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.

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.

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.

Are you one of the 99 thousand?

For years the Internal Revenue Service has encouraged taxpayers to receive their refunds through direct deposit.  The Internal Revenue Service recently announced that it is looking to return $153.3 million in undelivered tax refund checks. In all, 99,123 taxpayers are due refund checks for last year that could not be delivered because of mailing address errors.  The undelivered refund checks average $1,547.

Taxpayers who believe their refund check may have been returned to the IRS as undelivered should use the “Where’s My Refund?” tool on IRS.gov. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

Senator Chuck Schumer (D-N.Y.) recently announced that New York State has over 7,000 state refund checks returned by the post office as un-deliverable due to address issues.  These checks total about $14.5 million or an average of over $2,000 per check, sitting in a bin somewhere in Albany.

 Direct deposit is definitely the way to go!!

 

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: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Tis the season!

My favorite season is about to kick off…tax season.  This year we do not have many major changes in the tax law.  Here is a brief summary of some changes to expect:

• Overall, many of the dollar thresholds were adjusted upward for cost of living increases. This includes tax brackets, standard deductions, retirement contribution thresholds and amounts, etc.
• The “Making Work Pay” credit is gone.  For the past couple of years you received an extra $400 ($800 for a working couple) in your pocket. You will not see this on your 2011 tax return, so refunds should be smaller this year.
• Business mileage rates for 2011 were 51 cents per mile thru June 30 and jumped to 55.5 cents for the balance of the year.  In 2012 business mileage will remain at 55.5 cents, medical and moving mileage will be 23 cents, and charitable mileage will be 14 cents per mile.
• The most daunting change will be the reporting of capital gains on your investments.  A new Form 8949 for reporting capital gains/losses will be required to summarize your gains and losses before they flow to Schedule D.  Form 8949 will separate the reporting of cost basis into three potential categories before short term and long term gains/losses are summarized.
• We do have until April 17^th to file this year.
• Some other changes can be found on our website.

Have a happy season!

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: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Self-directed IRA – “Investor Alert”

The Securities and Exchange Commission (SEC) has issued an “Investor Alert” to warn IRA investors to be wary of fraudulent advisors promoting “alternative” investments for your self-directed IRA.

 http://http://www.sec.gov/investor.shtml

 As the recent volatility in the financial markets has shaken investor confidence the fraudulent promoters have come out in force to exploit the investor fear.  Before considering any change in IRA custodian always perform your own due diligence.  The grass may not be greener on the other side…

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: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

On the chopping block…

In recent years many of our income tax deductions have been temporary breaks with a shelf life of a couple of years. Over the next 14 months dozens of tax breaks will be expiring.  Some may be extended and others will probably disappear.  From year to year you cannot assume that the same benefits will be available for your tax return.  Below I have listed some of the tax breaks that will be on the chopping block.

 Expiring on 12/31/2011:

• School teacher expense deduction of $250.
• Option to deduct State and local sales tax.
• Mortgage insurance premium deduction
• Alternative minimum tax (AMT) patch that allows a larger exemption. Without this millions of additional taxpayers will get hit with AMT.
• The 2% reduction in Social Security tax withheld from our paychecks.
• The tuition and fees deduction of up to $4000.
• Tax free donation of IRA distribution for seniors.
• The $500 credit for energy saving improvements to your home.

 

Expiring 12/31/2012;

• The low capital gains rate.
• Qualified dividends being taxed at the low capital gains rate.
• The American Opportunity education tax credit of up to $2,500 for tuition paid.
• Deduction for student loan interest.
• Education IRA contribution limit drops from $2,000 to $500.
• The 10% tax bracket disappears.
• Child care deduction limit is reduced back to $2,400.
• Child tax credit for children under 17 drops to $500 from $1,000.
• Marriage penalty is back.
• Earned income credits will be greatly reduced.
• Debt forgiven on home foreclosures will be taxable.
• Many others…

Stay tuned…when Congress speaks…I will let you know…

 

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: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.