Estate Tax Planning

Congress radically changed the estate planning landscape in 2010 when it introduced the portability election, and it is time for you to learn how to take advantage of it.

 

Prior to 2010, the estate tax regime ignored the reality that married couples think of themselves as a single economic unit, and instead treated them as individuals.  Every individual was entitled to a basic exclusion amount (an amount of assets the value of which would not be subject to gift or estate taxes) which could be used by transferring their assets to any individual other than to a spouse (transfers to spouses were already excluded through the marital deduction).  This structure placed individuals in the difficult position of deciding how much of their assets to leave to their spouses for their support and well-being, and how much to leave to their children in order to take advantage of the basic exclusion amount.  This was a "use it or lose it" system because any unused portion of the basic exclusion amount would disappear.

 

This all changed in 2010 with the creation of the portability election.  If a valid portability election is made, a spouse may take the unused portion of their last deceased spouse's basic exclusion amount and add it to their own.

 

For example, Jacob and Sarah are a married couple.  Jacob dies in 2013 without having made any taxable gifts in his life, and his will directed his executor to leave his entire estate to his wife and to make the portability election.  This allows Sarah to inherit his $5.25 million basic exclusion and add it to her own basic exclusion.  Sarah would then be able to make gifts of up to $10.5 million in 2013 to her children without having to pay gift or estate taxes.

 

I would encourage you to talk to an estate planning attorney regarding your specific needs and desires.  The portability election is a great estate planning tool, but it should be used in conjunction with a will and trusts in order to ensure that your assets are disposed of in the manner that you want.

 

There are a number of issues relating to the portability election that I have not discussed here.  If you would like to learn more about this election or have any questions, please do not hesitate to send me an e-mail.

 

Also feel free to contact me if you would like a referral to a great estate planning attorney.

 

As always, I appreciate your feedback in the comments section below.

End of Year Tax Planning

Its already October, which means that time is quickly running out for you to minimize your 2013 tax liability.  While there are a number of tax-saving strategies that can be employed before year end, after December 31st the only viable way to reduce your tax liability would be to make a contribution to a qualified retirement plan (Plan For Your Retirement; What is an IRA?).

End of year tax planning is more important this year than it has been in a long time.  Here is why:

• Tax rates have gone up for high-income earners.  Single individuals making more than $400,000 per year and married couples (filing jointly) making more than $450,000 per year will have to be a top federal tax rate of 39.6%.
• Those same individuals will now be paying a 20% federal capital gains rate on qualified dividends and long-term capital gains.
• Single individuals making more than $200,000 per year and married couples (filing jointly) making more than $250,000 per year will be subjected to the 3.8% Medicare Surtax on net investment income.
• In addition to all this, California has raised its top tax rate to 12.3%, plus a 1% surtax on taxable income above $1,000,000.

There are ways to minimize the impact that these additional taxes will have on you!

The first thing you need to do is talk to a CPA.  There is plenty of advice you can find online about how to reduce your taxes, but this is not a "one size fits all" issue.  You are a unique individual with a unique financial situation.  What may work for Joe down the street may not be the ideal tax-minimization strategy for you.

Here is what a CPA can do for you:

1. Explain the New Tax Laws.  The Medicare Surtax is a brand new tax that operates in a different manner than the income taxes that you are used to.  A CPA can explain exactly how it works in a way that will make sense to you.
2. Prepare a Tax Projection.  A tax projection will allow you to see what your tax situation will be if you do not employ a new tax-minimization strategy. This will allow your CPA to identify what issues affect your tax situation and begin to develop a strategy to minimize your taxes.
3. Develop a Personalized Tax-Minimization Strategy.  A CPA will work with you to determine the best way to reduce your taxes in a way that best fits your life and desires.

If you have any questions, or would like to talk to me about your end-of-year tax planning, please do not hesitate to send me an e-mail.

As always, I appreciate you leaving any feedback you have below.

How does the Government Shutdown affect Taxes?

As I am sure you already have heard, as of October 1st, 2013, the federal government has "shut down" until a budget can be passed.  As you have been seeing on the news, this means that among other things national parks are closed and nearly 800,000 federal employees are on furlough.  But how does the government shutdown affect your taxes?

For individuals who have filed a tax extension, they must still file their tax returns by October 15th.

 

The IRS will only be processing tax returns that are filed electronically.  Any tax returns that are mailed to the IRS will not be deemed late, as long as they are still mailed by October 15th, but will not be processed until after the government shutdown ends.

 

The IRS will not be issuing any tax refunds.  Sorry, but this means that if the federal government owes you money you will not receive it until after the government shutdown ends.  I would expect that there will be delays even after the government is back to operating normally because it will take the IRS some time to process all of the tax returns.

 

Most customer service assistance will not be available.  There will not be any live telephone assistance and the IRS walk-in taxpayer assistance centers will be closed.  However, most automated telephone applications will still work.

 

IRS audits are on hold.  The IRS's auditors have been furloughed, so any meetings related to IRS audits, collections, or appeals have been cancelled.  If you are currently involved in an IRS audit, you should assume that it will resume once the government shutdown ends, but you have some extra time now to prepare for it.

 

Automated IRS notices will continue to be mailed.  This means that despite the government shutdown you may receive a notice from the IRS.  However, the IRS will not be working on any paper correspondence during this time.  If you receive an IRS notice, talk to your CPA about it just like you normally would.

 

If you would like to talk privately about how the government shutdown will affect your tax situation, please do not hesitate to send me an email.

 

What are your thoughts about the tax consequences of the government shutdown?  Please leave your comments below.

 

 

What is an IRA?

Everyone keeps telling you that you need to save for your retirement, but your company does not have a 401(k).  What are you supposed to do?  You can contribute to an Individual Retirement Account (IRA)!

 

The advice that everyone is giving you is right, you need to make sure you save for your own retirement.  One estimate projected that the Social Security trust fund will be exhausted by 2037 if not sooner.  I discussed this and provided advice for your retirement savings plan in Plan for Your Retirement: No One Else Will.

 

If your employer does not provide a company 401(k) plan, you will want to talk to your financial advisor about establishing an IRA.  But what is an IRA?

There are 2 basic types of IRAs:

 

1) Traditional IRA

 

Qualified contributions to a Traditional IRA help to reduce your taxes because they are tax-deductible.  Contributions to a Traditional IRA are one the few ways in which you can actually reduce your tax bill after the year ends.  The governments allows you to make a contribution up until April 15th of the following year, and to take the deduction in the preceding year.

 

The amount you are allowed to contribute to a Traditional IRA changes frequently as it is adjusted for inflation, but in 2013 you are allowed to make a contribution up to $5,500, or $6,500 if you are age 50 or over.

 

Once invested into a Traditional IRA, all of the funds grow without being taxed.  You will not be taxed until you withdraw the funds! 

 

There are a few basic requirements in order to make a contribution to a Traditional IRA:

• The contributor must be an individual (not a trust, company, etc.)
• You must be under the age of 70.5
• You must have sufficient earned income or compensation (at least as much as you contribute to your IRA)

 

Be careful though.  The ability to make a tax-deductible contribution phases out based upon whether or not your employer provides a company retirement plan, your tax filing status, and your income level. 

 

2) Roth IRA

 

The principal difference between Traditional IRAs and Roth IRAs are that with Traditional IRAs the contributions are tax-free while with Roth IRAs the distributions are tax-free.

 

In 2013, you are allowed to make a contribution up to $5,500 or $6,500 if you are age 50 or over.  However, the contribution limitation changes based upon your tax filing status and your income level.

 

Once invested into a Roth IRA, all the funds grow tax-free.  Furthermore, all of the distributions are tax-free provided that you are over the age of 59 1/2 and have had the Roth IRA account for at least 5 years.

 

Again, there are a few basic requirements in order to make a contribution to a Roth IRA:

• The contributor must be an individual (not a trust, company, etc.)
• You must have sufficient earned income or compensation (at least as much as you contribute to your IRA).

 

You will notice that unlike with Traditional IRAs, there is no age restriction on being able to contribute to a Roth IRA.

 

Of course these are only the 2 most basic types of IRAs.  You may want to discuss non-deductible IRAs, SEP IRAs, and SIMPLE IRAs with a financial advisor to determine what type of IRA makes the most sense for your situation.  If you need a referral to a great financial advisor, please do not hesitate to ask me.

 

If you have any tax questions that I can answer, please send me an e-mail.

 

Please feel free to leave your feedback below.

 

Business Networking

Want to grow your business?

There are a number of ways that you can promote yourself and your business.  In my opinion, one of the most effective methods is to network.

By going to a networking event, you are likely to meet someone who is either interested in your services or who knows someone who would be interested in your services.  Of course it is difficult to get a new customer/client based on one meeting, but it can be the first step to creating a new relationship.  I have met a number of professionals at various local events, and have followed up with them through e-mails and meetings in order to find out how we both can help each other.  You never know what chance encounter you may have at a networking event that can be a major benefit to your business.

So why I am talking about business networking in a tax blog? 

It is because the costs of business networking are tax deductible.  Like other forms of advertising, the IRS treats networking as an ordinary and necessary business expense and allows you to deduct it on your tax return.

The cost of admission to a networking event...deductible.

The cost of taking someone you met at a networking event to lunch to talk business... 50% deductible.

The dues paid to a business referral group...deductible.

The cost of traveling to a networking event or business referral group... deductible.

The requirements to claim these deductions are very simple.  First, you have to be able to prove you spent the amount you are deducting (save your receipts).  Second, you have to have had a valid business purpose.  For example, if you take someone you met at a networking event out to lunch you have to talk business with that person.  You cannot simply talk about sports and the weather.

If you have any tax questions, please do not hesitate to send me an e-mail.

What are some of your favorite networking events?  Please let me know in the comment section below.

Paying for College

College is expensive.  There is no getting around that one simple fact.  In one survey, it was determined that for the 2012-2013 school year, the average cost for an in-state public college was $22,261, and the average cost for a private college was $43,289.  Keep in mind that is a per-year cost, and included is the cost of tuition, fees, book, and housing.

Who thinks that the cost of higher education is going to go down?  Yeah, I don't either.

So what can you do to make college more affordable?

Of course there are academic and athletic scholarships.  If you can get any type of scholarship that is of course the ideal situation.  Not only is it "free" money, but it is non-taxable to the extent that it is used to pay for your tuition, fees, books, and other course-related supplies.

It is also very common to take out student loans.  There are a variety of types of student loans, but a common feature for tax purposes is that the interest paid on student loans is deductible.  This deduction phases out for single individuals with income over $75,000 and married couples with income over $155,000.

Already paying for college?  There are several federal tax credits that you can take advantage of.

• The American Opportunity Credit. This credit is worth up to $2,500 per year per eligible student.  This credit is available for the first 4 years of higher education at an eligible school.  You are able to claim the credit to cover the costs of tuition and required fees, books, and other course-related materials.   An added bonus with this tax credit is that it is partially refundable.  This means that you can get a tax refund of up to $1,000 even if you do not owe taxes.
   
• The Lifetime Learning Credit.  This credit is worth up to $2,000 per year per tax return.  The credit is available even after the first 4 years of higher education.

There are also several ways to help to save for college that have tax advantages.

• Savings Bond Interest Exclusion.  All of the interest income from Series I and Series EE bonds issued after 1989 are tax-free.  To qualify, the bond owner must have been at least 24 years old when the bond was issued, and the money must be used to pay qualified education expenses for yourself, your spouse, or a dependent.  This tax benefit phases out based upon your income level.
• 529 Savings Plans.  Your investment into a 529 Savings Plan grows tax-deferred, and the distributions from the plan that are used to pay for the beneficiary's college costs are tax-free.  With a 529 Savings Plan, the full value of your account can be used at any accredited college or university in the country.  Any non-qualified distributions are subject to a 10% penalty on the earnings and will be taxed.
• 529 Prepaid Plans.  Prepaid tuition plans are guaranteed to increase in value at the same rate as college tuition.  This means that tuition rates are locked in, offering peace of mind if you expect college tuition to rise. If the student attends an in-state public college, the plan pays the tuition and the required fees.  If the student decides to attend a private or out-of-state college, the plans typically pay the average of in-state public college tuition.  If a student decides not to attend college, the plan can be transferred to another member of the family.  529 Prepaid Plans are exempt from federal income taxation.  If no member of your family attends college, any non-qualified distributions are subject to a 10% penalty on the earnings and will be taxed.
• Education Savings Account.  Up to $2,000 can be contributed to a Coverdell Education Savings Account in any year.  The amounts deposited into the account grow tax-free until distributed, and the distributions are tax-free as long as they are used for qualified education expenses.  If a distribution exceeds qualified education expenses, the portion attributable to earnings will be subject to a 10% penalty and will be taxed.

If you have any questions, please do not hesitate to ask in the comment section below or send me an e-mail.

Do you know a high school athlete who is hoping to earn an athletic scholarship for college?  I can refer you to someone who will evaluate that athlete and help him or her get a scholarship.

I would also be happy to refer you to a great financial advisor who can discuss strategies for saving for your or your children's education.

I appreciate your feedback.  Please feel free to leave a comment below.

Why Have a 401(k)?

What financial advice have you been given?

Throughout my life I received 2 main pieces of financial advice.  1) Save for my own retirement.  2) Contribute enough to a 401(k) plan to maximize the employer match.

Every 401(k) plan is different as businesses set them up in order to best meet their needs and the needs of their employees.  However, a typical arrangement is for employers to match their employees contributions to their 401(k) plans $0.50 on the dollar, up to 3% of the employees gross salary.

If that is how your 401(k) plan works, you should contribute at least 6% of your gross salary to your 401(k) plan.  That effectively increases your salary by 3%! Why would you want to leave money on the table?

I would encourage you to actually contribute more than that to your 401(k) plan, as long as you can afford to do so.  In a previous blog post, Plan For Your Retirement: No One Else Will, I discussed why you should contribute to your own retirement and the significant advantages to doing so.  Please read that post and see why you should contribute what you can afford to your qualified retirement plan.

But what is in it for employers?  As an employer, why should you set up a 401(k) plan and put your money into your employee's retirement fund?

• $1,500 Tax Credit. Employers are entitled to claim a tax credit equal to 50% of the cost to set up and administer the plan, and to educate employees about the plan.  The credit is worth a maximum of $500 per year for each of the first 3 years of the plan.  If you are unable to use this credit in any given year, the unused portion can be carried back or forward to other tax years.  There are a few basic requirements that you should discuss with a CPA.
• Tax Deduction.  Every penny that an employer contributes to a 401(k) plan, including to his or her own, is a tax deduction.  As an employer, you are also able to deduct the cost of administering the plan and educating your employees about the plan.  This is because the IRS considers the operation of a 401(k) plan to be an ordinary and necessary business expense.
• Better Employee Recruitment and Retention.  For any business, having great employees is essential.  They represent you, so it is important that you are able to recruit the best possible employees and retain them once you have them.  All else being equal, I would choose to work for a company that has a 401(k) plan over one that doesn't.  It shows employees that you care about them and their retirement.  It helps to build loyalty to your company.

If you would like to discuss the tax benefits of establishing and operating a 401(k) plan, or you have any questions, please send me an e-mail.

I would also be happy to refer you to a great financial advisor who can discuss all the non-tax aspects of your existing 401(k) plan or help you to establish a new 401(k) plan.

I appreciate your feedback.  Please feel free to leave a comment below.