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.

Perspective from the Checkout Line

As I stood in line this past Sunday at Wegmans, amidst the usual sea of candy bars, energy shots, and chewing gum, I was faced with a dilemma.  As I stared down my favorite pack of gum, I couldn’t decide whether to buy or leave it alone.  Luckily, my phone’s calculator helped my answer the question as I waited for those in front of me to cash out.  Allow me to explain.

Our good friends at the IRS recently raised the contribution limit for 401(k) retirement plans by an additional $500 starting in 2013.  This means the amount you are now able to save for retirement during this coming year is $17,500.  Those over the age of 50 have an even sweeter deal, as the “catch-up” contribution of $5,500 that you’re allowed brings your maximum contribution to $23,000.

Now, I am not naïve enough to think that money grows on trees and we‘re all contributing the maximum amount right now and can easily add another $500 to that total.  In fact, according to this CBS article, just 5% of participants nationwide are making the maximum contributions to their retirement accounts.  That is understandable when you look at the cost of daycare, college tuition, and a single gallon of gasoline.

But consider this.  Over the course of a year, $500 breaks down to approximately $1.40 each day.  If you take that $500 and put it towards your retirement in each of the next 20 years, assuming a 5% yearly return, the extra $10,000 that you’ve contributed will be worth nearly $17,000.

Now I can answer the question – do I really need the gum?

Chuck Wade

(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).

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.

Ground Rule #2: Percents, Not Dollars!

We have covered the first question for plan participants: How much?  How much should you contribute, how much will keep you comfortable in retirement, how much can you afford today?   If you decide what you can afford and that’s your contribution, it’s a perfectly reasonable approach (but don’t forget this rule when deciding).  But once you have decided that a contribution of $5 or $50 or $500 per paycheck is the right amount, you have an important step to take.

Convert that dollar amount to a percentage.  If your gross pay in an average period is, say, $1000, then a contribution of $50 should be noted as 5%.  There is on the surface no difference, but what about when you get a raise or bonus? What if you work overtime? Your pay rises but your contribution does not, unless you use a percentage. The flip side is also true: if you earn less in a period, a percentage-based contribution will be smaller, so your net pay will not be reduced out of proportion.  But there is also a life issue that might not seem obvious.  You have a life to live, a job, family obligations; stuff to do.  Let’s face it: once you get your 401(k) or 403(b) set up, making changes will just not land very high up on your “to do” list.  Sometimes years can slip by before you get around to a review (that can be good).  But if your income grows and your contribution does not, you’ll fall behind in seeing your account grow to where you need it to be.  So set up your contribution as a percentage and you can get back to enjoying life.

GTC

(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).