health insurance in place – and don’t otherwise meet an exemption – you will face a penalty on your income tax return. Don’t forget that we’re not calling it a penalty. Or a tax. Those have a bad connotation. We’re calling it your “individual shared responsibility payment.” It works out to 1% of your yearly household income or $95 per person for the year, whichever is higher. Some exemptions and exceptions apply.
11. Finish that honey-do list. For the last several years, there have been energy credits available for environmentally-friendly improvements such as insulation, windows, doors, roofs, water heaters and heating and air conditioning systems. Those credits will expire after 2013. To claim the credit – of up to $500 – you have to install qualifying items before year end. All is not lost: I’m fairly certain that you can find a Lowe’s or Home Depot open today. Don’t forget to check those labels.
12. Figure out what you want to do with your life. But do it quickly. If you pay qualified education expenses in 2013, you can claim the tuition and fees deduction on your federal income tax return. It’s an “above the line” deduction which means that you can claim the deduction even if you don’t itemize. The deduction is worth up to $4,000 so long as your modified adjusted gross income (MAGI) is not more than $80,000 ($160,000 if filing a joint return). And unlike some of the educational credits, you don’t have to be enrolled in a formal degree program to qualify. All good stuff, right? Of course. Which is why Congress is letting it expire at the end of the day. But if you pay next semester’s tuition today, you can still take advantage of the deduction.
13. Have a baby. Statistically, just a few of you are going to be able to pull this off: only so many babies are going to be born today. If you manage to be one of those parents, you’ll be able to claim a personal exemption for your child (and maybe some other child-related breaks) for 2013. But if you wait until 2014, that’s okay, too: the personal exemption (and other tax items) will increase a bit next year. Be beware: babies are mostly cute but they’re also expensive. And stinky. Whether you agree that it’s good tax policy or not, there are significant tax breaks associated with having children including exemptions and the earned income tax credit. But don’t be fooled: those tax breaks don’t actually offset the real costs of having kids. Despite that, I liked them enough to have three of them (quick disclaimer: as they get older, they get less stinky but not less expensive).

So there you have it. Thirteen dramatic year end strategies for you to consider in 2013 based purely on tax outcomes.

Of course, I’m not saying you should do all of them. Or any of them. I don’t know what your personal circumstances are exactly – and those details matter. You shouldn’t plan your major life (or death) events around the potential tax consequences. But you should consider how you can take advantage of tax breaks which might be available to you – there’s nothing that says you should pay more in taxes than you have to. If you’re thinking about whether something makes sense, run the numbers and talk to your tax professional. And remember, from a tax perspective, timing is everything.

Happy New Year!