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What’s in Store for 2014?

A few weeks ago I was interviewed by a local business journal about our firm’s thoughts as to how the market would react in 2014 and how to best prepare for that reaction. Essentially, the journal was asking us to predict where the market would be in 2014. Most of our clients know the answer I am about to write, which was, “No one can predict the direction of the market with any degree of accuracy.” “If that were the case, (as I told the interviewer) neither she nor I would be having this interview.” In other words, we’d be clinking our glasses on our respective tropical beaches because we’d have gotten filthy rich predicting and timing the moves of the market. Markets are pretty efficient – meaning that the price of any particular stock in any particular sector, industry or country is generally priced based on all available information […]

Charitable Donations

This time of year many people find it in their hearts to give. They’ll give to friends, family, loved ones and charitable organizations that can help maximize the gift such as a church, charity, or foundation. Last week I had written about the law of reciprocity and giving, and this week I’d like to mention how you can make your giving work in favor when tax season rolls around. As of this writing there are about 11 days left in 2013. Some individuals will be looking to see how much they can give or how much more they can give in order to receive the biggest tax deduction they can for charitable giving. Of course, gifts to friends and family are not deductible, but there are times when gifts or donations are completely deductible and may be to the tax advantage of the person giving or donating the gift. According to […]

After The Storm: Tax Breaks to Minimize Devastation of Superstorm Sandy

When Superstorm Sandy made landfall in New Jersey, it is doubtful that many of the residents there, or in the other New England states, were thinking about taxes. It is in the aftermath of a major storm with the devastation clear that those in need start searching for tax breaks. Sandy left a death toll in the double digits and estimated damage to public, residential and commercial property in the billions. Included in the statistics are hundreds of homes lost, and thousands without power. The impact is in line with other historical storms such as Ivan and Katrina. As things start to settle and the worst hit areas begin the long, tedious rebuilding process, residents will be looking to government tax breaks for help. Immediate Relief on Tax Payments Immediately after the disaster, the IRS made the decision to defer the individual income tax payment deadline. Those owing payments initially […]

Roth Conversion/Recharacterization Strategy

Image via Wikipedia If you have an IRA you probably know about the concept of a Roth IRA conversion – where you take distribution of a portion of your IRA and directly transfer that money into your a Roth IRA, paying tax as you go.  Then the Roth IRA can continue to grow tax-free (as Roth IRAs do) and you’ll never owe tax on your qualified distributions from the Roth IRA. In addition, if the investments you’ve made in the Roth IRA have lost money, before October 15 of the following year you have the opportunity to recharacterize your Roth conversion.  If you didn’t recharacterize, you’d be paying tax on a conversion amount that is much lower now if there was a downturn in the investments, so your average tax rate is much higher than you’d hoped.  By recharacterizing, you can undo the conversion or a part of it. I […]

What Can Be Done to Save Social Security?

Image by Lady_Helena via Flickr This is, of course, one of the most volatile questions on the political landscape these days.  We have some constituencies claiming that the whole plan is a Ponzi scheme and we should get rid of it altogether – and many others aiming to make radical tax increases in the system to improve solvency, or pushing back the age(s) for receiving benefits to reduce drag on the system. True, the system is in dire straits – not bankrupt, but needing attention.  Current projections indicate that at current pace, funds allocated to the system will run out sometime around 2036 unless something changes. Increasing taxes is never popular, and current political winds have shown just how far the dream of no increases in taxes will be pushed.  In addition, extending the age limits during a time when unemployment is at record highs only exacerbates that issue – […]

The “Tax on Sale of Your Home” Email Myth

Image by Sean MacEntee via Flickr If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email.  In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks. The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from.  In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you. Here’s the […]

Caregiver Costs Qualify as Medical Expenses

Image by The Library of Virginia via Flickr It’s a little known fact that certain costs for caregivers, licensed or unlicensed, may qualify as medical expenses for tax deductions.  Maintenance and personal care service costs can be considered qualified medical expenses in cases where the patient receiving the care has been certified by a health-care professional as unable to perform two or more of the six activities of daily living: Bathing, Eating, Dressing, Toiletting, Continence, and Transferring (moving from bed to chair, for example). Note: An easy way to remember these six activities is to use the first characters in the order I presented them above – B E D To C – this gives us the first five, and the entire mnemonic provides the sixth, Transferring from BED To Chair. The health-care professional who certifies the patient as incapable of these activities can be a doctor, a nurse, or […]

Do You Need a Friend at the IRS?

Image by StephenZacharias via Flickr As taxpayers, many of us have faced difficulties in dealing with the IRS – and it can be a daunting position to be in.  One way to deal with these issues is to hire a CPA or Enrolled Agent to help you through the process.  Another way is to deal with it yourself.  The problem is that dealing with the IRS by yourself can be a very difficult thing to do. The good news is that you have a friend at the IRS:  The Taxpayer Advocate Service (TAS).  The purpose of the TAS is to help taxpayers whose problems with the IRS are causing financial difficulties; who have tried but have not been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. In the IRS Tax Tip 2011-75, the IRS listed […]

A Restriction on the Home Buyer Credit

Here is a case where, even though the IRS documentation did not state it directly, the real rule of the law makes an explicit statement, and therefore the Code is where the final rules are taken from. In this particular case, there is a situation where the home buyer credit is not available: if the home is purchased from a parent or another close relative (and vice versa). And the taxpayer who relied only on an IRS publication found out the hard way that the Internal Revenue Code is the final word on the subject. There was a recent Tax Court case (Nievinski, TC Summary Opinion 2011-10) that challenged the limitation, and the Tax Court ruled in favor of the Service.  The argument was that, in a particular document, IRS Publication 4819 “Important Information About the First-Time Homebuyer Credit”, there was no express explanation of this limitation. Image via The […]

The Roth Recharacterization

After all the hoopla around Roth conversions in 2010, now is the time to consider whether or not a recharacterization is in your future.  So what is a recharacterization, and how does it work? Recharacterization is the “backing out” of your Roth conversion.  In other words, you can literally make the conversion as if it had never been done at all, with your money back in the traditional IRA where it started. Why would you want to do that?  Here’s an example: let’s say you converted $100,000 to a Roth IRA in 2010 and you are ready to pay the tax on your 2010 return (you elected out of the spread to 2011 and 2012).  Except that now, your investment in the Roth IRA has dropped in value to only $50,000 – and you still owe tax on the conversion of $100,000!  Yikes – that’s just totally wrong! Recharacterization can […]

Why Your Paycheck is Changing in 2011

After the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Act) late last year, there were certain changes that will impact your take-home pay in 2011, versus what you were seeing in 2010. For starters, although the 2010 Tax Act extended the tax rates to be the same as they were in 2010, as always there are increases in the tax tables which have a minor impact on your take-home pay.  Typically, this change will increase your tax withheld, reducing your take-home pay. The 2010 Tax Act also included a provision to reduce the withholding requirement for Social Security from 6.2% to 4.2%, which will have the effect of increasing your take-home pay by 2%. One other change to your paycheck came about because of a provision that was not included to be extended as a part of the 2010 Tax Act […]

The Making Work Pay Credit

Many (or most) working taxpayers will be eligible to receive a special credit on their 2010 tax return, called the Making Work Pay Credit.  The IRS has recently produced their Tax Tip 2011-15 which explains five important provisions about the Making Work Pay Credit: The Making Work Pay Credit provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns. Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding during 2010. Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit.  Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. Taxpayers who file Form 1040-EZ should use the worksheet for […]

Over-The-Counter Drugs via Your Flex-Spending Account

In case you missed it when I wrote about Guidance from the IRS on Flex Spending Plans – one of the changes you’ll have to deal with beginning with 2011 is that you can no longer use your Flex-Spending Account (FSA) to reimburse yourself for over-the-counter drugs like you’ve been able to do in the past. However, there is a way to get the over-the-counter (OTC) drugs that your physician recommends and use your FSA funds to pay for it… if your physician gives you a prescription for it.  Even though the IRS has disallowed the use of FSA funds for OTC drugs, if your physician gives you a prescription for the OTC drug, your FSA can be used to pay for the drug. There are some rules though:  first, the prescription has to provided to the pharmacist prior to the purchase, and the pharmacist must dispense the drug just […]

Date Set for Processing Delayed Returns

The IRS announced on January 20, 2011, that the delayed returns – those that have itemized deductions on Schedule A, include higher education tuition and fees deductions on Form 8917, and/or that include the educator expenses deduction, can begin processing on February 14. Many processors (commercial software) will accept these returns now and send them to the IRS beginning on February 14, so there is no reason to delay.  And if your processor (or tax guy or gal) doesn’t allow for the early acceptance, you can still get your information in to them and they’ll submit it when the time is right. This delay was explained in the article that I wrote earlier about how some returns would be delayed this year due to the late passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Photo by hillary h

Credit for Energy Saving Home Improvements for 2011

This tax credit has undergone a change from previous years.  In 2010, for example, you could achieve a credit for as much as 30% of the cost of your energy-saving home improvements, with a ceiling of $1,500. Beginning January 1, 2011, the credit rate is now just 10%, and the ceiling has been lowered to $500.  Something important to keep in mind about this credit:  any credit claimed in prior years (2009 and/or 2010) will be used to reduce your ceiling.  In other words, if you claimed the full credit (or any amount up to $500) on a previous year’s tax return, you have no energy-saving home improvement credit available to you. In addition to the changes above, there are specific item caps in place as well.  For example, if you are putting in a new furnace or water heater, the credit for those units is capped at $150.  If […]

Book Review: Small Business Taxes Made Easy

This book was a surprise to me – I did not expect to find such a thorough guidebook on the process of starting up a small business, but that’s what Small Business Taxes Made Easy is.  Author Eva Rosenberg, (“TaxMama” to her devotees) has not only the experience, but also the in-depth understanding of both the small business and the small business-person to lead you through this process and help you to succeed, quite possibly in spite of yourself. The title of the book is misleading, as the first several chapters of the book have little to do with taxes and much to do with all of the administrivia that you need to go through when setting up a small business.  In fact, you really don’t get to tax matters at all until about page 70 (of 261) in the book. The first few chapters take you through the concepts […]

Staging Your Roth IRA Conversion

So you have a substantial IRA (or several IRAs), and you’ve retired.  For the first time since you started your career, you’re in a low tax bracket.  You’re not age 70½ just yet, so you don’t need to concern yourself with Required Minimum Distributions (RMDs). But then again, maybe you should concern yourself with those Required Minimum distributions…? Think about it – you’re in a good place, tax-wise, and your IRA money is bound to continue to grow over time.  You are getting along just fine with your pension, Social Security, and other investment income.  This is the perfect time to strategically reduce your future tax bite. Staging the Roth IRA Conversion Let’s say for example that your taxable income puts you in one of the lowest tax brackets… say 15% or 25%. You have some “headroom” left in the bracket to spare, meaning that you could realize some additional […]

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