How a Trust Can Cut Taxes / Higher income-tax rates may increase the incentives for trustees to pay out more to beneficiaries.

Arden Dale for the Wall St Journal writes: Putting money into a trust is a well-established way to avoid taxes. Taking extra money out of a trust can cut a tax bill, too, experts say.

Like individuals, trusts must pay taxes on earnings. Yet trusts vault into the highest bracket much quicker than individuals do: In 2014, trusts pay the maximum rate on any earnings above $12,150, while individuals can make as much as $406,750 before the top rate kicks in.

In addition, many trusts face a bigger income-tax bite when they file this year because of new higher rates on top earners that took effect in 2013. The maximum rate for trusts is 43.4%, now that the highest tax bracket has risen to 39.6% and there is also a new 3.8% surtax on net investment income for high earners.

As a result, trustees and financial advisers are aiming to lower their tax liability by increasing their distributions to beneficiaries, who are often in a lower tax bracket than the trust itself.

"It makes a whole lot more sense than usual to look at this," says Larry Maddox, president of Horizon Advisors, a Houston-based firm that manages around $230 million.

Trusts often are set up by deep-pocketed individuals to reduce or eliminate gift or estate taxes while passing on wealth to children or other beneficiaries. American families have long used trusts to pass assets to heirs; high-profile examples include the Rockefeller family trusts of 1934.

But trusts also pay tax on income from stock dividends, interest and other earnings.

Moving some of that income-tax liability to a beneficiary can generate big savings, experts say. For instance, a trust with $30,000 in taxable income that is set up for the benefit of a single individual with taxable income of $100,000 would owe $32,217 in combined 2013 taxes, if the trust made no distribution to the beneficiary, Mr. Maddox says.

But if the trust paid out $20,000 to the beneficiary, the total income-tax bill for the trust and the individual together would amount to $29,340, he says.

The trust's income-tax bill would fall from $10,923, paid at the 43.4% rate, to $2,446, paid at a lower 33% rate because the trust has less taxable income. The beneficiary would pay more in individual income tax—$26,893, as compared with $21,293. But because the beneficiary is in the 28% income-tax bracket, the combined savings to the trust and the beneficiary would be $2,877.

It can be important for trustees to run the numbers early in the new year, Mr. Maddox says, because the Internal Revenue Service allows trusts and beneficiaries to count any distribution made in the first 65 days of the year as income for the prior tax year.

Michael Puzo, a partner at Boston law firm Hemenway & Barnes who frequently serves as a trustee, says he and his fellow trustees will shift some trust income to individual beneficiaries, especially those in lower tax brackets, if a trust permits the move and a shift is otherwise in a family's interests.

At the same time, experts say, distributing funds from a trust could have consequences that overwhelm the benefit of potential tax savings.

Any strategy to pay out more to a beneficiary ought to take into account other current beneficiaries, and balance their needs with those of anyone who stands to inherit later on, they say. These may include future grandchildren, for example, or so-called remaindermen—those who stand to inherit whatever assets are left after current beneficiaries die.

Moreover, increasing payments to a child or college student could create new tax-filing obligations and raise questions about how the beneficiary will handle the money, says Michael Scherer, an adviser at Summit Financial Strategies, a Columbus, Ohio, firm that manages about $800 million.

Mr. Scherer says his firm is "absolutely" looking more closely at trust distributions, and in at least one case, it will recommend a bigger distribution for a trust beneficiary who dropped into a lower tax bracket.

Still, he says, "I feel it's more important to respect the purpose of the trust overall than to just make distributions for tax savings' sake."

Understanding Taxation Of Foreign Investments

Daniel Kurt for Investopedia/Forbes writes:  For many of today’s investors, diversification goes beyond owning companies in a variety of industries – it means adding securities from different parts of the globe, too. In fact, many wealth management experts recommend diverting a third or more of one’s stock allocation into foreign enterprises to create a more efficient portfolio.

But if you’re not aware of the tax treatment of international securities, you’re not maximizing your true earnings potential. When Americans buy stocks or bonds from a company based overseas, any interest, dividends and capital gains are subject to U.S. tax. Here’s the kicker: the government of the firm’s home country may also take a slice.

If this double taxation sounds draconian, take heart. The U.S. tax code offers something called the “Foreign Tax Credit.” Fortunately, this allows you to use all – or at least some – of those foreign taxes to offset your liability to Uncle Sam.

Basics of the Foreign Tax Credit

Every country has its own tax laws, and they can vary dramatically from one government to the next. Many countries have no capital gains tax at all or waive it for foreign investors. But plenty do. Italy, for example, takes 20% of whatever proceeds a non-resident makes from selling his/her stock. Spain withholds slightly more, 21%, of such gains. The tax treatment of dividend and interest income runs the gamut as well.

While it doesn’t hurt to research tax rates prior to making an investment – especially if you’re buying individual stocks and bonds – the IRS offers a way to avoid double taxation anyway. For any “qualified foreign taxes” that you’ve paid - and this includes taxes on income, dividends and interest – you can claim either a credit or a deduction (if you itemize) on your tax return.

So how do you even know if you’ve paid foreign tax? If you have any holdings abroad, you should receive either a 1099-DIV or 1099-INT payee statement at year’s end. Box 6 will show how much of your earnings were withheld by a foreign government. (The official IRS web site offers a basic description of the foreign tax credit here.)

In most cases, you’re better off opting for the credit, which reduces your actual tax due. A $200 credit, for examples, translates into a $200 tax savings. A deduction, while simpler to calculate, offers a reduced benefit. If you’re in the 25% tax bracket, a $200 deduction means you’re only shaving $50 off your tax bill ($200 x 0.25).

The amount of foreign tax you can claim as a credit is based on how much you’d be taxed on the same proceeds under U.S. tax law, multiplied by a percentage. To figure that out, you’ll have to complete Form 1116 from the Internal Revenue Service (download the form here).

If the tax you paid to the foreign government is higher than your U.S. tax liability, then the maximum foreign tax credit you can claim will be the U.S. tax due, which is the lesser amount. If the tax you paid to the foreign government is lower than your tax liability in the U.S., you can claim theentire amount as your Foreign Tax Credit. Say you had $200 withheld by an outside government, but are subject to $300 of tax at home. You can use that entire $200 as a credit to trim your U.S. tax bill.

Example 1

Now imagine just the opposite. You paid $300 in foreign taxes but would only owe $200 to the IRS for those same earnings. When your taxes abroad are higher, you can only claim the U.S. tax amount as your credit. Here, that means $200. But you can carry the remaining $100 over one year – if you completed Form 1116 and file an amended return – or forward up to 10 years.

Example 2

The whole process is quite a bit easier, however, if you paid $300 or less in creditable foreign taxes ($600 if married and filing jointly). You can skip the Form 1116 and report the entire amount paid as a credit in your Form 1040.

Be Careful with Overseas Fund Companies

Given the difficulty of researching foreign securities and the desire for diversification, mutual funds are a common way to gain exposure to global markets. But U.S. tax law treats American investment firms that offer international funds much differently than funds based offshore. It’s important to realize this distinction.

If a foreign-based mutual fund or partnership has at least one U.S. shareholder, it’s designated as a Passive Foreign Investment Company, or PFIC. The classification includes foreign entities that make at least 75% of their revenue from passive income or uses 50% or more of their assets to produce passive income.

The tax laws involving PFICs are complex, even by IRS standards. But overall, such investments are at a significant disadvantage to U.S.-based funds. For example, current distributions from a PFIC are generally treated as ordinary income, which is taxed at a higher rate than long-term capital gains. Of course, there’s a simple reason for this – to discourage Americans from parking their money outside the country.

In a lot of cases, American investors, including those living abroad, are better off sticking with investment firms based on U.S. soil.

The Bottom Line

For the most part, the Foreign Tax Credit protects American investors from having to pay investment-related taxes twice. Just watch out for foreign-based mutual fund companies, for which the tax code can be much less forgiving. When in doubt about your situation, it’s a good idea to consult a qualified tax expert who can guide you through the process.

Kashoo or Cash… ew?

Heather WatsOn for Kawartha writes: Industry Canada reports that as of December 2012, there were 1,087,803 small businesses in Canada that employ one to 99 people. This represented 98.22% of employer businesses in Canada. I’m no expert but I’d say small business is the backbone to our economy. Small business owners are generally experts in their field but when it comes to dealing with the ‘business’ side of the business owners need to get it done quickly and effortlessly so they can get back to the actual work they do. Fortunately there are apps to help. Here’s one that tackles the accounting function.

App Name:  Kashoo Accounting by Kashoo Inc.

Price: $20/month and additional in app purchases

Availability: iPad only (Requires iOS 7)

Last Update:  December 31, 2013

The Pitch:  “Simple Cloud Accounting” as they call it, which means easy, fast and accessible from the road. No need to use spreadsheets and be at your desk to invoice, track sales and expenses and get financial reports. It’s a double entry accounting system on the fly that you can update, send invoices and share with your financial team.

The Good:  Setting up accounting software can be a headache. Kashoo makes it simple with videos and help tools along the way. If you’re really stuck, there’s a toll free number, email and online support available. The app itself is simple to navigate and allows users to set up invoice templates and monitor accounts through the dashboard. The app is secure and they’re proud of it. Really important is that you can import and export your data in different formats that allows you to easily transfer your records to another application or software if you choose.

The Bad:  This app is only really functional for micro businesses. Currently, there is no way to handle inventory or payroll management. They do partner with other payroll service providers that will integrate with Kashoo but there is an additional cost for this which varies depending on the service partner.

The Ugly:  It’s a little pricey compared to other traditional accounting software. At first I thought it was because it is cloud based and that convenience is worth something. However, there are apps that support desktop software so you can take care of finances on your mobile device and have it sync to your desktop.

Recommendation:  I’m not fully sold on this app. It does what it says it will do, “Simple Cloud Accounting”. However the price, limitations and inability to use any device other than an iPad is too restrictive for my liking. This app won’t grow with your business and small business owners need that flexibility.

New online tools provide personal finance assistance

Steve Rosen for the Kansas City Star writes:  Valentine’s Day, a high-dollar holiday, is just around the corner. Prom, the first college tuition payments and a summer vacation aren’t that far off.

Wouldn’t it be nice if the family — teenagers included — could tighten up the finances, sock a little extra money away and create a budget rather than operating under an open wallet policy?

Mint.com, Manilla.com and LearnVest are among the most highly rated money management websites. But some new online tools have recently been introduced to help you and your high school or college kids make better decisions about budgeting, spending, saving and paying bills on time.

One of the newest products is called MoneyStream, which was designed by a group of financial and technology experts who left Intuit several years ago to create their own product.

Launched late last year, MoneyStream’s goal is to help busy families control their money.

“Our technology is designed to show you where your money is, what’s coming in, what’s going out and when,” said Christy Ross, MoneyStream’s chief marketing officer.

Here’s how it works: You provide MoneyStream with your bank account information and the service automatically gathers and organizes your bills, as well as what you have coming in on your paycheck and other income.

All the information is then plotted on a calendar, and users are alerted by email or text messages when a bill needs to be paid. In other words, no more excuses for not writing the monthly check for day care or for incurring late fees on the cable TV bill.

But it’s more than just a bill-paying website. There’s also a feature that monitors your monthly cash flow and alerts you if your spending is getting out of hand.

MoneyStream offers three services — a basic, free, mostly do-it-yourself plan that should appeal to teens and young adults; a premium plan for $9.95; and a super plan with more electronic banking bells and whistles for $19.95 a month. If you’re feeling overwhelmed at first or your payment records don’t quite square up, MoneyStream will contact you to go over any problems — a nice customer service touch.

“This is not a service you have to babysit,” said Ross. “We do the babysitting for you.”

Next up for MoneyStream is a mobile app this spring.

MoneyStream is not the only new personal finance program. A Silicon Valley startup called Finovera recently launched a free online service that links your bills and bank and investment statements into one secure file. Finovera collects a 12-month history of bills and statements, automatically downloads new ones as they post and alerts you when the payment is due.

Finovera also offers a digital service that allows you to store important documents, such as insurance policies and extended warranties on gaming systems.

Finally, Manilla.com has added a free bill-sharing feature that allows families to link multiple banking accounts, making it easier for Mom and Dad to monitor their kids’ spending and go over financial issues.

So the next time your college student sends a “Mom, I need more money” request, first see where all their money has gone.

Read more here: http://www.kansascity.com/2014/01/31/4782267/new-online-tools-provide-personal.html#storylink=cpy

Sage slips on competition concerns / Positive results from rival NetSuite highlight competitive UK market says analyst

Nick Fletcher for The Guardian writes: Sage, the accountancy software specialist, has fallen back on competition concerns.

Some investors thought it might receive a boost from positive results from rival NetSuite, which reported a 35% rise in fourth quarter revenue and raised its guidance for 2014.

But NetSuite is trying to make inroads into Sage's market, issuing a Sage Switch guide to encourage users to move to NetSuite's cloud services. Analyst George O'Connor at Panmure Gordon said:

Investors will read-across to Netsuite's beat last night and think - "bless, what's good for the goose is good for the gander". However, the latest Netsuite Sage Attack campaign includes customer case studies. To our knowledge these attack campaigns have yielded diddly in the past and we all know that Sage UK has been humming along - but the cloud is growing in momentum.

Netsuite's tactic only highlights that the UK - the jewel in the Sage crown - is one of the most competitive markets and where Sage has to contend with the likes of Xero, Intuit, and the re-formed IRIS, Tenhill and chewing away at the entry there is FreeAgent. None of that is obvious from the Sage share price which marches ever upward. While we are of course delighted for Sage shareholders the valuation is now punchy. We retain our hold for now.

Sage has slipped 7.9p to 412.6p.

Freshbooks is Awesome, but Not For Accounting

Sam Glover for Lawyerist writes: I really love Freshbooks for timekeeping and billing. There is no better option for solos and very small firms. But in 2012,Freshbooks changed its tagline to “cloud accounting.” Here’s the announcement, from Freshbooks founder, Mike McDerment:

So here’s the news: from this day forward, FreshBooks is Cloud Accounting. We’re not changing our name, we’re just changing the way we describe our services.

In fact, Freshbooks hadn’t changed anything about the software when McDerment made that announcement. Changes have come trickling out, though. One of the first “accounting features” introduced after the name change was the ability to create a balance sheet — by entering the numbers yourself. At first, I thought it was a joke. It wasn’t. The feature is still present in Freshbooks, and it has not changed.

A balance sheet is not something you can sketch on a cocktail napkin. Real accounting software generates a balance sheet using real numbers generated from your accounts. It’s not something you just make up yourself and then hand over to your accountant for tax preparation.

Then, Freshbooks announced the ability to import expenses from your bank accounts. That’s right, just expenses. And the data you get for your checks, for example, is not particularly useful. You don’t even get a check number to help you identify the check in question.

Further, Freshbooks ignores your deposits. I guess it assumes that the only deposits will be payments on the invoices you send through Freshbooks. If you do happen to have deposits that are not tied to an invoice, you have to enter them manually.

Speaking of payments, because Freshbooks does not match them up with your bank accounts, you do not get all the information you need. If you accept credit cards or use PayPal for processing payments, for example, you will pay a fee on every transaction. But Freshbooks does not account for those fees, so your profit and loss report will overstate your income by the amount of those fees. In other words, if the invoice is for $100, and someone pays with a credit card, there will be a fee of, say, $3. Freshbooks will show a deposit if $97, which leaves a $3 expense unaccounted-for.

But perhaps the most glaring omission is any sort of bank account register, which means there is no way to reconcile your accounts. This is a pretty fundamental omission. If you cannot even reconcile your accounts, you are not doing accounting.

Look, Freshbooks is fantastic timekeeping and billing software. If you are a solo or a very-small firm, there is nothing better. (Although if you want good timekeeping and billing bundled with practice management software, use one of our recommendations.)

But in advertising itself as “cloud accounting,” Freshbooks is misleading, at best. Freshbooks is excellent billing software with a few inadequate accounting features grafted on. It is not accounting software. It is woefully unsuitable for accounting.

(I did reach out to Freshbooks with my concerns, but I never received the promised response.)

Tax turmoil boosts donor-advised funds but stock market rally helps too / Charitable income tax deduction one of the few tax shelters remaining

Carl O'Donnell for Investment News writes: The Obama administration's tax hikes on affluent Americans — along with a strong stock market and fears that the government would push tax rates even higher — led to an increase in giving to donor-advised funds last year.

Major providers of donor-advised funds, which allow investors to make upfront contributions of cash or assets to an investment fund and then gradually dole out the money in the form of grants, enjoyed upticks in fund creation, contributions and grants in 2013 on the heels of higher income and capital gains taxes.

At Schwab Charitable Gift Fund, grants increased by 36% and contributions jumped by 35% last year. The Raymond James Charitable Endowment Fund saw a 35% increase in assets, largely from new contributions. At Fidelity Charitable Gift Fund grants jumped 29%, while contributions remained about flat. Meanwhile, Vanguard Charitable Gift Fund saw a 15% increase in the number of grants but a slight decline in contributions.

The broad market index S&P 500 surged about 29.6%. As for as taxes, the American Taxpayer Relief Act of 2012, which took effect Jan. 1, 2013, raised rates on the top income bracket to 39.6% from 35% and on capital gains to 20% from 15%. An additional 3.8% tax on net investment income raised the effective rate on capital gains even further.

Kim Laughton, president of Schwab Charitable, said that, coming on the heels of the creation of a wave of donor-advised funds in 2012, the main drivers of last year's increased contributions were the strong equities market and the higher tax rates on income and capital gains, Ms. Laughton said.

Fears that the debt ceiling negotiations would lead to an elimination of the tax deduction on charitable contributions prompted a wave of fund creations and contributions, she said. Now that many of those funds are issuing grants, charities are reaping the benefits.

“Since people now have a higher effective tax rate than they otherwise thought, they are saying 'how can I shelter my income?'” said Chris Raulston, a wealth strategist at Raymond James. “One of the few remaining tax shelters is the charitable income tax deduction.”

The new taxes, along with a strong equities market, also led to a much larger proportion of donation taking the form of appreciated assets such as stocks and bonds. Fidelity Charitable saw these donations jump to 62% of all contributions, from 54% in 2012. For Schwab Charitable, the assets contributed 65%, a five-year high. At Vanguard Charitable, appreciated assets made up 81% of contributions.

Donating appreciated assets allows investors to avoid paying capital gains tax and deduct the donation from taxable income, said Amy Danforth, senior vice president at Fidelity Charitable. The donor-advised fund can then liquidate the assets at any time so that grant recipients receive cash.

The most important numbers on your tax return / Most taxpayers concentrate on ways to reduce their taxable income, but they need to focus on adjusted gross income instead.

Robert D Flach for MSN writes:  Most taxpayers concentrate on ways to reduce their "taxable income." However, it is your "adjusted gross income" (AGI) -- Line 37 on Form 1040 or Line 21 on Form 1040A -- that is really the most important number on your tax return.

There are two types of tax deductions -- those allowed "above the line" and those claimed "below the line." The "line" is your adjusted gross income.

"Above the line" deductions reduce your adjusted gross income. You do not have to itemize to claim these deductions, aka "adjustments to income", which include:

• Alimony 
• Early withdrawal penalties for CDs and savings accounts 
• Educator expenses 
• Job-related moving expenses  
• Self-employed deductions for health insurance premiums, half of the self-employment tax and traditional retirement plan contributions. 
• Student loan interest
• Traditional IRA contributions 
• Tuitions and fees 

Deductions "below the line" include the standard deduction, personal exemptions and itemized deductions. These deductions reduce taxable income, but not adjusted gross income.

Why is your AGI so important? Many tax deductions and credits are phased-out, or altogether eliminated, based on the amount of your AGI, or in some cases a "modified" AGI (MAGI). Some items of income are increased, and deductible losses reduced, as this number grows. Reducing your AGI could reduce the amount of taxable income you must report and increase the deductions and credits you can claim.

An "above-the-line" deduction of $1,000 could actually reduce your net taxable income by more than $1,000. The tax benefit of a deduction claimed "below the line" is always limited to the amount of the actual deduction. A $1,000 "below the line" deduction will only reduce your net taxable income by $1,000.

The Hazards of Inheriting an IRA / Retirement accounts require their own beneficiary forms. Here's what you need to know.

Kelly Greene for the Wall St Journal writes:  Families are increasingly getting large chunks of their inheritances in individual retirement accounts. Some of them are finding themselves mired in messes caused by missing beneficiary forms.

Retirement accounts generally require their owners to fill out specific forms naming beneficiaries, separate from wills. When the owner dies, the designated beneficiary—if there is one—can choose to stretch those distributions across his life expectancy, giving the remaining assets more time to grow. No taxes are due until withdrawals are made.

When there isn't a designated beneficiary, the heir generally has to empty the account much sooner—and possibly get bumped into a higher tax bracket, says Jeffrey Levine, a certified public accountant and IRA consultant at Ed Slott & Co. in Rockville Centre, N.Y.

One big exception: When surviving spouses are the sole heirs, they follow different distribution rules. (For more details, see IRS Publication 590 at IRS.gov.)

New Account Numbers

Although it seems pretty simple to fill out a form saying who should inherit an account, the devil is in the details. Longtime account holders sometimes make changes that result in opening what are effectively new accounts, with new account numbers. And beneficiary forms can get lost, forgotten or simply neglected in the shuffle.

Deborah Harris, a Delaware retiree, and her two sisters inherited IRAs from her 70-year-old brother, John Heebner, when he died last year. He had been careful to fill out all the required beneficiary forms for every account with their names, according to Ms. Harris's son-in-law, Christopher Kamnitsis, senior vice president of Beacon Financial Group, a financial-planning firm in Flemington, N.J.

But when Mr. Heebner switched his largest IRA to a brokerage IRA at the same investment firm, the account number changed. That meant Mr. Heebner needed to fill out a new beneficiary form to match the new account number—but he didn't realize the need to redo the form, and his family contends that the company didn't tell him.

"My brother wasn't stupid," Ms. Harris says. "I'm assuming he thought the beneficiary form was there" as it was for his other IRAs.

When people inheriting an IRA are named on a beneficiary form, they can stretch withdrawals across their life expectancy, using a formula set by the Internal Revenue Service. The advantage: Small withdrawals can be taken over many years, allowing the account's pretax assets to increase in value and the heirs to postpone paying taxes until they take distributions.

Missing the Deadline

It is a good idea for IRA owners to give their beneficiaries copies of those forms during their lifetimes, says Jay Starkman, a CPA in Atlanta. One IRA custodian took more than a year to find Mr. Starkman's own mother's beneficiary form, nearly causing him to miss the deadline for taking the first required minimum distribution.

But when the heirs aren't specifically named on a beneficiary form, they have to empty the account sooner, as noted above.

And in some states, including Florida, where Ms. Harris's brother lived, such accounts have to go through probate court when there is no beneficiary form.

"All the adviser had to do was cut and paste, but he didn't do it," says Beacon's Mr. Kamnitsis. "Now, my family has lost a stretch IRA that could have lasted for generations."

To avoid such situations, workers who have made any changes in their accounts should make sure their beneficiary forms are still in place, Mr. Kamnitsis says.

Events that may require changes include changing jobs, retiring, getting married or divorced, having children or grandchildren, and converting a traditional account to a Roth IRA.

People inheriting an IRA have some paperwork to do on their end as well. When you inherit an IRA from anyone other than your spouse, you can't roll it over into your own IRA. Instead, you have to retitle the IRA so it is clear the owner died and you are the beneficiary.

If you move the account to a new custodian, make sure it is a "trustee to trustee" transfer. If the check is made out to you, the IRS will consider it a "total distribution" subject to tax, and if you are anyone other than the surviving spouse, it would effectively end the IRA.

The 50% Penalty

And be aware that there are deadlines for all of these actions. If the IRA owner dies after age 70½, when required withdrawals start, and didn't yet take a withdrawal for that year, the heir has to do so by Dec. 31. If you miss the deadline, you are subject to a 50% penalty on the amount you should have withdrawn.

The deadline for the first required minimum withdrawal from the inherited account is Dec. 31 of the year following the year of the owner's death.

How do you figure out how much you are supposed to take out? The calculation is different from the way retirees figure out how much they have to take from their own accounts.

If you are a nonspouse beneficiary, look up your life expectancy on the single-life table in IRS Publication 590. Subtract one year from your initial life expectancy to figure out how much to withdraw each year.

So, for example, if your life expectancy the first year is 20 and you inherit an IRA worth $100,000, you would withdraw $5,000. The next year, you would divide the balance by 19, and so forth. Most IRA custodians will calculate that withdrawal amount for you. But you need to make sure they are using the table and math for an inherited account.

Another tip: Confirm with the IRA custodian that the code "4" will be used for distributions from an inherited account, and that it is on their 1099 form, says Mr. Starkman, the CPA. That is the code used to show that it is a distribution on account of death.

A Strategy to Maximize an Employer's 401(k) Match

Alex Coppola for the Wall St Journal writes:  For almost a decade, the client and his wife scaled back their retirement savings while they put their children through college. Now, in their early 50s, their youngest had finished school and they found themselves behind in their retirement savings.  The client's first impulse was to increase his contributions to his 401(k). He was only contributing a little over $8,000 a year, which represented just 3% of his $250,000 salary and was less than half of the allowed annual contribution for an individual. But his adviser, Pat Burke, asked to take a look at the details of the company plan first.

"Conventional wisdom says that investors should always make the maximum contribution to their 401(k), but each plan works differently," says Mr. Burke, managing director at Mill Creek Capital Advisors in Conshohocken, Pa., which manages $3.2 billion for 250 clients. "You have to consider the fine print before you can develop a strategy."

In this case, that fine print revealed a flaw in the client's plan. If he increased his 401(k) contributions, he would actually lose the advantage of a very generous employer match--14% of salary up to the Social Security wage base, and 19.7% of salary above that wage base.

What the client hadn't considered was the $51,000 total limit on 401(k) contributions. If the man's combined contributions exceeded that amount, his employer would be forced to reduce its contributions dollar-for-dollar.

Instead, Mr. Burke suggested that the client contribute only enough to his 401(k) to maximize the employer match, and then focus on saving additional money in personal retirement accounts.

First, the adviser started by calculating how much the client could contribute before affecting his employer match. Based on his salary, the client's employer was contributing close to $43,000 annually to his 401(k), which meant that the client could contribute only $8,000 of his own money before exceeding the $51,000 total annual limit. So as it turned out, the client was already making the maximum contribution.

The $8,000 "seems almost trivial until you remember the plan rules and our goal," says Mr. Burke. "We wanted to be sure the client wasn't leaving any free money on the table."

Still, Mr. Burke had calculated that the couple needed an additional $13,000 in yearly savings to meet their retirement goals. Since the client's income level disqualified him for deductible contributions to a traditional IRA, Mr. Burke suggested using Roth IRAs to save that money.

"If we couldn't help the client save taxes on his contributions, we'd at least allow his money to grow tax-free going forward," Mr. Burke explains.

And while the client's income also disqualified him from making direct contributions to a Roth IRA, Mr. Burke explained that there were no limitations on account conversions. So he advised the client and his wife to contribute $6,500 each to traditional IRAs, which they would immediately convert to Roths. They couple will use the same strategy each year until their retirement.

The result: A portfolio of tax-free assets to supplement the retirement savings in his 401(k) that were largely funded by his employer.

"It's about making the most of the opportunities available," says Mr. Burke. "When the client and his wife make that final IRA conversion in a few years, they'll have what they need to meet their goals in the future."

Will Failing To File A Tax Return - Or Pay Taxes - Make You Ineligible For Obamacare? The Surprisingly Complicated Answer

Kelly Phillips Erb for Forbes writes:   It seemed like a simple question. A reader asked me: Would you still qualify for health insurance using the exchanges if you didn’t file a tax return or if you owed taxes?

For those of you just interested in the answer, it’s yes. With respect to the available advance payments and the tax credit, here are the details, straight from the Treasury:

Owing back taxes would NOT disqualify an individual from receiving advance payments of the premium tax credit. In order to receive advance payments, eligible individuals must indicate at the time of enrollment that they agree to file a tax return in 2015 to reconcile the advance payments they receive in 2014. Also note that, in the future, if individuals receive advance payments and then fail to claim the premium tax credit on a federal tax return and reconcile the advance payments, that could present a barrier to receiving additional advance payments. This barrier would not be relevant until the fall of 2015.

But you shouldn’t stop reading there. There’s more to it. Getting to the answer is the real story here.

The original question was triggered with a call from a potential enrollee to the exchanges out west. California, to be exact. California was the first state in the nation to enact legislation creating a health benefit exchange under the federal Patient Protection and Affordable Care Act. The marketplace for obtaining health care coverage is Covered California. As of two weeks ago, 1,410,919 California residents had started enrollment applications for health care coverage – that’s about 4% of the state’s population.

The new health care exchange system is tricky to maneuver no matter where you are in the country. That’s pretty much been the consensus all around and to be fair, it’s expected. The health care exchanges are new – and the legislation and related guidance is still evolving – and there are going to be some bumps in the road. That’s why the exchanges have representatives to help walk you through the process. In California, you can contact a representative by phone – but you should be prepared to wait. In the first full week in operation in January, the average hold time for callers to Covered California was 39 minutes, 44 seconds. That’s more than twice the length of timeyou’re forced to wait for the Internal Revenue Service to answer the phone – a problem that the National Taxpayer Advocate finds troubling.

I decided to give it a whirl myself. The first time I called, I was told that the average wait time would be “more than 30 minutes.” I made an effort to hold for a bit and gave up. About an hour later, I tried again. This time, the recording advised that there was an extremely high call volume, and that I needed to try again later. The recording then chirped, “Goodbye.”

While I didn’t get through, the potential enrollee with the original question had gotten through. And it was on one of those calls that he was told that he would not qualify for insurance under the exchanges if he could not demonstrate tax compliance. He didn’t go any further in the process – and that’s how the question ended up in my inbox.

Finding no luck with the phones, I poked around California’s website. The answer to the question, “Who can buy health insurance through Covered California?” had this answer:

Legal California residents, except for currently incarcerated individuals and legal minors, are eligible to buy insurance through Covered California. However, if an enrollee has access to affordable health insurance through another source, such as an employer or government program, the enrollee may not qualify for financial assistance through Covered California.

No mention of tax compliance.

I thought that perhaps California didn’t address the issue because it was covered in the original federal law. I’ve read the law – it’s long and awkward and bulky – and I didn’t recall seeing anything about lack of compliance being an obstacle to health care. To be fair, it was a few years ago so I went back to the drawing board. The law, known as Public Law 111-148, the Patient Protection and Affordable Care Act, is 906 pages long. It’s tough to slog through. But I did it. And I found the most relevant parts at Section 1411. There, the Act outlines eligibility requirements related to immigration status, income and current coverage options. Not a word about tax compliance. Nor could I find any at Section 1412, where the Act specifically outlines the premium tax credits. I couldn’t find anything in the amendment either.

I next checked out some agency regulations. There’s no way I could get through all of those – so I took a stab at the ones that seemed most relevant like 45 CFR Parts 155, 156, and 157 (for Department of Health and Human Services) where, despite the fact that the word “tax” appears 775 times, there’s no mention of tax compliance.

Still undeterred, I headed to the health care web site at healthcare.gov. Yes,that health care web site. The buggy one. I didn’t find any bugs. I also didn’t find any answers. I even downloaded the Marketplace Application Checklist(you can download it as a pdf). Still nothing.

So why did someone apparently say different on the phone? Where did that information come from?

There had to be an easier way to find out the answer. So, just over two weeks ago, I emailed the folks at healthcare.gov. I explained that I was working on a story and had what I thought were two easy questions:

1, Is there criteria that requires tax compliance before you can apply for health care?
2, If so, and you are not compliant, what steps would you have to take before you can qualify? For example, would it be sufficient to refile? Or would you have to wait for the statute of limitations to run… or something else?

I was referred to over to the Treasury. And then another person was looped in. And then they had to check with the exchange folks in California. Ten days after the original question, I got the answer posted above. And that is truly concerning.

Don’t get me wrong. The folks at Healthcare.gov and at Treasury were incredibly helpful. In particular, the Office of Public Affairs at Treasury did a lot of digging for me. And for that, I am thankful. I believe that those folks really did want to help answer my questions. I just don’t think those answers are easy for anyone to find. It shouldn’t be this hard, right?

Something as simple as the determination of eligibility for health care coverage should be easily accessible. And while I understand that you can’t imagine every question, it would seem to be a matter of common sense that if you’re going to use IRS to administer portions of the Health Care Act – and you’re going to rely on certain tax records to verify income and eligibility as well as issue credits which are related to the cost of the premiums – the issue of tax compliance should have been addressed. And assuming that it has been (somewhere), that information should be passed along to the folks who answer the phone. It shouldn’t take more than two weeks to find the answer.

I figured there ought to be some kind of direct connection between IRS and the state exchanges so I called up the media department at the California exchanges to inquire what sort of resources they had available, including accessibility to IRS and the Treasury to answer questions like this one. I was assured that they “followed the law” but beyond that, they did not have any answers for me.

I’ve been pretty vocal about the fact that I don’t think that IRS should be tasked with administering the Health Care Act. The IRS is already overburdened and underfunded. Piling on more responsibilities isn’t going to make that better. In fact, the National Taxpayer Advocate recently cited implementation of health care issues as one of the areas of focus in her2014 annual report to Congress (report downloads as a pdf). And the IRS web site has a laundry list of Affordable Care Act Tax Provisions on its web site that should give you pause.

To be clear, this isn’t meant to be a screed condemning the Health Care Act. Instead, it’s a concerned reaction to the staggering bureaucratic nature of the Act – and a deep worry about how we’re going to make this work. If the premise behind the Act is to give all Americans the opportunity to obtain basic health care coverage, the process should be simple. Looping in tax credits and eligibility based on tax terms (like MAGI) is already muddying the water. And sending confusing messages to applicants about tax filing and compliance scares off potential enrollees – remember, not everyone has to file a tax return.

It’s clear that 2014 will be important for the Act as implementation is phased in. From enrollment deadlines to benefits reporting to health care credits, this year will be the year that we collectively hash through the regulations and requirements. Hopefully, it will get easier moving forward.

(Author’s note: As of 1/30/2014, the IRS has updated their web site to confirm that you do not need to file a federal income tax return to qualify for advance payments of the premium tax credit and that the premium tax credit will not affect your 2013 federal income tax return.)

Tax benefits for education of grandkids

Judy O'Conner for Bankrate.com writes:  Question: Dear Tax Talk,  How can I deduct the cost of college for my grandkids? I have been helping them out, but never deducted any of it. I think we might help more people if we could at least get a deduction for it. Are there any tax benefits for education?
Thanks. -- Billie  

Dear Billie,

Your grandchildren are fortunate to have you as a grandparent who wants to help them with college. The IRS has a lot of tax benefits for education in the form of either credits or deductions, but unfortunately, unless your grandchildren are your dependents, you will not be able use them on your tax return.

However, there is something that you can do that will help with taxes, and that is to put your money into a 529 college savings plan for your grandchildren. There are two types of plans: prepaid tuition plans and savings plans. Each state has its own plan, but you are not restricted to your state's 529 savings plan, so be sure to compare the various features of each plan.

The contributions to the plan are not deductible on your federal return, but are tax-deductible in many states. The earnings in the account are not subject to federal tax and generally aren't subject to state tax when used for qualified education expenses of the designated beneficiary, such as tuition, fees, books and room and board. Allowed expenses even include the purchase of any computer technology or equipment and related services such as Internet access.

If you contribute to a 529 plan, there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 each year. If that is the case, there is a special rule that applies to contributions to 529 plans and the details for it are included in the instructions for Form 709 United States Gift Tax Return.

IRS Publication 970, Tax Benefits for Education is a good resource for taxpayers to guide them through the various tax benefits when paying for college or other postsecondary educational expenses.

Tax Planning Strategies 2014

Eisner Amper has released their report: Tax Planning Strategies 2014: They writes:  In addition to saving income taxes for the current and future years,  effective tax planning can reduce eventual estate taxes, maximize the amount of funds you will have available for retirement, reduce the cost of financing your children’s education, and assist you in managing your cash flow to help you meet your financial objectives.

Proper tax planning can achieve the following goals:
ƒ
 Lower this year’s tax.

ƒ Defer this year’s tax to future years.

ƒ Reduce your tax in future years.

ƒ Maximize the tax savings from allowable deductions.

ƒ Minimize the effect of the AMT on this year’s tax liability.

ƒ Take advantage of available tax credits.
ƒ
 Maximize the amount of wealth that stays in your family.

ƒ Minimize capital gains tax.

ƒ Minimize the Medicare Contribution Tax on net investment income.
ƒ
 Avoid penalties for underpayment of estimated taxes.
ƒ 
Free up cash for investment, business or personal needs by deferring your tax liability.
ƒ 
Manage your cash flow by projecting when tax payments will be required.
ƒ 
Minimize potential future estate taxes so you can leave the maximum amount to your beneficiaries (and/or charities) rather than the government.
ƒ 
Maximize the amount of money you will have for your retirement and education funding for your 
children.

To read and or download the

Eisner Amper Tax Planning Strategies 2014, Click Here.