Accounting
10 YEAR-END TAX MOVES TO CONSIDER
Hear those holiday bells? Soon they’ll be ringing in the New Year. But before the clock strikes 2013, you have opportunities to reduce your 2012 federal income tax bill. Here’s a grab-bag of suggestions.
1. Plan for the AMT. The annual exemption may change, but the usual triggers – items that can create alternative minimum tax liability such as certain large deductions – are the same.
2. Education incentives. Pre-paying qualifying expenses for the first semester of 2013 can get you a larger credit or deduction this year.
3. Family gifts. Take advantage of the expiring $5.12 million lifetime gift exclusion by sharing the wealth – and the tax burden – with lower-bracket family members.
4. Deferred plans. Maximize contributions to retirement plans such as your 401(k) or IRA, and fund other tax-favored accounts, such as health savings accounts.
5. Charitable contributions. Gifts to qualified charities made on your credit card by Dec. 31 qualify for a deduction this year, even though you’ll receive the credit card statement in January.
6. Itemized vs. standard deduction. Shift expenses such as property taxes between years to “bunch” deductions and get the most tax benefit.
7. Disaster relief. Check for a potential refund, and consider amending your 2011 return to claim your loss if you live in a federally declared disaster area.
8. Investment cost basis. Understand your cost basis choices before capturing capital gains or losses, especially when selling mutual funds.
9. Temporary depreciation deductions. Assets purchased for your business or rental property before year-end may qualify for accelerated depreciation methods that are scheduled to expire on Dec. 31.
10. Kiddie tax. Instead of transferring assets to your children to save for future education expenses, consider contributing to a 529 plan, which can limit exposure to “kiddie” tax on unearned income.
GIVE YOUR BUSINESS AN ANNUAL CHECKUP
You get an annual checkup from your physician to monitor and manage your personal health. Shouldn’t you do the same for your business? To keep your operation in top shape, consider an annual business review. The benefits of such a review are evaluating current performance to better plan and execute future operations.
Some things you should evaluate in an annual business review:
- Revisit your business strengths, weaknesses, and opportunities. Is your competitive position improving, or are you losing ground?
- How did you perform relative to your business plan? Did you meet or exceed your objectives? Are sales, profit margins, and cash flow improving?
- Get a pulse on your customers. An annual customer satisfaction survey is a great way to assess performance, obtain insight on potential new products or services, and to let your customers know how much you value their business.
- Evaluate your team. Are you developing a superior team, employing their unique talents, and training them to improve performance? Do you reward on merit or simply on seniority?
- How effective is your marketing? Are your current methods and channels working well, or are you simply doing what you’ve always done?
- Meet with your insurance agent. Is your coverage adequate and appropriate for changes in your business activities and acquisitions?
- Review your business tax strategy. Identify opportunities for tax savings. Are you using the right form of business entity? Are you aware of recent changes in the tax code that might benefit your business?
- How is your scorekeeping? Do your measurements track your progress or do they measure things that don’t matter? What are the key performance measures that drive your business?
REVIEW THE PROS AND CONS OF DRIPS
Appropriately enough, investors may notice a slow trickle in earnings from “dividend reinvestment plans” (DRIPs). But these investments may end up providing a steady stream of income over the long run.
The concept is relatively simple. More than 1,000 companies and closed-end mutual funds around the country offer DRIPs to their shareholders. These programs enable shareholders to purchase stock directly from the company by automatically reinvesting dividends in additional shares. Many DRIPs also allow you to voluntarily make cash payments directly into the plan to buy even more shares.
Here are some of the main attractions of DRIPs.
- Most DRIPs don’t charge any fee, or only a nominal fee, for purchasing shares.
- Participants may be able to purchase stock at a discounted price. The discount usually ranges from 3 percent to 5 percent and could be as high as 10 percent.
- The DRIP may allow you to send optional cash payments (OCPs), often for as little as $10, directly to the company to buy additional shares. OCPs are often used to purchase fractional shares, thereby enabling investors to acquire blue chip stocks they might not otherwise be able to afford.
- It’s easy to join in. Once you’ve chosen a particular stock, check to see if it has a DRIP. The company will furnish the specifics, including a prospectus and the appropriate application forms.
But that’s not to say that investing in DRIPs is without drawbacks. There is a growing trend within the industry to charge a small fee for acquiring shares. Minimum amounts for purchases may be required. Also, the dividends that are reinvested are treated as taxable income, even though you don’t currently receive any cash.
Consider all of the implications of investments in DRIPs before including DRIPs in your portfolio.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail kpaccounting@verizon.net or kpinsurance@verizon.net
FINANCE
Complying with Foreign Financial Account Reporting
As the middle of the holiday season and the New Year is around the corner, many people are working on tax planning for the current year and the next year. As taxpayers gather their tax documents, they may wonder if there are additional sources of income required to be reported. U.S. citizens and residents are required to report worldwide sources of income, such as income from foreign bank accounts and foreign investments on their tax returns. Furthermore, the Bank Secrecy Act of 1970 requires that Taxpayers file a Report on Foreign Bank and Financial Accounts (FBAR) with the U.S. Department of the Treasury to report their foreign financial accounts with specific account information, annually, in any year that the aggregate value of their foreign accounts exceeds $10,000 at any time during the year.
The focus on investigating large money transactions took on new importance and focus after the 9/11 attacks, with the U.S. government emphasis on monitoring movement of funds from terrorists and criminal organizations. The result of this has led to increased scrutiny of offshore accounts for US Taxpayers1. The IRS in the last several years has been going after offshore accounts and has set up a new unit that specializes in monitoring and investigating foreign and overseas transactions. The United States has expanded international cooperation with a number of other countries through Tax Exchange Agreement Treaties.
If a taxpayer is investigated by the IRS and comes under examination for unreported foreign accounts, he or she may be subject to criminal and/or substantial civil penalties in addition to paying back-taxes for the unreported foreign income. The penalty for failing to file a FBAR each year can carry civil penalties of up to $100,000 or 50 percent of the total balance in the foreign account(s), whichever is greater, per willful violation. For example, if an individual has balance of $300,000 in foreign accounts for each of the last five years the penalty could be a maximum of $750,000 ($150,000 x 5). Criminal penalties can carry a maximum five years in prison and a $250,000 fine. The deadline for filing timely FBAR’s in any calendar year is June 30th of the following year.
Starting in 2009, the IRS introduced the Offshore Voluntary Disclosure Programs (OVDI) program. The program is for taxpayers to come forward voluntarily reporting their offshore accounts to minimize the risk of criminal prosecution. A third version of the OVDI was created for 2012 and the good news is, as of now, the program is open ended. But, the IRS has reserved the right to end the program without any advance notice. The 2012 OVDI Program requires the taxpayer to pay back-taxes and related penalties for the years 2004 through 2011. The FBAR Penalty for the 2012 OVDI program is 27.5 percent of the highest account value in the unreported foreign accounts.
Any taxpayer with offshore financial accounts should consult with a tax professional and then weigh the potential benefits and risks on how to proceed in reporting their offshore accounts.
1R. Sebastian Gibson. "Recent IRS Efforts To Discover The Names Of Owners of Undeclared Foreign Bank Accounts." Avvo. 2010. the Law Firm of Sebastian Gibson. 26 Nov. 2012 <www.avvo.com>.
Satya Shaw, CPA, MBA, of Shaw Tax Advisory Group, can be reached at (o) 813-960-7429, (c) 901-550-2920, or e-mail satyashawcpa@aol.com Sagar Patel, accountant, can be reached at 813-960-7429 or e-mail spatel@shawfinancial.net
Your Annual Review Checklist
Preparing for an annual financial review may be easier with a checklist to help you focus on important matters. With that in mind, here is a list of key considerations that you may want to discuss with your financial advisor.
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Do I need to rebalance my asset allocation? Depending on the performance of your investments so far this year, you may want to examine whether your mix of stocks, bonds, cash, and other assets is close to your target. If not, it may be time to rebalance to a mix that more closely resembles your desired exposure to risk and potential return.1 Rebalancing can be accomplished in two ways: You can sell existing assets and use the proceeds to bring your portfolio closer to your desired mix. Or you can leave your portfolio as is and allocate new investments to the areas that you want to increase. Rebalancing may involve tax consequences, especially for non-tax-deferred accounts.
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Am I on track to fund my retirement? Making sure you are on track to amass the assets you will need for your later years should be one of your key concerns. If you participate in an employer-sponsored retirement plan, consider investing as much as you can afford. If you do not have access to an employer-sponsored plan, or if you do and can afford to contribute even more, consider funding an IRA.
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What were my yearly capital gains and losses? If your year-end planning entails selling certain assets, be aware of rules regarding capital gains and losses. Gains on investments held less than one year, known as short-term capital gains, are taxed as ordinary income. Gains on investments held for one year or longer, considered long-term capital gains, are taxed at a 15 percent rate for federal income tax purposes. State tax rules may differ. On the federal level, capital losses offset capital gains and are netted against each other. If net capital losses still remain, up to $3,000 may be used to offset ordinary income. Capital losses not used in a given year can be carried forward to future years. Note that different rules apply for gains on the sale of collectibles, or qualified small-business stock.
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Am I taking full advantage of tax-advantaged accounts? Remember that certain types of investments receive favorable tax treatment. Employee contributions to traditional 401(k)s, for example, are deducted from your paycheck before taxes are assessed, which lessens taxable income during the year the contribution is made. Contributions may potentially grow free of federal income taxes until qualified withdrawals are made during retirement. If you are age 59 1/2 or older and have maintained the account for a minimum of five years, qualified withdrawals from a Roth IRA are tax free.2 (To contribute to a Roth IRA, investors must meet income thresholds established by the IRS. Learn more at www.irs.gov.)
You may have additional concerns unique to your situation, but this checklist may help you keep your investment portfolio in order.
Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at Seema.Ramroop@morganstanleysmithbarney.com or call (727) 773-4629.
The Tough Conversation All Couples Should Have
If asked, most couples would say it's important to protect the financial future of their families in the event of a spouse's unexpected death.
Yet 74 percent of couples rarely or never discuss the topic of life insurance as part of their financial planning strategy, according to a 2010 State Farm® Life Insurance Study. A 2011 study from finance research firm LIMRA revealed that 41 percent of U.S. adults don't even have life insurance.
That doesn't mean it's not on their minds. Sixty-two percent of respondents said uncertainty in the economy makes having life insurance even more important than it had previously been.
Bringing up the subject can be difficult. It may be that discussing the unexpected death of a spouse is awkward. Or that one spouse already feels the pressure of being the primary wage earner. Or that a spouse who has recently lost a job will react negatively to the topic.
But whatever the obstacles, talking about life insurance is critical to both partners – even if one earns substantially more than the other, or one doesn't earn an income. To start the discussion, try these tips:
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Talk before you're in a financial crisis. Pick a time when you're not stressed, and treat the topic as you would any other aspect of your financial planning.
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Make a plan that incorporates life insurance as a primary component of your overall financial strategy. Having a plan in place can be reassuring if your circumstances change.
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Set a monthly budget and learn what options you can afford. Schedule follow-up evaluations and adjust your coverage as your needs, family situation and income change.
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Consult an insurance expert who can provide an outside perspective and make the discussion less stressful.
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Focus your discussion on the love you have for your family and your desire to protect it from financial burdens, rather than on the possible death of a spouse.
Adi Khorsandian, a State Farm agent providing insurance and financial services, can be reached at (813) 991-4111 or visit www.adikinsurance.com