Tag Archive for Chris Wittich

Tax Implications Of The DOMA Case

Gay GroomsThe Supreme Court just overturned DOMA which allows for same sex couples that are legally married to obtain federal benefits.  How did this come about?  Of course it was the tax case of a same sex couple that was legally married in their state and went to court against the IRS regarding the application of the federal estate tax laws to that couple.  This isn’t the first time that a tax has made major news.  The healthcare bill was ruled constitutional because it was deemed to be a tax.  Al Capone wasn’t convicted of any violent crimes; he was convicted of tax fraud.  Surprisingly often the tax cases can turn into landmark cases that have shaped the path of major legislation in this country.

In Minnesota, same sex couples will be allowed to legally marry starting August 1st after the voters decided not to ban same sex marriage in November and then the legislature legalized it in May.  So what does this Supreme Court ruling mean for a MN couple?  It means people in MN who are legally married can get federal benefits; practically speaking many of these benefits are tied to taxes.  It means they can file a joint tax return on both their federal and Minnesota tax returns.  I think everyone can agree that is a much simpler system than what previously existed where same sex couples would have to file separate federal returns and then could file joint state returns which was just a mess for everyone involved.

There is still going to be some messy tax situations for same sex couples, but this ruling at least allows for simplicity in the 12 states that do recognize same sex marriage.  If you get married in one of the 12 states that allow Read More

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Social Security Planning For Spouses

iStock_Elderly Pig SS CardXSmallStart with the previous post about the basics of Social Security.  Now that’s out of the way, let’s go over some of the extra complexity when you have a spouse.  One of the most overlooked and unknown aspect of Social Security is the spousal benefit.

If your spouse is at full retirement age (66), they are eligible for their full retirement benefit or 100% based on their work history.  Sometimes both spouses have been working and paying in a similar amount to Social Security so their benefits are similar.  Other times one spouse has been working while the other one either did not work or was paying in much less to Social Security because they had a lower paying job.  This can lead to some large discrepancies in the full retirement benefit.  Bill Johnson’s Social Security benefit might be $40,000 per year, but if his wife Barb hasn’t worked as much, her retirement benefit might be only $16,000.

The spousal benefit would allow Barb the option of claiming her $16,000 benefit at age 66 or 50% of her husband’s full benefit, which would be $20,000 (50% of his $40,000).  That spousal benefit is going to add $4,000 a year to her Social Security benefit for the rest of her life.  That certainly seems nice, but wait, there is more.  At age 66, Barb can claim her spousal benefit and receive the $20,000 per year.  She will collect $80,000 by age 70.  When she Read More

Written by | Posted in Federal • Individual

Social Security Starter Pack

iStock_Social Security CardsXSmallThere is a lot to consider when deciding when to take your Social Security, but let’s start off with the basics.  Every year you get a statement from Social Security that tells you what your benefit will be when you retire.  Full retirement age is currently 66, but forty years from now I assume it will be much higher for me.  The statement will tell you the benefit is $20,000 (depending on your earnings history) when you are 66 years old.

But there are choices, so many choices to be made.  If you claim Social Security early (before you are 66) you get a smaller amount.  If you claim when you are 62 years old, you get 75% of the full amount which would be $15k a year in this case.  If you claim at 63 it’s 80%, 64 it’s 87% and at 65 it’s 93% of the full value.

Taking your Social Security early will pay off if you are planning on getting hit by a bus at your 71st birthday party, but if you are planning to live to 100 it probably won’t work out well.  Another choice is to claim the Social Security later at 67, 68, 69 or 70 years old.  For every year you wait after 66, you get an additional 8%.  Meaning if you wait until 70 years old, you get 132% of the full value every year for the rest of your life.  $26,400 instead of $20,000 a year is a big difference and over the long haul you will come out ahead. Read More

Written by | Posted in TaxConnections

Saving And Budgeting Is A Science

Saving money can be a tricky proposition for many people.  The first step to saving is creating a budget  –   a detailed budget.  This is not a guestimate based on your recollection of prior month expenses; this needs to be an exact science.  First figure out your monthly income and then take out the taxes (payroll and income taxes).  If your withholding doesn’t cover your tax liability each year, consider changing your withholding so the monthly withholding covers all your taxes for the year.  From there I like to set aside savings.  Retirement may be 40 years in the future or it might be just around the corner, but saving for retirement is always one of my top priorities.

The tax code allows you some choices when saving for retirement.  Most employers offer a 401(k) plan and at least a partial match of your contributions.  If the employer is willing to match 6% of your salary, then the first place to save is 6% of your salary.  If you don’t, you are leaving money on the table right off the bat.  Nowadays many employees can choose between the Roth and traditional 401(k)s  –   the Roth/traditional works like the IRAs.  For a traditional you get a tax deduction when you put the money in, but it is taxed when you take it out in retirement.  For a Roth, the money is not deductible when it goes in and then it is not taxed when it comes out in retirement.  I prefer the Roth for most people, but to each their own depending upon the circumstances.  Keep in mind that you can make both a 401(k) and an IRA contribution.  Sometimes people think it is one or the other, but you can do both. Read More

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IRS – Flavored FUBAR 2013

The Internal Revenue Service saw all the fun that the FBAR was having and said “Ooh we want one of those, too!”  So the IRS created the FATCA, Form 8938.  The Form 8938 goes into your individual return each year and is similar to the FBAR.  The FATCA is actually administered by the IRS so it has a familiar feel to it, but the content of the form is very similar to the FBAR and unfortunately so are the penalties.  While some of the administration is more intuitive since it is an IRS form, the requirements of who should file and how to report everything is significantly more complex.

The form is due with your return, which means an extension for your 1040 is an extension for the FATCA.  You can also file amended returns to include or change the information on the FATCA just like you would amend a return to include some interest income that inadvertently got missed.  That’s it for the good news; the rest is rather unpleasant.

The FATCA started in 2011 for individuals and now it has also taken affect for business returns in 2012.  There is no tax due on a FATCA, but the penalty for someone who fails to properly file a FATCA is $10,000 per year.  There are some other related forms about foreign accounts and investments that also carry $10,000 penalties for not filing.  The penalties can certainly add up in a hurry at $10,000 per form per year.  Owning interests in foreign companies or foreign trusts will hit you with a few more complex forms, but for now let’s focus on the FATCA. Read More

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FBAR or FUBAR 2013

If you have to ask whether something is FUBAR or not, then it probably is.  There are many reasons that I commonly refer to the FBAR form as filing a FUBAR.  If you don’t know what FUBAR means look it up on urban dictionary.  The FBAR is just about the strangest form you will ever come across.  For starters it is not administered by the IRS; it is instead administered and filed with the Department of Treasury.  All the normal procedures are thrown out the window since the Internal Revenue Service isn’t involved.

Perhaps the lamest thing about the form is the due date.  It is due June 30th each year, for the 2012 year it works out to June 28th, 2013.  Unlike basically every IRS form, there are no extensions available.  And unlike everything you file with the IRS, you can’t just put it in the mail on June 28th. The Department of Treasury needs to have received it by June 28th.

The FBAR has existed for a long time, but it wasn’t until recently that the enforcement and penalties for non-filing have been increased.  There is no tax due on an FBAR, but it exposes accounts where people  maybe have been avoiding US taxes.  The penalty for someone who fails to properly file an FBAR is $10,000 per year.  A willful failure to properly file finds you with a $100,000 or 50% of the account balance penalty, whichever is greater.  Let that sink in. If they think you willfully failed to file, they can penalize you $100,000 or 50% of the account balance, whichever is greater.  Yikes! That should be sufficient motivation to file. Read More

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Foreign Earned Income Exclusion

The foreign earned income exclusion needs an acronym or a nickname or something, because that is a mouthful and I am not aware of any common shortcuts.  I guess I will try FEIE, but I admit that seems lame.

The FEIE is a spectacular way to pay less United States taxes if you are working in a foreign country.  A U.S. Citizen is required to file a return and report their worldwide income, even if you are spending the whole year teaching kids in Haiti, or working for a tech company in Germany, or playing hockey in Russia.  It doesn’t seem fair that you pay taxes to both the U.S. and the country where you are working, so there are two options available to reduce your U.S. tax liability.

The first option is the foreign tax credit; basically you get a credit for the taxes you paid to the foreign country on the income that is also being taxed by the U.S..  If the tax in Haiti is 10%, but the US tax is 25% then you end up paying the U.S. only 15%.  If the tax in Germany is 25% and the U.S. tax is 25% then you won’t pay any U.S. tax; it would all be offset by the credit.  Not a bad choice, but the FEIE is even better.

The FEIE allows you to exclude up to $95,100 of earned income from a foreign country (for 2012) if you meet the requirements.  That would mean if you make $80K in Haiti you would pay the Haitian tax, but you would be able to pay 0% to the U.S. because the income would be excluded – no need for the foreign tax credit.  Other than the requirement for it to be earned income, there is really only one big hurdle and there are two ways to clear it.  You can either qualify as the bona fide residence test or the physical presence test.  Bona fide residence means you have established a permanent residence in the foreign country.  The physical presence test is, you guessed it, a counting of the days you were physically in a foreign country.  Once you get to more than a year you can use the FEIE.

As with everything tax related, it’s much better to understand the tax consequences before you do something major like move to another country for a job.  There can be some huge tax savings by meeting the requirements for the FEIE.  It’s better to understand it before you head off for your foreign adventure.

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Say it Ain’t So: The MN Audit Guarantee

Audits by a taxing authority are not generally a pleasant experience.  Avoiding an audit is always a priority for taxpayers.  Generally there is a small chance you will be audited on any return and there is nothing you can do about it.  The State of MN came out saying they intended to audit all companies on sales tax once every three years and so far it seems they are following through with that.  But a one in three chance is still only 33%, so how do we get to a 100% audit rate?  Estate tax returns.

Estate tax returns are being looked at by agents.  In our experience, every single estate tax return is being looked at by a MN agent.  That’s the 100% audit rate that sounds like no fun.  So what happens in a MN estate tax audit?

The agents are looking to confirm the information that is on the estate tax return and they are checking against other information available on your possible assets.  Forget to report a car that has been registered with the State of MN?  They are going to ask you about it.  Fail to include an investment account that you received a 1099 for the year before?  They are going to ask you about it.  They are also going to ask for confirmation of some of the values you listed on the estate tax return like the bank accounts, the real estate values, the investment accounts, etc.  Having that documentation before you file the estate tax return is critical to making the process go more smoothly.  Calling the broker to find out the account value was $42,256.88 is great, but if you don’t have paper documentation of that, you aren’t going to get past the audit which is coming.  Not every post has a happy ending, but if you have all the documentation before you file the return and then reply promptly to the audit, it shouldn’t be too bad.

Written by | Posted in TaxConnections
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