Donating Appreciated Stock Offers Tax Advantages

When many people think about charitable giving, they picture writing a check or dropping off a cardboard box of nonperishable food items at a designated location. But giving to charity can take many different forms. One that you may not be aware of is a gift of appreciated stock. Yes, donating part of your portfolio is not only possible, but it also can be a great way to boost the tax benefits of your charitable giving.

No pain from gains

Many charitable organizations are more than happy to receive appreciated stock as a gift. It’s not unusual for these entities to maintain stock portfolios, and they’re also free to sell donated stock.
As a donor, contributing appreciated stock can entitle you to a tax deduction equal to the securities’ fair market value — just as if you had sold the stock and contributed the cash. But neither you nor the charity receiving the stock will owe capital gains tax on the appreciation. So you not only get the deduction, but also avoid a capital gains hit.
The key word here is “appreciated”. The strategy doesn’t work with stock that’s declined in value. If you have securities that have taken a loss, you’ll be better off selling the stock and donating the proceeds. This way, you can take two deductions (up to applicable limits): one for the capital loss and one for the charitable donation.

Inevitable restrictions

Inevitably, there are restrictions on deductions for donating appreciated stock. Annually you may deduct appreciated stock contributions to public charities only up to 30% of your adjusted gross income (AGI). For donations to nonoperating private foundations, the limit is 20% of AGI. Any excess can be carried forward up to five years.
So, for example, if you contribute $50,000 of appreciated stock to a public charity and have an AGI of $100,000, you can deduct just $30,000 this year. You can carry forward the unused $20,000 to next year. Whatever amount (if any) you can’t use next year can be carried forward until used up or you hit the five-year mark, whichever occurs first.
Moreover, you must have owned the security for at least one year to deduct the fair market value. Otherwise, the deduction is limited to your tax basis (generally what you paid for the stock). Also, the charity must be a 501(c)(3) organization.
Last, these rules apply only to appreciated stock. If you donate a different form of appreciated property, such as artwork or jewelry, different requirements apply.

Intriguing option

A donation of appreciated stock may not be the simplest way to give to charity. But, for the savvy investor looking to make a positive difference and manage capital gains tax liability, it can be a powerful strategy. Please contact our firm for help deciding whether it’s right for you and, if so, how to properly execute the donation.

Is The Sales Tax Deduction Right For You?

As the year winds down, many people begin to wonder whether they should put off until next year purchases they were considering for this year. One interesting wrinkle to consider from a tax perspective is the sales tax deduction.

Making the choice

This tax break allows taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. It was permanently extended by the Protecting Americans from Tax Hikes Act of 2015.
The deduction is obviously valuable to those who reside in states with no or low income tax. But it can also substantially benefit taxpayers in other states who buy a major item, such as a car or boat.

Considering the break

Because the break is now permanent, there’s no urgency to make a large purchase this year to take advantage of it. Nonetheless, the tax impact of the deduction is worth considering.
For example, let’s say you buy a new car in 2016, your state and local income tax liability for the year is $3,000, and the sales tax on the car is also $3,000. This may sound like a wash, but bear in mind that, if you elect to deduct sales tax, you can deduct all of the sales tax you’ve paid during the year — not just the tax on the car purchase.

Picking an approach

To claim the deduction, you need not keep receipts and track all of the sales tax you’ve paid this year. You can simply use an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale, plus the tax you actually pay on certain major purchases.
Then again, if you retain documentation for your purchases, you might enjoy a larger deduction. The “actual receipt” approach could result in a sizable deduction if you’ve made a number of notable purchases in the past year that don’t qualify to be added on to the sales tax calculator amount. Examples include furnishing a new home, investing in high-value electronics or software, or purchasing expensive jewelry (such as engagement and wedding rings).

Saving while buying

The sales tax deduction offers an opportunity to save tax dollars while buying the items you want or need. Let us help you determine whether it’s right for you.

AMT Awareness: Be Ready For Anything

When it comes to tax planning, you’ve got to be ready for anything. For example, do you know whether you’re likely to be subject to the alternative minimum tax (AMT) when you file your 2016 return? If not, you need to find out now so that you can consider taking steps before year end to minimize potential liability.

Bigger bite

The AMT was established to ensure that high-income individuals pay at least a minimum tax, even if they have many large deductions that significantly reduce their “regular” income tax. If your AMT liability is greater than your regular income tax liability, you must pay the difference as AMT, in addition to the regular tax.
AMT rates begin at 26% and rise to 28% at higher income levels. The maximum rate is lower than the maximum income tax rate of 39.6%, but far fewer deductions are allowed, so the AMT could end up taking a bigger tax bite.
For instance, you can’t deduct state and local income or sales taxes, property taxes, miscellaneous itemized deductions subject to the 2% floor, or home equity loan interest on debt not used for home improvements. You also can’t take personal exemptions for yourself or your dependents, or the standard deduction if you don’t itemize your deductions.

Steps to consider

Fortunately, you may be able to take steps to minimize your AMT liability, including:

resourcefully Timing capital gains. The AMT exemption (an amount you can deduct in calculating AMT liability) phases out based on income, so realizing capital gains could cause you to lose part or all of the exemption. If it looks like you could be subject to the AMT this year, you might want to delay sales of highly appreciated assets until next year (if you don’t expect to be subject to the AMT then) or use an installment sale to spread the gains (and potential AMT liability) over multiple years.

Sombrerete Timing deductible expenses. Try to time the payment of expenses that are deductible for regular tax purposes but not AMT purposes for years in which you don’t anticipate AMT liability. Otherwise, you’ll gain no tax benefit from those deductions. If you’re on the threshold of AMT liability this year, you might want to consider delaying state tax payments, as long as the late-payment penalty won’t exceed the tax savings from staying under the AMT threshold.

Investing in the “right” bonds. Interest on tax-exempt bonds issued for public activities (for example, schools and roads) is exempt from the AMT. You may want to convert bonds issued for private activities (for example, sports stadiums), which generally don’t enjoy the AMT interest exemption.

Appropriate strategies

Failing to plan for the AMT can lead to unexpected — and undesirable — tax consequences. Please contact us for help assessing your risk and, if necessary, implementing the appropriate strategies for your situation.

Sidebar: Does this sound familiar?

High-income earners are typically most susceptible to the alternative minimum tax. But liability may also be triggered by:

  • A large family (meaning you take many exemptions),
  • Substantial itemized deductions for state and local income taxes, property taxes, miscellaneous itemized deductions subject to the 2% floor, home equity loan interest, or other expenses that aren’t deductible for AMT purposes,
  • Exercising incentive stock options,
  • Large capital gains,
  • Adjustments to passive income or losses, or
  • Interest income from private activity municipal bonds.

Funding A College Education? Don’t Forget The 529

When 529 plans first hit the scene, circa 1996, they were big news. Nowadays, they’re a common part of the college-funding landscape. But don’t forget about them — 529 plans remain a valid means of saving for the rising cost of tuition and more.

Flexibility is king

529 plans are generally sponsored by states, though private institutions can sponsor 529 prepaid tuition plans. Just about anyone can open a 529 plan. And you can name anyone, including a child, grandchild, friend, or even yourself, as the beneficiary.
Investment options for 529 savings plans typically include stock and bond mutual funds, as well as money market funds. Some plans offer age-based portfolios that automatically shift to more conservative investments as the beneficiaries near college age.
Earnings in 529 savings plans typically aren’t subject to federal tax, so long as the funds are used for the beneficiary’s qualified educational expenses. This can include tuition, room and board, books, fees, and computer technology at most accredited two- and four-year colleges and universities, vocational schools, and eligible foreign institutions.
Many states offer full or partial state income tax deductions or other tax incentives to residents making 529 plan contributions, at least if the contributions are made to a plan sponsored by that state.
You’re not limited to participating in your own state’s plan. You may find you’re better off with another state’s plan that offers a wider range of investments or lower fees.

The downsides

While 529 plans can help save taxes, they have some downsides. Amounts not used for qualified educational expenses may be subject to taxes and penalties. A 529 plan also might reduce a student’s ability to get need-based financial aid, because money in the plan isn’t an “exempt” asset. That said, 529 plan money is generally treated more favorably than, for instance, assets in a custodial account in the student’s name.
Just like other investments, those within 529s can fluctuate with the stock market. And some plans charge enrollment and asset management fees.
Finally, in the case of prepaid tuition plans, there may be some uncertainty as to how the benefits will be applied if the student goes to a different school.

Work with a pro

The tax rules governing 529 savings plans can be complex. So please give us a call. We can help you determine whether a 529 plan is right for you.

Organizing Your Financial Records For Best Results

With tax time long over and midyear officially here, it’s a great time to organize your financial records. And the key word here is indeed “organize.” Throwing all your important documents into a drawer won’t help much when an emergency occurs and you (or a family member) need to find a certain piece of paper.

Make a list

Of course, emergencies aren’t the only reason to organize your records. For example, you may need to be able to access relevant personal records if you’re ever audited or a victim of theft. Or your home could be damaged in a storm or fire. Or you may need proof to cash in investments or claim insurance benefits.
To get started, make a list of important records. These include items related to:

  • Bank and investment accounts,
  • Real estate and homeownership,
  • Insurance policies,
  • Credit card accounts,
  • Health care benefits and medical history, and
  • Marriage and your estate.

Grouping the items into broad categories such as these will make them easier to file and find later.

Establish your approach

With your list in hand, it’s time to start organizing and storing your records. Here are some tips for streamlining the process:
Create a central filing system. The ideal storage medium for personal documents is a fire-, water- and impact-resistant security cabinet or safe. Create a master list of the cabinet contents and provide a copy of the key to your executor or a trusted family member.
Designate a second storage location. Maintain a duplicate set of the records in another location, such as a bank safety deposit box, and provide access to a trusted individual (preferably not the same individual with access to the original documents). Consider keeping originals of your important legal documents, such as your will, with your attorney.
Back up records electronically. It also makes sense to store copies of records electronically. Simply scan your documents and save them to a trustworthy external storage device. If opting for a cloud-based backup system, choose your provider carefully to ensure its security measures are as stringent as possible.

Follow the ritual

Make organizing your records an annual ritual and not just a one-time event. Need assistance? We can help you identify the specific documents pertinent to your situation and organize them appropriately.

Sidebar: Create an emergency checklist to cope with calamity

Having an emergency checklist of important personal records handy is essential in the event you must evacuate your home. In a crisis, you’ll likely be able to take only what you can easily carry with you. That means storing the bare essentials in a portable container. Include these items:
Driver’s license, passport and Social Security card,
Credit cards,
Vital medical condition and medication information,
Health insurance cards, and
Emergency family and physician contacts.
Also set up an “In Case of Emergency” (ICE) directory in your cell phone. In your phone directory, simply type in “ICE” before each contact (ICE-1 Jane Smith, ICE-2 Dr. John Smith, etc.). Also consider storing and carrying electronic copies of key personal records on a USB flash drive.

Summer Camp Costs May Brighten Your Tax Return

The coming and going of Memorial Day marks the beginning of summer in the minds of many Americans. Although the kids might still be in school for another week or two, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax break?
Day camp is a qualified expense under the child and dependent care credit. This tax break is worth 20% of qualifying expenses, subject to a cap — and could be worth even more if your adjusted gross income is less than $43,000. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.
Be aware, however, that overnight camp costs don’t qualify for the credit, nor do expenses related to summer school tutoring. In addition, certain types of child care are ineligible. These include care provided by a spouse and care provided by a child who’s under age 19 at the end of the year.
A variety of additional rules may apply. For example, eligible costs for care must be work-related. In other words, parents need to pay for the care so that they can work (or look for work). If you think you might qualify for the child and dependent care credit, please contact us. We can help you determine whether you’re eligible and then properly claim this potentially valuable tax break.

Why your health insurance company may ask for your Social Security Number

Your health insurance company may request that you provide the Social Security Numbers (SSNs) for you, your spouse, and your children covered by your policy. This is because the Affordable Care Act requires every provider of minimum essential coverage to report that coverage by filing an information return with the IRS and furnishing a statement to covered individuals. The information is used by the IRS to administer — and by individuals to show compliance with — the health care law.
Health coverage providers will file an information return (Form 1095-B, “Health Coverage”) with the IRS and will furnish statements to you in 2016 to report coverage information from calendar year 2015. The law requires coverage providers to list SSNs on this form. If you don’t provide your SSN and the SSNs of all covered individuals to the sponsor of the coverage, the IRS may not be able to match the Form 1095-B with the individuals to determine that they have complied with the individual shared responsibility provision.
Your health insurance company may mail you a letter that discusses these new rules and requests SSNs for all family members covered under your policy. The IRS has not designated a specific form for your health insurance company to request this information. However, it should be a written request that is mailed to you through the U.S. Postal Service, not emailed to you. If you receive an email request, it could be a phishing attempt by a hacker who is aware of this requirement, so be cautious and take precautions to protect yourself. Don’t respond directly to the email. Instead, call the insurance company at its main number (not any number contained in the email) or go directly to the insurance company’s website (not from the link or to an address contained in the email) to verify the request.
The Form 1095-B will provide information for your income tax return that shows you, your spouse, and individuals you claim as dependents had qualifying health coverage for some or all months during the year. You do not have to attach Form 1095-B to your tax return. However, it is important to keep it with your other important tax documents.
Anyone on your return who does not have minimum essential coverage, and who does not qualify for an exemption, may be liable for the individual shared responsibility payment.
The information received by the IRS will be used to verify information on your individual income tax return. If you refuse to provide this information to your health insurance company, the IRS cannot verify the information you provide on your tax return, and you may receive an inquiry from the IRS. You also may receive a notice from the IRS indicating that you are liable for the individual shared responsibility payment.

How working impacts Social Security Benefits

Continuing to work while receiving Social Security benefits may cause the benefit to be reduced below the anticipated amount. If you are under the full retirement age (currently 66), an earnings test determines whether your Social Security retirement benefits will be reduced because you earned more from a job or business than an annual exempt amount.
As a general rule, the earnings test is based on income earned during the year as a whole, without regard to the amount you earned each month. However, in the first year, benefits you receive are not reduced for any month in which you earn less than one-twelfth of the annual exempt amount.
For 2015, Social Security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1 reduction in benefits for each $2 earned over the exempt amount ($15,720 in 2015) for each year before the year during which they reach the full benefit retirement age. However, in the year beneficiaries reach their full benefit retirement age, earnings above a different annual exempt amount ($41,880 in 2015) are subject to a $1 reduction in benefits for each $3 earned over the exempt amount. Social Security benefits are not affected by earned income beginning with the month the beneficiary reaches full benefit retirement age.

Filing 2014 foreign bank and financial account reports

If you have a financial interest in or signature authority over a foreign financial account exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the IRS by filing a Financial Crimes Enforcement Network (FinCEN) Form 114 (“Report of Foreign Bank and Financial Accounts (FBAR)”).
Specifically, for 2014, Form 114 is required to be filed if during the year:
1. You had a financial interest in or signature authority over at least one foreign financial account (which can be anything from a securities, brokerage, mutual fund, savings, demand, checking, deposit, or time deposit account to commodity futures or options, and a whole life insurance or a cash value annuity policy); and
2. The aggregate value of all such foreign financial accounts exceeded $10,000 at any time during 2014.
The FBAR is filed on a separate return basis (that is, joint filings are not allowed). However, a spouse who has only a financial interest in a joint account that is reported on the other spouse’s FBAR does not have to file a separate FBAR.
The 2014 Form 114 must be filed by June 30, 2015, and cannot be extended. Furthermore, it must be filed electronically through http://bsaefiling.fincen.treas.gov/main.html. The penalty for failing to file Form 114 is substantial — up to $10,000 per violation (or the greater of $100,000 or 50% of the balance in an account if the failure is willful).
Please give us a call if you have any questions or would like us to prepare and file Form 114 for you.

Taxation of college financial aid

If your college-age child is or will be receiving financial aid, congratulations. Now, you’ll probably want to know if the financial aid is taxable. Keep in mind that the economic characteristics of financial aid, rather than how it is titled, will determine its taxability. Strictly speaking, scholarships, fellowships, and grants are usually awards of “free money” that are nontaxable. However, these terms are also sometimes used to describe arrangements involving obligations to provide services, in which case the payments are taxable compensation.

Tax-free awards. Scholarships, fellowships, and grants are awarded based on the student’s financial need or are based on scholastic achievement and merit. Generally, for federal income tax purposes, these awards are nontaxable as long as (1) the recipient is a degree candidate, (2) the award does not exceed the recipient’s “qualified tuition and related expenses” (tuition and enrollment fees, books, supplies, and equipment required for courses, but not room and board or incidental expenses) for the year, (3) the agreement does not expressly designate the funds for other purposes (such as room and board or incidental expenses) or prohibit the use of the funds for qualified education expenses, and (4) the award is not conditioned on the student performing services (teaching, research, or anything else).

Work-study arrangements. If the financial aid is conditioned on the student performing services, the amount that represents payment for such services is taxable income and will be reported on a Form W-2 or Form 1099. This is true even if the work is integrated with the student’s curriculum or if the payment is called a scholarship, fellowship, or grant. Students typically work for the school they’re attending. However, they could work for other employers under the auspices of a work-study program.

Student loans. Naturally, student loan proceeds are not taxable income because the borrowed amounts must be paid back. However, some college education loans are subsidized to allow borrowers to pay reduced interest rates. Fortunately, college loan interest subsidies are nontaxable to the same extent as if they were provided in the form of an outright scholarship, fellowship, or grant. An above-the-line deduction (i.e., available whether or not the borrower itemizes) of up to $2,500 is allowed for interest expense paid by a taxpayer on a loan to fund qualified higher education expenses. The deduction is phased out for taxpayers with adjusted gross income exceeding certain amounts.

What happens when financial aid isn’t free? Fortunately, taxable scholarships, fellowships, grants, and compensation from work-study programs count as earned income. Assuming the student is your dependent, this means that for 2015 he or she can offset this income by his or her standard deduction of the greater of (1) $1,050 or (2) earned income plus $350, up to $6,300. Since taxable scholarships, fellowships, grants, and compensation count as earned income, they increase the student’s standard deduction. If the student isn’t anyone’s dependent for 2015, he or she can offset earned income of up to $10,300 with his or her personal exemption ($4,000) and standard deduction ($6,300). (Dependents are not entitled to a personal exemption.)
Taxable financial aid in excess of what can be offset by the student’s personal exemption (if any) and standard deduction is usually taxed at only 10%. (For 2015, the 10% bracket for single taxpayers applies to taxable income up to $9,225.)

Warning: The “kiddie tax” rules may cause investment income (such as interest, dividend, and capital gains) received by students who are under age 24 to be taxed at the parent’s higher rates instead of at the student’s lower rates. The student’s earned income (including taxable scholarships, fellowships, grants, and compensation) is not subject to the kiddie tax.
Please give us a call if you have questions or want more information.