April Showers Bring May Flowers

“April is the cruelest month . . .” begins the first line of The Waste Land, the signature modernist poem by T.S. Eliot.

The poem had nothing to do with taxes. However, with the goal to raise awareness about National Poetry Month, the Academy of American Poets and the American Poetry & Literacy Project cleverly came up with the idea to distribute thousands of free copies of The Waste Land to selected post offices on tax day.  At least anxious taxpayers had something pleasant to read after they dropped their returns in the mail!

The first half of April can be very stressful and yes, cruel, if you aren’t organized or run out of funds to pay your tax. With the exception of an IRA contribution, there is nothing you can do to alter the outcome in April.  (Yes, you can file an extension, but you still have to pay the taxes due).

But taxes are money’s enemy on more than just tax day.  Taxes can erode the value of your investment portfolio and eat away at your income all during the year.  We all have to pay our fair share, but there are tips and strategies that can be implemented to help keep more of your money in your pocket and return thoughts of April to lovely Spring weather, longer days, strawberries and sweet English peas!

Tax Planning Strategies To Keep You Sane

Get Organized.
If you don’t do anything else, setting up a filing system for tax documents is a must. Not only will everything be in one place when you need it, but you are less likely to miss out on deductions when you are consciously filing receipts and documents all year. A series of folders with labels such as charitable contributions, property tax, business expenses is recommended. If you just dump everything into one file, you will have another major organizing task come April.

Tracking Expenses
Buy a notebook and keep it in your car. If you are doing charitable work, you can deduct miles to and fro. Keep good records of  the date, starting mileage, ending mileage, and the name and address of the charity. Keep track of business miles in the same manner. No more stressful guess work at tax time.  Also note the starting mileage on your odometer on January 1st and the ending mileage on December 31st. If you pay cash for parking meters while doing charitable works or business note those in your book too.

Know Your Cost Basis (purchase price of investments you buy)
Most brokerage companies track cost basis for you these days. But if you change brokerage company or advisor, it’s very wise to make sure you walk away with a document that lists cost basis for each investment. You need this data when you sell an investment. Maintain records of any improvements you do to your home as well. When you sell these costs will increase your basis (a good thing because it means you owe less tax).

Donating Items To Charity
Carefully itemize clothing, household goods, books, etc. that you give to your local Good Will, Salvation Army or other charity. Estimating a total dollar deduction is not enough. Do this before you drop the goods off, or you will forget what you gave away!

Calendar Important Dates
It’s so easy to forget to pay estimated taxes, especially if you are newly self-employed. When your taxes are not being deducted directly from your earnings you need to pay estimated taxes. The dates are April 15, June 15, September 15 and January 15. Set a calendar alert to yourself a week before so you have time to do the calculations. The best time to do tax planning is well before the calendar year is over: plan to do-it-yourself or meet with your tax advisor in October.

Tax Saving Tips

• If you can hold on to a winning investment for more than one year, you will pay capital gains tax on the sale (currently at 15%) rather than your ordinary tax rate which can be significantly higher.
• Buy income producing investments (i.e. bond funds or balanced funds) in retirement accounts rather than taxable accounts as the income from these investments is taxed at ordinary income tax rates not the lower capital gains rates.
• Choose growth stock funds, individual stocks or tax-efficient mutual funds for your taxable accounts as they generate less or no current income.
• If you have losses in your taxable account, you can sell them to offset gains in that account. Plus you can deduct $3000 in losses against your taxable income. You can buy back the investment if you want to as long as you follow the wash-sale rules.
• Invest in a ROTH IRA if your income permits. You won’t get a tax deduction, but you won’t owe tax on withdrawal, ever.  (Special rules apply for earnings in Roth Accounts).
• Save as much as you can in company retirement accounts. This money is tax-deferred and provides welcome tax relief in your highest earnings years. If you are self-employed take advantage of SEP IRA’s, Simple IRA’s or Defined Benefit plans. The type of plan you choose depends on your income and number of employees amongst other factors.
• Consider converting some or all of your Individual IRA accounts to Roth IRA’s this year. For 2010, the income limitations are waived and you can spread the tax over two years if you choose.
• State and Federal government’s occasionally provide tax credits. Unfortunately they all have different starting and expiration dates. Do a search on the IRS website www.irs.gov and your State’s tax board website to keep abreast of current credits. There are or have been credits for energy savings improvements to your home, childcare credits, first home buyer credits, education credits, etc.
• Review your tax withholdings whenever your tax status changes. For example, when you get a pay raise (or pay cut), you buy a home, have a child, get married or get a divorce. The IRS has a tax withholding calculator or read IRS Publication 919 or ask your tax advisor for help.
• If you buy mutual funds at the end of the year in your taxable account, research the date of any planned capital gain or dividend distribution first. You don’t want to buy a fund and get immediate taxable income before you have a chance to benefit from any investment gain. Buy after the distribution date.
• Tax-payers in high tax brackets can benefit from buying muni-bond funds or bonds in their taxable accounts.  These investments earn federally tax-free and sometimes state tax-free income.  (Not beneficial for lower tax bracket individuals).

This isn’t an exhaustive list, but it’s a good start for most people. I hope these tips and strategies will help to make tax time less stressful and keep more money in your wallet!

It Is Better To Give Than To Receive

TAX PLANNING 101

There are many confusing tax laws, but the one that seems to generate the most misunderstanding is the gift tax law.   Everyone seems to be aware that people can give up to $13,000 (this amount is periodically adjusted for inflation) a year with no tax consequences – but beyond that it’s fuzzy. A client asked me today if she would have to pay tax on a $100,000 gift her parents were planning to give her to buy a house.  The answer is no.

Here’s the low-down on the gift tax law:

1. Anyone can make gifts of up to $13,000 to as many people as they choose each calendar year without any tax implications. This gift is called an “annual exclusion gift” – meaning the gift is excluded from taxes. The donor can start all over again giving gifts up to 13,000 a person each and every year.

2. If a donor exceeds the annual exclusion (of $13,000) to any one person, tax is still not due until they have made gifts totaling an aggregate of more than $1 million during their lifetime.  A minor annoyance:  Form 709 – United States Gift Tax Return – must be filled out and filed with that year’s tax return.   But NO tax is due.

3. The recipient of said gifts whether it be $13,000, $100,000 or $500,000 does not pay tax on the money ever, at all.

Let’s step back and define what a gift is for IRS purposes:  It’s something that is given and nothing is received in return. It is complete as a gift. Loans are not gifts.

What  are some of the reasons people give gifts?:

1. They are generous and kind.
2. They want to help a loved one with expenses such as a down payment on a house,
   education costs, or a vacation.
3. They are very wealthy and want to reduce the size of their estate and therefore, estate taxes.
4. They know they won’t spend all their money during their lifetime and want to
   share it with their loved ones before they die.

Examples:
1. You decide to give $13,000 each to your four grown children for Christmas.  No tax is due and no gift return is filed.

2. A couple gives $100,000 to their daughter to assist in her purchase of her first home. A gift tax return for $74,000 ($100,000 -  $13,000×2) would be filed with that year’s tax return.  In subsequent years, any gifts given over the exclusion amount will be added to the $74,000. If in any given year the total lifetime gifts reaches over $1,000,000, tax will be due.