Smart strategies that may save you money and make it less stressful at tax-filing time
Procrastination rarely pays. That’s particularly true when it comes to taxes. Since most tax-smart strategies take time to implement and come with a December 31 deadline, an early start can save you money and stress. Wouldn’t you rather be enjoying the December holidays than scrambling to meet a tax deadline?
Many of the smart tax moves for 2014 are familiar ones—such as contributing to tax-advantaged retirement plans and increasing deductions—but there are a few new twists. The Affordable Care Act (ACA), for example, has tax implications for some people, as does the legal recognition of same-sex marriages. Also, Congress hasn’t renewed several popular deductions, which could affect your year-end tax-planning decisions. The sales tax deduction, and the ability for people over age 70½ to give required IRA distributions directly to a charity and save on taxes, are two examples.
“Regardless of your income or tax situation, one rule applies to everyone,” says Mark Luscombe, principal federal tax analyst for accounting research and software provider Wolters Kluwer, CCH. “The sooner you get started, the more effective you can be in managing your taxes.”
Here are 12 tips to get you started.
Students, Athletes – and Taxpayers?
A recent court decision may have major repercussions for colleges’ star players
BY JACKIE PERLMAN AND ALISON FLORES
As the result of a recent court ruling, college football and basketball stars may soon share in the big money brought to their schools through college athletics, but there hasn’t been much discussion about the tax implications this case could have on college athletes’ tax-free education and the many perks they receive.
The court decision
In O’Bannon et al. v. NCAA, a judge for the Federal District Court for the Northern District of California ruled that NCAA regulations barring payments to college athletes were in violation of antitrust laws. The lead plaintiff in the class-action lawsuit was former U.C.L.A. basketball player Ed O’Bannon. More than 10 years after graduation, O’Bannon discovered that his likeness was being used on a video game, without his consent or compensation, and he accordingly filed suit.
The court ruled in favor of O’Bannon, allowing colleges with football teams in the Top 10 conferences and colleges with Division I men’s basketball teams to offer recruits a share of:
This ruling is set to go into effect in July of 2016 and applies only to Football Bowl Subdivision football recruits and Division I basketball recruits. The NCAA is appealing the ruling.
Commentators have discussed how this decision could affect college sports, amateurism, TV audiences’ viewing choices, recruiting competitiveness and fairness, higher education budgets, the NCAA’s tax-exempt status, and the fate of the NCAA altogether. For the student-athletes themselves, the ruling may have unintended tax consequences.
Background on scholarships and tax
Qualified scholarships are excluded from gross income under IRC Section 117, which means that the recipient does not pay tax on the scholarship funds. To get this tax-free treatment:
Qualified expenses are tuition and fees, as well as books, supplies and equipment required for coursework. Room and board, travel, and other costs are not qualified expenses.
Services to the school
Under the law, if the student is required to perform services for the school to receive the scholarship (laboratory research, for instance), the funds attributable to the services provided to the school are equivalent to taxable wages (with limited exceptions). Treas. Reg. Section 1.117-4 also emphasizes this point.
This type of restrictive language in the law and regulations raises questions about whether an athletic scholarship really qualifies as true educational assistance, or crosses the line as payment for services to the school.
Room and board
According to a nearly 38-year-old IRS ruling (Rev. Rul. 77-263), an athletic scholarship is nontaxable only under the following conditions:
The first condition in this ruling does not mean that an athletic scholarship can be used to provide students with tax-free room and board. Rather, it means that the total scholarship awarded (both taxable and non-taxable portions) must not exceed the total cost of attending the school. If this and the other two conditions are met, then the portion of the athletic scholarship covering qualified expenses will be tax-free and not treated as payment for services.
IRS Pub. 970, Tax Benefits for Education, bears this out: Athletic scholarship recipients are referred to the same worksheet used by all scholarship recipients to determine the taxable and nontaxable parts of scholarship funds received.
What could change
Few students who apply for athletic scholarships get one at all, much less get one of the limited number of full-ride athletic scholarships doled out each year. According to some reports, the odds of a high school athlete getting any sports scholarship are only 2%. For most of these students, the scholarship covers only a fraction of their costs.
But what about the few star athletes who play basketball or football for one of the top college conferences and manage to get a high-dollar or full-ride scholarship? While we may know that they get much more than “regular” students – and that their many perks are not just dorm rooms and cafeteria vouchers – scholarships for these students are not called out for any special treatment in the Tax Code, limited IRS guidance, or even in the Internal Revenue Manual. Perhaps this could change.
The tax implications
The O’Bannon decision refers to student-athletes’ share of revenue from the use of their names and likenesses as “compensation.” It is difficult to see how reporting this type of compensation as anything other than taxable income could ever be justified.
Students’ share of licensing revenue would likewise have to be treated as taxable compensation. The fact that deposits might be made to trusts does not necessarily mean that the funds won’t be immediately taxable. Although athletes may not have access to the trust funds while they are in school, the athletes would likely be taxed when the compensation is paid to the trust. And interest earned on the trust funds will certainly be taxable in the year earned. With all of this extra scrutiny, the other perks of being a star college athlete – travel, guest passes, gear, health care – might just show up on a Form 1098-T in the scholarship and grant box one day.
Finally, just as with medical residents, the very notion that the star player is really a student first and athlete second – rather than a paid employee of the school – will continue to be called into question. Although they may not see it in that light, the athletes themselves may cast doubt on their own student status. Consider student-athletes’ interest in forming labor unions, the NCAA’s approval of unlimited meals, and other changes in the news this year.
It remains to be seen what will happen in 2016. The NCAA could win on appeal. And schools and conferences would have a lot to consider when deciding what to offer future recruits. Stay tuned.
Jackie Perlman, CPA, and Alison Flores, JD, are principal tax research analysts at The Tax Institute at H&R Block, specializing in providing expert insight and analysis on changes in the legislative, regulatory, and judicial tax world.
Even Lawmakers Don’t Like the Tax Plan Congress Is Ready to Pass
BY RICHARD RUBIN
U.S. lawmakers, about to pass a short-term deal to extend dozens of targeted tax breaks, know what they’re doing is bad policy. And they’re doing it anyway.
Dozens of tax breaks expired on Dec. 31, 2013, and Congress spent the year fighting over them. Now, with just four weeks left in the year, the House of Representatives plans today to punt the whole debate and slap on a new expiration date: Dec. 31, 2014.
Policy experts say tax cuts like these should be predictable and stable. This plan is far from that, because it means that business executives and individuals on New Year’s Day will have no idea if they can take the breaks again in 2015.
“We’re going to go back to the uncertainty that plagues the code, the lack of stability that plagues investment,” said Representative Richard Neal, a Massachusetts Democrat. “We have no choice, because there was not the institutional will to do something bigger and longer.”
The $45 billion plan set to be passed in the waning days of the session would give windfall benefits to companies for actions they took during the first 11 months of 2014. It would provide businesses with almost no time to take advantage of the breaks before they lapse again.
U.S. lawmakers, who earlier this year flirted with the most significant revamp of the tax code since 1986 before abandoning the effort, said they don’t like what they’re doing. They recognize that the short-term deal will force Congress and taxpayers back into the same cycle in January.
GE and Wal-Mart
The tax breaks in question include benefits for big corporations such as General Electric Co. and Wal-Mart Stores Inc., with incentives for hiring workers from disadvantaged groups and for installing wind turbines.
Individual taxpayers have a few items at stake, too, including the ability to deduct sales taxes, which benefits residents of states such as Washington and Nevada that don’t have income taxes. People who have debt forgiven in short sales of homes would be able to exclude that from their income for 2014 if the bill passes.
The breaks, known on Capitol Hill as tax extenders, have survived for years as a package. They typically are tacked onto more important legislation and benefit from lawmakers’ willingness to vote for a few ideas they oppose while their colleagues reciprocate.
Supporters of the House bill include Americans for Tax Reform, the group led by anti-tax advocate Grover Norquist, and the National Association of Manufacturers. Opponents include Koch Industries Inc., the conglomerate that is against the production tax credit for wind energy.
A few twists and turns are possible before the House bill, H.R. 5771, becomes law. Obama administration officials have expressed openness to a short-term deal without endorsing the measure.
Senate Democrats may try to add an extra year of extensions or revive some jettisoned by the House, such as a tax credit that pays for the health care of laid-off workers or a break for plug-in electric motorcycles.
“Game on,” Senate Finance Chairman Ron Wyden told reporters yesterday.
How Congress got here is no game.
The tax extenders proposal followed a four-year effort by Dave Camp, chairman of the House Ways and Means Committee. Camp, a Michigan Republican, sought to revamp the tax code by lowering rates and eliminating breaks.
When that effort fizzled, Republicans tried to lock in permanent extensions of a few of the lapsed breaks, including the research and development tax credit and more generous capital equipment write-offs for small businesses.
Camp and Senate Majority Leader Harry Reid almost had a deal last week. It would have made those policies and others permanent while extending the rest of the breaks through 2015.
That plan, too, fell apart, victim to a fight among Democrats over the party’s priorities. President Barack Obama threatened to veto the emerging deal because it didn’t extend expansions of the child tax credit and earned-income credit that lapse at the end of 2017.
Administration officials, including Treasury Secretary Jacob J. Lew, contended that the package was tilted too heavily toward corporations and away from low-income families.
“Given how bad that was, a temporary deal is a much better outcome and maybe the best that we can hope for from this Congress,” said Harry Stein, associate director for fiscal policy at the Center for American Progress, a group aligned with Democrats that opposed the tentative agreement.
Camp and House Republicans then turned to the one-year retroactive bill.
“Half a loaf is better than no loaf at all,” said Senator Johnny Isakson, a Georgia Republican. “You owe it to the people who have expected us to make this year’s retroactive to do it.”
For entrenched breaks where extensions are routine and bipartisan, such as the research credit, business groups say the gaps are annoying and disruptive without being catastrophic.
“Each time we go through this, I think the possibility has become more real that Congress won’t act for whatever reasons,” said Dave Koenig, vice president for tax and profitability at the National Restaurant Association, which backs higher expensing limits for small businesses and more generous depreciation rules.
For others, late is almost as bad as never.
The tax-break package includes popular tax incentives for people to donate conservation easements—the development rights to land.
Those donations require timely appraisals and complicated transactions between donors and land trusts. The incentive would have been made permanent under the bipartisan agreement that fell apart last week.
Donors and land trusts don’t want to spend time and money preparing transactions without the certainty that the tax break will be there, said Russ Shay, director of public policy at the Land Trust Alliance in Washington.
“We can tell them to go ahead and hope for the best, but they really can’t do that,” he said. “We need two years to get one, and even that’s not long enough for most of our donors. We’re really caught in this and want out in the worst way.”
Similarly, a tax break that lets workers set aside more pretax money for transit commuting each month has little benefit retroactively.
In May, the Joint Committee on Taxation estimated that an extension of that provision through 2015 would cost the government $180 million in forgone revenue. An extension for 2014 would only cost $10 million.
The decision to cut off the extensions on Dec. 31 will create more work next year for the new chairmen of the tax-writing panel, a fact that both of them—Representative Paul Ryan and Senator Orrin Hatch—pointed out yesterday.
“The president and his allies here in the Senate missed a big opportunity to address some of their party’s priorities,” Hatch said in a Senate floor speech. “It’s difficult to imagine that they’ll have another bite at that same apple in the next Congress.”
If it passes, the House bill will be combined with another bill that creates tax-advantaged accounts for disabled people.
1 in 6 Taxpayers in Danger of Losing Tax Breaks
BY MICHAEL COHN
Tax benefits for individuals and small businesses that expired in 2013 could have an impact on as many as one in six taxpayers, according to a new analysis.
The analysis, by the Tax Institute of H&R Block, estimates that five of the more popular expired tax breaks benefiting individuals delivered more than $87 billion in tax benefits in 2013.
These benefits, which include the state and local sales tax deduction, mortgage insurance premium deduction, educator expenses deduction, tuition and fees deduction and the mortgage debt relief tax benefit, are part of proposed “extenders” legislation that would extend up to 55 tax breaks that expired last year. The Tax Institute identified another two benefits as particularly significant to individuals and—the nonbusiness energy property credit and the charitable IRA distribution provision.
“Unless Congress renews the expired tax breaks, taxpayers of all types and across all incomes will lose tax benefits they've used in the past,” said Kathy Pickering, executive director of the Tax Institute at H&R Block, in a statement. “Taxpayers should prepare themselves and their tax returns for the changes that are ahead and look at other tax benefits for relief.”
The affected taxpayers include residents of the seven states with no income tax—such as Florida, Texas and Washington—who itemize their state and local sales taxes. These residents have been able to deduct state and local sales tax from federal returns, similar to taxpayers who deduct their state income tax when itemizing.
Others affected include homeowners who pay mortgage insurance and who have used the mortgage insurance premium deduction, which may help taxpayers unlock itemization of their deductions, leading to greater tax savings.
In addition, the average teacher spends $356 out-of-pocket on classroom supplies and has been able to use the $250 educator expenses deduction to reclaim some of those expenses.
Finally, taxpayers who face foreclosure and receive protection through the mortgage debt relief tax benefit would lose this tax break unless it is extended. Without this provision, taxpayers may find their debt discharge results in taxable income.
Five times in the past 10 years, Congress has extended expiring tax provisions or retroactively renewed expired tax benefits anytime between November and January, the Tax Institute noted.
"No matter what Congress does or does not do, taxpayers will face changes this tax season," said Pickering. "These tax breaks expired more than 10 months ago, so either taxpayers will face the loss of these tax benefits or face late changes by Congress."
Taxpayers should prepare for the possibility that Congress does not renew all of the expired tax benefits, the Tax Institute noted. Taxpayers should familiarize themselves with the expired tax breaks they have used in the past. Then they should identify alternative benefits, if any, they may use in their place. While some taxpayers may be eligible to claim alternative credits, they are not identical substitutes and have unique qualifications and restrictions.
Other Key Facts
• The expiration of the state and local sales tax deduction will affect one in every 14 taxpayers. More than 10 million tax returns used this deduction in 2013 to the tune of $17.5 billion.
• More than 4.5 million tax returns used the mortgage insurance premium deduction in 2013 for $6.2 billion in tax benefits.
• The educator expenses deduction for teachers totaled more than $996 million on almost 4 million returns in 2013.
• On more than 2 million tax returns, students used the tuition and fees benefit to deduct $4.5 billion for 2013.
• The mortgage debt relief tax benefit affected a little more than 500,000 tax returns, but delivered more than $58 billion in relief in 2013.
• Taxpayers, using two residential energy credits—one of which is expiring—claimed almost $1.5 billion in energy-efficient improvements in 2013. Taxpayers who increased their home's heating and/or cooling efficiency can no longer claim the nonbusiness energy tax credit.
• The charitable distribution provision allowed taxpayers to rollover IRA distributions tax-free to charitable organizations. IRA distributions were reported on 14.2 million tax returns in 2013; these taxpayers will no longer have an option to save on taxes by making qualified charitable distributions from their IRAs.
IRS Has Millions of Dollars in Frozen Credit Accounts
BY MICHAEL COHN
The Internal Revenue Service needs to take action to resolve millions of dollars in so-called “frozen credit accounts” that are effectively in a state of limbo, preventing some taxpayers from receiving their tax refunds, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, examines the accounts, which require special handling or await the occurrence of a pending future event. The IRS’s computer system uses special coding to identity these types of accounts. These situations are commonly referred to as freeze conditions. Taxpayer accounts in “credit” status (in which payments exceed assessments), and also coded with at least one freeze condition, are commonly referred to as frozen credit accounts.
If the freeze conditions are not adequately identified and resolved, TIGTA noted, IRS processing of taxpayer frozen credit accounts can be delayed and taxpayers can be adversely affected by delayed refunds or payments not applied to the proper tax modules.
Frozen credit accounts that are not adequately identified and resolved could also lead to barred assessments, collections and refunds due to the expiration of the applicable statute of limitations; unnecessary payment of additional interest to taxpayers for not issuing applicable refunds on a timely basis; or taxpayer burden if the delayed refunds or payments not applied to the proper tax module affect a taxpayer’s ability to meet their financial obligations.
The IRS has procedural requirements and standardized systemic checks in place to identify and resolve most frozen credit accounts. In addition, the IRS has conducted research projects to help identify ways to improve the processing of these accounts. However, TIGTA’s review found that further IRS actions are still needed to resolve some frozen credit accounts and some IRS computer systems need modifications to better reflect current procedures.
By reviewing samples of three different frozen credit conditions, TIGTA identified 156 individual tax modules with credits of $46.4 million and 128 business tax modules with credits of almost $1.6 billion for which the IRS did not take actions that could have resolved the credit tax modules sooner.
“By improving adherence to its processing procedures and making improvements to certain computer systems, the IRS can minimize resolution delays for many frozen credit accounts,” said TIGTA Inspector General J. Russell George in a statement.
TIGTA made 10 recommendations for the IRS to re-emphasize its existing procedures, establish and enforce new procedures, and make improvements to its computer systems. In response, IRS management agreed with nine of the 10 recommendations and plans to take appropriate corrective actions. However, IRS management stated that, due to resource constraints, they will not take corrective actions for two of the agreed recommendations related to improving computer systems. For the one disagreed recommendation, IRS management said it believes the current process will ensure that credits are properly resolved within the Offshore Voluntary Disclosure Program. TIGTA contended that it continues to believe that the IRS remains at risk for not resolving frozen credits in taxpayer accounts by not implementing all of the recommendations.
“As you acknowledge in your report, we have detailed procedures and standardized systemic checks to identify and resolve the conditions leading to a frozen credit in a taxpayer’s account,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division. “Most special conditions are resolved within a few months. And, as you also note in your report, we have initiated research projects to help identify ways to improve frozen credit processing. These projects have resulted in several recommendations, many of which we have implemented with the goal of returning frozen credit accounts to the normal compliance process and providing taxpayer refunds, when appropriate, in a more timely and efficient manner. However, you found that further action is needed to resolve some accounts with frozen credit condition and recommended we take several actions to improve our performance in resolving these accounts. We agree that there are additional actions we can take.”
Contributing to a 401(k) or an IRA may be the smartest tax move that most taxpayers can make. Not only does it reduce your taxable income for the current tax year and allow your potential earnings to grow on a tax-deferred basis, it also helps get you closer to achieving your retirement savings goal. Contributions to your 401(k), 403(b), or similar workplace retirement plan must be made by December 31, 2014, to impact your 2014 taxes, so you need to act quickly to increase your deferral. The 2014 401(k) contribution limit is $17,500 ($23,000 for people age 50 or older). With an IRA, you have until April 15, 2015, to make a 2014 tax-deductible contribution1 of up to $5,500 ($6,500 if you’re age 50 or older).
Other possibilities for tax-advantaged plan contributions are a Simplified Employee Pension plan (SEP), for self-employed individuals, or a Health Savings AccountLog In Required (HSA). Contributions to either of these plans can be made up until April 15 and still apply to 2014.
Ideally, the amount of money withheld from your paycheck or sent to the IRS in quarterly payments should come very close to your actual tax liability. Withhold too little and you could have a big tax bill when you file your return. Withhold too much and you’re giving the IRS what amounts to a tax-free loan of money that you could be using to pay down debt or save for retirement (and, potentially, reduce your taxes).
There’s still time to adjust your withholding for 2014 by making changes to the W-4 you have on file with your employer, or, if you make quarterly payments, by increasing or decreasing your payments between now and when the last 2014 payment is due in January. Keep in mind that the longer you wait, the fewer pay periods you’ll have to reach your target. To learn more about how to adjust your withholding, read Viewpoints: “Are you giving the IRS an interest-free loan?Log In Required”
If you have capital gains outside of your retirement accounts, you may be able to lower your tax liability through tax-loss harvesting. That simply means selling losing investments that no longer fit your investing strategy and using the loss as a write-off against some or all of your gains. If you employ a tax-loss harvesting strategy, you must be aware of the wash-sale rule that disallows the write-off if you purchase substantially the same investment 30 days before or after the loss sale. Viewpoints “Tackle taxes: Got gains or losses?Log In Required” explains in more detail how tax-loss harvesting works.
Contributing to charitable causes before the end of the year is a tried-and-true tax-reduction strategy. But remember to get a receipt for every contribution you make, not just those over $250. Also, if you want to be more strategic, you could open a donor-advised fund, which offers several advantages for managing your charitable-giving activity. You could, for example, contribute a lump sum to the fund before December 31, take the entire deduction on your 2014 tax return, and then instruct the fund to use the money to make next year’s gifts.
One strategy that offers two tax benefits is donating appreciated securities, such as stocks or bonds, to charity. The tax code allows you to use the current market value of the asset as a deduction without having to pay tax on the capital appreciation, so you get the charitable contribution deduction and avoid capital gains tax. ReadViewpoints: “Planning your year-end charitable giving.Log In Required”
An individual can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts) to help reduce the amount of your estate and help reduce or avoid federal gift and estate taxes. This may include cash, stocks, bonds, and portions of real estate. However, anything above $14,000 per person per year may be subject to gift taxes, so it’s important to keep track of this information. For more information, speak with your tax adviser and review IRS Publication 559, Survivors, Executors, and Administrators.
If you would like to contribute money toward a child’s education, consider a 529 plan account. Contributions are generally considered to be removed from your estate. You can also make a payment directly to an educational institution and pay no gift tax.
In addition to charitable contributions, other types of deductions offer some flexibility. If you make estimated state or local tax payments, for example, you could send in the January payment before the end of this year. And maybe you could do the same with a property tax bill that’s due near the beginning of the next year. Other possibilities include accelerating payments for medical services or purchasing work-related items, such as uniforms, for which you are not reimbursed. Recognize, however, that increasing your tax deductions only makes sense if you have enough of them to exceed the standard deduction of $6,200 for single taxpayers, $12,400 for married couples filing jointly, and $9,100 for heads of household.
Thresholds and limits apply to many types of deductions, including medical expenses and charitable contributions, which could lower or even eliminate your deductions. If you’re a high earner, another concern is the Pease limitation, which affects single taxpayers with taxable income of $254,200 or more, and married couples filing jointly with income above $305,050. Finally, if you’ve been subject to the alternative minimum tax (AMT) in the past or think you might be this year, you should reevaluate your itemized deduction strategy. Under the AMT, many deductions are disallowed. Read Viewpoints: "The AMT and you.Log In Required"
On the flip side of accelerating deductions is deferring income. Not everyone has the option to push income into next year, but if you can, you might consider doing it. This may also keep your income below the level that would subject you to the net investment income tax this year. But take into account what you expect your tax situation to be next year. If you anticipate earning significantly more next year and moving up a tax bracket, deferring income might not make sense for you.
The legal status of same-sex marriage has changed greatly over the past couple of years and continues to be affected by judicial and administrative rulings. In general, however, legally recognized same-sex married couples now have the option to jointly file federal income taxes and, in many cases, state income taxes. If you’re in this group, you may have new possibilities for managing your tax situation, the benefits and drawbacks of which will vary from couple to couple. If you think you might file jointly for the first time with your 2014 return, you should evaluate your situation before the end of the year to optimize your tax strategies. Unless you’re well versed in tax regulations, you should consult a tax professional—preferably one with expertise in same-sex marriage law—about the strategies that are right for your situation.
The standard advice for people with an FSA at work used to be to spend the money on medical expenses before the end of the year or lose the balance. A change in the law, however, now allows employers to offer either a 2½-month grace period to use up the money for the previous year or a $500 carryover per year to use in the following year. The new flexibility isn’t automatic, so make sure you know the rules for your employer’s plan, or you will run the risk of losing some of the money you deferred into an FSA.
The Affordable Care Act (ACA) requires every individual, with some exceptions, to have qualifying health insurance coverage in 2014 or owe an “individual responsibility payment” of the greater of 1% of household income above the income tax filing threshold ($10,150 for an individual) or a flat amount of $95 for an adult and $47.50 per child under age 18, up to a maximum of $285. The payment will be due with your 2014 tax return. If you’re uninsured for just part of the year, 1/12 of the yearly penalty applies to each month you’re uninsured. If you’re uninsured for less than three months, you don’t have to make a payment.
Several popular tax breaks that expired this year have yet to be reinstated by Congress. Among the most significant is the sales-tax deduction, which gave taxpayers in states with low or no income tax the option of deducting state and local sales tax instead of income tax. If you live in one of those states and were planning to accelerate a large purchase before the end of the year—a car or a boat, for example—to take advantage of the sales tax deduction, you might hold off to see what Congress plans to do. Other tax breaks that are up in the air are those for certain unreimbursed teachers’ expenses, tuition, mortgage insurance premiums, exclusion of employer-provided mass transit and parking benefits, and exclusion for debt forgiveness on foreclosed homes.
Twelve tips aren’t enough? Here’s one more as a bonus: Start now to manage your 2014 tax bill and to begin putting in place longer-term strategies for 2015 and beyond. Early tax planning is always smart tax planning.
by Vicky Oliver
Millennials, or people born between 1981 and 1999, are a talented generation of workers, bringing with them new skills to the workplace. And while this generation has been studied a lot, not all studies concur with their conclusions. Are our youngest employees more socially conscious than previous generations? Are they more into life balance? Sometimes it seems there are almost as many theories as studies.
But a recent survey by PricewaterhouseCoopers found that more than half of Millennials surveyed were not content with just working. They wanted to be provided real opportunities for career advancement. A new Deloitte study found something similar; 75 percent of its Millennial respondents sought hands-on leadership development from their employers.
Perhaps we can all agree that the newest group of workers seek more power, responsibilityand influence at work faster than their older counterparts did. In this 24/7 Internet-connected world, it makes sense that this generation would expect speedier recognition. But does it have the right skills and attitudes to do it?
Seven Life Lessons
There are seven essential lessons for career progression that most Millennials did not learn in college.
1. Don't feel entitled. There are now three generations of workers in the workplace. And sporting the entitlement chip can be very off-putting to older workers. The truth is no one is entitled to any special perks or plum assignments until after he's proven himself. So come in early, leave late and respect those deadlines. (Unlike in college, deadlines at work often can't be pushed back.)
2. Pay those dues. Today, research can be pulled up in a nanosecond, and we're all six degrees of separation from Warren Buffett. But one thing hasn't changed: in order to scramble to the top rung of the corporate ladder, you still have to excel at the bottom. So don't shirk the boring assignments, and volunteer for additional work if possible. Show supervisors and co-workers alike that you're diligent, self-motivated and reliable.
3. Find a mentor. How, you wonder? Everyone decries the disappearance of mentors. Seek mentors from the outside if you can't find them on the inside. Look for mentors among your peers at other companies — particularly those who are 5-10 years ahead of you in terms of experience; those who hold the kind of position that you would like to occupy in a few years. (Be sure to return the favor once you advance — it's only fair.)
4. Work hard. Make your first job your number one priority: above your love life, exercise routine, and hanging out with your friends. When you're at the office, resolve to be mentally present by turning off your mobile device, too. Thomas Jefferson famously claimed, "I am a great believer in luck, and I find the harder I work, the more I have of it."
5. Master the rules, then challenge. Learn the way things are done, and excel at that system and process before trying to change anything. Too often, especially when we're first starting out, we believe we know a better way. Trust that the system in place is probably there for a reason. If it isn't efficient or up-to-date, learn everything about it so you can build a cogent and convincing argument for doing things differently.
6. Hone your people skills. As the old adage says, "It's not the grades you make, it's the hands you shake." Realize that every business is a people business. Yes, it's essential to be good at the details of your job. But it's even more important to polish those soft skills, including helping others, listening, asking smart questions, not interrupting, being attentive and getting along.
7. Lead your own way. Don't look for your boss to carve out your career path. You may get lucky and have a boss who will take a special interest in helping you get ahead. Then again, you may have to make horizontal career moves a few times before you move up or find the right career trajectory. With today's "flat" hierarchical structures becoming the norm (i.e., having few if any managers between employees and the top leaders), you may be expected to define your own leadership role.
About the Author
Vicky Oliver is a Manhattan-based job interview consultant, and the bestselling author of five career development books, including 301 Smart Answers to Tough Interview Questions, 301 Smart Answers to Tough Business Etiquette Questions, and Bad Bosses, Crazy Coworkers & Other Office Idiots. She's been featured and interviewed widely in the business media, including Fox News, Wall Street Journal, US News and World Report, Forbes, Fortune, CareerBuilder and many others. Interested readers may visit www.vickyoliver.com.
If you are an employer, the number of employees in your business will affect what you need to know about the Affordable Care Act (ACA).
Employers with 50 or more full-time and full-time-equivalent employees are generally considered to be “applicable large employers” (ALEs) under the employer shared responsibility provisions of the ACA. Applicable large employers are subject to the employer shared responsibility provisions. However, more than 95 percent of employers are not ALEs and are not subject to these provisions because they have fewer than 50 full-time and full-time-equivalent employees.
Whether an employer is an ALE is determined each calendar year based on employment and hours of service data from the prior calendar year. An employer can find information about determining the size of its workforce in the employer shared responsibility provision questions and answers sectionof the IRS.gov/aca website and in the related final regulations.
In general, beginning January 1, 2015, ALEs with at least 100 full-time and full-time equivalent employees must offer affordable health coverage that provides minimum value to their full-time employees and their dependents or they may be subject to an employer shared responsibility payment. This payment would apply only if at least one of its full-time employees receives apremium tax credit through enrollment in a state based Marketplace or a federally facilitated or Marketplace. Also, starting in 2016 ALEs must report to the IRS information about the health care coverage, if any, they offered to their full-time employees for calendar year 2015, and must also furnish related statements to their full-time employees.
For 2014, the IRS will not assess employer shared responsibility payments and the information reporting related to the employer shared responsibility provisions is voluntary. In addition, the employer shared responsibility provisions will be phased in for smaller ALEs from 2015 to 2016. Specifically, ALEs that meet certain conditions regarding maintenance of workforce size and coverage in 2014 are not subject to the employer shared responsibility provision for 2015. For these employers, no employer shared responsibility payment will apply for any calendar month during 2015 (including, for an employer with a non-calendar year plan, the months in 2016 that are part of the 2015 plan year). However these employers are required to meet the information reporting requirements for 2015. The employer shared responsibility provision questions and answers section of the IRS.gov/aca website and the preamble to the employer shared responsibility final regulations describe the requirements for this relief in more detail. Both resources also describe additional forms of transition relief that apply for 2015.
Small employers, specifically those with fewer than 25 full-time equivalent employees, may be eligible for the small business health care tax credit.
Regardless of the number of employees, if an employer sponsors a self-insured health plan, it mustreport to the IRS certain information about its health insurance coverage plan for each covered employee.
Find out more about the small business health care tax credit, applicable large employers, the employer shared responsibility provision, information reporting requirements and the premium tax credit at IRS.gov/aca.
Supersizing your charitable contribution deductions
You might want to consider three charitable giving strategies that can help boost your 2014 charitable contribution deduction.
1. Use your credit card. Donations charged to a credit card are deductible in the year charged, not when payment is made on the card. Thus, charging donations to your credit card before year end enables you to increase your 2014 charitable donation deduction even if you're temporarily short on cash or just want to put off payment until later.
2. Donate a life insurance policy. A number of charities are asking their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). The fact that a charity may have to wait many years before receiving a payoff from the gift is typically not a problem because charities normally earmark such gifts for their endowment or long-term building funds.
If handled correctly, a life insurance policy donation can net the donor a charitable deduction for the value of the policy. A charitable deduction is also available for any cash contributed in future years to continue paying the premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, no deduction is allowed. For this reason, we encourage you to contact us if you are considering the donation of a life insurance policy. We can help ensure that you receive the expected income or transfer tax deduction and that the contribution works as planned.
3. Take advantage of a donor-advised fund. Another charitable giving approach you might want to consider is the donor-advised fund. These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations.
With donor-advised funds, which are available through a number of major mutual fund companies, as well as universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice.
The minimum for establishing a donor-advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. These funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.
UNICAP rules and exemptions
A set of tax rules known as the uniform capitalization (UNICAP) rules require certain business costs that are normally expensed as they’re incurred to instead be capitalized as part of the cost of inventory held for resale or noninventory items produced by a taxpayer for use in its trade or business.
The rules are far from new, having been around since the mid-1980s. However, a recent Tax Court decision is a reminder that the rules can be a trap for the unwary. The taxpayer in the case was a homebuilder who capitalized the direct material and labor costs of constructing the homes, as well as postcompletion carrying costs until the houses were sold. However, it failed to capitalize a whole host of generally indirect costs that the IRS and the Court found to be related to completing the homes (from front office salaries and overhead, to the cost of supervisors, designers, and decorators). The end result was that the taxpayer faced a substantial additional tax bill.
Fortunately, there are several exceptions to the UNICAP rules that exempt numerous businesses from having to comply with them (including most service businesses, small to medium-size retailers, and even most homebuilders with sales of no more than $10 million, along with many in the farming and oil and gas businesses). However, many other businesses are subject to the rules, sometimes without even knowing it — for example, where the business previously qualified for an exemption but has outgrown it or otherwise no longer meets the requirements.
Give us a call if you have questions about whether your business is subject to the rules or qualifies for an exemption.
Retaining key employees
Unless you have capable successors and employees, your closely held business may not survive. Therefore, strategies to identify, retain and reward key employees are a must. There are numerous methods for rewarding a key employee’s commitment, loyalty and hard work. The most effective incentives are usually monetary. Generally, they are offered in the form of nonqualified plans so the incentive can be tailored to a particular person’s situation.
Nonqualified plans are much more flexible than qualified plans concerning benefits, contributions, and participation requirements. Nonqualified plans also provide the opportunity to “tie” the employees to the business by incorporating conditions that cause the forfeiture of benefits if the employee leaves or the business does not reach certain performance targets. Let’s look at some options.
Restricted stock. A restricted stock plan transfers stock to an employee subject to certain restrictions. Often, the shares are transferred to the employee at little or no cost, but are subject to forfeiture if the employee fails to fulfill the terms of the plan. A common restriction requires employees to forfeit their shares if they terminate employment within a certain number of years.
Incentive stock options (ISOs). ISOs can provide key employees additional compensation through the opportunity to share in the appreciation of the company’s stock value. ISOs are usually granted to the employee at no cost with an exercise price at or above the stock’s current market price.
A nonqualified stock option (NQSO). An NQSO is an option that specifically states it is an NQSO or one that does not meet the requirements of an ISO. Like an ISO, you can use an NQSO to provide key employees additional compensation through the opportunity to share in the appreciation of the company’s stock value.
Home office expenses of employees
In our always-connected, always-on business environment, it isn’t unusual for employees to work from home on a regular basis. For the majority of individuals, this work occurs in the evenings, or on weekends or holidays, when they’re not otherwise expected to be in the office. However, for an increasing number of employees, they’re telecommuting all or almost all of the time. When they do show up in the office, it is frequently just for group meetings or other gatherings, not to put in a “regular” day’s work sitting in an office, cubicle or other workspace.
It is employees in this latter situation who may be interested in a recent Tax Court decision involving a telecommuting employee with large home office deductions. However, before we get to this case, let’s quickly review the general requirements for a deduction.
The rules allowing a home office deduction if you’re self-employed generally require that the space be used regularly and exclusively:
As a principal place of business,
As a place to meet or deal with clients and customers in the normal course of business, or
“In connection with” the business if the space is a separate structure from the residence (e.g., a barn or detached garage).
When you’re an employee (rather than self-employed), you have to meet one of the above requirements and the employer convenience test. This test is hard to satisfy, unless your employer doesn’t provide you with an appropriate space in which to get your work done. This was the situation in a recent court case.
The case involved an employee hired to work in New York for an employer in the marketing and public relations field whose only offices were in California. The plan was to secure office space in New York, but that never happened and the employee worked out of her apartment, utilizing about a third of its space as a home office. The employer listed the employee’s apartment as its New York office and the phone number listed for that office was the employee’s landline phone. The employee worked out of the home office throughout the year and even saw clients there on a regular basis. Due to the company’s tight financial condition, she was never reimbursed for any of her home office expenses. As a result, she claimed a large home office deduction.
Although the IRS disallowed the entire deduction, the court found that the taxpayer met the “employer convenience test” and sustained a deduction for a third of her rent and cleaning expenses — equal to the third of her studio apartment used as a home office. It did this despite the fact that she technically didn’t meet the “exclusive use” part of the test for claiming the deductions because she occasionally did nonbusiness activities in the home office and had to regularly walk through the space to get to and from the sleeping quarters.
If you are regularly working from home because your employer doesn’t provide you with appropriate space from which to perform your job and you are not currently claiming a home office deduction, we should talk. It could be that you’re entitled to some additional deductions.
Check your partnership and S corporation stock basis before year end
If you own an interest in a partnership or S corporation, your ability to deduct any losses it passes through is limited to your basis. Although any unused loss can be carried forward indefinitely, the time value of money diminishes the usefulness of these suspended deductions. Thus, if you expect the partnership or S corporation to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end.
Disability insurance for business owners and professionals
As you probably know, it is wise to have disability insurance coverage to protect you and your family from loss of earnings in the event you become unable to work. Studies show that the possibility of permanent disability is far greater than death during a person’s working lifetime. It can also have a much greater financial impact on the family. Disability might not only remove a source of family income; it may also increase family expenditures, as the disabled person must be fed, clothed and sheltered, and the family may be faced with large, ongoing medical expenditures.
Disability insurance needs are usually based on the level of wages that would be lost if you were disabled. However, a more precise method may be needed if you have other income sources or special funding needs, such as unfunded education costs.
The benefits paid under a disability insurance policy can be totally tax-free to you, 100% taxable, or partially taxable depending on the type of policy, who pays the premiums, and whether or not they are paid with pretax dollars.
Seniors age 70 1/2+: Take your required retirement distributions
The tax laws generally require individuals with retirement accounts to take annual withdrawals based on the size of their account and their age beginning with the year they reach age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.
If you turned age 70½ in 2014, you can delay your 2014 required distribution to 2015. Think twice before doing so, though, as this will result in two distributions in 2015 — the amount required for 2014 plus the amount required for 2015, which might throw you into a higher tax bracket or trigger the 3.8% net investment income tax. On the other hand, it could be beneficial to take both distributions in 2015 if you expect to be in a substantially lower tax bracket in 2015.
New Standard Mileage Rates Now Available; Business Rate to Rise in 2015
The Internal Revenue Service today issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.
Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in Revenue Procedure 2010-51, the instructions to Form 1040 and various online IRS publications including Publication 17, Your Federal Income Tax.
Besides the standard mileage rates, Notice 2014-79, posted today on IRS.gov, also includes the basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan.
Top Four Year-End IRA Reminders
Individual Retirement Accounts are an important way to save for retirement. If you have an IRA or may open one soon, there are some key year-end rules that you should know. Here are the top four reminders on IRAs from the IRS:
1. Know the limits. You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. In some cases, you may need to reduce your deduction for traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level. You have until April 15, 2015, to make an IRA contribution for 2014.
2. Avoid excess contributions. If you contribute more than the IRA limits for 2014, you are subject to a six percent tax on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2014 tax return (including extensions).
3. Take required distributions. If you’re at least age 70½, you must take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2014. That deadline is April 1, 2015, if you turned 70½ in 2014. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out.
4. Claim the saver’s credit. The formal name of the saver’s credit is the retirement savings contributions credit. You may qualify for this credit if you contribute to an IRA or retirement plan. The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000, or $2,000 for married couples. The credit you receive is often much less, due in part because of the deductions and other credits you may claim.
How Accounting Technology Can Save Small Businesses
BY SABRINA PARSONS
There are currently 29 million small businesses in the U.S., and 500,000 more are launched each month. Unfortunately, most of those new companies will fail within five years.
If a minor percentage of the vast number of small businesses in the U.S. can last just a few years longer, our entire economy would improve dramatically. But how can business owners who don’t have a plethora of financial resources extend their company’s lifespan? Accounting.
Most small business owners, especially new entrepreneurs, have not mastered the ability to effectively manage finances and use budgeting and forecasting to plan, track and pivot. As a result, they miss opportunities to make fundamental changes to their business strategy that could save them, and their company, in the long run.
Accountants usually understand the financial aspect of a business better than the business owner, who is often scared by financial statements and accounting terminology, and are the most qualified people to provide proactive advice for financial planning and financial management. But in order to provide these services, accountants need to get comfortable providing CFO-like services, and getting their clients acclimated to value-based billing instead of hourly billing.
Here are some ways accounting technology can help accountants become strategic advisors for small businesses and truly make a difference in the economy:
Embrace the Future
Many accounting firms are still providing only traditional services like bookkeeping, taxes and audit support. As more tools become available at cheaper prices to more small businesses, accounting tasks like bookkeeping and even taxes are become commoditized. If you want to grow your firm and keep existing clients, you’re going to have to move to proactive services and provide more strategic value to small businesses.
As an accountant, you are well-positioned to offer these high-value services as you already have the complete trust of the small business owner. No one would hire an accountant to do their books and file their taxes if they did not trust them. Not only does the small business owner already trust you, he or she is looking to you for advice on how to run their business better. Your clients are not comfortable (for the most part) with reading financial statements and don’t always understand financial terminology. So, embrace new technology to give yourself the ability to offer strategic services to your clients, and ultimately move you accounting practice to the future.
Accountants often tell me that they can’t help clients with strategic planning, forecasting and budgeting because they don’t have MBAs. They tell me “I'm not the business expert, I’m just the accountant.” This is a missed opportunity. As an accountant, you are likely the person most comfortable with the small business clients’ numbers and financial statements. You have the knowledge that, when applied correctly, becomes a powerful tool to help your clients get beyond “surviving” and toward “thriving”
The first step is to use a tool to help you client put together a forecast. It’s easier than you think. Use 12 months of history as a starting point, and then help your client think through their financial goals for the next 12 to 24 months to put a forecast together. Talk with them and help them through the process.
Here are some great questions you can ask to help get them started:
Once you have started the process of strategic planning with your clients and have them thinking with key questions, the end goal will be to help them produce a full financial forecast. That forecast includes a projected P&L, balance sheet, and, most critical, a projected cash flow statement. There are plenty of great online tools to help you help your client, so don’t get mired in cumbersome Excel spreadsheets. Use an online business planning tool that includes a full financial forecast in order to streamline the process and better collaborate with your clients.
Once you have helped you clients put together strategic financial plans, you can make sure that your clients have included key financial goals and business objectives within that plan. This will ensure that your client uses their business plan to guide them throughout the year, and keeps them focused on what they are trying to accomplish. A good strategic business plan with a forecast and budget is an essential tool to help your small business clients make the right decisions as they grow their business.
Track & Pivot
While entrepreneurs are financially conscious, they are by no means financial experts. This is where you can play the role of broader financial advisors. Small business owners are usually focused on the everyday tasks that need to happen to keep their business running, and so they often manage their business finances by looking at their bank account balance. As an accountant, you know that this can be a deadly way for a small business to be managed.
Your clients need to use their strategic financial plan and manage their business numbers weekly, monthly and quarterly by comparing the actual results to:
The best way to help your clients manage their numbers on a regular basis is to find a great online dashboard that automates their financials into easy to read KPI’s and easily helps them look at these numbers and compares them automatically to all the right time periods and against planned numbers. As the year goes on, you will be able to help your client see where their financial goals are on track, and where they may be off what they wanted and expected.
With your ease of understanding financial statements and information, you will be able to help a client understand if their missed assumptions will have a positive or negative impact on their business, and if they will need to make adjustments in order to keep their business fiscally sound. For instance, they may be collecting money slower than they thought in their forecast, and have less cash in the bank. This is where you can jump in, and help them put together AR policies that will help them collect money faster, and get their cash back on track.
Empowering your client with easy-to-use financial tracking tools can help you assert your relevance year-round and steer them down the path to success. Financial planning is never easy for small business owners, but with your help and the right technology, they can beat the odds.
Sabrina Parsons is the CEO of Palo Alto Software.
IRS Phone Service Lags Due to Budget Cuts
BY MICHAEL COHN
The Internal Revenue Service received fewer phone calls from taxpayers this year than in recent years, according to a new government report, but the percentage of callers seeking help who received it remained low while wait times remained high compared to prior years.
The report, from the Government Accountability Office, noted that the IRS’s processing of tax returns was timely, even though the filing season was delayed due to the 2013 government shutdown. Continued growth in electronic filing enables the IRS to reduce costs and issue refunds faster. Although the IRS received fewer calls in 2014, the percentage of callers seeking help who received it remained low and wait times remained high compared to prior years.
One way to improve taxpayer telephone service is to compare it to the best in the business, as required by Congress and executive orders, the GAO noted. However, the IRS has not systematically made such a comparison for its telephone service because of budget constraints and difficulty in identifying comparable organizations, according to IRS officials. “By not comparing itself to other call center operations, IRS is missing an opportunity to identify and address gaps between actual and desired service, and inform Congress about resources needed to close the gap,” said the GAO. “More efficient telephone service could help improve correspondence service because the same staff provides those services.”
The IRS did not set numerical goals—such as a reduction in wait time—or develop a plan to assess the effects of its 2014 service changes, the GAO pointed out. Such information would help Congress, IRS managers, and others understand the benefits and potential budget tradeoffs associated with IRS service changes. This is important because the IRS has identified additional service changes for 2015 and beyond.
The IRS used its new enterprise-wide risk management approach to identify risks such as staffing and training, the GAO acknowledged, and the IRS has made good progress in setting up its risk management process. However, while risks were identified and countermeasures discussed, such as contingency plans and workload adjustments, most countermeasures were not specific. “Without specific countermeasures identified in advance, IRS's ability to respond to adverse events may be hampered,” said the GAO.
In response to the report, the IRS argued that it had improved its telephone service abilities. “By effectively applying available resources, the IRS was able to exceed performance projections in many areas this filing season,” wrote IRS deputy commissioner of services and enforcement John M. Dalrymple. “Concentrating staffing in the January through June period enabled us to deliver a 70 percent level of telephone service and answer 15.2 million customer calls. Cumulatively, we maintained high levels of accuracy, 95 percent for Tax Law calls and 96 percent for Account calls. In addition, while receipts in our adjustments inventory program were 111 percent of prior year through June, our ending inventory was 63 percent of prior year with 468,000 fewer overage cases.”
JEFF CUTTER EDITED FOR PHIL PUTNEY of AFS Wealth Management – Farmington Hills, MI
If you are a regular Phil's Weekly reader (or even just a casual one), you have probably noticed that I emphasize taking an active role in your retirement. This isn't just a coincidence. Each week I want to serve as a reminder to you that you deserve more than the status quo. Do not put your head in the sand. Do not accept the status quo. Do not simply follow the herd. We are facing financially challenging times and you owe it to yourself to be actively involved in planning for your financial future. Now is the time where you need to take control.
This begins with understanding the role and standards of the people helping you with that future. One of the most important questions that you can ask of any financial "adviser" is, "Do you have my best interest in mind?" You know something...that question may be harder to answer than you think.
I have spoken before about distinguishing between a fiduciary and a broker. An investment adviser is a fiduciary who is legally obligated to act in the best interest of his or her clients, while a broker only needs to ensure that the products they are selling are "suitable" for their clients. The line between the two has become a bit clearer after the recent termination of a team of top advisers at Merrill Lynch. Their termination was based on allegations that these advisers recommended that clients invest in products and funds offered by other brokerage houses, other than Merrill Lynch. Their firm’s policy and FINRA rules prohibit these brokers from selling securities without permission from their firm, or processing them outside of their brokerage house's platform.
In other words, even if investing in a platform not offered by your broker's platform is in your best interest, your broker may be prohibited from recommending that for you.
Hmmmm...let’s think about that all-important question you must ask your adviser/broker: "Do you have my best interest in mind?"
Well, a broker might want to act in your best interest, but might not be permitted to because his or her loyalties ultimately must lie with the brokerage house for which he or she works. So another question that must be asked is, “Who does a broker work for?” Well...who do you think?
Let me give you a comparison. Let’s say you are looking to buy a new car. As you know, there is an almost endless variety of options to choose from. You need a car that can transport your three kids and their sports gear, gets good gas mileage, and has an automatic transmission. These basic requirements are met by dozens of car models, but there are likely only a few that are the best for you.
Think of a broker as being a car salesman. Obviously, if you go to a Dodge dealer, that salesman will not be able to recommend a Toyota. If he or she has a Dodge vehicle that meets your requirements and is suitable for you, he or she is under no obligation to recommend you go to a different dealer, right? A "broker" could send you off the lot with a two-door Dodge pickup truck that seats five, which would be suitable for your needs. But what happens if you have all the kids' sports equipment in the back of the pickup and it rains? Does "suitable" work in this situation?
On the other hand, a "fiduciary" would be required to recommend those vehicles that are best for you, choosing from any model, brand, and company available. He or she may recommend an SUV from Toyota, or a Mazda hatchback, or a Chrysler minivan.
The issue that many face is that it is difficult to distinguish between a pickup truck and a minivan, or an SUV and sports car when it comes to investments.
What clouds the issue even more is the difficulty in distinguishing not just between investment options, but between the "dealers" as well. Many brokers are dually licensed as investment advisers, but are not legally held to that standard if their investment advice is only "incidental to their business as a broker." A recent article from Investment News highlighted the issue by saying, "If financial professionals present themselves as advisers when it’s convenient to do so—on business cards and in marketing—but then don’t uphold the position's fiduciary responsibility, the distinction is muddled and everyone loses."
The author of that article proposes a solution to the confusion, suggesting that brokers include a two-sentence disclosure stating, "I am a broker, and my primary obligation is to my firm. I will do the best I can for you within that structure." How is that for transparency and full disclosure?
I don’t mean to suggest that brokers are bad people; it is just that they are constrained to their particular business model and most investors do not understand it. But investors need to be aware of this truth.
So I urge you, Phil's Weekly readers, to stay active in your retirement planning, because you deserve more than "what is suitable." You deserve the best, don’t you?
BY MICHAEL COHN
Congress’s long-awaited passage of tax extenders legislation provides a short-term extension through only the end of this year of dozens of familiar tax breaks for businesses and individuals, along with a new savings program for the disabled.
The Senate passed the Tax Increase Prevention Act on Tuesday evening and President Obama is expected to sign the bill into law (see Congress Passes Tax Extenders). The bill was combined with the Achieving a Better Life Experience Act, also known as the ABLE Act, to help those with disabilities and their caregivers to save and provide for education, housing, and medical expenses in the future.
“In short, the ABLE Act lets those with disabilities set up tax-free savings accounts to help them manage the costs of medical care, housing, transportation and continued education,” said House Ways and Means Committee chairman Dave Camp, R-Mich., in a statement. “This will allow those who are on Medicaid and SSI to work, earn, and save more while still receiving those important benefits. It is important to note that these savings accounts will be available to all individuals with disabilities and their caretakers, not just those on Medicaid or SSI.”
The Portland, Maine-based accounting firm Albin, Randall & Bennett provided a list of highlights of the tax extenders legislation, based on information currently available as of Wednesday:
Title I of the Act extends for one year nearly all of the provisions that expired in 2013. Along with two provisions that were set to expire in 2014. Title II is made up of corrections to current tax laws and repeals of provisions that are no longer applicable.
Some of the Act’s highlights include:
Business Tax Extenders
The Act extended the following business related tax credits and deductions through 2014:
• Bonus depreciation has been extended through 2014, allowing an additional first year deduction of 50 percent of the cost of the equipment.
• The Section 179 rules have been extended allowing for the expense of $500,000 on acquired property for business use.
• The exclusion from capital gains tax of 100 percent of small business stock sold by an individual.
• The practice of making a reduction in S corporation basis equal to the shareholders share of the adjusted basis of a charitable contribution.
• Reduction in S corporation recognition period for built-in gains tax to five years rather than 10 years.
• The Work Opportunity Tax Credit for hiring of military veterans and other qualified individuals
• The Research Tax Credit
• New Markets Tax Credit
• Enhanced deduction for charitable contributions of food inventory
Energy Tax Extenders
The Act extends through 2014 a number of energy credits and provisions that expired at the end of 2013. Some of the items extended include:
• Credit for nonbusiness energy efficiency property, extended one year.
• Biodiesel and renewable diesel credits are extended.
• The renewable electricity production credit. This includes the wind production tax credit.
• The above the line deduction for Energy efficient commercial buildings has been extended.
Individual Tax Rates
• All current individual marginal tax rates are retained (10, 15, 25, 28, 33 and 35 percent) including the recent increased top rate of 39.6 percent.
School Teacher Expenses Deduction
• Elementary and Secondary teachers can take an above-the-line deduction of $250 in out-of-pocket expenses for educational items for their classroom.
Deduction for State and Local Sales Taxes:
• Taxpayers are allowed an itemized deduction for state and local sales taxes.
• Taxpayers have to choose between deducting state income taxes or deducting state and local sales taxes.
• For the sales tax deduction, they can either keep track of their expenses or use the tables that the IRS provides.
Deduction for Qualified Tuition and Expenses
• This above the line deduction is extended through 2014.
• Taxpayers with income of up to $130,000 (joint) or $65,000 (single) can claim a deduction for up to $4,000 in expenses.
• For taxpayers with income over $130,000 but under $160,000 (joint) and over $65,000 but under $80,000 (single) can take a deduction up to $2,000.
• Taxpayers with income over those amounts are precluded from taking advantage of this deduction.
Mortgage Insurance Deductibility
Homeowners can deduct mortgage interest premiums as though they were mortgage interest payments.
Obamacare Tax Problems to Watch Out For
Affordable Care Act-related tax issues await CPAs and those who prepare their own returns this upcoming tax season, according to the National Conference of CPA Practitioners.
There has been very little clarity about many ACA policies, leaving significant opportunities for error as people try to carve out their own interpretations. Businesses and individuals will be required to be compliant, but the reality remains that many may not know how to go about achieving this goal. Here are some ACA tax issues that NCCPAP feels CPAs and their business and individual clients should know about now.
Effective Jan. 1, 2015, one of the main provisions of the Affordable Care Act—employer shared responsibility—will begin. This means all employers with 100 or more employees are required to offer health insurance. Further, all employers will have required reporting for 2015. All employers will need to file the Form 1095-C with both the IRS and their employees by the end of January 2016. This form will provide essential information for employees to prepare their taxes. Specifically, it will verify the months that each employee had minimum essential coverage
There are no mandatory ACA employer filing requirements for 2014. The IRS is telling CPAs to use their best judgment to determine if a person had minimum essential coverage, which is a bronze plan, but also requires an individual to have had coverage for all 12 months
If taxpayers are preparing their own returns, many may mistakenly check the box that affirms they did have minimal essential coverage, even in cases when that is not accurate. This is because individuals either don't know what minimal essential coverage entails, or are intentionally trying to avoid a penalty.
For example, those who had insurance for half the year with an employer, but who were unemployed for half the year without health insurance, might think they had minimal essential coverage. In this situation they would be wrong since each person is required to have coverage for all 12 months to avoid paying a penalty.
There is no way the government will be able to verify whether or not a person is telling the truth because employers have no mandatory reporting requirements for 2014. Even if someone had purchased an individual plan on their own, since the health insurance companies have no reporting requirements for 2014, there is no way for the government to verify whether someone had an individual plan or had no insurance at all.
If someone purchased health insurance on the exchange, the government would be able to prove the months they were covered with the exchange-purchased insurance through Form 1095-A. For example, if an individual were uninsured for six months and covered with exchange-purchased insurance for six months, the government would only be able to see the timeframe the individual had exchange-purchased coverage. Essentially this person would not meet the minimal essential coverage guidelines and would be subject to a financial penalty—that is if the government had documentation to prove the gap in coverage, which it doesn't.
There is a lot of concern and confusion regarding all of the various ACA exemptions. Some are very clear: if you're a member of a religious sect, such as the Amish, or a member of a federally recognized Native American tribe, you are exempt from minimal essential coverage. Some Catholic religious orders like nuns don't need to have contraception coverage. Those are the basic and obvious exemptions
Not all exemptions are that easy to interpret, according to Stephen Mankowski, CPA, who is the Tax Policy Chair for NCCPAP, and a partner in the Bryn Mawr, Pa., accounting practice, EP Caine & Associates. "Here is where it gets fuzzy," Mankowski said. "You may be eligible for an exemption if you had financial difficulties, received shut-off notices, experienced the death of a close family member or were in prison for part or all of the year. In these situations, so much is left up to the taxpayer for interpretation. For example, how does one define financial difficulties, or a 'close' family member? If you claim either of those, it could land you a cushy three-year exemption, according to ACA guidelines. Of course proving these in the event of an IRS audit could cause problems down the road." Mankowski said. "There are many more exemptions beyond what I've listed here that will cause confusion to CPAs and the American taxpayer."
"The repayment of premium tax credits is starting to get more attention," said NCCPAP President Sandra G. Johnson, CPA, who runs a practice under her name out of Bellmore, N.Y. "This is a conflict that has been underreported for a long time," Johnson stated. "Now people are realizing for the first time that they had a premium discount for the health insurance premiums they paid in 2014 because their premium cost was based on their 2012 income. When their income increased in 2014, their premium tax credit decreased. These individuals are now going to owe the government money, and payback will occur through their 2014 federal tax return. More and more taxpayers will be faced with this sad reality." Johnson is referring to how many taxpayers did not understand that their reasonable premiums were due to a government-offered discount based on the income they stated on their application (in many cases from their 2012 taxes). A higher 2014 income means taxpayers must now pay the government back for that premium discount that was initially credited to them if they are found ineligible
Weirdest Sales Taxes of 2014
The Tax & Accounting business of Thomson Reuters has rounded up its annual list of quirky sales tax laws for 2014.
If California residents want a White Christmas, it requires artificial snow. But since this is a manmade product, it is subject to tax, unlike the real deal. According to California code, the manufacture of artificial snow at a customer's site is considered a sale of tangible personal property. The true object desired by the customer is the snow, and not the service of making the snow, making it a product subject to sales tax.
Alaska has created a blanket sales and use tax exemption for goods and services related to space flight, as well as any tangible personal property that is launched, or intended to be launched, into space, regardless of whether it returns to Earth. Thus, an elegant Alaskan tax dodge involves telling Amazon to ship all your purchases via low-Earth orbit.
Even though Washington voters legalized the recreational use of marijuana, recent tax law written by the state’s Department of Revenue intends to remove any economic incentives to buy or cultivate the product. Washington regulators have declared that, for sales tax purposes, marijuana is neither a food ingredient nor an agricultural product. As a food ingredient or agricultural product, it would have enjoyed an exemption from sales tax. Instead, it is subject to not only sales tax, but also a 25 percent excise tax at wholesale and retail.
In North Carolina, college students are now required to pay sales tax on university meal plans, making the pitfalls of the dreaded “freshman fifteen” even more painful. But if you’re headed back to Washington, D.C., for winter break, don’t worry. Personal trainers hired by an individual in the District are not subject to tax if separately stated from taxable charges at the time of transaction.
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
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