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.

Take The Worry Out Of Business Valuations

Appraisals can inspire anxiety for many business owners. And it’s understandable why. You’re obviously not short on things to do, and valuations cost time and money. Nonetheless, there are some legitimate reasons to obtain an appraisal regularly or, at the very least, to familiarize yourself with the process so you’re ready when the time comes.

Strategic perspectives

Perhaps the most common purpose of a valuation is a prospective ownership transfer. Yet strategic investments (such as a new product or service line) can also greatly benefit from an accurate appraisal. As growth opportunities arise, business owners have only limited resources to pursue chosen strategies. A valuation can help plot the most likely route to success.
But hold on — you might say, why not simply rely on our tried-and-true projected financial statements for strategic planning? One reason is that projections ignore the time value of money because, by definition, they describe what’s going to happen given a set of circumstances. Thus, it can be difficult to compare detailed projections against other investments under consideration.
Valuators, however, can convert your financial statement projections into cash flow projections and then incorporate the time value of money into your decision making. For instance, in a net present value (NPV) analysis, an appraiser projects each alternative investment’s expected cash flows. Then he or she discounts each period’s projected cash flow to its present value, using a discount rate proportionate to its risk.
If the sum of these present values — the NPV — is greater than zero, the investment is likely worthwhile. When comparing alternatives, a higher NPV is generally better.

3 pillars of the process

Many business owners just don’t know what to expect from a valuation. To simplify matters, let’s look at three basic “pillars” of the appraisal process:

1. Purpose. There’s no such thing as a recreational valuation. Each one needs to have a specific purpose. This could be as clear-cut as an impending sale. Or perhaps an owner is divorcing his spouse and needs to determine the value of the business interest that’s includable in the marital estate.
In other cases, an appraisal may be driven by strategic planning. Have I grown the business enough to cash out now? Or how much further could we grow based on our current estimated value? The valuation’s purpose strongly affects how an appraiser will proceed.

2. Standard of value. Generally, business valuations are based on “fair market value” — the price at which property would change hands in a hypothetical transaction involving informed buyers and sellers not under duress to buy or sell. But some assignments call for a different standard of value.
For example, say you’re contemplating selling to a competitor. In this case, you might be best off getting an appraisal for the “strategic value” of your company — that is, the value to a particular investor, including buyer-specific synergies.

3. Basis of value. Private business interests typically are designated as either “controlling” or “minority” (nonmarketable). In other words, do you truly control your company or are you a noncontrolling owner?
Defining the appropriate basis of value isn’t always straightforward. Suppose a business is split equally between two partners. Because each owner has some control, stalemates could impair decision-making. An appraiser will need to definitively establish basis of value when selecting a valuation methodology and applying valuation discounts.

Unbiased perspective

Often, we all find it difficult to be objective about the things we hold close. There are few better examples of this than business owners and their companies. But a valuation can provide you with an unbiased, up-to-date perspective on your business that can help you make better decisions about its future.

Have A Pension? Be Sure To Plan Carefully

The traditional pension may seem like a thing of the past. But many workers are still counting on payouts from one of these “defined benefit” plans in retirement. If you’re among this group, it’s important to start thinking now about how you’ll receive the money from your pension.

Making a choice

Some defined benefit plans give retirees a choice between receiving payouts in the form of a lump sum or an annuity. Taking a lump sum distribution allows you to invest the money as you please. Plus, if you manage and invest the funds wisely, you may be able to achieve better returns than those provided by an annuity.
On the other hand, if you’re concerned about the risks associated with investing your pension benefits (you could lose principal) — or don’t want the responsibility — an annuity offers guaranteed income for life. (Bear in mind that guarantees are subject to the claims-paying ability of the issuing company.)

Choosing yet again

If you choose to receive your pension benefits in the form of an annuity — or if your plan doesn’t offer a lump sum option — your plan likely will require you to choose between a single-life or joint-life annuity. A single-life annuity provides you with monthly benefits for life. The joint-life option (also referred to as “joint and survivor”) provides a smaller monthly benefit, but the payments continue over the joint lifetimes of both you and your spouse.
Deciding between the two annuity options requires some educated guesswork. To determine the option that will provide the greatest overall financial benefit, you’ll need to consider several factors — including your and your spouse’s actuarial life expectancies as well as factors that may affect your actual life expectancies, such as current health conditions and family medical histories.
You might choose the single-life option, for example, if you and your spouse have comparable life expectancies or if you expect to live longer. Under those circumstances, the higher monthly payment will maximize your overall benefits.
But there’s a risk, too: Because the payments will stop at your death, if you die prematurely and your spouse outlives you, the overall financial benefit may be smaller than if you’d chosen the joint-life option. The difference could be substantial if your spouse outlives you by many years.
Your overall financial situation — that is, your expenses and your other assets and income sources — also play a major role. Even if you expect a joint-life annuity to yield the greatest total benefit over time, you may want to consider a single-life annuity if you need additional liquidity in the short term.

Managing this asset

Although increasingly uncommon, these defined benefit plans can be a highly valuable asset. Please contact us for help managing yours appropriately.

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:

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.

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.

Are You Sure You Want To Take That 401(K) Loan?

With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.

Pros and cons

Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:
They’re easy to get (no income or credit score requirements),
There’s minimal paperwork,
Interest rates are low, and
You pay interest back into your 401(k) rather than to a bank.
Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.
You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.
Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.
Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.

Hardship withdrawals

If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.
Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.
Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.

The right move

Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.

How To Assess The Impact Of A Child’s Investment Income

When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.

Potential danger

For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.
Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.
But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)

Simplified approach

In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.
Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.

Many lessons

Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.

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.

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.

Juggling Family Wealth Management Is No Trick

Preserving and managing family wealth requires addressing a number of major issues. These include saving for your children’s education and funding your own retirement. Juggling these competing demands is no trick. Rather, it requires a carefully devised and maintained family wealth management plan.

Start with the basics

First, a good estate plan can help ensure that, in the event of your death, your children will be taken care of and, if your estate is large, that they won’t lose a substantial portion of their inheritances to estate taxes. It can also guarantee that your assets will be passed along to your heirs according to your wishes.
Second, life insurance is essential. The right coverage can provide the liquidity needed to repay debts, support your children and others who depend on you financially, and pay estate taxes.

Prepare for the challenge

Most families face two long-term wealth management challenges: funding retirement and paying for college education. While both issues can be daunting, don’t sacrifice saving for your own retirement to finance your child’s education. Scholarships, grants, loans and work-study may help pay for college — but only you can fund your retirement.
Uncle Sam has provided several education incentives that are worth checking out, including tax credits and deductions for qualifying expenses and tax-advantaged savings opportunities such as 529 plans and Education Savings Accounts (ESAs). Because of income limits and phaseouts, many higher-income families won’t benefit from some of these tax breaks. But, your children (or your parents, in the case of contributing to an ESA) may be able to take advantage of them.

Give assets wisely

Giving money, investments or other assets to your children or other family members can save future income tax and be a sound estate planning strategy as well. You can currently give up to $14,000 per year per individual ($28,000 if married) without incurring gift tax or using your lifetime gift tax exemption. Depending on the number of children and grandchildren you have, and how many years you continue this gifting program, it can really add up.
By gifting assets that produce income or that you expect to appreciate, you not only remove assets from your taxable estate, but also shift income and future appreciation to people who may be in lower tax brackets.
Also consider using trusts to facilitate your gifting plan. The benefit of trusts is that they can ensure funds are used in the manner you intended and can protect the assets from your loved ones’ creditors.

Overcome the complexities

Creating a comprehensive plan for family wealth management and following through with it may not be simple — but you owe it to yourself and your family. We can help you overcome the complexities and manage your tax burden.

Sidebar: Charitable giving’s place in family wealth management

Do charitable gifts have a place in family wealth management? Absolutely. Properly made gifts can avoid gift and estate taxes, while possibly qualifying for an income tax deduction. Consider a charitable trust that allows you to give income-producing assets to charity, but keep the income for life — or for the charity to receive the earnings and the assets to later pass to your heirs. These are just two examples; there are more ways to use trusts to accomplish your charitable goals.

Need A Do-over? Amend Your Tax Return

Like many taxpayers, you probably feel a sense of relief after filing your tax return. But that feeling can change if, soon after, you realize you’ve overlooked a key detail or received additional information that should have been considered. In such instances, you may want (or need) to amend your return.
Typically, an amended return — Form 1040X, to be exact — must be filed within three years from the date you filed the original tax return or within two years of the date the applicable tax was paid (whichever is later). Your choice of timing should depend on whether you expect a refund or a bill.
If claiming an additional refund, you should typically wait until you’ve received your original refund. Then cash or deposit the first refund check while waiting for the second. If you owe additional dollars, file the amended return and pay the tax immediately to minimize interest and penalties.
Bear in mind that, as of this writing, the IRS doesn’t offer amended returns via e-file. You can, however, track your amended return electronically. The IRS now offers an automated status-tracking tool called “Where’s My Amended Return?” at https://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1.
If you think an amended return is needed or warranted, please give us a call. We will be glad to help.

Juggling Family Wealth Management Is No Trick

Preserving and managing family wealth requires addressing a number of major issues. These include saving for your children’s education and funding your own retirement. Juggling these competing demands is no trick. Rather, it requires a carefully devised and maintained family wealth management plan.

Start with the basics

First, a good estate plan can help ensure that, in the event of your death, your children will be taken care of and, if your estate is large, that they won’t lose a substantial portion of their inheritances to estate taxes. It can also guarantee that your assets will be passed along to your heirs according to your wishes.
Second, life insurance is essential. The right coverage can provide the liquidity needed to repay debts, support your children and others who depend on you financially, and pay estate taxes.

Prepare for the challenge

Most families face two long-term wealth management challenges: funding retirement and paying for college education. While both issues can be daunting, don’t sacrifice saving for your own retirement to finance your child’s education. Scholarships, grants, loans and work-study may help pay for college — but only you can fund your retirement.
Uncle Sam has provided several education incentives that are worth checking out, including tax credits and deductions for qualifying expenses and tax-advantaged savings opportunities such as 529 plans and Education Savings Accounts (ESAs). Because of income limits and phaseouts, many higher-income families won’t benefit from some of these tax breaks. But, your children (or your parents, in the case of contributing to an ESA) may be able to take advantage of them.

Give assets wisely

Giving money, investments or other assets to your children or other family members can save future income tax and be a sound estate planning strategy as well. You can currently give up to $14,000 per year per individual ($28,000 if married) without incurring gift tax or using your lifetime gift tax exemption. Depending on the number of children and grandchildren you have, and how many years you continue this gifting program, it can really add up.
By gifting assets that produce income or that you expect to appreciate, you not only remove assets from your taxable estate, but also shift income and future appreciation to people who may be in lower tax brackets.
Also consider using trusts to facilitate your gifting plan. The benefit of trusts is that they can ensure funds are used in the manner you intended and can protect the assets from your loved ones’ creditors.

Overcome the complexities

Creating a comprehensive plan for family wealth management and following through with it may not be simple — but you owe it to yourself and your family. We can help you overcome the complexities and manage your tax burden.

Sidebar: Charitable giving’s place in family wealth management

Do charitable gifts have a place in family wealth management? Absolutely. Properly made gifts can avoid gift and estate taxes, while possibly qualifying for an income tax deduction. Consider a charitable trust that allows you to give income-producing assets to charity, but keep the income for life — or for the charity to receive the earnings and the assets to later pass to your heirs. These are just two examples; there are more ways to use trusts to accomplish your charitable goals.

Need A Do-over? Amend Your Tax Return

Like many taxpayers, you probably feel a sense of relief after filing your tax return. But that feeling can change if, soon after, you realize you’ve overlooked a key detail or received additional information that should have been considered. In such instances, you may want (or need) to amend your return.
Typically, an amended return — Form 1040X, to be exact — must be filed within three years from the date you filed the original tax return or within two years of the date the applicable tax was paid (whichever is later). Your choice of timing should depend on whether you expect a refund or a bill.
If claiming an additional refund, you should typically wait until you’ve received your original refund. Then cash or deposit the first refund check while waiting for the second. If you owe additional dollars, file the amended return and pay the tax immediately to minimize interest and penalties.
Bear in mind that, as of this writing, the IRS doesn’t offer amended returns via e-file. You can, however, track your amended return electronically. The IRS now offers an automated status-tracking tool called “Where’s My Amended Return?” at https://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1.
If you think an amended return is needed or warranted, please give us a call. We will be glad to help.

Go, Save Green with Sustainable Tax Breaks

Many people want to do something, however small, to contribute to a healthier environment. There are many ways to do so and, for some of them, you can even save a few tax dollars for your efforts.
Indeed, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) late last year, a couple of specific ways to go green and claim a tax break have been made permanent or extended. Let’s take a closer look at each.

Not driving for dollars

Air pollution is a problem in many areas of the country. Among the biggest contributors are vehicle emissions. So it follows that cutting down on the number of vehicles on the road can, in turn, diminish air pollution.
To help accomplish this, many people choose to commute to work via van pools or using public transportation. And, helpfully, the PATH Act is doing its part as well. The law made permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for both parking benefits and van pooling / mass transit benefits.
Before the PATH Act’s parity provision, the monthly limit for 2015 was only $130 for van pooling / mass transit benefits. But, because of the new law, the 2015 monthly limit for these benefits was boosted to the $250 parking benefit limit and the 2016 limit is $255.

Sprucing up the homestead

Energy consumption can also have a negative impact on the environment and use up limited natural resources. Many homeowners want to reduce their energy consumption for environmental reasons or simply to cut their utility bills.
The PATH Act lends a helping hand here, too, by extending through 2016 the credit for purchases of residential energy property. This includes items such as:

  • New high-efficiency heating and air conditioning systems,
  • Qualifying forms of insulation,
  • Energy-efficient exterior windows and doors, and
  • High-efficiency water heaters and stoves that burn biomass fuel.

The provision allows a credit of 10% of eligible costs for energy-efficient insulation, windows and doors. A credit is also available for 100% of eligible costs for energy-efficient heating and cooling equipment and water heaters, up to a lifetime limit of $500 (with no more than $200 from windows and skylights).

Doing it all

Going green and saving some green on your tax bill? Yes, you can do both. Van pooling or taking public transportation and improving your home’s energy efficiency are two prime examples. Please contact us for more information about how to claim these tax breaks or identify other ways to save this year.

Could Your Debt Relief Turn Into A Tax Defeat?

Restructuring debt has become a common approach to personal financial management. But many people fail to realize that there’s often a tax impact to debt relief. And if you don’t anticipate it, a winning tax return may turn into a losing one.

Less debt, more income

Income tax applies to all forms of income — including what’s referred to as “cancellation-of-debt” (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex but, essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit.

Mortgage matters

You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure. Here, the tax consequences depend on which of the following two categories the mortgage falls into:

1. Nonrecourse. Here the lender’s sole remedy in the event of default is to take possession of the home. In other words, you’re not personally liable if the foreclosure proceeds are less than your outstanding loan balance. Foreclosure on a nonrecourse mortgage doesn’t produce COD income.

2. Recourse. This type of foreclosure can trigger COD tax liability if the lender forgives the portion of the loan that’s not satisfied. In a short sale, the lender permits you to sell the property for less than the amount you owe and accepts the sale proceeds in satisfaction of your mortgage. A deed in lieu of foreclosure means you convey the property to the lender in satisfaction of your debt. In either case, if the lender agrees to cancel the excess debt, the transaction is treated like a foreclosure for tax purposes — that is, a recourse mortgage may generate COD income.
Keep in mind that COD income is taxable as ordinary income, even if the debt is related to long-term capital gains property. And, in some cases, foreclosure can trigger both COD income and a capital gain or loss (depending on your tax basis in the property and the property’s market value).

Exceptions vs. exclusions

Several types of canceled debt are considered nontaxable “exceptions” — for example, debt cancellation that’s considered a gift (such as forgiveness of a family loan). Certain student loans are also considered exceptions — as long as they’re canceled in exchange for the recipient’s commitment to public service.
Other types of canceled debt qualify as “exclusions.” For instance, homeowners can exclude up to $2 million in COD income in connection with qualified principal residence indebtedness. A recent tax law change extended this exclusion through 2016, modifying it to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. Other exclusions include certain canceled debts relating to bankruptcy and insolvency.

Complex rules

The rules applying to COD income are complex. So if you’re planning to restructure your debt this year, let us help you manage the tax impact.

Walk the Path to Tax Savings for 2015

Like many taxpayers, you may have been expecting to encounter a few roadblocks while traversing your preferred tax-saving avenues. If so, tax extenders legislation signed into law this past December may make your journey a little easier. Let’s walk through a few highlights of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).

Of interest to individuals

If you’re a homeowner, the PATH Act allows you to treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, this deduction is phased out for higher income taxpayers. The law likewise extends through 2016 the exclusion from gross income for mortgage loan forgiveness.
Those living in a state with low or no income taxes (or who make large purchases, such as a car or boat) will be pleased that the itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. Your deduction can be determined easily by using an IRS calculator and adding the tax you actually paid on certain major purchases.
Investors should note that the PATH Act makes permanent the exclusion of 100% of the gain on the sale of qualified small business stock acquired and held for more than five years (if acquired after September 27, 2010). The law also permanently extends the rule that eliminates qualified small business stock gain as a preference item for alternative minimum tax (AMT) purposes.

Breaks for businesses

The PATH Act gives business owners much to think about as well. First, there’s the enhanced Section 179 expensing election. Now permanent (and indexed for inflation beginning in 2016) is the ability for companies to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction phases out, dollar for dollar, to the extent qualified asset purchases for the year exceeded $2 million.
The 50% bonus depreciation break is also back, albeit temporarily. It’s generally available for new (not used) tangible assets with a recovery period of 20 years or less, and certain other assets. The 50% amount will drop to 40% for 2018 and 30% for 2019, however.
In addition, the PATH Act addresses two important tax credits. First, the research credit has been permanently extended, with some specialized provisions for smaller businesses and start-ups. Second, the Work Opportunity credit for employers that hire members of a “target group” has been extended through 2019.
Does your company provide transit benefits? If so, note that the law makes permanent equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits.

Much, much more

Whether you’re filing as an individual or on behalf of a business, the PATH Act could have a substantial effect on your 2015 tax return. We’ve covered only a few of its many provisions here. Please contact us to discuss these and other provisions that may affect your situation.

Sidebar: Good news for generous IRA owners

The recent tax extenders law makes permanent the provision allowing taxpayers age 70½ or older to make direct contributions from their IRA to qualified charities up to $100,000 per tax year. The transfer can count toward the IRA owner’s required minimum distribution. Many rules apply so, if you’re interested, let us help with this charitable giving opportunity.

5 Things to Know About Substantiating Donations

There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.
No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:

1. Cash contributions of less than $250 are the easiest to substantiate. A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.

2. Noncash donations of less than $250 require a bit more. You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.

3. Bigger cash donations mean more paperwork. If you donate $250 or more in cash, a canceled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.
Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged item or service. You can deduct only the difference between the amount donated and the value of the item or service.

4. Noncash donations valued at $250 or more and up to $5,000 require still more. You must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgment also must include a description of the item.

5. Noncash donations valued at more than $5,000 are the most complicated. Generally, both a contemporaneous written acknowledgment and a qualified appraisal are required — unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.