Archive for the Tax Management Category

The return of Income Tax Breaks for Donations after 70 ½

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Making donations after 70 1/2The recent tax bill (enacted December 17th) had some good news for those age 70 ½ or older. A popular tax break for those who make charitable donations from their individual retirement accounts was resurrected. Under the new law, IRA owners who are 70 ½, can donate up to $100,000 per year from their account to one or more charities.

How donors benefit

Under the new law, which was first enacted in 2006, resurrected in 2008, and lapsed again in 2009, a donor receives no tax deduction for such charitable contributions, but they also don’t have to include the IRA withdrawal in their taxable income.

Essentially, that means the withdrawal will not inflate your taxable income. You can make donations from a SEP or SIMPLE IRA as well, provided no contributions were made into those accounts the same year as the gift was distributed.

Donate according to the rules

The rules further indicate that the donation should be issued directly to a public charity (we’ll talk about how to pick one in a minute). Private foundations, donor-advised funds, supporting organizations and charitable gift annuities do not count. The charity must also acknowledge the gift in writing.

Making the Most of your Charitable Donations

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Making your donation countIn a recent post, we described how to take advantage of a recently resurrected tax break for charitable contributions if you are 70 ½ and how best to research a charity so you know your money will be well-spent. In this post, we’re going to talk about ways to maximize your charitable giving (even if you’re younger than 70).

Focus your dollars

If you have a limited amount to give, experts say that it’s best to concentrate your giving on the charity that is most important to you. Not only does this make the decision-making process easier for you, it also gives you an easy out when other groups approach you for your dollars. Focusing your dollars means your cash will have a bigger impact.

Consider donating more than cash

Donating objects such as jewelry, automobiles, or the use of a second home can have just as big an impact as sending a check because those objects can be auctioned off for more money. Also, non profits nearly always need volunteers and there are many roles within a charitable organization to fill. You can ask your favorite charity what they might need in the way of time or other, and you can find opportunities at

Give while you shop

If you shop online, you can use a free portal called to send a percentage of your shopping dollars to a favorite charity – without changing the price tag of the items you buy. As an example, a $50 purchase with Famous Footwear generates $2.60 for the non profit of your choice. Register with and you get coupons and free shipping deals as well.

Avoid these losses and scams

Donations are diminished by 2-3% when you pay with a credit card because of card issuer processing fees. Even fund-raising sites take as much as a 4.75% cut when they process your donation. Pledging through a for-profit telemarketing firm can take as much as half your donation, so it is the most ineffective method of giving.

Look-alike websites are often set up with URLs and names that are very similar to charity organizations. These phishing sites are set up to steal your financial data and are very common right after a disaster, when people are more likely to open their wallets for the victims.

The most effective way and safest way to donate is to issue a check directly to the charity. Their website will have the address where you should send the check, but it can’t hurt to give them a quick call to double-check you have an accurate address just to be sure.

Filed Under: Charitable Donations

Get Acquainted with your Charity’s Financial Practices

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Researching your charityEven if you have a favorite charity, doing a little homework can reassure you that your donation is going to a good cause rather than lining the pockets of the charity’s executives.

  1. Look for an IRS-approved charity. Tax-exempt status means your contributions are tax-deductible, plus the IRS has become pretty good at weeding out bogus organizations. Of course, the IRS hasn’t become perfect at it yet, and so, you’ll want to continue with the next steps.
  2. Locate the charity’s Form 990. These forms are public information for any charity that earns more than $25,000. You can access charity tax returns through these evaluation websites: GuideStar and Charity Navigator. To get the Form 990 for any organization, you’ll have to register (for free) and conduct and Advanced Search. If you have the charities’ exact legal name, that helps.
  3. Check the charity’s excess or deficit. This is essentially their operating profit and loss statement and it’s likely you’ll want to see expenses that are pretty close to the revenue numbers.
  4. Check their net assets at the end of the year. This figure is the charity’s net worth as of that date. You might be surprised to find that number can be quite high, but ultimately you choose whether to add your donation to their pile or not.
  5. Check their functional expenses. This schedule tells you how much was spent on various categories for the charity’s services. In most cases, you’ll want to see expenses that are consistent with the charity’s stated purpose and mission. It’s also nice to see modest overhead numbers, but again, it’s ultimately your decision.
  6. Finally, check the salaries and other distributions to officers, directors, and employees. This doesn’t mean you have to avoid giving to a charity simply because the CEO makes over $100,000, however. According to Charity Navigator, the median CEO salary for charities with expenses between $3.5 and $13.5 million is $160,000.

Try not to fixate on charity ratings

The websites shown above: Charity Navigator and GuideStar have sprung into being to help donors evaluate a charity, specifically their administrative, employee, and fund-raising expenses. While it’s important to look at their ratings, it’s also important to understand that non profits have become experts in managing their rating. In the past, some have disguised fund-raising mail as ‘educational material’ or passed fund-raising costs along as charitable program expenses.

Of course, there’s also the other side of the coin: some charitable organizations earn lower ratings when they don’t deserve it. For example, groups with higher overhead, such as food banks, may have higher administrative costs because the provide a direct service to people in need.

Best method if you’re still unsure? Pick up the phone and ask the non profit to explain the numbers behind their rating. Speaking with an executive or financial officer – and be sure to ask specific questions – can tell you a lot about whether that particular non profit deserves your money.

Filed Under: Charitable Donations

New Estate Tax Rules for 2011 and 2012

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Estate tax rule changes for 2011 and 2012Last October, we wrote about the uncertainty around the estate tax and the potential changes that were coming depending on Congressional action. As you know, following the Tax Relief Act of (very late) 2010, that uncertainty has been laid to rest. In this post, we’d like to summarize the changes enacted by Congress at the end of 2010 and discuss a little about how those changes will affect you.

Regarding Estate Tax Rules, the following is a summary of the enacted changes:

  • The estate and generation-skipping transfer taxes were phased out and fully repealed in 2010.
  • The gift tax rate was reduced to 35%.
  • The gift tax exemption was increased to $1 million for 2010.
  • The estate and generation-skipping transfer taxes for 2011 and 2012 were reduced from the top rates of 55% to 35% and the exemption amount was increased from $1 to $5 million (as indexed after 2011).

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate, gift, and generation-skipping tax rules were set to automatically reinstate in 2011 unless Congress enacted changes before 2011. That would have meant the estate tax rates returning to the rates of 2001, with with the top estate and gift tax rates reverting to 55%!

Some additional technicalities that were included in the Tax Relief Act include, but are not limited to, the following:

  • For gifts made after December 31, 2010, the Act reunifies the gift tax with the estate tax and allows an application exclusion amount of $5 million with a top estate and gift tax rate of 35%.
  • The Act also provides that the generation-skipping transfer tax for descendants dying or gifts made after December 31, 2009 is equal to the applicable exclusion amount for estate tax purposes. Specifically, up to $5 million for 2010.

This means that up to $5 million in generation-skipping transfer tax exemption may be allocated to a trust created or funded during 2010. Although the generation-skipping transfer tax is applicable in 2010, the tax rate for transfers made during 2010 is 0%. The generation-skipping transfer tax rate for transfers made in 2011 and 2012 will be 35%.

Estate Tax Uncertainty October 2010

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An estate plan in a filing cabinetAlthough it seems certain that the estate tax will be reinstated in 2011, it’s impossible to know whether the estate tax rate will be 55%, as it is currently scheduled, or if Congress will impose a different rate before next year. Many of our clients are making plans now to implement taxable gifts this year in an effort to avoid what may be much higher estate tax rates in 2011. In doing this, they will pay the 2010 applicable 35% gift tax now instead of paying what could be higher estate taxes later. As a result of the uncertainty, however, there are a variety of estate funding techniques being implemented in an attempt to avoid unnecessary taxes and we’d like to talk about the options with our clients.

While the gift tax rate is lower in 2010, some clients are waiting to make their gifts very late in the year, as late as December 26th or the 31st, due to concerns about the risk of dying unexpectedly in 2010. If they make a taxable gift now, and then die before Congress changes the laws, they will have paid a gift tax rate of 35% when their assets could have been passed through their estates in 2010 without being subject to estate taxes.

The risk in waiting until the end of the year is that Congress may enact a gift tax at a rate higher than 35% before clients are able to make their gifts. This has some clients considering making their taxable gifts now, but instead of gifting directly to family members, they are creating trusts for their family members who are beneficiaries. A trust has provisions that allow the beneficiaries to disclaim the gift, an act known as ‘reversing’ the gift, and sending that property back to the original owner as if the gift never occurred. This type of flexible technique gives the family the opportunity to decide later (reversing must be done within nine months of the gift) whether the gift will be implemented as planned or reversed later depending on the laws passed in Congress.

Making Plans Based on What We Know

When approaching the estate-tax conversation with our members, we hear many of them say they don’t want to make changes until they know for certain what the exemption will be for 2011. Since we do not know if the federal government is going to make changes to the current exemption for 2011, and we do know that it is scheduled to be $1 million, we are recommending that our clients plan according to those facts.

The most important factor is coming up with a plan based on a $1 million exemption and to implement that plan. If the exemption turns out to be higher in 2011, then we can make necessary adjustments to accommodate after that occurs.

The last thing we want to see is one of our clients with a $5 million net worth without an effective estate plan. If the exemption remains at $1 million in 2011 and a client dies on the first of January, their heirs will suffer a huge tax bill, potentially forcing the family members to liquidate assets at an inopportune and unfortunate time just to pay the taxes due.

Transfer Now at Lower Market Values

The uncertainty around the estate tax situation in Congress cannot be cause for individuals to halt progress on the implementation of their estate plans. Other factors make now an excellent time to transfer assets to the next generation through gifting or intra-family sales. Many commonly transferred assets, particularly real estate and businesses, are at suppressed values in the current market . Plus, the AFR rate – the rate charged on intra-family loans – is at historic lows. Gifting assets at these historically low values enables individuals to transfer or remove more assets out of their estates than would have been appropriate or cost-effective a few years ago.

Current advice includes transferring assets at the lowest values via intra-family sales in order to freeze the estate value. Because the asset, which is typically real estate or ownership in a business and could increase in value in the future, is replaced in the estate by an intra-family promissory note of a fixed amount, the asset’s value is stabilized.

Another important factor to take into consideration is the opportunity to transfer partial interest in an asset to take advantage of the discounts on the gift or sale, allowing even more value to be transferred. The discounts can range from 10% to 40% depending on the percentage of the asset being transferred.

So while the uncertainty around estate taxes is unclear, we do know that designing and implementing an effective estate plan is still necessary. In addition, we know that now is an excellent time for planned asset transfers to occur for some of our clients. Please give our investment representative a call and schedule an appointment to make or continue your estate planning efforts.

Filed Under: Tax Management

Roth IRA Conversions – Choose your own Adventure

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Roth Conversion crossroads

You’ve probably heard that 2010 is the year of the Roth IRA conversion. With the repeal of the $100,000 income ceiling for Roth IRA conversions and for the first time ever, anyone with any IRA type can convert it to a Roth IRA regardless of their tax filing status. Here’s the important part:

By converting your traditional IRA to a Roth IRA, you are agreeing to pay taxes now on previously untaxed money in exchange for the right to have that money grow indefinitely without further tax obligations.

The question of whether to convert or not is best answered by a comprehensive and personal analysis that includes both tax management and investment management advisers. Further, the decision is usually not as easy as a simple ‘yes’ or ‘no’. Additional factors may affect each investor’s decision, such as:

  • whether to convert the entire IRA or just a part
  • whether to convert today or later (depending on whether you want to pay the taxable amount at one time or over the next two years)
  • and so on

Similar to the choose-your-own-adventure books popular in the early 1980s, the question of whether and when to convert your traditional IRA is an adventure with a number of choices to be made.

When a Conversion Does Not Make Sense

We can make the initial choice of whether to convert a little easier for you by identifying the circumstances in which a conversion does not make sense, and those are:

  • If the IRA funds will be used within 10 years. Converting will not make sense in this situation because there is simply not enough time for the investment growth to compensate for the pre-paid taxes.
  • If the funds are not available to pay the taxes on the conversion. While half of the taxes due can be deferred as late as the filing of your 2012 return, those funds still have to be a available and if they are not, the conversion should not be completed. Taxes paid with money from the IRA will be treated as a distribution too, so unless you are in a position where you can withdraw from your IRA without penalty, then a 10% penalty will be assessed.
  • If the funds in the IRA will be donated to charity as part of your estate plan. Qualified charities can already liquidate the gifted IRA without paying taxes, and donating your IRA increases the value of your donation by your marginal tax rate. Of course, as of today, an IRA can only be donated after your death, not before.
  • If you are concerned about a market crash. If you’re confident the market will repeat the record-setting free fall of 2008, then you should delay your conversion until the market hits bottom. The primary reason is this: taxes are assessed on the value of your account on the day of the conversion. So, from a tax perspective, the lower your account value is on the date of conversion, the lower your assessed taxes.
  • If your are predicting lower taxes. If you project your tax obligations will be lower in the future than they are today, due to a lower tax bracket or other expected changes such as a post-retirement reduction in income, then a conversion now is not a logical choice.

If none of the situations above fit your circumstances, then a Roth conversion might be a valid option. Let’s break down some of the choices you’ll need to make.

How much of the traditional IRA will you need to use and when?

  • If you plan to use some of the traditional IRA funds now and the rest in the near future, then convert only the portion you don’t need for at least ten years. Assuming tax rates remain the same or
    higher, our cutoff for time required to justify prepayment of taxes is 10 years from the date of conversion. If you will need part, but not all, of your IRA funds within ten years then you might choose to convert only the portion you don’t need within your 10-year window.
  • If you plan to use the funds in your traditional IRA after ten years from now, then convert the entire IRA as soon as possible. Converted funds will grow indefinitely with no tax obligations upon withdrawal. If you’re concerned about increasing federal tax rates, then the converted funds will be dramatically more valuable than either the tax-qualified funds in an IRA or the non qualified funds where everything but the initial investment is still taxed.
  • If you do not plan to use or need the funds in your traditional IRA, then convert the entire IRA as soon as possible. If the funds in your IRA are eventually to be passed on to heirs, then converting now has three primary benefits:
    1. The converted funds are not subject to Required Minimum Distributions (RMDs) and will therefore continue to grow until your estate is executed at your death and the funds are distributed.
    2. Distributed funds will not have an associated tax burden upon receipt of the inheritance.
    3. Funds can continue to grow tax exempt, even after distribution to your heirs.

    If you’re planning to convert all or even a portion of the traditional IRA funds, when is it best to time the conversion?

    • If you believe a market recovery will continue on a fairly linear and upward trend, then you will want to convert as soon as possible. While the recovery in 2009 was impressive, the markets are still over 35% off the record highs of 2007. While no one forecasts an immediate return to 2007 levels, if you expect even minimal asset appreciation, then the sooner you convert the better because you will be assessed taxes based on the value of the traditional IRA on the date of conversion.
    • If you forecast impending market adjustments or corrections, then you will want to delay your conversion to as close to the market bottom as possible. Taxes will be assessed on the value of your traditional IRA account on the date of the conversion, so if you expect the future value of your account to decrease, then you will want to wait and convert it when the account value is lower.
    • If you’re planning to convert all or even a portion of the traditional IRA funds, when should you pay the taxes on the conversion?

  • If you are concerned that your marginal tax rate will increase from your 2010 levels in 2011 or 2012, then you should pay the entire tax due when filing your 2010 return. Your marginal tax rate can increase due to changes in the Federal tax code or with an increase in income and either or both can affect your tax bracket. If you’re worried about an increase in your taxes, then you will want to pay the taxes with your 2010 tax return to avoid the increased taxes on your converted funds.
  • If you are not concerned about increases in your marginal tax rate, or if you do not have the funds to pay the additional taxes with the filing of your 2011 return, then you should elect to pay the tax with the filing of your 2011 and 2012 tax returns. If you elect not to pay the tax with the filing of your 2010 taxes,
    you can report half of the converted amount of income on your 2011 tax return and the remaining half on your 2012 tax return. Taxes will still be asses on your marginal tax rate for the year in which you are reporting the income.

If you’re planning to convert all or even a portion of the traditional IRA funds, you’ll need to decide how to invest the converted funds.

  • If you are interested in long-term growth, and you are willing to accept “market” risk for all or part of the funds in your converted Roth IRA, then you should transfer all of your higher-risk investments into separate registration from your lower-risk positions. Converted Roth IRAs can be unconverted and the taxes that have been paid can be reclaimed. So, if the market was to have an unexpected contraction between the conversion and October 15, 2011, then the conversion could be re-characterized, the taxes could be reclaimed, and the IRA returned to its previous pre-conversion status. The key is the entire registration of the
    converted Roth has to be converted. Therefore, if the equity portion of a converted Roth is in one registration and the fixed income portion of a converted Roth is in a separate registration, and if circumstances warranted, the equity account could be re-characterized to save on taxes and leave the fixed income to grow without future tax obligations.

As we discussed in the beginning of this post, there are a host of questions that have to be carefully considered before choosing whether and when to convert. Your best bet is still to work closely with your tax management and investment advisers to ensure that you are first making the right decision about whether to convert or not, and second to make the right decisions

Healthcare Reform Tax Increases

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The implications of the recent health care reform are many, but for a moment, let us focus on the impact to investors, especially those earning more than $250,000 a year.

Starting in 2013, these taxpayers will pay a new 3.8% tax for Medicare on their investment income. These investors will also pay a higher general Medicare tax rate, as follows:

Now 2013 Increase
1.45% 2.35% 0.90%

Next, let’s take a look at the tax increases on income generated from the investments of those earning more than $250,000. Starting in 2011, the tax rate on investments is expected to rise as follows:

Now 2011 With the Medicare Increase
15.00% 20.00% 23.80%

Under the new law, investors keep 76.2% of the
income from investments that are currently subject to long-term
capital gains, which is a 10.4% decrease in their current income

So, what does all this mean for you?

Despite a 70% rise in value over the last 12
months, many stocks are still considered undervalued. For investors
on both sides of the $250,000 income line, stocks are still
considered a good value.

Investors earning less than $250,000, with the
majority of their investments held in non taxable accounts, such as
IRAs and 401(k)s, should continue their current investing strategies.
For taxable accounts, however, we may want to consider more
‘tax-managed’ approaches.

In summary, many investors earning over $250,000
will find these tax rates pretty familiar since you’ve seen them
before. In the past 40 years, the maximum federal tax on capital
gains has averaged 24.7% and the maximum tax rate on dividends was
44.6%, so this is like de´ja`vu all over again.

We at Private Advisory Group have always carefully
considered tax issues in our investment proposals, and we will do so
in the future with an even more keen sense of awareness. After all,
it’s less about what you make and more about what you keep
that matters!

Filed Under: Tax Management

Tax substantiation of charitable deductions

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By Art Auerbach
May 12, 2009
Situation: This is a good time during the year to discuss the Internal Revenue Service deductibility rules for charitable contributions with clients, as they are all probably being inundated with mail and telephone solicitations for donations.

Solution: Regarding cash contributions, the IRS requires either a bank record (canceled check), a charge showing on a credit/debit card statement or a pay stub showing a deduction from net pay.

If the contribution is either a single payment or a series of related payments to the same charity that totals $250 or more, then the donor needs a written communication from the charity stating the amount given and that nothing was given to the donor in exchange.

The letter must be dated prior to the date of filing the tax return for the year of the contribution, including extensions. The donor can receive items of de minimis value such as personalized mailing labels, cards, mugs, etc.

For contributions of property, a taxpayer must have appropriate documentation of the property donated and the condition of the property on the date of contribution.

Additional information on how the property was acquired and how the fair market value was determined on the date of the contribution must be retained by the taxpayer.

The taxpayer — not the charity — has this burden of substantiation. Used property must be in good condition or better. The taxpayer can use any one of several websites to assist in determining the “thrift shop value” for use on the tax return.

There is also the issue of how to show charitable deductions on a tax return.

It would be advisable to list each cash contribution with appropriate amounts and the name of the charity. Avoid listing a large figure for miscellaneous deductions, which might prompt an inquiry from the IRS. For donations of property, it is not necessary to attach an explanation to a return unless the contribution exceeds $500. That requires the completion of Part 2 of Form 8283 (non-cash charitable contributions).

Should the value exceed $5,000, then a qualified appraisal should be completed and submitted along with Form 8283.

Contributions that are no longer deductible are cash gifts to charities where no receipt is obtained and no bank record exists. Placing cash in a collection plate when the charity does not use the envelope system or tossing money into the kettle during the holidays no longer qualify. Merely having a trinket of appreciation in exchange for a property contribution will not satisfy the statute. It would lack the list, condition and value of the contribution.

Obviously, if regular, continuous or large contributions are going to occur, it is in the taxpayer/donor’s best interest to consult a tax professional.