Mid Year Financial Checkup from the USA Today

Some great tips for getting your financial house in order… see here or see below for the article text.

This year is more than half gone. Amid your summer vacation and plans for fun in the sun, find time now for your mid-year financial checkup.

Like many, you probably picked a financial goal for this year, such as pay off debt or generally get your financial house in order. Now reevaluate your intentions and take a good look at where you stand. Start reviewing the following:

• Spending plan. Cash flow management is key to a successful financial future and knowing where your money goes a must in creating a plan.

If you still need a spending plan, use Excel or another application to start tracking where your money goes. Scrutinize amounts you pay for such fixed expenses as your mortgage or rent, car, insurance premiums and utilities. Pay yourself first (via savings or investing) before laying out for variable or discretionary expenses such as entertainment, clothing or other, extracurricular activities.

This tracking allows you to pinpoint areas and categories where you may need to make adjustments, such as decrease dining out to put more toward savings for travel or a home down payment.

• Debt management. Did your credit card and personal debt balances decrease or increase so far this year? Review your statements to track your progress (if any) in the last six months.

When paying down debt, either give priority to your accounts carrying the highest interest rates first or target your lowest balances for payoff first. Your spending plan also comes into play with debt reduction: Review where your money goes and target any areas you can cut back on to help you accelerate payoff.

• Savings and investments. Is your emergency fund of three to six months’ expenses fully funded or do you still work toward that first $1,000? What about taking advantage of employer retirement plans and contributing to your company 401(k)?

Set up a systematic transfer from your paycheck to your savings or investment account – and then forget it. For Roth individual retirement accounts and employer retirement plans, saving in smaller, automated increments minimizes your cash flow strain and sets the stage for a disciplined investment strategy.

Also review allocation of your investment accounts and make any necessary adjustments or rebalances.

• Personal and asset protection. Nothing can send your dreams off course faster than inadequate insurance coverage in time of need.

If you’re single with no dependents, for example, make sure you’re covered for disability, health, home, auto and personal liability. If you’re married or others depend on your income, add life insurance.

Reach out to your insurance agent or broker to ensure you hold adequate coverage. Take into account updates for potential transitions in your life such as marriage, the birth of a child, job loss, an increase in your income, a remodeling of your home, big ticket purchases, death or divorce.

• Estate planning. Review or create your family trust, wills or powers of attorney to allow others to make your health-care decisions if you’re incapacitated; do it now. If you have children, also establish guardianship provisions.

The more clearly and concisely you document your intentions, the better. Although this planning area may make you uncomfortable, your family and you need a current plan outlining your wishes and specific requests for after you die.

Don’t worry if you’re behind on some of these; getting on track financially is a journey, not a race. Set small goals and tasks for yourself and remember to celebrate your achievements along the way for the rest of 2014.

William A. Olson, CPA: Contact me at wolsoncpa.com

What’s NOT Deductible

I often get asked, “What expenses are deductible?” However, I have never had someone ask what is not deductible. Here is an article from Forbes with some “bad” ideas of tax deductible items… if you do not want to click over, I have reproduced the list below.

  1. Pets. No matter how much your four-legged, scaly or feathered friend feels like a member of your family, the cost of caring for your pet – from food to vet visits – is generally not deductible. The IRS considers pet-related expenses routinely personal. A few exceptions do apply, including service animals and guard dogs.
  2. Alarm systems. Generally, there is no tax deduction for installing an alarm system at your home. Similarly, the monthly fees are not deductible. If, however, the property that you alarm is a rental or commercial property, the installation and the monthly fees are deductible as the cost of doing business. Additionally, if you take the home office deduction, then you may claim the pro rata portion of the alarm system on your taxes, just as you do with other home office expenses; the portion attributable to the non-office portion of your home is still not deductible.
  3. Gym memberships. Most weight loss programs are only deductible as a treatment for a specific disease diagnosed by a physician. The diagnosis is key and the program must be specifically ordered by the doctor: if your doctor merely advises you to lose some weight to protect your health, that’s not sufficient. That said, you cannot deduct gym or health club membership dues even if your doctor orders you to up your activity level. Some separately stated activity fees, such as those for water aerobics, however, could be deductible if prescribed by a doctor.
  4. Maternity clothes. Clothing for work is only deductible if the sole purpose of the clothing/uniform is clearly for business purposes (think branded uniforms). It’s not deductible if you could wear the clothes outside of your workplace even if you don’t. That goes for maternity clothes, too. If you have to stock up on maternity clothes – including suits for court or coats for outdoor use – to get you through your pregnancy, that cost is not deductible even if you don’t plan to wear them again.
  5. Driver’s license fees. While state and local taxes are deductible, including certain personal and real property taxes, associated costs and fees may not be. That includes your driver’s license fees and car inspection fees. Similarly, you can’t deduct the cost of licensing dogs, cats or other animals – even if they’re considered property in the state where you live.
  6. Plastic surgery. You cannot deduct the cost of surgeries to simply look or feel better; the procedure must be a treatment for a specific disease diagnosed by a physician. But plastic surgery for non-medical purposes (including breast augmentation surgery for cosmetic reasons) is never a deductible expense.
  7. Political contributions. You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. And don’t try to be tricky: you can’t get around the rules by claiming it’s for business or other purposes. The IRS clearly states that advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible.
    English: Traffic with 73 solo drivers vs. traf...

    English: Traffic with 73 solo drivers vs. traffic with 73 commuters using commute alternatives including bus, carpool and vanpool. (Photo credit: Wikipedia)

  8. Commuting expenses. You cannot deduct the costs of getting to and from work, no matter if you take a bus, trolley, subway, taxi, or drive your own car. Commuting expenses to and from your regular place of work (as opposed to travel for work) are never deductible.
  9. Private school. Private school expenses (including tuition) are not deductible. However, expenses for a child in nursery school, preschool, or similar programs for children below the level of kindergarten are deductible for purposes of the child care tax credit if they otherwise qualify as child care. The IRS takes the position in Pub 503 (downloads as a pdf) and in the Regs that expenses to attend private or parochial kindergarten or higher grades are not deductible (I happen to think that’s not always the case).
  10. Babysitting. Occasional babysitting so that you can catch a movie that isn’t animated (!) or enjoy a nice meal may be a much-needed expense, but it’s still considered personal in nature and not deductible. This should be distinguished from childcare that allows you to work or look for work: those expenses may be count towards the child and dependent care credit.
  11. Vitamins. For federal income tax purposes, you can only deduct qualifying medical expenses: qualifying medical expenses include the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. That includes any medicine or drug which requires a prescription of a physician for legal use. Over the counter meds – even if you need them – don’t count unless prescribed by a doctor (like gym memberships, the prescription is required, a mere mention or suggestion isn’t sufficient).
  12. Child support. Child support is tax neutral. It is neither tax deductible to the payor nor taxable to the recipient. Spousal support, on the other hand, is both tax deductible to the payor and taxable to the recipient. You don’t get to choose which is which at tax time: that’s up to the judge or it must be memorialized in agreement.

Mid year 2014 Tax Planning

It is almost June 30th which means we are about half way through 2014. It is not too late or too early to do some tax planning to manage your tax liability.

Common strategies/suggestions for lowering your tax liability include:

  1. Income deferral (hold off on selling those stocks until 2015)
  2. Deduction acceleration (paying your winter tax bill early)
  3. Increasing your 401(k) deferral percentage
  4. Establishing an HSA with a high deductible health insurance plan

Additionally, this article from BusinessWest.com has some great ideas/suggestions… if you would like to discuss any of them with me and find out how they might apply to you, please contact my office.

THANKS!

It’s never too early to do tax planning

There are always things you can be doing throughout the year to lower your tax bill at year end. Full year tax projections are a great way to see how what you do now will make your life easier come tax time in 2015 and they can be updated as your circumstances change… contact me at any time if you would like one prepared for you.

As an additional resource, here is an article from Kiplinger with some good ideas you can implement right now.

William A. Olson, CPA

 

4 Tax Planning Moves to Make Before Year End (from Market Watch)

With the end of the year approaching, it’s time to make some moves to lower your 2013 tax bill. This is the second installment of our two-part series on that subject (also see: Tax moves to make before Christmas).

Strategy: Prepay Deductible Expenditures

If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2013 write-offs makes sense if you expect to be in the same or lower tax bracket next year. (See the tables at the end of this column for the 2013 and 2014 federal income tax brackets.)

January House Payment: Accelerating the house payment that’s due in January will give you 13 months’ worth of deductible interest in 2013 (unless you’ve already been following the prepayment drill). You can use the same strategy with a vacation home.

State and Local Taxes: Prepaying state and local income and property taxes that are due early next year can reduce your 2013 federal income tax bill, because your total itemized deductions will be that much higher.

Charitable Donations: Prepaying charitable donations that you would otherwise make next year can reduce your 2013 federal income tax bill, because your total itemized deductions will be that much higher. Donations charged to credit cards before year-end will count as 2013 contributions.

Medical Expenses and Miscellaneous Deduction Items: Consider prepaying expenses that are subject to deduction limits based on your AGI. The two prime candidates are medical expenses and miscellaneous itemized deductions. As explained earlier, medical costs are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be 65 or older as of year-end, the deduction threshold is a more-manageable 7.5% of AGI. Miscellaneous deductions—for investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses—count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you’ll have a fighting chance of clearing the 2%-of-AGI hurdle and getting some tax savings.

Warning: Prepaying Is Not a No-Brainer: The prepayment strategy can backfire if you will owe the alternative minimum tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions. So prepaying these expenses may do little or no tax-saving good for AMT victims. Solution: ask your tax adviser if you’re in the AMT mode before prepaying taxes or miscellaneous deduction items.

Strategy: Make Major Year-end Purchases and Deduct Sales Taxes

If you live in a state with low or no personal income taxes, consider making the choice to deduct state and local general sales taxes instead of state and local income taxes on your 2013 return. Most people who choose the sales tax option will use an IRS-provided table to calculate their allowable sales tax deduction. However, if you’ve hoarded receipts from your 2013 purchases, you can use your actual sales tax amounts if that results in a bigger write-off.

Even if you’re stuck with using the IRS table, you can still deduct actual sales taxes on a major purchase such as a motor vehicle (car, truck, SUV, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an aircraft, a home (including a mobile prefabricated home), or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle. So making a major purchase (or motor vehicle lease) between now and year-end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

Remember: the sales tax write-off only helps if you itemize. And if you’re hit with the AMT, you’ll lose some or all of the tax-saving benefit.

Strategy: Prepay College Tuition

If your 2013 AGI allows you to qualify for the American Opportunity college credit (maximum of $2,500) or the Lifetime Learning higher education credit (maximum of $2,000), consider prepaying college tuition bills that are not due until early 2014 if that would result in a bigger credit on this year’s Form 1040. Specifically, you can claim a 2013 credit based on prepaying tuition for academic periods that begin in January through March of next year.

  • The American Opportunity credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high. The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000. The range for married joint filers is between MAGI of $160,000 and $180,000. MAGI means “regular” AGI, from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the U.S. which you probably don’t have.
  • Like the American Opportunity credit, the Lifetime Learning credit is also phased out if your MAGI is too high. However, the Lifetime Learning credit phase-out ranges are much lower, which means they are much more likely to affect you. The 2013 phase-out range for unmarried individuals is between MAGI of $53,000 and $63,000. The 2013 range for married joint filers is between MAGI of $107,000 and $127,000.

If your MAGI is too high to be eligible for the Lifetime Learning credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider prepaying tuition bills that are not due until early 2014 if that would result in a bigger deduction on this year’s Form 1040. As with the credits, your 2013 deduction can be based on prepaying tuition for academic periods that begin in the first three months of 2014.

Strategy: Give to Charity

If you have charitable instincts, here are two suggestions.

Donate Appreciated Stock; Sell Losers and Donate Cash: If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you’ve held in a taxable brokerage firm account for over a year, consider donating them, instead of cash, to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and donate the cash sales proceeds. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Remember: you must itemize deductions to gain any tax-saving benefit from charitable donations, except for donations out of an IRA, as explained immediately below.

If You’ve Reached Age 70 1/2: Donate from Your IRA: You can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA, if you’ll be 70 1/2 or older by year-end. Such direct-from-your-IRA donations are called qualified charitable distributions, or QCDs. Because they are tax-free, and no deductions are allowed for them, QCDs don’t directly affect your tax bill However, they count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70 1/2. So you can avoid taxes by arranging for tax-free QCDs in place of taxable RMDs. Note that the QCD privilege will expire at the end of this year unless Congress extends it.

Don’t Overlook Estate Planning

For 2013, the unified federal gift and estate tax exemption is a relatively generous $5.25 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. You may also have state estate tax issues that need to be addressed. Finally, you may need to make some changes for reasons that have nothing to do with taxes (births, deaths, and so forth). Contact your estate planning pro if you think your plan might need a tune-up. Year-end is a good time to do it.

Click here for the full article.

2013 changes to your Income Taxes

Even in a year with no changes to the tax laws, it’s often a good idea to do an income tax projection at some point during the year to see if there are ways to lower your tax liability or to avoid interest and penalties for underpayment. The article below details seven significant changes to the Federal Income Tax that may affect you.

Seven significant new income tax law changes went into effect at the beginning of the year as a result of two pieces of legislation: The 2010 Health Care Reform Act and the American Taxpayer Relief Act of 2012.

Although the new laws are primarily designed to increase taxes for those with higher levels of income, everyone with earned income is affected. With the first seven months of 2013 behind us, have you begun planning for these changes?

Increased Social Security tax

At a basic level, anyone with earned income has seen a reduction in take-home pay this year as a result of the first tax law change. The employee Social Security tax rate, which was reduced from 6.2% to 4.2% in 2011 and 2012, is back to 6.2%.

Combined with the increase in the maximum Social Security wage base from $110,100 in 2012 to $113,700 in 2013, maximum Social Security tax withholding has increased from $4,624.20 in 2012 to $7,049.40 in 2013. This has resulted in a total paycheck reduction of $2,425.20 for individuals reaching the maximum wage base.

Six changes for high income levels

There are a total of six changes to be aware of once your income exceeds the $200,000 single or $250,000 married filing joint (MFJ) levels. Two of the changes begin at these levels, two at $250,000 (single) or $300,000 (MFJ), and two at $400,000 (single) or $450,000 (MFJ), with different definitions of income associated with each change.

A summary of the six changes, which are also included on the 2013 Individual Federal Income-Based Tax Law Changes spreadsheet, including the income types and applicable income threshold amounts, follows:

1. Medicare earned income tax increase

The Medicare tax on earned income increased from 1.45% in 2012 to 2.35% in 2013 on earned income exceeding $200,000 (single) or $250,000 (MFJ) if modified adjusted gross income (MAGI) also exceeds these threshold amounts. While the percentage increase of 0.9% is about half of the Social Security tax rate increase of 2%, unlike the calculation of Social Security tax which is capped at a maximum wage base, there’s no limit on the amount of wages that are subject to the Medicare tax.

2. New Medicare investment income tax

The Medicare investment income tax is a brand new tax that penalizes individuals with MAGI exceeding $200,000 (single) or $250,000 (MFJ) with taxable interest, dividends, and capital gains, as well as rental, royalty, and nonqualified annuity income, otherwise known as “investment income.” A surcharge of 3.8% is assessed on the lesser of net investment income or MAGI in excess of the applicable threshold amounts.

3. Itemized deductions limitation

Repealed in 2010, the itemized deductions limitation was reintroduced this year to the dismay of individuals with adjusted gross income (AGI) exceeding $250,000 (single) or $300,000 (MFJ). It reduces otherwise allowable itemized deductions by 3% of the amount by which AGI exceeds the threshold amounts with some exceptions.

4. Personal exemption phase out

Also repealed in 2010, the personal exemption phase out reduces the personal exemption amount of $3,900 per individual in 2013. The amount of the reduction is 2% for each $2,500 in excess of AGI threshold amounts of $250,000 (single) or $300,000 (MFJ).

5. Income tax bracket increase

Individuals with taxable income (TI) of $400,000 (single) or $450,000 (MFJ) will see an increase of 4.6% in their top tax bracket, with the 2012 top bracket of 35% increasing to 39.6% in 2013 on income exceeding these thresholds.

6. Long-term capital gains and qualified dividends tax rate increase

The federal income-tax rate on long-term (assets held longer than one year) capital gains and qualified dividends increased from 15% to 20% for individuals with TI exceeding $400,000 (single) or $450,000 (MFJ).

When applicable, any one, let alone a combination, of the foregoing seven income tax law changes can result in a sizable increase in your 2013 federal income tax liability compared with 2012.

If you haven’t had a 2013 income tax projection prepared to determine the potential impact of the various changes on your tax situation, now’s the time to get it done. Trust me; you don’t want to wait until your 2013 tax returns have been prepared to unveil the damage.

Article above reposted from here.

Year End Tax Planning

The 2013 tax year is almost over and it is the perfect time to do some end of year tax planning… before it is too late. Many tax planning decisions can only be made before December 31st.

The first step is to estimate or project your tax liability based on the information you have now recognizing that the final numbers are subject to change. The second step is to play the “what-if” game.

  • What if I sell my Ford stock for a capital gain?
  • What if I wait to pay my winter tax bill until next year?
  • What if I buy a new computer for my business?
  • What if my bonus is 50% bigger than it was last year?

The ultimate goal of a good tax plan is to lower your overall liability. But a secondary goal is to make sure you are not going to get penalized for underpaying your liability for the current year. Either way, the objective is to save you money.

Good tax planning can you save you substantial amounts of money… and help you avoid tax penalties and interest. I offer my clients a comprehensive tax plan based on your individual circumstances. Contact me today to get yours.

Health Insurance Premium Tax Credit Calculator

Under the Affordable Care Act, individuals and families at or below 400% of the poverty level will be eligible for Health Insurance Premium tax credits under the Affordable Care Act. For a family of four, 400% of the poverty level is approximately $94,200 so many families will qualify for this tax credit.

Click here for a link to calculate your potential tax credit, and if you have questions about your personal situation please feel free to contact me using the phone number or e-mail on this website.

New Method for Calculating the Home Office Deduction (Journal of Accountancy)

Very simply, the new method available for tax years 2013 and after, allows you to calculate your home office deduction by multiplying the square footage of your home office by $5 (max = 300 square feet or $1,500). The qualifications for taking the home office deduction remain the same.

See the full article from the Journal of Accountancy below:

In Rev. Proc. 2013-13, issued in January, the IRS gave taxpayers an optional safe-harbor method to calculate a deduction for expenses of a business use of a residence under Sec. 280A, effective for tax years beginning in 2013.

Individual taxpayers who elect this method can determine the deduction by multiplying the allowable square footage by $5. The allowable square footage is the portion of the dwelling used in a qualified business use, up to 300 square feet; thus, the maximum safe-harbor deduction is $1,500. The safe harbor is elected on a timely filed original tax return (instead of on Form 8829Expenses for Business Use of Your Home, which is used for the actual-expense method), and taxpayers are allowed to change their treatment from year to year. However, the election made for any tax year is irrevocable.

No depreciation is allowed for the years in which the safe harbor is elected, but it is permitted in years in which the actual-expense method is used. The revenue procedure gives detailed examples of how depreciation is calculated in a year after the safe-harbor method is used.

To use the safe-harbor method, taxpayers must continue to satisfy all the other requirements for a home office deduction, including that the space be used exclusively for the qualified business purpose and that an employee qualifies for the deduction only if the office is for the convenience of the taxpayer’s employer.

The deduction under the safe-harbor method cannot exceed the amount of gross income derived from the qualified business use of the home, minus business deductions unrelated to the qualified business use of the home. Unlike the limitation under the actual-expense method, however, a taxpayer cannot carry over any excess to another tax year; nor can there be any carryover from an actual-expense method year to a safe-harbor year. Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe-harbor method, but not for qualified business use of the same portion of the home. The revenue procedure contains detailed rules for use of the home for part of the year. Taxpayers who have a qualified business use of more than one home for a tax year may use the safe harbor for only one home and must use the actual-expense method for the other home or homes.