Year End Tax Tips

·        Review your portfolio.  Consider taking a loss if you have substantial capital gains. 

·        Review tax refunds.  Are you loaning your money to the government tax free?

·        If you owe state income taxes, consider contributing to a 529 College Savings Plan for your grandchildren.  NY allows a deduction up to $5,000 (or $10,000 for married filing joint filers) for contributions made by an account owner to an account belonging to NY’s 529 plan.

·        Plan your itemized deductions.  If you are on the border for itemizing deductions focus on bundling.  Time deductible expenses to produce lean and fat years.  The goal is to surpass the standard deduction amount. Standard deduction rates for 2013 are $12,200 for married taxpayers filing joint and $6,100 for single taxpayers.  The additional standard deduction amount for the aged or blind is $1,200.   

Internet Sales Tax

In May 2013, the US Senate passed the Marketplace Fairness Act which would require online retailers to collect sales tax for the states to which they ship goods.  The act has to be passed by the House before it becomes law.   The discussion is quite heated.  When it will be passed or if it will be passed is difficult to call.

The issues…

As online commerce grew, shoppers often did not pay sales tax.  Online retailers were required to collect taxes only in those states where they had a physical presence: a retail store, a distribution center (brick & mortar).  It wasn't that sales tax wasn't due, but that it was too complicated to collect. States, counties, and other municipalities have varying rates and tax different items.  Keeping track of all the tax details was considered a burden for businesses. Most states require shoppers to keep track of online purchases and report and pay sales tax through their state income tax filings. Many taxpayers are either not aware of this requirement or choose to ignore it.  Online commerce has grown exponentially.  Uncollected sales tax is estimated to be in the tens of billions of dollars; revenue sorely needed by the states.

Supreme Court Ruling on DOMA

Back in 2011, when New York passed the Marriage Equality Act, we discussed the issues particularly as they related to the Federal law, Defense of Marriage Act (DOMA).   For Federal purposes, DOMA defined marriage as between a man and a woman and allowed states which do not allow same sex marriage to not recognize same sex marriages performed in other states.  On June 26, 2013, the Supreme Court decided that much of DOMA is unconstitutional, since same sex married couples were not being treated equally under the law. Specifically, Section 3 of DOMA, which allowed the Federal government to deny benefits to same sex couples, was invalidated.  However, Section 2, which allows states to decide who may marry and which marriages to recognize, is still law.

This means that same sex couples married in New York and living in New York can expect the same rights as heterosexual married couples.  However, some issues remain murky, particularly for those same sex couples married in one state and now living in a state that does not recognize same sex marriage.  Benefit eligibility is often governed by the state in which a couple lives as opposed to the state in which the couple was married.

Nearing Retirement

If you are hoping to retire in two to five years, what should you be doing now to make it happen?  As in all things financial, you must have a plan.  In retirement, especially in the later years, there is little you can do to increase income.  Additionally, there are significant expenses over which you’ll have little control (medical costs).  An assessment now will help toward understanding if you will be financially prepared for retirement.

The Marriage Penalty

June is wedding month.  When planning to marry, the happy couple has many things to consider.  Very likely, not on that list are the tax implications of their new tax status “married filing jointly”.  But perhaps they have heard of the “Marriage Penalty” as regards taxes.  Certainly, the decision to marry should not be based on US tax law.  But knowledge of the consequences is important for planning.

What is the Marriage Penalty?  The marriage penalty refers to higher taxes levied when a couple is married then the total of the taxes they would have paid as individuals.  In fact, filing a joint tax return can have a negative effect, penalty, or a positive effect, bonus, depending on the income and deductions for the individuals getting married.  Generally, lower and middle income individuals do not get hit with the penalty.  Higher income couples usually will pay more taxes filing jointly then if they remained single and filed individually. This occurs because the tax code is progressive, with marginal tax rates rising as income rises and because the tax brackets for married are less than twice the span of the brackets for single filers.   For 2013, the rates go up to 39.6%.  Remember the marginal rate applies to the income within the bracket. A married couple must file “married filing jointly” or “married filing separately”.  Married filing separately has the highest tax; the brackets are narrower than single status.  

New College Graduates & Financial Planning

May is the month of college graduations.  Graduates, their family and friends celebrate, reflecting on how far the student has come and the promise of his future.  The graduate is transitioning from academic life to the “real” world.  Finances are a significant part of that world.  Habits established the first few years of working life set the precedent for financial stability in the future.  What should the graduate do?

IRS and Foreign Accounts.

A US citizen or resident alien must report all income, that earned in the US and that earned in other countries, when filing his tax return.  Additionally, the taxpayer must answer a series of questions on the Schedule B about foreign accounts he holds or for which he has signature authority.  Failure to report foreign income or to disclose foreign accounts subjects the taxpayer to civil penalties and possible criminal prosecution.

Most taxpayers have no interest in foreign financial accounts which include bank accounts, brokerage accounts, mutual funds or trusts.  However, any taxpayer that has such an account has to be aware of IRS reporting requirements enacted under the Bank Secrecy Act.  The FBAR, Report of Foreign Bank and Financial Accounts, is used by the US government to identify people who may use foreign accounts to avoid US tax laws.  Investigators also use the FBAR to assist in tracking funds used for illegal purposes or to identify unreported foreign income.

Who must file an FBAR?  Any US citizen, US resident, US business, or US trust or estate with an interest in or signature authority over at least one financial account located outside the United States when the total value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.   The FBAR must be filed even if the accounts generated no income for the tax year.

The FBAR is not filed with the tax return.  The tax return includes Schedule B with the questions about foreign accounts appropriately answered and Form 8938, Statement of Specified Foreign Financial Assets, if the value of the financial accounts was over $50,000 at yearend or over $75,000 at any time during the year.  The FBAR is completed and filed separately.  The FBAR is due by June 30.  No extensions are granted.

The consequences of not disclosing foreign financial accounts are significant.  If non-disclosure was inadvertent, non-willful in IRS terms, the penalty is up to $10,000.  If the non-reporting is considered willful, the penalty is the greater of $100,000 or 50 percent of the total of the account balances.  The level of the penalties is indicative of the seriousness of this issue to the IRS. 

If you are a taxpayer with an interest in foreign accounts it is probably best to have your tax professional review your holdings, identify your reporting requirements, and complete and file the forms.  Make sure this is done correctly and avoid future problems. 

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

 

The IRS and Identity Theft

Have you filed your tax return expecting a refund only to be notified by the IRS that a return was already filed in your name?  Over the past few years the number of returns filed fraudulently has skyrocketed.  Untangling the mess and getting the refund to the legitimate taxpayer can take six months or longer.

The IRS has upped its efforts to work on identity theft issues dedicating a significant number of employees to identify fraudulent tax returns and prevent the issuance of refunds. In January, federal authorities targeted 389 people in 32 states and Puerto Rico, arresting and charging suspected identity thieves.

IRS Startup Delay

The IRS will begin processing individual tax returns for 2012 on January 30th. The delay in the IRS start is due to the “fiscal cliff” legislation signed into law on January 2nd, requiring changes to tax processing. Some parts of the law reinstated credits retroactively to the January 1, 2012.

The vast majority of taxpayers, more than 120 million, will be able to file on January 30th, whether they file electronically or via paper. The IRS will be ready to process returns affected by some of the new legislation, specifically those returns which are affected by the AMT patch or which claim sales tax deduction, educator deduction, or higher tuition and fees deductions.

However, if the tax return requires some special forms, the taxpayer will not be able to file until late February or early March. The IRS needs additional time to change and test their processes. Key among these forms is the Residential Energy Credit, Depreciation and Amortization, and the General Business Credit. A complete list of the forms impacted can be found at the IRS website. The IRS will announce specific dates for the forms availability.

Regardless of when you file, it is advantageous to file electronically and to have any refund direct deposited.


IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

The “Fiscal Cliff” Solution & How It Impacts You

For the last six to eight weeks of 2012, the media bombarded us with news of the “Fiscal Cliff”, essentially the expiration of the Bush tax cuts passed in 2003. If the tax cuts were allowed to expire, higher tax rates for all would take effect and possibly derail the country’s economic recovery. If the Bush tax cuts were continued, President Obama would not meet his goal of raising revenue by raising taxes on the wealthiest. The compromise was the American Taxpayer Relief Act of 2012, passed by Congress on January 1st and signed by the President on January 2nd.

The act makes the changes permanent, no expiration date. It maintains lower tax rates for most while raising tax rates for high income individuals. The act did little to address spending and the debt.

The main features of the law follow.

• The reduction of payroll taxes for social security was not extended. The deduction for social security in 2013 will be 6.2 percent rather than the 4.2 percent deducted in 2011 and 2012. This change impacted salaried employees lowering take home pay as of January 1st. For 2013, the tax is payable on income up to $113,700.
• For individuals making less than $400,000 per year ($450,000 for married filing jointly) the tax rates for income, dividends, and capital gains remained at the 2012 or Bush tax cut level.
• For those reporting income above these levels:
• The top marginal tax rate on income increased from 35% to 39.6%.
• The top marginal tax rate on capital gains increased from 15% to 20%.
• The dividend tax rate was set to the capital gains tax rate increasing from 15% to 20%.
• The phase-out of tax deductions and credits for individuals with income above $250,000 ($300,000 married filing jointly) was reinstated.
• The Alternative Minimum Tax (AMT) was permanently tied to inflation. The AMT was introduced to ensure that taxpayers with an adjusted gross income above a specified threshold paid some federal tax (a variety of deductions are disallowed). The threshold was not automatically adjusted. Over time more middle class taxpayers were required to pay the AMT. Congress had to pass legislation to adjust the threshold. The threshold is now tied to inflation.
• Estate taxes were raised to 40% of the value above $5 million, adjusted each year by inflation. Estate taxes were 35% of the value above $5,120,000.
• Many Bush era tax credits were extended through 2013 or made permanent. Some were reinstated for 2012. The credits affected include, but are not limited to, the child tax credit, the enhanced Earned Income Credit, tuition credit, child and dependent care credit, and home energy credit.
• Two provisions impact retirement savings.
• Tax free distributions from an IRA to a qualified charity by individuals above 70 ½ years of age have been extended for 2 years.
• Restrictions on 401K participants to transfer funds to an in-plan Roth have been lifted.
• Many temporary business tax provisions were extended. Of primary importance are Code Sec 179 small business expensing, bonus depreciation, the research tax credit, and the Work Opportunity Tax Credit.

Generally, the Tax Relief Act could be summarized by stating “if you have a lot of income, you’ll pay more. If you don’t, your taxes will be about the same”. However, since there are enough different items addressed, particularly on tax credits, you would be wise to consult with your tax preparer.

IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.