Blog Archive



U.S. Tax Court rules against MBA student seeking tuition tax break

 The U.S. Tax Court has dealt a setback to young MBA students with little work experience who try to claim their tuition costs as a tax-deductible business expense, lawyers and accountants said on Thursday.

In a ruling on Monday, a Tax Court judge denied Adam Hart of Florida, who was studying for a Master of Business Administration degree in finance, a $17,138 tax deduction he claimed for his tuition costs in 2009. The IRS billed Hart for $2,572 in unpaid taxes.

Hart, now 31, who graduated in 2011 from the Rollins College MBA program in the state, did not have enough consistent work experience prior to starting school to claim the deduction, the judge ruled.

"There is no evidence in the record that (the) petitioner was carrying on a trade or business before he enrolled in the MBA program," wrote Tax Court Judge Kathleen Kerrigan.

Claiming MBA tuition as an ordinary, cost-of-business deduction is a narrow needle to thread, tax professionals said. The tax break cannot be claimed by law or medical students.

MBA students may be able to convince the IRS their education is an expense if they have years of consistent experience built up before starting a program, and then return to that career after graduation, professionals agreed.

The Tax Court decision will prevent MBA students without an established career path from claiming the tax break, lawyers and accountants said.

"Given where we are economically, it may be more difficult for younger professionals to establish themselves in careers. This in turn could make it more difficult to take advantage of the deduction," said John DeBoy, a tax lawyer at Covington & Burling LLP.


Tax and accounting expert Robert Willens, who teaches MBA classes at Columbia University, said the tax break accounts for about one-third of the tuition cost a year for the students he knows who have been able to claim it.

Following Hart's Tax Court loss, "the IRS could decide to read it more broadly than it should be read and begin challenging people," Willens said.

Josh Nowack, an accountant in California, said he does between 30 and 50 tax returns a year that claim MBA tuition as a business expense. Students in high-tax states like New York and California can save between $5,000 and $10,000 with the MBA tax break.

He said a strong candidate for the tax break is an engineer, for example, who has worked for 15 years then gets an MBA to broaden his or her career opportunities.

But for Hart, who started his MBA program two years after receiving an undergraduate degree, the Tax Court ruling "was not surprising," Nowack said.

In an interview on Thursday, Hart said he would ask the Tax Court to reconsider his case with new evidence that shows he had more work experience before starting the MBA program.

Hart said he works now for McKesson Corp, a drug wholesaler, as a sales representative. He said he could owe the IRS up to $10,000 if he ultimately loses his case.


"I'm fighting this all the way to the end," Hart said.



6 End-Of-Year Questions To Ask Your Tax Advisor


Laura Shin, Contributor,



Your end-of-year to-do list may seem full already. But it’s not complete unless it includes a conversation with your accountant.

Now that you can see how your year has ended up — whether you’ll be getting that raise you angled for, had your first child, bought a new house or launched your own business — your financial situation has likely changed in a way that you’ll want to strategize to ensure that you pay your fair share in taxes, but no more.

“In tax planning, it is important to limit the amount of potential taxation you’re looking at by doing things such as pushing off revenues to the following year or giving more money to charity [to take yourself out of a higher tax bracket],” says Ted Flynn, CEO of the Massachusetts Society of CPAs. “By sitting down with your tax advisor, he can tell you what your tax liability will be before the end of the year and some ways you might go about reducing that tax liability.”

Your tax advisor, such as a certified public accountant or enrolled agent, can help you figure out exactly what financial moves you need to make before year’s end to do so. While a face-to-face meeting is preferable, a phone call or email could also do the trick. Here are six questions to ask.

1. Should I accelerate or defer income?

If you think you’ll be in a higher tax bracket next year, you may want to bring in more income this year instead of next. For instance, if you’re retired, look at taking IRA distributions now, or if you’re self-employed, ask clients to pay before the end of the year.

If, however, you think you’ll be in a lower tax bracket next year, then you want to try to defer end-of-year bonuses until January, delay exercising nonqualified stock options (since that is usually recognized as income) and postpone any Individual Retirement Account distributions over the required minimum (if you’re over 70 1/2).

You may also want to consider accelerating deductions that you plan to take on your income tax return. For instance, you may want to prepay your state income tax estimated payment or real estate taxes not due until 2014.

2. Are there any gains or losses I should take this year given my tax position?

When it comes to your investments, if you’re in a low tax bracket and have gains, it may make sense to sell investments that are performing well in order to enjoy low taxes on those earnings, says Mark Alaimo, a CPA, personal financial specialist, certified financial planner and principal at Wealth Management Advisors LLC in Boston, Mass.

“If you’re going to be in the 15% tax bracket or lower, your long-term capital gains tax rate is 0%,” says Alaimo. Alternatively, you may want to realize losses in order to lower your capital gains tax, though you will not be able to repurchase that specific investment for 30 days in order for that loss to be used to offset other capital gains for income tax purposes.

3. Should I do a Roth conversion by year-end?

If you’ve been saving money in a traditional IRA, you may want to convert some of the money into a Roth IRA. Although you’ll pay taxes on that money now, the earnings will grow tax-free, which could mean huge tax savings, especially if retirement is a ways off. This could make sense if you’ll be in a low tax bracket this year and have the money to pay any taxes that will be levied with the conversion.

For instance, says Alaimo, “For some wealthy retirees who are paying no taxes or are in very low brackets, we look to do a partial Roth conversion. We pay tax at a 10% or a 15% rate [on each conversion] until 70 1/2, when they’re required to take out minimum distributions from their 401(k)s and IRAs.” Since the person’s tax bracket at age 70 1/2 would likely jump to something like 25% when he or she starts taking distributions, it makes sense to do the conversion now.

Additionally, if there have been enough conversions by age 70 1/2, the retiree’s minimum required distribution may also have been lowered, keeping her in a lower tax bracket than she would have been in had she not converted that money.

The other benefit of these conversions? It can create a valuable asset for your heirs if you never end up tapping that Roth money.

4. Should I make any changes to my 2014 employee benefits? 

Review your flexible spending accounts, health savings accounts and dependent care arrangements in light of any new developments in your life. For instance, if you anticipate medical expenses (another child, glasses, braces, dental work, lasik surgery), you may want to increase the funds in your flexible spending account spending, which allows you to use pretax money for out-of-pocket medical expenses. These funds could help you pay for the additional doctor copays and prescriptions you’re likely to incur this year, plus lower your overall tax bill. Or, if you have a child in daycare and file a joint tax return, you can set aside up to $5,000 a year pretax for daycare expenses.


5. What charitable contributions should I be making?

If you have a higher income this year, you may want to make more charitable deductions by the end of the year to put yourself in a lower tax bracket. If you’re in a lower tax bracket, or have been unemployed, then it could make sense to push your end-of-year charitable giving to January.

If you have an investment with unrealized gains, it’s best for you to give that appreciated stock as a donation. Let’s say you invested $4,000 and the security is now worth $10,000. If you were to sell it and then donate the cash, you’d pay 15% capital gains tax on your $6,000 gain. If you instead gift the appreciated security, you’ll avoid the tax plus be able to deduct the full donation.

Taxpayers over 70 1/2 are able to gift up to $100,000 from their IRA directly to a charity; and in fact, this will most likely be the last year that you’ll be able to do so without being taxed on this distribution. (You will not receive a charitable deduction for the gift, but will avoid the required minimum distribution up to $100,000).

6. What year-end interfamily gifting should I be doing? 

Every individual can give $14,000 to as many people as he or she wants this year without paying taxes on those gifts. For that reason, if you have working children, one way of transferring wealth in a way that won’t be taxed is to give them a gift the same amount as their Roth IRA contribution — $5,500 for this year.

In addition, if you are later in life with a large estate subject to estate taxes, you should consider gifting $14,000 ($28,000 if you are married) to your heirs annually to lower the size of your estate over time while assisting family members while you’re still alive.


What’s even worse than divorce? The taxes

A guide to the tax implications of untying the knot


TAX GUY Dec. 3, 2013
By Bill Bischoff


Among the many consequences of divorce are some potentially significant tax issues, especially for couples who are relatively well-off. Here are the most important things to know about splitting up assets between soon-to-be-exes.


State law is key

How you must split up assets in divorce depends largely on where you live.

California, Texas, Washington, Wisconsin, Arizona, Nevada, New Mexico, Louisiana, and Idaho are the so-called community property states. In these states, the general rule is that community property assets (those that were accumulated by you and your spouse during the marriage) are owned 50/50. Therefore, each spouse is entitled to half of the total community property (net of liabilities). In contrast, assets that were owned by one spouse before the marriage, or that were received by one spouse as a gift or bequest during the marriage, are generally considered to belong solely to that person.

All the other states are so-called equitable distribution states where the general rule is that you and your spouse must split things up according to “whatever is fair” in the eyes of the divorce court. That often works out to a 50/50 split, but it’s not preordained. Of course you and your spouse can agree out of court on your own version of “whatever is fair” and the divorce court will generally go along with your proposed deal.

Now let’s talk about the federal tax aspects of divorce.

Tax-free transfer rule applies to most assets

The general rule is that you can divide up most assets, including cash, between you and your spouse without any federal income or gift tax consequences--thanks to Section 1041 of the Internal Revenue Code. When an asset falls under the tax-free transfer rule, the spouse (or ex-spouse) who receives the asset takes over its existing tax basis (for tax gain/loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

Example 1: : You agree to give your ownership interest in your primary residence and some cash to your soon-to-be-ex in exchange for keeping ownership of your small business and its assets. You also agree to let your soon-to-be ex keep your vacation home in exchange for some stock held in taxable brokerage firm accounts and more cash. These swaps are tax-free thanks to the tax-free transfer rule. The existing basis and holding periods for the homes and stocks carry over to the spouse who winds up owning them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they are made incident to divorce, which means those that occur: (1) within one year after the date the marriage ends or (2) within six years after that date as long as they are made pursuant to your divorce or separation agreement.

Transfers of non-capital-gain assets

For years, the IRS appeared to say that the tax-free transfer rule only applied to capital-gains assets. For instance, if you transferred vested stock options to your soon-to-be-ex or bonds with accrued interest, the IRS wanted you to report the date-of-transfer difference between fair market value and basis as ordinary income on your Form 1040. In other words, you paid the tax even though your ex got the cheese. Now it appears the IRS has reversed its field and concluded that most ordinary income assets can be transferred tax-free. If so, the spouse who winds up with the asset must recognize the taxable income when the asset is sold or converted to cash (or exercised in the case of stock options). Fair enough.

Even when tax-free transfer rule applies, there are still important tax implications to consider

The spouse who winds up owning an appreciated asset (fair market value in excess of tax basis) must recognize taxable gain when it is sold (unless some exception applies, such as the exclusion for gain on sale of a principal residence).

Example 2: : Your divorce settlement calls for your soon-to-be-ex to receive all your long-held Apple shares. Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your spouse keeps on rolling under the same tax rules that would have applied had you continued to own the shares (carryover basis and carryover holding period). When your spouse ultimately sells the shares, he or she (not you) will owe any resulting capital gains taxes.

Heads up: When you are the one who winds up with appreciated assets, you are the one who is on the hook for the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that have not appreciated.

Retirement accounts are big exception to tax-free transfer rule

The tax-free transfer rule definitely does not apply to tax-advantaged retirement accounts like IRAs or accounts with employer-sponsored retirement plans. You must jump through some hoops to get tax-free treatment if you transfer all or part of your account balance(s) to your ex in divorce. If you screw up, you can wind up getting taxed on money that goes into the pocket of your ex.

Conclusion: be careful out there


Like any major financial transaction, a divorce can have important tax implications. If you have a healthy net worth or high income, seek advice from a tax professional with experience handling divorces. Be warned: divorce attorneys are often not up to speed on tax issues even though they may be unwilling to admit it.



How you can avoid paying taxes on Social Security


Dear Tax Talk,
I am 66 years old. My income is approximately $30,000 a year. I just started collecting Social Security at 66. Do I have to pay taxes on this extra money and why? How do I prevent this from happening if possible?
-- Fred

Dear Fred,
According to the September 2013 statistics released by the Social Security Administration, you are now in the company of 39,313,000 individuals aged 65 or older receiving Social Security benefits. As a general rule, Social Security benefits are not taxable if they are your only source of income during a year. But if you have investment income or earned income, then up to 85 percent of your Social Security benefits may be taxable, depending on your filing status and the amount of the income.

The first step is to determine whether your benefits are taxable and if the answer is yes, then the next step is to calculate how much of your benefits are taxable.

To calculate whether your Social Security benefits are taxable, you need to add half of your Social Security income that is reported in Box 5 of your Form SSA-1099 to your income, which includes taxable pensions, wages, interest, dividends, other taxable income and tax-exempt interest income. If you are married and file a joint return, you need to include the income and benefits, if any, received by your spouse. You then need to compare this number to your "base amount."

Your base amount is:

  • $25,000 if your filing status is single, head of household or qualifying widow(er);
  • $25,000 if you are married filing separately and lived apart from your spouse for all of 2013;
  • $32,000 if you are married filing jointly, or
  • $0 if you are married filing separately and lived with your spouse at any time during 2013.

If the amount you calculated above is equal to or less than the base amount for your filing status, none of your Social Security benefits are taxable this year. If the amount calculated is more than your base amount, then some of your benefits may be taxable.

The next step is to use the worksheet that is included in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to calculate the amount of the taxable Social Security benefits. You will report the Social Security benefits on Line 20 of your Form 1040.

In order to prevent the Social Security benefits from being taxable, you will have to decrease the amount of income you are receiving so that you are below your base amount.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.



Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.



More tax moves to make before Christmas

It’s time to take steps to reduce your 2013 tax bill


By Bill Bischoff, TAXGUY

Nov. 7, 2013


With the end of the year approaching, it’s time to make some moves to lower your 2013 tax bill. This is the second installment of our two-part series on that subject.

Strategy: Prepay Deductible Expenditures

If you itemize deductions, accelerating some deductible expenditures into this year to produce higher 2013 write-offs makes sense if you expect to be in the same or lower tax bracket next year. (See the tables at the end of this column for the 2013 and 2014 federal income tax brackets.)

January House Payment: Accelerating the house payment that’s due in January will give you 13 months’ worth of deductible interest in 2013 (unless you’ve already been following the prepayment drill). You can use the same strategy with a vacation home.

State and Local Taxes: Prepaying state and local income and property taxes that are due early next year can reduce your 2013 federal income tax bill, because your total itemized deductions will be that much higher.

Charitable Donations: Prepaying charitable donations that you would otherwise make next year can reduce your 2013 federal income tax bill, because your total itemized deductions will be that much higher. Donations charged to credit cards before year-end will count as 2013 contributions.

Medical Expenses and Miscellaneous Deduction Items: Consider prepaying expenses that are subject to deduction limits based on your AGI. The two prime candidates are medical expenses and miscellaneous itemized deductions. As explained earlier, medical costs are deductible only to the extent they exceed 10% of AGI for most people. However, if you or your spouse will be 65 or older as of year-end, the deduction threshold is a more-manageable 7.5% of AGI. Miscellaneous deductions—for investment expenses, job-hunting expenses, fees for tax preparation and advice, and unreimbursed employee business expenses—count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into a single calendar year, you’ll have a fighting chance of clearing the 2%-of-AGI hurdle and getting some tax savings.

Warning: Prepaying Is Not a No-Brainer: The prepayment strategy can backfire if you will owe the alternative minimum tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions. So prepaying these expenses may do little or no tax-saving good for AMT victims. Solution: ask your tax adviser if you’re in the AMT mode before prepaying taxes or miscellaneous deduction items.

Strategy: Make Major Year-end Purchases and Deduct Sales Taxes

If you live in a state with low or no personal income taxes, consider making the choice to deduct state and local general sales taxes instead of state and local income taxes on your 2013 return. Most people who choose the sales tax option will use an IRS-provided table to calculate their allowable sales tax deduction. However, if you’ve hoarded receipts from your 2013 purchases, you can use your actual sales tax amounts if that results in a bigger write-off.

Even if you’re stuck with using the IRS table, you can still deduct actual sales taxes on a major purchase such as a motor vehicle (car, truck, SUV, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an aircraft, a home (including a mobile prefabricated home), or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle. So making a major purchase (or motor vehicle lease) between now and year-end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

Remember: the sales tax write-off only helps if you itemize. And if you’re hit with the AMT, you’ll lose some or all of the tax-saving benefit.

Strategy: Prepay College Tuition

If your 2013 AGI allows you to qualify for the American Opportunity college credit (maximum of $2,500) or the Lifetime Learning higher education credit (maximum of $2,000), consider prepaying college tuition bills that are not due until early 2014 if that would result in a bigger credit on this year’s Form 1040. Specifically, you can claim a 2013 credit based on prepaying tuition for academic periods that begin in January through March of next year.  

  • The American Opportunity credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high. The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000. The range for married joint filers is between MAGI of $160,000 and $180,000. MAGI means “regular” AGI, from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the U.S. which you probably don’t have.

  • Like the American Opportunity credit, the Lifetime Learning credit is also phased out if your MAGI is too high. However, the Lifetime Learning credit phase-out ranges are much lower, which means they are much more likely to affect you. The 2013 phase-out range for unmarried individuals is between MAGI of $53,000 and $63,000. The 2013 range for married joint filers is between MAGI of $107,000 and $127,000.

If your MAGI is too high to be eligible for the Lifetime Learning credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs. If so, consider prepaying tuition bills that are not due until early 2014 if that would result in a bigger deduction on this year’s Form 1040. As with the credits, your 2013 deduction can be based on prepaying tuition for academic periods that begin in the first three months of 2014.

Strategy: Give to Charity

If you have charitable instincts, here are two suggestions.

Donate Appreciated Stock; Sell Losers and Donate Cash: If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you’ve held in a taxable brokerage firm account for over a year, consider donating them, instead of cash, to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and donate the cash sales proceeds. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Remember: you must itemize deductions to gain any tax-saving benefit from charitable donations, except for donations out of an IRA, as explained immediately below.

If You’ve Reached Age 70 1/2: Donate from Your IRA: You can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA, if you’ll be 70 1/2 or older by year-end. Such direct-from-your-IRA donations are called qualified charitable distributions, or QCDs. Because they are tax-free, and no deductions are allowed for them, QCDs don’t directly affect your tax bill However, they count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70 1/2. So you can avoid taxes by arranging for tax-free QCDs in place of taxable RMDs. Note that the QCD privilege will expire at the end of this year unless Congress extends it.

Don’t Overlook Estate Planning

For 2013, the unified federal gift and estate tax exemption is a relatively generous $5.25 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. You may also have state estate tax issues that need to be addressed. Finally, you may need to make some changes for reasons that have nothing to do with taxes (births, deaths, and so forth). Contact your estate planning pro if you think your plan might need a tune-up. Year-end is a good time to do it. 


Tax moves to make before Christmas

Take these steps to reduce your 2013 tax bill

By Bill Bischoff, TAXGUY
Nov. 5, 2013

With the end of the year approaching, it’s time to make some moves to lower your 2013 tax bill. This column is the first of two installments on that subject. But first, let’s cover some necessary background information.

Income Tax Rates Are Unchanged for All but Higher-Income Individuals

For most individuals, the federal income-tax rates for this year are the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the American Taxpayer Relief Act (ATRA), passed at the beginning of this year, increased the maximum rate to 39.6%. That rate only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000. For 2014, the tax bracket cutoffs are slightly higher, as shown in the table at the end of this column.

Capital Gain and Dividend Tax Rates Are Unchanged for All But Higher-Income Individuals

The federal income-tax rates on long-term capital gains and dividends for this year are also the same as last year for most individuals: either 0% or 15%. However, the ATRA raised the maximum rate to 20% for singles with taxable income above $400,000, married joint-filing couples with income above $450,000, and heads of households with income above $425,000. For 2014, the thresholds for the 20% maximum rate will be $406,750, $457,600, and $432,200, respectively. Folks with taxable income below these levels will pay a 15% federal rate on long-term gains and dividends or 0% for gains and dividends that would otherwise fall within the 10% or 15% brackets (see the tables at the end of this column for the 10% and 15% brackets).

Two New Medicare Surtaxes for Higher-Income Individuals

The 2010 Obamacare legislation included two new Medicare surtaxes that kicked in this year. The new 0.9% surtax hits salary and self-employment income collected by higher-income folks. The new 3.8% surtax hits net investment income collected by higher income folks.

The 0.9% Surtax: The new 0.9% Medicare surtax is charged on salary and/or net self-employment income above $200,000 for an unmarried individual and salary and/or net self-employment income above $250,000 for a married joint-filing couple.

The 3.8% Surtax: If your modified adjusted gross income (MAGI) exceeds $200,000 if you are unmarried or $250,000 if you are married and file jointly, all or part of your net investment income can be hit with the new 3.8% Medicare surtax. The definition of investment income includes long-term capital gains, dividends, interest and a host of other items. The 3.8% surtax applies to the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold. MAGI means “regular” adjusted gross income (AGI), from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the U.S. which you probably don’t have. See my earlier columns for some advice on how to minimize or avoid the 3.8% surtax: How to avoid new 3.8% tax on investment income and Tips for avoiding 3.8% investment income tax

Strategy: Time Investment Gains and Losses for Tax Savings


As you evaluate investments held in your taxable brokerage firm accounts, carefully consider the tax impact of selling appreciated securities (currently worth more than you paid for them). For most people, the federal income-tax rate on long-term capital gains is still much lower than the rate on short-term gains. For that reason, it often makes sense to hold appreciated securities for at least a year and a day before selling in order to qualify for the lower long-term capital gains rate.

Selling some loser securities (currently worth less than you paid for them) before year-end can be a tax-smart move. The resulting capital losses will offset capital gains that you racked up earlier this year, including high-taxed short-term gains from securities that you owned for one year or less. This year’s maximum federal rate on short-term gains is 39.6%, and the new 3.8% Medicare surtax may apply too — which can result in a combined federal rate as high as 43.4%. Ouch! But you don’t have to worry about paying a high rate on short-term gains that you’ve successfully sheltered with capital losses. You’ll pay 0% on those gains, and 0% is good!

If your capital losses for this year exceed your capital gains, you’ll have a net capital loss for 2013. You can use it to shelter up to $3,000 of this year’s high-taxed ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you’re married and file separately). Any excess net capital loss is carried over to 2014 and beyond until you use it up. So it won’t go to waste. In fact, selling enough loser securities to create a bigger net capital loss to carry over to next year and beyond might make perfect sense. You can use it to shelter both future short-term gains and future long-term gains that might otherwise be taxed at higher rates than those that apply this year.

Strategy: Set Up Loved Ones to Pay 0% Rate on Investment Income

The federal income-tax rate on this year’s long-term capital gains and dividends is still 0% for gains and dividends that fall within the 10% or 15% rate brackets (see the table at the end of this column for the brackets). While your income may be too high to take advantage of the 0% rate, you probably have loved ones who can benefit. Consider giving them some appreciated stock or mutual fund shares. They can sell the shares and pay 0% federal income tax on the resulting long-term gains. Remember: the gains will be long-term as long as your ownership period plus the gift recipient’s ownership period equals at least a year and a day. Giving away dividend-paying stocks is another tax-smart idea. As long as the dividends fall within the gift recipient’s 10% or 15% rate bracket, they too will qualify for the 0% federal rate.

Warning: If your gift recipient is under age 24, the Kiddie Tax rules could potentially cause some of his or her capital gains and dividends to be taxed at the parent’s higher rates. That would defeat the purpose. Contact your tax adviser if you have questions about how the Kiddie Tax works.

Strategy: Convert Traditional IRA into Roth Account

The best scenario for the Roth conversion deal is when you expect to be in the same or higher tax bracket during retirement. While some higher tax rates have already kicked in for this year, there’s certainly no guarantee that more tax hikes are not in our future.

Of course, there is a current tax cost for doing a Roth conversion. That’s because the conversion is treated as a taxable liquidation of your traditional IRA followed by a non-deductible contribution to the new Roth account. Here’s the advantage: after the conversion, all the income and gains that accumulate in your Roth account, and all your withdrawals, will be federal-income-tax-free — assuming you only take qualified withdrawals. Qualified withdrawals are those taken after: (1) you’ve had at least one Roth account open for more than five years and (2) you’ve reached age 59 1/2. With qualified withdrawals, you avoid having to pay higher tax rates that may exist during your retirement years. Put another way, the current tax hit from a Roth conversion is unwelcome, but it could be a very reasonable price to pay for the future tax savings. But please talk to your tax pro before pulling the trigger on a conversion. There are lots of variables to consider. 

Standard Federal tax parameters

Income tax rate brackets Single Joint Head of household
10% tax bracket           $0-8,925   $0-17,850  $0-12,750
Beginning of 15% bracket       8,926     17,851     12,751
Beginning of 25% bracket      36,251     72,501     48,601
Beginning of 28% bracket      87,851    146,411    125,451
Beginning of 33% bracket     183,251   223,051    203,151   
Beginning of 35% bracket     398,351    398,351   398,351
Beginning of 39.6% bracket   400,000    450,000    425,000
  Single Joint Head of household
Standard deduction               $6,100  $12,200      $8,950
Personal/dependent exemption    $3,900      $3,900 $3,900

Estimated 2014 Federal tax parameters (IRS has not yet released official numbers

Income tax rate brackets Single Joint Head of household
10% tax bracket           $0-9,075 $0-18,150  $0-12,950
Beginning of 15% bracket       9,0766 18,151 12,951
Beginning of 25% bracket      36,901 73,801 49,401
Beginning of 28% bracket      89,351 148,485    127,551
Beginning of 33% bracket     186,351   226,851    206,601   
Beginning of 35% bracket     405,101    405,101   405,101
Beginning of 39.6% bracket   406,751    457,601    432,201
  Single Joint Head of household
Standard deduction               $6,200     $12,400      $9,100
Personal/dependent exemption    $3,950 $3,950 $3,950



Feds change “use it or lose it” rule on FSAs


By Jonnelle Marte
MarketWatch,  October 31, 2013

The Treasury Department and the Internal Revenue Service are giving taxpayers more time to use their pre-tax medical spending accounts.

New rules put an end to the 30-year old “use it or lose it” restrictions on health-care flexible spending arrangements, allowing taxpayers to carry over up to $500 of unused balances to the following year.  Employees can contribute up to $2,500 a year into the tax-deferred accounts and then use the money to cover qualified out-of-pocket medical expenses. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year,” Treasury Secretary Jacob Lew said in a statement.

Before Thursday’s change, plan participants would have to forfeit any cash they didn’t use by the end of the year.  Some employees may have been hesitant to use the accounts out of fear that they might overestimate their medical expenses for the year and have to lose those savings.

Some plan sponsors will let taxpayers take advantage of the carryover option as early as this year.  Some employers have been giving their workers a grace period of up to 2 ½ months the following year to use the rest of the funds but going forward they will only be able to allow a carryover or a grace period, not both, the Treasury Department said on Thursday.



Grab These 8 Individual Tax Breaks Expiring Year End 2013



 TAXES  10/15/2013


It may be your last chance to snag a tax credit for making green home renovations or buying an electric vehicle, or to partake in other popular tax breaks that are expiring at year-end 2013 if Congress doesn’t act to extend them. Sound familiar? It’s a story played out over and over as Congress dithers on tax reform and leaves taxpayers and their tax advisers hanging.

In its 2013 Year-End Tax Planning Special Report, tax publisher CCH, a Wolters Kluwer business, lists these sunsetting “ tax extenders” and says that taxpayers should consider acting now, before year-end 2013, whenever possible, to take advantage of these breaks. “Whether Congress will extend them again is questionable,” the report says. “While all have their supporters, Congress appears likely to take an extremely budget-conscious approach toward any tax provision it may consider.”

At least there’s certainty for 2013. When Congress passed the American Taxpayer Relief Act in January, it included renewing these extenders through year-end 2013–and retroactively for 2012. Let’s hope we don’t have to wait until 2015 for clarity on their fate for next year.

That said, here’s a rundown for your consideration before the New Year.

Remodeling your home for energy-efficiency. There’s a $500 tax credit (that’s a dollar for dollar savings) for making certain energy-efficient improvements to your home like putting in a new front door, added insulation or a corn stove. The credit is 10% of the cost of building materials, so if the cost is $5,000 you get $500 back courtesy of Uncle Sam. One big caveat: The $500 credit applies to cumulative claims for the credit dating back to 2006. For details, see Fiscal Cliff Deal Helps Pay For Green Home Remodels.

Get an electric vehicle. A tax credit for certain 2 or 3 wheeled electric vehicles expires at year-end. A separate tax credit of $7,500 is available for 4-wheeled electric vehicles including the 2012-2014 Ford Focus Electric, the 2013 Ford Fusion Energi, the 2013 Ford C Max Energi and the 2011-2012 Nissan Leaf and will be phased out once a manufacturer’s has sold 200,000 vehicles.

Commuter benefits. The transit parity tax break—putting train commuters on the same footing as car commuters who park so they can defer $245 a month of pretax salary to use for commuting expenses—is in danger yet again. If you commute and your employer offers the benefit, make sure you’re taking advantage of it for the rest of the year. And then for 2014, sign up through your employer, and if Congress extends the break retroactively, you’ll be more likely to be able to get money back. 

Donate conservation property. Through year-end conservationists who donate property or easements on their property to conservation organizations like the Nature Conservancy or a local land trust get an enhanced tax break that’s helped modest-income landowners; these enhancements are good through year-end. 

Charitable contributions from your IRA. If you’re 70 and a half or older, you can transfer up to $100,000 out of your Individual Retirement Account to charity. For some taxpayers, this is more tax-efficient than taking the required IRA distributions, paying income tax on those distributions and then giving to charity and getting an income tax deduction for the charitable gift. I described how the math works in the Forbes story Charity Strategy  when the technique first became available in 2006.

State and local sales tax. CCH pegs this one as “the most politically-backed extender” so you probably don’t have to worry about it going away. But to be safe, if you’re a taxpayer who deducts state and local sales tax (in lieu of state and local income tax) and you’re contemplating big purchases in the near term you might want to make them in 2013.

Teacher’s classroom expense deductions. For school teachers who buy school supplies out of pocket, they get an above-the-line deduction of up to $250 for unreimbursed expenses. So it might pay to stock up on classroom supplies for the whole school year before year-end.

Exclusion of cancellation of indebtedness on principal residence.Taxpayers who are seeking debt modification or facing a short sale or foreclosure can exclude from income cancellation of mortgage debt of up to $2 million on their home.  Forbes contributor Tony Nitti describes how this works here.


Would You Prepare Your Home For A Disaster If It Were Tax Deductible?


Tony Nitti, Contributor,


Wherever you may stand on the climate change debate (cue the angry comments!), it’s undeniable that Mother Nature has grown a bit unpredictable in exacting her revenge for hairspray and Styrofoam. Superstorms in New Jersey. Mudslides in Colorado. Cyclones in India. But while we may not know where the next natural disaster is going to hit, one House Republican is doing his best to encourage people to be prepared.

Dennis Ross (R-FL) recently sponsored H.R. 3298, a bill that would permit taxpayers to deduct the cost of amounts contributed to a savings account to help ready their homes for the next natural disaster.

It works like this: Each year, an “eligible individual,” would be permitted to deduct up to $5,000 contributed to a designated “disaster savings account.” An eligible individual is defined as any individual who owns a home in the U.S. that is insured.  A disaster savings account would be a trust created in the U.S. exclusively for the purpose of paying disaster mitigation expenses of the trusts beneficiary.

The definition of “disaster mitigation expenses” is where things get interesting. The proposed law defines the term as expenses for any of the following:

  • Safe rooms.
  • Opening protection, including impact and wind resistant windows, exterior doors, and garage doors.
  • Reinforcement of roof-to-wall and floor-to-wall connections for wind or seismic activity.
  • Roof covering for impact, fire, or high wind resistance.
  • Cripple and shear walls to resist seismic activity.
  • Flood resistant building materials.
  • Elevating structures and utilities above base flood elevation.
  • Fire resistant exterior wall assemblies/systems.
  • Lightning protection systems.
  • Whole home standby generators.
  • Any activity specified by the Secretary as appropriate to mitigate the risks of future hazards (including earthquake, flood, hail, hurricane, lightning, power outage, tornado and wildfire) and other natural disasters.

Any amounts withdrawn from the account and used for a qualifying expense would not be included in taxable income. Obviously, amounts distributed for other purposes would be included in taxable income, with an extra 20% excise tax tacked on for good measure.

While the bill is certainly well-intentioned, good ol’ Gov Track is not optimistic, giving H.R. 3298 a 0% chance of being enacted.


Fed shutdown and your retirement: Remain calm

But keep an eye on tax and Social Security issues

By Robert Powell,
Oct. 11, 2013

Shutdown, shmutdown.

Retirees and those saving for retirement may be worried about their investments, taxes and retirement plans as the federal government shutdown drags on, and lawmakers argue about extending the debt ceiling. But retirement advisers say you should take a deep breath and hold on. Only if these issues drag on for a seriously extended period should you need to review your investment plans. We’ve been down this road before and the world didn’t end, say some.

That said, there are some other issues, such as taxes and Social Security, you should keep an eye on.

The first order of business, said Steve O’Hara, a principal with CLA Financial Advisors, is to put the government shutdown in perspective. According to O’Hara, there have been 17 government shutdowns since the mid-1970s through the mid-‘90s and during that time the government was shut down for a total of about 110 days. “And none of those shutdowns had any significant impact on the market,” he said. “So the first thought that I would have is ‘just take a deep breath.’ And any quick reaction that anybody might be planning to do probably ought to think twice about doing that.”

Others are in the same camp.


As far as taxes are concerned, experts say there is no getting around it. You still have to pay Uncle Sam what he’s owed. Plus, despite the shutdown, the IRS just reminded taxpayers that the Oct. 15 due date for 2012 individual tax returns on extension hasn't been extended, according the Journal of Accountancy. (Of note, the IRS says more than 12 million taxpayers filed for extensions this year.) Read Reminder: Oct. 15 Tax Deadline Remains During Appropriations Lapse.

What’s worse is this: You have to pay Uncle Sam, but the government doesn’t have to pay you. “Refunds are not being processed,” said Barry Picker, CPA, of Picker & Auerbach, as well as the author of Barry Picker’s Guide to Retirement Distribution Planning and the technical editor of 100+ Roth IRA Examples & Flowcharts. The good news? “The law says that if you don’t get your refund within a certain period, the government has to pay you interest, at a 3% rate.”

One bit of good news: IRS recently reminded taxpayers that it isn’t generating liens or levies during the shutdown.  The IRS might not generate a lien, but you should still comply with filing anything due the IRS. “I’ve heard a number of people suggesting that there is no point in send replies to IRS notices and the like,” said Marty Shenkman, an attorney with Martin M. Shenkman, PC. “After all there is no one there to receive them. Big mistake.”

If any taxpayer has an IRS notice or tax deadline, Shenkman offered these words of wisdom; “Not only would I make the point of sending in what you have to but I would send it certified or priority mail so you can get a confirmation of delivery from the post office. Not return receipt, because there may be no one to sign. Ignoring deadlines and notices could well be at the taxpayer’s peril.”

Speaking of taxes, Blackwelder advised those with high incomes and who plan to realize capital gains this to evaluate the tax law changes applicable to 2013, and especially the so-called Medicare surtax. For tax years beginning after 2012, new Internal Revenue Code Section 1411 imposes a 3.8% surtax on certain passive investment income of individuals and of trusts and estates based on a mathematical formula, according to a recent Retirement Weekly report. For individuals, the amount subject to the tax is the lesser of 1) net investment income or what some call NII or 2) the excess of a taxpayer’s modified adjusted gross income (MAGI) over an applicable threshold amount, according to the report written by Robert Keebler, CPA, a partner with Keebler & Associates.

Social Security

Social Security beneficiaries are still getting monthly checks, but they will have to wait to find out the size of next year’s cost-of-living adjustment, according to published reports. The date to announce the annual COLA was Oct. 16.

The Social Security Administration is warning Americans public that if the debt ceiling isn't increased, the agency cannot guarantee full benefit payments. Should that happen, retirees are being urged to make sure they have enough cash on hand to make up any shortfall for three to six months if not longer. 

A harsh reminder

The shutdown is also a reminder of the need to plan for such events, the importance of having an emergency fund in place, and perhaps the need to have marketable skills.

Frank Paré, an instructor in the personal financial planning program at the University of California at Berkeley and the founder of PF Wealth Management, recently provided—along with other financial planners—pro-bono financial planning services to low- and no-income families.

“We had over 200 individuals show up for the event, and there was a real sense of concern about how the government shutdown and potential default would impact their day-to-day living situation as well as their ability to retire at some later date, he said. “Unfortunately, there was very little we could advise them to do in response to the shutdown or in the event of a default.”

And what made the effort to help low- and no-income people particularly challenging for Paré and his peers was this: His county’s services relies on the federal government for a large portion of its budget. “As result of sequestration, the county resources were cut and as a result of the shutdown, the process of sending the remaining funds (if any) is delayed,” he said. “I would imagine we’re not alone and that cities and counties across the country are having the same challenges.”


Long-term care insurance and your taxes

Qualified policies deliver tax breaks; here are the basics

TAXWATCH Sept. 26, 2013
By Bill Bischoff

If you or a loved one turns out to need long-term care, you don’t want to see a big chunk of hard-earned savings go down the drain to pay for it. Long-term care (LTC) insurance can help. As a bonus, qualified LTC policies deliver some tax breaks. Before getting to the tax angles, let’s first cover the basics on LTC insurance.

Long-Term Care Insurance Basics

Benefits paid under a long-term care insurance policy are usually stated as daily maximums ranging from $50 to $300. While lower benefits translate into lower premiums, don’t get carried away. According to a recent MetLife survey, the national average cost for a semi-private nursing home room in 2012 was $222 a day, which translates to about $81,000 over a full year. The average base rate for a year in an assisted living facility was about $44,000, and additional services cost extra. Most LTC policies also cover at least a portion of home health-care costs, which came to about $21 per hour last year. While these national numbers are interesting, the costs where you live are what really matter, and they can be significantly higher or lower.


You can buy a LTC policy with or without automatic annual inflation adjustments to your benefit maximums. Usually, the annual inflation adjustment rate is 3% to 5%, and that rate can be compounded annually or not. Choosing a 5% compounded inflation adjustment feature is more expensive, but it could be money well spent.

Benefit payments commence after the policy waiting period has been satisfied. Policies with waiting periods of 90-100 days are the most popular.

Finally, you can usually choose benefit periods ranging from two years to lifetime coverage. Most policies have benefit periods of three, four, or five years. The average length of a nursing home stay is about two and a half years, but this statistic doesn’t account for periods of home health care.

When you sign up for LTC insurance, the hope is that you’ll pay fixed monthly premiums. The premiums are based on your age and health factors at the time you enroll. Enrolling at age 65 could cost twice as much or more than enrolling at age 55. Your overall health status needs to be good when you apply for coverage or you won’t be accepted at any age. After you obtain coverage, it will remain in force—regardless of changes in health and advancing age—as long as you pay the premiums. Beware: while the insurance company can’t raise your LTC premiums due to changes in your personal age or health, it can raise premiums for broad classes of policyholders when financial results go south. This has turned out to be an all-too-often occurrence. So be sure to check the overall reputation and premium-raising history of any insurance company you’re considering for LTC coverage.

Tax Breaks for Qualified Policies

Qualified LTC policies are eligible for federal income tax breaks (and maybe state income tax breaks too depending on where you live). Qualified policies must be guaranteed renewable, and they cannot have any cash value. Most policies sold these days are qualified policies, but make certain before signing up if you want to collect the tax breaks I’m about to explain.

Tax-Free Benefits: Benefits received under a qualified LTC policy are generally federal-income-tax-free (and usually state-income-tax-free too) because they are considered insurance reimbursements for medical expenses. For 2013, this tax-free treatment automatically applies to benefits of up to $320 per day. (The tax-free cap is adjusted annually for inflation.) Even if you receive benefits above the cap, they are still tax-free as long as they don’t exceed your actual LTC costs. If you collect LTC insurance benefits during the year, the total amount will be reported to you on Form 1099-LTC, which you should receive early in the following year. You then calculate the taxable amount of benefits (probably zero) on Form 8853, which is attached to your Form 1040.

Tax Deductions for Premiums: Because a qualified LTC policy is considered health insurance for federal income tax purposes, the premiums are treated as medical expenses for itemized medical expense deduction purposes. However, if your premiums exceed the age-based caps listed below, you can only count the capped amount as a medical expense. Don’t forget to count premiums paid for coverage on your spouse as well as premiums paid for any other dependent relative (for this purpose, a dependent relative is someone for whom you pay over half the cost of support during the year).

Age on Dec. 31, 2013

Amount you can treat as medical expense

40 or under


41 to 50


51 to 60


61 to 70                        


Over 70


Take your qualified LTC insurance premium amount (limited to the age-based cap if applicable) and combine that figure with your other medical expenses (health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs, and all your other unreimbursed medical outlays). If the resulting total exceeds 10% of your adjusted gross income (AGI), you can write off the excess as an itemized medical expense deduction. If you or your spouse will be age 65 or older as of Dec. 31, 2013, you can write off medical expenses to the extent they exceed 7.5% of AGI. (AGI is the number at the bottom of Page 1 of your Form 1040; it includes all taxable income items and is reduced by certain write-offs such as deductible IRA contributions and alimony payments to an ex-spouse.)

If you’re self employed, you can generally deduct premiums for qualified LTC insurance on page 1 of Form 1040 whether you itemize or not. However, the age-based deduction cap applies to you too.


The Cure For Cold & Flu Season: An Alphabet Soup Of Tax Favored Accounts




I wasn’t home an hour today after taking my middle child to the doctor when the nurse called to let me know that my oldest child just vomited at school. That pretty much completed the trifecta since my youngest child was at the doctor over the weekend with a nasty cough and a low-grade fever. Cold and flu season has officially arrived.

Thank goodness for my health reimbursement account (HRA). Without it, I’d feel a lot worse about all of these out-of-pocket expenses that I’m paying while my kids get better.


Most years, we don’t get the benefit of claiming our medical expenses on our federal income tax return. That’s because in prior years, even though we itemized our deductions on Schedule A, we have rarely met the threshold. Until this year, under the Tax Code, you can only claim eligible medical expenses as a deduction to the extent they exceed 7.5% of adjusted gross income (AGI).

You can find your AGI at line 37 of the form 1040:



It’s even worse now. For 2013, we definitely aren’t going to hit the threshold. This year, taxpayers younger than 65 (that’s us!) can only deduct medical expenses to the extent those expenses exceed 10% of AGI; those taxpayers who are 65 and older in 2013 keep the 7.5% threshold through 2016. That new threshold is a pretty high bar – even with a busy cold and flu season.

It’s not just my family: more taxpayers will find that their expense won’t hit the necessary numbers in 2013 to take advantage of the deduction.

According to the most recent census report, median household income, adjusted for inflation, was$51,017 in 2012. Using that number as our example for AGI, to claim the medical expense deduction, a family reporting those kinds of dollars would have had to spend $3,826.27 (7.5% x $51,017) on qualified medical expenses in 2012 before deducting a single dollar: that’s a lot of co-pays. That explains why only about 6% of taxpayers have traditionally claimed the deduction. With Obamacare, that percentage of taxpayers is about to get a lot smaller.

In 2013, the threshold for the same level of income will increase to $5,101.70 (10% x $51,017). That means that the family in the example would have to spend $5,103 on qualifying medical expense before claiming a single dollar of deduction. And I literally mean a single dollar. Remember that you can only deduct expenses over that the threshold amount. If the family spent $5,000 in medical expenses, there would be no deduction ($5,000 – $5,102 = less than zero); if the family spent $6,000 in medical expenses, the allowable deduction would be $898 ($6,000 – $5,102 = $898).

With those kind of hurdles, I asked around about alternatives and landed on the idea of an HRA. It’s one of a handful of special accounts available to taxpayers for medical expenses.

A health reimbursement arrangement (HRA) is a 100% employer-funded spending account. In other words, it’s not an employee savings plan but a tax-favored perk: contributions to the account are available to employees, tax free, as reimbursements. In fact, amounts in the HRAs aren’t even reported on a federal income tax return.

It’s not just current employees who can participate. Under most plans, current or former W-2 employees, as well as qualified dependents, may participate. But read the fine print: each plan is employer-specific.

Here’s how it works. The contribution amount for each employee is determined each year by the employer. The employer also determines which expenses qualify: typically, the HRA is used to help pay for eligible out-of-pocket medical expenses. Eligible expenses are generally the same sort of out-of-pocket costs that qualify for the medical deduction. That includes the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. That tends to include the costs of visiting to medical professionals as well as the purchase of any medicine or drug which requires a prescription of a physician for legal use.

When expenses are incurred – a good example is a co-pay for a doctor’s visit – those expenses can be reimbursed to the employee, assuming that the expense qualifies and is backed up by documentation. In my case, expenses do include co-pays as well as medications and, thankfully, vision and dental. In terms of documentation, a detailed receipt will generally do – I’m allowed to snap a photo of the receipt on my smartphone and send it electronically for processing.

After the expense is approved, the reimbursement shows up in the form of a check – most commonly included on a paycheck – and it’s tax free. That means that the expenses are paid for with the equivalent of pre-tax dollars: these dollars are subtracted from gross pay before any income or payroll taxes are calculated. In other words, if you earn $50,000 in wages and get $1,000 in reimbursement, your form W-2 will reflect just $50,000.

But what if your employer doesn’t offer an HRA? All is not lost. An individual can, without an employer-sponsored plan, create their own health savings account (HSA).

The HSA is a bit like an IRA for medical expenses. Contributions are made by the taxpayer, or a combination of the taxpayer and his/her participating employer. Those contributions are capped: for 2013, the limits are $3,250 for individuals and $6,450 for families and those numbers increase to $3,300 for individuals and $6,550 for families in 2014. Contributions are not subject to federal income tax. Taxes are handled one of two ways: either the contribution is made with pre-tax dollars if related to an employment benefit or made with post-tax dollars subject to a corresponding deduction if made by an individual or family.

As with an HRA, the payment of qualified medical expenses is federal income tax free. Generally, this is accomplished by pulling the dollars straight out of the HSA. Many accounts offer special debit cards or checks to make this easy; alternatively, other HSAs may operate on a reimbursement basis, as with HRAs.

It’s not a spend or lose it account: if the dollars in the HSA aren’t used up in one year, the account can be rolled over from year to year with no penalty. You cannot, however, roll them into another kind of tax-favored account, like an IRA.

Both accounts, HSAs and HRAs, have advantages and disadvantages to taxpayers. And as with all tax-favored breaks, there are rules, exceptions and limitations which apply. The fine print matters. Check with your human resources office for more information – or your insurance or tax professional if you are setting up a plan on your own.

Don’t assume that these plans are for somebody else: there are so many different variations that you’re liable to find one that benefits you either on its own or, occasionally, in tandem with another plan (MSAs and FSAs, for example). This alphabet soup of accounts and plans could be the tax-favored cure for what ails you


The Tax Break You're Missing Out On



How to avoid taxes on sale of a vacation home

Some may be able to swap one home for another



TAXWATCHAug. 14, 2013
By Bill Bischoff


As real estate prices recover, many vacation properties are once again worth far more than their tax basis (generally the purchase price plus the cost of improvements minus any depreciation deductions you’ve claimed for rental periods). As a result, if you’re looking to sell a vacation home and use the proceeds to buy another one, there could be a big tax hit. But you can avoid it if you swap your vacation home for another in a tax-deferred exchange — as long as it’s a home you’ve rented out most of the time and used as your personal residence some of the time.

In fact, the government has supplied the recipe for how to exchange mixed-use vacation properties. Here’s what you need to know.

Section 1031 Exchange Basics


When available, a tax-deferred Section 1031 exchange is a great tool for real estate owners. It allows you to unload one property (the relinquished property) and acquire another one (the replacement property) without triggering a current income tax bill on the relinquished property’s appreciation (the difference between its fair market value and its tax basis).

The untaxed gain gets rolled over into the replacement property where it remains untaxed until you sell the replacement property in a taxable transaction. But if you still own the property when you die, any taxable gain may be completely washed away thanks to another favorable rule that steps up the tax basis of a decedent’s property to its date-of-death value. So taxable gains can be postponed indefinitely, or even eliminated altogether if you die while still owning the property. Real estate fortunes have been made in this fashion without sharing much with Uncle Sam.

Naturally, there are intricacies to arranging a successful Section 1031 exchange. I’m not going to cover them here, because I don’t want this to turn into a book. That said, you need to understand that you can have a taxable gain even on a successful Section 1031 exchange to the extent you receive cash in the deal. Ditto if you assume a mortgage on the replacement property that is smaller than the mortgage on the relinquished property that is assumed by the new owner. Worse yet, the IRS will treat an exchange that fails to meet all the Section 1031 rules as a garden-variety taxable sale of the relinquished property with the resulting tax hit. Ouch! For these reasons, I recommend hiring a tax pro who is experienced in conducting Section 1031 exchanges before pulling the trigger.

With those thoughts in mind, we are finally ready to talk about special considerations that apply when swapping mixed-use vacation homes.

IRS-Approved Safe Harbor

In Revenue Procedure 2008-16, the IRS opened up a “safe-harbor” that allows tax-deferred Section 1031 exchange treatment for swaps of mixed-use vacation properties. To be eligible for the safe-harbor, you must meet the guidelines explained below for both the relinquished property (the property you give up in the swap) and the replacement property (the property you receive). When you meet these guidelines (along with all the other Section 1031 exchange rules), your swap will qualify for the safe harbor, which means it will automatically pass muster with the IRS.

Relinquished Property Guidelines:

For the relinquished property, you must pass both of the following tests.

First Test: You must have owned it for at least 24 months immediately before the exchange.

Second Test: Within each of the two 12-month periods during the 24 months immediately preceding the exchange: (1) you must have rented out the property at market rates for at least 14 days and (2) your personal use of the property cannot have exceeded the greater of 14 days or 10% of the days the property was rented out at market rates.

Replacement Property Guidelines:

For the replacement property, you must pass both of the following tests.

First Test: You must continue to own it for at least 24 months immediately after the exchange.

Second Test: Within each of the two 12-month periods during the 24 months immediately after the exchange: (1) you must rent out the property at market rates for at least 14 days and (2) your personal use of the property cannot exceed the greater of 14 days or 10% of the days the property is rented out at market rates.

Here’s an Example

Say you have a mixed-use vacation home that’s worth $600,000. It has a tax basis of only $200,000 and no mortgage. If you sold it, you would have to report a $400,000 taxable gain ($600,000 - $200,000) on Form 1040. Yikes! However, if you want to acquire another vacation home, you could arrange a Section 1031 exchange. Say you find another home worth $700,000 that you would love to own. So you swap your old vacation home (the relinquished property) for the new one (the replacement property) and throw in $100,000 cash to equalize the trade. As long as you meet the aforementioned usage guidelines for both properties, you can pull off a tax-deferred Section 1031 exchange and thereby avoid any current income tax hit. Congrats! Your tax basis in the replacement property is $300,000 ($700,000 - $400,000 gain rolled over from the relinquished property).

The Bottom Line

The ability to arrange IRS-approved Section 1031 swaps of appreciated vacation homes is a great tax-saving opportunity. However, you cannot make a Section 1031 exchange of a vacation home that you’ve used strictly for personal purposes. That said, you can set yourself up for a future Section 1031 exchange by renting the property out for enough days over the next 24 months to meet the relinquished property safe-harbor guidelines. 



Ten Tax Tips for Individuals Selling Their Home


IRS Summertime Tax Tip 2013-24
From  August 26, 2013

If you’re selling your main home this summer or sometime this year, the IRS has some helpful tips for you. Even if you make a profit from the sale of your home, you may not have to report it as income.

Here are 10 tips from the IRS to keep in mind when selling your home.

  1. If you sell your home at a gain, you may be able to exclude part or all of the profit from your income. This rule generally applies if you’ve owned and used the property as your main home for at least two out of the five years before the date of sale.
  2. You normally can exclude up to $250,000 of the gain from your income ($500,000 on a joint return). This excluded gain is also not subject to the new Net Investment Income Tax, which is effective in 2013.
  3. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.
  4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S, Proceeds From Real Estate Transactions.
  5. Use IRS e-file to prepare and file your 2013 tax return next year. E-file software will do most of the work for you. If you prepare a paper return, use the worksheets in Publication 523, Selling Your Home, to figure the gain (or loss) on the sale. The booklet also will help you determine how much of the gain you can exclude.
  6. Generally, you can exclude a gain from the sale of only one main home per two-year period.
  7. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.
  8. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523 for details.
  9. You cannot deduct a loss from the sale of your main home.
  10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822, Change of Address, to notify the IRS.

For more information on this topic, see Publication 523. It’s available at or by calling 800-TAX-FORM (800-829-3676).



Do you owe the self-employment tax?

Commentary: If you do, it can amount to big bucks


          By Bill Bischoff

If you’re self-employed as a sole proprietor, partner, or LLC member, you may owe the dreaded self-employment (SE) tax. If so, the bill is on top of any income taxes owed to the Feds and your friendly state tax collector. Here’s what you need to know about the potentially painful SE tax.

SE Tax Basics

The purpose of the SE tax is to collect Social Security and Medicare taxes from self-employed folks. Now, if you’re an employee, the first $113,700 of your wages (for 2013) is hit with the Social Security tax at a rate of 12.4%. All wages up to infinity are hit with the Medicare tax at a rate of 2.9%. An unmarried individual’s wages above $200,000 get hit with the new 0.9% additional Medicare tax. If you’re a married joint filer, the new 0.9% Medicare tax hits the combined wages of you and your spouse in excess of $250,000. In general, half of these federal employment taxes are withheld from your paychecks while the other half gets paid by your employer (however, all of the new 0.9% Medicare tax comes out of your hide). Since you never actually see the portion of Social Security and Medicare taxes paid by your employer, you may be blissfully unaware of how high these taxes really are.

In contrast, self-employed individuals cannot help but notice, because they must pay all Social Security and Medicare taxes themselves via quarterly estimated tax payments. The bottom line is that, for 2013, a self-employed person owes SE tax at a whopping 15.3% rate on the first $113,700 of SE income. Of that 15.3% rate, 12.4% is for Social Security tax, and 2.9% is for Medicare tax. If your SE income exceeds the $113,700 Social Security tax cutoff, the extra income is hit with the 2.9% Medicare tax. Finally, the extra 0.9% Medicare tax applies to SE income above $200,000 for an unmarried individual or combined SE income above $250,000 for a married joint-filing couple.

Unfortunately, the SE tax is only going to get worse if you have a profitable and growing business. That’s because the Social Security tax cutoff point is usually increased annually to account for inflation. Because more and more of your SE income will be taxed at the maximum 15.3% rate, your SE tax bill will probably go up every year. According to Social Security Administration projections, the Social Security tax cutoff point is expected to increase from the current $113,700 to $115,500 for 2014, then to $118,500 for 2015, and to $123,600 for 2016.

If that’s not enough to spike your blood pressure, you can bet that someone in Congress will propose simply doing away with the Social Security tax cutoff, which would make all of your SE income subject to the full 15.3% SE tax rate. I think the odds are pretty good that this idea will become reality in the relatively near future.

Calculating the SE Tax

You must fill out Schedule SE to calculate how much SE tax you owe. Here’s the drill. Take your bottom-line net business income from Schedule C (if you’re a sole proprietor), or Schedule E (if you’re a self-employed business that’s treated as a partnership for tax purposes), or Schedule F (if you’re a farmer). Multiply that bottom-line number by the factor of .9235 (don’t ask the reason for this step; you don’t want to know). The result is your SE income for SE tax purposes. As mentioned earlier, the first $113,700 of your 2013 SE income is taxed at 15.3%, while any remaining SE income will be taxed at either 2.9% or 3.8% if the new 0.9% extra Medicare tax applies.

Example: Say this year’s Schedule C for your sole proprietorship business shows net income of $200,000. Your SE income is $184,700 ($200,000 x .9235 = $184,700). Of that amount, the first $113,700 is taxed at the maximum 15.3% rate. The remaining $71,000 is taxed at 2.9%. So your SE tax bill is $19,455 [($113,700 x .15.3%) ($71,000 x 2.9%) = $19,455)].

Now for a Little Good News

Enough gloom and doom. There are a few rays of sunshine in this SE tax picture.

  • If you have a job and have Social Security tax taken out of your salary, you get credit for that on your Schedule SE. For example, say you have a $100,000 salary and earn $50,000 of SE income from a side business in 2013. You only have to pay the maximum 15.3% SE tax rate on the first $13,700 of the SE income because you get credit for already paying Social Security tax on the $100,000 of salary. However, you must still pay the 2.9% SE tax rate on the entire $50,000 of SE income to cover the Medicare tax. This all gets taken care of automatically when you fill out Schedule SE while preparing your Form 1040.

  • You can deduct 50% of your SE tax bill on page 1 of Form 1040. The write-off is available whether you itemize or not. However, you cannot deduct any portion of the new 0.9% extra Medicare tax.

  • You generally don’t have to pay SE tax on profits from selling business assets that are not considered inventory. For example, say you sell a small office building that has been used for years to house your unincorporated business. You don’t have to put the gain on Schedule SE, so you don’t owe any SE tax on the gain. Instead, you can treat the entire gain as a low-taxed long-term capital gain.