Investing

IRA Contributions

Westchester NY accountant Paul Herman has all the answers to all your personal finance questions!

One popular tax savings outlet available to taxpayers today is the Individual Retirement Account, more commonly referred to as an IRA.

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Keep your nest egg secure with these quick tips!

There are several options you have when deciding which type of IRA account to enter into. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on whether you€” or your spouse, if filing jointly are covered by an employer’s pension plan and how much total income you have. Conversely, you cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Generally, you can contribute a percentage of your earnings for the current year or a larger, €œcatch-up€ if you are age 50 or older. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these annual amounts (currently $5,500 for 2013, or $6,500 if you are age 50 or older).

You can file your tax return claiming a traditional IRA deduction before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions. If you haven’t contributed funds to an Individual Retirement Account (IRA) for last tax year, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15 due date for filing your tax return for last year, not including extensions.

Be sure to tell the IRA trustee that the contribution is for last year. Otherwise, the trustee may report the contribution as being for this year, when they get your funds.

If you report a contribution to a traditional IRA on your return, but fail to contribute by the deadline, you must file an amended tax return by using Form 1040X, Amended U.S. Individual Income Tax Return. You must add the amount you deducted to your income on the amended return and pay the additional tax accordingly.

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!

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

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Stock FAQs

Accountants in Westchester NY here at Herman and Company CPA’s have all the answers to your personal finance questions! Stock trading can be a tremendous way to grow your finances if approached with the correct research and are carefully monitored.

stock trading tips from scarsdale accountant paul hermanThe following are FAQs our Westchester accounting firm regularly receives regarding stock trading and how it works. 
▼ How does stock trading work?

Stocks are traded in quantities of 100 shares, called round lots. Any quantity of stock under 100 shares will be considered an odd lot.

▼ What is the difference between Preferred and Common Stock?

Most stocks are common stocks. However, there is another type (known as preferred) which gives certain advantages regarding dividends. Generally, preferred stock holders do not have the same voting rights that the holders of common shares do. Common stocks are based on company performance, while preferred stocks will usually have a stated dividend.

▼ How can I invest in foreign stocks?

It is fairly easy to invest in foreign corporations, because these corporations need to register these securities with the SEC. These companies are subjected to the same rules as U.S. companies.

How are stock prices determined?

A stock’s prices are a result of trading on stock exchanges, and prices rise and fall based on the supply and demand of the stock.

What are common and preferred stocks?

Common stock is piece of corporate ownership. Those who hold common stock share profits from the corporation as dividends, and also have voting rights. This means that common stock holders benefit financially if a company succeeds, but also means they lose money if a company does not. Those who hold preferred stock in a company have an unchanged dividend amount of stock in a company, and often do not have voting rights. Over a period of time, companies often increase their common stock dividend.

 How can I be a successful stock trader?

Determine your goals and do your homework. Get to know the industry and companies you’re investing in, and keep up with the latest news and trends. Make sure you know when to cut your losses, and focus on making small and steady short-term profits.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Bedford Hills NY, Chappaqua NY, Larchmont NY, Rye Brook NY, Purchase NY, Bronxville NY, White Plains NY, Stamford CT and beyond.

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Our 2013 Annual Year-End Tax Planning Letter

 

Tax planning advice from cpa in scarsdale ny

 

Fall, 2013

To our clients and friends,

As a follow up to the first of our year-end tax planning letters, we provide here specific strategies for your consideration. The implementation of just one of these strategies can save you meaningful dollars.

Remember tax rates for many are now higher than they were last year. We all have a serious opportunity to save taxes now by devoting time to reviewing our tax situation. Please contact us shortly to see which strategies can benefit you.

The old standby strategies, now with some modification: 

1. Postpone income 

In most years, it usually pays to postpone income to a subsequent year. This gives you the use of the money for a year before having to pay tax.

If it makes sense to delay income to the following year, you might defer compensation, defer year-end bonuses, defer the sale of capital gain property (or take installment payments rather than a lump-sum payment) or postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

2. Accelerate your deductions 

The phasing out of itemized deductions is now back in the tax law starting this year. If you itemize deductions, consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction (now a higher threshold at 10% of your adjusted gross income). Charge deductible expenses on credit cards to get the current deduction even if the payment of the charge will not be made until 2014. Also, you can prepay your January mortgage payment in December, so you can deduct the interest included in that payment this year. Pay your final state estimated tax payment before year-end as long as you are not in an AMT situation. If you are likely to be paying taxes under the AMT rules, hold off this payment until January as you will get no benefit at all this year by paying it early and you’ll lose the deduction for next year.

You also can make alimony payments early or make charitable contributions in advance, subject to certain limitations. If you are planning to donate property, consider whether to do it before or after the end of the year. Remember substantiation rules for donations. If the property is valued at more than $5,000, a “qualified” written appraisal is mandatory. You must get receipts for contributions over $250. Your cancelled check alone will not satisfy the IRS. Instead of putting cash in the collection basket, you may want to put a check in! If you want to make a donation but won’t have the money until next year, consider charging your gift on a credit card before the end of the year. The gift will be deductible on your 2013 return!

Remember that you can’t deduct contributions of clothing or household items unless the property is in at least “good condition.”

3. Distributions from IRA’s 

Whenever possible, withdraw money you need from taxable savings and investments accounts. IRA accounts should be left to grow tax-free as long as possible. Once you reach the age of 70, you MUST begin taking distributions and paying income tax on the monies withdrawn. Distributions taken before age 59. are subject to a 10% penalty in addition to the tax due.

4. Incentive stock options 

Exercise ISO’s early in the year. Exercise of ISO’s may put you in the AMT unless you dispose of the stock in the same calendar year it was purchased. Exercising your options early in the year gives you the full year to see if the shares are down, get rid of them and not get hit with the AMT. You may have heard the horror stories of people who converted their options, then held the stock they got until it subsequently went down. They ended up with an AMT bill higher than the value of their stock. A nightmare scenario.

For more tips now and throughout the year follow us on . . . 

Facebook at facebook.com/hermancpa

Twitter at twitter.com/hermancpa

Linkedin at linkedin.com/in/newyorkcpa

Our blog at blog.hermancpa.com 

5. Capital gains and losses 

If you have realized capital gains this year, be sure to take capital losses now to offset those capital gains. Anyone sitting with net gains in 2013 should take action now if possible.

Even under the new law, long-term gains are taxed at a lower rate than short-term gains and ordinary income. Planning for investment gains can reduce your taxes significantly. Beginning on January 1, 2013, the long-term capital gains tax can be as much as 24%. An asset must be held for more than a year to be considered long-term.

Here is an easy way to save some potential taxes that every investor should take the time to check out. Review the securities you have sold so far this year to see if you have a net gain or loss. Net any carry-forward losses from last year against 2013 trades. If the result is a short-term capital gain, it will be taxed as ordinary income unless you offset it with additional losses. If you have a net loss, remember that the maximum net capital loss you may deduct in any one year is $3,000. Losses in excess of this limit may be carried forward to 2014 and beyond, if necessary.

What to do? If you have net gains, review your current holdings for sales that would result in a loss and which will reduce or eliminate your net gain. If you have losses already and are holding some positions with gains that you no longer wish to own, sell them to use up your existing losses or just keep the losses to use in the future when rates are higher. Remember that capital losses realized in an IRA account are not deductible.

Although you can choose when to realize capital gains and losses, we advise you to consider the worth of investments and not let tax consequences alone dictate when to sell.

6. Watch out for the “wash sale” rule 

To accelerate a loss without significantly changing your investment position, you can “tax swap” securities. That is, sell securities to recognize a loss and replace them with the same or similar securities. But watch out for the “wash sale” rule. If you sell a stock to recognize a loss, you may not repurchase the same stock for a 30-day period before or after the date of sale or the loss will be disallowed. You can replace it with a similar, but different security. The wash sale rule does not apply to gains.

If you like a particular stock for the long term, but would like to sell it this year to get the benefit of the loss, double up on the position more than 30 days before selling the original position. After at least 31 days, sell the higher cost shares. You’ll create a tax loss and be left with the same number of shares you originally owned. You must act quickly so as to have owned the shares for at least 31 days and be able to sell the shares prior to December 31st.

7. Contribute to a Qualified Tuition Program (“QTP”) for your child’s future college costs 

These so-called Section 529 plans let you establish a savings plan from which tuition can be paid. Contributions are generally deductible for state tax purposes and distributions are tax-free as long as used for qualified higher education costs. The income earned in such accounts will not be taxed. This definitely is worth a look for those with young children. Speak to us as we can help you setup and manage such an account.

8. Take losses on your 529 plans! Yes, that’s what I said, take losses on the college savings plan you set up for your child. 

This is not widely publicized. You may be able to take a loss on your investment in a QTP, if you distribute all of the amounts in an account and the total distributions are less than the amounts contributed. The loss is not taken as a capital loss, but rather as a miscellaneous itemized deduction which is an ordinary deduction (i.e. not subject to the $3,000 capital loss limitation). All miscellaneous itemized deductions must exceed 2% of adjusted gross income to be of benefit. Of course if you find yourself in the AMT, this strategy won’t help you at all. You can reinvest the money taken out into another 529 plan account, but there are some rules to be dealt with.

Among the services we provide . . . When you are considering life, health or long-term care insurance, we can help find the right policy for you. We’ll help you analyze your needs, determine the appropriate amount of coverage necessary to protect your family and determine the right policy to suit your needs. 

9. Reduction of tax on certain dividends 

If you are an owner of a closely held ‘C’ corporation and the company is in the 15% bracket and you are in at least the 25% bracket, taking a dividend payout in place of salary can result in more money in your pocket after taxes. Note that dividends on stocks are taxed at a lower rate than interest paid on bonds.

10. Keep track of accrued interest you paid 

Keep accurate records for any accrued interest you paid when you bought bonds. You received interest from the last date the bond paid interest. This interest will be reported on your 1099 Form. Since you purchased the accrued interest, it’s not taxable to you. Speak to us for information on how to write-off the accrued interest on your 2013 return.

11. Get a receipt from your charity 

As previously noted, the Internal Revenue Service requires that you have a written receipt from charities for each contribution. The receipt must be for a donation made in 2013. If you are examined and you do not have a receipt, your deduction will be disallowed; the check will not be enough. You can make more than one contribution to a charity in one year each of less than $250 (that cumulatively exceed $250 for the year) without a receipt, but the Internal Revenue Service has the authority to curb abuses such as with multiple checks issued on the same day. Also, a charity is required to give you a breakdown of the deductible portion of your contribution when goods or services are purchased in connection with a charitable event (dinners, tickets, etc.).

12. Donations of used cars 

Remember that you are now only able to deduct an amount equal to what the charity sells the car for.

13. Donate appreciated securities 

Consider using appreciated securities that you’ve owned at least a year to make your charitable contributions. You can deduct the fair market value of the securities and avoid paying the capital gains tax you would incur if you sold the securities. There are limits related to your income on the amount of charitable contributions that can be deducted.

Contributions in excess of the deductible amount can be carried to subsequent years. Note that gifts of appreciated assets sometimes affect the alternative minimum tax.

If you have losses in securities you want to donate, sell the securities to recognize the loss for your taxes and then donate the proceeds.

14. Pay off nondeductible interest with a home equity loan 

You can benefit by paying off your credit card balances (which typically carry high interest charges and are non-deductible) with a home equity loan, the interest on which may be deductible. Interest is deductible on home equity loan balances up to $100,000.

15. Casualty losses 

A casualty loss occurs when your property is damaged as a result of a disaster such as a storm, flood, car accident, theft or similar event. The general rule is that such a loss is deductible only after it has been reported to your insurance company. Then the unrecovered loss less $100 may be deducted to the extent that it exceeds 10% of your adjusted gross income. Losses occurring in declared disaster areas have additional rules but give us some flexibility to enhance the tax benefit.

16. Look into tax advantaged health care accounts or flexible spending accounts 

Participation allows you to use pre-tax income for medical expenses that were not covered by insurance or for other eligible expenses. This includes co-pays.

17. If eligible, contribute to an IRA 

If you are not an active participant in an employer-provided retirement plan and have wages or self-employment income, you are eligible to make a tax deductible contribution of up to $5,500 ($6,500 if you are age 50 older) per year to an Individual Retirement Account (IRA) up until the year that you turn 70½, subject to phase-outs based on your income. This money will earn income tax-free and is taxable only when you withdraw funds from the account. If you withdraw the money before age 59½ there may be a penalty tax of 10%. You must begin withdrawing from the account based on a formula at age 70½. You (and/or your spouse) must have wages or self- employment income at least equal to the amount you contribute. Payment can be made to the IRA anytime up until April 15, 2014 to be deductible on your 2013 return.

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2013 if your modified adjusted gross income is less than $59,000 if you are single or $95,000 if you are married and filing jointly. Above these income levels, the ability to deduct an IRA contribution is reduced and eventually fully phased out. If you have self-employment income, you should consider establishment of a SEP, SIMPLE or Keogh retirement plan before year-end. You can contribute significantly more than $5,500 to these plans and you may not have to make any contributions to the plans until the filing date (including extensions) of your personal tax return.

Retirement plan contribution limits for 2013 are as follows: 401(k) Plans IRA’s Keogh’s/SEP’s SIMPLE Plans
Taxpayers under 50 $17,500 $5,500 $51,000 $12,000
Taxpayers over 49 22,500 6,500 51,000 14,500

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a 529 plan are never taxed if used to pay for college, graduate school or post high school vocational education.

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59.. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a

529s plan are never taxed if used to pay for college, graduate school or post high school vocational education.

See the important discussion regarding gifting in our first letter.

Anyone is permitted to make gifts of up to $14,000 per year to an unlimited number of people without having to pay gift taxes. Married couples can make combined gifts of up to $28,000. A married couple wishing to make gifts to two married children and four grandchildren can make gifts of up to $224,000 per year ($28,000 to each child, grandchild and child’s spouse) without paying any gift taxes. This is a simple way to reduce the size of one’s future taxable estate. There are a number of other ways to reduce your taxable estate. Please contact us for further insight. Planning Tip: Income can also be shifted upwards. For example, a high-earning professional can make the gift to his/her elderly parents who are in a lower tax bracket. The additional income can be used to help pay for medical and/or assisted living expenses. After the parents die, the assets can go to the original donor’s children (if the “kiddie tax” does not apply) for additional income shifting.

Be aware that direct payments of tuition and medical expense for another individual are not subject to gift tax. There is an unlimited exclusion of amounts paid directly to educational organizations for tuition and to health care providers for medical expenses.

If you own your own business, you can hire your kids and fully deduct their pay. And, if your business is unincorporated and your children are under the age of 18, you won’t owe any payroll taxes on their wages.

21. Let Uncle Sam pay part of your kid’s college tuition bill

Don’t pay your children’s college tuition bill by selling appreciated securities you own. Rather, give your children the shares of appreciated stock or mutual fund and have them sell the shares to pay for school. Assuming they have limited income, neither of you may have to pay any capital gains tax at all. That’s letting your Uncle Sam pay part of the tuition bill!

This is one of my favorites and makes so much sense if grandma or grandpa have sizeable estates and are facing a large estate tax bill. They should be paying your child’s college tuition! Payments made directly to the school are not counted towards the $14,000 annual gift limit. This is a great way to reduce estate taxes!

College Tuition Credit. If you have kids in college listen up. The American Opportunity Tax Credit expanded and renamed the old Hope Credit. The credit can be claimed for qualified undergraduate education expenses paid for an eligible student.

Unlike the Hope credit, which was only available for qualified tuition and fees for just the first two years college, the new credit includes related expenses such as books and other required course materials. Additionally, the credit can be claimed for those qualified expenses paid for any of the first four years of post-secondary education.

The credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000 per student each year. The maximum $2,500 credit is possible for a taxpayer who pays $4,000 or more in qualifying expenses. The credit is available to individual taxpayers who make less than $80,000 or $160,000 for married couples. Above those levels, sorry, it’s phased out.

The Lifetime Learning Credit of up to $2,000 (20% of tuition of up to $10,000) applies to graduate classes as well as undergraduate. It is also subject to phase out at higher income levels.

Although we’ve done our best to keep our annual letter as short as possible, it is again considerably lengthier than we would have liked, and it is far from complete. We wish we could summarize

in just a couple of pages, but the tax law keeps changing. We hope it proves to be more than just good bedtime reading. Please devote some time before the end of the year to review your tax situation and call us for analysis and recommendations. 

As always we are available to help you with any tax, accounting, bookkeeping, investment, insurance or estate planning needs. But don’t wait until mid-December! If you are not a client of our office and wish to consider implementing any of these strategies, or just want to talk about your particular situation, please call us for a free consultation.

Our best wishes to you and to your family for the holidays. 

Sincerely,

Paul S. Herman,

Scarsdale accountant Paul Herman CPA logo

 

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.