Should You File Your Own Taxes? Or Should You Hire a CPA?

Paula Pant, WiserAdvisor Contributor for the HuffPo writes: Lots of people honor traditions. Some people eat turkey on Thanksgiving. Some people bake an apple pie on Independence Day.

Me? I abide by a longstanding tradition, as well: I yank my hair out every April, when I attempt to file my own taxes.

Life hasn't always felt this way. Back in ancient times (college), I only had one or two W2 forms and a single mutual fund. I could complete my 1040 without breaking a sweat.

But after I graduated, life became complex. I started collecting both W2 forms (given to employees) and 1099-MISC forms (given to contract-based workers). I earned interest income, dividend income and capital gains -- and I earned these through multiple financial institutions. I sheltered my money through multiple types of tax-deferred accounts: the 401k, the IRA, the Health Savings Account.

My taxes morphed from a breezy afterthought into a paperwork nightmare. That's when my longstanding tradition of growing grey hairs in April began.

This year, my taxes will reflect even more complexity: I own a house, multiple rental properties and a handful of small businesses. My taxes require a depreciation schedule.

Clearly, I need professional help. 

And so my cherished tradition of April frustration is coming to a close. It's time for me to hire a CPA.

But should you? Should you file your own taxes, either by hand (long-form) or using software such as TurboTax? Or should you hire a CPA?

As with most questions in personal finance, there's no "right" answer. But here are the factors you should consider.

Advantages to Filing Your Own Taxes:

#1: Strong Understanding of the Tax Code. Years of filing my own taxes have taught me more about the tax code than any human being should know. (I'm half-joking.)

In all seriousness, filing your own taxes is incredibly educational. You'll learn a lot about how the tax system works, and you can then apply that knowledge towards your future tax planning. Yes, you can (and should) involve a CPA in your future tax planning conversations, but you can't outsource 100 percent of your strategic thinking. You'll need to have a two-way dialogue.

#2: Save Money. Assuming you have relatively simple taxes -- such as a single W2 form, minimal investments and a standard deduction -- you probably don't need to use a CPA. (Heck, you probably don't even need to use TurboTax software.) If you fit into this category, as I did when I was younger, filing your own taxes will help you save on the expense of hiring someone else.

#3: Less Time. If your taxes are as simple as described above, then you may actually save time by filing yourself. Most likely, you can complete your taxes in 15 or 20 minutes -- far less than the amount of time it would take you to hire a CPA.

Advantages to Hiring a CPA:

#1: Expert Advice. Your CPA may be able to offer you advice regarding how you can save more money on taxes. For example, you might be eligible to contribute more to your tax-sheltered accounts, claim child care or educational expenses, or claim deductions for adoption, educator expenses and more.

#2: Save Money. The expert advice that you receive from your CPA can translate into potentially saving thousands of dollars on taxes. In this regard, hiring a CPA can be viewed as an "investment."

#3: Less Time. The more complex your taxes, the more time it takes you to file. Your CPA is far more experienced at handling taxes and can knock out the work in a fraction of the time that it takes you.

Which Should You Choose?

You might have noticed that Reasons #2 and #3 for both "file it yourself" and "hire a CPA" are identical. Depending on your personal situation, either option could help you save time and money.

Reasons #1 for both options are two sides of the same coin: You'll either learn enough to advise yourself or you'll benefit from expert advice from an accredited professional.

Given that the advantages mirror each other so much, which option should you pick?

Let's look at a few hypothetical examples.

Mike is 22. He's a recent college graduate with no student loans, and he works full-time as a salaried W2 employee. He rents his home and has no investments other than his company 401k. 

Mike is a strong candidate for someone who should file his own taxes.

Jessica is 43. She owns two homes, one of which she uses as a rental property. She has a full-time job as a teacher, but she performs freelance projects during the summertime for extra income. She's recently divorced and has two children, and she's actively saving money in her kids' 529 College Savings Accounts, as well as her own 403(b) account.

Jessica may want to hire a CPA.

Derek is 54. He works full-time as an hourly employee, rents his home and has no investments other than his IRA account. He's single with no children. 

Under normal circumstances, Derek would be a good candidate for someone who should file his own taxes. His situation is similar to Mike.

However, Derek feels anxious about his taxes. He's nervous that he might be "doing it wrong" and may be subject to penalties. He can easily afford to pay a few hundred for a CPA, and this expense will help him sleep easier at night.

Derek should hire a CPA.

2014 Estate And Tax Planning

William Finestone for Blank Rome LLP writes:  With the recent expansion of Blank Rome's Los Angeles office and the addition of a San Francisco office, the Private Client Group has planted its flag on the West Coast. On February 1, 2014, William Finestone joined our group in Los Angeles. Bill is a member of the American College of Trust and Estate Counsel ("ACTEC"), is included in "Best Lawyers in America," and has been recognized as a "Southern California Super Lawyer" by Los Angeles Magazine. With the addition of Bill, members of our group are admitted to practice in California, New York, Connecticut, Pennsylvania, New Jersey, Florida, Virginia, the District of Columbia, and Maryland.

This estate and tax planning newsletter discusses certain concepts and techniques that we hope may be of interest to our clients and friends.

1. Transfer Tax Changes. The American Taxpayer Relief Act of 2012 (the "2012 Act," passed in 2013) made permanent the major changes made in 2010 in the law regarding gift, estate, and generation-skipping transfer ("GST") taxes (collectively, "transfer taxes").
   
   1. Gift Tax. The tax-free "annual exclusion" amount remains $14,000 per donee in 2014. The cumulative lifetime exemption increased from $5,250,000 in 2013 to $5,340,000 in 2014 (inflation adjustment). The tax rate on gifts in excess of $5,340,000 remains at 40%.
   2. Estate Tax. The estate tax exemption (reduced by certain lifetime gifts) also increased from $5,250,000 in 2013 to $5,340,000 in 2014, and the estate tax rate on the excess value of an estate also remains at 40%. All of a decedent's assets (other than "income in respect of a decedent," such as IRAs and retirement plan benefits), as well as a surviving spouse's half of any community property assets, will have an income tax basis equal to the fair market value of those assets at the date of death ["stepped-up (or down) basis"]. In this regard, securities brokers still are required to retain basis records and report the income tax basis of securities to the IRS. Accordingly, be sure to advise your broker of your basis in securities received by gift or inheritance.
   3. GST Tax. For 2014, the GST tax rate also remains at 40% and the lifetime exemption also has increased (inflation adjustment) from $5,250,000 in 2013 to $5,340,000 in 2014. Paragraph 5 includes more information about the GST tax.
   4. Portability of Estate Tax Exemption. The 2012 Act also made permanent the temporary "portability" rules introduced in 2010 that provide for the transfer of a deceased spouse's unused estate tax exemption ("deceased spousal unused exclusion amount" or "DSUEA") to a surviving spouse (without inflation adjustments). Thus, if a 2014 decedent's taxable estate is less than $5,340,000, the DSUEA can be used by the surviving spouse with respect to both gift taxes and estate taxes (but not GST taxes). Portability is not available if either spouse is a nonresident alien. Portability may allow some couples to forgo a more complex estate plan while still taking advantage of both spouses' transfer tax exemptions. Portability must be irrevocably elected on a timely filed (including extensions) estate tax return, even if a return is not otherwise required to be filed.
      A typical estate plan for a married couple generally has provided for the establishment of several trusts at the death of the first spouse: An "Exemption (or "Bypass" or "Credit Shelter") Trust"; a "Marital Trust," in California where joint trusts are common, a "Survivor's Trust," and possibly a "Generation Skipping Tax Exempt Trust." One of the reasons for the Exemption Trust is to use the deceased spouse's estate tax exemption to the fullest extent possible. Under the new portability law, however, if one spouse dies and leaves assets to persons (other than the surviving spouse and charity) in an aggregate amount less than the basic exclusion amount ($5,340,000 in 2014), the surviving spouse may be able to use the DSUEA as well as the surviving spouse's own exemption.
      This portability provision may eliminate the need to create an "Exemption Trust" at the first spouse's death. For example, if this year the first spouse to die leaves all of his or her assets to the surviving spouse, no part of the deceased spouse's exemption is used because of the marital deduction available for assets passing to a surviving spouse at the first spouse's death. Unless the surviving spouse remarries and survives his or her new spouse, he or she will have an aggregate exemption of (i) $5,340,000 ("DSUEA") and (ii) his or her own inflation-adjusted $5,340,000 exemption ($10,680,000 total in 2014). Similarly, if in 2014 the first spouse to die leaves $1,000,000 to his or her children, the surviving spouse will have an aggregate exemption of $9,680,000 (the remaining $4,340,000 "DSUEA" in addition to his or her own inflation-adjusted $5,340,000 exemption).
      In many cases, however, we will advise our clients to continue to use an Exemption Trust as part of their estate plans for both tax and non-tax reasons. State tax considerations may also impact the use of Exemption Trusts.
      Federal tax reasons include the following: (i) The DSUEA is not indexed for inflation; (ii) eliminating estate tax on any appreciation of Exemption Trust assets at the surviving spouse's death, regardless of the value of the surviving spouse's assets; (iii) allowing for an allocation of the deceased spouse's GST exemption to the Exemption Trust;* (iv) the surviving spouse could remarry, survive his or her second spouse and be limited to using the unused exemption of his or her second predeceased spouse if any (a DSUEA thus may inhibit remarriage); and (v) an estate tax return must be filed timely to qualify for portability.
      Non-tax reasons include the following: (i) Limiting (or eliminating) the ability of the surviving spouse to direct the disposition of the deceased spouse's assets on the surviving spouse's death; (ii) restricting the surviving spouse's right to use principal (perhaps only for health, support, and maintenance); (iii) providing creditor protection (creditors generally cannot reach the assets in an irrevocable trust established by another person); and (iv) providing professional management if desired.
      Exemption Trust disadvantages include the following: (i) Annual costs for the preparation of Exemption Trust income tax returns and maintaining separate records for the Exemption Trust; (ii) the possible loss of a further stepped-up basis on the surviving spouse's death; (iii) lack of surviving spouse ability to change the estate plan to adapt to changed circumstances, unless as is often the case the surviving spouse has a limited power to change the Exemption Trust distribution provisions; (iv) lack of ability to offset capital gains and losses realized by the surviving spouse and the Exemption Trust; (v) Exemption Trust assets generally cannot be used to implement further estate planning techniques; (vi) the surviving spouse cannot use the $250,000 exclusion from capital gain upon the sale of a residence held in the Exemption Trust; and (vii) the possible need to accelerate taxable distributions from retirement accounts.
      Planning Tip. If the reasons for establishing an Exemption Trust are not significant, but you nevertheless want to provide for the possible establishment of an Exemption Trust in case your spouse decides that it is advisable to do so, your estate plan can provide for distribution of your estate to your spouse, but include a provision that would allow your surviving spouse to "disclaim" all or a portion of his or her inheritance and have the disclaimed assets allocated to an Exemption Trust ("Disclaimer Trust"). The surviving spouse would make his or her decision to disclaim during the nine-month period following the first spouse's death. The only difference between a Disclaimer Trust and an Exemption Trust established by the first spouse is that the surviving spouse cannot have a power to provide for distribution of the assets of a Disclaimer Trust in a manner different from the first spouse's distribution plan.
   5. Income Tax Changes. Many income tax changes were made by the 2012 Act, effective January 1, 2013. The following is a brief summary of those changes taking into account 2014 inflation adjustments:
      
      • the highest tax rate is increased from 35% to 39.6% for incomes in excess of $457,600 (was $450,000) (joint return), $432,000 (was $425,000) (head of household), and $407,650 (was $400,000) (single)—these
      • the social security tax increased from 4.2% to 6.2%;
      • the alternative minimum tax ("AMT") exemption amounts have been increased and are to be adjusted for inflation (retroactive to 2012);
      • the maximum tax rates for long-term capital gains and dividends remain increased from 15% to 20%; and
      • the itemized deduction and personal exemption "phase-outs" were reinstated with adjusted gross income thresholds of $305,050 (was $300,000) (joint return), $279,650 (was $275,000) (head of household), and $254,200 (was $250,000) (single), which thresholds will continue to be adjusted for inflation annually. These "stealth tax" provisions effectively increase marginal tax rates for those affected.
      In addition, a 3.8% "Medicare" tax is still imposed on investment income (including capital gains) of "high-earning" taxpayers, and a 0.9% Medicare tax is still imposed on employment income earned by those taxpayers.
2. Revocable Trust. The revocable trust is a valuable estate planning technique for both single and married clients, used primarily to avoid the inconvenience and extra costs of a probate administration of an estate upon death (multiple probate administrations would be required if you own property in other states). The same estate tax savings techniques available by Will can be employed via the revocable living trust. Many of the post-death income tax advantages previously available to probate estates have been eliminated, thus making the revocable trust even more attractive for wealthier clients.
3. Annual Gift Program. A lifetime gift-giving program could reduce overall transfer tax costs considerably. By receiving lifetime gifts, donees will benefit from all future appreciation of and income generated by the transferred property free of transfer taxes. This year, every individual may transfer cash or other property worth $14,000 (or $28,000 for married couples) to each of as many donees as the donor selects without incurring any gift or later estate tax. An inflation adjustment applies when that adjustment would increase the annual exclusion amount by $1,000 (e.g., from $10,000 in 2001 to $11,000 in 2002, to $12,000 in 2006, to $13,000 in 2009; and to $14,000 in 2013). Donors may make these gifts (known as "annual exclusion" gifts) outright or via custodianships or trusts, although careful planning is needed if trusts are to be used. For example, it is very important to assure that any trust for a grandchild contains special provisions so that gifts made to that trust are exempt from the GST tax (discussed in paragraph 5). In addition, no gift taxes are imposed if you pay a donee's tuition or medical expenses (payments must be made directly to the school or health care provider), and you may prepay tuition under certain circumstances.
   Even if a gift is not "tax-free" as described above, if your aggregate gifts do not exceed the $5,340,000 lifetime gift tax exemption amount (or $10,680,000 for married couples), no gift tax will be payable at the time of the gift. Taxable gifts in excess of the $5,340,000 lifetime exemption will accelerate transfer tax payment, but an overall tax savings may result because your gift tax dollars generally will not be subject to estate taxes at death. Paying gift taxes now, however, may result in an unnecessary tax payment if estate taxes would not be payable at death under new legislation; the possibility of estate tax repeal should be considered. Certain valuation advantages (such as "minority" discounts) that might be unavailable at death often are possible under current law in connection with lifetime gifts (e.g., see paragraph 13). Finally, the low interest rates currently in effect make this a very good time to loan funds to younger generations, and may make certain types of gifts via trust particularly attractive.
4. Life Insurance. Life insurance proceeds are generally exempt from income tax. In addition, all estate tax on life insurance proceeds may be avoided on the death of the insured through proper planning: Insurance proceeds can be available free of estate tax to the surviving spouse, but by designating other family members or a trust for their benefit as owners and beneficiaries, estate taxes can be avoided in both spouses' estates. "Joint life" (or "survivorship" or "second to die") policies make life insurance planning affordable for many more people. You should consider the ownership and beneficiary designations for any newly acquired life insurance carefully before the policy is purchased. You also should review the ownership and beneficiary designations of your existing policies; your revocable living trust or Will does not generally control distribution of life insurance proceeds. "Split-dollar" life insurance plans now are subject to much more stringent rules; we suggest that you review with an insurance professional or with us any "split-dollar" life insurance programs in which you currently participate or in which you contemplate participating. Finally, recent economic activity may have caused your life insurance policies to experience financial problems; you may wish to contact your insurance professional to discuss the current status of your policies.
5. GST Tax. The GST tax generally imposes an additional transfer tax (at the 40% estate tax rate) on property transferred to grandchildren and other younger beneficiaries by lifetime gift or at death, and whether outright or via trust. Certain techniques are available to avoid or substantially reduce this GST tax. One technique involves making "tax-free" gifts as described in paragraph 3 via an "annual exclusion" gift program to grandchildren (either outright or via trust) and by paying a grandchild's tuition and medical expenses (remember, direct payments to the school or health care provider are required). Another technique involves use of your lifetime GST exemption to establish a "dynasty" trust (which can invest in life insurance policies or other property) to enable a substantial amount of property to pass to grandchildren, great-grandchildren, and later generations free of any estate or GST tax. The GST exemption for 2014 is the same as the $5,340,000 unified estate and gift tax exemptions. Whereas use of the gift and estate tax "exemptions" is automatic, use of the GST exemption is elective. In view of the voluntary GST exemption allocation rules, we generally recommend that clients who make gifts to trusts from which a grandchild or other younger beneficiary may receive distributions file gift tax returns (even if not required) in order to specifically elect whether to allocate or not allocate GST exemption to those trusts.
6. Marital Deduction; Noncitizen Spouse. The vast majority of married couples combine the estate tax "exemption" granted to each person with the unlimited marital deduction to assure that no estate taxes are payable until the death of the surviving spouse. The unlimited marital deduction generally is available for gifts and bequests to spouses; those gifts and bequests can be outright transfers or can be made via trusts (although not all types of trusts will qualify for the marital deduction). Severe restrictions, however, are imposed on the ability to defer estate taxes if the surviving spouse is not a United States citizen (the surviving spouse's residence is not a factor). Under these rules, property passing to a noncitizen surviving spouse must be held in a special type of trust (a "qualified domestic trust") in order to qualify for the marital deduction. In addition, although gift taxes on gifts to noncitizen spouses generally cannot be deferred via the marital deduction, in 2014 you may make "annual exclusion" gifts (discussed in paragraph 3) of a maximum of $145,000 (rather than $14,000) to your noncitizen spouse (subject to annual inflation adjustments). As discussed in paragraph 1-D, portability is not available if either spouse is a nonresident alien. You should review your estate plan now if either spouse is not a U.S. citizen.
7. Estate Planning for Nonresident Aliens. The estate of a nonresident alien ("NRA") (a noncitizen who is not a U.S. resident) has only a $60,000 (not $5,340,000) estate tax exemption available. U.S. donees of gifts from NRAs or foreign estates in excess of $100,000 [or $15,358 in 2014 (inflation adjusted) from a foreign corporation or partnership] must report these gifts to the IRS on Form 3520. Several interesting planning opportunities may exist for an NRA. An NRA may avoid transfer taxes completely by structuring his or her holdings so that no U.S. "situs" assets are owned directly (for example, U.S. "situs" assets may be held by a wholly-owned foreign corporation, although U.S. real estate presents special income tax issues). If your spouse is not a U.S. citizen, you may wish to defer estate taxes by use of a "qualified domestic trust" (discussed in paragraph 6). Lifetime gifts by an NRA of U.S. "situs" intangible personal property (such as stock or partnership interests) are not subject to U.S. gift taxes, even though these items might be subject to U.S. estate taxes if owned by the NRA at death. An NRA also may wish to establish a trust to hold property for U.S. resident children or other family members to provide them with tax-free income and arrange for the trust property to pass to other family members free of transfer taxes.
   A U.S. taxpayer who expatriates can be subject to severe tax penalties unless that taxpayer has a net worth of less than $2,000,000 and average annual income of less than $157,000 (subject to annual inflation adjustments). The tax penalties can be deferred on an asset-by-asset basis if an election is made (interest and security are required). In addition, transfer tax is imposed on the receipt by U.S. taxpayers of any amounts in excess of $14,000 (adjusted for inflation) from an expatriate described above.
8. Community Property v. Joint Tenancy. California law allows a form of ownership between spouses called "Community Property". For income tax purposes, both "halves" of appreciated community property receive a "step-up" in basis upon the death of either spouse. Because only one-half of the basis of property held in joint tenancy receives a basis "step-up" at the death of the first spouse, we generally recommend that legal title to appreciated assets owned jointly by spouses and not held in a revocable living trust be held as "community property" rather than as "joint tenants." California now recognizes "community property with right of survivorship" as a form of legal title for real estate.
9. Charitable Tax Planning. There are several techniques available to transfer significant wealth to intended beneficiaries in a tax-favored manner and at the same time benefit charity. This is particularly true in connection with a sale of highly appreciated assets; a charitable remainder trust can be used to advantage in these circumstances. You also may be able to arrange to receive a lifetime annuity in exchange for cash or appreciated property, or even for agreeing to transfer your residence to a charity at your death (or at the death of the surviving spouse). You also may be able to transfer property to your descendants without (or with reduced) transfer taxes by establishing a charitable lead trust (these are particularly advantageous in a low interest rate environment as currently exists). The income tax benefits of donating partial interests in tangible personal property items (such as works of art) are currently restricted. The popular "Charitable IRA Rollover" rules expired on December 31, 2013, and as of this writing have not been extended for 2014. Wealthier taxpayers may be interested in a private foundation or a donor-advised fund established at a public charity, such as a community foundation. The IRS has developed two web pages that may be of interest to these taxpayers: "Life Cycle of a Private Foundation" deals with private foundations(http://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Life-Cycle-of-a-Private-Foundation ); and "Life Cycle of a Public Charity" deals with public charities http://www.irs.gov/charities/charitable/article/0,,id=122670,00.html).
10. "Buy-Sell" Agreements/Options. A "Buy-Sell" or option agreement (whereby a family member or business associate has the obligation or option to acquire assets at an established price) can be used to advantage to restrict ownership of a business, to establish the value of an asset for estate tax purposes, and to provide a market for the asset to allow owners to plan for liquidity. This estate planning device is subject to restrictions, but some of these restrictions do not apply to agreements made before October 9, 1990. You therefore should be very careful if you wish to modify "Buy-Sell" or option agreements made prior to October 9, 1990. Employer-owned life insurance generally now is subjected to income taxation, although insurance used to fund a Buy-Sell Agreement is exempt from income taxation, provided that certain written notice and consent requirements are met in advance.
11. Employee Benefit Plans and IRAs. Assets in pension and profit-sharing plans, IRAs, and other retirement plans (other than Roth plans) can be subject to severe taxes at death. You should review your plan benefits to determine whether you can avoid or postpone these taxes and whether your plan benefits are coordinated with your estate plan; your revocable living trust or Will generally does not control disposition of these benefits. Plan proceeds still can be the most advantageous to use for charitable gifts at death, including transfers to charitable remainder trusts and to establish charitable gift annuities.
12. Subchapter "S" Corporations. The use of Subchapter "S" corporations has become somewhat less popular because of the increased use of limited liability companies ("LLCs"). Care must be taken, however, with respect to existing Subchapter "S" corporations. For example, upon the death of a Subchapter "S" corporation shareholder, Subchapter "S" corporation status can be lost unless the decedent's shares pass to a qualified shareholder in a timely manner. All Subchapter "S" corporation shareholders therefore should assure that their estate plans allow for the continuation of Subchapter "S" corporation status. Subchapter S corporations also might be used to reduce payroll taxes imposed on their owner-employees.
13. Family Limited Partnerships and Limited Liability Companies. A "family limited partnership" ("FLP") or "family limited liability company" ("FLLC") can be an excellent estate planning vehicle for clients who own valuable assets. A FLP or FLLC can be advantageous if a family member encounters creditor problems in the future. Gifts of FLP or FLLC membership interests to your beneficiaries or to trusts for their benefit can qualify for the gift tax "annual exclusion" (discussed in paragraph 3) if properly drafted, and the value of those gifts can reflect the "discounts" available for minority and nonmarketable interests. "Discounted" values also can be used in connection with sales to desired limited partners or LLC members, including family members or trusts for their benefit. Some recent IRS challenges to these entities have been successful, however, so all administrative and operational details must be respected; some recent Court decisions have focused on the actual organizational and operational aspects of the family entities. The tax benefits anticipated at the time of the formation of the entity should be available at the donor's death if the entity is organized for a significant non-tax business purpose and operated strictly in accordance with the provisions of the governing instrument and applicable state law, the donor has retained enough assets outside the entity to satisfy the donor's personal financial needs, and the donor is not a general partner or LLC manager. We continue to urge all clients who have implemented FLPs or FLLCs to review those entities now.
14. Durable Financial and Health Care Powers. It has become more important to plan for the risk of lifetime incapacity. A Durable Power of Attorney can provide for lifetime asset management, especially if your estate plan does not include a revocable living trust. An Advance Health Care Directive permits you to designate someone to make health care decisions on your behalf if you become unable to do so, and also can be used to make known your desires that artificial life-prolonging measures be or not be employed on your behalf. Appropriate health care documents for your children (both minors and adults) also should be completed. In California, a Durable Power of Attorney for Health Care signed prior to 1992 probably is ineffective today. The California Secretary of State has established an Advance Health Care Directive Registry, and will issue an identification card to each registered person and respond to inquiries by health care providers. A registration form can be obtained at http://www.ss.ca.gov/ahcdr/index.htm. In addition, you should consider executing an appropriate Authorization for use and disclosure of health information that otherwise would be protected and thus unavailable under the federal Health Insurance Portability and Accountability Act ("HIPAA").
15. Same-sex Marriages; Registered Domestic Partnerships. On June 27, 2013, in United States v. Windsor, the United States Supreme Court held that Section 3 of the Defense of Marriage Act ("DOMA") is unconstitutional. The case arose in connection with a New York statute that recognized same-sex marriages. On the same date, in Hollingsworth v. Perry, the Supreme Court held that the proponents of California Proposition 8 did not have judicial standing to intervene in a case to argue in favor of the constitutionality of Proposition 8, which a United States District Court had previously declared unconstitutional. The Hollingsworth case paved the way for California same-sex marriage. We will follow up on the impact of these decisions and subsequent IRS pronouncements regarding them in a later letter.
16. Deposit Insurance. The FDIC bank deposit insurance limit is $250,000 per account. Generally, all retirement accounts of a single "participant" at a particular bank are insured up to $250,000. All accounts held by a revocable trust are insured on a "per settlor per beneficiary" basis. For example, a single revocable trust established by a married couple that provides that, on the death of the first spouse, the assets will remain in the trust for the benefit of the surviving spouse for life, and that on the death of the surviving spouse, the assets will be divided into equal shares for their three children, will be insured while both spouses are living for $1,500,000 at each bank in which the trust maintains accounts (husband is treated as having three $250,000 beneficiaries, and wife is treated as having three $250,000 beneficiaries). This rule will apply regardless of the relationship between the trust creators and the beneficiaries; previous law provided for this protection only to certain close family members. For more information about FDIC insurance for revocable trusts, see http://www.fdic.gov/deposit/deposits/insured/ownership4.html.
17. Foreign Bank Account Reporting. The Treasury Department is actively pursuing taxpayers who fail to report their foreign bank and securities accounts (including foreign fund accounts maintained outside the U.S.) on IRS Form 8938 as required by the Foreign Account Tax Compliance Act ("FATCA"). Filing this Form 8938 does not relieve U.S. taxpayers (including non-resident U.S. citizens and dual citizenship individuals) from the separate obligation to electronically file a Foreign Bank Account Report ("FBAR" Form TD F 90-22.1) by June 30 each year to report an interest in, or a signature authority over, any financial account in a foreign country if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. These two forms must be filed even if the accounts earned no income. IRS Form 8938 must be filed with a U.S. resident's income tax return if total foreign financial assets aggregate $50,000 at year-end or $75,000 at any time during the year (single or married filing separately) or $100,000 at year-end or $150,000 at any time during the year (joint return). Severe penalties are imposed and criminal prosecution is possible for failure to comply with either of these filing requirements. Finally, the IRS has renewed the offshore voluntary disclosure program that expired on September 9, 2011, with some changes.

The attorneys in the Private Client Group have extensive experience in implementing cutting-edge estate planning techniques to take advantage of these unique opportunities and challenges.

New Tax-Efficient ETFs from BMO

Dan Bortolotti for ETFDailyNews.com writes: Bonds are one of the least tax-friendly asset classes: most of their return comes from interest payments, which are taxed at the highest rate. They’re even less tax-efficient when their market price is higher than their par value: these premium bonds are taxed so unfavorably they can actually deliver a negative after-tax return. Unfortunately, because interest rates have trended down for three decades, virtually every bond index fund and ETF is filled with premium bonds. Enter the BMO Discount Bond ETF (ZDB), which begins trading tomorrow. This unique new ETF promises to eliminate the problem that has long plagued bond funds in non-registered accounts.

 

Let’s take a step back and review the important idea underpinning this new ETF. Consider a premium bond with a coupon of 5% and a yield to maturity of 3%. The bond will pay you 5% interest annually and then suffer a capital loss of 2% at maturity, for a total pre-tax return of 3%. Now consider a discount bond that pays a coupon of 2% and has the same yield to maturity of 3%: now, in addition to the interest payments, you’d net a 1% capital gain at maturity, and your total pre-tax return would again be 3%. In an RRSP or TFSA, therefore, these two bonds would be virtually identical.

But not so in a taxable account: the investor holding the premium bond would be fully taxed on the 5% interest payments and would suffer a capital loss—a double whammy. Meanwhile the holder of the discount bond would be fully taxed on just 2% in interest, and then taxed on only half the 1% capital gain. As a result, the discount bond holder would have a significantly higher after-tax return.

There are a couple of ways to hold fixed income in a non-registered account while avoiding premium bonds. One is to use GICs instead of bond funds: GICs always trade at par, so they have lower interest payments and never suffer capital losses. Another is to use strip bonds, which always trade at a discount to par value. Last year saw the launch of the First Asset DEX 1-5 Year Laddered Government Strip Bond Index ETF (BXF), inspired by Justin Bender’s search for a tax-efficient fixed-income ETF. Now BMO has entered the arena with the first ETF designed to  give taxable investors exposure to the broad Canadian bond market, but with a portfolio that consists only of tax-friendly discount bonds.

The new ETF will have characteristics very similar to the BMO AGGREGATE BOND INDEX ETF(TSE:ZAG), which could be a core bond holding in any balanced portfolio. The two funds will be very similar in average term to maturity, duration, credit quality, yield to maturity and management fee (0.20%). The key difference, however, will be that ZDB’s average coupon will be lower that its yield to maturity, resulting in much greater tax-efficiency:

According to BMO, the new fund will hold about 50 issues when it launches, and as the ETF gathers assets it will build to more than 70 bonds. By comparison, traditional broad-based bond index funds include hundreds of holdings, but remember, there just aren’t that many discount bonds available in the marketplace. A portfolio of 50 to 70 is more than enough to provide adequate diversification.

More potential tax savings

BMO’s latest crop of new ETFs also includes at least on other notable fund. At first glance theBMO MSCI EAFE Index ETF (ZEA) seems late to the party: both iShares and Vanguard have already launched international equity ETFs without currency hedging. However, BMO’s is the only one that holds the underlying stocks directly, rather than holding a US-listed ETF. This structure allows Canadian investors to avoid one layer of foreign withholding taxes, making the BMO fund potentially less costly in both registered and taxable accounts.

Rather than explaining this idea in full here, I’ll just announce that Justin and I recently completed a new white paper that includes the estimated cost (including both MER and foreign withholding taxes) of many popular ETFs in all account types. The paper will finally allow investors to make informed decisions about this confusing topic. Look for it next week.

Intuit Price Target Lowered to $65.00 at Deutsche Bank (INTU)

Logan Wallace for TicketReport.com writes: Stock analysts at Deutsche Bank cut their price objective on shares of Intuit (NASDAQ:INTU) from $68.00 to $65.00 in a report issued on Thursday, Analyst Ratings.Net reports. Deutsche Bank’s target price indicates a potential downside of 7.22% from the stock’s previous close.

INTU has been the subject of a number of other recent research reports. Analysts at Evercore Partners downgraded shares of Intuit from an “equal weight” rating to an “underweight” rating in a research note on Wednesday. They now have a $62.00 price target on the stock, up previously from $10.00. Separately, analysts at Wedbush raised their price target on shares of Intuit from $79.00 to $82.00 in a research note on Friday, November 22nd. Finally, analysts at Jefferies Group raised their price target on shares of Intuit from $65.00 to $73.00 in a research note on Friday, November 22nd. Three research analysts have rated the stock with a sell rating, seven have given a hold rating, six have given a buy rating and one has given a strong buy rating to the stock. The stock presently has an average rating of “Hold” and a consensus price target of $72.13.

Intuit (NASDAQ:INTU) opened at 69.52 on Thursday. Intuit has a one year low of $55.54 and a one year high of $77.78. The stock has a 50-day moving average of $74.45 and a 200-day moving average of $70.02. The company has a market cap of $19.803 billion and a price-to-earnings ratio of 24.23.

Intuit (NASDAQ:INTU) last released its earnings data on Thursday, November 21st. The company reported ($0.06) earnings per share for the quarter, beating the analysts’ consensus estimate of ($0.10) by $0.04. The company had revenue of $622.00 million for the quarter, compared to the consensus estimate of $603.00 million. During the same quarter last year, the company posted ($0.03) earnings per share. Intuit’s revenue was up 10.7% compared to the same quarter last year. On average, analysts predict that Intuit will post $3.57 earnings per share for the current fiscal year.
Intuit Inc (NASDAQ:INTU) is a provider of business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions.

Accountants Cite Cost, Features and Local Data as MYOB Strengths / “The main difference between Xero and MYOB is that Xero is double the price,”

Aimy Chen for BoxFree IT writes: Accounting software company MYOB revealed an aggressive, mobile-focused product roadmap at the New Zealand roadshow, its first major event for the year.

BoxFreeIT spoke to accountants at the event to find out how MYOB’s technology investments would fare in a strong field of competitors. But accountants were more interested in cost, advanced features, integration with practice management software and the ability to save data to the desktop than mobile apps.

“The main difference between Xero and MYOB is that Xero is double the price,” said Natasha McDowall from Tael Solutions.

“I think MYOB will surpass their existing competitors because of the technology changes they’re doing with the one ledger. The implementation of the practice suite into client ledgers is huge for accountants.”

MYOB was ahead compared to its competitors in basic functions and price, partners said.

“From an accountant point of view, user ability, price and functionality works for our clients and gives MYOB an advantage over its competitors,” said Matthew Jones, partner at Jones Accounting Services.

“From an IT point of view, I prefer MYOB because you actually download it to your desktop. Whereas Xero is still not making money and there’s always the risk that if (Xero) don’t pay their bills that (clients’) data cannot be (recovered),” said Ross Kinnerley of Ross Kinnerley Accountancy Limited.

Before MYOB launched its cloud-based programs there were cases of clients switching from MYOB, said McDowall. But in the last six to 12 months people had started to move back to MYOB because MYOB products had more features for a lower price.

“I’ve always found MYOB very good and have used it for about 17 years,” said Glynis Buxton from Chatfield & Co.

Disclosure: Aimy Chen travelled to New Zealand as a guest of MYOB.  You can read BoxFreeIT daily by clicking here.

Tax Hacks 2014: Home Office Deduction

Stacy Johnson for MoneyTalkNews.com writes: It’s mid-February. By now you should have received paperwork documenting your 2013 income, as well as paperwork from those who paid you interest and from those you paid. You’ve also hopefully corralled your receipts to document your deductions.

But before you sit down to take care of business, there’s a potential deduction that can slash your tax bill: the home office deduction. According to the IRS, “In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home.”

In the video below, I break down the basics. Check it out, then read on for more.

Home office deduction: Are you eligible?

A home office deduction is a great way to make normally nondeductible expenses like rent and utilities partially deductible. But simply doing some work at the dining room table isn’t enough to qualify. The first hurdle to overcome: using part of your home as your principal place of business, and using it exclusively for that purpose.

Exclusive use

IRS Publication 587 says, “To qualify to deduct expenses for business use of your home, you must use part of your home … exclusively and regularly as your principal place of business.” That sounds straightforward, but it’s less so than it seems. For example, when they say “exclusively,” here’s how it works.

• The space can be as small as a desk or as big as a room. There’s no size requirement, and there don’t have to be walls or partitions marking it off. It just has to be a “separately identifiable space” and used exclusively for business.
• The space you want to deduct expenses for can’t be used for personal purposes. So the couch you watch TV on doesn’t count. And even if you do all of your accounting in the dining room, eating there nixes the deduction.
• You can ignore the previous point if the business use is “storage” or “day care,” but there is an entirely different set of requirements you have to meet. Storage space has to be for product inventory you intend to sell, and your home has to be “the only fixed location” of your business. So you don’t qualify if you’re just storing extra business equipment, or operate in a commercial space and keep spare stock at home. Day cares have to meet and maintain state licensing requirements.
• Like independent contractors or sole proprietors, employees can deduct home office expenses, but there are additional restrictions. Your use has to be for the company’s convenience (because they lack space, for instance) instead of yours (it’s easier to work from home). You also can’t double-dip by renting the space to your employer and claiming the deduction.

Primary/principal place

The other major tricky term is “principal.” Here’s what the IRS means by that:

• It’s OK to have more than one place of business and claim the deduction. But you can only claim the home office if it’s where you do the majority of the work, or certain kinds of work.
• If your home office isn’t where you spend the most time or do the most important part of your job, it’s still a valid deduction if you use it “exclusively and regularly for administrative or management activities” such as billing, record keeping, ordering, writing reports, or booking appointments. So people like plumbers, whose job is to visit other people’s homes and businesses for a living, can still potentially claim the deduction.
• There are several situations that don’t automatically disqualify your home office, including: having somebody else handle the administrative stuff, handling those kinds of tasks minimally outside the office or while traveling (“places that are not fixed locations of your business”), or primarily using your home office for administrative tasks even though another place in your business has ample space for them.
• Another big exception for doctors, dentists, attorneys and many other professionals: If part of your home is used exclusively and regularly to meet with clients, patients, or customers, it still qualifies for the deduction without being your primary place of business. But telephone calls and occasional visits don’t count; you have to meet in person, regularly.
• It’s OK to take a partial deduction if you met the requirements for only part of the year. Just make sure you get the math straight.

Figuring the deduction

If you thought all the allowances and exceptions were messy, at least the IRS has a flow chart for that. They also offer a home office deduction worksheet to figure things out.

Before you begin, you’ll need to know the total square footage of your office space and home, because you’ll be deducting the percentage of home-related expenses the business uses. So if you have a 2,000-square-foot home and use a 200-square-foot spare bedroom as a home office, you’ll deduct up to 10 percent of the rent or mortgage payments, utilities, insurance and so on. Stuff that’s only for the business area, like paint, can also be fully deducted.

A new, simpler way to claim it

Starting with tax year 2013, the IRS has introduced a new, simpler way to compute the deduction. It allows those with qualifying home offices to deduct up to $1,500 nearly hassle-free. (According to the IRS, this will collectively save filers 1.6 million hours of work annually.)

Rather than adding up the proper percentage of rent, electricity and other home office expenses, all you do is deduct $5 per square foot of your home office. The only drawback: The new method is capped at 300 square feet, limiting the deduction to $1,500 per year.

So if the portion of your home used for business is larger than 300 square feet, and/or the deduction would add up to more than $1,500, you’ll want to use the old method. If not, keep it simple by using the new one.

Don’t be shy, but do be careful

Because home offices are ever more ubiquitous and the potential deduction so attractive, you can imagine this is something many taxpayers might be tempted to abuse. After all, the IRS gets a copy of your W-2 from your employer, but they (let’s hope) don’t yet know the square footage of your former guest bedroom.

But be careful. The same factors that make this deduction easy to fudge also make it one that invites scrutiny. This doesn’t mean you should be afraid to take it. Always take every deduction you’re legally entitled to. But when it comes to this one, make sure you can verify it, just in case.

About  the Author: Sign up for my free newsletter from the Author Stacy Johnson : Every day, the Money Talks Newsletter delivers fresh, exciting news you can actually use to make more and spend less. It only takes seven seconds to sign up, doesn't cost a dime and will make you richer. Do it now, and you'll get two free gifts: a PDF featuring 205 Ways to Save, and free access to the Life or Debt personal finance course: a $50 value. Click here to sign up now.

SMAs Have Tax Advantages For High-Net-Worth Clients

Rey Santodomingo for FA-MAG.com writes: Comparing Tax-Managed SMAs vs. ETFs
Advisors using ETFs for index-style exposure in their client accounts should also consider using tax-managed SMAs. While market index ETFs can be a good choice for smaller accounts, or accounts with no need for customization, tax-managed SMAs are often a better solution for larger accounts—providing the same market exposure, but with the added potential benefits of increased tax efficiency and flexibility.

Customizable Index Exposure
ETFs and tax-managed SMAs are similar from exposure and fee perspectives.  However, while available ETFs span market capitalization, investment styles (i.e. value/growth), and geography,  SMA portfolios can be managed to track a wider selection of indexes, including published indexes for which ETFs may not currently be available.  With SMAs, advisors also have the flexibility to customize the index exposure by applying social screens or building a completion portfolio for clients with concentrated positions by excluding certain sectors or industries.

Boosting Tax Efficiency With Loss Harvesting
While ETFs can be tax efficient, SMAs have the potential to be even more tax efficient.  Much of the ETF’s tax efficiency stems from the fact that many ETFs track low turnover indexes -- low turnover usually translates into less realized gains and associated taxes. In comparison, because they are able to take advantage of loss-harvesting opportunities, tax-managed SMA accounts can be even more tax efficient.  Loss harvesting is the systematic process of “selling losers” to realize losses that can be used to offset gains (in or outside of your client’s account) – thereby reducing their overall tax bill.  Since ETFs cannot pass excess losses through to individual shareholders, they cannot provide the benefits of loss harvesting the way SMAs do.

Charitable Gifting
Your client’s tax-managed SMA can be used as a tool for tax-efficient charitable gifting. Within a broadly diversified SMA, highly appreciated positions can be selected for charitable gifts. Gifting highly appreciated tax lots enables clients to fulfill their charitable gifting goals while potentially reducing their current and future tax liability. Since ETFs do not provide access to underlying positions they cannot be used for this purpose.

Tax Efficient Rebalancing And Transitions
The structure of SMAs also creates the potential for cost savings during portfolio rebalances and investment style changes. By allowing access to individual securities and tax lots within the SMA structure, the potential for tax efficiency is greater than with a comparable ETF.  Investors using ETFs may also choose specific tax lots, but only at the ETF level—not at the individual company level.

Conclusion
Both ETFs and tax-managed SMAs provide transparent market index equity exposure. SMAs offer benefits not available with ETFs including loss harvesting, charitable gifting of highly appreciated securities, and tax-efficient rebalancing and transitions. While smaller accounts may be well-served by a simple ETF solution, larger accounts should seek to gain the additional benefits available by implementing their market index exposure through a tax-managed SMA.

The author Rey Santodomingo is a member of the Investment Strategy team at Parametrics.