investing

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.

Photo Credit:  David Paul Ohmer via Photopin cc

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

 

Our 2013 Annual Year-End Tax Planning Letter

 

 Our 2013 Annual Year-End Tax Planning Letter. 

The clock is ticking on your chances to take 

advantage of great tax savings opportunities!

Tax planning and tips from scarsdale cpa

 

 Fall, 2013 

To our clients and friends, 

It’s that time of year when we think about spending, spending for the holidays. But I’d like you to also think about savings. That is, thinking about ways to lower your tax bill. I believe ignoring your taxes until next year could be an expensive mistake. I’d like to suggest that you have us (or your preparer if you are not a client of our office) prepare an estimate now of your current year’s tax liability and then review strategies to see if there are ways to keep extra money in your pocket for the holidays and beyond.

We’re going to provide you with lots of food for thought in this letter. 

As I sit down to write this year’s annual tax letter, I am turning nostalgic. I long for the “good old days”. My wife and I were talking at dinner recently about the good old days. We tried to come up with a list of things that are better today than they were back “in the day”. Our list was short, technology, television, phones, automobiles, medical care to name a few things. Unfortunately, one item not on the list was the tax laws. 

The passage very late last year of The American Taxpayer Relief Act of 2012 makes 2012 seem like the good old days! I would have named the new law something else, but they didn’t ask me.

In addition, The Affordable Care Act (“Obamacare”) is kicking in, in full force along with its’ increased taxes on interest, dividends and capital gains (depending on your level of income).

Some of our clients will see little change in their taxes this year as many of the law changes kick in above specified income thresholds. But “There are many, many high-income taxpayers now who are finding themselves facing tax rates in excess of 50%,” said Suzanne Shier, a tax strategist and Director of Wealth Planning at Chicago-based Northern Trust Corp. “That really gets their attention.” Ours too!

So . . . this year-end it makes a great deal of sense to review strategies to reduce your taxes. At this point, you likely have a fairly complete picture of your 2013 income from sources such as salary, retirement plan distributions, and dividends. The total of those, combined with other predictable income items, provides a good starting point for tax planning. Doing nothing could leave you paying significantly more in taxes and is a lousy tax planning strategy. Year-end tax planning is very important this year. At a minimum you should know what to expect on your 2013 tax return which may look quite different than past years’ returns.

I encourage you to make 2013 year-end tax planning a priority and we are here to help and guide you through the process! 

Although we’ve done our best to keep this year’s annual letter as short as possible, it is again considerably lengthier than then we would have liked. As a result, we have divided this year’s letter into two letters of which this is the first. The second letter contains twenty-one strategies for tax reduction.

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

Overview 

Let’s start with income thresholds. Starting in 2013, individual taxpayers with incomes under $200,000 and married taxpayers with incomes under $400,000 will feel minimal impact under the new laws. Keep reading though as there are still opportunities to reduce taxes. Above these levels, your taxes are likely going up and maybe significantly.

Increase in Top Tax Rate. Beginning in 2013, a new top tax rate of 39.6% takes effect. This rate applies to taxable income in excess of $450,000 (joint returns and surviving spouses), $425,000 (heads of household), $400,000 (single taxpayers other than head of household and surviving spouse), and $225,000 (married filing separately).

Increased Tax Rate on Certain Capital Gains and Dividends. While the favorable tax rates in effect before 2013 for capital gains and dividend income were generally made permanent by the American Taxpayer Relief Act of 2012, a new 20% rate has been added for high incomers. Thus, rates of 0%, 15%, and 20% apply to capital gain and dividend income, depending on your tax bracket. These rates apply for alternative minimum tax purposes also.

New Taxes in 2013. There are a couple of new taxes that take effect in 2013: a 3.8% tax on net investment income above a threshold amount, and a .9% additional tax on wages and self-employment income above a threshold amount. For both taxes, the threshold amount is $200,000 ($250,000 if married filing jointly or $125,000 for married filing separately). Net investment income includes most rental income and net gain attributable to the disposition of property other than property held in a trade or business (i.e. capital gains).

Increased Threshold for Deducting Medical Expenses. Medical and dental expenses that exceed a certain percentage of your adjusted gross income (AGI) are deductible. For years before 2013, that percentage was 7.5%. For 2013 and later years, the deduction floor is increased to 10%. So not only are your health insurance premiums likely to be higher, you now cannot deduct as much of your out-of-pockets medical costs as previously. However, for tax years through 2016, the floor is 7.5% if you or your spouse has reached age 65 before the end of that year. Reduction in Personal Exemptions and Itemized Deductions for High-Income Taxpayers There is a reduction in personal exemptions and itemized deductions for taxpayers with adjusted gross income over $250,000 (single people other than head of household and surviving spouse), $300,000 (joint returns), $275,000 (head of household), and $150,000 (married filing separately), which will have the effect of increasing taxes and tax rates on affected taxpayers. We need to consider whether these new taxes affect you and, if so, whether you have paid a sufficient amount of taxes through withholdings and estimated tax payments so as to avoid any underpayment or late payment penalties.

Alternative Minimum Tax. If you are subject to the alternative minimum tax (AMT), some of your deductions may be worthless. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under AMT.

What does this mean? Well for many wealthy taxpayers, the rate on long-term capital gains and qualified dividends now can be as much as 25%, including the new surtax and limits on deductions. That’s a 67% increase from the 15% rate in 2012. The tax rate on other investment income such as royalties, interest and rents can exceed 43%.

There is a lot to cover and any one strategy can save you lots. So here we go. 

Tax Rates: 

For 2013, the amount of income needed to reach into a bracket has increased slightly.

This table shows the tax rate that applies on income up to the amount shown. Incomes above the amounts shown in the 35% column are taxed at a rate of 39.6%. 

10% 15% 25% 28% 33% 35%
2013 Joint Federal Tax Brackets 17,850 72,500 146,400 223,050 398,350 450,000
2013 Single Fed’l Tax Brackets 8,925 36,250 87,850 183,250 398,350 400,000
2013 AMT Tax Rates 26% 28%
Applies to AMT income over 80,800 260,300
2013 NY Joint Tax Brackets 4.50% 5.25% 5.90% 6.85% 7.85% 8.97%
Applies to taxable income over 16,000 23,000 26,000 40,000 300,000 500,000
2013 NJ Joint Tax Brackets 1.40% 1.75% 3.50% 5.53% 6.37% 8.97%
Applies to taxable income over 0 20,000 50,000 70,000 80,000 500,000
2013 CT Joint Tax Brackets 3.0% 5.0% 6.5% CTSingle brackets are
Applies to taxable income over Zero 20,000 1,000,000 half of joint brackets

Top Marginal Tax Rates for 2013

Connecticut  6.70%
New Jersey  8.97%
New York  8.82%
New York City  3.648%
California  13.3% 

A Unique Strategy for Your Situation 

In this environment where change is the new normal, we need to consider all options. So let’s see if we can save you some tax dollars and guide you to avoid missteps that could increase your taxes. Each year at this time we give you a number of strategies to consider. Your personal tax situation is

unique to you. Taking advantage of even one or two of these planning strategies could save you real money.

What to do between now and December 31, 2013. 

But first a word from our sponsor, the AMT!

The alternative minimum tax (AMT) 

If you are ensnared in the AMT, remember that many deductions normally allowed, ARE NOT allowed for the AMT calculation…personal exemptions, the standard deduction, state and city income taxes and real estate taxes.

So . . . taxpayers who have significant deductions, such as those who live in states that have relatively high personal income tax rates and high real estate taxes like New York, are a likely victim for the clutches of the AMT. There are other deductions that could trigger the AMT too, such as exercising incentive stock options, taking numerous personal exemptions for a large family, experiencing significant deductible medical expenses, or large miscellaneous itemized expenses (such as employee business expenses).

The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum. By reducing regular tax liability through deductions, deferral and overall rate reductions, the alternative minimum tax liability exposure is increased. Since many of the strategies that are used for reducing your regular taxes will backfire when it comes to the AMT, you really need to know your exposure to the AMT.

If in fact you are in the AMT, the irony is that unlike the basic strategy (discussed below) of postponing income, you may want to actually accelerate income into 2013 since the AMT tax rate is in fact lower. Yes, this is a bit confusing! All planning is highly personalized and unique to each individual and must consider multiple years to be truly effective.

So what to do now? 

Although there are serious tax reform proposals being discussed by Congress, as of now tax rates are not scheduled to increase in 2014. The following are some of the strategies you should review before year end to see if they make sense in your situation. The focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.

These are the usual and most common strategies:

Deferring Income into 2014Options for deferring income include: (1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2014; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2014; (3) delaying the exercise of any stock options you may have; (4) if you are selling property, considering an installment sale; (5) consider parking investments in deferred annuities; (6) establishing an IRA, if you are within certain income requirements; and (7) if your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year end.

Accelerating Deductions into 2013. Usually we want to accelerate what deductions we can into the current year to offset the higher income this year. This would also be an appropriate strategy if we anticipate lower income next year.

Options include: 

(1) consider prepaying your property taxes in December; (2) consider making your January mortgage payment in December; (3) if you owe state income taxes, consider making up any shortfall in December rather than waiting until your return is due; (4) since medical expenses are deductible only to the extent they exceed 10% (7.5% if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold; (5) making any large charitable contributions in 2013, rather than 2014; (6) selling some or all of your loss stocks; and (7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

Generally we want to delay recognizing income to defer the payment of additional taxes. However,

depending on your projected income, it may make sense to accelerate income into 2013 and delay deductions.

Accelerating Income into 2013. Besides harvesting gains from your investment portfolio, other options for accelerating income include:

(1) if you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year; (2) taking IRA distributions this year rather than next year; (3) selling stocks or other assets with taxable gains this year; (4) if you are self-employed with receivables on hand, trying to get clients or customers to pay before year end; and (5) settling lawsuits or insurance claims that will generate income this year.

Deferring Deductions into 2014. If you anticipate a substantial increase in taxable income, we may want to explore deferring deductions into 2014 by looking at the following: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and (2) postponing the sale of any loss-generating property.

Among the services we provide . . . is a tax projection and planning analysis. We gather current year tax information from our clients and use it to project their taxes for the current year. We then determine what strategies we may be able to implement to reduce their 2013 and 2014 taxes.

Gifting Strategies to Maintain Family Wealth 

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.

Above and beyond the annual gift exclusion of $14,000, the federal applicable exemption amount for gifts during a lifetime is $5,250,000. This is by far the highest it has ever been. Wealthy individuals, who have both the means and desire to do so, might plan on making the gifts up to the exclusion amount. This amount could be reduced in the future. As every estate and financial planning expert will tell you, making lifetime gifts is a simple and effective estate tax minimization strategy. Giving away assets at no gift tax cost will allow both the present value and its appreciation to forever escape the Federal estate tax.

Retirement Plan Distributions 

Taxpayers receiving retirement plan distributions should note that while such distributions are not subject to the 3.8% surtax, they could raise your adjusted gross income over the $200,000 threshold, making all other unearned income fair game for the tax. One possible solution would be to convert your IRA to a Roth IRA. You will recognize income now, but future Roth distributions will be tax free.

Roth Conversions 

High-income taxpayers with traditional IRAs or rollover IRAs have an opportunity, first available in 2010, to roll over their IRAs into a Roth IRA. Many of you reading this may want to consider this. Over time it could save you and your heirs big taxes. However, it does not make sense in all cases and needs to be analyzed carefully.

For those who previously chose not to convert to a Roth, keep in mind that the Obamacare surtax applies primarily to investment income, not IRA distributions.

Distributions from traditional and rollover IRAs are generally taxable when received. Contributions to Roth IRAs are non-deductible when made, but all principal and earnings will be distributed tax free. Therefore, Roth IRAs may be preferable to traditional IRAs.

When you convert to a Roth IRA, you must pay tax on the converted amount in the year of conversion. 

There’s another important point on this. The government gives you a do over, called re-characterization. You are allowed to change your mind if the value of your now Roth IRA goes down and you don’t want to pay taxes on the old higher value. You can put it back to a regular IRA like nothing ever happened. And what makes this even better is that the government gives you until you file your tax return for that year. So in a perfect world, if you convert on January 2, 2014 and you extend your 2014 tax return, you would actually have until October 15, 2015, to look back, see how it is doing and perhaps re-characterize it. But if you had converted your traditional IRA to a Roth on December 15, 2014, you only have a ten-month window to evaluate its performance. It’s still worth considering.

Last point on this, issues related to transferring wealth to succeeding generations also come into play here and should be considered. There is a lot to think about when it comes to whether or not to convert an IRA to a Roth IRA. Reasons for us to chat!

Expiring Energy-Related Tax Credit 

There is an expiring energy-related tax credit that may be worth looking at. The residential energy credit is available only through the end of 2013. If you are contemplating energy improvements to your home, you may want to accelerate the improvements into 2013. The credit is 10% of the amounts paid or incurred for qualified energy efficiency improvements installed during the tax year and the amount of residential energy property expenditures paid or incurred during the tax year, up to a maximum credit of $500.

Changes enacted in the past few years: For 2013, taxpayers in the lowest two tax brackets will pay zero tax on capital gains and qualifying dividends.

Among the services we provide . . . 

is personal financial recordkeeping. We track your income and expenses and provide comprehensive reports so you’ll know where your money is coming from and where it’s going. We reconcile your bank, credit card and brokerage accounts to monthly statements. Reports show your net worth changes! If you’d like, we can even pay your bills for you. This service is also great for an elderly or disabled relative. 

Some other late-year moves to save 2013 taxes: 

• If self-employed, hold off sending bills to your customers until January or if you want to accelerate income, send bills out ASAP.

• Apply now for a social security number for any children born in 2013 as you’ll need to put the number on your tax return (complete IRS Form SS-5).

• Increase your basis in S corporations or partnerships to make deduction of 2013 operating losses possible.

• If adopting a child in 2013, take advantage of the tax credit for up to $12,970 of qualified expenses, subject to phase outs.

• Use credit cards to prepay deductible expenses.

• Increase withholdings to eliminate or reduce estimated tax penalties.

• One of the biggest deductions available to all businesses, and one that will be dramatically reduced in 2014, is the Section 179 expensing election. This is the last year for expensing up to $500,000 of Section 179 property. The maximum amounts drops to $25,000 next year!

• Keep in mind deductible mileage rates: for unreimbursed business travel – 56.5 cents per mile; for medical and moving – 24 cents per mile; for charitable activities – 14 cents per mile. A log of such travel should be maintained in order to take a mileage deduction.

If you would like to discuss any topic concerning your specific situation, please give us a call. 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.

Sincerely, 

Paul S. Herman, CPA

paul@hermancpa.com

Circular 230 Disclosure: Any U.S. federal tax advice included in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein. Any suggestions contained herein are general, and do not take into account an individual’s specific circumstance or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Recipients who are not clients of this office should consult their applicable professional advisors prior to acting on the information set forth herein.

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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.