Monthly Archives: October 2014

College Students: The Gray Area of Exemptions

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

There’s still time to take advantage of last-minute, tax-saving moves for dependency exemptions. For 2014, there are bigger dependency exemptions, as well as rules that, in some cases, are dauntingly complex. Read the below article by Julian Block from Accounting Web!

1900419_830540933635821_8455817655413948302_o

The 2014 exemption is worth $3,950, up from the 2013 figure of $3,900. But you can’t take an exemption for an individual who is eligible to be claimed as a dependent on someone else’s return. An example: No exemption for a child on the child’s return when he or she can be claimed on the parent’s return.

The basic rules haven’t changed: To claim a 2014 exemption for a dependent, you must furnish more than half of the dependent’s total support for the year or, under a multiple support agreement, more than 10 percent. Generally, the exemption is lost if a dependent’s reportable income for 2014 surpasses $3,950. However, only income from taxable sources counts. Funds received by a dependent from tax-exempt sources like Social Security benefits, inheritances and gifts don’t count.

But there’s a break: Assuming you meet the support test, the tax code sets no limit on the amount of a dependent’s reportable income when your child is either (1) under age 19 at the close of 2014 or (2) a full-time college student who spends at least five months of the year in school and won’t reach the age of 24 by the close of 2014. Note, though, that the income cap does apply when your college-attending child has income above $3,950 and will be 24 by 2014′s close.

Some strategies. Are you supporting a son or daughter in college? In some cases, you need to remind your child to bank part of his or her earnings or to spend some money on nonsupport items; meanwhile, you take care of support items like food, lodgings, clothing, education, medical and dental care, recreation, transportation and similar necessities. Why? Because that maneuver might enable you to pass the support test and get the exemption for 2014.

Count as support the “fair rental value” of the lodgings you provide for a child living with you; add a reasonable allowance for use of telephone, electricity, furnishings, appliances and the like. “Fair rental value,” says the IRS, is the amount you could reasonably expect to receive from a stranger for the same kind of lodgings, not the rent or real estate taxes, mortgage interest, an so on, paid by you that’s attributable to the space involved. Also include the value of a year-round room you maintain for an away-at-college child and the food you provide while he or she is at home during a school recess.

Don’t count a scholarship in calculating total support. It makes no difference that your child actually uses the award for education and other support items. As for GI Bill benefits and the proceeds from college loans secured by the student, they are support the child provides. But any loan for a child’s education secured by you is support you furnish.

The IRS strictly defines “student.” Your son or daughter must be enrolled on a full-time basis for a minimum of five months in the calendar year in an educational institution with a regular faculty, an established curriculum, and an organized student body.

The IRS authorizes no exceptions to the five-month rule. But your child doesn’t have to be enrolled for five consecutive months or even five full months.

An example: Clarice Lecter registers for a full-time course load in January, with classes to run from February through May. With that time span, Clarice satisfies the time requirement, provided she completes the semester.

The IRS allows her to include some night attendance as part of a full-time course of study. But the agency cautions that if Clarice attends exclusively at night, she must enroll for the number of hours or classes that’s considered full-time attendance.

Just how inflexible the agency is on the time stipulation is underscored by an IRS ruling that was sought by the parents of a 19-year-old student who dropped out of school after four months following hospitalization for a nervous breakdown. He was unable to return to school for the remainder of the year. The verdict: No exception from the five-month requirement, regardless of the son’s reason for leaving school. Consequently, the parents couldn’t claim an exemption for him.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

Simple Tax Savings Techniques for Security Gains

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

Simple Tax Savings Techniques for Security Gains

The market swings over the last several years may have you wondering whether it’s time to capitalize on some market gains. While taxes should not be the main consideration in this decision, they certainly need to be considered, as they can make a significant impact on your investment return.

With that in mind, here are a couple of tax-smart strategies to consider as you analyze your investment opportunities and decide what to do about recent gains.

Should you wait to sell until the stock qualifies for long-term capital gains treatment?

If the stock sale qualifies for long-term capital gains treatment, it will be taxed at a maximum tax rate of 23.8%. Otherwise it will be taxed at your ordinary-income tax rate, which can be as high as 43.4%.

Clearly, you’ll pay less taxes (and keep more of your gains) if the stock sale qualifies for long-term capital gains treatment. The amount of taxes you’ll save depends on your ordinary-income tax bracket.

To qualify for the preferential long-term capital gains rates, you must hold the stock for more than 12 months. The holding period generally begins the day after you purchase the stock and runs through (and includes) the date you sell it. These rules must be followed exactly, because missing the required holding period by even one day prevents you from using the preferential rates.

The question then becomes: Are the tax savings that would be realized by holding the asset for the long-term period worth the investment risk that the asset’s value will fall during the same time period? If you think the value will fall significantly, liquidating quickly, regardless of tax consequences, may be the better option. Otherwise, the potential risk of holding an asset should be weighed against the tax benefit of qualifying for a reduced tax rate.

Comparing the risk of a price decline to the potential tax benefit of holding an investment for a certain time is not an exact science. We’d be glad to help you weigh your options.

Use “specific ID method” to minimize taxes

If you are considering selling less than your entire interest in a security that you purchased at various times for various prices, you have a couple of options for identifying the particular shares sold:

(1) The first-in, first-out (FIFO) method and

(2) The specific ID method.

FIFO is used if you do not (or cannot) specifically identify which shares of stock are sold, so the oldest securities are assumed to be sold first. Alternatively, you can use the specific ID method to select the particular shares you wish to sell. This is typically the preferred method, as it allows you at least some level of control over the amount and character of the gain (or loss) realized on the sale, which can lead to tax-savings opportunities.

The specific ID method requires that you adequately identify the specific stock to be sold. This can be accomplished by delivering the specific shares to be sold to the broker selling the stock. Alternatively, if the securities are held by your broker, IRS regulations say you should notify your broker regarding which shares you want to sell and the broker should then issue you a written confirmation of your instructions.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Tax Calendar for 2014

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

13047964665_42857c1cf2_b

Tax Calendar

October 15

 

    • Personal returns that received an automatic six-month extension must be filed today and any tax, interest and penalties due must be paid.

 

 

    • Electing large partnerships that received an additional six-month extension must file their Forms 1065-B today.

 

 

    • If the monthly deposit rule applies, employers must deposit the tax for payments in September for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

 

October 31

 

    • The third quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is due today and any undeposited tax must be deposited. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 10 to file the return.

 

 

  • If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through September exceeds $500.

November 17

 

    • If the monthly deposit rule applies, employers must deposit the tax for payments in October for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

 

December 15

 

    • Calendar-year corporations must deposit the fourth installment of estimated income tax for 2014.

 

 

    • If the monthly deposit rule applies, employers must deposit the tax for payments in November for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

 

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.