Monday, January 6, 2014

Tax filing tips 2014: Suggestions for young professionals

Katie Leone Scripps Digital . WPTV writes: The federal government may be a bit behind on taxes this year, but it doesn't mean everyone has to be.

The first day the Internal Revenue Service will begin processing individual tax returns is Jan. 31 — later than normal this year due to the government shutdown in fall 2013. This means many people who might be used to getting a tax return in early February will have to wait until the middle or end of February, and plan accordingly.

According to the IRS, the average wait time for a tax return is 21 days. But the sooner a tax return is filed, the sooner a refund will be issued. Waiting until closer to April 15 (the individual tax return filing deadline) can result in a delay in getting a refund, as the IRS is inundated with returns to process.

Although more people expect a refund than a tax bill, what's interesting this year, according to finance coach and founder of FinancesWithFunk.com , Trisha Funk, is that for 2013 the average person expecting a return is down about 5 percent to about the same expecting to actually owe money this year that never have had to.

It's usually near a 60/40 split, but this year it's estimated that the split will be more like 55/45.
The majority of people can still expect a refund, but it's fewer than it has been in the past.
"That could be a sign that the economy has been improving but it's definitely a shift to keep in mind and pay attention to," Funk said.

Funk breaks down the filing process and how to maximize the amount of your tax return.
One of the best ways to increase your return is to take advantage of tax deductions. For the purposes of this article, the focus will be on deductions for those who are single and do not have children (because deductions are few and far between for this demographic).
Deductions this demographic may qualify for include:

Earned income tax credit: Of deductions that even singles with no children can take advantage of or those who have children, the earned income tax credit is probably one of the biggest ones. If you are at least 25 and have a child or even if you don’t you still may be able to qualify.
The IRS has created a great resource for this credit. Find out if you qualify by using this EITC Assistant. (link here: http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-–--Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it. ) But there are some issues to avoid when it comes to errors with the earned income tax credit:

1. Ensure proper income reporting. (That means making sure that your 1099s or W-2s actually match up with what you are reporting on your tax return.)

2. For those who are married who should be filing as married, filing separate rather than single or head of household?

3. Be sure you are claiming a qualified child and be sure that child can’t be claimed on anyone else’s taxes. (The courts may have granted rights to one parent to claim that child on their taxes and even when there is no formal agreement in place it has to be decided on ahead of time or it will send errors on both parties’ taxes.

4. Reporting the wrong income and reporting the wrong social security numbers are some of the biggest errors that cause people to lose out on the earned income tax credit.
American opportunity tax credit: This credit benefits higher education costs for those with income of $80,000 or less if single or $164,000 if married filing joint. This credit is for students for the first four years of their education and students only have to be enrolled in half time credit. (That’s something to consider if you are going to school part time and taking one extra credit or so could put you at that ½ time status it would be worth seeing if you can fit it into your schedule.)

Lifetime learning credit: This isn’t just secluded to those first four years and doesn’t have to be a degree-specific goal in mind. You can actually qualify for the credit based on simply being interested in learning a new skill or developing new opportunity.

Saver’s credit: This credit is hardly ever used. Aside from awesome tax implications of putting some of your income into retirement savings and the possibility of getting employer match contributions, if you contribute to your retirement account you could get tax credits. Income limits are $29,500 for singles, $44,250 for a head of household filing or $59,000 for married filing jointly. That means you should contribute to your 401(k), even if it’s a small amount.
How do you find out which deductions you may be eligible for?

Funk: One of the best resources you can possibly use is the IRS website itself. www.IRS.gov is going to give you all the different tax credits and those specific limitations and exclusions that make sure that you are within your legal rights to claim that tax credit.
How many people do not take advantage of tax deductions?

Funk: The majority of people don’t take deductions. Seventy percent of filers use 1040EZ or 1040A for their tax returns and taking the standard deduction.
I think so many people just assume they won’t qualify for them. The tax code is complicated, and we naturally avoid things we don’t really understand. Also, many have no idea that these deductions actually even exist, so I don’t think for some it may be a blatant disregard. Some procrastinate on their filing so they don’t have the time to do the research or preplanning to be able to take those deductions.

What can be done throughout a year to qualify for tax deductions?

Funk: One of the most important things that people can do throughout the year is to have a plan and a tracking system that works.

I have a really simple strategy that works wonders and my clients use it all the time. Create a tax deduction calendar either on your Google calendar or on Outlook calendar, even a little paper pocket calendar, whatever you happen to use.  Every time you go to the doctor, just jot your copay into the calendar (along with your mileage driven there). Miles driven for charity? Write them in your calendar. College expenses? Whatever. And if you’re totally nerdy like me you can color code your entries based on what type of a deduction it is. At the end of the year just print off your month and add it all up.

Grab a simple accordion folder to keep your receipts or be sure you have a file on your computer that you can swipe all of that documentation into. In case of an audit you want to be able to back up your medical claims.

What is the best way to file taxes? Should I use free or paid online versions of e-filing software?
Funk: Absolutely the easiest way to file taxes is to e-file.

The difference between the paid or free versions really depends on the resource you are using. There are a number of free versions that are actually going to upgrade you to other things if you want them to check for other credits you might be missing. If you have really done your homework yourself and are comfortable with what you are doing, a free version may be fine. Otherwise you really need to choose a program that is going to walk you through an initial interview to find out if there are things you may qualify for.

None of these really can compare with a live Certified Public Accountant. People have this perception that having an actual CPA do your taxes costs tons of money but the reality is that the few hundred dollars you invest in them could reward you quite a bit more. They also are going to be able to give you information on areas that you were close to qualifying for or things you could do different in the future in order to take advantage of exemptions and deductions out there.

When is e-filing not allowed?
Funk: E-filing is not going to be allowed if: you’re married but filing a separate return and live in a community property state; you are claiming a child who has already been claimed by someone else or you have a multiple support agreement. In any of these situations your return is going to be rejected.

The benefits to e-filing:
Funk: Your work file is processed quicker. Every paper file that the IRS gets they have to hand type it into their system. Which means you get your return quicker especially if you do automatic deposit.

The other benefits of e-filing is that if you have made an error you get a notification within 24 hours that your return has been rejected so you can correct it right away and resubmit.
Do your homework and make sure you have all the information correct, e-file your return, and have your refund direct deposited into your checking or savings account.
What document should I have on hand when ready to file?

• Vehicle license taxes from your registration bill
• Any state taxes you paid
• Property taxes paid if you own property
• Any charitable contributions that you have made throughout the year
• Some states still have a renter’s credit, so you need a total of the rental payments for the year
• Any receipts or mileage related to a side business venture (even if you don’t feel like you really made any money or you know you spent more on it than you made)
• 1099s (including those from any savings or investment accounts)
• W-2s
• Any mortgage interest that you paid
• Any medical bills or expenses you paid including and especially those that insurance doesn’t cover
• Any educational expenses
What if I throw out my mail?
Funk: Well first, stop doing that. I don’t care if you open it or not but quit throwing it away. Your best resource is to log on to your accounts and start looking. Go online to your bill pay and search by the specific charity, doctor’s office, or wherever and set your date range Jan. 1 – Dec. 31 if your bank or credit card company will let you. Then you can get a consolidated amount for the year. And almost 100 percent of mortgage companies, banks, investment companies and others will let you print your 1099s or other tax documentation online.
What else should I be taking advantage of or consider?
• High deductible insurance with an HSA account
• Utilize flex spending accounts if available through your employer
Commuters Tax Credit if you use public transit regularly
• Contribute to your IRA or 401k
• Strategize your deductions (Make 2014 the year you get all your medical issues taken care of, get the new glasses, have the dental procedure done you’ve been putting off, so you can qualify for the deduction. An every other year approach is smart if you come in just under most of the time. )
• If you have made a big purchase in the last year, such as a vehicle or boat, you may be able to get credit for the sales tax paid

Posted on 5:43 PM | Categories:

3 Reasons Why CEOs Don’t Use QuickBooks

Samuel Clemens for InsightSquared writes: Financial data like revenue, profit, and cash is critical for a CEO to run their company. An HBS professor has famously observed that “The most important job of the CEO is to make sure the company never runs out of cash.”
If that’s true, why is it so hard for a CEO to see their financials in a system like QuickBooks?
And how can we change that?

1. CEOs Can’t Access The Company File

The majority of companies using QuickBooks are on the Desktop edition, not the Online edition (although the Online edition has a higher percentage growth rate).
For companies on the Desktop edition of QuickBooks, the technical barriers to a CEO accessing financial data are daunting. For example, it requires remote access and multi-user mode in QuickBooks. It’s possible, but difficult — here is our writeup on 3 ways to enable CEOs to access financials in QuickBooks.

2. An Interface Only An Accountant Could Love (Or Use)

Accountants love QuickBooks — it’s the most popular accounting software in the world, by a wide margin. However, it’s designed for accountants: lots of tables, double-entry, and the reports are a field of numbers. Data blizzard!
Fields of numbers are good for entering data. Not so good for understanding the big picture, though.
Which of these two software interfaces will be easier for a CEO to use?
Courtesy of cias-quickbooks.com(courtesy of CIAS)
…or this…

3. Plain Data vs. Analytics and Insight

A common refrain from CEOs is “show me the actionable insight.” Don’t just show me the raw data. Show me what it means so that I can do something.
QuickBooks reports and analytics reports may contain exactly the same raw data. But in a QuickBooks report, the meaning is hard for a human to see. Analytics reports are designed to show meaning at a glance.
For example:
Yes, like in QuickBooks, there is a table of accounts receivable data.
But unlike QuickBooks right away a CEO can look at the chart and conclude two things:
1. This customer (British Petroleum) had been very delinquent in their payments up through July, when they got much better.
2. They are starting to get worse again.
This could mean a relationship issue with BP — and since BP is a big customer, it probably means the CEO should get on the phone with them to see what’s up.
That’s actionable insight.
Posted on 2:48 PM | Categories:

Free Webinars: - January 7th The Calm Before the Storm: 10 Simple Ways to Prepare for Tax Season / January 15th "QuickBooks 2014 New Features You Won't Believe You Lived Without"

Cloud9 Realtime writes: Tax Season is upon us! And with that comes long hours, deadlines, and tech problems. Join Cloud9 on Tuesday January 7th, Pacific Time to learn 10 Simple things you can do for your firm this tax season that will alleviate many of the common headaches and frustrations that many firms face year after year.   


Also, the Free Webinar:   QuickBooks 2014  New Features you Won’t Believe you Lived Without!  Wednesday, January 15, 2014 @ 10am Pacific Time  
Posted on 2:05 PM | Categories:

Why Your Company May Dump QuickBooks This Year

Gene Marks for Forbes writes:  Believe it or not, your company is about to be part of an enormous wave of change in the next few years.
That’s because, if you’re like most small and medium sized businesses, you’re likely using an on-premise accounting application. And most likely that on-premise solution is QuickBooks.  QuickBooks is by far the most popular accounting application for SMBs and deservedly so – it’s full featured, easy to use and well supported by Intuit. My company is an Intuit INTU 0% partner. We sell QuickBooks. But this year we’re going to look into selling other products as well. Why? Because as good as QuickBooks is, I believe that many of my clients are going to dump it starting this year and over the next few years. You too.
That’s because the cloud has caught up to the accounting world. And there are many competitors to QuickBooks standing by to pounce.
My consulting firm serves about 600 active companies. More than 90% of them currently use an on-premise accounting (or financial management or Enterprise Resource Planning/ERP) application. Isn’t it ridiculously obvious that within the next few years just about all of those companies will be using a cloud-based application instead? Of course it is. I’ve watched the enormous growth of software-as-a-service applications for customer relationship management, human resources and payroll. I’ve noticed the faster performance. I’ve witnessed their ease of access from tablets and mini-laptops and even smartphones. I’ve watched companies move more and more of their in-house systems to hosted ones, eliminating their servers and IT infrastructure. And I’ve seen my own clients, small business owners who look at any new relationship or technology with a wary eye, grow more comfortable letting other companies handle their data on managed servers over the past few years. We admit that though no one’s infallible, the security that they provide are better than our own. The environment is perfect for cloud based accounting applications.
And it’s a perfect environment for software developers too. “Most of the large software companies aren’t putting many resources into on-premise solutions any more,” Brian Jacobs, a partner at venture capital firm Emergence Capitaltold me recently. “They are basically pushing their customers into a software-as-a-service environment.”  This is true. Emergence Capital invests in cloud based business applications and Jacobs believes the market is in its infancy. Ask anyone at Microsoft MSFT -1.87%, Sage, Oracle ORCL +0.16% or SAP and they’ll tell you what the guys at Salesforce.com have been saying for years: the cloud is the future for them. It’s a more profitable and more productive business model for a software company to distribute their products. “There are so many advantages of a cloud solution that I personally don’t see how these on-premise systems can move into the future,” said Rob Reid, CEO of Intacct, an online financial management application. “VCs are not investing in premise software companies any more.”
Which brings me back to QuickBooks. In the next few years it’s inevitable that you’re going to replace your on-premise QuickBooks system for something cloud-based. You won’t have much of a choice. And you’re going to take that opportunity to look around. And you’re going to discover there are some interesting alternatives.
There’s Xero, which just raised $150 million in October. And Intacct, which has received multiple rounds of financing over the past few years. There’sFreshBooks. There’s NetSuite and of course there’s QuickBooks Online. There are others but these, in my opinion, are the big players right now in the cloud accounting/ERP market. To oversimplify, Xero, FreshBooks and QuickBooks Online are arguably geared to the basic bookkeeping/invoicing/bill-paying customer – the startup, the very small micro-business, the mom and pop. Intacct and NetSuite are targeting the next level – those companies that employ controllers or CFOs, are growing, have multiple users and need advanced tools like sales order processing, purchase order, inventory and warehouse management, workflows, automation and more complex reporting for cash flow and consolidations.
These applications have been built from the ground up and support a better, more flexible web-based architecture. Smelling the opportunity, resellers and partners for these products (like me) are popping up everywhere. Migration tools to move away from QuickBooks are available. Deals have been struck to integrate these products with other popular online services and collaboration tools like DropboxZohoPayPal and Bill.com.
So what will happen? Many current QuickBooks customers (perhaps you?) who are frustrated with the software’s older architecture but have suffered with it because they/you did not feel the need (or were just too lazy) to change will now be forced to change in the next few years. And they/you will be looking at other alternatives. And, for the first time in a long time, there are many great other options to consider. “50% of the customers we are getting are coming from QuickBooks,” Intacct’s Reid told me. “And we’re expecting a tornado wave of activity in the next few years.” The company has experienced a 150% growth in bookings over the past year alone.
So be prepared: maybe this year, but certainly during the next few years you will be part of this enormous trend. That’s a certainty. Will you be one of the many who decide to dump QuickBooks?
Posted on 1:52 PM | Categories:

How "Stealth" Taxes Can Cost You / Stealth Taxes = the loss of tax benefits as your income rises past certain thresholds in the tax code.

 for the Motley Fool writes: Stealth taxes are not a line item you'll find on your income tax return. But millions of taxpayers end up paying them without even knowing they exist. Only by learning about stealth taxes can you take action to try to avoid them.
The basics of stealth taxes
Most people know that our tax rate on each additional dollar of income rises as we reach higher income levels. However, there's more to your total tax bill than higher tax brackets.
Say you're in the 25% tax bracket. You generally expect to pay 25% in federal income taxes on every additional dollar you make. If you could swear you're paying more than that, you may actually be right. There's a good chance you're paying higher taxes thanks to what I call "stealth taxes" -- the loss of tax benefits as your income rises past certain thresholds in the tax code. Rather than raising the tax rate -- a politically unpopular move -- the tax code phases out or eliminates your tax credits and other benefits when you make too much money.
High-income phase-outs: Not just for rich people
If you think you don't make enough money to lose out on tax breaks due to high income, think again. Many thresholds hit middle-income taxpayers right on the chin.
One example of how stealth taxes can hit ordinary Americans is education credits. If you have a kid in college, you may start to lose the benefits of certain tax credits at income levels as low as $52,000, depending on the credit and your filing status.
Education credits are fabulous -- if you can get them. The Lifetime Learning Credit pays back 20% of the first $10,000 you spend on tuition and other qualified expenses for yourself, your spouse, and qualifying dependents. That's a tax credit of up to $2,000.
But you start to lose that credit when your modified adjusted gross income (basically your total income before itemized deductions) is more than $52,000 (in 2014), if you are single. By the time your modified adjusted gross income, or MAGI, hits $62,000 -- hardly enough money to put you on Easy Street -- the credit is gone. If you're married filing jointly, the credit starts to phase out at an MAGI of $104,000 and disappears completely when your MAGI reaches $124,000.
Not all tax breaks phase out at the same income levels. The American Opportunity Credit is available to taxpayers in slightly higher income brackets. This education credit pays 100% of the first $2,000 you spend on you spend on tuition and other qualified expenses for yourself, your spouse, and qualifying dependents, plus 25% of the next $2,000, for a total credit of up to $2,500.
For the American Opportunity Credit, if you're single, your modified adjusted gross income can be up to $80,000 (in 2013) before it starts to be phased out. It's gone when your MAGI hits $90,000. If you're married filing jointly, the credit starts to phase out at an MAGI of $160,000 and disappears completely when your income reaches $180,000.
Common tax breaks and phase-out levels
For 2013, check out these income phase-out levels for common tax breaks:
Tax benefitPhase-Out Range (filing single)Phase-Out Range (filing jointly)
Child tax credit$75,000-plus$75,000-plus
American Opportunity Credit$80,000 to $90,000$160,000 to $180,000
Lifetime Learning Credit$52,000 to $64,000$108,000 to $128,000
Adoption credit$197,880 to $237,880$197,880 to $237,880
Tuition deduction* (may not be renewed for 2014)$65,000 to $80,000$130,000 to $160,000
Student loan interest deduction$60,000 to $75,000
$125,000 to $155,000
Retirement savings credit$17,750 to $29,500
$35,500 to $59,000
Your tax benefit begins to phase out when your adjusted gross income, with certain modifications, is more than the lower end of the phase-out range. You cannot take the tax benefit if your adjusted gross income is more than the higher end of the phase-out range.
If you file as head of household or as married filing separately, your phase-out levels may be different. Some phase-out levels for 2014 are adjusted for inflation.
Itemizing deductions doesn't help
You can't lower your modified adjusted gross income by taking itemized deductions. Mortgage interest expense, charitable contributions, and other itemized deductions reduce your taxable income after MAGI. The same goes for dependency exemptions. They have no effect on your modified adjusted gross income.
Because your MAGI is the amount the IRS uses to determine whether certain tax breaks are phased out, itemized deductions and dependency exemptions do not help you avoid phase-outs of tax breaks due to high income. 
Tax planning for stealth taxes
You wouldn't turn down a raise because it would put you in a higher bracket and make you lose tax breaks. So long as your tax rate on incremental income is less than 100%, you're always better off earning a dollar than passing it up.
What you can do is plan ahead to lower your adjusted gross income in years when you may qualify for certain breaks.
You may be able to time your income and other tax items. For example, you can put off selling an investment at a gain so you still get that education credit or other tax benefit.
One of the best ways to lower your adjusted gross income and thus qualify for more credits and other breaks is to contribute to a qualified retirement account. Deductions from your paycheck into a traditional 401(k) plan reduce the amount of income you report on your tax return, and thus your adjusted gross income. If you make contributions to a retirement plan yourself, such as a traditional IRA, these also reduce your adjusted gross income.
Contributions to Roth IRAs and Roth 401(k) plans do not reduce your adjusted gross income or taxable income.
You can't change the IRS rules, but you can plan for them. Understanding how tax breaks are phased out at certain levels income is a good first step for better tax planning in 2014.
Posted on 1:50 PM | Categories:

Retirement Plan Limits Largely Unchanged In 2014

Jason Alderman for NJ Today writes: Anyone who’s bought groceries, filled their gas tank or paid insurance premiums recently would probably be surprised to learn that, according to Department of Labor’s Consumer Price Index for Urban Consumers (CPI-U), the rate of inflation is relatively flat – only 1.2 percent from September 2012 to September 2013.

That’s bad news for people who were hoping to boost their contributions to an IRA, 401(k) plan or other tax-advantaged retirement savings accounts, since the IRS uses the CPI-U’s September year-over-year performance to determine whether or not to make cost-of-living adjustments to many of the retirement contributions you and your employer can make in the following year.
Here are highlights of what will and won’t change in 2014:

Defined contribution plans. The maximum allowable annual contribution you can make to a workplace 401(k), 403(b), 457(b) or federal Thrift Savings plan remains unchanged at $17,500. Keep in mind these additional factors:

People over 50 can also make an additional $5,500 in catch-up contributions (unchanged from 2013).
The annual limit for combined employee and employer contributions increased by $1,000 to $52,000.
Because your plan may limit the percentage of pay you can contribute, your maximum contribution may actually be less. (For example, if the maximum contribution is 10 percent of pay and you earn $60,000, you could only contribute $6,000.)

Individual Retirement Accounts (IRAs). The maximum annual contribution to IRAs remains the same at $5,500 (plus an additional $1,000 if 50 or older – also unchanged from 2013). Maximum contributions to traditional IRAs are not impacted by personal income, but if your modified adjusted gross income (AGI) exceeds certain limits, the maximum amount you can contribute to a Roth IRA gradually phases out:
For singles/heads of households the phase-out AGI range is $114,000 to $129,000 (increased from 2013′s $112,000 to $127,000 range). Above $129,000, you cannot contribute to a Roth.

For married couples filing jointly, the range is $181,000 to $191,000 (up from $178,000 to $188,000).
Keep in mind these rules for deducting traditional IRA contributions on your federal tax return:
If you’re single, a head of household, a qualifying widow(er) or married and neither spouse is covered by an employer-provided retirement plan, you can deduct the full IRA contribution, regardless of income.

If you are covered by an employer plan and are single/head of household, the tax deduction phases out for AGI between $60,000 and $70,000 (up from $59,000 to $69,000 in 2013); if married and filing jointly, the phase-out range is $96,000 to $116,000 (up from $95,000 to $115,000).
If you’re married and aren’t covered by an employer plan but your spouse is, the IRA deduction is phased out if your combined AGI is between $181,000 and $191,000 (up from $178,000 to $188,000).
For more details, read IRS Publication 590 at www.irs.gov.

Retirement Saver’ Tax Credit. As an incentive to help low- and moderate-income workers save for retirement through an IRA or company-sponsored plan, many are eligible for a Retirement Savers’ Tax Credit of up to $1,000 ($2,000 if filing jointly). This credit lowers your tax bill, dollar for dollar, in addition to any other tax deduction you already receive for your contribution.

Qualifying income ceiling limits for the Savers’ Tax Credit increased in 2014 to $60,000 for joint filers, $45,000 for heads of household, and $30,000 for singles or married persons filing separately. Consult IRS Form 8880 for more information. 
Posted on 1:46 PM | Categories:

2014 Estate Planning: Should I Take Advantage of Portability?

Beth Shapiro Kaufman, Anne J. O’Brien, William D. Fournier and Megan E. Wernke
Caplin & Drysdale for Caplin & Drysdale write:  As part of the American Taxpayer Relief Act of 2012, Congress made permanent the portability of estate tax exemption between spouses. Although this change was supposed to be a simplification for married couples, after a year of experience with it, we have concluded that it is anything but simple!
  Under portability, if the first spouse to die does not use up all of his or her exemption from estate and gift tax, the executor of the first spouse's estate may elect to give the use of the remaining exemption to the surviving spouse. The surviving spouse can then use that exemption amount (the deceased spousal unused exemption amount, or DSUE) to make lifetime gifts or to shelter bequests at death. This provides an alternative to the traditional estate planning for wealthy married couples in which a credit shelter trust, or bypass trust, is set up when the first spouse dies in order to use up the deceased spouse's exemption. Now, with the top marginal estate tax rate set at 40% and the top income tax rate set at 39.6% (plus the 3.8% surtax in many cases), both estate tax and income considerations must be taken into account in planning. Drafting a flexible estate plan that allows circumstances at death to be considered before making the choice between portability and a credit shelter trust often will be the best option.

Set forth below are some of the most significant pros and cons of these alternative planning techniques as they would apply to a hypothetical couple, Ozzie and Harriet. We'll assume for purposes of this discussion that Ozzie will be the first spouse to die.

Credit Shelter Trust
vs.
Portability
Assets put in a credit shelter trust for the benefit of Harriet will appreciate outside of Harriet's taxable estate.
vs.
If portability is used, all of the couple's assets will pass to Harriet, along with Ozzie's unused exemption, but Ozzie's exemption, the DSUE amount, is not indexed for inflation.
Assets in the trust do not get a new (presumably higher) basis when Harriet dies.
vs.
Assets are included in Harriet's estate and get a new basis when Harriet dies.
Ozzie's GST exemption can be applied to the credit shelter trust.
vs.
Ozzie's GST exemption is wasted if he doesn't use it during life, unless a QTIP trust is used in conjunction with portability.
Ozzie's exemption is used for the benefit of the intended beneficiaries, with no possibility of loss through remarriage.
vs.
Harriet controls who gets the benefit of the DSUE amount. In addition, if Harriet remarries and does not use the DSUE amount before her new spouse dies, the DSUE amount received from Ozzie will be lost because he will no longer be her "last deceased spouse."
In a state with an estate tax but an exemption lower than the federal exemption (such as DC or Maryland), use of the full amount of the federal exemption will require payment of a substantial state estate tax. The state-law QTIP election in Maryland provides an option to avoid this issue.
vs.
In a state with an estate tax but an exemption lower than the federal exemption (such as Maryland or DC), complete reliance on portability will lead to loss of the state estate tax exemption.
If Ozzie's estate is below the dollar threshold for filing, no federal return needs to be filed. However, if the state has an estate tax with a lower filing threshold, a pro forma federal return may have to be prepared in any event.
vs.
Portability requires that Ozzie's estate file a federal estate tax return even if the value of the estate is below the filing threshold.
A credit shelter trust provides some asset protection for Harriet.
vs.
With portability, Harriet owns the assets, so there is no asset protection.
A credit shelter trust offers all of the advantages of trusts (management of the assets in case of incompetency or lack of interest, protection of the assets from undue influence, certainty that the remaining assets will pass to the intended beneficiaries, etc.)
vs.
Portability avoids the expense and inconvenience of a trust and gives Harriet complete control over the assets.

Which plan is better in any particular case turns on an analysis of many factors including:
  • The overall value of the estate
  • Anticipated increase in value of the assets
  • Anticipated estate, income tax, and capital gains tax rates applicable to the estate, the spouse and the ultimate beneficiaries of the estate
  • The rate of inflation
  • The types of assets that are owned
  • Age of the clients and the likely period of time between the two deaths
  • Applicable state law
  • Whether a surviving spouse is likely to remarry
  • Whether the couple has children from prior marriages
  • Whether it is important to be able to use the GST exemption
Posted on 10:11 AM | Categories:

Ensuring a Long Retirement with 'Buckets' / a strategy that employs three "buckets" to addres short-, medium- and long-term retirement needs.

The couple was nearing retirement with ample assets: They were selling their consulting business for $5 million and already had another $1.5 million in investments. 
 
Still, they were conflicted about an investment strategy. They worried about the effect of inflation on a long retirement if they didn't invest aggressively enough, but they also were concerned that another market downturn could decimate their savings. 

They wanted their money to be invested in a way that helped ensure a yearly income after taxes of $85,000--something they would need for several decades, as the husband was 64 and his wife just 55. 

Their adviser, Scott Barker, came up with an investment and income strategy that employed three "buckets" to address their anxiety and their short-, medium- and long-term retirement needs. Mr. Barker is a senior financial adviser at Seattle's Moss Adams Wealth Advisors, which manages $1.6 billion for 900 clients. 

Mr. Barker took a close look at the couple's other types of income. Besides the $5 million sale price, the business they were selling would provide $65,000 a year in rental income for five years. The wife also had a pension from a prior job, which included survivor benefits for her husband if she died. Both spouses could also claim Social Security benefits. 

The adviser and his clients sat down to discuss longevity and a gamut of spending issues. He suggested planning for the wife to live to age 95. During that 40-year period, the couple would need to address not just living and travel expenses but also, among other things, the college costs of the wife's children from a previous marriage. They also wanted to leave up to $300,000 to various charities. 

From this discussion, Mr. Barker identified three distinct buckets for retirement income. During the first five years of retirement, the wife's pension and the couple's residual business income would provide about $90,000 annually. "That told us that we didn't need to take any money out of the investment portfolio for the first five years," says Mr. Barker. 

For the second bucket, Barker invested $1 million in individual bonds with maturity dates between five and 10 years. These bonds would provide the supplemental income the couple needed from years five through 10 of their retirement. 

Finally, he placed their remaining money in a diversified portfolio of stock funds and commodities. There were assets the couple could tap after the 10-year mark to replenish their short-term and medium-term buckets. Each year, the couple and their adviser would assess market conditions, interest rates, taxes and changes in expenses to determine the best strategy for shifting funds between the buckets, while maintaining the option to use some equity exposure to stay ahead of inflation. 

The plan eased the clients' worries. They were confident they had enough money to last through their retirement and were free from worry about day-to-day stock market volatility because their short- and medium-term income needs were covered. 

"We constructed a portfolio with more of a growth posture," said Mr. Barker. "But they had peace of mind about not being heavily invested because they knew when they needed the money."
Posted on 9:10 AM | Categories:

From Xero to $3 Billion In 7 Years / Why The Cloud Just Might Be The Most Disruptive Technology Ever

Greg Satell for Forbes wrote on "disruptive technology" and included a section on Xero that reads:   In 2004, Rod Drury was already a successful technology entrepreneur, having founded two successful companies and amassed a small fortune.  Yet, like many serial entrepreneurs, he found himself restless and was looking for a new opportunity. 

He found one when he looked at accounting software for small business. Unlike consumer technology, which was quickly moving to a web-based approach, business software was still sold in boxes.  That made it difficult to integrate with other software and almost impossible for the people who used it to collaborate effectively.

So he went to his friend and accountant, Hamish Edwards, and together they decided to build a software company that centered on the relationship between small businesses and their accountants. Rather than just transferring files every quarter or so, their product would allow accountants to act as real-time advisors.

In 2006, they launched Xero, which has been revolutionizing how small business operate ever since.  It goes far beyond just keeping the books, it seamlessly integrates with a wide array of add-on software tools, from point-of-sale to timesheets to invoicing and payroll.  Xero currently has a market capitalization of over $3 billion and is still growing fast.

Low-End Disruptions
To get an idea of why companies like Xero are so disruptive, think back to how software used to work. You would buy a package from a vendor and it would be installed on your company server or PC. Through partnerships and acquisitions, the software company would could then offer you additional products with expanded capability.

This was not only time consuming and expensive, but it limited you to the vision of your software provider.  If you had a restaurant and wanted to start selling take-out on the Web, you had to either get software that was compatible with your accounting software or basically run two sets of books.

In the best case, you were held hostage to the partnerships and acquisitions your vendor saw fit to make.  Most of the time though, your ability to was hampered by the strategies and vision of your software provider.  If it didn’t see why your point-of-sale system needed to be integrated with E-commerce, you were basically out of luck.

But cloud technology works differently.  Typically, an application programing interface (API) is set up so that any developer that wants to make its product compatible can do so on its own.  There’s even a company called Zapier.com that combines applications automatically in the cloud for you.  Power has shifted from software companies to everyday consumers.

Posted on 8:47 AM | Categories:

How to Max Out Your Retirement Accounts in 2014 / Use these strategies to make optimum use of your 401(k) and IRA

Emily Bandon for US NewsWorld Report writes:  Contributing to retirement accounts will allow you to take advantage of tax breaks for retirement savers and employer contributions, as well as capture valuable investment returns on your savings. To take full advantage of all the available retirement account perks, you will need to be able to save a considerable amount of money and invest it in a way that minimizes taxes and fees. Here's how to make the most of your retirement accounts in 2014:

Max out your 401(k). Most workers can contribute up to $17,500 to a 401(k), 403(b) or the federal government's Thrift Savings Plan in 2014. To max out this type of retirement account, you would need to contribute $1,458 per month or $729 per paycheck if you are paid twice per month. For someone in the 25 percent tax bracket, contributing the maximum will save you $4,375 in federal income taxes. Income tax won't be due on your 401(k) contributions until you withdraw the money from the account. The contribution limits are adjusted annually to keep pace with inflation. "Adjust your contributions each year on the 401(k) site, and work with your [human resources] department to make sure that you are maximizing it," says Clarissa Hobson, a certified financial planner for Carnick and Kubik in Colorado Springs, Colo.

Take advantage of 401(k) catch-up contributions. Workers age 50 and older can contribute an additional $5,500 to their 401(k) in 2014, or a total of $23,000. To save this much, you'll need to set your twice-a-month 401(k) contributions to $958 or contribute $1,917 per month. An older worker in the 25 percent tax bracket who contributes the maximum amount can reduce his or her 2014 tax bill by $5,750. Workers in higher tax brackets can save even more. "If you are a high wage earner, every tax deduction you can get is a good thing," says Debbie Price, a certified financial planner and president of Price Planning in Powell, Ohio.

Get employer contributions. In addition to tax breaks, many employers will match the amount workers contribute to the company 401(k) plan. "If you have a company match, I think it's always a good idea to start there," Hobson says. The most common 401(k) match is 50 cents per dollar contributed up to 6 percent of pay. Using this formula, a worker earning $75,000 per year who saves at least $4,500 in a 401(k) plan could get another $2,250 from his or her employer in matching contributions.

Max out your IRA. You can contribute up to $5,500 to an IRA in 2014, which jumps to $6,500 if you are age 50 or older. To max out this type of account over the course of the year, you would need to contribute $458 per month, or $542 monthly if you are age 50 or older. However, if you have a workplace retirement plan, the tax deduction for traditional IRA contributions is phased out for individuals with modified adjusted gross incomes between $60,000 and $70,000 in 2014 ($96,000 and $116,000 for couples). If only one spouse has a retirement plan at work, the deduction is phased out if the couple's income is between $181,000 and $191,000. Unlike 401(k) contributions, which generally need to be made by the end of the year, IRA contributions can be made up until the tax filing deadline, resulting in nearly immediate tax savings on your current return.

Consider Roth accounts. Roth 401(k)s and Roth IRAs have the same contribution limits as traditional retirement accounts, but the tax treatment is different. Instead of getting a tax break when you make the contributions, Roth accounts allow you to pay the income tax at your current rate, which can be especially beneficial for people who are young or in a low tax bracket. Withdrawals in retirement will then be tax-free. "Having that pot of money that has already been taxed and will never be taxed again gives you so much more flexibility in your retirement years," Price says.

Eligibility to make Roth IRA contributions is phased out once an individual's income is between $114,000 and $129,000 in 2014 ($181,000 to $191,000 for couples). But investors who earn more than the income cutoff may still be eligible to convert traditional IRA assets to a Roth. "For those people who don't qualify to contribute to a Roth IRA because of income level, you can contribute to a traditional IRA and turn right around and convert that traditional IRA to a Roth IRA and pay the tax in the current year," says Gregory Zandlo, a certified financial planner and founding principal of North East Asset Management in Minneapolis. "Yes, they forgo a little bit of the tax benefit now, but they give themselves greater financial flexibility by putting money into a Roth 401(k) option."

Get the saver's credit. There's an extra retirement saving tax perk for low- and moderate-income workers who save for retirement. Couples with an adjusted gross income of less than $60,000 ($30,000 for individuals) who save for retirement in a 401(k) or IRA are eligible to claim the saver's credit on their tax return, which can be worth as much as $1,000 for individuals and $2,000 for couples.

Choose low-cost investments. One of the ways money leaks out of your 401(k) or IRA is when you pay high fees on your investments. Choosing low-cost investments will help your money grow faster. "Become really astute in terms of the fees that are being charged in the investments in your plan," Zandlo says. "Even if you are able to save half a percent, over 10 years, that is 5 percent of your money."

Hold high-tax investments in retirement accounts. When you withdraw money from a traditional retirement account, it will be taxed at regular income tax rates, regardless of what the money was invested in. If you are saving in both retirement and taxable accounts, it makes sense to hold investments that are taxed at a low rate outside your retirement account and investments that are taxed at a higher rate within the retirement account.

Don't take the money out too early or too late. Traditional 401(k)s and IRAs have a variety of rules about when money can and should be withdrawn from the account. Withdrawals from traditional retirement accounts before age 59 1/2 typically result in a 10 percent early withdrawal penalty in addition to regular income tax on the amount withdrawn. However, there are some exceptions to the early withdrawal penalty if an IRA distribution is used for higher education costs, a first home purchase (up to $10,000), high medicals costs or health insurance expenses after a period of unemployment. After you turn age 70 1/2, withdrawals from traditional retirement accounts become required. The penalty for missing a withdrawal is 50 percent of the amount that should have been withdrawn.

Posted on 8:15 AM | Categories: