financial planning

3 Essential Tips for Financial Planning When You Have a Disability

Having a disability is not quite as rare as many people think. In fact, about 14 percent of adults around the world have a disability of some kind. This includes people who have a physical, mental, intellectual, or sensory limitation at a mild, severe, or moderate level. Also, these disabilities could have happened at birth, in old age, or anywhere in between.

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One thing that remains consistent across all forms of disability, however, is that life generally costs more money for those who have them. Normal expenses such as medical care and food, as well as additional costs such as modified housing and assistive devices and technology, can put a major burden on those with disabilities. That’s why it’s essential to have a financial plan in place. If you have a disability, these three tips will help you prepare and form the financial skills it takes to live your best life, both now and in the future.

Consider Life Insurance

One of the first things you should do when planning your finances is to look into life insurance. If you get a policy that benefits your current situation, it could provide significantly for your family if you were to pass away unexpectedly. And life insurance can help cover things like medical expenses, funeral expenses, and lost income. Moreover, shopping for life insurance is fairly straightforward nowadays, as you can easily purchase it online and use online calculators to figure out the coverage you need.

Set a Budget

Much of your financial planning comes down to making a budget. Not only will your budget serve as a guideline for your spending and saving, the process of making a budget will teach you a lot about your financial situation and the steps you can take to grow. If you’re on a fixed income, start with how much you bring in each month. If you are able to work or already have a job, where does that put your monthly income?

Once you factor in your income, write down all of your expenses; include everything you can think of. This might include normal monthly expenses such as your mortgage payment, home and auto insurance, utilities, food, entertainment, gas, etc. Also, consider your medical expenses: How much do you spend on medical care, assistive devices, or any other medical-related expenses? Furthermore, include any credit card debt you want to pay off.

Once you get these basic costs on paper, see where you stand concerning your income and expenses. Then you can determine what you can cut (entertainment, miscellaneous items, etc,) if necessary. Also, be sure to research all your options when it comes to financial assistance.

Build an Emergency Fund

As it is with anyone, saving money is important when you have a disability. Once you figure out your budget, determine how much you can put away in savings. Building an emergency fund will create a safety net in the event that something unexpected happens — whether it’s a medical incident, major home or car repair, or any other kind of sudden expense. Decide on a set amount to put into a cash jar or savings account, and stick to it as close as you can.

There may be many expenses that come with a disability, but that doesn’t mean you can’t navigate them and make a plan that meets your needs and sets you up to be cared for later in life. Work through your finances and set a budget to guide you through your spending and saving. Find the best life insurance plan for you and your family, and start building an emergency fund today. Being financially prepared will help you overcome a lot of challenges and put you in a better position to live a fulfilling life.

 Written by Ed Carter

Retirement investing through the decades

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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Investing to grow your retirement savings is a long-term project. The earlier you begin, the better, thanks to compounding interest.

You don’t have to worry about saving a lot at first. It’s all about forming a plan you can stick to.

Here are suggestions for retirement planning through the decades.

Your 20s: Open a 401(k) and IRA

You will likely land your first job in your 20s and can begin saving money for retirement. But before doing so, make sure you have enough cash to pay for three to six months’ worth of living expenses, in case an emergency arises. If you set up a retirement account and then withdraw from it to pay for emergency expenses, you may be subject to taxes and a penalty payment.

Once you have emergency savings, start funding a 401(k) if your employer offers one, especially if the company matches some of your contributions. If you turn down the option to contribute to a 401(k) plan that matches, you’re essentially giving away free money. In 2017, you can contribute up to $18,000 in a 401(k).

You also can open an individual retirement account, or IRA. In 2017, you can contribute up to $5,500.

If you can’t save enough to maintain both a 401(k) and an IRA, go for the 401(k) because contributions are automatic, pretax and subject to matching.

Your 30s: Consider a Roth, adjust asset mix

If you open an IRA in your 20s or 30s, you’ll want to consider a Roth IRA. Unlike a regular IRA, you don’t receive a tax deduction for contributions to a Roth. But when you withdraw money from a Roth IRA during retirement, it’s all tax-free. The money you withdraw from a regular IRA is taxed as regular income.

So if your tax rate is likely to be higher when you withdraw money from your IRA than it is now, you’re better off with a Roth IRA.

When it comes to allocating your retirement investments, try to put at least 60 percent in stocks during your 20s and 30s. But it all boils down to your risk tolerance. If you are unwilling to stomach losses, don’t put everything in stocks. The worst thing you can do is buy stocks and then sell them for a big loss.

Your 40s: Stay focused on the long run

Many people purchase homes in their 30s and 40s. It’s important to remember that your house is not part of your retirement plan, says Mick Heyman, an independent financial adviser in San Diego.

“I haven’t seen too many times that somebody buys a great home, sells it at 60 and then lives off the profits,” he says. So don’t spend so much money on a home that you can’t afford to save for your retirement as well.

You also must be realistic in providing for your children. Don’t spend so excessively on your kids that you neglect your retirement savings goals. That may even mean putting retirement plans ahead of your children’s college. Tuition payments can come from many sources, but retirement funds will have to come largely from the parents.

Your 50s: Capitalize on catch-ups

The 50s are the peak earning years for most people, so it’s even more critical to save. The government gives you some assistance, allowing increased contributions to IRAs and 401(k)s through “catch-up provisions.”

For IRAs, people 50 and older can contribute an extra $1,000 this year — $6,500 in total.

For 401(k) plans, participants 50 and older can put in an extra $6,000 — $24,000 in total.

If you have children who are now out of the house, you might have enough money to finance those catch-up payments.

Your 50s are a good time to opt for more safety in your asset allocation, experts say.

“Somewhere in your 40s and 50s, you want to transfer to more conservative stocks, and make sure you aren’t all in stocks,” Heyman says. “Start having 20 to 30 percent in bonds.” He also recommends orienting your stock holdings toward dividend-paying blue chips. They offer safety and income payments that you’ll appreciate during retirement.

Your 60s: Plan an income strategy

This is the decade in which you may well retire, which means you’ll begin withdrawing from your retirement funds.

The traditional rule of thumb is that you can cash out about 4 percent of your portfolio in each year of retirement. But with low interest rates limiting the amount of income your portfolio will generate, 3 percent may be more appropriate now.

Ideally, you should have two years’ worth of living expenses in cash to avoid having to dump your investments when markets are weak.

Adjust your asset allocation so that bonds account for a larger part of your portfolio, given your need for safety and income.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Herman & Company CPA’s Serves Clients in Delray Beach With An Eye to the Future

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As one of only seven states with no income tax, Florida presents unique benefits when it comes to preparing your taxes. Florida also has a variety of property tax exemptions that can reduce taxes for qualified taxpayers, as well as special exemptions for senior citizens, veterans, and the disabled. With a thorough understanding of financial trends and Floridian taxation policies, Herman & Company CPA’s, PC provides year-round financial services to residents of Delray Beach— whether you own a business, are tired of navigating social security and pension plans on your own, or simply want to minimize your taxes. We are dedicated to guiding our clients in Delray Beach towards maximizing what they have and minimizing their tax bite, as well as providing year-round financial services.

Year-Round Financial Planning for Business Owners and Individuals

In a fluctuating economy, every penny counts. In addition to helping clients prepare their annual taxes, we offer comprehensive, year-round financial support.

Business owners are passionate about the services they provide and products they sell, but sometimes small details can get lost in the big picture and result in substantial losses, or missed opportunities for savings. Herman & Company CPA’s, PC offers bookkeeping and accounting services with an eye not only on the success of your company, but also its future potential and growth. Clients in Delray Beach can be assured that our attention to detail and strategic financial planning will benefit their businesses year-round.

Herman & Company CPA’s, PC also offers services to assist individuals throughout the year. With services ranging from financial and retirement planning to life insurance, pension plans, and budgeting analysis, our experienced team creates personalized services tailored to our clients’ needs. Our roster of satisfied clients attests to the success of our customized financial strategies.

Clerical errors, confusion about current taxation policies, and disorganized record keeping can result in unnecessary financial loss. Herman & Company CPA’s, PC provides meticulous and comprehensive support to ensure that our clients in Delray Beach don’t miss out on opportunities for savings and financial growth, both during tax season and every other day of the year.

Seniors age 70 1/2+: Take your required retirement distribution

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation! 

The tax laws generally require individuals with retirement accounts to take annual withdrawals based on the size of their account and their age beginning with the year they reach age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.

If you turned age 70½ in 2014, you can delay your 2014 required distribution to 2015. Think twice before doing so, though, as this will result in two distributions in 2015 — the amount required for 2014 plus the amount required for 2015, which might throw you into a higher tax bracket or trigger the 3.8% net investment income tax. On the other hand, it could be beneficial to take both distributions in 2015 if you expect to be in a substantially lower tax bracket in 2015.

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Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

2015 HSA amounts

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

2015 HSA amounts HSA-piggy_360_360_95

Health Savings Accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small to medium-size companies who do not have access to health insurance.

The tax benefits of HSAs are quite substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions into HSA accounts. The funds in the account may be invested (somewhat like an IRA), so there is an opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax-free.

An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the participant who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan. Consequently, an HSA is not insurance; it is an account, which must be opened with a bank, brokerage firm, or other provider (i.e., insurance company). It is therefore different from a Flexible Spending Account in that it involves an outside provider serving as a custodian or trustee.

The recently released 2015 inflation-adjusted contribution limit for individual self-only coverage under a high-deductible plan is $3,350, while the comparable amount for family coverage is $6,650. For 2015, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,300 for self-only coverage and $2,600 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,450 for self-only coverage or $12,900 for family coverage.

 

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Low Income Taxpayer Clinics

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

2015 Application Period Opened May 5, 2014

The 2015 application period opened May 5, 2014, and closes June 20, 2014. The 2015 Publication 3319, LITC Grant Application Package and Guidelines will be available on IRS.gov and two copies will be shipped to all current clinics. Organizations that must submit a full application must do so via Grants.gov and those that do not must complete their application in Grant Solutions.

About Low Income Taxpayer Clinics

The Low Income Taxpayer Clinic program provides partial funding and oversight for Low Income Taxpayer Clinics (LITCs). LITCs are independent from the IRS.

Some clinics serve individuals who need to resolve a tax problem and their income is below a certain level. These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee.

Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language.

For more information and to find a clinic near you see the LITC page on www.irs.gov/advocate or IRS Publication 4134Low Income Taxpayer Clinic List. This publication is also available by calling 1-800-829-3676 or at your local IRS office.

Low Income Taxpayer Clinic (LITC) Program Reports on Activities

The Low Income Taxpayer Clinic (LITC) Program, administered by TAS, has issued a 2014 Program Report. The report summarizes how clinics assist thousands of low income taxpayers through pro bono representation, education and advocacy efforts. The report includes examples of how the clinics assist taxpayers daily.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Life Situations and Finances: FAQs

Scarsdale accountant Paul Herman has all the answers to your personal finance questions!

Personal finance faqs from westchester accountant paul herman

Save money with these handy tips!

 

The following are common “life situations” that many of us find ourselves in at one point or another. Get to know these common questions and concerns to save big!

 

The following are a few ways to lessen your bank fees:

 

  • Look into what is necessary to get free checking and free ATM usage and do it. This is typically done by having a minimum balance and only using your bank’s ATMs. Another thought is joining a credit union instead of a bank as they generally charge less for banking services.
  • Investigate how to invest in higher interest accounts. Determine how much money you would need in case of an emergency and roughly six month’s worth of expenses and keep that amount in your savings. Take the rest of you money and make it work for you.
  • Don’t order checks through your bank. Generally speaking, check printers charge less than the printers employed by the bank.
▼ What can I do to save money on my insurance costs?

These tips will help you save on all types of insurance:

  • Shop around for your life insurance policy. Take the time it takes to periodically check the prices on different policies, as it will pay off in the end. If you have recently quit smoking, you will probably be able to get better rates in a few years.
  • Evaluate your needs in terms of life insurance to see whether you are being charged too much for coverage.
  • Use the same insurer for home and auto insurance, as you will more than likely get a break.
  • Look around for auto insurance to find the best possible rate.
  • Save on your homeowner’s insurance by installing burglar alarms, smoke detectors and sprinkler systems. Consult an insurance agent to learn more.
  • Do away with private mortgage insurance. Ask your lender to cancel this as soon as you have enough equity in the home (this is required by law).
▼ What can I do to cut my utility costs?

These are a few tips to remember to help save money with utility costs:

  • See if your utility has a subsidizing program to make your home more energy-efficient. If that turns up nothing, you can still caulk your windows and check the insulation to make sure it has a high enough “R” factor.
  • Use fluorescent lights instead of incandescent bulbs for lights that are constantly on.
  • Maintain the thermostat at the highest and lowest temperature for comfort in the summer and winter, respectively.
▼ What can I do to reduce the cost of my phone bill?

There are many opportunities due to today’s cost-cutting competition among phone service providers, such as:

  • Verify that your long-distance charges are competitively priced. Research which long-distance carrier will give you the best rate and switch if you are not with that carrier.
  • Use the phone book instead of dialing “Information.”
  • If you have children at home, block all “900” numbers.
  • Stay in touch with relatives and friends through e-mail.
▼ What can I do to reduce the cost of my mortgage?

The options that follow will help in reducing the cost of your mortgage:

  • Think about paying down your mortgage. This is an effective way for saving and raising net worth for many people. Make a decision to pay a specific amount more than the mortgage principal and faithfully stick to it.
  • Think about refinancing your mortgage. Determine if refinancing your mortgage will save you money. Calculate to see if the costs for refinancing are worth a reduction in your monthly payments. If you intend to remain in the house for at least five years, the common guideline is that at least two points reduction will make it worthwhile to refinance.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Larchmont NY, Mamaroneck NY, Bronxville NY, Scarsdale NY, Greenwich CT and beyond.

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Qualified Charitable Deductions

Scarsdale accountant Paul Herman has all the answers to your personal finance questions! IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make donations to IRS-approved public charities directly out of their IRAs. charity donation tax tips from scarsdale cpaThese so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no charitable deduction on your tax return. But, that is fine because the tax-free treatment of QCDs is the same as an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too.

A QCD is a payment of an otherwise taxable distribution made by your IRA trustee directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity. You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. Unfortunately, this taxpayer-friendly provision is set to expire at year-end unless extended by Congress.

Before Congress enacted this beneficial provision, a person wanting to donate money from an IRA to a charity would make a withdrawal from his or her IRA account, include the taxable amount in gross income, donate the cash to charity, and then claim an itemized charitable donation.

QCDs are not included in your adjusted gross income (AGI) on your federal tax return. This helps you remain unaffected by various unfavorable AGI-based phase-out rules. It also keeps your AGI low for computation of the 3.8% NIIT. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities. QCDs also count as payouts for purposes of the required minimum distribution (RMD) rules. Therefore, you can donate all or part of your 2013 RMD amount (up to the $100,000 limit on QCDs) and thereby convert otherwise taxable RMDs into tax-free QCDs. Individuals can arrange to simply donate amounts that they would normally be required to receive (and pay tax on) under the RMD rules.

Note that the charity must provide you with a record of your contribution. Also, you cannot receive any benefit from the charity in return for making the contribution. If the donor receives any benefit from the charity that reduces the deduction under the normal rules, tax-free treatment is lost for the entire distribution.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Armonk NY, Bedford NY, Chappaqua NY, Katonah NY, Scarsdale NY, White Plains NY, Tarrytown NY, Stamford CT and beyond.

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Itemized Medical Deductions

Scarsdale accountant Paul Herman has all the answers to your personal finance questions!

Before this year, you could claim itemized deductions for medical expenses paid for you, your spouse, and your dependents to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI).

itemized medical tax deduction tips from scarsdale accountant

From surgical procedures to your annual check-up, tax-related medical deductions have changed since last year.

But the rules have changed for the worse in 2013 and beyond.

Due to the 2010 Affordable Care Act, the old 7.5%-of-AGI hurdle is now 10% for most taxpayers in 2013. An exception applies for taxpayers, or their spouse if married, who are age 65 or older on December 31. They can still use the 7.5%-of-AGI threshold through 2016.

Many individuals have flexibility regarding when certain medical expenses will be incurred. They may benefit from concentrating expenses in alternating years. That way, an itemized medical expense deduction can be claimed every other year instead of lost completely if it doesn’t exceed the threshold.

Medical expenses paid for a taxpayer’s dependent, such as a parent or grandparent, can be added to the taxpayer’s own expenses for itemized medical expense deduction purposes. For a person (other than a qualified child) to be the taxpayer’s dependent, the taxpayer must pay more than half of that person’s support for the year. If that test is passed, the taxpayer can include medical expenses paid for the supported person—even if the taxpayer cannot claim a dependency exemption for that person. While the taxpayer must still clear the applicable AGI threshold to claim an itemized medical expense deduction, including a supported person’s expenses in the computation can really help.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford Hills NY, Mt. Kisco NY, Rye Brook NY, Purchase NY, Mamaroneck NY, Scarsdale NY, Bronxville NY, Greenwich CT and beyond.

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Our 2013 Annual Year-End Tax Planning Letter

 

Tax planning advice from cpa in scarsdale ny

 

Fall, 2013

To our clients and friends,

As a follow up to the first of our year-end tax planning letters, we provide here specific strategies for your consideration. The implementation of just one of these strategies can save you meaningful dollars.

Remember tax rates for many are now higher than they were last year. We all have a serious opportunity to save taxes now by devoting time to reviewing our tax situation. Please contact us shortly to see which strategies can benefit you.

The old standby strategies, now with some modification: 

1. Postpone income 

In most years, it usually pays to postpone income to a subsequent year. This gives you the use of the money for a year before having to pay tax.

If it makes sense to delay income to the following year, you might defer compensation, defer year-end bonuses, defer the sale of capital gain property (or take installment payments rather than a lump-sum payment) or postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

2. Accelerate your deductions 

The phasing out of itemized deductions is now back in the tax law starting this year. If you itemize deductions, consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction (now a higher threshold at 10% of your adjusted gross income). Charge deductible expenses on credit cards to get the current deduction even if the payment of the charge will not be made until 2014. Also, you can prepay your January mortgage payment in December, so you can deduct the interest included in that payment this year. Pay your final state estimated tax payment before year-end as long as you are not in an AMT situation. If you are likely to be paying taxes under the AMT rules, hold off this payment until January as you will get no benefit at all this year by paying it early and you’ll lose the deduction for next year.

You also can make alimony payments early or make charitable contributions in advance, subject to certain limitations. If you are planning to donate property, consider whether to do it before or after the end of the year. Remember substantiation rules for donations. If the property is valued at more than $5,000, a “qualified” written appraisal is mandatory. You must get receipts for contributions over $250. Your cancelled check alone will not satisfy the IRS. Instead of putting cash in the collection basket, you may want to put a check in! If you want to make a donation but won’t have the money until next year, consider charging your gift on a credit card before the end of the year. The gift will be deductible on your 2013 return!

Remember that you can’t deduct contributions of clothing or household items unless the property is in at least “good condition.”

3. Distributions from IRA’s 

Whenever possible, withdraw money you need from taxable savings and investments accounts. IRA accounts should be left to grow tax-free as long as possible. Once you reach the age of 70, you MUST begin taking distributions and paying income tax on the monies withdrawn. Distributions taken before age 59. are subject to a 10% penalty in addition to the tax due.

4. Incentive stock options 

Exercise ISO’s early in the year. Exercise of ISO’s may put you in the AMT unless you dispose of the stock in the same calendar year it was purchased. Exercising your options early in the year gives you the full year to see if the shares are down, get rid of them and not get hit with the AMT. You may have heard the horror stories of people who converted their options, then held the stock they got until it subsequently went down. They ended up with an AMT bill higher than the value of their stock. A nightmare scenario.

For more tips now and throughout the year follow us on . . . 

Facebook at facebook.com/hermancpa

Twitter at twitter.com/hermancpa

Linkedin at linkedin.com/in/newyorkcpa

Our blog at blog.hermancpa.com 

5. Capital gains and losses 

If you have realized capital gains this year, be sure to take capital losses now to offset those capital gains. Anyone sitting with net gains in 2013 should take action now if possible.

Even under the new law, long-term gains are taxed at a lower rate than short-term gains and ordinary income. Planning for investment gains can reduce your taxes significantly. Beginning on January 1, 2013, the long-term capital gains tax can be as much as 24%. An asset must be held for more than a year to be considered long-term.

Here is an easy way to save some potential taxes that every investor should take the time to check out. Review the securities you have sold so far this year to see if you have a net gain or loss. Net any carry-forward losses from last year against 2013 trades. If the result is a short-term capital gain, it will be taxed as ordinary income unless you offset it with additional losses. If you have a net loss, remember that the maximum net capital loss you may deduct in any one year is $3,000. Losses in excess of this limit may be carried forward to 2014 and beyond, if necessary.

What to do? If you have net gains, review your current holdings for sales that would result in a loss and which will reduce or eliminate your net gain. If you have losses already and are holding some positions with gains that you no longer wish to own, sell them to use up your existing losses or just keep the losses to use in the future when rates are higher. Remember that capital losses realized in an IRA account are not deductible.

Although you can choose when to realize capital gains and losses, we advise you to consider the worth of investments and not let tax consequences alone dictate when to sell.

6. Watch out for the “wash sale” rule 

To accelerate a loss without significantly changing your investment position, you can “tax swap” securities. That is, sell securities to recognize a loss and replace them with the same or similar securities. But watch out for the “wash sale” rule. If you sell a stock to recognize a loss, you may not repurchase the same stock for a 30-day period before or after the date of sale or the loss will be disallowed. You can replace it with a similar, but different security. The wash sale rule does not apply to gains.

If you like a particular stock for the long term, but would like to sell it this year to get the benefit of the loss, double up on the position more than 30 days before selling the original position. After at least 31 days, sell the higher cost shares. You’ll create a tax loss and be left with the same number of shares you originally owned. You must act quickly so as to have owned the shares for at least 31 days and be able to sell the shares prior to December 31st.

7. Contribute to a Qualified Tuition Program (“QTP”) for your child’s future college costs 

These so-called Section 529 plans let you establish a savings plan from which tuition can be paid. Contributions are generally deductible for state tax purposes and distributions are tax-free as long as used for qualified higher education costs. The income earned in such accounts will not be taxed. This definitely is worth a look for those with young children. Speak to us as we can help you setup and manage such an account.

8. Take losses on your 529 plans! Yes, that’s what I said, take losses on the college savings plan you set up for your child. 

This is not widely publicized. You may be able to take a loss on your investment in a QTP, if you distribute all of the amounts in an account and the total distributions are less than the amounts contributed. The loss is not taken as a capital loss, but rather as a miscellaneous itemized deduction which is an ordinary deduction (i.e. not subject to the $3,000 capital loss limitation). All miscellaneous itemized deductions must exceed 2% of adjusted gross income to be of benefit. Of course if you find yourself in the AMT, this strategy won’t help you at all. You can reinvest the money taken out into another 529 plan account, but there are some rules to be dealt with.

Among the services we provide . . . When you are considering life, health or long-term care insurance, we can help find the right policy for you. We’ll help you analyze your needs, determine the appropriate amount of coverage necessary to protect your family and determine the right policy to suit your needs. 

9. Reduction of tax on certain dividends 

If you are an owner of a closely held ‘C’ corporation and the company is in the 15% bracket and you are in at least the 25% bracket, taking a dividend payout in place of salary can result in more money in your pocket after taxes. Note that dividends on stocks are taxed at a lower rate than interest paid on bonds.

10. Keep track of accrued interest you paid 

Keep accurate records for any accrued interest you paid when you bought bonds. You received interest from the last date the bond paid interest. This interest will be reported on your 1099 Form. Since you purchased the accrued interest, it’s not taxable to you. Speak to us for information on how to write-off the accrued interest on your 2013 return.

11. Get a receipt from your charity 

As previously noted, the Internal Revenue Service requires that you have a written receipt from charities for each contribution. The receipt must be for a donation made in 2013. If you are examined and you do not have a receipt, your deduction will be disallowed; the check will not be enough. You can make more than one contribution to a charity in one year each of less than $250 (that cumulatively exceed $250 for the year) without a receipt, but the Internal Revenue Service has the authority to curb abuses such as with multiple checks issued on the same day. Also, a charity is required to give you a breakdown of the deductible portion of your contribution when goods or services are purchased in connection with a charitable event (dinners, tickets, etc.).

12. Donations of used cars 

Remember that you are now only able to deduct an amount equal to what the charity sells the car for.

13. Donate appreciated securities 

Consider using appreciated securities that you’ve owned at least a year to make your charitable contributions. You can deduct the fair market value of the securities and avoid paying the capital gains tax you would incur if you sold the securities. There are limits related to your income on the amount of charitable contributions that can be deducted.

Contributions in excess of the deductible amount can be carried to subsequent years. Note that gifts of appreciated assets sometimes affect the alternative minimum tax.

If you have losses in securities you want to donate, sell the securities to recognize the loss for your taxes and then donate the proceeds.

14. Pay off nondeductible interest with a home equity loan 

You can benefit by paying off your credit card balances (which typically carry high interest charges and are non-deductible) with a home equity loan, the interest on which may be deductible. Interest is deductible on home equity loan balances up to $100,000.

15. Casualty losses 

A casualty loss occurs when your property is damaged as a result of a disaster such as a storm, flood, car accident, theft or similar event. The general rule is that such a loss is deductible only after it has been reported to your insurance company. Then the unrecovered loss less $100 may be deducted to the extent that it exceeds 10% of your adjusted gross income. Losses occurring in declared disaster areas have additional rules but give us some flexibility to enhance the tax benefit.

16. Look into tax advantaged health care accounts or flexible spending accounts 

Participation allows you to use pre-tax income for medical expenses that were not covered by insurance or for other eligible expenses. This includes co-pays.

17. If eligible, contribute to an IRA 

If you are not an active participant in an employer-provided retirement plan and have wages or self-employment income, you are eligible to make a tax deductible contribution of up to $5,500 ($6,500 if you are age 50 older) per year to an Individual Retirement Account (IRA) up until the year that you turn 70½, subject to phase-outs based on your income. This money will earn income tax-free and is taxable only when you withdraw funds from the account. If you withdraw the money before age 59½ there may be a penalty tax of 10%. You must begin withdrawing from the account based on a formula at age 70½. You (and/or your spouse) must have wages or self- employment income at least equal to the amount you contribute. Payment can be made to the IRA anytime up until April 15, 2014 to be deductible on your 2013 return.

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2013 if your modified adjusted gross income is less than $59,000 if you are single or $95,000 if you are married and filing jointly. Above these income levels, the ability to deduct an IRA contribution is reduced and eventually fully phased out. If you have self-employment income, you should consider establishment of a SEP, SIMPLE or Keogh retirement plan before year-end. You can contribute significantly more than $5,500 to these plans and you may not have to make any contributions to the plans until the filing date (including extensions) of your personal tax return.

Retirement plan contribution limits for 2013 are as follows: 401(k) Plans IRA’s Keogh’s/SEP’s SIMPLE Plans
Taxpayers under 50 $17,500 $5,500 $51,000 $12,000
Taxpayers over 49 22,500 6,500 51,000 14,500

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a 529 plan are never taxed if used to pay for college, graduate school or post high school vocational education.

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59.. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a

529s plan are never taxed if used to pay for college, graduate school or post high school vocational education.

See the important discussion regarding gifting in our first letter.

Anyone is permitted to make gifts of up to $14,000 per year to an unlimited number of people without having to pay gift taxes. Married couples can make combined gifts of up to $28,000. A married couple wishing to make gifts to two married children and four grandchildren can make gifts of up to $224,000 per year ($28,000 to each child, grandchild and child’s spouse) without paying any gift taxes. This is a simple way to reduce the size of one’s future taxable estate. There are a number of other ways to reduce your taxable estate. Please contact us for further insight. Planning Tip: Income can also be shifted upwards. For example, a high-earning professional can make the gift to his/her elderly parents who are in a lower tax bracket. The additional income can be used to help pay for medical and/or assisted living expenses. After the parents die, the assets can go to the original donor’s children (if the “kiddie tax” does not apply) for additional income shifting.

Be aware that direct payments of tuition and medical expense for another individual are not subject to gift tax. There is an unlimited exclusion of amounts paid directly to educational organizations for tuition and to health care providers for medical expenses.

If you own your own business, you can hire your kids and fully deduct their pay. And, if your business is unincorporated and your children are under the age of 18, you won’t owe any payroll taxes on their wages.

21. Let Uncle Sam pay part of your kid’s college tuition bill

Don’t pay your children’s college tuition bill by selling appreciated securities you own. Rather, give your children the shares of appreciated stock or mutual fund and have them sell the shares to pay for school. Assuming they have limited income, neither of you may have to pay any capital gains tax at all. That’s letting your Uncle Sam pay part of the tuition bill!

This is one of my favorites and makes so much sense if grandma or grandpa have sizeable estates and are facing a large estate tax bill. They should be paying your child’s college tuition! Payments made directly to the school are not counted towards the $14,000 annual gift limit. This is a great way to reduce estate taxes!

College Tuition Credit. If you have kids in college listen up. The American Opportunity Tax Credit expanded and renamed the old Hope Credit. The credit can be claimed for qualified undergraduate education expenses paid for an eligible student.

Unlike the Hope credit, which was only available for qualified tuition and fees for just the first two years college, the new credit includes related expenses such as books and other required course materials. Additionally, the credit can be claimed for those qualified expenses paid for any of the first four years of post-secondary education.

The credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000 per student each year. The maximum $2,500 credit is possible for a taxpayer who pays $4,000 or more in qualifying expenses. The credit is available to individual taxpayers who make less than $80,000 or $160,000 for married couples. Above those levels, sorry, it’s phased out.

The Lifetime Learning Credit of up to $2,000 (20% of tuition of up to $10,000) applies to graduate classes as well as undergraduate. It is also subject to phase out at higher income levels.

Although we’ve done our best to keep our annual letter as short as possible, it is again considerably lengthier than we would have liked, and it is far from complete. We wish we could summarize

in just a couple of pages, but the tax law keeps changing. We hope it proves to be more than just good bedtime reading. Please devote some time before the end of the year to review your tax situation and call us for analysis and recommendations. 

As always we are available to help you with any tax, accounting, bookkeeping, investment, insurance or estate planning needs. But don’t wait until mid-December! If you are not a client of our office and wish to consider implementing any of these strategies, or just want to talk about your particular situation, please call us for a free consultation.

Our best wishes to you and to your family for the holidays. 

Sincerely,

Paul S. Herman,

Scarsdale accountant Paul Herman CPA logo

 

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.