2019 Year-End Tax Planning Tips & Traps

As the end of the year is fast approaching, we should consider any last-minute strategies that might help reduce your 2019 tax bill. Last year was the first year to be impacted by the Tax Cuts and Jobs Act of 2017 (TCJA). While there was plenty of clarifying guidance on application of the TCJA, there were was no significant new legislation in 2019 affecting individual taxes. But situations do change from year to year, thus requiring a fresh look at how to approach year-end tax planning. The following are strategies that may benefit you and that we should discuss before December 31.

Bunching Deductions into 2019

As you may know, TCJA significantly increased the standard deduction for all taxpayers. This means that many individuals who previously received a tax benefit by itemizing deductions no longer do because taking the standard deduction is more advantageous. For 2019, the standard deduction is $12,200 for single taxpayers, $24,400 for married taxpayers filing a joint return, $18,350 for taxpayers filing as head of household, and $12,200 for married taxpayers filing separately.

In addition, there is a $10,000 limitation ($5,000 in the case of married taxpayers filing separately) on the combined amount of state income taxes and property taxes that may be deducted when itemizing. Unfortunately, this $10,000 limitation applies to single as well as married taxpayers and is not indexed for inflation.

If the total of your itemized deductions in 2019 will be close to your standard deduction amount, alternating between bunching itemized deductions into 2019 and taking the standard deduction in 2020 (or vice versa) could provide a net-tax benefit over the two-year period. For example, if you give a certain amount to charities each year, and if it’s financially feasible, you might consider doubling up this year on your contributions rather than spreading the contributions over a two-year period. If these amounts, along with your mortgage interest and medical expenses exceed your standard deduction, then you should double up on the expenses this year and take the standard deduction next year.

Similar opportunities may be available for bunching property tax payments and state income tax payments, subject to TCJA’s $10,000 limitation on deductions for such payments. This strategy can be especially attractive for single taxpayers because the standard deduction is so much lower for single individuals. It’s important to remember, however, that the deduction for property taxes applies only to property taxes that have been assessed. Thus, if the assessment for 2019 property taxes occurred in 2018 and the taxes are due in 2019, you can deduct in 2019 the taxes assessed for 2019 that you have paid as well as the property taxes assessed for 2020, assuming you also pay the 2020 taxes in 2019.

Finally, if any of your real estate or income taxes can be allocated to a trade or business, they are not subject to the $10,000 limitation.

Medical Expenses and Health Savings Accounts

For 2019, your medical expenses are only deductible as an itemized deduction to the extent they exceed 10 percent of your adjusted gross income. Depending on what your taxable income is expected to be in 2019 and 2020, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2019 or defer them until 2020. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.

However, health saving accounts (HSAs) present an attractive alternative. If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. Thus, the contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2019, the annual contribution limits are $3,500 for an individual with self-only coverage and $7,000 for an individual with family coverage.

Mortgage Interest Deduction

If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., mortgage) could be limited. The TCJA limits the interest deduction on mortgages of more than $750,000 obtained after December 14, 2017. The deduction is limited to the portion of the interest allocable to $750,000 ($375,000 in the case of married taxpayers filing separately). For mortgages acquired before December 15, 2017, the limitation is the same as it was under prior law: $1,000,000 ($500,000 in the case of married taxpayers filing separately). However, as discussed below, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.

You can potentially deduct interest paid on home equity indebtedness, but only if you used the debt to buy, build, or substantially improve your home. Thus, for example, interest on a home equity loan used to build an addition to your existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

Home Office Expenses

When the TCJA eliminated the miscellaneous itemized expense deduction, it eliminated the ability of employees to deduct home office expenses. However, taxpayers with their own business can still file a Schedule C and take a home office expense deduction if part of the home is used for that business. State income taxes, property taxes, and home mortgage interest allocable to your business can also be deducted and such deductions are not subject to the limitations that apply to individual taxpayers who do not operate a Schedule C business from their home.

Revised Kiddie Tax Rules

One of the changes made by TCJA involves what is known as the “kiddie tax.” The kiddie tax applies to a child’s net unearned income (e.g., dividends, interest, and capital gain distributions) over $2,200. While such income used to be taxed at the parent’s marginal income tax rate and took into consideration the unearned income of any siblings, TCJA simplified the calculation so that the child’s unearned income is taxed at trust and estate tax rates. Although the trust and estate tax rates are similar to the individual tax rates, the tax brackets are much lower, meaning higher rates of tax apply to lower levels of income.

For 2019, the top marginal tax rate for a couple filing a joint return is 37% for taxable income over $612,350. For income subject to the estate and trust tax rates, the 37% tax rate begins at taxable income over $12,750. There is a way to save some taxes here, however, if your child is under the age of 18 at the end of 2019 and didn’t have earned income that was more than half of the child’s support, or a full-time student at least age 19 and under age 24 and the end of 2019 and didn’t have earned income that was more than half of the child’s support. For such children, you can elect to include the child’s income on your tax return. However, we would need to evaluate whether adding such income to your tax return would subject you to the net investment income tax of 3.8 percent.

Child-Related Expenses and Credits

While the TCJA eliminated the personal and dependent exemption deductions that applied to tax years before 2018, it increased the child tax credit available for years after 2017 and increased the income level at which taxpayers are eligible for the credit. For 2019, if you file a joint return and your modified adjusted gross income (MAGI) is $400,000 or less, you are eligible for a $2,000 child tax credit for each qualifying child. If you are filing as single, head of household, or married filing separately, the MAGI limitation for claiming a child tax credit is $200,000 or less. For income above those levels, a pro rata credit may be available depending on total MAGI. Taxpayers with income below certain thresholds may be eligible for a refundable child tax credit.

Additionally, if you paid someone to take care of your child or a dependent so you can work or look for work, you may be entitled to a tax credit for up to 35 percent of the expenses paid. The amount of employment-related expenses used to calculate the credit is generally limited to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. Various qualifications must be met in order to be eligible for the credit, but if you incurred such expenses, you may qualify. Additionally, if you paid someone to come to your home and care for a child or dependent, you may be a household employer subject to employment taxes.

If you incurred expenses to adopt a child, you may be eligible for a tax credit of up to $14,080 for some or all of those expenses. The determination of the tax year in which qualified adoption expenses are allowable as a credit depends on whether the expenses were paid before the year in which the adoption became final or whether they were paid during or after the year in which the adoption became final.

Education-Related Deductions and Credits

While the tuition and fees deduction that had previously been available expired at the end of 2017 along with the miscellaneous itemized deduction for work-related education expenses, other education-related tax deductions, credits, and exclusions from income may apply for amounts paid in 2019. Tax-free distributions from a qualified tuition program of up to $10,000 are now allowed for elementary or secondary school tuition. In addition, if your modified adjusted gross income level is below certain thresholds, the following are available for 2019:

· an exclusion from income for education savings bond interest;

· a deduction for student loan interest; and

· a lifetime learning credit of up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution.

Charitable Contribution Deductions

As a result of the increase in the standard deduction, some taxpayers are no longer getting a benefit from itemizing their deductions, such as charitable contributions, as they once were. However, as noted above, you can still help charities and get a tax benefit if you contribute enough to get over the standard deduction amount or bunch itemized deductions that would otherwise be spread over multiple years into one year.

Additionally, you can reap a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles you to a charitable contribution deduction but you also avoid the capital gains tax that would otherwise be due if you sold the stock. For example, if you own stock with a fair market value of $1,000 that was purchased for $250 and your capital gains tax rate is 15 percent, the capital gains tax would be $113 ($750 gain x 15%). If you donate that stock instead of selling it, and are in the 24 percent tax bracket, you get an ordinary income deduction worth $240 ($1,000 FMV x 24%). You also save $150 in capital gains tax that you would otherwise pay if you sold the stock. Thus, the after-tax cost of the gift of appreciated stock is $647 ($1,000 – $240 – $113) compared to the after tax cost of a donation of $1,000 cash which would be $760 ($1,000 – $240). However, it’s important to also keep in mind that tax deductions for appreciated property are limited to 50 percent of your adjusted gross income.

Finally, taxpayers 70 1/2 years old and older who own an individual retirement account (IRA) are required to take minimum distributions from that account each year and include those amounts in taxable income. If you are in this category, a special rule allows you to make a charitable contribution directly from your IRA to a charity. This has several benefits. First, since charitable contributions deductions are usually only available to individuals who itemize, individuals who take the standard deduction instead can benefit from this rule. Second, making the contribution directly to a charity counts towards your required minimum distribution but that amount is not included in income and thus reduces your taxable income and adjusted gross income (AGI). A lower AGI is advantageous because it increases your ability to take medical expense deductions that you might not otherwise be able to take. For example, medical expenses are only deductible to the extent those expenses exceed 10 percent of your AGI and a lower AGI means you can deduct more medical expenses. In addition, as AGI increases, more of your social security income is subject to tax. Finally, the 3.8 percent net investment income tax applies to the extent your AGI exceeds a certain level.

Rental Real Estate

If you own rental real estate, you may be eligible for a special tax break – TCJA’s Section 199A deduction – which is based on a percentage of income earned by the rental real estate activity. In order to be eligible for the deduction, the activity must be considerable, regular, and continuous in scope. In determining whether your rental real estate activity meets those criteria, relevant factors include, but are not limited to, the following:

· the type of rented property (commercial real property versus residential property);

· the number of properties rented;

· you or your agent’s day-to-day involvement;

· the types and significance of any ancillary services provided under the lease; and

· the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).

Under a safe harbor issued by the IRS, a rental real estate activity will be treated as a business eligible for the special deduction if certain requirements are satisfied, such as:

· separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;

· for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);

· contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services; and

· certain compliance requirements are met.

If you think you may be eligible for this deduction, we should get together to nail down any last steps you may need to take to fall within the safe harbor. Alternatively, even if you don’t meet the safe harbor requirements, you may still be eligible for this deduction.

In addition, if you rent out a vacation home that you also use for personal purposes, we should review the number of days it was used for business versus pleasure to see if there are ways to maximize tax savings with respect to that property.

Retirement Planning

By investing in a qualified retirement plan you’ll not only receive a current tax deduction, thereby reducing current year income tax, but you can sock away money for your retirement years. If your employer has a 401(k) plan and you are under age 50, you can defer up to $19,000 of income into that plan. Catch-up contributions of $6,000 are allowed if you are 50 or over.

If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2019 is $13,000. That amount increases to $16,000 if you are 50 or older.

If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. If you are under 50, the maximum contribution amount for 2019 is $6,000. If you are 50 or older but less than 70 1/2, the maximum contribution amount is $7,000. Contributions exceeding the maximum amount are subject to a 6 percent excise tax. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it will allow you to later convert that traditional IRA to a Roth IRA. Qualified withdrawals from a Roth IRA, including earnings, are free of tax, while earnings on a traditional IRA are taxable when withdrawn.

If you already have a traditional IRA, we should evaluate whether it is appropriate to convert it to a Roth IRA this year. You’ll have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax and the decrease in tax rates that are effective this year makes such a conversion less costly than it would have been in previous years. Of course, this option only makes sense if the tax rates when the money is withdrawn from the Roth IRA are anticipated to be higher than the tax rates when the traditional IRA is converted. And if you have a traditional 401(k), 403(b), or 457 plan that includes after-tax contributions, you can generally rollover these after-tax amounts to a Roth IRA with no tax consequences. A rollover of a SIMPLE 401(k) into a Roth IRA may also be available. As with all tax rules, there are qualifications that apply to these rollovers that we should discuss before any actions are taken.

Finally, if you make qualified retirement savings contributions during 2019 you can claim a retirement savings credit of up to $1,000 (single or head of household) or $2,000 (joint filers) if your adjusted gross income does not exceed $64,000 (married filing jointly), $48,000 (head of household), or $32,000 (all other taxpayers).

Reevaluating Your Stock Portfolio

Year end is a good time to review your stock portfolio to see if you might want to divest yourself of stocks that have lost value since you originally bought them. We should evaluate whether you might benefit from selling off appreciated stocks, particularly those that would generate a short-term capital gain, and using the resulting gain to limit your exposure to a long-term capital loss on stocks you may want to dump, since the deduction of long-term capital gains is limited. And any net capital gain you may reap will be taxed at the substantially reduced capital gain tax rate.

The tax rate for net capital gain is generally no higher than 15 percent for most taxpayers. Some or all of your net capital gain may be taxed at 0 percent if your income is not above $39,375 (single), $78,750 (joint), or $52,750 (head of household). However, a 20 percent tax rate on net capital gain does apply to the extent that your ordinary taxable income is over $434,550 (single), $488,850 (joint), $244,425 (married filing separately), or $461,700 (head of household). Additionally, the following types of capital gains have different tax rate structures: (1) the taxable part of a gain from selling certain qualified small business stock is taxed at a maximum 28 percent rate; (2) the net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28 percent rate; and (3) the portion of certain unrecaptured gain from selling real property is taxed at a maximum 25 percent rate. If you have been involved in any such transactions during the year, we should review your options for reducing the tax on those transactions.

Substantial Increases in Deductions or Nontaxable Income Could Result in AMT Exposure

While fewer taxpayers are subject to the alternative minimum tax (AMT) as a result of the TCJA increasing exemption amounts and raising the exemption phaseout levels, the AMT is not completely dead. Certain adjustments to your taxable income, or certain exclusions from gross income, for regular tax purposes are not allowed for AMT purposes and will increase your AMT income (AMTI), thus potentially subjecting you to the AMT. Typical items which may reduce regular income but are not allowed for AMTI purposes include the standard deduction, the state and local income tax deduction, and the deduction for property taxes. In addition, the exercise of incentive stock options can result in AMT income, whereas such income is not recognized for regular tax purposes. Thus, if you have exercised any incentive stock options or have had a substantial increase in certain deductions in 2019, but have not previously been subject to the AMT, there is the possibility that you could be subject to the AMT for 2019.

If you work from home, one strategy for avoiding the AMT is to allocate part of your mortgage interest or property taxes to your Schedule C business. To the extent you can claim items on your Schedule C, they aren’t added back in calculating AMTI.

While all taxpayers are eligible for an exemption from the AMT, the amount of the exemption depends on your filing status. For 2019, the exemption amounts for individuals, other than those subject to the kiddie tax, are (1) $111,700 in the case of a joint return or a surviving spouse; (2) $71,700 in the case of an individual who is unmarried and not a surviving spouse; and (3) $55,850 in the case of a married individual filing a separate return. However, these exemptions are phased out by an amount equal to 25 percent of the amount by which your alternative minimum taxable income (AMTI) exceeds: (1) $1,020,600 in the case of married individuals filing a joint return and surviving spouses and (2) $510,300 in the case of all other individuals.

Planning for the 3.8 Percent Net Investment Income Tax

A 3.8 percent tax applies to certain net investment income of individuals with income above a threshold amount. The threshold amounts are $250,000 (married filing jointly and qualifying widow(er) with dependent child), $200,000 (single and head of household), and $125,000 (married filing separately). In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities. Thus, while the top tax rate for qualified dividend income is generally 20 percent, the top rate on such income increases to 23.8 percent for a taxpayer subject to the net investment income tax (NIIT).

If it appears you may be subject to the NIIT, the following actions may help avoid the tax and we should discuss whether any of these options make sense in light of your financial situation.

· Donate or gift appreciated property. As discussed above, by donating appreciated property to a charity, you can avoid recognizing the appreciation for income tax purposes and for net investment income tax purposes. Or you may gift the property so that the donee can sell it and report the income. In this case, you’ll want to gift the property to individuals that have income below the $200,000 (single) or $250,000 (couples) thresholds.

· Replace stocks with state and local bonds. Interest on tax-exempt state and local bonds are exempt from the NIIT. In addition, because such interest income is not included in adjusted gross income, it can help keep you below the threshold for which the NIIT applies.

· If you are in the real estate business, we should review the criteria for being classified as a real estate professional in addition to the criteria necessary for meeting the safe harbor requirements mentioned above for obtaining the qualified business income deduction. If you meet the requirements for being a real estate professional, your rental income is considered nonpassive and thus escapes the NIIT.

· If you intend to sell any appreciated assets, consider whether the sale can be structured as an installment sale so the gain recognition is spread over several years.

· Since capital losses can offset capital gains for NIIT purposes, consider whether it makes sense to sell any losing stocks, but keeping in mind the transaction costs associated with selling stocks.

· If you have appreciated real property to dispose of and are not considered a real estate professional, a like-kind exchange may be more advantageous. By deferring the gain recognition, you can avoid recognizing income subject to the NIIT.

Because the NIIT does not apply to a trade or business unless (1) the trade or business is a passive activity with respect to the taxpayer, or (2) the trade or business consists of trading financial instruments or commodities, we may want to look at ways in which a venture you are involved with could qualify as a trade or business. However, such classification could have Form 1099 reporting implications whereas personal payments are not reportable if your activity is not considered a trade or business.

Additional Medicare Tax

An additional Medicare tax of 0.9 percent is imposed on wages, compensation, and self-employment income in excess of a threshold amount. The threshold amounts are $250,000 (joint return or surviving spouse), $125,000 (married individual filing a separate return), and $200,000 (all others). However, the threshold amount is reduced (but not below zero) by the amount of the taxpayer’s wages. Thus, a single individual who has $145,000 in self-employment income and $130,000 of wages is subject to the .9 percent additional tax on $75,000 of self-employment income ($145,000 – $70,000 (the $200,000 threshold – $130,000 in wages)). No tax deduction is allowed for the additional Medicare tax.

For married couples, employers do not take a spouse’s self-employment income or wages into account when calculating Medicare tax withholding for an employee. If you and your spouse will exceed the $250,000 threshold in 2019 and have not made enough tax payments to cover the additional .9 percent tax, you can file Form W-4 with the IRS before year end to have an additional amount deducted from your paycheck to cover the additional .9 percent tax. Otherwise, underpayment of tax penalties may apply.

Timing Income and Deductions

If there is going to be a dramatic swing in your taxable income or your life circumstances between 2019 and 2020, it may make sense to either: (1) accelerate income into 2019 and defer deductions into 2020, or (2) accelerate deductions into 2019 and defer income into 2020.

· Accelerating Income into 2019. Options for accelerating income include: (1) harvesting gains from your investment portfolio, keeping in mind the 3.8 percent NIIT; (2) converting a retirement account into a Roth IRA and recognizing the conversion income this year; (3) taking IRA distributions this year rather than next year; (4) if you are self-employed and have clients that owe you money, try to get them to pay before year end; and (5) settling any outstanding lawsuits or insurance claims that will generate income this year.

· Deferring Deductions into 2020. If you anticipate a substantial increase in taxable income next year, it may be advantageous to push deductions into 2020 by: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent deductions are available for such payments, until next year; and (2) postponing the sale of any loss-generating property.

· Deferring Income into 2020. If it looks like you may have a significant decrease in income next year, either from a reduction in income or an increase in deductions, it may make sense to defer income into 2020 or later years. Some options for deferring income include: (1) if you are due a year-end bonus, having your employer pay the bonus in January 2020; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2020; (3) if you are considering exercising stock options, delaying the exercise of those options; (4) if you are planning on selling appreciated property, consider an installment sale with larger payments being received in 2020; and (5) consider parking investments in deferred annuities.

· Accelerating Deductions into 2019. If you expect a decrease in income next year, accelerating deductions into the current year can offset the higher income this year. Some options include: (1) prepaying property taxes in December, keeping in mind the $10,000 limitation on deducting state income and property taxes and the fact that the property taxes must have been assessed in order to be deductible; (2) if you owe state income taxes, making up any shortfall in December rather than waiting until your state income tax return is due (and similarly keeping in mind the $10,000 limitation); (3) making your January mortgage payment in December; (4) making any large charitable contributions in 2019, rather than 2020; (5) selling some or all loss stocks; and (6) if you qualify for a health savings account, setting one up and making the maximum contribution allowable.

Foreign Bank Account Reporting

The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report of Foreign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States; (2) you had one or more financial accounts that exceeded $10,000 during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please let me know at your earliest convenience.

Other Considerations

Here are some additional items to consider:

Flexible Spending Accounts: Generally, you will lose any amounts remaining in a health flexible spending account at the end of the year unless your employer allows you to use the account until March 15, 2020, in which case you’ll have until then. You should check with your employer to see if the employer gives employees the optional grace period to March 15.

Life Events. Life events can significantly impact your taxes. For example, if you are using head of household or surviving spouse filing status for 2019, but will change to a filing tax status of single for 2020, your tax rate will go up. Thus, accelerating income into 2019 and pushing deductions into 2020 may also yield tax savings.

Individual Healthcare Penalty. For 2019, the tax penalty on individuals who fail to carry health insurance, which was enacted as part of the Affordable Care Act, has been eliminated.

Moving Expense Reimbursement. If you received a reimbursement from your employer for moving expenses incurred in 2019, the reimbursement is taxable income. While taxpayers could previously deduct employment-relating moving expenses, this deduction is no longer available for moves taking place in years 2018-2025, unless you are a member of the U.S. Armed Forces on active duty and move pursuant to a military order to a permanent change of station.

Casualty and Theft Losses. If you incurred a casualty loss in a presidentially declared disaster area in 2019, it may be deductible. Any other casualty loss, along with all theft losses, are not deductible.

Section 199A Passthrough Tax Break. Enacted as part of TCJA, the Section 199A tax break allows a 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax returns as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $160,700 ($321,400 for joint filers; $160,725 for married individuals filing separately) are simpler and more permissive than the ones that apply above those thresholds.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Tax Reform or Accountant’s Re-employment Act?

For as long as I can remember, tax reduction and simplification have been on the table for congress and past presidents. So why not President Trump? File your next tax return on a postcard (not likely)? I might be a bit cynical, but the only result of the next tax act I see will be extending my employment as a tax planner and preparer for the foreseeable future.

I sincerely doubt I’ll see significant tax simplification in my lifetime, so my fellow CPA’s and Turbotax employees can probably breathe a sigh of relief-their jobs are likely safe for years to come.

You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after multiple failures to overhaul our health care system, but professional advisors are studying the newly-released nine-page proposal closely nonetheless. We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:

First, we would see the current seven tax brackets for individuals reduced to three — a 12% rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%. The proposal doesn’t include the income “cutoffs” for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples–currently $75,900), and joint filers would start paying 35% at $225,000 of income (currently $416,700).

The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal. But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.

The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17. (No actual figure was given.)

At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions. The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.

The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected. Anyone with enough money to be subject to the estate tax, has probably paid lawyers and accountants enough for planning to avoid paying a single dollar of it.

The plan would also limit the maximum tax rate for pass-through business entities like partnerships and limited liability companies (LLC’s) to 25%, which might allow high-income business owners to take their gains through the entity, rather than as personal (1040) income and avoid the highest personal tax brackets.

Finally, the tax plan would lower America’s maximum corporate (C-Corporation) tax rate from the current 35% to 20%. To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.

What are the implications of this bare-bones proposal? The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%. That, plus the elimination of the estate tax, in addition to the lowering of the corporate tax (potentially leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors. But the mysterious “surcharge” on wealthier taxpayers might taketh away what the rest of the plan giveth.

But many Americans with S corporations, LLCs or partnership entities (known as pass-through entities because their income is reported on the owners’ personal returns and therefore no company level tax is paid) would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40% currently. (No big surprise: The Trump organization is a pass-through entity.)

A huge unknown is which itemized deductions would be eliminated in return for the higher standard deduction. Would the plan eliminate the deduction for state and local property and income taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate? Note that on average, only about 35% of Americans itemize their deductions on Schedule A, most of them higher income taxpayers.

Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim state and local tax deductions. Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300. Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now. Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5 percent.

Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt. One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years. According to the Committee for a Responsible Federal Budget analysis, Republican economists have identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.

Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.

CA - 2017-9-30 - Tax Reform Proposal_2

These cost estimates have huge political implications for whether a tax bill will ever be passed. Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.

That means compromise. To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut (gee…thanks?). Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.

Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes. The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy. Would you bet on that sort of compromise?

We shall see, and I’ll keep you posted on tax developments. For now, put away that post card–you’re probably going to need an envelope and more postage.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:
https://www.yahoo.com/finance/news/trump-overpromising-tax-cuts-205013012.html
https://www.aei.org/publication/the-big-six-tax-reform-framework-can-you-dynamically-score-a-question-mark/
https://www.washingtonpost.com/blogs/plum-line/wp/2017/09/27/trumps-new-tax-plan-shows-how-unserious-republicans-are-about-governing/?tid=sm_tw&utm_term=.d37e0bcf718d
https://www.yahoo.com/finance/news/hidden-tax-hikes-trumps-tax-cut-plan-202041809.html
https://www.yahoo.com/finance/news/republicans-700-million-problem-could-173027048.html
https://www.yahoo.com/finance/news/trumps-tax-plan-just-got-180000645.html
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

 

Rollover Rules

One of the oddest things about tax law is the fact that often the rules and regulations are decided by the many court cases that are brought by taxpayers who didn’t follow the rulebook. This happened once again in a recent tax court case, where the Tax Court decided that people can only do one IRA rollover in any one-year period, no matter how many other IRA accounts they happen to have. Never mind that the decision directly contradicted the IRS’s own guidance in its Publication 590 and a number of private-letter rulings issued by the IRS.

Since the so-called Bobrow decision (which may be appealed), a common way to move money from one IRA account to another now has to be monitored closely. The ruling affects situations where an IRA owner takes a distribution from an IRA and then rolls those same funds over to another IRA within 60 days. So long as the same amount of money is put back into an IRA account within that time period, no taxes have to be paid on the distribution of funds (and no 10% additional penalty, if the IRA owner is under age 59 1/2). But now you WILL have to pay taxes–and the penalty, if applicable–if you try to do this again with the same or other IRAs during the same 365-day period.

Fortunately, this rule doesn’t apply to direct transfers, which is the way most professionals prefer to move money between IRA accounts. A direct transfer is exactly what it sounds like: the trustee of one IRA moves the money directly from that account into the hands of a trustee for another IRA account; that is, the money flows directly from one account to the other without the taxpayer ever touching it or putting it into his or her own checking account. Under current rules, even with the Bobrow decision, these kinds of transfers can be done all day long, all year long.

It has always been good advice to use only direct transfers to move IRA funds from one IRA to another. Now it’s even more so.

Incidentally, this once-per-year IRA rollover rule doesn’t apply to rollovers from an IRA to a Roth IRA (commonly known as a Roth IRA conversion). But most advisors prefer to handle those on a trustee-to-trustee basis anyway, to avoid confusion and potential problems with the 60-day rule. Mistakes on transfers can be costly from a tax standpoint, and the way things stand, they can’t be fixed after the fact–unless you decide to take the case to court and hope to reverse the current rule of law, which is far more costly still.

If you’d like to know more about rollover rules or if you want to discuss other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Source:
http://www.investmentnews.com/article/20140413/REG/304139996/irs-only-one-ira-rollover-per-year

2014 Year-end Tax Planning Tips

Year-end planning will be more challenging than normal this year. Unless Congress acts, a number of popular deductions and credits expired at the end of 2013 and won’t be available for 2014. Deductions not available this year include, for example, the election to deduct state and local sales taxes instead of state and local income taxes, the above-the-line deductions for tuition and educator expenses, generous bonus depreciation and expensing allowances for business property, and qualified charitable distributions that allow taxpayers over age 70½ to make tax-free transfers from their IRAs directly to charities.

Of course, Congress could revive some or all the favorable tax rules that have expired as they have done in the past. However, which actions Congress will take remains to be seen and may well depend on the outcome of the elections.

Before we get to specific suggestions, here are two important considerations to keep in mind.

  1. Remember that effective tax planning requires considering both this year and next year—at least. Without a multi-year outlook, you can’t be sure maneuvers intended to save taxes on your 2014 return won’t backfire and cost additional money in the future.
  2. Be on the alert for the Alternative Minimum Tax (AMT) in all of your planning, because what may be a great move for regular tax purposes may create or increase an AMT problem. There’s a good chance you’ll be hit with AMT if you deduct a significant amount of state and local taxes, claim multiple dependents, exercised incentive stock options, or recognized a large capital gain this year.

Here are a few tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.

Year-end Moves for Your Business

Employ Your Child. If you are self-employed, don’t miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children under age 18 are exempt from social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them contribute to an IRA. The compounded growth in an IRA started at a young age can be a significant jump start to the child’s retirement savings.

Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child’s age and work skills. Second, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid eligibility.

Check Your Partnership and S Corporation Stock Basis. If you own an interest in a partnership or S corporation, your ability to deduct any losses it passes through is limited to your basis. Although any unused loss can be carried forward indefinitely, the time value of money diminishes the usefulness of these suspended deductions. Thus, if you expect the partnership or S corporation to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end.

Avoid the Hobby Loss Rules. A lot of businesses that are just starting out or have hit a bump in the road may wind up showing a loss for the year. The last thing the business owner wants in this situation is for the IRS to come knocking on the door arguing the business’s losses aren’t deductible because the activity is just a hobby for the owner. Surprisingly, the IRS has been fairly successful recently in making this argument when it takes taxpayers to court. Thus, if your business is expecting a loss this year, we should talk before year-end to make sure we do everything possible to maximize the tax benefit of the loss and minimize its economic impact.

Managing Your Adjusted Gross Income (AGI)

Many tax deductions and credits are subject to AGI-based phase-out, which means only taxpayers with AGI below certain levels benefit. [AGI is the amount at the bottom of page 1 of your Form 1040—basically your gross income less certain adjustments (i.e., deductions), but before itemized deductions and the deduction for personal exemptions.] Unfortunately, however, the applicable AGI amounts differ depending on the particular deduction or credit. The following table shows a few of the more common deductions and credits and the applicable AGI phase-out ranges for 2014:

 

Deduction or Credit

Adjusted Gross Income Phase-out Range
 

Joint Return

Single/Head of Household (HOH) Married Filing Separate
American Opportunity Tax Credit $160,000–$180,000 $80,000–$90,000 No credit
Child Tax Credit Begins at $110,000 Begins at $75,000 Begins at $55,000
Itemized Deduction and Personal Exemption Reduction Begins at $305,050 Begins at $254,200 Single, $279,650 HOH Begins at $152,525
Lifetime Learning Credit $108,000–$128,000 $54,000–$64,000 No credit
Passive Rental Loss ($25,000) Exception $100,000–$150,000 $100,000–$150,000 No exception unless spouses live apart
Student Loan Interest Deduction $130,000–$160,000 $65,000–$80,000 No deduction

Managing your AGI can also help you avoid (or reduce the impact of) the 3.8% net investment income tax that potentially applies if your AGI exceeds $250,000 for joint returns, $200,000 for unmarried taxpayers.

Managing your AGI can be somewhat difficult, since it is not affected by many deductions you can control, such as deductions for charitable contributions and real estate and state income taxes. However, you can effectively reduce your AGI by increasing “above-the-line” deductions, such as those for IRA or self-employed retirement plan contributions. For sales of property, consider an installment sale that shifts part of the gain to later years when the installment payments are received or use a like-kind exchange that defers the gain until the exchanged property is sold. If you own a cash-basis business, delay billings so payments aren’t received until 2015 or accelerate paying of certain expenses, such as office supplies and repairs and maintenance, to 2014. Of course, before deferring income, you must assess the risk of doing so. If you’re considering a gift to a person in a lower capital gains bracket or charity (see below), giving appreciated securities avoids recognition of the capital gains and thereby lowers AGI.

See also It May Pay to Wait until the End of the Year to Take Your IRA Required Minimum Distributions below for a possible extension of a tax provision that expired in 2013.

Charitable Giving

You might want to consider two charitable giving strategies that can help boost your 2014 charitable contributions deduction. First, donations charged to a credit card are deductible in the year charged, not when payment is made on the card. Thus, charging donations to your credit card before year-end enables you to increase your 2014 charitable donations deduction even if you’re temporarily short on cash. As mentioned above, donating appreciated securities gets you a charitable contribution deduction at fair market value without having to recognize the capital gain income.

Another charitable giving approach you might want to consider is the donor-advised fund. These funds essentially allow you to obtain an immediate tax deduction for setting aside funds that will be used for future charitable donations. With these arrangements, which are available through a number of major mutual fund companies, custodians, universities and community foundations, you contribute money or securities to an account established in your name. You then choose among investment options and, on your own timetable, recommend grants to charities of your choice. The minimum for establishing a donor-advised fund is often $10,000 or more, but these funds can make sense if you want to obtain a tax deduction now but take your time in determining or making payments to the recipient charity or charities. These funds can also be a way to establish a family philanthropic legacy without incurring the administrative costs and headaches of establishing a private foundation.

Year-end Investment Moves

Harvest Capital Losses. There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 maximum ($1,500 married filing separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers—your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date. However, never let the tax “tail” wag the investment “dog”; the sale must make investment sense first, tax sense second (always keep in mind long term investment objectives over short-term tax objectives).

Consider a Bond Swap. Bond swaps can be an effective means of generating capital losses. With a bond swap, you start with a bond or bond fund that has decreased in value, which might be due to an increase in interest rates or a lowering of the issuer’s creditworthiness. You sell the bond or fund shares and immediately reinvest in a similar (but not substantially identical) bond or bond fund. The end result is that you recognize a taxable loss and still hold a bond or shares in a bond fund that pays you similar or more interest than before.

Secure a Deduction for Nearly Worthless Securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules capital loss and wash sale rules previously discussed).

Consider a Roth IRA Conversion. If your highest tax bracket is lower than normal this year, consider a Roth IRA conversion of some of your traditional IRA funds. You may also have some “room” in your current tax bracket that might be able to absorb a small Roth IRA conversion without pushing you into a higher tax bracket. Roth conversions affect AGI, so it’s best done with professional help to understand all the ramifications of the conversion.

Year-end Moves for Seniors Age 701/2 Plus

Take Your Required Retirement Distributions. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age beginning with the year they reach age 701/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. If you turned age 701/2 in 2014, you can delay your 2014 required distribution to 2015 if you choose. But, waiting until 2015 will result in two distributions in 2015—the amount required for 2014 plus the amount required for 2015. While deferring income is normally a sound tax strategy, here it results in bunching income into 2015. Thus, think twice before delaying your 2014 distribution to 2015—bunching income into 2015 might throw you into a higher tax bracket or bring you above the modified AGI level that will trigger the 3.8% net investment income tax. However, it could be beneficial to take both distributions in 2015 if you expect to be in a substantially lower bracket in 2015. For example, you may wish to delay the 2014 required distribution until 2015 if you plan to retire late this year or early next year, have significant nonrecurring income this year, or expect a business loss next year.

It May Pay to Wait until the End of the Year to Take Your Required Minimum Distributions. If you plan on making additional charitable contributions this year and you have not yet received your 2014 required distribution from your IRA, you might want to wait until the very end of the year to do both. It is possible that the Congress will bring back the popular Qualified Charitable Distributions (QCDs) that expired at the end of 2013. If so, IRA owners and beneficiaries who have reached age 70½ will be able to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. QCDs are federal-income-tax-free to you and they can qualify as part of your required distribution, but you get no itemized charitable write-off on your Form 1040. That’s okay because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to itemize your deductions or worry about restrictions that can reduce or delay itemized charitable write-offs. However, to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Once you receive the cash, the distribution is not a QCD and won’t qualify for this tax break.

Ideas for the Office

Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

Take Advantage of Flexible Spending Accounts (FSAs). If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2015 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts—you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

If you currently have a healthcare FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you’ll lose the remaining balance. It’s not that hard to drum some things up: new glasses or contacts, dental work you’ve been putting off, or prescriptions that can be filled early.

Adjust Your Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2014, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholding) equal at least 90% of your 2014 liability or, if smaller, 100% of your 2013 liability (110% if your 2013 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

Don’t Overlook Estate Planning

For 2014, the unified federal gift and estate tax exemption is a historically generous $5.34 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. Also, you may need to make some changes for reasons that have nothing to do with taxes.

Conclusion

Through careful planning, it’s possible your 2014 tax liability can still be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction. The ideas discussed in this article are a good way to get you started with year-end planning, but they’re no substitute for personalized professional assistance. Please don’t hesitate to call us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a tax or financial planning meeting by calling (734) 447-5305 or assist you in any other way that we can. You can always visit our web site at http://www.ydfs.com

2013 Year-End Tax Planning Tips

As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2013 return and in future years.

For most individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the fiscal cliff legislation, passed early this year, increased the maximum rate for higher-income individuals to 39.6% (up from 35%). This change affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, and $425,000 for heads of households. In addition, the new 0.9% Medicare tax and 3.8% Net Investment Income Tax (NIIT) potentially kick in when modified adjusted gross income (or earned income in the case of the Medicare tax) goes over $200,000 for unmarried, $250,000 for married joint-filing couples, which can result in a higher-than-advertised federal tax rate for 2013.

Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. This article presents several tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.

Ideas for Maximizing Non-business Deductions

One way to reduce your 2013 tax liability is to look for additional deductions. Here’s a list of suggestions to get you started:

Make Charitable Gifts of Appreciated Stock. If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual or exchange traded funds because there are no transaction fees involved.)

However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available. Also, if you sell the stock at a loss, you can’t immediately buy it back as this will trigger the wash sale rules. This means your loss won’t be deductible, but instead will be added to the basis in the new shares. You must wait more than 30 days to buy back shares sold at a loss to avoid the wash sale rules.

Don’t Lose a Charitable Deduction for Lack of Paperwork. Charitable contributions are only deductible if you have proper documentation. For cash contributions of less than $250, this means you must have either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain, by the time your tax return is filed, a charity-provided statement that shows the amount of the donation and lists any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically states that you received no goods or services from the charity.

Maximize the Benefit of the Standard Deduction. For 2013, the standard deduction is $12,200 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,100. Currently, it looks like these amounts will be about the same for 2014. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years.

For instance, you might consider moving charitable donations you normally would make in early 2014 to the end of 2013. If you’re temporarily short on cash, charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2014. But, watch out for the AMT, as these taxes are not deductible for AMT purposes.

Manage Your Adjusted Gross Income (AGI). Many tax breaks are only available to taxpayers with AGI below certain levels. Some common AGI-based tax breaks include the child tax credit (phase-out begins at $110,000 for married couples and $75,000 for heads-of-households), the $25,000 rental real estate passive loss allowance (phase-out range of $100,000–$150,000 for most taxpayers), and the exclusion of social security benefits ($32,000 threshold for married filers; $25,000 for other filers). In addition, for 2013 taxpayers with AGI over $300,000 for married filers, $250,000 for singles, and $275,000 for heads-of-households begin losing part of their personal exemptions and itemized deductions. Accordingly, strategies that lower your income or increase certain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits.

Making the Most of Year-end Securities Transactions

For most individuals, the 2013 federal tax rates on long-term capital gains from sales of investments held over a year are the same as last year: either 0% or 15%. However, the maximum rate for higher-income individuals is now 20% (up from 15% last year). This change affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads-of-households, and $225,000 for married individuals who file separate returns. Higher-income individuals can also get hit by the new 3.8% NIIT on net investment income, which can result in a maximum 23.8% federal income tax rate on 2013 long-term gains.

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

But be smart about this and don’t let the tax “tail” wag the investment “dog”; you don’t want hold the investment long term just to gain tax benefits at the cost of a possible loss of the accumulated gain.

Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a tax-smart idea. The resulting capital losses will offset capital gains from other sales this year, including high-taxed short-term gains from securities owned for one year or less. For 2013, the maximum rate on short-term gains is 39.6%, and the 3.8% NIIT may apply too, which can result in an effective rate of up to 43.4%. However, you don’t need to worry about paying a high rate on short-term gains that can be sheltered with capital losses (you will pay 0% on gains that can be sheltered).

If capital losses for this year exceed capital gains, you will have a net capital loss for 2013. You can use that net capital loss to shelter up to $3,000 of this year’s high-taxed ordinary income ($1,500 if you’re married and file separately). Any excess net capital loss is carried forward to next year.

Selling enough loser securities to create a bigger net capital loss that exceeds what you can use this year might also make sense. You can carry forward the excess capital loss to 2014 and beyond and use it to shelter both short-term gains and long-term gains recognized in those years.

Identify the Securities You Sell. When selling stock or mutual fund shares, the general rule is that the shares you acquired first are the ones you sell first. However, if you choose, you can specifically identify the shares you’re selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it’s long-term or short-term.

Secure a Deduction for Nearly Worthless Securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules for capital losses and the wash sale rules restricting the recognition of loss if the security is repurchased within 30 days before or after the sale).

Ideas for Seniors Age 701/2 Plus

Make Charitable Donations from Your IRA. IRA owners and beneficiaries who have reached age 701/2 are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called Qualified Charitable Distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That’s okay because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too. Contact us if you want to hear about them.

Be careful—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So, this could be your last chance.

Take Your Required Retirement Distributions. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 701/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. There’s good news for 2013 though—QCDs discussed above count as payouts for purposes of the required distribution rules. This means, you can donate all or part of your 2013 required distribution amount (up to the $100,000 limit on QCDs) and convert taxable required distributions into tax-free QCDs.

Also, if you turned age 701/2 in 2013, you can delay your 2013 required distribution to 2014, if you choose. However, waiting until 2014 will result in two distributions in 2014—the amount required for 2013 plus the amount required for 2014. While deferring income is normally a sound tax strategy, here it results in bunching income into 2014. Thus, think twice before delaying your 2013 distribution to 2014—bunching income into 2014 might throw you into a higher tax bracket or have a detrimental impact on your other tax deductions in 2014.

Ideas for the Office

Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

Take Advantage of Flexible Spending Accounts (FSAs). If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2014 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts—you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

Married couples who both have access to FSAs will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than what’s known as the FICA wage limit (which is $113,700 for this year and will likely be somewhat higher next year) and the other spouse’s will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. The reason is that the 6.2% social security tax levy for 2014 is set to stop at the FICA wage limit (and doesn’t apply at all to money put into an FSA). Thus, for example, if one spouse earns $120,000 and the other $40,000 and they want to collectively set aside $5,000 in their FSAs, they can save $310 (6.2% of $5,000) by having the full amount taken from the lower-paid spouse’s salary versus having 100% taken from the other one’s wages. Of course, either way, the couple will also save approximately $1,400 in income and Medicare taxes because of the FSAs.

If you currently have a healthcare FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you’ll lose the remaining balance. It’s not that hard to drum some things up: new glasses or contacts, dental work you’ve been putting off, or prescriptions that can be filled early.

Adjust Your Federal Income Tax Withholding. As stated at the beginning of this article, higher-income individuals will likely see their taxes go up this year. This makes it more important than ever to do the calculations to see where you stand before the end of the year. If it looks like you are going to owe income taxes for 2013, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholdings) equal at least 90% of your 2013 liability or, if smaller, 100% of your 2012 liability (110% if your 2012 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

Watch Out for the Alternative Minimum Tax

Recent legislation slightly reduced the odds that you’ll owe the alternative minimum tax (AMT). Even so, it’s still critical to evaluate all tax planning strategies in light of the AMT rules before actually making any moves. Because the AMT rules are complicated, you may want our assistance.

Don’t Overlook Estate Planning

For 2013, the unified federal gift and estate tax exemption is a historically 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. Also, you may need to make some changes for reasons that have nothing to do with taxes.

Ideas for Your Business

Take Advantage of Tax Breaks for Purchasing Equipment, Software, and Certain Real Property. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property or to make certain improvements to real property, you might consider doing so before year-end to capitalize on the following generous, but temporary tax breaks:

  • Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. (However, limits apply to the amount that can be deducted for most vehicles.) For tax years beginning in 2013, the maximum Section 179 deduction is $500,000. For tax years beginning in 2014, however, the maximum deduction is scheduled to drop to $25,000.
  • Section 179 Deduction for Real Estate. Real property costs are generally ineligible for the Section 179 deduction privilege. However, an exception applies to tax years beginning in 2013. Under the exception, your business can immediately deduct up to $250,000 of qualified costs for restaurant buildings and improvements to interiors of retail and leased nonresidential buildings. The $250,000 Section 179 allowance for these real estate expenditures is part of the overall $500,000 allowance. This temporary real estate break will not be available for tax years beginning after 2013 unless Congress extends it.

Note: Watch out if your business is already expected to have a tax loss for the year (or be close) before considering any Section 179 deduction, as you cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.

  • 50% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 50% bonus depreciation break will expire at year-end unless Congress extends it.

Note:First-year bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business’s 2013 tax year. You can then carry back a 2013 NOL to 2011 and 2012 and collect a refund of taxes paid in those years. Please contact us for details on the interaction between asset additions and NOLs.

Evaluate Inventory for Damaged or Obsolete Items. Inventory is normally valued for tax purposes at cost or the lower of cost or market value. Regardless of which of these methods is used, the end-of-the-year inventory should be reviewed to detect obsolete or damaged items. The carrying cost of any such items may be written down to their probable selling price (net of selling expenses). [This rule does not apply to businesses that use the Last in, First out (LIFO) method because LIFO does not distinguish between goods that have been written down and those that have not].

To claim a deduction for a write-down of obsolete inventory, you are not required to scrap the item. However, in a period ending not later than 30 days after the inventory date, the item must be actually offered for sale at the price to which the inventory is reduced.

Employ Your Child. If you are self-employed, don’t miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, have a great start on retirement savings since the compounded growth of the funds can be significant.

Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child’s age and work skills. Second, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid eligibility.

Conclusion

Through careful planning, it’s possible your 2013 tax liability can still be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction. The ideas discussed in this article are a good way to get you started with year-end planning, but they’re no substitute for personalized professional assistance. Please don’t hesitate to contact us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a planning meeting or assist you in any other way that we can. You can find us at http://ydfs.com

Highlights & Summary of the Tax Relief Act of 2010

I promised to keep you updated on the tax bill that was before congress which essentially extends the Bush era tax cuts for two years. Here are the highlights and full summary with more details to come in the next couple of weeks:

On Thursday December 16, 2010, Congress passed the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010. President Obama just signed the bill this afternoon Friday December 17, 2010.  This legislation, negotiated by the White House and select members of the House and Senate, provides for a short-term extension of Bush era tax cuts made in 2001.  It also addresses the Alternative Minimum Tax (AMT) and Estate, Gift and Generation-skipping Transfer taxes.

The following summary will provide you with key information and highlights from the bill with help from the Financial Planning Association. If you have any additional questions, please do not hesitate to contact me at (734) 447-5305 or at hf@ydfs.com. I hope that you find this summary useful for your personal and business affairs.

HIGHLIGHTS

Two-year extension of all current tax rates through 2012

  • Rates remain 10, 25, 28, 33, and 35 percent
  • 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
  • 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012

  • Reunification of estate and gift taxes
  • 35% top rate and $5 million exemption for estate, gift and GST
  • Alternatively, taxpayer may choose modified carryover basis for 2010
  • Unused exemption may be transferred to spouse
  • Exemption amount indexed for inflation in 2012

AMT Patch for 2010 and 2011

  • Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly).  It also allows the nonrefundable personal credits against the AMT.

Extension of “tax extenders” for 2010 and 2011, including:

  • Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
  • Above-the-line deduction for qualified tuition and related expenses
  • Expanded Coverdell Accounts and definition of education expenses
  • American Opportunity Tax Credit for tuition expenses of up to $2,500
  • Deduction of state and local general sales taxes
  • 30-percent credit for energy-efficiency improvements to the home
  • Exclusion of qualified small business capital gains

Temporary Employee Payroll Tax Cut

  • Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.

FULL SUMMARY

Reductions in Individual Income Tax Rates through 2012

  • Income brackets remain 10, 25, 28, 33, and 35 percent
  • Capital gains and dividend rates remain at 0 or 15 percent
  • Repeal of the Personal Exemption Phase-out (PEP)
  • Repeal of the itemized deduction limitation (Pease limitation)
  • Marriage penalty relief
  • Expanded dependent care credit
  • Child Tax Credit
  • Earned income tax credit

Education Incentives Extended Through 2012

  • Expanded Coverdell accounts and definition of education expenses
  • Expanded exclusion for employer-provided educational assistance of up to $5,250
  • Expanded student loan interest deduction
  • Exclusion from income of amounts received under certain scholarship programs
  • American Opportunity Tax Credit of up to $2,500 for tuition expenses

Extension of Certain Expiring Provision for Individuals through 2011

  • Above-the-line deduction for qualified tuition and related expenses
  • Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes.  Donors may treat donations made in January 2001 as if made in 2010.
  • 30-percent credit for energy-efficiency improvements to the home
  • Deduction of state and local general sales taxes
  • Parity for employer-provided mass transit benefits
  • Contributions of capital gain real property for conservation purposes
  • Deductibility of mortgage insurance premiums for qualified residence
  • Estate tax look-through of certain Regulated Investment Company (RIC) stock held by nonresidents for decedents dying before January 1, 2012
  • Above-the-line deduction for certain expenses of elementary and secondary school teachers

Alternative Minimum Tax (AMT) Relief

  • The legislation increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).  It also allows the nonrefundable personal credits against the AMT.

Temporary Estate Tax Relief and Modification of Gift and Generation-skipping Transfer Taxes

  • Higher exemption, lower rate. The legislation sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
  • Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption.  The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
  • Reunification of estate and gift taxes. Prior to the 2001 tax cuts, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
  • As noted above. the look-through of RIC stock held by non-resident decedents is extended through 2011

Temporary Extension of Investment Incentives

  • Extension of bonus depreciation for taxable years 2011 and 2012
  • Small Business Expensing: increase in the maximum amount and phase-out threshold under section 179. Sets the maximum amount and phase-out threshold for taxable years 2012 at $125,000 and $500,000 respectively, indexed for inflation.  (Previously-passed legislation raised the 2010 and 2011 max amount and phase-out at $500,000 and $2,000,000 respectively.)

Extension of Certain Expiring Provisions for Businesses through 2011

  • Enhanced charitable deduction for corporate contributions of computer equipment for educational purposes
  • Enhanced charitable deduction for contributions of food inventory
  • Enhanced charitable deduction for contributions of book inventories to public schools
  • Special rule for S corporations making charitable contributions of property
  • 15-year straight-line cost recovery for qualified leasehold improvements
  • Employer wage credit for activated military reservists
  • Tax benefits for certain real estate developments
  • Extension of expensing of environmental remediation costs
  • Treatment of interest-related dividends and short term capital gain dividends of Regulated Investment Companies (RICs)
  • Work opportunity tax credit (WOTC)
  • 100% Exclusion of qualified small business capital gains held for more than 5 years
  • Research credit
  • Qualified Zone Academy bonds

Extension of Unemployment Insurance

  • The unemployment insurance proposal provides a one-year re-authorization of federal UI benefits.

Temporary Employee Payroll Tax Cut

  • The legislation creates a payroll/self-employment tax holiday during 2011 of two percentage points. The employer’s share of the payroll tax remains unchanged.  This means employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.  The social security trust fund is made whole by transfers from the general fund.

Please check out my January-February 2010 Money Magazine Portfolio Makeover-Can I retire Early? http://bit.ly/5aGwIO

Have a small business?  Don’t miss out on these business tax deductions http://bit.ly/a49I1K

6 Ways To Gift Money to Family http://bit.ly/aDG90W

Follow me on Twitter at http://twitter.com/TheMoneyGeek for relevant personal finance advice and tips on great deals.

Read our blog: http://themoneygeek.com

YDream Financial Services, Inc. is providing this information as a service to its subscribers. While this information deals with tax and legal issues, it does not constitute tax or legal advice and cannot be relied upon as such for avoidance of penalties in matters before the IRS. If you have specific questions related to this information, you are encouraged to consult us, a tax professional or an attorney who can investigate the particular circumstances of your situation.

Sources: U.S. Senate Committee on Finance; U.S. Congress Joint Committee on Taxation

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner (CFP®), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP® and the Financial Planning Association(of which Sam is a member) and is provided by YDream Financial Services, Inc.

Update on Extension of Bush Era Tax Cuts

I promised to update you on progress in changes to income tax legislation that affects all of us in 2011.  As you may recall, the Bush-era tax cuts were scheduled to expire after 2010, which essentially amounts to a tax increase if Congress didn’t act to extend them.

After the stock market close yesterday, President Obama, in a televised speech, announced a compromise with Republicans in Congress which, if passed into law, would amount to a much bigger fiscal package in 2011 than virtually anyone expected. In addition to a two-year extension of the Bush-era tax cuts, he added a one-year reduction in the payroll tax and a huge investment tax credit.  While the ultimate bill that gets passed may be different than detailed below, I wanted to get you some details right away.

I would expect that the proposal will be signed and turned into law in the next couple of weeks.  Among the highlights of the proposed bill are:

— A two year extension of tax cuts for all income levels.   The 15% rate on capital gains and dividend income would also be extended as part of the deal. The president also proposes a 35% estate tax rate, with a $5 million exemption.  It appears that the President traded tax extensions for the “rich” for unemployment benefit extensions and the below payroll tax deduction.

— Payroll tax deduction. This would reduce the 6.2% Social Security payroll tax applied to employee wages by 2 percentage points.

— Renewal of emergency unemployment benefits through the end of 2011. This would be more than the three-month extension most analysts had expected. It puts around $60 billion in the hands of unemployed citizens, which is much more than the consensus expected.

— ARRA tax cut extensions. Several small tax cuts in the American Recovery and Reinvestment Act, passed in 2009, will be extended, including an expanded earned income tax credit, and various education-related tax breaks.

— Full expensing of business investments in 2011.  This would allow the expensing of business investment in 2011, similar to the policy that the president proposed in September.  It will allow companies to deduct the entire cost of capital expenditures on their taxes rather than depreciate them.

Congress and the White House will need to work out the details, but I expect this tax bill to pass. It’s not likely that this lame duck Congress would leave for the holidays until this is sent to the President for his signature.  It’s rare that I pity the Internal Revenue Service, but with tax forms to revamp and guidance and rules to formulate, they will be behind the curve on getting this out.  I would expect some delays of 2010 income tax refunds for returns filed early, but none that are terribly lengthy.

The stock markets have been expecting this, and some of it already factored into current levels, but I still expect market reaction to be positive and further bolster any Santa Claus rally we may have coming.  This is essentially another huge fiscal stimulus plan, perhaps larger than any of us have been expecting or realize.

I’ve been saying all along that Congress will “hem and haw”, posture for their constituents, and pretend to be against tax cuts and for fiscal responsibility.  But ultimately the economy is too fragile to be saddled with a tax increase this year or next. Even I am a bit surprised by the depth and breadth of the bill, but I could not see Congress not doing something before year-end. Failing to pass something would have amounted to a quantitative easing neutralizer (i.e., rendering quantitative easing worthless).

I will keep my eyes and ears peeled open for more details about this bill and its ultimate passage and will let you know what ultimately gets passed. If you, a family member, friend or colleague would like more information about this or just need to talk about a financial situation, please feel free to forward a link to this post to them and suggest they get in touch with me (http://www.ydfs.com).  I will be sure to take good care of them.  As always, I’m available for any questions you may have and welcome your comments.

Have a great holiday season and look for my year-end and 2011 Economic and Market Outlook letter later this month.

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