Tag Archive for Chris Wittich

Year-End Planning – Retirement Plans

TaxConnections Picture - Money Egg

Retirement plans come in many different flavors with many different rules.  Maybe there are fewer than the flavors of coffee at Starbucks, but there are still quite a few flavors of retirement plans.  The end of the year is a good time to review your retirement plan decisions.

A few plans need to be funded before the end of the year; a few plans just need to be set up before the end of the year.  IRAs and 401(k) plans are the two common retirement plans and their rules are different.  The 401(k) plans need to be funded by the end of each calendar year through the payroll.  IRA contributions can be made through the due date of the return and still be tax deductible – a nice benefit.  You can wait until spring and prepare your return Read more

Year-End Planning – Charitable Contributions

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Charitable contributions are one of the things that taxpayers can fully control when trying to get the best tax deduction.  The end of the year is often when people make charitable contributions.  People are making good on their charitable pledges for the year and the holiday season is a popular time to solicit donations and hold special events for charities.

Charitable contributions are allowed as an itemized deduction for taxpayers.  The deduction is limited to 50% of the taxpayer’s adjusted gross income for the year.  Sometimes for taxpayers with large contributions and a low income, planning the timing of contributions around that 50% limitation is critical.  Any excess charitable contributions can be carried forward, but that carry-forward only lasts five years. Read more

Year-End Planning – Tax Payments

TaxConnections Blogger PostOne of the key things to year-end planning is to make sure you understand your tax payments.  This is not the sexiest of year-end planning topics, but it is one of the more important ones.  The first goal is to determine how much you might owe when the return is filed.  The second goal is to analyze the estimated tax payments.  The third is to save taxes with the timing of state payments.

Nothing is worse than an unexpected tax bill in April when you go to file your tax return.  That is one of the common reasons people become frustrated with their tax advisors.  An unexpected tax bill is why people dread filing their returns.  If you do planning in November/December, then at least you have five months to prepare for that tax bill that is due April 15th.  This year with the federal and Minnesota tax rates higher for high income taxpayers, planning for a tax bill in April is even more crucial.

It is important to make sure your estimated tax payments are enough to meet the safe harbor estimates so you don’t incur estimated tax underpayment penalties.  The underpayment penalties aren’t crazy high; they depend on the interest rates which are quite low at the moment.  Just the idea of paying the IRS a few dollars more is enough to make some people sick.  The safe harbor means that if your AGI was over $150k, then 110% of your prior year tax needs to be paid quarterly.  If your AGI is less than $150k, then only 100% of the prior year tax needs to be paid quarterly.  Keep in mind that wage withholding is counted as paid throughout the year, even if the withholding occurs on a year-end bonus. Read more

Estate Planning Part 3 – Old Age

TaxConnections Blog Picture After a lifetime of working, retirement sounds like it would be fun.  When you get to retirement there are lots of changes in your life and one of them should be your estate planning.  At this point your kids are grown and maybe you have grandchildren.  Reworking your will and trusts to include grandchildren and account for other changes in the family can be important.

Gifting can play a major role in your estate planning.  In Minnesota, the estate and gift exemptions are only $1M so annual gifts can be useful in keeping an estate under the $1M threshold.  A couple of kids plus spouses, plus a few grandchildren can make for a big gifting base.  In 2013 you can gift $14,000 to each person without filing a gift tax return.  If you are so inclined, you could gift $14,000 to each person and quickly reduce the assets in your estate.

Another way to change your estate planning is to change the beneficiary designations on your retirement plan accounts.  IRAs and 401ks can be a great way to skip generations in your estate planning.  When a non-spousal beneficiary receives an IRA or 401k from an estate, they are required to make minimum distributions each year.  Those minimum distributions are based on the age of the beneficiary.  A 55 year-old child that inherits an IRA will need to withdraw 3.4% each year, while a 25 year-old grandchild only has to withdraw 1.7% each year.  That can make a huge difference over time as the account grows tax free.  Each family situation is different and the needs of the family and each beneficiary can vary, but it’s important to update your estate planning at each stage of your life.

Estate Planning Part 2 – Middle Age

TaxConnections Blogger postEstate planning needs to be re-evaluated during your lifetime as your situation changes.  For middle aged taxpayers there can be significant changes to your estate planning needs.  When your kids are minors, your will should include provisions for caring for the children in case something would happen to you and your spouse.

A great way to set aside assets for minor children is to use trusts.  Trusts can have any number of provisions in them, but they commonly set aside assets that provide for the children until they reach age 25.  It’s probably not a good idea for your 15-year old kids to just inherit all the assets free and clear.  Having a trustee to keep an eye on the money until they are a bit older is probably a good idea.

Once your kids are grown and hopefully responsible adults, you might want to look at your will and trusts again.  Changing beneficiary designations is always a part of estate planning.  When the kids were younger, the beneficiary designations might have been to a trust for the benefit of the kids.  When they reach an age of maturity, you can make them the direct beneficiaries and there might be no need to include trusts in the estate planning.

Estate Planning Part 1 – Charity

TaxConnections Picture - Living Trust Estate PlanningEstate planning is very important, but it’s obviously an uncomfortable topic to discuss with the family. The sooner you address it, the more options you will have and the better off the beneficiaries will be. Let’s break this into three parts with Part 1 focusing on the charitable aspects of estate planning. Part 2 will focus on a middle aged person who maybe has kids and who has parents that might still be living. Part 3 will focus on the classic grandparents getting older and their kids are grownups, with probably some grandkids in the mix.

For taxpayers that are somewhat charitable in nature, estate planning can play an important role in their charitable giving both while they are alive and after they pass. The simplest way to give money to charity is to include them in your will. Either a specific amount or a residual amount of the estate can be given to charity. One common example is to give your beneficiaries the amount that would be tax free, and any excess assets that the estate has would go to charity. That’s simple to do and simple to understand but sometimes that is not the best solution.

For people with substantial assets and a charitable inclination, a CRUT can be a great solution. Basically there is a chunk of assets set aside for the charity and the taxpayer gets a current charity deduction (present value). When the taxpayer dies, the charity gets all the money. While the taxpayer is still alive they receive an income distribution from the CRUT so they haven’t given up the income stream during their lifetime. It’s a bit more complex to understand and there are some costs to setting up and operating a CRUT, but it can be worthwhile for people with larger estates.

Snowbird States

TaxConnections Picture - Beach UmbrellasHere in Minnesota it is common for people to avoid the winters by having a second home in a friendlier climate.  Usually that means California, Arizona, and Florida.  There are a lot of rules about residency and I have blogged about that before, but let’s dive a little deeper into the tax situations of those snowbird states.

In Florida everyone seems to know there is no state income tax.  What people don’t always realize is that there is a 6% sales tax, plus property taxes to go with a 5.5% corporate income tax which make up for the lack of income tax.  For snowbirds, there is no estate tax in Florida.

In Arizona the tax situation is much simpler than in Minnesota.  The tax rate is lower  –  much lower.  The top rate in MN is now 9.85%, but the top individual tax rate in Arizona is only 4.5%.  As always there are a few state-specific, quirky things.  The strangest thing I have run across is a personal property rental tax which is applied to gross rents on a rental property.  The tax rates vary depending on location, but it can be around 1 or 2%.  Another big difference between MN and AZ is the gift and estate taxes.  Both are non-existent in Arizona.

In California the tax situation is brutal; yes that is the technical term for it.  The top individual rate is 13.3%.  The property taxes are quite high with the value of property being quite high.  Sales taxes are around 7.5% and with the tough budget Read more

Z is for Zones

TaxConnections Picture - Tax FreeZ is for Zones.  I tried to make this “Z is for Zoinks”, but I could not figure out how to make Scooby phrase about taxes, so let’s try zones instead.  (Maybe next year for Zoinks.)  There are many different kinds of zones in the world of taxes.  The federal government declares disaster zones when natural disasters strike; the most recent was the flooding in Colorado.  When those federal disaster zones are declared, the IRS normally extends deadlines for people that live in those zones.  If you were working on your individual return and then your house got washed away 2 weeks before the deadline, it would be hard to get it filed on time so the IRS and states are understanding about those situations.

Another type of zone for taxes are the Job Opportunity Building Zones or JOBZ which are designated by Minnesota.  JOBZ are located throughout Minnesota and inside those areas businesses can be eligible for sales tax exemptions, income tax exemptions, property tax exemptions and also a refundable income tax credit that is based on payroll.  The idea is to encourage investment in specific areas of the state by new businesses.  The business has to be willing to locate in one of the JOBZ areas, but the tax breaks can be very lucrative for the business.  The rules are complicated and once you qualify there are conditions placed on your qualification, but it is definitely something worth exploring if the business has flexibility of location.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

In accordance with Circular 230 Disclosure

“Y” Is For Yuletide

TaxConnections Picture - Chris Wittich A - Z“Y” is for yuletide.  Yuletide basically just refers to Christmas in the United States and that means a time for gifts.  If you want to start shopping now for your favorite accountant, I like gummy bears, things that are orange and tickets to sporting events.  As long as you keep your gifts under $14,000 for the year you won’t need to file a gift tax return.  Avoiding the gift tax return is nice, but when can gifts be tax deductible?  Well my grandmother taking me out to dinner isn’t tax deductible and my mother taking me to a hockey game isn’t tax deductible, but what about a referral source taking me to that same hockey game?  It might have a different result.

A referral source is taking me to the game because they want to talk business and improve our relationship so we can find opportunities for us to work together in the future with clients.  The gift of tickets to the game is for both business and personal reasons so the IRS allows 50% deduction for entertainment expenses.  The IRS does audit this area often so keeping receipts and documenting the business purposes is very important.  That’s why a hockey game with my mother isn’t deductible; there is no business purpose for that.

Sometimes companies send out gift baskets to clients around the holidays.  Up to $25 is fully tax deductible for those gift baskets.  I have always thought that chocolate makes for a great gift; everybody loves chocolate.  The differences between a gift and entertainment expense can be tricky to determine but in many cases you are allowed to choose which would be more beneficial.  Sometimes deducting 100% up to $25 is better and sometimes deducting 50% of the total is better. As usual it depends on the facts and circumstances how and when the gift and entertainment rules apply.

Did I mention there’s only 45 more shopping days for your favorite accountant until Yuletide?

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

“W” is for Water

TaxConnections Blogger Chris Wittich posts about Water and Taxes“W” is for water.  Water, water everywhere… including in the world of tax.  Sometimes water is deductible sometimes it is not.  If you have a rental property, feel free to deduct the water bill as part of your utilities expense for the rental property.  That means if you own it and rent it out to someone else and you are paying the water bill, its deductible.  That doesn’t mean if you are renting it there is any way to deduct the utilities.  If you own a house that is just used as your principal residence your water bill won’t be deductible since it is just a personal expense.

Sometimes water can cause damage to your property.  Casualty losses fall in the nebulous sometimes deductible category.  Are the costs to repair a casualty to your property a deductible expense?  Yes.  Is that tax deduction going to save you any taxes?  Maybe.  A casualty first needs to be a single identifiable event. The gradual erosion of the property over time due to weather is not a casualty.  A single storm that damages your property is a casualty.

A casualty is deductible to the extent that the costs exceed $100 and 10% of your AGI for the year.  So if your costs to repair are $85 that’s not going to work.  If your income for the year was $350,000 and the costs to repair are less than $35,000 you are out of luck.  As you can see a 10% threshold knocks out many of the casualties from having a tax benefit.  One other important thing to note on the casualties is that a net operating loss generated from a Read more

“V” is for Venture Capital

TaxConnections Blogger Chris Wittich posts Taxes A - Z“V” is for venture capital. Venture capital is a way for small businesses to get needed funding. Venture capital comes in many different ways, but generally a deep pocket invests a bunch of money in a growing company that needs cash to keep expanding. If that sounds like the setup of Shark Tank, well it is. Shark Tank is basically venture capitalists trying to strike a deal with promising companies.

Venture capital is really a financing mechanism but it can have some important tax ramifications. When venture capitalists contribute their money, they normally receive shares of the company in exchange. That purchase is not a taxable transaction, but down the road if they sell, it will be a capital gain or loss. Holding the shares of the company will normally entitle the venture capitalist to a share of the distributions of the business. In partnerships and S corps the distributions are a reduction of basis but not taxable. For C corps, distributions are normally dividends which are taxable when received.

Venture capital can be set up a number of ways, but understanding the tax impact is obviously very important for both the venture capitalist and the business that is seeking the investment. When you get into more complicated  royalties or payback models, it’s good for both sides to have a clear understanding of the taxes so you don’t run into problems in the future.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

In accordance with Circular 230 Disclosure

“U” is for Unqualified Options

TaxConnections Picture - Letter U“U” is for unqualified options.  Does this mean the options are not qualified, but not qualified for what?  They don’t qualify for the incentive stock option treatment.  Unqualified or non-qualified stock options result in taxable income to the recipient when they are exercised.  If the stock is worth $50 a share and the option is to purchase at $32 a share, then a gain of $18 per share is recognized when the option is exercised.  These are relatively easy to track and simple to account for because the company can deduct the value ($18 per share) that is income to the taxpayer.

The incentive stock options or qualified stock options are a bit more complicated.  There is no income on the grant date or the exercise date of the option, but when the stock is eventually sold it will qualify for capital gains.  That sounds great, but of course there is an important detail.  On the exercise date, the FMV less the option price is an AMT adjustment for the individual.  This can cause a huge amount of AMT which is only reversed when the stock is sold.  The need for cash to pay the AMT tax at least partially offsets the benefits of the capital gain treatment, so keep an eye out for that.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.