2013 Year-End Tax Planning and Financial Wellness
November 27, 2013
Welcome to my annual Thanksgiving Family Money letter!
I’m attaching the nicely formatted PDF of the letter to an email, but also including the actual text inline here, in case you don’t like to open attachments or spam filters got the email. (It’s just more readable as a PDF, I think.)
I’ve recently completed several continuing education courses, and this letter is a way to make sure that you’ve had a chance to hear about some changes you’ll want to know before tax season hits. I figure it’s a fun letter to pass around the Thanksgiving table, since we all know how well money and family mix. 🙂
Remember that “fiscal cliff” the government was stumbling over last winter? What made it a “cliff” was that a lot of financial blows were all being struck at once. Several temporary tax reductions were due to expire and some new tax increases were arriving. You might have noticed your withholding went up (and your paycheck went down) last January, but a lot of the tax increases you won’t notice until you go to do your tax return: many people with incomes over $100K will see much higher taxes this year.
I apologize for the length of this, but skim it to see if anything applies, and then feel free to pass it along. It has four main parts:
+ immediate tax planning opportunities to do before December 31st
+ basic financial wellness to check in on yourself
+ news about the impact of the demise of DOMA, and
+ some thoughts on strategizing for the Affordable Care Act, aka ObamaCare.
First, the fun stuff: things you can do now to decrease your tax bill for 2013.
If you are over 70 and have to take a required minimum distribution from an IRA, in 2013 you may still do it straight from the IRA to a charity of your choice if you prefer. This is a lovely way to fund charitable contributions you meant to do anyway. This is due to expire this year.
The income limits are gone on Roth conversions, so that’s still a planning opportunity. Also, anyone who is in the lowest tax bracket of their lives for whatever reason might wish to convert some Traditional IRA to a Roth IRA (or just withdraw it entirely) because Trad. IRA money is tax-DEFERRED, not tax-avoided. We’re always looking for the right time to pay those taxes since they will inevitably land sometime. IRA conversions need to be done in the calendar year, so call for an appointment if you want to do a bit of tax planning.
There are still some energy efficiency credits for 10% off the cost of materials that improve your building envelope’s energy efficiency, but they are only helpful if you haven’t already used your maximum $500 credit in the past several years since that’s now the lifetime limit.
Don’t forget to pay at least $4,000 in tuition in 2013 to maximize the American Opportunity Tax Credit if you have a child in college; the amount paid via student loan disbursements counts towards that, but sometimes we want to pre-pay in December for January bills.
If you are someone who teeters on the edge of whether it’s worth it to itemize deductions, you can strategize whether it is better to load more of your deductions into 2013 or 2014. You can affect the timing of deductions by when you pay the bills for charitable contributions, real estate taxes, and even to some extent medical bills. Another strategy is to prepay MA state taxes (you can send them an estimated tax voucher even if you don’t normally do that). Sorry, there is no deduction for pre-paying Federal taxes. This strategy can cause problems with “Alternative Minimum Tax” (AMT) at even moderate income levels, but is often worth it, particularly for people without kids.
Last tip, if you made it this far: be very careful about IRAs. If you inherited one there is a possibility that you have to take a distribution from it by December 31st, even if it is a Roth IRA that normally doesn’t have a “Required Minimum Distribution” (RMD). If you just turned 70 you may also have a RMD but in either case you have a planning opportunity to spread the tax burden over two years.
You may also seriously wish to consider IRA distributions even if there is no RMDbecause of the way IRA distributions interact with social security benefits, Medicare surcharges, and investment income to cause other things to be taxed higher. It’s a really good idea to take IRA distributions in years when your income is very low, but those aren’t the people who come in for tax planning. If you have friends or relatives that still have IRAs that they are planning to leave for their heirs, perhaps, please pass along the word that IRAs need to be handled strategically. It’s a good idea to draw them down a little each year to avoid them being taxed at the highest bracket of your life!
Now for the bad news: Be wary about capital improvements to real property, they need to be capitalized more than ever before. Don’t think you can put a new roof on your rental house and call it a deduction that year; you can’t, we’ll have to depreciate it.
There is a new higher threshold for claiming medical expenses for filers where neither spouse is over 65. (But good news there; DOMA overturned means we won’t be needing to deduct after-tax health insurance premiums anymore — more later.)
There are a myriad of deductions that phase out and surcharges that phase in as your income starts to go up. Social security starts to be taxed when your income goes over about $40K, followed by at least six other phase outs as your income rises. You’ve probably heard about the new Form 8960 with a special 3.8% surcharge on investment income for high earners (over $200K/single and $250K/joint), and a new 0.9% surcharge on their wages, but those are on TOP of all the exemption phase-outs and deduction phase-outs and AMT, along with the Medicare premium surcharge on income over $84K/single, $165K/joint. Oh, and self-employment tax went up 2% this year. So the cumulative effect of all these tax increases can be quite distressing.
With the new tax on investment income, it is more important than ever to have investments in municipal bond funds if you are in a higher bracket. Good news is that you can consider them a socially responsible investment.
Another strategy to consider is gifting appreciated stock to charities. Since investment income includes capital gain income, the new tax on investments effectively means the capital gains rates did end up going up in 2013 after all.
The other piece of bad news that affects even low and normal income earners is the wayidentity theft has increased dramatically. It turns out that anyone who can find out your name and social security number can make up a fake W-2 using your name, and then file a fake tax return for a very real refund. They get it direct deposited into a bank account owned by the scam artist, who then empties the bank of the refunds and leaves town before the scam is ever detected.
Fraudulently filed U.S. tax returns are big business world-wide now. We practice superior data security protocols in our office, but your name and social security number are on your Medicare card in every doctor’s office, on file at every former employer’s office, on the paperwork for every loan for which you’ve ever applied, etc. etc. etc. All it takes is one bad security breach anywhere from your past for your information to end up in criminal hands. And it’s big business: South Carolina’s Department of Revenue was hacked last year and all the names and social security numbers of everyone who’d filed (or been a dependent on a return that was filed) for ten years was stolen. South Carolina helpfully set up identity-theft tracking with Experian for people it determined had been hacked, but then Experian’s records were hacked, too! We’ve also discovered, to our astonishment, that the IRS wasn’t matching names to bank accounts where they send direct deposit refunds. Refunds for withholding on W-2s have always been issued before the employer had submitted the forms to the IRS for matching against what was claimed on the 1040s. They just figured no one would lie about their W-2s or something.
This was the year that this type of fraud went from “guess what amazing thing crooks will think of” to something like 4% of returns were fraudulently filed for massive billions of dollars of losses. The IRS is working on fraud-prevention strategies, but meanwhile our best protection for this fraud is to file your own tax return before the criminals get around to it. If you e-file a tax return and it bounces back saying a return has already been filed in your name, you need to go to http://www.irs.gov/uac/Newsroom/Tips-for-Taxpayers,-Victims-about-Identity-Theft-and-Tax-Returns
and let them know you need a new taxpayer ID pin to use to identify your return as really being from you. Also expect refunds to be delayed while the IRS tries to get the W-2s into the system for matching purposes. W-2s are due to you by January 31st, but you get them before the IRS gets a copy from the employer, so refund applications in early February are likely to be held back. (We will efile them anyway to get them in the queue, but just don’t count on a fast refund this year!)
One last reminder: people who took a New Home Buyer Tax Credit in 2008-2010 may have to repay it unless they subsequently sell the house for a loss. The IRS knows who you are and is sending notices and $500 bills to people who got that $7,500 under the “loan” terms. New people should mention this, since I wouldn’t normally ask to see a 2008 return at this point.
General financial wellness matters: There are some changes for the better in Flexible Spending Accounts. I particularly like Medical FSAs if you have a good idea of how much you’re going to have in out-of-pocket medical spending, particularly really foreseeable things like braces and glasses. They are now limited to $2500 per employee. But watch out, dependent care benefits are limited to $5,000 per return, so don’t have both spouses do it. In fact, be very careful about either of these because they are “use it or lose it” plans, where you have the money withheld from your pay but only get reimbursed if you submit actual expenses to the custodian. If you don’t turn out to have the expense (or won’t get around to submitting for reimbursement) you lose the money. The dependent care plan is great if you have one kid who needs more than $5K in childcare, but for amounts under $3,000 per child it isn’t quite as helpful and comes with extra compliance at tax time, so focus on making sure you use it if you’ve got a baby in full-time daycare, and consider skipping it if you have school-age kids who use summer day camps and after-school care.
One thing that is really good to touch base on is to take a moment to consider whether you have your estate planning in order.
+ If you die, who gets your pension at work? Your IRAs? Your life insurance?
+ Do you have any one named as a joint on a bank account that perhaps you don’t want there?
+ Do you have wills? Health care proxies?
+ Is your life insurance adequate for immediate cash needs to settle your estate?
As for risks, becoming disabled is often a bigger risk than dying. Do you have disability insurance that covers you for your own occupation? (Like life insurance, you can go out and buy your own; you don’t need to get it at work.) Do you have adequate liability for uninsured motorists for car insurance?
Watch out for elders being sold revocable trusts; typically you can do this cheaper with “Transfer on Death” also called “TOD” accounts. If you do have a revocable trust, make sure you move your assets into it so they’re titled that way, otherwise it does no good! Note that these trusts do NOT save on taxes.
Be aware that estate taxes have changed a lot lately. Now the Federal estate tax limit is up over $5M, but MA still taxes estates of over $1M. One new thing is that it’s worth filing an estate return for the first spouse to die so that you can get “portability of their lifetime exemption” to the surviving spouse. (Ask me or your attorney if you want to know what that actually means!)
Gifts are part of the estate tax system, so it eats into your eventual $5M limit if you give gifts that are over the “de minimus” amount. That amount is $14,000 in 2013, i.e., if you give gifts of less than $14,000 per person you don’t need to report it on a gift tax return. If, however, you did give gifts over that amount, you need to log them on a Form 706 to just keep track of how much you’ve eaten into your overall estate exemption someday. People who GET gifts don’t need to report anything. It’s a good idea, though, to note its source in your records so you can show someday that it wasn’t actually unreported self-employment income.
If you are considering gifting away assets to reduce your estate, here are a couple of quick tips: payments made directly to medical providers or educational institutions for someone else aren’t limited. Another tip is to give them appreciated assets (or assets likely to appreciate) because it offloads the capital gains to the donee (who then says “thank you” rather than “awww, man, you loaded me down with a built-in tax liability”). But it also prevents your estate from growing further; if you give away $14K now that could be $140K by the time you die that isn’t in your estate.
A nice hint for gifts: consider good old fashioned gelt. I have some links on my webpage to places I’ve bought bullion before. It has some lovely attributes for estate planning.
Generous donors should consider whether the name-brand charity with the advertising budget is the best place for their dollars. Websites like Charity Navigator will help you evaluate which charities do good works without spending so much on marketing that you’ve heard of them. http://www.charitynavigator.org/
Last but not least, it’s a good idea to get a free credit report at least once a year. You can get one each from each of the credit reporting agencies, but since they are largely duplicates of each other I’d say to just get it from one credit agency to start. I’m not talking about the credit score; I’m talking about the report itself. It shows your actual activity, and your goal is to scan it to see if something simply makes no sense. If you forgot you opened up a Home Depot credit card to save $20 that time, that’s fine. But if you discover that someone else is opening up credit cards in your name then it’s time to take action. Start here for the free report:
Planning issues related to DOMA:
Several years ago Gill v. OPM ruled that DOMA was unconstitutional in the 1st District. Then the court determined that DOMA would only be constitutional if there were a compelling reason to discriminate. After due consideration of any compelling reasons to discriminate, I came to the conclusion that DOMA would not be able to overcome that standard. At that time I started filing people “married filing joint” if they benefited from doing so, and went back and put protective claims in for people as far back as 2008 if they would benefit. So the short version is that I don’t have any people where I did both spouse’s returns that need to amend an old return to file jointly; if it benefited you, we already did it. Happily, no one is being forced to amend to file jointly if they don’t want to (and most people don’t want to – more on that below.)
But it turns out there’s ANOTHER reason to amend your old returns. If you were someone who got health insurance for your spouse through your workplace, you had a weirdness on your W-2 that we can now go back and change, and with the new W-2s in hand, amend 2010, 2011 and 2012. Apparently, no one is being forced to be consistent in their tax treatment. What that means is that you can still amend your 2010 return to show lower income on a revised W-2 without having to amend to file jointly.
Basically, if you had imputed health insurance on your W-2 there are good reasons to ask your employer to revise your W-2s. This pertains to you if you had “imputed income” from your employer’s share of your spouse’s income AND if you paid for your spouse’s insurance out of your own payroll deductions, too, since now we can revise your W-2 to show that those expenses should have been before Federal taxes, Social Security Taxes and Medicare taxes. The procedure is that you need to get a revised W-2 from your employer for 2010, 2011 and 2012. We have time to fix 2011 and 2012, but 2010 is going to expire soon so it’s good if we can get that moving ASAP. Ask me if you need help, or check out this paper on how to do it. https://www.talx.com/News/TaxIntelligence/2013-10-ETS-Tax-Intelligence-DOMA.pdf
If I didn’t do both returns for you and your spouse there is a possibility that you might wish to amend 2010, 2011 and 2012 to file jointly. Most of the time we find people have a better outcome if they file as two single people, but there is one scenario where you save on taxes if your marriage is recognized: where you earn very little and your spouse earns quite a lot. So two people making $40K would have higher taxes if they marry, but one person making $70K and another making $10K would be better off at tax time because of being married. (Sorry, married people, Married Filing Separately is usually the worst of all the options.) You are considered married based on your status on December 31st. If you are a situation where I didn’t already do both tax returns AND you have uneven incomes, give my office a call to schedule some time to explore whether we want to amend old years. Again, 2010 is the time-critical one; the chance to amend it expires on 4/15/14 unless you filed for an extension in 2010. Note that it’s a good idea to ask for the W-2 to be revised first and do both amends at once.
Planning issues related to Affordable Care Act: The Affordable Care Act, otherwise known as ObamaCare, is substantially similar to the RomneyCare we’ve been living with for the past six years. While the rest of the nation is discovering what “creditable coverage” means, we already knew this; our health insurance premiums are already the highest in the nation. There are two good additions that come from ObamaCare though, and something to warn you about.
First off, the Healthcare.Gov
issues are not our concern. We work from our own state exchange that has been up and running for several years now, and we have a bevy of talented health insurance advisors to assist you in navigating the options as well. Although it is currently being renovated and has a few growing pains, it is usually fairly easy to sign up at MA Health Connector. Sadly, the Insurance Partnership appears to have been disbanded as it folded into the new ACA format. Those of you who were used to buying your health insurance through the Insurance Partnership are probably going to have to start over on the MA Health Connector,https://www.mahealthconnector.org/
One new addition is the Bronze plan. For the past six years we in MA haven’t been allowed to have a “High-Deductible Health insurance Plans (HDHP); they weren’t considered creditable. So, while the rest of the country could use a HDHP combined with “Health Savings Account” (HSA), it was almost unheard of in MA. The good news is that the Bronze plan combined with an HSA is a really useful option in risk management if you’re both a saver and unlikely to have a lot of medical expenses; in that case it’s really nice to have an HSA as a better option than a Trad. IRA for saving for retirement (while still being able to access it for medical misadventures.) The thing is, while premiums are lower, your risk of having a big bill is much higher. A Bronze plan is not appropriate for people who would be forced into bankruptcy if they had a $3,000 repair befall them. This is true insurance to handle only really BIG issues; it is more like the car insurance you buy: it covers accidents, not needing a new exhaust and tires.
As usual, you’ll want to be very careful about thresholds. But the other big new benefit is the way that thresholds have been extended so they aren’t as much of a cliff as they used to be. Now, instead of being subsidized up to $45K for a family of two and then having no premium support at all, the subsidies extend all the way up to $62K, gradually phasing out as you earn more. The only remaining cliff is the 400% of poverty level cliff, where all premium support fades away PLUS you now are responsible for repaying credits you took in error. Here’s that table: try to make sure you stay under 400% of FPG if you are close! http://www.familiesusa.org/resources/tools-for-advocates/guides/federal-poverty-guidelines.html
That’s the big thing to warn you about. Previously we decided how much your subsidy would be based on your prior year tax return, so the 2012 returns decide how much your subsidy is for the 2013 period. But under ObamaCare it looks like they will be doing a year-end reconciliation on your tax return; if you are eligible for higher subsidies in 2014 than you had taken in advance based on your actual 2014 income, then you will get them in the form of a larger tax refund (or smaller balance due) on your 2014 tax return done 15 months from now. If you earn one dollar more than the 400% cap then you could be in the situation of having to pay back the subsidy you weren’t entitled to. It’s a pretty scary possibility. The way we avoid it is to over-estimate a bit how much you’ll make in 2014 when you go to apply for your new health insurance. If you think you’ll make $30K then tell them $33K. This reduces the subsidy you have each month (increasing the amount you actually have to pay yourself for your health insurance) but makes it more likely that you won’t be in the sad process of having to repay the over-subsidy.
Or, if you want to try to game the system, there’s another option: if you anticipate making very little, and get a massive subsidy, and then it turns out you made 395% of the Federal Poverty Guidelines you will be responsible for repaying SOME of the overage, but not all. You just keep the extra premium subsidy. Originally there was going to be a system in place to safeguard people from lying about their projected 2014 income, but it turns out to be impossible, since no one who buys their own insurance actually DOES have a decent idea of what their 2014 income will be from where we sit in 2013. It’s one of the many glitches still waiting to be worked out.
Another thing to just mention in passing: the number of people who will pay penalties for not having health insurance in 2014 is miniscule, approaching zero. Essentially, the only reason you’d pay that penalty is if you volunteer to do so. There are many exceptions to who has to pay it, it is easy to appeal, and they are not enforcing it for the people who don’t have any excuse. Besides, in MA we’ve already got insurance for almost everyone who wants it.
Changes at Tea & Taxes Company: Our expansion to Main Street right before tax season last year was very challenging, but one year later I am happy to report that it is working just as I hoped. I am very pleased with my staff accountant Jessica Washer, who has enabled us to expand our capacity in tax prep, bookkeeping, and payroll. This tax season we’re bringing on the multi-talented Jessica Farwell, who reports she just “likes doing taxes”. We’re currently in the process of hiring another year ‘round staff accountant, so spread the word. We are delighted that Ta Mara Conde will be returning again as our seasoned person on the front desk and phones, and Jenny New is bringing her skills to help in office admin, too, as we expand again, this time also offering comprehensive financial planning. (Stay tuned for more about “ProsperiTea Planning”!)
We’re not ready to make appointments for next year yet, but we are scheduling tax planning appointments in December. Our plan is to get the organizers out early this year, so watch for a packet in the mail at the end of December. When that arrives it’ll be a good time to phone for your appointment spot, since we wait to mail them out until we have that part up and running.
You have my very best wishes for a prosperous and happy season,
Wendy Marsden, CPA
IRS Circular 230 Disclosure: To ensure compliance with US Treasury Regulations governing tax practices we inform you that: Any US tax advice contained in this communication (including attachments) was not written for and cannot be used for purposes of avoiding any tax related penalties that may be imposed under Federal tax laws, or the promotion, marketing or recommending to another party any transaction or matter addressed there in.
Originally Published by email, Thanksgiving, 2013