Kailin Liu for Morningstar writes: Investing in a 529 college-savings plan allows you a significant break on your federal taxes:
tax-free compounding and withdrawals, provided the money is used for
qualified college expenses. Most 529 plans also offer some sort of a
state tax break on contributions by in-state residents, usually a
deduction but sometimes a credit.
There are no one-size-fits-all answers about whether to stay with
your home state's plan or pursue one of the best plans available
nationally. To reach a good decision, you'll need to weigh how much
you're saving in taxes by staying in-state alongside the potential costs
you'll incur if you invest in a subpar plan.
Understanding Your State Tax Break To reach a sound decision, the starting point is to find out
just what kind of a tax break your state offers 529 savers--or doesn't. Usually, investors in 529 plans can deduct at least a portion of
their contribution amount from their state income taxes if they invest
in their own state's plan. Naturally, state tax benefits associated with
529 plans depend on where the investor lives. Some states offer quite
generous 529-related tax benefits, while others offer no benefits at
all. In general, state tax benefits for 529s can be aggregated into a
few different buckets, listed below. Some states don't follow these
patterns (for instance, they offer a tax credit instead of a deduction),
but these cases are few and far between.
No tax benefits: Some
states offer no tax benefits for investing in a 529 plan. This can
either mean that the state offers no tax deductions for 529 savings or
that the state does not collect any income tax at all. The following
states offer no tax benefits for investing in a 529 plan.
States With No Tax Benefits
Alaska
California
Delaware
Florida
Hawaii
Indiana
Kentucky
Massachusetts
Minnesota
Nevada
New Hampshire
New Jersey
South Dakota
Tennessee
Texas
Utah
Source:
Morningstar
Tax parity:Tax
parity is an interesting inversion of a state having no tax benefits.
In this instance, the states are aiming to give their residents the
incentive to save for college, period, rather than the incentive to
invest in their home state's 529 plan. States that offer tax parity
provide state income tax benefits for resident 529 savers regardless of
which state's 529 they use. This means that a resident of Missouri (one
of the tax parity states) can invest in a 529 plan in Virginia while
still collecting Missouri's state income tax deductions for 529 savers.
States With Tax Parity
Arizona
Kansas
Maine
Missouri
Pennsylvania
Source:
Morningstar
Low tax benefits: A few
states offer income tax deductions for 529 savings but cap those
deductions at $1,000 or less. This means investors can deduct only the
first $1,000 they invest in their state's 529 plan. Any contribution
higher than that amount is not tax-deductible.
Low Tax Benefits
State
State Tax-Deduction Limit (Joint Filing)*
State Tax-Deduction Limit (Individual Filing)*
State Income Cap for Deduction (Joint)*
State Income Cap for Deduction (Individual)*
State Tax-Deduction Basis
Maine
250
250
200,000
100,000
Per Beneficiary
Vermont
500
250
--
--
Per Beneficiary
Rhode Island
1,000
500
--
--
Per Taxpayer
Source:
Morningstar
* Numbers in dollars
Medium tax benefits:These states offer income tax deductions of between $1,000 and $10,000.
Medium Tax Benefits
State
State Tax-Deduction Limit (Joint Filing)*
State Tax-Deduction Limit (Individual Filing)*
State Income Cap for Deduction (Joint)*
State Income Cap for Deduction (Individual)*
State Tax-Deduction Basis
Arizona
1,500
750
--
--
Per Taxpayer
Ohio
2,000
2,000
--
--
Per Beneficiary
Georgia
2,000
2,000
--
--
Per Beneficiary
Maryland
2,500
2,500
--
--
Per Beneficiary
Wisconsin
3,000
3,000
--
--
Per Beneficiary
Virginia
4,000
4,000
--
--
Per Account
Oregon
4,345
2,170
--
--
Per Taxpayer
Louisiana
4,800
2,400
--
--
Per Beneficiary
Nebraska
5,000
5,000
--
--
Per Taxpayer
North Carolina
5,000
2,500
100,000
60,000
Per Taxpayer
Montana
6,000
3,000
--
--
Per Taxpayer
Kansas
6,000
3,000
--
--
Per Beneficiary
Iowa
6,090
3,045
--
--
Per Beneficiary
Dist. of Columbia
8,000
4,000
--
--
Per Taxpayer
Source:
Morningstar
* Numbers in dollars
High tax benefits:These states offer income tax deductions of $10,000 and higher (generally the plan's contribution limit).
High Tax Benefits
State
State Tax-Deduction Limit (Joint Filing)*
State Tax-Deduction Limit (Individual Filing)*
State Income Cap for Deduction (Joint)
State Income Cap for Deduction (Individual)
State Tax-Deduction Basis
Arkansas
10,000
5,000
--
--
Per Taxpayer
Alabama
10,000
5,000
--
--
Per Taxpayer
Michigan
10,000
5,000
--
--
Per Taxpayer
North Dakota
10,000
5,000
--
--
Per Taxpayer
Connecticut
10,000
5,000
--
--
Per Taxpayer
New York
10,000
5,000
--
--
Per Taxpayer
Missouri
16,000
8,000
--
--
Per Taxpayer
Illinois
20,000
10,000
--
--
Per Taxpayer
Oklahoma
20,000
10,000
--
--
Per Taxpayer
Mississippi
20,000
10,000
--
--
Per Taxpayer
Pennsylvania
28,000
14,000
--
--
Per Beneficiary
West Virginia
265,620
265,620
--
--
Per Beneficiary
New Mexico
294,000
294,000
--
--
Per Beneficiary
South Carolina
318,000
318,000
--
--
Per Taxpayer
Colorado
350,000
350,000
--
--
Per Taxpayer
Source:
Morningstar
* Numbers in dollars
Case Study: The Buchanans To help model the trade-offs of staying with a home-state 529
versus pursuing an out-of-state plan, we'll use one family, the
Buchanans, as an example. Let's assume that Daisy and Tom Buchanan have a
combined household income of $500,000 and a state income tax rate of
10%. They will save $25,000 in their 529 account this year. We also
assume that the Buchanans invested in an age-based option and that the
best-performing age-based options did not outperform the
worst-performing age-based options by more than 5 percentage points.
First, the no brainer: If the Buchanans' state has no state tax
benefits for 529 investors or offers tax parity--meaning that they can
obtain a tax benefit even if they invest outside of their home state's
plan--they are free to pick from the best 529 plans in the country. (Click here for a list of top-rated 529 plans. )
If their state does offer tax benefits for investing in-state,
before investing elsewhere it's important for them to quantify the
magnitude of forgone tax benefits against potentially better performance
in another plan. The amount of forgone tax benefits depends on a
household's state income tax level, the amount they intend to invest,
and their state's income-tax-deduction limit. (See charts above.) Those
who would leave a substantial chunk of change (relative to their total
assets) on the table may want to stay put, while those who won't lose
much money by going out of state may find a better deal elsewhere. It's
important to note that if the in-state option is of average or better
quality, it becomes very difficult to make up the lost tax savings by
pursuing another plan.
For instance, if the Buchanans live in a state with a $10,000
deduction limit, they would leave at least $1,000 (their 10% state
income tax rate times $10,000) on the table by investing out of state.
Given their $25,000 investment, passing on $1,000 is like waving goodbye
to an automatic 4% boost to returns, which will be difficult to make up
even in the strongest plan available nationwide. (Note that the
performance differential between the top and bottom deciles of age-based
options up to age 18 has been around 2 to 5 percentage points during
the trailing three-year period). However, if the Buchanans live in a
state with only a $1,000 deduction limit, they would only forgo $100 in
tax savings (10% of the $1,000 limit) by investing outside of their
state's plan, which adds up to only 0.40% of their $25,000 asset base.
It's much more likely that they can make up 0.40% in one of the nation's
strongest plans via better performance or lower fees. Individual
households can follow this framework to crunch the numbers for their
unique situations.
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
Bogan's analysis will appear in a forthcoming issue of the journal Contemporary Economic Policy.
In the early 2000s, Section 529 of the Internal Revenue Code was
amended to create investment plans that would encourage parents to save
for their children's education. As a result almost every state offers
"529 plans" that allow parents to deduct contributions from their state income tax. Like 401(k) retirement plans, 529 plans usually invest in a group of mutual funds.
Analyzing data from 2002 to 2006, Bogan found that the greater the
tax advantage a state offered, the higher the fees charged by investment
managers, even after controlling for such factors as the amount of
competition in a state and the administrative structure of the plan. The
statistics support an assertion that investment management companies
set their fees based on the amount of tax saving offered by the state,
she said. And if the state is receiving a share of the fees charged by
plan administrators, Bogan added, it has an incentive not to regulate
those fees, creating a "moral hazard risk."
Bogan offers the example of parents investing $10,000 a year in a
typical plan, starting when a child is born. Tax savings will amount to
around $500 a year, depending on the investor's federal tax
bracket, and the parents would invest that money back in the plan. But
fees – based on the growing value of the fund – will quickly reach $585 a
year. "By year four or five…the annual asset-based fees completely
cannibalize the state taxable income benefit," Bogan reported. At the
end of 18 years, the 529 fund could be worth thousands less than an
ordinary mutual fund, depending on the fees charged.
"Households would be well advised to educate themselves about each
specific educational savings plan prior to investing," Bogan concluded.
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
Bogan's analysis will appear in a forthcoming issue of the journal Contemporary Economic Policy.
In the early 2000s, Section 529 of the Internal Revenue Code was
amended to create investment plans that would encourage parents to save
for their children's education. As a result almost every state offers
"529 plans" that allow parents to deduct contributions from their state income tax. Like 401(k) retirement plans, 529 plans usually invest in a group of mutual funds.
Analyzing data from 2002 to 2006, Bogan found that the greater the
tax advantage a state offered, the higher the fees charged by investment
managers, even after controlling for such factors as the amount of
competition in a state and the administrative structure of the plan. The
statistics support an assertion that investment management companies
set their fees based on the amount of tax saving offered by the state,
she said. And if the state is receiving a share of the fees charged by
plan administrators, Bogan added, it has an incentive not to regulate
those fees, creating a "moral hazard risk."
Bogan offers the example of parents investing $10,000 a year in a
typical plan, starting when a child is born. Tax savings will amount to
around $500 a year, depending on the investor's federal tax
bracket, and the parents would invest that money back in the plan. But
fees – based on the growing value of the fund – will quickly reach $585 a
year. "By year four or five…the annual asset-based fees completely
cannibalize the state taxable income benefit," Bogan reported. At the
end of 18 years, the 529 fund could be worth thousands less than an
ordinary mutual fund, depending on the fees charged.
"Households would be well advised to educate themselves about each
specific educational savings plan prior to investing," Bogan concluded.
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
Bogan's analysis will appear in a forthcoming issue of the journal Contemporary Economic Policy.
In the early 2000s, Section 529 of the Internal Revenue Code was
amended to create investment plans that would encourage parents to save
for their children's education. As a result almost every state offers
"529 plans" that allow parents to deduct contributions from their state income tax. Like 401(k) retirement plans, 529 plans usually invest in a group of mutual funds.
Analyzing data from 2002 to 2006, Bogan found that the greater the
tax advantage a state offered, the higher the fees charged by investment
managers, even after controlling for such factors as the amount of
competition in a state and the administrative structure of the plan. The
statistics support an assertion that investment management companies
set their fees based on the amount of tax saving offered by the state,
she said. And if the state is receiving a share of the fees charged by
plan administrators, Bogan added, it has an incentive not to regulate
those fees, creating a "moral hazard risk."
Bogan offers the example of parents investing $10,000 a year in a
typical plan, starting when a child is born. Tax savings will amount to
around $500 a year, depending on the investor's federal tax
bracket, and the parents would invest that money back in the plan. But
fees – based on the growing value of the fund – will quickly reach $585 a
year. "By year four or five…the annual asset-based fees completely
cannibalize the state taxable income benefit," Bogan reported. At the
end of 18 years, the 529 fund could be worth thousands less than an
ordinary mutual fund, depending on the fees charged.
"Households would be well advised to educate themselves about each
specific educational savings plan prior to investing," Bogan concluded.
The final value of a college savings plan depends on management
fees. Parents purchasing a mutual fund portfolio for a newborn child and
investing $10,000 each year until the child starts college (18 years)
would finally have almost $415,000 …more
(Phys.org) —Government efforts to make it easier to save for
college have unintended consequences, according to a Cornell economist.
When you get a tax deduction for contributing to a college savings plan,
your savings may be more than consumed by higher fees charged by plan
administrators, according to research by Vicki Bogan, associate
professor in the Charles H. Dyson School of Applied Economics and
Management. Parents may be better off putting their money in ordinary,
non-tax-exempt investments, she suggested.
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
Bogan's analysis will appear in a forthcoming issue of the journal Contemporary Economic Policy.
In the early 2000s, Section 529 of the Internal Revenue Code was
amended to create investment plans that would encourage parents to save
for their children's education. As a result almost every state offers
"529 plans" that allow parents to deduct contributions from their state income tax. Like 401(k) retirement plans, 529 plans usually invest in a group of mutual funds.
Analyzing data from 2002 to 2006, Bogan found that the greater the
tax advantage a state offered, the higher the fees charged by investment
managers, even after controlling for such factors as the amount of
competition in a state and the administrative structure of the plan. The
statistics support an assertion that investment management companies
set their fees based on the amount of tax saving offered by the state,
she said. And if the state is receiving a share of the fees charged by
plan administrators, Bogan added, it has an incentive not to regulate
those fees, creating a "moral hazard risk."
Bogan offers the example of parents investing $10,000 a year in a
typical plan, starting when a child is born. Tax savings will amount to
around $500 a year, depending on the investor's federal tax
bracket, and the parents would invest that money back in the plan. But
fees – based on the growing value of the fund – will quickly reach $585 a
year. "By year four or five…the annual asset-based fees completely
cannibalize the state taxable income benefit," Bogan reported. At the
end of 18 years, the 529 fund could be worth thousands less than an
ordinary mutual fund, depending on the fees charged.
"Households would be well advised to educate themselves about each
specific educational savings plan prior to investing," Bogan concluded.
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
Bogan's analysis will appear in a forthcoming issue of the journal Contemporary Economic Policy.
In the early 2000s, Section 529 of the Internal Revenue Code was
amended to create investment plans that would encourage parents to save
for their children's education. As a result almost every state offers
"529 plans" that allow parents to deduct contributions from their state income tax. Like 401(k) retirement plans, 529 plans usually invest in a group of mutual funds.
Analyzing data from 2002 to 2006, Bogan found that the greater the
tax advantage a state offered, the higher the fees charged by investment
managers, even after controlling for such factors as the amount of
competition in a state and the administrative structure of the plan. The
statistics support an assertion that investment management companies
set their fees based on the amount of tax saving offered by the state,
she said. And if the state is receiving a share of the fees charged by
plan administrators, Bogan added, it has an incentive not to regulate
those fees, creating a "moral hazard risk."
Bogan offers the example of parents investing $10,000 a year in a
typical plan, starting when a child is born. Tax savings will amount to
around $500 a year, depending on the investor's federal tax
bracket, and the parents would invest that money back in the plan. But
fees – based on the growing value of the fund – will quickly reach $585 a
year. "By year four or five…the annual asset-based fees completely
cannibalize the state taxable income benefit," Bogan reported. At the
end of 18 years, the 529 fund could be worth thousands less than an
ordinary mutual fund, depending on the fees charged.
"Households would be well advised to educate themselves about each
specific educational savings plan prior to investing," Bogan concluded.
Government efforts to
make it easier to save for college have unintended consequences,
according to a Cornell economist. When you get a tax deduction for
contributing to a college savings plan, your savings may be more than
consumed by higher fees charged by plan administrators, according to
research by Vicki Bogan, associate professor in the Charles H. Dyson
School of Applied Economics and Management. Parents may be better off
putting their money in ordinary, non-tax-exempt investments, she
suggested.
Government efforts to
make it easier to save for college have unintended consequences,
according to a Cornell economist. When you get a tax deduction for
contributing to a college savings plan, your savings may be more than
consumed by higher fees charged by plan administrators, according to
research by Vicki Bogan, associate professor in the Charles H. Dyson
School of Applied Economics and Management. Parents may be better off
putting their money in ordinary, non-tax-exempt investments, she
suggested.
Government efforts to
make it easier to save for college have unintended consequences,
according to a Cornell economist. When you get a tax deduction for
contributing to a college savings plan, your savings may be more than
consumed by higher fees charged by plan administrators, according to
research by Vicki Bogan, associate professor in the Charles H. Dyson
School of Applied Economics and Management. Parents may be better off
putting their money in ordinary, non-tax-exempt investments, she
suggested.
Government efforts to
make it easier to save for college have unintended consequences,
according to a Cornell economist. When you get a tax deduction for
contributing to a college savings plan, your savings may be more than
consumed by higher fees charged by plan administrators, according to
research by Vicki Bogan, associate professor in the Charles H. Dyson
School of Applied Economics and Management. Parents may be better off
putting their money in ordinary, non-tax-exempt investments, she
suggested.
Robert D Flach for MainSt writes: Most taxpayers contact their tax professional only during the tax
filing season – after the tax year has ended – to prepare their returns. But you should contact your tax professional during the year - before year-end - if any of these events occur:
you get married, divorced, or become widowed
you have a child
you change jobs
your spouse starts working
you have a substantial increase in income
you have a substantial gain from the sale of investments
you buy or sell a home or rental real estate
you start, acquire, or sell a business
you retire
you make an unplanned withdrawal from an IRA or pension plan
you receive an inheritance
you receive correspondence from the IRS or a state tax agency
You should actually contact your tax professional BEFORE many of these events are finalized.
For example, if you are beginning the process of divorce you should
contact your tax professional for guidance in negotiating the divorce
agreement and the distribution of assets.
It is also a good idea to contact your tax professional in November –
before the end of the year – even if none of the above events have
occurred to discuss possible year-end tax planning moves.
Business Management Daily writes: Under Section 162 of the tax code, your business can deduct a wide
range of “ordinary and necessary” business expenses. This may include
bona fide business management
fees paid to professionals or a management firm used for this purpose.
But you can’t deduct expenses just because you’ve labeled them as
“management fees.”
In a new case, the Tax Court determined that such an arrangement was a sham and denied the taxpayer any deductions.
Facts of the new case: A dentist, who was the sole shareholder
of his professional corporation (PC), used a bookkeeper and an outside
payroll service for the PC. All of the stock in the PC was owned by an
employee stock ownership plan (ESOP). Then the dentist set up another
corporation to manage his practice.
The new corporation was purportedly responsible for providing annual
financial reports, investigating patient complaints, developing
employment policies and procedures, recruiting and training employees
and complying with various requirements. The dentist arranged to pay
between 1% and 25% of his monthly gross receipts from the practice to
the corporation. During the tax years in question, he paid management
fees of $430,000 and $303,000. These amounts were deducted in full by
the PC.
But the IRS objected and the Tax Court sided with the IRS. Reason:
Although management fees may be deductible as business expenses, the
fees weren’t “ordinary and necessary” in this instance. The management
corporation had no employees of its own, while it only employed the
dentist and his bookkeeper as co-employees. Essentially, the corporation
did nothing for the practice (other than codifying the co-employment
agreement with the dentist).
In other words, the Tax Court viewed the arrangement as a ploy to
create income for the ESOP, to the tax benefit of the dentist. Case
closed: No deduction was allowed. (Elick, TC Memo 2013-139)
Integration of Expense Management and Cloud Accounting Transforms Expense Report Hassle Into Increased Financial Clarity Xero, the global leader in online accounting software, and Expensify,
the world's top small business (SMB) expense reporting application,
today announced a partnership integrating Expensify's expense report
data directly into Xero's accounting platform. The partnership solves
traditional expense report hassles and gives small businesses,
bookkeepers, accountants and finance departments a complete view of
their finances with just one click.
This integration is a powerful addition to Expensify's
extensive list of partnerships and adds to Xero's strong add-on partner
ecosystem. The announcement comes as Xero experiences record growth,
with U.S. revenues and customers doubling year-over-year.
"Typical expense reporting and tracking is not only a hassle
but leads to delays and financial guesswork that can really hurt a small
business," said Scott Scharf, owner of Catching Clouds, an accounting
firm specializing in cloud-based accounting and a Xero Silver Partner.
"Expensify makes expense management fast, accurate and simple, and now
with the Xero integration, our clients get this data presented in the
context of their complete finances. Our clients' books are balanced
instantly and finances are up-to-date at all times -- there's never any
question of where they stand. For our firm's small business owners, this
is critical."
Through the partnership, data from Expensify feeds into
Xero's cloud accounting software immediately, eliminating a
time-consuming submission process and integrating critical financial
information into a 360-degree view of business finances. With Expensify
and Xero, small businesses can now organize and manage expenses and
receipts using line-item transaction data from their credit cards and
bank account statements. Combining Xero and Expensify creates a crystal
clear picture of a business's finances, facilitating financially sound
decision making.
"Xero's cloud-based approach to accounting has disrupted the
traditional accounting industry, making them an ideal partner to improve
our customers' financial workflows and giving businesses around the
world a definitive view into their finances," said David Barrett, CEO of
Expensify. "With this integration, business owners and financial
managers no longer need to worry about the hassles of managing complex
expense reporting through their accounting system. Our technologies now
sync effortlessly, giving customers the ability to assess their full
financial health anytime, anywhere -- period."
Beta customers are seeing immediate benefits from using Xero
and Expensify in tandem and the companies are set to formally debut the
new partnership at Xerocon, taking place on September 4 and repeating on
September 5 in San Francisco. For complete details on the conference,
visit here.
"Expensify has resolved the inconvenience of traditional
expense reports with a simple, effective cloud service," said Jamie
Sutherland, president, Xero U.S. "In a financial landscape filled with
old school legacy players, Xero and Expensify are taking financial
management, expense reporting and accounting to the next level: the
cloud. For small businesses and their financial advisors, this means
advanced, on-the-go and up-to-date financial analytics to help them move
their business forward."
For those who cannot attend Xerocon in San Francisco, Xero
and Expensify will co-host a webinar outlining the new integration on
Tuesday, September 24 at 1:00 p.m. ET. To register, visit here.
Laura Saunders for the Wall St Journal writes: The U.S. and Swiss governments are nearing agreement on a
comprehensive plan allowing Swiss banks to settle with U.S. authorities
over accounts held by U.S. tax evaders. A deal is expected within days,
according to officials from both countries.
The plan would create four tiers of banks and require some to pay
fines and name names, according to a senior Department of Justice
official. The U.S. could collect up to $1 billion or more in penalties
from this program, the official said.
Credit Suisse is among about a
dozen Swiss banks that are already cooperating with the U.S. Department
of Justice probe into tax evasion.
A pact between Switzerland and the U.S.
would likely move closer to an end an international dispute that has
destabilized the massive banking sector of the world's largest offshore
wealth center. It would also mark a victory for a U.S. legal effort once
seen facing unsure odds as it assaulted Switzerland's decades-old
bank-secrecy laws.
The U.S. official warned holders of undeclared offshore accounts to
declare them immediately to the Internal Revenue Service, which has a
limited amnesty program for such taxpayers.
U.S. officials' intense campaign against offshore tax evasion took shape after Swiss banking giant UBS AGUBS-0.56%
admitted that it had helped U.S. taxpayers hide money abroad. In an
unprecedented outcome, UBS paid $780 million and turned over the names
of more than 4,000 U.S. taxpayers holding secret accounts to settle U.S.
charges, ending decades of Swiss bank secrecy. Since then, more
than 120 U.S. taxpayers and advisers have been criminally charged in
connection with undeclared offshore accounts, most of which were in
Switzerland. The country's oldest bank, Wegelin & Co., closed after
admitting to helping U.S. taxpayers hide $1.2 billion abroad, and 14
other Swiss banks are under criminal investigation by the U.S.
"This agreement will open the doors for Swiss banks to put the past
behind them," said Jeffrey Neiman, who led the prosecution of UBS and is
now private practice in Fort Lauderdale, Fla. "Given the choice between
protecting their remaining U.S. clients and existing without the U.S.
scrutiny, banks will run to the Justice Department to make deals."
U.S. officials have also pursued individual bankers and outside
advisers. On Aug. 16, Edgar Paltzer, a high-level Swiss lawyer, pleaded
guilty to helping U.S. taxpayers hide money abroad. Mr. Paltzer's lawyer
said that client's cooperation with U.S. authorities would be "complete
and without limitation."
The U.S.'s pursuit of undeclared offshore accounts is expected to
continue. "When the UBS case was completed, officials said that this was
the beginning, not the end, of offshore tax enforcement," said Mr.
Neiman. "U.S. officials will be able to shift their focus to other
offshore tax jurisdictions, such as Singapore, Hong Kong, Israel and
countries in the Caribbean."
In the wake of the financial crisis, cash-strapped governments have
pressured Switzerland to allow its banks to share information on their
citizens who may have used accounts there to avoid paying taxes.
Switzerland's strict banking-privacy laws make sharing such information
difficult and sometimes illegal. Once Switzerland signs a deal with the
U.S., Swiss banks will be able to share that information with the U.S.
without violating Swiss law.
According to the senior U.S. official, the new plan is expected to
create four categories of banks and cover a period from 2008 to 2014. In
2014, a U.S. law known as the Foreign Account Tax Compliance Act, or
Facta, takes effect that requires turnovers of information on U.S.
taxpayers by banks outside the U.S.
The first tier includes the 14 banks currently under criminal
investigation by the U.S., which would not be eligible to take part in
the U.S. program. The second includes institutions that will provide
account holder information or pay fines, or both, in exchange for
deferred prosecution agreements or nonprosecution agreements with the
U.S.
The third tier consists of banks that can prove they did not help
U.S. taxpayers hide assets abroad, and the fourth is comprised by local
Swiss banks not covered by Fatca. No individuals or advisers would be
covered by the program, said the U.S. official. The new proposal is expected to allow a wide swath of the country's
banks to deal with ramifications of any undeclared accounts held by
Americans that they may have. It comes roughly two months after
Switzerland's Parliament voted down a different plan for a sweeping
settlement amid concerns the country's sovereignty was being violated.
Unlike a previous attempt at a wide-ranging bank settlement, the
proposed deal doesn't require parliamentary approval, according to a
finance department spokesman.
The Swiss Bankers Association welcomed the new proposal on Wednesday,
saying it would allow the industry to put legal uncertainty behind it.
The SBA had already accepted the plan during a board meeting on Monday.
"The process will be painful for Swiss banks, but [the board] decided to
back it because it allows for a final settlement," a spokeswoman said
of the latest plan.
Arden Dale for the Wall St Journal writes: Financial advisers are concerned the 3.8% tax on investment income
could cost some business owners millions of dollars in taxes because
they aren't sure how to help their clients minimize the tax hit.
At issue is how the Internal Revenue Service will tax income
generated by businesses owned by trusts, which families set up to pass
the enterprise on to heirs. Advisers say the IRS needs to provide guidance on how it will apply
the tax on trusts so they can perform proper tax planning for their
clients.
A tax group at the American Bar Association, and other groups, have
asked the IRS for answers. The agency says it carefully reviews all
comments and will take them into account as it develops final
regulations. In the meantime, advisers have no choice but to start talking with
clients about the tax--which targets dividends, capital gains and other
investment--and to try to help estimate the best they can its potential
impact for 2013.
"The adviser world is trying to read between the lines," said Bill
Fleming, a managing director at PricewaterhouseCoopers Private Company
Services practice.
A hypothetical client, said Mr. Fleming, might be a family that owns a
business that manufactures aircraft parts which is held in five trusts.
One son is the trustee of all of the trusts, as well as an owner and an
employee. (Mr. Fleming isn't permitted to discuss actual client cases.)
Mr. Fleming would recommend that the man keep separate logs that
document time spent wearing each hat in the business. His reason: the
IRS may end up applying the tax based on how active the taxpayer is in
helping to run the business.
In fact, that is the way the IRS imposes the 3.8% tax on businesses
set up as S corporations or partnerships. Someone who owns a business in
his own name, not a trust, doesn't owe the tax if he can show he worked
a certain number of hours on the job, is its sole participant, or meets
other criteria.
Sorting out time spent in different roles isn't so easy, however.
When someone sits on a sofa watching television at night and mulls over a
business issue, is he or she acting as owner or trustee? Lots of
business owners think about the business all the time, said Mr. Fleming,
and several of them "have had the
middle-of-the-night-staring-at-the-ceiling-discussion with me."
Advisers are eager to get some answers from the IRS because the
stakes are high. Individuals don't have to pay the 3.8% tax--which took
effect this year as part of the 2010 Affordable Care Act--unless they
have an adjusted gross income of $200,000 or higher ($250,000 filing
jointly). But trusts must pay it on undistributed income above $11,950.
"There's a lot of money at risk," said Richard L. Dees, a partner in
the private-client department at law firm McDermott Will & Emery in
Chicago.
Citing how owners of S corporations and partnerships can escape the
tax by proving they are active owners, Mr. Dees noted that it is also a
good idea for trustees to keep a log detailing their active
participation in running the business. Some owners, he added, may even
want to think about changing the way they have their businesses set up.
For example, Michael Krol, a planner at Waldron Wealth Management, an
advisory firm in Pittsburgh with around $1.1 billion under management,
says he is exploring a defective-grantor trust, rather than other kinds
of trusts most often used to hold a business. The business owner, not
the trust itself, would owe the tax.
"Because there are no clear answers, we're exploring different avenues," Mr. Krol said.
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Tom Pullar-Strecker writes: Xero will write down $700,000 after deciding to axe a software tool designed to help people manage their personal finances.
The company said 12,000 people used its personal financial management tool, Xero Personal, but it had not "taken off" as the company had hoped.
Those customers had not been included in Xero's customer tally of businesses using its cloud-based accounting product, which stood at 193,000 at the start of the month.
"A few years ago, independent personal financial management looked like a complementary space to accounting, especially for small-business owners," chief executive Rod Drury said.
"While a valuable service with many fans, we haven't seen a mass market of consumers willing to pay for PFM products. The market just hasn't taken off for any players and relies on advertising-based models that aren't our business."
Xero would "wind down" development work on Xero Personal and axe the service on November 30 next year, he said.
Xero Personal contributed $600,000 towards Xero's total annual revenues of $39 million in the year to March.
Withdrawing the product would not affect the company's forecast of posting at least 80 per cent revenue growth this year, it said.
Existing Xero Personal users would be able to continue to use the service after their annual expiry date at no additional charge until it was shut down.
"In coming weeks, information will be provided to assist customers in exporting their data and considering alternatives," Xero said.
Click here for a list of top-rated 529 plans. )
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
"The government policies designed to make college more
affordable could be creating market frictions which enable investment
firms to charge excess fees," Bogan said, adding that federal regulation
may be needed "to preclude financial management companies from
appropriating the benefits intended for individuals."
