5 Steps to End-of-the-Year Startup Tax Planning

David Ehrenberg, CEO of Early Growth Financial Services writes:  It’s that time of year again: time to start working on those startup tax estimates—otherwise known as that time of year when you need to start getting your act together! If you engaged in mid-year tax planning, great! You’re ahead of the game. But, if you didn’t, you’ll want to start those estimates now so you can avoid any unwelcome surprises come tax time. 

Even if your company didn’t have much of a profit (or any profit at all!) to show for the year, you still need to stay on top of your tax obligations. In the case that your company has no taxable income, you’ll want to try to maximize your losses, reducing the amount of book tax differences. And of course you want to make sure you file in time to stay in compliance. 

Follow these steps to start the process of end-of-the-year startup tax planning:

1. Profit and loss analysis. Hopefully this isn’t the first time all year you’ll be checking out your profit and loss statement. Presumably you’ve been keeping track of all of your expenses and income throughout the year. Once you’ve confirmed that these numbers are current and reconciled, print out a current profit and loss statement, reflecting the year-to-date with a comparison to the previous year. Comparing your profit and loss statement to the previous year is key in understanding how your business is performing, both in terms of cash in and cash out. Note that whether you select cash or accrual accounting will depend on your reporting of income and expenses for tax purposes. 

2. Project to year-end. Use the data in your year-to-date profit and loss statement to project your income and expenses out through the end of the year, factoring in any end-of-the-year seasonal impact.

3. Identify significant book tax differences. For example, the purchase of any capital assets will affect your tax liability, so make sure that transactions such as these have been captured in your financial statements. Fixed assets should show up and you should record depreciation. If you acquired fixed assets, you can take deductions for 50% of depreciation, plus the asset, plus the regular depreciation on the remaining basis. Make sure you’re not missing out on these types of tax savings.

4. Consider the impact of your business return on your individual return. Depending on your classification, all the things that impact on your corporate tax are going to impact on your individual tax as well. For example, if your business is classified as an S corp, profits are factored into your individual tax return, though not subject to self-employment tax. On the other hand, if you own a C corp, your company will incur and pay tax, separate from your individual and self-employment tax. 

5. Consult with a tax professional. You can only get so far on your own when it comes to tax planning. Ultimately you need to work with a professional whose business it is to understand all of the most recent changes to tax law, all possible exemptions, credits, etc. Your tax specialist will be able to help you to identify what you can do to minimize your taxes for the year. Whether it’s AMT credits or capital losses, your tax professional will guide you through the tax planning process and identify factors that will directly impact your tax liability.

Bundle Up This Winter with an HSA Account and a Tax Deduction / How An HSA Can Work For You

Joel Yoder for REA Associates writes: With Dec. 31 at our doorstep, are you looking for a quick and easy way to avoid some taxes? At the end of the year, there is always a rush to find those extra deductions to take advantage of, and a health savings account (HSA) has been a tried and true method of doing just that. An HSA allows a participant to:

• Keep their own money
• Earn interest – tax-free
• Save money that would have been used for medical expenses
• Get a tax deduction just for putting money into their own account.

Here are a few items and resources you need to know to unravel the mystery of an HSA:

• What is an HSA?
  An HSA is an account established exclusively for paying unreimbursed qualified medical expenses.
  
• Am I eligible for an HSA?
  To participate in an HSA, you must be covered by a high-deductible health plan (HDHP). You must also not be eligible for Medicare.

• What qualifies as a HDHP?In 2013, the deductible must be at least $1,250 for self-coverage. If you have family coverage, your annual deductible must be at least $2,500. The annual limits on total out-of-pocket costs are $6,250 for single and $12,500 for family.

• How much can I contribute to an HSA, and defer from taxes?For 2013, the maximum contribution is $3,250 for single and $6,450 for family. For participants 55 or older, the annual contribution limit goes up by $1,000.   

• When do I have to contribute to my HSA?Contributions can be made in one or more payments and at any time before the due date (without extensions) for filing the eligible individual’s tax return. The contribution window for you to make an HSA contribution for 2013 is Jan. 1, 2013 – April 15, 2014.  

• Can I get the money for things other than qualified medical expenses?Yes; however, there is 20 percent penalty if a distribution is taken prior to the participant reaching age 65. The distribution is also taxable at the participants’ marginal income tax rate. 

• How are HSA contributions deferred from taxes?
  
  
  • If you’re an employee: This can be done in one of two ways. First, your employer may withhold the contribution from your paycheck and in turn the contribution is not included in income on Form W2. Secondly, contributions can be made outside of payroll, in which case they are deducted on your tax return.
    
  • If you’re a sole proprietor: Contributions are made outside of payroll and deducted on your tax return
    
  • If you’re a partner in a partnership: There are two ways a partnership can handle HSA contributions. The partnership may either give a tax-free distribution (not deductible to the partnership) to the partner or include the amount as a guaranteed payment (deductible by the partnership, but the partner would owe self-employment tax). Then the amount is contributed to the HSA and deducted on the partner’s tax return.
    
  • If you’re a shareholder/employee in an S-corporation: There are two ways an S-corporation can handle HSA contributions. They may either give a tax-free distribution (not deductible by the S-corporation) to the shareholder or include the amount in wages (deductible by the S-corporation). Then the amount is contributed to the HSA and deducted on the shareholder’s tax return.

If you’re interested in learning more about setting up an HSA account, you should get in touch with your financial advisor or insurance agency that sets up the account. You can also consult IRS Notice 2008-59 or IRS Publication 969.

Be Prepared for the Capital Gains Tax Rate in 2014

Chuck Saletta for the MotleyFool writes: If you sell an investment for more than you paid to buy it, that profit is known as a capital gain on your investment. Like ordinary income, the profit you receive is subject to taxes, but at the federal level, the rates are often different from those on your earnings from work. The capital gains tax rate in 2014 depends on your overall taxable income, the length of time you've held the investment, and whether you took offsetting losses to charge against some or all of your gain.
 

What is the capital gains tax rate in 2014?
While Congress can always change the law, as of Dec. 18, 2013, the expected capital gains tax rates in 2014 for ordinary investments are as follows:

Short-term gains (gains on assets owned for less than one year plus one day) are taxed at your ordinary income tax rates. Long-term gains (gains on assets owned for at least one year plus one day) are taxed depending on your overall income tax bracket. If your overall income falls in:

• the 10% or 15% marginal income tax brackets, then your long-term capital gains tax rate is 0%.
  
• the 25%, 28%, 33%, or 35% marginal income tax brackets, your long-term capital gains tax rate is 15%.
  
• the 39.6% marginal income tax bracket, your long-term capital gains tax rate is 20%. 
  

In addition, the capital gains of high-income earners are subject to a net investment income tax of 3.8%, above and beyond that capital gains tax rate. Those rates kick in at $125,000 if you're married filing separately, $200,000 if you file single or as a head of household, or at $250,000 if you're married filing jointly or a qualifying widow(er) with a dependent child. 

Not all assets fall under standard capital gains treatment. Qualified small-business stock and collectibles carry a maximum 28% capital gains tax rate, and recaptured depreciation is taxed at a maximum 25% capital gains tax rate in 2014. The big break in capital gains tax rates generally comes when you sell your home. If you've owned and lived in your home long enough to qualify, you can exclude $250,000 of gain (or $500,000 if married and filing jointly) from being subject to capital gains taxes.

The benefits of losing money
The other thing to note when it comes to capital gains taxes in 2014 is that you can use losses to offset gains, though you can't claim a loss for your taxes on the sale of your primary residence. If you have more losses than gains, up to $3,000 of losses can go to offset ordinary income, and the rest of your losses carry forward to your next tax year. 

Be careful with taking losses, though, because of something known as the "Wash Sale" rule. In essence, if you sell an item for a loss and then buy it or a "substantially identical" item back within 30 days (before or after the sale), you can't immediately claim your loss. Instead, the loss adjusts your basis price and holding date on your new purchase. 

Despite all that complexity, capital gains tax rates in 2014 generally remain lower than ordinary income taxes, especially for assets that you've held for more than a year. Managed well over an entire investing lifetime, your portfolio can give you plenty of opportunity to leverage those lower rates to help your money go further in your golden years.

Tax Planning for Owning a Second Home

Kiplinger writes: If you are in the market for a second home, congratulations! Not only can you look forward to having a place to relax, you also can garner some tax benefits for that place in the mountains or at the beach. You can use several tax breaks:

Mortgage Interest

If you use the place as a second home -- rather than renting it out as a business property -- interest on the mortgage is deductible just as interest on the mortgage on your first home is. You can write off 100% of the interest you pay on up to $1.1 million of debt secured by your first and second homes that was used to acquire or improve the properties. (That's a total of $1.1 million of debt, not $1.1 million on each home.) The rules that apply if you rent the place out are discussed later. Property taxes. You can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own.

If You Rent the Home

Lots of second-home buyers rent their property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown between personal and rental use. If you rent the place out for 14 or fewer days during the year, you can pocket the cash tax-free. Even if you're charging $10,000 a week, the IRS doesn't want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes just as you do for your principal home.

Rent for more than 14 days, though, and you must report all rental income. You also get to deduct rental expenses, and that gets complicated because you need to allocate costs between the time the property is used for personal purposes and the time it is rented.
If you and your family use a beach house for 30 days during the year and it's rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible, too. And you could claim depreciation deductions based on 80% of the value of the house. If a house is worth $200,000 (not counting the value of the land) and you're depreciating 80%, a full year's depreciation deduction would be $5,800. You can always deduct expenses up to the level of rental income you report. But what if costs exceed what you take in? Whether a loss can shelter other income depends on two things: how much you use the property yourself and how high your income is.

If you use the place more than 14 days, or more than 10% of the number of days it is rented -- whichever is more -- it is considered a personal residence and the loss can't be deducted. (But because it is a personal residence, the interest that doesn't count as a rental expense -- 20% in our example -- can be deducted as a personal expense.)

If you limit personal use to 14 days or 10%, the vacation home is considered a business and up to $25,000 in losses might be deductible each year. That's why lots of vacation homeowners hold down leisure use and spend lots of time "maintaining" the property. Fix-up days don't count as personal use. The tax savings from the loss (up to $7,000 a year if you're in the 28% tax bracket) help pay for the vacation home. Unfortunately, holding down personal use means forfeiting the write-off for the portion of mortgage interest that fails to qualify as either a rental or personal-residence expense.

We say such losses might be deductible because real estate losses are considered "passive losses" by the tax law. And, passive losses are generally not deductible. But, there's an exception that might protect you. If your adjusted gross income (AGI) is less than $100,000, up to $25,000 of such losses can be deducted each year to offset income such as your salary. (AGI is basically income before subtracting your exemptions and deductions.) As income rises between $100,000 and $150,000, however, that $25,000 allowance disappears. Passive losses you can't deduct can be stored up and used to offset taxable profit when you ultimately sell the vacation house.

Tax-Free Profit

Although the rule that allows home owners to take up to $500,000 of profit tax-free applies only to your principal residence, there is a way to extend the break to your second home: make it your principal residence before you sell. That's not as wacky as it might sound. Nor is it as lucrative as it used to be.

Some retirees, for example, are selling the big family home and moving full time into what had been their vacation home. Before 2009, this had a very special tax appeal. Once you live in that home for two years, up to $500,000 of profit could be tax free -- including appreciation in value during the years it was your second home. (Any profit attributable to depreciation while you rented the place, though, would be taxable. Depreciation reduces your tax basis in the property and therefore increases profit dollar for dollar.)

A few years ago, though, Congress cracked down on this break for taxpayers who covert a second home to a principal residence. A portion of the gain on a subsequent sale of the home is ineligible for the home-sale exclusion of up to $500,000, even if the seller meets the two-year ownership and use tests. The portion of the profit that's subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit to the total time you owned it.

This can still be a great deal if you've owned your second home for many years before the law changed. Let's say you have owned a vacation home for 18 years and make it your main residence in 2011. Two years later, you sell the place. Since the two years after 2008 the place was your second home (2009 and 2010) is 10% of the 20 years you owned the home, only 10% of the gain is taxed. The rest qualifies for the exclusion of up to $500,000.

Some final tax moves to consider in 2013 / These tips will help you start 2014 off right.

Janet Kidd Stewart for the Chicago Tribune writes:With 2013 almost in the books, some last-minute tax moves for your retirement money could help you start 2014 off right.

New retirees whose income will be significantly lower this year than it has been in the past or who are picking up self-employed gigs as they downshift into retirement, and anyone who turned 70 ½ this year should pay especially close attention to these three strategies, experts say:

Roth while you can. If you've retired but haven't yet started taking Social Security and large retirement account distributions, you may be in a sweet spot to convert some assets in traditional IRAs to a Roth IRA, said Chris Benson, an accountant and financial adviser with L.K. Benson & Co. in Towson, Md.

"I just got out of a client meeting with someone who retired a couple years ago but hasn't started taking big 401k distributions yet," Benson said. "Right now he's in a pretty low bracket and just has some investment income, so we're looking at converting some of that money to a Roth."

Hate the thought of paying income taxes to convert to a Roth by the year-end deadline only to see those assets decline in value if markets go into a correction in 2014? You can always undo the deed by recharacterizing the conversion by Oct. 15 of next year.

DIY 401k. If you're picking up some consulting work as you downshift a career, consider using this time to double down on retirement savings with an individual 401k, also known as a Solo 401k.

The deadline for opening a Solo-k is also Dec. 31. The plans are generally for one-owner businesses and the self employed but can include a spouse. The appeal is the much larger contribution limits compared with IRAs.

Another bonus: Unlike with IRAs, you can keep contributing to Solo-k plans after age 70 ½, said David Littell, a tax professor at The American College of Financial Services.

For 2013 and 2014, Solo-k owners who are 50 and older can contribute up to $23,000 in elective deferrals, plus up to 25 percent of compensation, which is calculated according to IRS Publication 560, chapter 5.

Total contributions can't be more than $51,000 for this year and $52,000 in 2014, plus the 50-plus catch-up contributions.

As with IRAs, there are traditional and Roth Solo-k plans, so you'll need to decide if you want a tax deduction now on the contribution or if you want the money to be withdrawn tax-free later in retirement. If your income is lower now because of the career downshift, it might make more sense to consider a Roth.
Not all IRA custodians offer the Solo-k, so it pays to shop around for one that offers a full selection of investments and low or no fees.

Take the long view on RMDs. If you turned 70 ½ this year, you don't absolutely have to take your first minimum distribution from your traditional IRA and 401k plans by year-end. (Older account holders do need to take their distributions by Dec. 31.)

In the first year of required distributions, you have the option to defer taking the distribution until April 1 of the following year. The catch is that you'll have to then take two distributions in that following year, which could ramp up your tax bill.

So if you haven't already, you might as well spend some time figuring out if it would be better to take the distribution in 2013. And while you're at it, think even longer term about how your income will flow in retirement and what that will mean for your tax situation.

"We're doing a lot of work covering a longer period of time in terms of how should I be managing my overall retirement income," said Robert Keebler, a tax adviser in Green Bay, Wis. "You can't just look at this in a one-year window."

Help with Tax Efficient re-Allocation

At Bogleheads we read: Help with Tax Efficient re-Allocation

by lexstyles » Thu Dec 19, 2013 7:15 pm

Hello,

I have been a long time reader of the forum and this is my first post. Thank you for your help.

My wife and I are both 36 and have taxable and tax-deferred accounts with Vanguard.
The taxable one holds approximately the following allocation:

\
VFIAX (S&P Index): 35%
VEXAX (Mid-Cap Index): 8%
VFWAX (Int'l Index): 28%
VGSLX (REIT): 10%
VBTLX (All Bond Index): 20%

The Roth + Rollover IRA:
VFORX (2040 target retire fund): 100%

The reason I started using the target retirement fund is that when the accounts were small I could not meet the minimums of all the individual funds necessary for my target allocation.

Now the accounts have grown and I have been reading about the benefits of tax-efficient allocations, I am considering selling off the target retirement fund, buying more of the individual funds, and shifting the holding so that the all the REIT and Bond index are held completely in the tax-advantaged accounts, followed by the MidCap, Int'l, and S&P indices in the taxable account.

The questions I have are:

1) Does it make sense to reallocate for tax efficiency even though selling the REIT and Bond funds in the taxable account will incur capital gains and thus some tax implications?

2) If so, does it make sense to wait until next year when i believe our taxable income will be lower (wife going on maternity leave)?

3) regarding the tax-efficiency of these funds, do you agree with my assessment of low to high efficiency (REIT - bond fund - midcap fund - int'l stock - S&P)?

4) are there recommendations regarding asset classes that are best held in either Roth vs Traditional IRAs?

5) should we diversify the bond allocation to include a tax-exempt bond fund, or is the total bond market fund sufficient?

Thanks again for your help. This forum has been an incredible help as we have tried to begin our path toward financial independence.

Re: Help with Tax Efficient re-Allocation

by Duckie » Thu Dec 19, 2013 10:00 pm

lexstyles, welcome to the forum.

lexstyles wrote:1) Does it make sense to reallocate for tax efficiency even though selling the REIT and Bond funds in the taxable account will incur capital gains and thus some tax implications?

Yes it makes sense because taxable bonds and definitely REITs do not belong in taxable.

2) If so, does it make sense to wait until next year when i believe our taxable income will be lower (wife going on maternity leave)?

Yes, especially since next year is two weeks away.

3) regarding the tax-efficiency of these funds, do you agree with my assessment of low to high efficiency (REIT - bond fund - midcap fund - int'l stock - S&P)?

This is the Boglehead view of tax efficiency.

4) are there recommendations regarding asset classes that are best held in either Roth vs Traditional IRAs?

If all things were equal it is suggested that funds with higher expected growth (stock funds) are better in the Roth and funds with lower expected growth (bond funds) are better in traditional because the Roth IRA growth won't be taxed. Things aren't always equal.

5) should we diversify the bond allocation to include a tax-exempt bond fund, or is the total bond market fund sufficient?

TBM is sufficient as long as you have enough room in tax-sheltered accounts to hold it.

Re: Help with Tax Efficient re-Allocation

by Taylor Larimore » Thu Dec 19, 2013 10:47 pm

Lexstyles:

Welcome to the Bogleheads Forum!

You are fortunate to realize now that your fund placement is not the most tax-efficient.

I agree with Duckie's sound advice. Any capital-gain on your REIT and Bond Index fund should be much less than the unnecessary taxes you will incur if you do not move these two funds into tax-advantaged accounts.

Happy Holiday!
Taylor

Five Year-End Tips for Accounting Firms on Wealth Management Services

Isaac M. O'Bannon for CPA Practice Advisor writes:   The end of the year brings the happiness of the holidays, time spent with family, hopes for the year to come and, for many individuals and business owners, challenges relating to their financial health.

Tax planning is most effective when it is a continuing discussion between a tax advisor and the individual, not a once-a-year thing that is tackled at the last minute. The same is true for personal and business financial planning, according to Ryan George, director of communications for 1^st Global, which provides wealth management services to accounting and legal firms throughout the nation.

Whether a firm has financial management expertise within its staff or partners with a financial planner to provide the services to its clients, the accountant is uniquely qualified to assess many of the fiscal strengths and weaknesses an individual may have. And while it may be late in the year, George says there are still many things that firms and individuals can do to address these issues.

1. Have a face-to-face meeting with your clients. When it’s possible to do so, an in-person meeting can strengthen the relationship, whether it’s at the firm, at the client’s location, or even at a coffee shop. December and January are a good time for such an engagement, because it can help set up some parameters for the coming year. The meeting doesn’t need to be a full engagement, nor should it be looked at as an opportunity to sell, says George. Instead, a short, 15-minute conversation can help get the client to start thinking about wealth management.
2. If the practice provides in-firm wealth management services, make sure that clients know it. This can often be overlooked in larger firms, where clients may be provided tax compliance or business accounting services, but the separate wealth management team does not have direct contact with the client.
3. While taxes are often a chief concern, other opportunities also affect their financial health. When looking at a client’s broader financial portfolio, the end of the year is a good time to identify opportunities such as restructuring their investments, investing in REITs, etc.
4. Establish a triage form of client identification. Categorize your clients into the ones that are already missing some potentially beneficial tax or investment opportunities, especially critical ones. These clients are the ones you want to sit down with as soon as possible. The next group, who may be missing some opportunities, come second, and you should reach out to them in some manner to schedule a meeting, but with less priority. The final group, lesser likelihood of benefit/engagement, can be reached through traditional communication channels, such as mailing lists.
5. Establish best-practice processes. Before the tax season crunch truly sinks in, this is also a good time to ensure that work in the back-end of the office is flowing efficiently. This helps ensure quality client service, as well as meeting productivity expectations. Larger firms, in particular, have to maintain a streamlined workflow ethos which also helps avoid missed opportunities.

Companies like 1^st Global are not in competition with accounting firms, but instead work to help them more effectively serve their clients. And the company recognizes the special relationship that CPAs and tax advisors have as their clients’ most trusted advisor.
“However, many of these professionals never reach their full potential of client services because they fail to adequately integrate comprehensive planning into their traditional client service offerings,” said 1^st Global Chairman and CEO Tony Batman.
“Often these efforts stall somewhere between acting as a packaged investment product provider and serving as a comprehensive wealth manager. While most firms start with a basic service model of access to financial and investment products, only those firms that continue to add specialization, complexity and integration based on a total client service approach arrive at a holistic and very profitable wealth management model.”
To gain a clearer definition, the company offers a definition of its Method 10 approach:

• Tax Planning – This is the foundation of any wealth management business and how CPA firms differentiate themselves from traditional financial advisors who work with high net worth clients. Tax planning provides frequent opportunities to communicate your wealth management value proposition to your clients.
• Investment Planning – Wealth management firms must use sharp, pointed questions to help clients create a blueprint for investment success. Proper investment planning must be based on each client’s investor profile: the specific goals, time horizons and risk tolerance for that individual client.
• Retirement Planning — Retirement planning affects all of your clients, whether they are individuals planning for their own retirement or business owners wanting to establish a retirement plan. An individual’s retirement planning should be approached from three fronts focusing on employer-sponsored plans, Social Security or other government programs, and individually owned plans.
• Income Protection and Asset Preservation – Your professional responsibility doesn’t end with building your clients’ wealth. You must help them protect it. To make appropriate recommendations for protecting income and preserving wealth, you need to understand the sources of your clients’ income and the location of their assets, both now and in the future.
• Education Planning – Few of life’s essential elements have increased more over the past decade than the cost of higher education. The education planning process begins with defining your clients' goals for their children (or grandchildren), then determining a plan of action to reach those goals. This planning process involves asset allocation, tax planning, estate and generation-skipping planning, asset protection planning and financial aid considerations. Once the plan is implemented, it must be monitored to ensure the goals are achieved.
• Insurance Planning — Insurance planning can help your clients answer the difficult question, “How will my family members and dependents manage financially if I die or become disabled?” It’s a subject many of your clients may not want to think about. But if a loved one depends on them financially, it’s a topic they cannot avoid. Insurance protects your clients from having to abandon or compromise their future goals if the unexpected occurs. You can help your clients plan for the unexpected by uncovering their needs, answering their concerns, and crafting an insurance plan to protect their financial goals.
• Estate Planning – Regardless of your clients’ overall net worth or whether they think their estate will be subject to an estate tax, there are several non-tax reasons to fully engage your clients on the subject of estate planning. Beyond minimizing the tax bill, you can help your clients craft an estate plan that addresses many vital issues, such as who gets what, when and how much; who’s in charge; charitable intent; and end-of-life considerations.
• Business Planning – The majority of business owners have no written succession plan. If their wealth is tied up in their business, this lack of formal succession planning could be financially and emotionally devastating. Read why succession planning is key for small business owners.
• Debt Management – Certain types of debt, such as home mortgages, car loans and education loans, are unavoidable for most of your clients. Other “elective” debts, such as credit cards or outstanding loans, can risk your clients’ financial future. Getting discretionary debt under control quickly should be your clients’ No. 1 priority so they can obtain the funds necessary to focus on their comprehensive wealth management plan.
• Special Situations — Special situations refer to any type of life event, such as divorce, elder care or even addiction, that forces dramatic change and places financial and emotional stress on your clients and their dependents. Planning for special situations requires wealth managers to use their insurance, investment and tax planning skills to create an effective solution.

Frozen 401(k) contributions might have silver lining

Dan Berman for BenefitsPro writes: Maximum 401(k) contributions for next year were frozen at 2013 levels by the IRS, but advisors say that might not be such bad news for those saving for retirement.  “By building so much 401(k) money you are making a deal with the devil,” said Jim Heafner, president of Heafner Financial Solutions in Charlotte, N.C.

Heafner explained that, with many expecting tax rates to rise over the next several years, using Roth IRAs, brokerage accounts and other post-tax vehicles for a portion of retirement savings is a good strategy.

Kile Lewis, co-CEO and founder of oXYGen Financial in Atlanta, puts the matter succinctly.
“Just because you can’t contribute to a 401(k) doesn’t mean you can’t save,” he said.
The limits on 401(k) contributions for 2014 announced by the IRS kept them at $17,500 for those in 401(k), 403(b) and 457 plans. Those over age 50 are still allowed an additional $5,500 in catch-up contributions. The limit for IRA contributions was kept at $5,500. The self-employed will be allowed to contribute $52,000 to SEP-IRA and Solo 401(k)s next year, a $1,000 bump from this year.

The methods advisors use to keep their clients on track with their retirement savings and other financial needs vary from the technological to the old fashioned, but they all promote discipline and awareness of needs.

“I use purpose-based asset allocation,” said David Edwards, president of Heron Financial Group in New York City. “I divide clients’ money into separate accounts for retirement, college. Each has its own investment strategy.”

That leaves some clients with seven or more accounts that can offer a snapshot of exactly where they stand in relation to the goal they have set in each area.  Lewis prefers a modern version of the multiple accounts strategy by using software to analyze the assets of clients. Either way, the effect is the same.

“I still believe in planning,” he said. “It’s hard to save if you don’t know why you are saving. Our clients have 10,000 choices. Our job is to show them the 10 that matter and help them choose the best three.”

Exactly which options work for a client and how much can be saved depends on every day needs for things like housing and college, and, of course, how much a client earns.

Heafner’s advice is simple for everyone: “The more they can save the better.”
One trend he has seen among younger workers is a move to purchase annuities, which traditionally have been marketed to those at or near retirement age. While they guarantee an income for life once retirement begins, no money is recouped for heirs if the purchaser dies at a younger age.

“Younger people have been driven by stock market crashes to seek something stable,” Heafner said, adding that the sale of annuities is more “consumer driven than sales driven.”
Adding to the allure of annuities are those that are indexed to inflation, thereby adding more income protection to those that purchase them.  “I think if you look ahead,” Heafner said, “inflation is going to be a big thing [in retirement planning].”

That “deal with the devil” Heafner mentioned is a key element that all three advisors mentioned when plotting strategy for retirement savings.
“I think the tax environment is going to get tougher,” Lewis said. “If everything is in nontaxable [accounts], you can get bitten down the road.”

He advocated making sure that all breaks and exemptions are used to reduce income tax bills. In that way, more money will be available to save for retirement and use for other needs.
For instance, he noted a Georgia law that allows citizens to purchase tax credits from movie companies that can’t use them. Other states have their own quirky tax laws that can lower the amount owed to the government.

In the end, whether because of pressure to buy the latest smartphone or TV or lack of income and other factors, retirement savings fall short for many U.S. workers.  “I think what we don’t do a good job of in this country is save monthly,” Lewis said, adding that for “many it’s a cash flow issue.”

Recent surveys bear that out. A Towers Watson study, for instance found that less than half have saved money outside of their employer’s retirement plans. And a J.P. Morgan poll found that most workers underestimated how much money they would need to save to replace their income.

Helping clients sort through the choices they need to prepare for retirement gets complicated. Add in the stress of working and family needs and it can be tough to figure out the right path.
“If you don’t get it right, the results can be disastrous.”

Year-End Tax Planning until the Ball Drops

Roger Russel for AccountingToday writes: “It’s never too late for tax planning,” a wise CPA once told me. “You’ve got till the ball drops to take action, and if you do it later than that, then you’ve got an early start for next year.”

Everyone in the tax business has seen their fair share of end-of-year tax planning tips. I’ve seen dozens, mostly from medium and large accounting firms, but also from wealth managers, lawyers, insurance reps, trust companies and charitable organizations.

They range from the mundane and obvious “defer income and accelerate deductions” to the more esoteric, such as “reduce your state unemployment tax by making a prepayment if your state allows it.”

Even the IRS has gotten in on the action by offering up some of its own tips: start a filing system, make charitable contributions (especially the special tax-free charitable distributions for certain IRA owners), and contribute to retirement accounts. For employers, the IRS suggests hiring a veteran by December 31 in order to claim the Work Opportunity Tax Credit, which can be worth thousands of dollars.

“We expect the tax rates to be generally the same in 2014 as in 2013,” said Mike Campbell, a tax partner in the Private Client Tax Services practice at BDO USA. “So we’re back to the advising our clients how to accelerate their deductions and defer income until next year.”

“Last year it was a different scenario,” he said. “Planning was inverse to the norm, where we advised accelerating income and deferring deductions into 2013 because the rates were higher this year than in 2012. But now we’re back to the standard practice for tax planning: defer income and accelerate deductions.”

So long as the taxpayer is not subject to the alternative minimum tax, the biggest deductions for most people would be state income taxes and property taxes, according to Campbell. “Prepay any state income taxes due by paying them by the end of December,” he said. “Then they will get a deduction for 2013 on their federal income taxes for state income taxes.”

“The same is true for property taxes,” he said. “Pay any property tax that is due in early 2014 by making payment in December of this calendar year and get a current deduction for 2013. The caveat, if the taxpayer is subject to the AMT for 2013, they shouldn’t do this, because they wouldn’t get the benefit of the deduction.”

“Those are two ways to accelerate deductions,” Campbell said. “Another way, if the client is contemplating a charitable contribution and has a choice, is to make the contribution in 2013. That way he or she will get a more current tax deduction, and a decrease in taxes currently for 2013.”

For the few clients lucky enough to get a bonus, Campbell recommends they push it into 2014. “If it’s paid in January, the tax liability is spread across 2014 and into 2015,” he said. “There’s no sense accelerating income into this year because all you do is pay taxes earlier.”

The 100 percent exclusion on gain for the sale of qualified small business stock is set to expire at the end of the year, Campbell observed. After the end of the year, the exclusion drops to 50 percent.

”If you buy stock in a qualified small business and hold it for five years, it would be eligible for exclusion of the gain of 100 percent up to $10 million,” he said. “This might not apply to Main Street America, but entrepreneurs who want to set up a C corporation or angel investors should take advantage of the opportunity to get the exclusion.”

Exercising stock options: Timing has tax lesson for everyone / Spousal benefit question

Dan Moisand for MarketWatch writes: Most Americans don't earn stock options at their job but some of the dynamics of the decision to exercise in one year or another can apply to just about anyone. This week I show the potential savings possible through smart tax planning. The concepts can help any taxpayer that is near a change point for their marginal income-tax rate.

Q. Shares of my employer's stock are at an all-time high and I have an option that just vested worth ~$250k. I am happy with the current price but doubt it will last so I am ready to exercise the options. However, with the change in calendar year, I am wondering if waiting until 2014 would be better tax wise. I wouldn't have to pay the taxesuntil April of 2015. I estimate my non-option income will be roughly the same in '14 as it was in '13 ( ~$360k). What should I be thinking about? Best — P.S.R.

A. The two main drivers on this decision are the stock price and taxes. You already have an opinion on the stock price.

For the taxes, a cornerstone of year-end planningis choosing in which year to incur taxable income and deductible expenses. This principle applies to taxpayers of all income levels. I will go with your assumption that your non-option income will be the same in both years. We want to think about income and deductions.

Being December, there is not much guesswork for 2013. If you were confident that more vested options would be worth exercising in 2014, you may want to cash out this 250k in 2013 so only those additional options would be hitting in 2014. For deductions, think about any deductible expenses that may be higher in 2014 versus 2013 like charitable contributions. If you were planning to make donations of some size in 2014, it may help a little to wait until after Jan. 1 to exercise.

Sometimes there is no clarity on which year would be better. If it isn't clear, exercising now alleviates the concern about a pull back in the stock price.

If you don't have anything else coming up in 2014, you might only cash out some this year. For federal, taxable income over 400k (398,350 to be exact) is taxed at 35% up to $450k and then 39.6% above 450k. The proceeds from these "non-qualified" options is taxed as wage income so it is not subject to the new 3.8% taxes on net investment income but is subject to 0.9% of Medicare taxes.

So let's pretend you have no deductions or exemptions and all $360,000 is taxable as wages. If 250k in proceeds from options is exercised in 2013, the first 40k ($400k-$360) will be taxed at 33%, the next 50k costs 35%, and the remaining 160k gets hit at 39.6% That totals roughly $94,000 in taxes ($13,200+$17,500+$63,360).

But, if you exercise $90k this year and the remaining $160k on Jan. 2, 2014, you'll pay about $30,700 in 2013, and $58,420 (30.7+27.72) for a total of $89,120. To make the calculation a little simpler, I did not use the tax brackets for 2014 so the 2014 estimate of the taxes is a bit high but you get the idea.

If you have some deductible expenses you could incur in 2013 or 2014 like charitable contributions or real estate taxes, you could exercise more than 90k in 2013 and maintain the effect. It can get complex, particularly since as your AGI increases the allowed deductions decrease but it can be worth taking the time to work through some projections to assess the tax effect.

Clearly if you delay and the stock price falls enough, you won't net as much. You can quantify how far the stock would need to decline to wipe out the tax advantage of splitting the exercise.

One final note, when you exercise, funds will be automatically withheld for taxes so you won't be able to keep the taxes due for yourself until April of 2015.

Q. Hopefully you can help me with a Social Security question for a client of mine. The wife will be 63 in March 2014 and is considering collecting SS benefits then. Her benefit would be $900 per month. Her husband is also 63 and will continue working. At age 66 his estimated benefit will be $2,650. When the husband reaches age 66, will the wife receive a spousal benefit of $1,325 (50% of $2,650) or will that be reduced because she took her benefit earlier under her own account. Social security told her that her reduced benefit from claiming early was about 80% of her total benefit and that her spousal benefit would be 80% of $1,325 or $1,060 — not $1,325. Is that true? Should she take her benefit early anyhow? Thanks for your help. — Frank H, CPA

A. That is about right. Spousal benefits can be confusing to a lot of people because the quick description is "a spouse can get 1/2 as a spousal benefit." Technically, the spousal benefit is a supplement equal to 1/2 of the husband's Primary Insurance Amount (PIA) less the PIA of the wife claiming the spousal benefit. If this is a positive number, is claimed at or after the wife's FRA, and the husband has claimed his retirement benefit, this supplemental amount is added to the wife's retirement benefit.

If she follows through on her plan, she will be claiming early, her retirement benefit is reduced from her PIA. When she claims the spousal at her FRA, the supplement is added to her reduced retirement benefit so the total won't equal half his PIA.

As to when they should claim, there are several factors, life expectancy being a big one. Generally if either is expected to have longevity, delaying the highest benefit is often preferred. Starting early for her can be good since if either passes away the survivor will only get the husband's benefit since it is larger. In other words, at the first death, benefits from her record end.

At his FRA, he can file and suspend making her eligible to receive a spousal while still allowing his retirement benefit to accrue delayed credits. As an alternative to file and suspend, he could file a restricted application. This would get them delayed credits but he would get a spousal of 1/2 her retirement.

A New Look At How We All Benefit From Tax Breaks

Howard Gleckman for Forbes writes:   Who benefits from the tax credits, deductions and exclusions that have become such an integral part of the modern tax code? Nearly all of us. And that’s why any tax reform that eliminates or scales back many of these preferences in return for lower tax rates is so hard to do. 

The Tax Policy Center has just updated its estimates of the effects of ten of the biggest tax expenditures. And we’ve found great variation among the benefits—the rich get an outsized share of the subsidy from some, while low-income households enjoy most of the benefits of others.  Here is a look a just a few—all reflecting 2015 taxes:

The Earned Income Tax Credit: Almost three-quarters of the benefits of this one go to households making between $10,000 and $40,000. This should not be a surprise since the EITC is refundable and aimed at low-wage working households. For instance, those making  between $20,000 and $30,000 get an average tax cut of about $900, which is three-quarters of their total tax bill. By the time a household makes $75,000, the EITC is essentially worthless.

The Home Mortgage Interest Deduction: The biggest winners are the upper middle-class and merely wealthy rather than the super-rich. The one percenters do just fine thank you, but because the value of the deduction is limited to the first $1.1 million of mortgage debt, the deduction reduces their average tax rate but just a few tenths of a percent. By contrast, a household making between $200,000 and $500,000 gets an average tax reduction of about $3,300 and can knock its average income tax rate down by almost a full percentage point.

The Exclusion of Employer-Sponsored Health Insurance:  While high-income households get the biggest benefit in dollar terms, those squarely in the middle get the largest reduction in their average tax rate. Because health insurance is such a large share of their total income, households making $40,000-$50,000 pay an effective rate that is 1.3 percentage points lower than they would if their employer gave them cash instead of insurance.

The Charitable Deduction: This one overwhelmingly benefits top bracket taxpayers.  Low income people donate a relatively big chunk of their earnings. But since 70 percent of taxpayers don’t itemize, the money they toss in the collection plate or drop in the Salvation Army bucket isn’t deductible to them at all. Thus, the average tax benefit for those making $75,000 or less is well below $100.

The rich also give away a relatively big chunk of their income. But they do itemize. In addition, because their tax rate is higher, so is the value of the deduction. As a result, those making $1 million or more get an average tax break of $28,000 from the charitable deduction and reduce their average tax rate by almost one percent. Another way to look at it: Those making $1 million or more represent 0.4 percent of all households but enjoy one-third of the benefit of the charitable deduction.

State and local tax deduction:  This one is effectively worthless for households making less than $50,000 but sweet for those in the upper brackets. This time, that 0.4 percent of taxpayers making $1 million-plus get about 28 percent of the tax benefit—or an average tax cut of about $40,000. Households making $100,000 to $200,000 reduce their average tax rate by about 0.5 percent.

Overall, those making $100,000-plus get 90 percent of the benefits of the state and local tax deduction. Thanks to the Alternative Minimum Tax, many upper income taxpayers lose some benefit of the state and local tax deduction. But since the uber-rich are less likely to be on the AMT than the merely wealthy, the alternative tax magnifies their benefit.

One technical note: These tables reflect TPC’s new expanded measure of income so shouldn’t be compared with the older numbers we ran in past years. The tax breaks haven’t changed, but the way we measure income has.

Take a look at the tables for yourself but the story is pretty clear: There is a tax expenditure under the holiday tree for just about everyone.

New Lifetime High Reached By Intuit (INTU)

Jamie Hodge for TheStreet writes: Trade-Ideas LLC identified Intuit (INTU) as a new lifetime high candidate. In addition to specific proprietary factors, Trade-Ideas identified Intuit as such a stock due to the following factors:

• INTU has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $135.1 million.

• INTU has traded 2.2 million shares today.

• INTU is trading at a new lifetime high.
•  
• More details on INTU:
• Intuit Inc. provides business and financial management solutions for small businesses, consumers, and accounting professionals in the United States, Canada, the United Kingdom, Australia, India, and Singapore. The stock currently has a dividend yield of 1%. INTU has a PE ratio of 27.7. Currently there are 7 analysts that rate Intuit a buy, no analysts rate it a sell, and 9 rate it a hold.
  The average volume for Intuit has been 2.0 million shares per day over the past 30 days. Intuit has a market cap of $21.3 billion and is part of the technology sector and computer software & services industry. The stock has a beta of 0.87 and a short float of 4.8% with 7.36 days to cover. Shares are up 25.9% year-to-date as of the close of trading on Tuesday.
  
   
• Highlights from the ratings report include:
• INTU's revenue growth has slightly outpaced the industry average of 6.2%. Since the same quarter one year prior, revenues rose by 10.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
• INTU's debt-to-equity ratio is very low at 0.22 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.26, which illustrates the ability to avoid short-term cash problems.
• Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Software industry and the overall market, INTUIT INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
• The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Software industry. The net income increased by 42.1% when compared to the same quarter one year prior, rising from -$19.00 million to -$11.00 million.
• The gross profit margin for INTUIT INC is currently very high, coming in at 84.41%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -1.76% is in-line with the industry average.
•  

Major Tax Credits Expiring In 2013

 Mark P. Cussen, for Investopedia writes: 2013 will mark the end of several major tax deductions, exclusions and credits that both personal and business filers have enjoyed for years. The Obama Administration has eliminated these breaks in an effort to increase revenue, a move that will pinch many taxpayers when they file their 2014 returns, particularly those in the middle and upper classes. Taxpayers, therefore, need to take advantage of these breaks this year while they are still available.

Here’s a list of the major deductions and credits that are disappearing:

• Educational expense deduction for teachers – The $250 ($500 for those who aremarried filing jointly (MFJ)) that educators who work in eligible primary or secondary institutions could take for unreimbursed expenses will be disallowed in 2014. This affects everyone who is eligible for these deductions, because it is an above-the-line deduction, which means that filers do not have to itemize in order to report them. Any expenses in excess of the $250/$500 limit, however, can be taken on Schedule A if the taxpayer itemizes, but this deduction is subject to the 2% floor on miscellaneous deductions.

• Mortgage cancelation exclusion – Created in the wake of the 2008 Subprime Meltdown, this exclusion allows homeowners who had any portion of their mortgage debt forgiven to escape having to report the amount forgiven as income, which is typically required for any other type of debt cancelation. Homeowners who had short sales or foreclosures in 2013 can exclude up to $2 million of mortgage debt that is forgiven. (Some are hopeful that this exclusion may yet be renewed for next year). The debt must have been incurred after Jan. 1, 2007, and not after Dec. 31, 2012, and be secured by the taxpayer's principal residence.

• State and local sales taxes – For the past few years, taxpayers who itemized their deductions have had the option of choosing either income or sales taxes that were paid to states as a deduction. Filers will no longer have this choice in 2014 and will only be able to deduct state income tax paid.

• Private mortgage insurance (PMI) – Homeowners who carry PMI on their mortgages will no longer be able to write off the cost of their premiums in addition to interest and taxes paid if they itemize their deductions. These premiums must have been paid or accrued before Dec. 31, 2013, and cannot be allocated to any time after that date.

• Credit for qualified electric vehicles – Taxpayers who purchased an eligible plug-in electric vehicle can receive a credit of up to $7,500 in 2013. The amount of the credit that can be taken varies according to the size of the battery pack and from one make and model to another. Those who lease one of these vehicles may also be eligible for this credit.

• Charitable IRA distributions – IRA holders who take mandatory minimum distributions and wish to make charitable contributions can still escape taxation on up to $100,000 of their IRA distributions by using them for this purpose in 2013. This is an excellent deduction that few taxpayers take.

• Deduction for transit expenses – Employees who pay for commuter expenses such as bus and train fare can take a $245 pretax deduction for these costs in 2013, but this will fall to $130 in 2014. The parking deduction of $245 will remain the same.

• Credit for energy-efficient home remodeling – Homeowners who make eligible remodeling changes to their homes that increase its energy efficiency - such as new insulation, door and window replacement and other upgrades that cut utility bills - can take a credit of up to $500 for expenses incurred. This credit is expiring in 2013 and it is not slated to be renewed.

• Donation of conservation property – Taxpayers who donate real capital gainproperty or easements on their property to qualified conservationist organizations will not be able to deduct the value of the donation after 2013. This year they can take a deduction of up to 50% of their charitable contribution base.

• Bonus depreciation – This deduction, through which businesses can take an additional deduction of up to 50% of depreciation on qualified business property and equipment, is set to expire in 2013.

• Enhanced Section 179 Expensing – Businesses that place more than $2.5 million worth of eligible property into use will face new dollar limitations on their expensing in 2014. The $500,000 limit on Section 179 expensing is set to expire at December 31, 2013, and set to decrease to only $25,000 in 2014.

• Work opportunity tax credit – Businesses will no longer be able to take a credit for hiring employees who belong to certain groups such as veterans or those receiving certain forms of government aid such as supplemental Social Security. The credit is for 40% of allowable wages paid up to varying dollar thresholds according to the type of employee hired. This credit is 25% if the employee has worked less than 400 hours.

• Research tax credit – Businesses will no longer be able to take a credit for business-related research expenses or fees paid to universities or other qualified research institutions for this purpose. The credit only applies to an increase in these costs that is above the average amount paid for research each year.

• Miscellaneous business incentives – There are many other tax credits for businesses that are expiring in 2013. The Indian Employment credit, the New Markets credit, the incentives for empowerment zones and several other deductions and credits will not be available in 2014 and beyond.

• Miscellaneous energy-related tax credits – A host of lesser-known tax credits for individuals are also expiring, including credits for property that is used to refuel alternative fuel vehicles, credits for biodiesel and renewable fuels, and credits for manufacturing energy-efficient homes and appliances. Credits relating to biofuelproduction and ethanol are also disappearing.

• Qualified tuition and related expenses - This above-the-line deduction is for qualified educational expenses paid during the tax year. The maximum deduction is $4,000, and is subject to phase-outs. This provision will expire on December 31, 2013.

Take Action Now
Taxpayers who may be eligible for any of the incentives listed above should not wait until the last minute to incur their expenses or perform the necessary qualifying transactions. According to Paul McNeil, MBA, EA, and owner of Ferguson Tax & Accounting in Lawson, Missouri: “The holidays always make it harder for customers to concentrate on their tax situation. Like everyone else, they are concerned with getting their shopping done and visiting their loved ones. But many of these deductions are likely not going to come back any time soon. It is unlikely that Congress will take any further action on a tax bill in 2013 that will enact any new provisions or changes. According to one expert, this will not occur until late 2014, at which time, of course, Congress could make retroactive changes that could affect 2013.”

IRA owners need to take their distributions as soon as possible, and homeowners who might qualify for debt forgiveness need to start the short sale or foreclosure processes now. Those who are eligible for credits based upon expenditures need to make their purchases immediately. Perhaps any big ticket items that have sufficient sales tax should be purchased before the end of 2013, assuming that this will be more than state and local taxes paid and that itemization is possible. Small businesses that are planning on purchasing equipment that currently qualifies for the $500,000 limit would also be wise to accelerate their purchase schedule to take advantage of the higher limit while it is available.

Obamacare Bonus
The news isn't all bad for filers; the Affordable Care Act has also created two new tax credits that will become available in 2014: the Premium Assistance Tax Credit and the Small Employer Health Insurance Credit, both of which help taxpayers to pay for theirhealth insurance premiums under Obamacare. For more information about tax incentives that are expiring and how you can minimize your own tax bill, visit the IRS website or consult your tax or financial advisor.