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.

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).

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

There’s Still Time (Just Not Much)

This coming Saturday is New Year’s Eve.  But for most financial and tax purposes, Friday this week is the end of the year, and your last chance to get a little financial “buttoning up” done.

 If you plan to deduct certain expenditures on your Schedule A for 2011, you need to make the payment this week. Included would be medical expenses, home mortgage interest, state & local taxes, certain employment-related expenses, and – of course – charitable contributions.  Have you noticed an increase in solicitations from charities asking for your consideration at year end?  Charities know that people who think about making a donation typically have one eye on the calendar and the other on their checkbook this time of year.  So if you’re going to donate, do it by Friday and you may save a couple of bucks.

 There’s an over-70 postscript about charitable contributions this year: once again the IRS is allowing taxpayers who are over 70½ and required to take IRA distributions to direct those distributions to a charity and still meet their requirement. Most folks have met their requirements by now, but if you’re not sure, give us a call.

 Another year-end area worth scrutiny is the area of capital gains and losses.  When you sell a stock, bond, or mutual fund (outside of a retirement account) you will have a gain or a loss and will need to report it on your tax return.  If you have realized capital gains booked earlier this year (“realized” meaning something you have sold) it may be time to look at your portfolio. If you have a losing position that does not show signs of a near-term rebound, this week is your chance to sell and trim your tax bill.

 

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).

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.

The “Santa Claus” tax deduction paradox

Conventional wisdom would tell us that if we did not pay for an expense, we certainly could not deduct it on our tax return.  Seems like there are always exceptions to the rules and the tax world is no different.  Medical expenses, property taxes and points paid on a mortgage can all be paid by someone else and potentially be your tax write-off.  Many people who do their own tax returns tend to miss these unexpected deductions.

 With the current economic conditions of high unemployment and homeowners underwater with their mortgages it has become fairly common for parents/grandparents to step in and pay bills for the kids/grandkids.  Recent tax court rulings have concluded that if your parent pays a medical bill for you it can be characterized as a gift of funds to you hence, your tax deduction.  If the payment is made directly to the medical service provider there are also no gift tax implications.

Otherwise there is a gift filing requirement for gifts over $13,000 in one year.  Real estate taxes paid by your parent would also be considered a gift (subject to gift tax filing requirements over $13K), and deductible by you.

 Many times a home buyer will negotiate for the seller to pay points to their bank enabling them to get a lower interest rate.  As long as the home is going to be your principal residence you can deduct the points on your tax return even though the seller paid them.

 Santa Claus could be busy till April 15^th this year!

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.

Math: Summer fun = tax credit

 The equation above does not require a PhD in Mathematics to solve.  Here are the facts you need to know to understand the solution:

• Both parents work and have children under the age of 13 who are out of school for the summer.
• The cost of a summer day camp can count toward the child care credit.
• Expenses for overnight camps do not qualify.
• The credit can be up to 35% of the qualifying expenses, depending on your income.
• This credit can be based on up to $3,000 of unreimbursed expenses for one child or $6,000 for two or more qualifying children.
• If you have a flexible spending account at work and use pre-tax dollars to pay for day camp, these dollars do not count toward the credit (double dipping = not allowed).

 Hopefully my equations did not cause too much confusion.

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).

Mileage rates boost

For those of you who deduct auto mileage on your tax return there is good news from the IRS.

During the final six months of 2011 taxpayers who use the optional standard rates to deduct travel expenses will get an additional 4.5 cents per mile.  Effective July 1, each business mile will be deductible at a rate of 55.5 cents (up from 51 cents).

 Some taxpayers choose to use actual expenses on their tax return. The optional standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs.  Gas prices, depreciation, maintenance, and insurance costs have all increased in recent months.

The new rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents. The rate for providing services to charitable organizations remains at 14 cents a mile.

Coincidently, the same day that this auto mileage rate was increased the Obama administration had decided to release 30 million barrels of oil from the country’s emergency reserve as part of a broader international response to rising oil prices.  If gasoline prices do retreat the increased mileage deduction will have a more significant impact for business taxpayers.

 

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).

“Tax Deduction” Trickery

There is a large population of taxpayers who want nothing to do with taxes; they simply retain all of their mail that is labeled “important tax document” and hand them off to their tax preparer sometime before April 15^th.  Just as they hate filing their tax returns, they love anything that can be taken as a “tax deduction.”  I put those words in quotation marks as often times the taxpayer receives no benefit from them.

Two common deductible expenses that regularly offer no benefit to the taxpayer are cash charitable contributions and medical expenses.  It’s true that medical expenses are tax deductible. But it is also true that the vast majority of people end up never realizing these deductions on their returns, as the only portion that can be used is that amount greater than 7.5% of your adjusted gross income (AGI).  That means if a taxpayer’s AGI is $100,000, only the amount of medical expenses over $7,500 are tax deductible.  It doesn’t sound too appealing anymore, right?

Cash charitable contributions that are not made solely for the tax deduction are of benefit to the taxpayer.  But, when they are made solely for tax deduction purposes, the taxpayer is doing himself a disservice.  Assuming a 20% tax rate, every dollar donated would save the taxpayer $.20 on his tax return.   But if no cash donation is made instead, the taxpayer would save himself $.80 for every dollar not donated.  That’s four times the savings!  Don’t get me wrong, I’m not encouraging anyone to stop donating to charities; just don’t do it solely for the tax deduction—it’s not worth it.

Both deductions mentioned in the paragraphs above are further limited by the fact that the deduction can only be used if the taxpayer’s total itemized deduction is greater than their standard deduction, making them even less likely to be useful.

Remember, you want to be sticking it to Uncle Sam, not vice versa, so don’t be fooled by some of those “tax deductions.”

 Jordan Tepfer

(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).