A Double-Dip Tax Deduction

Over the years, the IRS has closed most so-called “tax loopholes.” There is one type of charitable donation that allows you to capture a double benefit.  Donating appreciated shares of a stock or fund to a qualified charitable organization will give you two different tax breaks.  One, you can deduct the current value of the stock as a charitable donation. Two, you avoid paying capital gains tax on your gain.

For example; you bought 100 shares of XYZ for $10,000 five years ago and it is now worth $20,000, donating the 100 shares would give you a $20,000 write-off and you avoid paying tax on the $10,000 gain.  This really is a double-dip deduction.

There are two caveats that I want to mention.  First, make sure you have owned the stock over one year.  The rules are very different if you donate a stock with a short-term gain. In the above example, if you had only owned the stock for 11 months and donated $20,000 worth of stock your deduction would be limited to your cost basis or $10,000.  You would lose half of your deduction.

The second caveat is that you should not do this with depreciated stock.  If your stock has lost value since you purchased it, you should first sell it to capture the tax loss and then donate the proceeds to your charity.  If you donate the stock in this case, you will lose the capital loss write-off.

As always, consult your advisor before making this type of financial decision.

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

A Bit of Help with IRS Inflation

The IRS will be adjusting many dollar limits and benefits due to inflation. Here are some of the changes starting January 1 , 2013:

• Deduction for business use of Auto will be 56.5 cents per mile, medical miles increase to 24 cents and charitable miles remain at 14 cents.
• The annual exclusion for gifts increases to $14,000 per person.
• Foreign earned income exclusion increases to $97,600.
• Social Security benefits will increase by 1.7%.
• The wage base for computing Social Security tax will increase to $113,700.
• Threshold for unearned income regarding “kiddie tax” rises to $1,000.
• The maximum IRA contribution will increase to $5,500.
• The maximum contribution to 401K and 403B plans will increase to $17,500, for those over 50 years old the catch up amount remains $5,500.
• The maximum contribution to a SIMPLE IRA plan will increase to $12,000.
• For those covered by a pension plan at work, the income phase out for deductible IRA contributions increases as follows;  $59,000 to $69,000 for singles and $95,000 to $115,000 for married filing joint.

Now we wait for the fun part…How much will they raise our taxes??

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Tax provisions of the Affordable Care Act

The Affordable Care Act was enacted on March 23, 2010. It contains some tax provisions that are currently in effect and others that will be implemented over the next several years. Here is a brief summary of some of the tax related provisions that we will see:

• Flexible spending accounts will have a $2,500 limit on health FSA salary reduction effective 12/31/12 and will be indexed for cost-of-living adjustments beginning 12/31/13.
• Starting in 2012, employers will be reporting the cost of coverage for health plans on W-2’s in box 12.  The amount reported does not impact tax liability.
• Beginning in 2011, insurance companies were required to spend a specified percentage of premium dollars on medical care and quality improvement, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012.
• Starting in 2014, certain employers must offer health coverage to their full-time employees or may be subject to a shared responsibility payment.
• Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums.
• Beginning in 2014 if the coverage offered by your employer fails to provide a minimum value (as defined by the IRS), an employee may also be eligible to receive a premium tax credit.

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

National Taxpayer Advocate Nina E.

Yesterday, Nina E. Olson, the National Taxpayer Advocate, released a report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will focus on this year. Below I have cut and pasted a summary of some items presented:

Impact of Changes in Tax Law on Taxpayers and the IRS.  “The continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers’ returns and caused many taxpayers to underclaim benefits because they did not know what the law was,” Olson wrote.  “Because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk.  The 2013 filing season is likely to pose problems for many (if not most) taxpayers and the IRS if Congress does not address the many provisions that have already expired or soon will.”

Expired Tax Provisions.  Among tax provisions that expired at the end of 2011 are the following:

• The so-called “AMT patch.”  As result, an estimated 27 million more taxpayers are subject to the Alternative Minimum Tax this year.
• The deduction for state and local taxes.  About 11 million taxpayers claimed this deduction last year.
• The deduction for mortgage insurance premiums.  About four million taxpayers recently claimed this deduction.
• A provision allowing persons over age 70-1/2 to make tax-free withdrawals from their Individual Retirement Accounts (IRAs) to make charitable contributions.

Congress is likely to extend many of these and other expired provisions retroactive to January 1, 2012, but neither taxpayers nor the IRS know for certain what will happen and therefore cannot make plans.  For example, a homebuyer trying to decide whether to utilize a loan package that includes mortgage insurance now lacks important information.  So does a pensioner trying to decide whether to tap his IRA to make a charitable donation.

Expiring Tax Provisions.  In addition to the provisions that expired at the end of 2011, an even larger number of provisions are set to expire at the end of 2012, including the Bush-era cuts in marginal tax rates, reduced tax rates on dividends and long-term capital gains, various marriage penalty relief provisions, certain components of the child tax credit, the earned income tax credit, and the adoption credit, and the moratoria on the phase-outs of itemized deductions and personal exemptions.

“An aura of uncertainty prevails as the IRS and taxpayers wait for word about what will be the law governing us this year and for the near future,” Olson wrote.  “This uncertainty affects the IRS’s ability to smoothly administer the filing season and taxpayers’ ability to make plans.”

Impact of Tax Fraud and Tax-Related Identity Theft.  Tax fraud and tax-related identity theft, although distinct problems, often overlap and present similar challenges for taxpayers and the IRS.  Both problems are growing.  In FY 2011, the IRS’s Electronic Fraud Detection System (EFDS) identified more than one million returns as potentially fraudulent, a 72 percent increase from the previous year.  The IRS blocked nearly one million additional refund claims using other means.  While not all fraudulent returns involve identity theft, many do.  The IRS recently reported an inventory of more than 450,000 identity theft cases.

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Lesson learned from Joe-Pa

Here is an interesting article in Forbes magazine on Joe Paterno’s estate.

The moral of this story is that a will is not a private document; in probate it becomes public record.  If you want the value of your assets and your beneficiary designations to remain private you should use a living trust.  A living trust also makes it much harder for relatives to challenge your wishes than with a will.

If you are considering a living trust, I would recommend using an attorney who specializes in trusts and estates.

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Time to review Social Security

Last year the Social Security Administration (SSA) stopped mailing statements to taxpayers to reduce their costs (by about $70 million).  Earlier this year they resumed mailing to people 60 or older who have not yet started drawing social security.  Now they have launched a new online version of your social security statement, available at www.ssa.gov.

If you are doing any retirement planning this SSA tool will provide useful information.  The tool will show your estimated benefit amount at early retirement age (62), full retirement age (typically 66-67) and if you wait until 70.  The estimates are based on your current earnings rate.  You are also provided with a history of your prior years’ earnings.  Since benefits are based on your 35 highest earning years, it would be wise to verify that yours have been posted accurately in Social Security’s database.  This tool will also show estimates for disability and survivor benefits, including the amount your spouse and children would receive if you pass away.

If you have not started your retirement planning, now would be a great time to start.

Joe Arena

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRSCIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Eastman Kodak Shares

One of my favorite lines from the Lord of the Rings trilogy is when the wizard, Gandalf, speaking to Frodo about feelings of regret at having to witness difficult times, says, “So do all [people] that come to see such times, but that is not for them to decide.  All we have to decide is what to do with the time that is given to us.”  So it is with the shareholders of Eastman Kodak’s (EKDKQ) common stock.  Ten years ago it was worth over $30/share.  Today it is worth a bit more than $0.40/share. 

We’ve been getting questions about what happens to common stock in bankruptcy.  The answer is that it’s possible there might be some value left to the stock in bankruptcy, but it’s pretty unlikely.  Common Shareholders come last in bankruptcy (right after Preferred Shareholders) and have a residual claim on assets of the company assuming there are any left – and that’s a very large assumption.  So, the question Common Shareholders should be asking themselves is not will I get any value out of this stock through the bankruptcy, but rather what should I do with it now?

The punch line is to suggest it for bathroom wallpaper.  But beyond the minimal price you might fetch in the market today or any residual claim you might get at the end of bankruptcy, there could be some value in tax savings from the loss of your investment’s value.  For those who own Kodak stock outside of an IRA or other tax-advantaged accounts, selling the stock at such a steep loss can shield you from having to pay taxes on some gains derived from elsewhere in your portfolio.  If there are no other gains to offset, or you have exhausted your ability to offset gains and still have losses leftover, you can offset up to $3,000 per year in ordinary income.

You may elect to take advantage of these losses by selling Kodak stock at any time up until the shares stop trading.  It is important to know that you must begin to book the loss on your taxes within the calendar year that you either sell or when the stock goes to $0.00 and stops trading.  If you do not promptly report the loss on your taxes you will not be able to record the tax loss in following years.  We don’t believe Kodak’s stock will stop trading and become worthless until 2013.  If that happens in 2013 and you still hold it, then that is the year in which you must book the loss or risk forgoing the potential tax savings forever.

Regrettably, this is probably the most value you will realize from the shares have owned for years. 

For more information about the tax advantage, look for a blog to follow today from our Director of Tax & Business Services, Joe Arena.

Brennan R. Redmond, CFA
Vice President
Brighton Securities

Kodak Shareholders: Value in a Loss

Since the Eastman Kodak bankruptcy announcement we have been getting many questions regarding the income tax impact of losses on Kodak stock.

In general, if your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately. If your total net capital loss is more than the yearly limit of $3,000, you can carry over the unused part to the next year and treat it as if you incurred the loss in that next year, and continue each year until the total loss is used.

In the case of Kodak there are two scenarios that would result in your taking a capital loss. The first scenario is if you sell your shares while they are trading in the stock market.  The second scenario would be if you held on to the shares and if the bankruptcy court decided to cancel the shares and declare them worthless.  In the first scenario you would receive a 1099 form indicating your gross proceeds from the sale and the difference between your cost basis and the proceeds would be your capital loss.  In the second scenario you are permitted to report a loss in a security equal to your tax basis in the year the security becomes completely worthless.

For many Kodak shareholders the difficult process will be calculating their cost basis as many retirees’ have accumulated shares over many years. 

As always,  you should seek professional advice before making major financial decisions.

Joe Arena
Director of Tax & Business Services
 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.