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Steiny

MAXIMIZING YOUR CAPITAL GAINS

Now that the 2013 tax year is over halfway completed and the stock markets have seen historical highs, many investors have some large capital gains and/or large “paper” gains. The question that often arises is “How do I keep these capital gains in my pocket?” Well, due to the recent tax law changes, this answer isn’t so simple. Let’s examine how to keep the money you earned in your pocket and out of the government’s hands.

What is a Capital Gain?

A capital gain is the amount realized on the sale or exchange of a capital asset. Capital assets include personal property items such as stocks, bonds, mutual funds, your personal residence, etc. The amount realized on the sale or exchange of a capital asset is equal to the proceeds received over the adjusted tax basis of the asset. The adjusted tax basis is, in general, equal to what you paid to acquire the asset. This amount can be increased or decreased upon certain events.

How Much Tax Do I Pay on a Capital Gain?

Because of the recent tax law changes from the American Taxpayer Relief Act of 2012, this answer has become very complicated.

The first order of business is to determine the holding period of the capital gain asset. If the asset was held for one year or less, the gain is considered short-term. Short-term capital gains are taxed at your ordinary tax rate. For example, if you fall into the 25% tax bracket, your short-term capital gain will be taxed at this rate as well.

If the asset was held for over one year, the gain is considered long-term. Long-term capital gains are taxed at a preferential rate depending on the income tax bracket you fall into. Beginning in 2013, the long-term capital gains rates have increased to 20% for taxpayers in the highest income tax brackets as follows:

  • Married Filing Jointly and Surviving Spouse taxpayers over $450,000 of income
  • Single taxpayers over $400,000 of income
  • “Head of Household” taxpayers over $425,000 of income

For taxpayers that are above the 15% tax bracket but below the highest tax bracket, the tax rate is 15%. For those in the 10% or 15% tax bracket, the tax rate is 0%.

Are There Any New Taxes on Capital Gains Starting in 2013?

The answer to this question is maybe. One of the provisions of the recently issued Patient Protection and Affordable Care Act (“Act”) by the U.S. Supreme Court, was the institution of the Medicare Contribution Tax (“MCT”). The MCT imposes a tax of 3.8% on net investment income starting in 2013.

Taxpayers will be subject to this tax if you have Net Investment Income (“NII”) and your Modified Adjusted Gross Income (“MAGI”) is over $250,000 for married filing jointly (MFJ) taxpayers or $200,000 for Single taxpayers. The 3.8% tax is calculated as the lesser of your NII or MAGI in excess of these limitations. NII includes the following types of income: capital gains, interest, dividends, annuities, rents, royalties, passive activities, and trading of financial instruments or commodities. Please note that certain deductions related to these types of investment income may reduce the amount taxed (i.e. investment interest expense, investment expenses, etc).

So How Do I Go About Reducing My Taxes?

That is a great question! Let’s go through some potential tax planning techniques you can implement to avoid these tax increases.

  • If you had large capital losses in the past when markets were at their lows, you may have been limited on the deductible loss amount you could take. It may make sense to consider selling certain highly, appreciated capital assets and realizing those “paper” gains in 2013.

  • If your 2013 income is below the 15% tax bracket, it would make sense to look at your portfolio and think about selling capital gain assets at an amount that would take you right up to the 15% tax bracket threshold. For 2013, the 15% tax brackets are $70,700 for MFJ and $35,350 for Single taxpayers.

  • If your income is slightly above the 15% tax bracket, then it may make sense to accelerate deductions into 2013 to move yourself into the 15% tax bracket. This strategy will need additional analysis to determine the impact of the Alternative Minimum Tax (“AMT”) however.

  • If your income is hovering around the MCT or the top tax bracket, consider accelerating deductions into 2013 or implementing other strategies, such as contributing money to your retirement plan (IRA, SEP IRA, etc) in 2013. Again, the AMT will need to be considered as part of this tax planning.

  • If you are married and one spouse has no other income but capital gains, it make sense to consider filing your 2013 taxes as married filing separately.

  • If you have already sold some investments for large gains, considered selling some of your “loser” stocks to offset these gains. If you implement this strategy and decide to rebuy the “loser” stock sold, the “Wash Sale” rules will need to be considered.

  • Consider gifting highly appreciated stock to your kids and have them sell the stock. Gift tax rules will apply and need to be considered before utilizing this strategy.

If you are currently sitting on large capital gains and/or large “paper” gains, the time to act on maximizing your capital by limiting your tax bite is now! Please contact me at 610-363-5965 for a free consultation and discussion of your personal tax situation.

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Source: Tax Articles

Steiny

From: Tax Articles

MAXIMIZING YOUR CAPITAL GAINS

Now that the 2013 tax year is over halfway completed and the stock markets have seen historical highs, many investors have some large capital gains and/or large “paper” gains. The question that often arises is “How do I keep these capital gains in my pocket?” Well, due to the recent tax law changes, this answer isn’t so simple. Let’s examine how to keep the money you earned in your pocket and out of the government’s hands.

What is a Capital Gain?

A capital gain is the amount realized on the sale or exchange of a capital asset. Capital assets include personal property items such as stocks, bonds, mutual funds, your personal residence, etc. The amount realized on the sale or exchange of a capital asset is equal to the proceeds received over the adjusted tax basis of the asset. The adjusted tax basis is, in general, equal to what you paid to acquire the asset. This amount can be increased or decreased upon certain events.

How Much Tax Do I Pay on a Capital Gain?

Because of the recent tax law changes from the American Taxpayer Relief Act of 2012, this answer has become very complicated.

The first order of business is to determine the holding period of the capital gain asset. If the asset was held for one year or less, the gain is considered short-term. Short-term capital gains are taxed at your ordinary tax rate. For example, if you fall into the 25% tax bracket, your short-term capital gain will be taxed at this rate as well.

If the asset was held for over one year, the gain is considered long-term. Long-term capital gains are taxed at a preferential rate depending on the income tax bracket you fall into. Beginning in 2013, the long-term capital gains rates have increased to 20% for taxpayers in the highest income tax brackets as follows:

  • Married Filing Jointly and Surviving Spouse taxpayers over $450,000 of income
  • Single taxpayers over $400,000 of income
  • “Head of Household” taxpayers over $425,000 of income

For taxpayers that are above the 15% tax bracket but below the highest tax bracket, the tax rate is 15%. For those in the 10% or 15% tax bracket, the tax rate is 0%.

Are There Any New Taxes on Capital Gains Starting in 2013?

The answer to this question is maybe. One of the provisions of the recently issued Patient Protection and Affordable Care Act (“Act”) by the U.S. Supreme Court, was the institution of the Medicare Contribution Tax (“MCT”). The MCT imposes a tax of 3.8% on net investment income starting in 2013.

Taxpayers will be subject to this tax if you have Net Investment Income (“NII”) and your Modified Adjusted Gross Income (“MAGI”) is over $250,000 for married filing jointly (MFJ) taxpayers or $200,000 for Single taxpayers. The 3.8% tax is calculated as the lesser of your NII or MAGI in excess of these limitations. NII includes the following types of income: capital gains, interest, dividends, annuities, rents, royalties, passive activities, and trading of financial instruments or commodities. Please note that certain deductions related to these types of investment income may reduce the amount taxed (i.e. investment interest expense, investment expenses, etc).

So How Do I Go About Reducing My Taxes?

That is a great question! Let’s go through some potential tax planning techniques you can implement to avoid these tax increases.

  • If you had large capital losses in the past when markets were at their lows, you may have been limited on the deductible loss amount you could take. It may make sense to consider selling certain highly, appreciated capital assets and realizing those “paper” gains in 2013.

  • If your 2013 income is below the 15% tax bracket, it would make sense to look at your portfolio and think about selling capital gain assets at an amount that would take you right up to the 15% tax bracket threshold. For 2013, the 15% tax brackets are $70,700 for MFJ and $35,350 for Single taxpayers.

  • If your income is slightly above the 15% tax bracket, then it may make sense to accelerate deductions into 2013 to move yourself into the 15% tax bracket. This strategy will need additional analysis to determine the impact of the Alternative Minimum Tax (“AMT”) however.

  • If your income is hovering around the MCT or the top tax bracket, consider accelerating deductions into 2013 or implementing other strategies, such as contributing money to your retirement plan (IRA, SEP IRA, etc) in 2013. Again, the AMT will need to be considered as part of this tax planning.

  • If you are married and one spouse has no other income but capital gains, it make sense to consider filing your 2013 taxes as married filing separately.

  • If you have already sold some investments for large gains, considered selling some of your “loser” stocks to offset these gains. If you implement this strategy and decide to rebuy the “loser” stock sold, the “Wash Sale” rules will need to be considered.

  • Consider gifting highly appreciated stock to your kids and have them sell the stock. Gift tax rules will apply and need to be considered before utilizing this strategy.

If you are currently sitting on large capital gains and/or large “paper” gains, the time to act on maximizing your capital by limiting your tax bite is now! Please contact me at 610-363-5965 for a free consultation and discussion of your personal tax situation.

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Source: Tax Articles

Steiny

Issue Number: IRS Tax Tip 2013-38 Inside This Issue

Tax Rules for Children Who Have Investment Income

Some children receive investment income and are required to file a federal tax return. If a child cannot file his or her own tax return for any reason, such as age, the child's parent or guardian is responsible for filing a return on the child’s behalf.

There are special tax rules that affect how parents report a child’s investment income. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return.

Here are four facts from the IRS about the taxability of your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child's total investment income is more than $1,900. The parent’s tax rate may apply to part of that income instead of the child's tax rate.

3. If your child's total interest and dividend income is less than $9,500, you may be able to include the income on your tax return. See Form 8814, Parents' Election to Report Child's Interest and Dividends. If you make this choice, the child does not file a return.

4. Your child must file their own tax return if they received investment income of $9,500 or more. File Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, with the child’s federal tax return.

For more information on this topic, see Publication 929, Tax Rules for Children and Dependents. This booklet and Forms 8615 and 8814 are available at IRS.gov. You may also have them mailed to you by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Publication 929, Tax Rules for Children and Dependents
  • Form 8814, Parents' Election to Report Child's Interest and Dividends
  • Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900

Source: Tax News & Notes

Steiny

Issue Number: IRS Tax Tip 2013-36 Inside This Issue

Home Office Deduction: a Tax Break for Those Who Work from Home

If you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts from the IRS to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:

• your principal place of business, or

• a place where you meet with patients, clients or customers in the normal course of your business, or

• a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.

2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.

3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.

4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.

6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer’s convenience.

For more information, see Publication 587, Business Use of Your Home. It’s available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

Source: Tax News & Notes

Steiny

Issue Number: IRS Tax Tip 2013-35 Inside This Issue

Tax Rules on Early Withdrawals from Retirement Plans

Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

For more information on early distributions from retirement plans, see IRS Publication 575, Pension and Annuity Income. Also, see IRS Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Publication 575, Pension and Annuity Income
  • Publication 590, Individual Retirement Arrangements (IRAs)
  • Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

Source: Tax News & Notes

Steiny

If you have made some nice short-term swing trades during 2012 and have built up long-term unrealized losses in other stocks, it may be a wise move to sell your long-term "loser" stocks.

Reason being is that for Federal income tax purposes, long-term losses can offset short-term gains (but can't go in excess of $3,000). Long-term losses are generally taxed at 15% and your short-term gains are taxed at your ordinary tax rate, which can be as high as 35% in 2012. By selling these long-term "loser" stocks you will be able to offset 35% tax bracket income with 15% tax bracket losses.

Please note that this situation may not work for everyone so please be sure to contact your trusted tax advisor before undertaking this strategy. Also, be sure to consider wash sale losses before selling any stock!

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Source: Steiny's Tax Corner

Steiny
blog-0779299001358924776.jpg

Education Costs Put Dollars in Your Pocket

As of the end of the year nears, tax planning for 2012 should be on everyone’s minds. One of the key areas the government allows for tax incentives is for the cost of your education.

Two of the most attractive incentives the government offers are the Lifetime Learning Credit and the American Opportunity Credit. Both credits are available for post-secondary qualified expenses such as tuition, fees, and course materials for yourself, your spouse, or your dependent. The great part about tax credits is that they reduce your tax bill dollar-for-dollar for the amount of credit you are able to claim.

  • The Lifetime Learning Credit is a non-refundable credit of up to $2,000 of qualified expenses. There is no limit on the number of years you can claim this credit for each eligible student.
  • The American Opportunity Credit (formerly known as the Hope Scholarship Credit) allows for a maximum credit of up to $2,500 of qualified expenses for each eligible student for the 2012 tax year. Up to 40% of the credit, or $1,000, may be fully refundable.

Both credits are subject to statutory phase out limits. The American Opportunity Credit expires after the 2012 tax year and if it is not renewed by Congress it will revert back to the old Hope Scholarship Credit rules. The maximum credit under these rules is $1,500.

In addition to the education credits mentioned above the government also allows for educational tax deductions. Although these amounts are not dollar-for-dollar savings they can still reduce your tax bill significantly.

  • Student Loan Interest: up to $2,500 may be deducted, subject to phase out limits.
  • Employer-Provided Education Assistance: these employer-provided programs can be used for qualified expenses such as tuition, fees, book, and supplies. Under this program you may be able to exclude up to $5,250 from your taxable W-2 wages. This program can be used for work and non-work related educational activities.
  • Business Deductions for Work-Related Education: if you pay for education that is required by your employer or improves your skills needed in your present line of work, some or all of these expenses may be deductible. For individual taxpayers, these expenses must be greater than 2% of your adjusted gross income. For the self-employed, these expenses are deductible against your self-employment income.
  • Qualified Education Expenses: expenses such as tuition or fees for postsecondary education may be deducted from your taxable income. There is a $4,000 limit and the amount is subject to phase out limits.

In addition to the credits and deductions above you may also want to consider a Coverdell Education Savings Account (Coverdell ESA) or a Qualified Tuition Program (529 Plan) to fund a student’s expenses.

If you have any questions or need additional information please shoot me a PM or contact your tax advisor.

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Source: Steiny's Tax Corner

Steiny

From: Steiny's Tax Corner

Hey everyone, I just recently started a new CPA firm and I will be posting up my tax articles and tax information from time to time here on KOAT. Below is an article I recently wrote regarding 2012 year-end tax planning. If you haven't already started looking at your tax situation I strongly suggest you do ASAP - you can contact me or your current tax advisor.

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Can you believe the holiday season is rapidly approaching? Hopefully you have all of your shopping done at this point and can start to get ready for something a little more exciting -- year-end tax planning! As you may already know, the big whigs down in D.C. have yet to come to an agreement on the 2013 tax situation for individuals and businesses. Because of this, it is pertinent to take a hard look at yours or your businesses’ current tax situation so you can minimize both your 2012 and 2013 taxes.

The natural question to ask is “Where do I start?”. Below are some key issues you should consider:

3.8% Medicare Contribution Tax (“MCT”)

Upon the recent issue of the Patient Protection and Affordable Care Act (“Act”) by the U.S. Supreme Court, one of the provisions of the act was institution of the MCT. The MCT imposes a tax of 3.8% on net investment starting in 2013.

Taxpayers will be subject to this tax if you have net investment income and your Modified Adjusted Gross Income (“MAGI”) is over $250,000 for married filing jointly (MFJ) or $200,000 (single).

The 3.8% tax is calculated on the lesser of your net investment income or MAGI in excess of the limitations mentioned above.

In general, net investment income includes the following amounts: interest, dividends, capital gains, annuities, rents, royalties, passive activities, and trading of financial instruments or commodities. Please note that deductions related to these types of investment income are allowed (i.e. investment interest expense, investment expenses, etc).

0.9% Medicare Surtax

The Act also included a 0.9% increase to the employee portion of Medicare taxes on wages starting in 2013. The additional surtax takes effect on ordinary income levels over $250,000 (MFJ) or $200,000 (single filers).

Please note that employers are required to withhold this additional tax based solely on the individual’s income level and not based on the employees filing status. If the employer does not withhold this amount you are still liable to pay this amount with your taxes. The 0.9% tax also applies to self-employment income and estimated tax payments.

2013 Potential Tax Rate Increases

Along with the Medicare tax increases stated above, tax rates are scheduled to increase as well if the government does not extend the current tax brackets. For the 2012 tax year, the top tax rate for individual income taxpayers is 35%. Beginning in 2013, this top tax rate is scheduled to increase to 39.6%. Couple this with the additional Medicare taxes and your marginal ordinary income tax rate could potentially reach 43.4%. This does not even include state income taxes!

Long-Term Capital Gains and Qualified Dividends

Through the 2012 tax year, long-term capital gains (“LTCG”) and qualified dividends have been generally taxed at a 15% tax rate. In 2013 the rates are scheduled to change as follows:

  • LTCG rate is scheduled to increase to 20%
  • Qualified dividends rate will equal your individual tax rate

Please note that if you add in the new Medicare taxes, LTCG gains could be taxed as high as 23.8% and qualified dividends could be taxed up to 43.4%.

Transfer Taxes

The estate, gift, and generation-skipping (“GST”) tax rules and rates are all scheduled to change in 2013 as well:

  • Tax rates are scheduled to increase from 35% to 55%
  • The gift tax exemption will decrease from $5.12 million to $1 million
  • GST exemption will decrease to a projected $1.43 million

Other Considerations

Some other items of note worth consider before year-end:

  • Medical expense deduction: for individuals under the age of 65, the threshold to deduct medical expenses increases from 7.5% to 10% of AGI. If you are over the age of 65, the threshold will remain at 7.5%.

  • Itemized Deductions: deductions over the standard deduction will begin to be phased out over certain AGI thresholds.

  • Alternative Minimum Tax: if the government does not issue a “patch”, AMT exemptions will revert back to old laws. This could potentially push a great deal of middle-class income taxpayers into an unexpected tax bill this upcoming April.

Now more than ever the timing of income and deductions will play a crucial part in tax savings for this year and in the future. With that being said, it may make sense for some taxpayers to accelerate income into 2012 vs. deferring the income to 2013. Another strategy could involve deferring expenses to 2013 and beyond to combat rising tax rates.

Should you be interested in talking about your current or future tax situation and potential tax planning opportunities, please feel free to shoot me a PM with your contact information and we can discuss further.

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Source: Steiny's Tax Corner

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