10 Year-End Tax Planning Topics

November 26, 2011

1. Deferring income to 2012 means postponing taxes

Consider opportunities you might have to defer income to 2012. You might be
able to delay a year-end bonus, for example. If you’re able to push what would
have been 2011 income into 2012, you may be able to put off paying income tax on
the deferred dollars until next year.

2. Paying deductible expenses sooner may help you in 2011

Does it make sense for you to accelerate deductions into 2011? If you itemize
deductions, it might help your 2011 bottom line to pay deductible expenses like
medical costs, qualifying interest, and state and local taxes before the end of
the year, instead of waiting until 2012.

3. Income tax rates to remain the same in 2012

The same six federal income tax rates that apply in 2011 will apply in 2012.
So, depending upon your income, you’ll fall into either the 10%, 15%, 25%, 28%,
33%, or 35% rate bracket. And, as in 2011, long-term capital gains and
qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012;
and if you’re in the 10% or 15% tax rate brackets, a special 0% tax rate will
generally continue to apply.

4. Is AMT a factor?

If you’re subject to the alternative minimum tax (AMT), special rules apply.
For example, the AMT rules can effectively disallow a number of itemized
deductions, making it a potentially significant consideration when it comes to
year-end planning. You’re more likely to be subject to AMT if you claim a large
number of personal exemptions, deductible medical expenses, state and local
taxes, and miscellaneous itemized deductions. If you’ve been subject to the AMT
in the past, or think that you might be for 2011, you’ll want to make sure that
you understand how the AMT rules might affect you.

5. IRA and retirement plan contributions

Employer-sponsored retirement plans like 401(k) plans and traditional IRAs
(if you qualify to make deductible contributions) present an opportunity to
contribute funds on a pre-tax basis, reducing your 2011 taxable income.
Contributions that you make to a Roth IRA (assuming you meet the income
requirements) aren’t deductible, so there’s no tax benefit for 2011–they’re
still worth considering, though, because qualified distributions are free from
federal income tax. The window to make 2011 contributions to your employer plan
closes at the end of the year, but you can generally make 2011 contributions to
your IRA up to April 17, 2012.

6. Special distribution requirements at age 70½

Once you reach age 70½, you’re generally required to start taking required
minimum distributions (RMDs) from any traditional IRAs or employer-sponsored
retirement plans you own. It’s important to make withdrawals by the date
required–the end of the year for most individuals. The penalty is steep for
failing to do so: 50% of the amount that should have been distributed. Barring
additional legislation, 2011 will be the last year to take advantage of a
popular provision allowing individuals age 70½ or older to make qualified
charitable distributions of up to $100,000 from an IRA directly to a qualified
charity (these charitable distributions are excluded from your income, and count
toward satisfying any RMDs that you would otherwise have to take from your IRA
for 2011).

7. Depreciation and expense limits to drop for business owners and the self-employed

If you’re a small business owner or a self-employed individual, you’re
allowed a first-year depreciation deduction of 100% of the cost of qualifying
property acquired and placed in service during 2011; this “bonus” first-year
additional depreciation deduction will drop to 50% for property acquired and
placed in service during 2012. For 2011, the maximum amount that can be expensed
under IRC Section 179 is $500,000, but in 2012 the limit will drop to
$139,000.

8. Last chance to deduct energy-efficient home improvements

This is the last year you’ll be able to claim a credit for energy-efficient
improvements you make to your home (up to 10% of the cost of qualifying
property). Improvements can include a qualifying roof, windows, skylights,
exterior doors, and insulation materials. Specific credit amounts may also be
available for the purchase of energy-efficient furnaces and hot water boilers.
However, there’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve
claimed the credit in the past–in one or more years since 2005–you’re only
entitled to the difference between the current cap and the amount you’ve claimed
in the past.

9. Other expiring provisions

Barring additional legislation, this is the last year that you’ll be able to
elect to deduct state and local general sales tax in lieu of state and local
income tax, if you itemize deductions. This also will be the last year for both
the above-the-line deduction for qualified higher education expenses, and the
above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid
by education professionals.

10. Get help

Making effective year-end moves requires a solid understanding of the rules
that are in effect for both 2011 and 2012. It also requires a comprehensive
grasp of your overall financial situation. A financial professional can help you
evaluate potential opportunities, and can keep you apprised of any last-minute
legislative changes.

Family Business Succession

October 11, 2011

Succession Planning and Estate Planning for Family Businesses

Succession planning is as important in a family business as in a public corporation. According to the Family Business Institute, 97% of family businesses do not survive past the third generation. Succession planning and estate planning can help determine what to do if a family member who is next in line is performing poorly.

There are numerous high profile examples of failed family businesses. Perhaps the most glaring is the Busch family, founders of Anheuser-Busch. Adolphous Busch joined the struggling company in 1864, and through four generations it thrived, generating nearly $17 billion in revenue in 2008. But personal problems and failure to adapt to the market led to the company’s hostile takeover by Belgian-Brazilian conglomerate InBev.

With successful family businesses, the generation that created the wealth tends to be highly productive. The creator is frequently a larger-than-life type A personality who enjoys enormous control over the company and undertakes extreme effort for wealth creation, which can be detrimental to family relationships. The founder often does not share control or ideas about the company with his family while he is alive.

The next generation doesn’t learn about saving or wise spending, becoming accustomed to a lavish lifestyle. Subsequent generations lack the incentive to become strong, resourceful leaders and to strike out on their own to make more money. They develop a completely different ethic about spending than the previous generation. Since the founder put himself over his family, adversarial relationships develop between spouses and children, often leading to conflicts and alcohol and drug abuse.

The failure of wealth to survive to the third or fourth generation is usually not because of estate taxes or the inability to transfer the wealth, but because the knowledge of how to create wealth and then to keep it is not passed on. When the children are not integrally involved in the company before the founder’s death, they lack wisdom and experience. They also may feel they have something to prove once they take over, which can lead to reckless decision-making.

Children in the second and subsequent generations also may not be as intelligent or shrewd as the founder and find themselves taken advantage of. This is especially the case for children with a famous name. The name attracts hangers-on who do not have the children’s best interests at heart. Detailed estate planning using trusts can help mitigate this problem by not allowing the children unfettered access to inherited money.

Estate planning is also important because of the danger of drug and alcohol abuse. The World Health Organization states that the more money someone has, the more likely they are to abuse drugs and alcohol.  Substance abuse is one of the most common reasons wealthy families see their fortunes squandered. Trusts can be used to help encourage entry into a recovery program or keep substance abusers away from the family fortune.

A successful family business created through dedication and hard work by one generation can be preserved through careful succession planning and estate planning by qualified professionals.

  photo credit: Tumbleweed:-)

A Child’s Inheritance

September 28, 2011

Inheritance Planning for Children

Parents often worry that their children will spend their inheritance recklessly. There are a number of steps that can be taken to ease their concerns. Select financial training, carefully chosen trustees, and creatively written trusts can be used to develop a plan that gives children room to mature financially while still respecting their independence.

Parents need to make an honest determination of their children’s financial knowledge. Often, simply allowing children to sit in on meetings with financial advisors can help teach them how to be an owner of wealth. Another method is to create a family investment firm that can give children some experience. They sit on the company’s board, interview investment advisors, and hold quarterly strategy calls where the parents listen, but don’t talk. The company can even pay for financial education programs for the children. Such methods often yield surprising results.

Picking the right trustees can also be important. One approach is to have a corporate trustee who controls cash disbursement and a co-trustee who knows the child, like a longtime family friend. The co-trustee can periodically report to the corporate trustee on the beneficiary’s financial development. Alternatively, the heir could serve as the co-trustee in a sort of apprenticeship role.

Creatively written trusts are the most common way parents try to protect their assets from reckless spending. A delicate balance must be achieved between honoring the parents’ goals for their children, respecting the children’s independence, and not putting too much of a burden on the trustee.

Some parents depend on extremely specific trust language describing how their children can access inherited money, but most experts advise against this. Such language constrains both the children and the trustee and can be very hurtful to a child. Clauses that hold money back if an heir is not behaving should include generic language instead of singling out an individual by name. The goal is to find a middle ground where the parents make clear that the trust should not be the sole means of support for a child in good health.

Parents with children who are demonstrably reckless spenders or other problem heirs have several ways to use trust language to protect their assets. For example, having a trustee from outside the family can be essential for children with substance abuse problems. Trust language can give a trustee the ability to pay bills like rent or medical costs, if necessary. In addition, a trust can be structured so that a spendthrift child cannot get title to the family home, allowing the trust to buy real estate on behalf of the heir. A trust can also be set up so a child’s creditors cannot access the inheritance.

Parents must realize that a trust can continue for more than one hundred years, so clauses should not be too narrow or specific. Trustees should be permitted to adapt to changed circumstances. A great approach is to include a letter with the trust documents which can expand on the legal language to explain the parents’ decisions.

photo credit: quinn.anya

Teenagers and Roth IRAs

August 11, 2011

Dear CPA

Recently I had a discussion with my husband about putting some funds in an IRA for our 18 year old.  We have little extra money this year and thought it might be good to get her going with a retirement savings account.   Should we do a Roth or traditonal IRA?

Marie,  Eden Prairie

Hello Marie,

Yes, I think you’re on to something.  Not only would starting a retirement account for your daughter be a good idea, funding a Roth IRA would be an even better idea.

If you daughter is receiving compensation in the form of wages, she could begin a retirement account and (you can) fund it up to $5,000 depending on her compensation.  She must have taxable wages in the year.

A Roth contribution is non-deductible for taxes, but once the funds are in a Roth, the earnings would be tax free once withdrawn.  Starting a Roth for a younger person offers tremendous benefits over the years.

Keep in mind that you have until the April filing deadline to fund the Roth.

Call me to help get you started!

888-RAPACKI

Joe

photo credit: alancleaver_2000

How Do “High Income” Individuals Pay No Tax?

June 6, 2011

The Internal Revenue Service recently released tax data from 2007. 

In 2007 over 2.5 million Americans reported “adjusted gross incomes” of $200,000 or more.  Over 10,000 of them paid zero federal income taxes.   Many more high income taxpayers paid only minimal income taxes .

How did they do it?  According to the IRS the items that produced the largest tax effects on high-income taxpayers were:

1.  Interest paid (including mortgage interest and investment interest)

2.  Taxes paid (Real Estate and State Income Taxes)

3.  Charitible contributions

4.  Casualty and theft losses

5.  Partnership and “S corporation” losses

6.  Tax-exempt interest

What sets these people apart frequently is “TAX PLANNING.”  Higher income individuals utilize professionals to help them in tax planning.  Middle income taxpayers may not have all the same opportunities, but can frequently save considerable taxes with some planning.  

We cannot promise that tax planning will eliminate your tax entirely, but it will give you your best shot to save some money.    

  photo credit: kenteegardin

Tax Refund to Fund Fun?

February 23, 2011

As snow melts and the calendar slides into April it means a new season is on the way. No, not spring. Tax season. For many, tax season means a refund check. Then the question becomes: What do I do with that refund?

The answer to that question for many people, at least according to recent surveys, is pay bills. And that is a strong plan—paying down credit card bills or other high-interest loans pays off in the end.

But what about more creative uses for your refund? After all, you can’t spell refund without fun. Consider spending your refund on a trip you have been planning. Or consider other health benefiting activities such as a massage or signing up for a health club membership. Investing money on your health—mental or physical—will continue to pay dividends in the future.

No matter what you choose, make sure you stay within your means and never lose sight of your long-term financial plans.

And if you’re not gettting a refund?  Perhaps you should be visiting somebody as myself for tax planning.  We can help ensure that your financial picture will be bright in the spring of 2012.

photo credit: Just Add Light

Insurance Against College Calamities

August 26, 2010

Some important tips courtesy of the AICPA :

If you’re the parent of dependent college students living away from home, you may not be aware that your homeowners policy will cover their personal property and personal liability.

Personal Property Coverage

Although limits and coverage vary by state, as long as your children’s permanent residence is your home, their personal property is automatically covered anywhere in the world up to a limit of 10% of your personal property coverage limit or $1,000, whichever is greater. Under the terms of a basic policy, they’re covered for the actual cash value of their lost or damaged items.

To get the most from your coverage:

• Take an inventory of your child’s personal property.
• Keep the receipts of valuable items.
• Make a video of the dorm room or apartment after you’ve set it up.

Personal Liability Coverage

Personal liability coverage protects your child against claims of unintentional bodily and property damage up to $100,000 per incident. Coverage includes medical bills for injured parties up to three years from the time of the incident, property damage up to $500 per occurrence and legal defense against claims brought on by injured parties.

A note about renters insurance
If your child establishes legal residency in a place other than your home and lives in an apartment, be aware that a landlord’s insurance policy covers only damage to the apartment building itself, not the tenant’s personal property. You should, therefore, purchase a separate renters policy, which provides personal property and personal liability coverage.

These tips brought to you by Liberty Mutual Group and the AICPA Auto and Homeowners Insurance Program.
photo credit: Karmalize

Bankruptcy

August 9, 2010

Joe,
My husband and I feel lost due to our mounting bills and debts and inability to pay our taxes. Some of our friends suggested filing bankruptcy, but we are worried about both the black mark on our credit scores, and, to be honest, the moral stigma. We aren’t bad people, just found ourselves in tough times and not sure what to do. Any advice would be much appreciated.
Madeline, Plymouth

Madeline,

Thanks for your question. I hope you find my thoughts helpful. Before l begin, let me offer two thoughts:

1) There is help available.
2) There is no need to feel guilty for your situation.

First, let me address the guilt issue. Many of my clients fear the moral stigma of not being able to pay their “fair share” of taxes. But the fact is that sometimes good people simply are over-burdened financially. Whether it is due to job loss, an ARM that has gone out of control, or shrinking investments, people need to make financial choices. And for many people, simply providing food for their family limits their ability to pay taxes. Note: I am not suggesting to you, or anyone else for that matter, that it is OK to skip out on tax liabilities if you can afford it. However, from your question I gather you are doing all you can.

Second, allow me to address the request for help. Your first step should be to meet with a CPA to talk about taxes and an attorney who specializes in bankruptcies for your assets. I say that because each situation is different. For some people bankruptcy is the best options; for some people it is not. The only way to say for sure is to talk with experts—not neighbors.

If you were to come in to my office—and I hope any other CPA would follow these steps—I would first request your transcript of record from the IRS. This would give me a list of your outstanding liabilities itemized by year. It would give me a host of other needed information such as filing dates and extensions requested.

Once I had that information I could recommend a course of action. Not all bankruptcies are created equal. For some people a Chapter 7 bankruptcy (liquidates assets to pay creditors) works better. For others Chapter 11 or Chapter 13 bankruptcy (defers payments and makes a payment plan) is the answer.

Another advantage of speaking with a CPA is our knowledge of tax payments and scheduling. The IRS has a set of very complex rules that govern the timeframe and eligibility of liquidating or deferring liabilities. For instance, a return needs to be filed long before you are eligible to file for bankruptcy. This is just a basic sketch of the rules and plans out there. Someone with an in-depth knowledge of these rules can leverage your situation to maximize the advantage to you.

Madeline, thank you for your question and hope my answer provides some comfort and clarity. If it helps, know that many other people—many good, honest people—are in your situation. Please don’t hesitate to contact me if there is anything else I can help with.

Best,
Joe Rapacki

photo credit: danesparza

Unemployed or seeking a new position

July 5, 2010

photo credit: irina slutsky

The Minnesota Society of CPAs (MNCPA) offers some advice to keep in mind during the economic recovery.

Roth IRA

November 30, 2009

 

 

Joe,

One of my friends just asked me if I planned on converting my IRA to a Roth IRA. He was excited because of a rule change that now made him eligible. He asked me if I were going to do the same thing. I lied and said I was. To be honest, I don’t even know the difference. Should I convert my IRA? What is the rule change he is talking about?

Walter, Stillwater

 Walter,

You are not alone in not knowing the difference between a traditional IRA and a Roth IRA. The basic difference rests when the taxes come out. With a traditional IRA you put money in tax free, but are then taxed when you withdraw. With a Roth IRA, you pay an upfront tax on the investment, but then the money is tax-free to withdraw.

My guess is the change he is talking about is the dropping of the income limit for those who can open or convert a Roth IRA. In the past, only investors with a yearly income under S100,000 could access a Roth IRA. A recent study by Fidelity Investments found that 83% of those surveyed knew nothing about the removal of income limits on IRAs. Understandable given that most investors face other financial issues to worry about. Which is a shame because investor ignorance clouds a significant economic opportunity.

So should you convert your traditional IRA to a Roth IRA? Probably. The most obvious reason is the tax-free income stream. With a Roth IRA, an investor pays the upfront tax, based on his income tax percentage, on the contribution. This strategy works especially well for those who plan on being in a higher income bracket upon retirement than they are now. Not just those starting out, but those who are out of work right now.

But even if you are doing well financially a Roth conversion is advisable. In a one time offer, the government will allow investors to defer the tax hit over two years. If you convert your traditional IRA to a Roth IRA in 2010, you can spread the tax liability evenly over 2011 and 2012. This helps to lessen the shock of a one time large tax hit.

 Another reason to convert now is to take advantage of a shrunken portfolio. Yes, there is an upside to the freefall of your IRA. When you convert to a Roth IRA, you are taxed on the amount converted. If your IRA has a value reduction of 30%, that means 30% less in taxes. When the account grows, you will not be taxed on the additional growth.

Finally, a conversion to a Roth IRA provides you more control over your estate planning. There are no mandatory deductions at 70.5, meaning a Roth IRA is preferable if you plan to pass on the account to beneficiaries.

All of these factors contribute to the proverbial perfect storm for you to convert your traditional IRAs to a Roth IRA. Don’t let your ignorance or a lack of press contribute to a missed financial opportunity.

Hope this information helps. Maybe you can even give your friend some advice. As always, check with a money manager whom you trust before making any conversions. There are many subtle rules that impact your conversion. Best of luck, Walter.

photo credit: scottwills

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