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7 Tax Changes That Could Impact Your 2013 Return

Tax PlanningNo Comments

tax wallet empty 150x150 7 Tax Changes That Could Impact Your 2013 ReturnA recent Wall Street Journal article noted 7 tax changes that could impact your 2013 return, including:

Increase in top tax rate on income, capital gains and dividends.  A new top tax rate of 39.6% now applies to individuals earning more than $400,000/year, married couples filing jointly with income in excess of $450,000/yr. and head of household filers with annual income of over $425,000.  For people in these income brackets, the top tax rate on capital gains and dividends has increased to 20%.

Investment income Medicare surtax.  If your adjusted gross income (AGI) is more than $200,000 (individual) or over $250,000 (married, filing jointly), you could be subject to the 3.8% Medicare surtax.  If — or how much — you owe depends on the amount of your net investment income and how much your AGI exceeds the threshold of $200K/$250K.

Medicare surtax on combined salaried and self-employed income.  Taxpayers with a combined salary and self-employment income greater than $200,000 (individual) or $250,000 (married, filing jointly) will be subject to an additional 0.9% Medicare surtax – on top of the 2.9% Medicare tax.

Personal and dependent exemptions cut.  Personal and dependent exemptions may be cut or eliminated entirely for some taxpayers for 2013.  The phasing out of these exemptions begin at $250,000 AGI for individuals, $300,000 AGI for married couples filing jointly, and $275,000 AGI for heads of household.

Itemized deductions cut.  The phasing out of itemized deductions – home mortgage interest, property taxes, state and local income taxes, charitable donations and others — begin at $250,000 AGI for individuals, $300,000 AGI for married couples filing jointly, and $275,000 AGI for heads of household. The affected deductions are reduced by an amount equal to 3% of AGI over the threshold limits.

Medical deduction threshold increased.  The new threshold for claiming itemized medical expense deductions is up 2.5% for 2013 — medical expense must now exceed 10% of AGI, up from 7.5% in 2012.  However, if you or your spouse was over the age of 65 at the end of 2013, this higher level won’t kick in until 2017.

Married same sex couples have to file as married taxpayers.  Same sex couples that were legally married in states that recognize same sex marriage must file their federal taxes either jointly or as married-filing-separately.

If you are looking for ways to save on taxes, contact our Costa Mesa law firm.

 

How to Achieve Your Goals When Leaving an IRA to Heirs

Estate Planning, Tax PlanningNo Comments

ira e1346184593476 How to Achieve Your Goals When Leaving an IRA to HeirsA recent Forbes.com article by Deborah Jacobs reiterated the importance of checking IRA beneficiary designations, noting that the biggest – and costliest – mistake many people make is failing to designate the right people to inherit IRA assets.

Do not make the mistake of lumping your IRA assets into what you are bequeathing to heirs via your will.  IRA assets are passed through beneficiary designations forms.  If no form has been filled out, then your heirs are at the mercy of the IRA custodian’s policy.  Many times, the assets will go to the estate, which will negate important tax benefits.

January is the perfect time to review your IRA beneficiary designations and the best way to fill out your forms will depend on the goals you want to reach by bequeathing your IRA assets.  For example:

You want to provide for your spouse.  Name your spouse as the beneficiary, but name contingent beneficiaries as well in case your spouse predeceases you.

You want to maximize the stretch.  Name a younger heir as beneficiary, as inherited IRA distributions are calculated based on life expectancy.

You want to keep things even.  If you have more than one child and wish to leave equal portions of your IRA to those children and their heirs, then designate the portions as “per stirpes”.  This will ensure that if one of your children dies before you do, their share will go to their children.

You want to preserve assets.  Name a trust as the beneficiary.

You want to give your heirs options.  Name primary and alternate beneficiaries, so if one of your primary heirs wants to disclaim the inherited IRA for any reason, the assets can pass to the alternate(s).

You want to give to charity.   Name a charity as beneficiary to gain estate and income tax benefits.

If you need help reaching your estate planning goals in 2014, contact our Orange County law firm.

Taxes That Must Be Paid By The Self-Employed

Business Planning, Tax PlanningNo Comments

tax wallet empty 150x150 Taxes That Must Be Paid By The Self EmployedIf you are considered as self-employed by the IRS, you are responsible for paying self-employment taxes based on your earnings. The IRS defines self-employment as any business that does not file a business income tax return – including LLCs, sole proprietorships, partnerships and independent contractors.

The biggest tax burden for the self-employed is the self-employment tax. You are required to pay Social Security and Medicare taxes both as employee and employer. If you have over $400 in annual net earnings – which is the profit left over after business expenses are deducted – you’ll owe self-employment tax.

The earnings threshold for Social Security tax in 2013 was $113,700; any earnings over that limit are not subject to the Social Security portion of the self-employment tax. However, the Medicare tax portion still applies.

You may also be responsible for federal, state or local taxes, depending on the size and nature of your small business.

A business planning attorney can advise you on the laws surrounding self-employment taxes.  Contact our Costa Mesa law firm for help.

Know the Rules for Making Gifts

Tax PlanningNo Comments

money gift 2 e1316545217983 Know the Rules for Making GiftsThe timing of making year-end gifts is important because a transfer of property is only counted as a gift once a donor has unconditionally relinquished all control over it.  Here are the rules concerning gifts:

Gifts by Check – the check must be cashed or deposited into the recipient’s account by Dec. 31 to count as a 2013 gift, so if you have given a gift via check, be sure the recipient follows through by cashing or depositing the check before the end of 2013.

Gift of Securities – the securities must be physically transferred into the recipient’s account by year-end.

Large Gifts – gifts above the $14,000 annual exemption count toward your lifetime exemption, which is $5.25 million for 2013.  You should consult with your estate planning attorney about the tax consequences of gifting more than $14,000.

Charitable Gifts – if you are making a donation by check, it must be mailed by Dec. 31.  If you are making a donation via credit card, you must also make it by Dec. 31, even though you will not pay for it until 2014.

To learn ore about how gifting can benefit your estate, contact our Costa Mesa law firm.

How Married Couples Can Maximize Social Security Benefits

Estate Planning, Tax PlanningNo Comments

boomer couple1 150x150 How Married Couples Can Maximize Social Security BenefitsFor married couples where both spouses have a work record and will be entitled to receive Social Security retirement benefits, there are some strategies that will help you maximize your benefits for the largest possible payout.  These include:

File and Suspend – When the highest earning spouse – we’ll call him Bob — reaches retirement age, he files for benefits and then immediately suspends them.  This allows Bob’s wife Carol to choose the higher benefit – half of Bob’s benefit or her own benefit.  Bob can continue to work or draw income from an IRA and delay receiving his benefits – which will be larger – until he is 70.

Double Dip – This term is applied to the ability to draw your spousal benefit and your own benefit at different times.  To do this, you must file for the spousal benefit first, even though it may be smaller.  Taking your own benefit down the road will mean a bigger check.

62/70 Strategy – If you can’t afford to postpone taking your Social Security benefits, this strategy allows you to maximize your benefits as a married couple.  The lower earning spouse files first at age 62, and the higher earning spouse delays filing for benefits until age 70.  Even though Bob is waiting until age 70 to begin taking his benefits, he can file for a spousal benefit based on Carol’s record once he reaches full retirement age.  When he turns 70, he then drops the spousal benefit and starts taking his larger benefit.

For more information on how married couples can benefit from estate planning, contact our Orange County law firm.

Dec. 31 is Deadline for Charitable IRA Rollover

Tax PlanningNo Comments

ira e1346184593476 Dec. 31 is Deadline for Charitable IRA RolloverFor owners of IRA accounts over the age of 70 ½, there are only two more weeks to take advantage of the opportunity to save on taxes through donating all or a portion of your required minimum distribution to charity.

The charitable IRA rollover was extended only through 2013 via the fiscal cliff tax deal last January, although Congress could reauthorize it in the new year.  It allows individuals who are 70 ½ or older to donate up to $100,000 of IRA assets to a charity without having to report the withdrawal as taxable income.  The donated assets can count against your annual required minimum distribution.

This ability to reduce your taxable income will enable you to avoid or reduce a number of tax increases that went into effect in 2013, such as the 3.8% tax on net investment income for those with an adjusted gross income of $200,000+ ($250,000 for married couples).

A charitable IRA rollover can also help those individuals with an AGI over $85,000 or couples with an AGI over $170,000 to avoid or reduce taxes on Social Security benefits and sidestep higher Medicare Part B and Part D premiums.

To make a charitable IRA rollover in 2013, have your IRA custodian make a direct transfer from your IRA to a qualified charity by Dec. 31.

For more tax-saving strategies, contact our Newport Beach law firm.

IRS to Delay Start of Tax Filing Season

Tax PlanningNo Comments

IRS Logo 150x150 IRS to Delay Start of Tax Filing SeasonDue to the government shutdown earlier this month, the IRS has announced that it is delaying the start of the tax filing season for 2013 returns by one or two weeks, although the April 15 deadline remains in place.

The IRS said it expects to delay the start of when it will accept 2013 returns to some time between Jan 28 and Feb. 4.  The final decision on when filing can start will be announced in December.

“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Daniel I. Werfel, the acting I.R.S. commissioner, said in a statement.

“The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers,” Werfel said. “We want the public and tax professionals to know about the delay well in advance so they can prepare.”

The IRS furloughed more than 90 percent of its work force during the 16-day government shutdown.

There is still time to implement strategies that will help you save on 2013 taxes.  Contact our Costa Mesa law firm for more information.

How to Beat the 2013 Capital Gains Tax Increase

Asset Protection, Estate Planning, Tax PlanningNo Comments

tax wallet empty 150x150 How to Beat the 2013 Capital Gains Tax IncreaseIn January, capital gains taxes increased to 20% plus another 3.8% surtax for singles earning over $200,000 and couples making more than$250,000 annually.  Add to that the fact that California has the top capital gains rate of any state at 13.3% and you have a lot of Californians looking for ways to offset the hikes in capital gains tax rates.

A recent article at Forbes.com explored 11 ways to help beat the 2013 capital gains tax rate hike:

1.  Use your home as a tax shelter.  Singles can exclude up to $250,000 of gain and married couples get a $500,000 exclusion.  Keep track of any capital improvements that add to your primary residence’s cost basis.

2.  Control your tax bracket.  Employ strategies that keep your taxable income at a minimum so you can take just enough gains to stay in the 15% bracket, making your capital gains rate zero.

3.  Sell your loser stocks.  If you have some losers in your portfolio, harvest those to offset the gains.

4.  Make gifts to family.  You can gift highly appreciated stock (up to $14,000 each) to a child or parent in a lower tax bracket; when they sell, their capital gains rate is zero.

5.  Make gifts to charity.  Giving appreciated stock to a charity gives you a deduction for the fair market value of the stock and capital gains taxes do not apply.

6.  Feed a Roth.  Stuffing after-tax cash into a Roth ensures future growth and distributions are tax-free.

7.  Open a 529 Account.  Money you set aside in a 529 College Savings Account will grow tax-free and withdrawals are not taxed either.

8.  Buy and hold.  Stocks left to heirs receive a step-up in basis to current market value upon your death, so you escape the capital gains bite.

9.  1031 Exchanges.  Real estate investors or art collectors can roll all the capital gains from an asset being sold into new property or art, which takes on the old property’s low basis.

10.  Charitable trusts.  Using a charitable remainder unitrust (CRUT) to house appreciated assets lets you defer a capital gains tax hit.

The 11th strategy outlined in the Forbes article suggests a move from California to a tax friendlier state like Nevada, Texas or Florida.  But we would hate to see you go, so we’re not going to suggest that here!

If you would like to learn more about preserving and protecting your assets, contact our Newport Beach law firm.

 

 

Tips for Giving Money to Grandchildren

California Trusts, Estate Planning, Tax PlanningNo Comments

grandchildren e1379622938556 Tips for Giving Money to GrandchildrenGrandparents and grandchildren have a special relationship.  As grandparents, you get to have the joy of being around children you are related to but not directly responsible for.  And grandchildren have someone to turn to who aren’t their parents.

So it’s natural that grandparents like to find ways to reward this special relationship, including financially.  Here are some great ways that grandparents can give money to grandchildren and help their own bottom lines through estate and tax reduction:

Direct contributions.  Each grandparent can gift up to $14,000 in 2013 without having it count against their lifetime gift tax exemption – and married grandparents can double that, for a total of $28,000 per grandchild.

Custodial account.  A parent can set up a custodial account for a minor child, which a grandparent can contribute to for the benefit of that child.

Indirect contribution.  Grandparents can pay for educational or medical expenses with no limits, so long as they make the payments directly to the educational institution or medical provider.

529 account.  Grandparents who want to contribute to a child’s college education can use a 529 account, which will also help reduce your taxable estate.

Trusts.  Grandparents can establish a trust and name a grandchild or grandchildren as beneficiary.

IRAs.  Grandparents can use other gifting strategies like contributing to an IRA or savings bonds for grandchildren.

If you’d like to learn more about estate planning strategies for providing a secure financial future for your family, contact our Orange County law firm.

How to Plan for Receiving an Inheritance

Asset Protection, Estate Planning, Tax Planning, WillsNo Comments

money gift 2 e1316545217983 How to Plan for Receiving an InheritanceIt is estimated that the next few decades will see the largest transfer of wealth in history in the form of inheritances.  Planning for receiving an inheritance is imperative if you want to protect assets to come and even pass them along to the next generation.

A recent Morningstar article details the things you need to know about inheritance planning:

The type of assets you will receive.  You may be inheriting real estate, an art collection, cash, stock, retirement accounts or a combination of all of these.  But whatever you will inherit requires some tax planning so you don’t incur unnecessary capital gains or estate taxes.

How the assets will be distributed.  If the assets are not being transferred via a trust, this could trigger some taxes as well.

Do your own estate planning first.  Many financial experts caution people against waiting on an inheritance before they create their own estate plan.  What would happen to the inheritance if something were to happen to you first?

Set your priorities.  If you already have an estate plan, you have likely established your financial priorities.   Working with an estate planning attorney or financial planner to determine the best use for your inheritance before you receive it is a better option than waiting until it arrives.

Determine other obligations.  Maybe you don’t need the entire inheritance to meet all your priorities, but your children could use the money.  You should have a plan that addresses what will happen to the inheritance after you receive it, including any obligations you want to fulfill to other family members or a favorite charity.

For additional information on creating an estate plan and protecting the assets you have now as well as what you will receive via an inheritance, contact our Newport Beach law firm.

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