Tax Moves You Must Make Before the End of the Year (Accounting Today)

Taxes Going Up- Obama Victory means you need to act now

November 12, 2012

By Margaret Collins

(Bloomberg) The race is on for wealthy Americans to save on taxes before January 1.

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President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
“If you have to put a movie title on what’s going to happen from now until the end of the year it would be: ‘The Fast and the Furious,’” said Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”

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Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Saccacio said. Now is the time to start running the calculations, he said.
“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”
The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent yesterday to 1,394.53, its lowest level since August.
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds—after capital gains taxes—of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at New York-based JPMorgan Chase & Co.’s private bank unit. The tax rate on dividends may jump to as much as 43.4 percent next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Johnson said. “We don’t know what the compromises are going to be,” she said.
Fiscal Cliff
Democrats maintained control of the U.S. Senate in the election results last week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Obama’s determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.
Lawmakers may have to address the so-called fiscal cliff of tax increases and spending cuts that would start in January if Congress doesn’t act in a lame-duck session set to begin this month.
House Speaker John Boehner told reporters last week that Republicans are “willing to accept new revenue under the right conditions.” He cited ideas Democrats already have rejected: restructuring entitlement programs and relying on revenue generated by economic growth from a tax-code overhaul.
Some tax-rate increases scheduled to take effect next year don’t depend on fiscal-cliff negotiations, said Di Re of Ernst & Young. The 2010 health-care law, which Republican presidential candidate Mitt Romney had vowed to repeal, applies a 3.8 percent surtax on unearned income such as realized capital gains, dividends and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll TaxThe law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners.
Wealthy taxpayers with large carryover losses remaining from 2008 and 2009 may not want to rush to sell securities before year-end, Saccacio said. They may have enough losses to offset future gains even with higher tax rates, he said.
When capital losses exceed gains, the extra generally can be deducted on individuals’ tax returns and used to reduce other income, such as wages, up to an annual limit of $3,000, according to the IRS. If the total loss is more than the cap, the unused portion may be carried over to following years.
The Obama victory also may lead some millionaires who were hesitating to take advantage of current rules on gifts to fund trusts they’ve set up, said Linda Beerman, manager of the wealth strategies group at Atlantic Trust. The firm is the private wealth-management unit of Atlanta-based Invesco Ltd.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million—or $10.24 million for married couples—free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009.
“People are really rushing here at the end to take advantage of it,” Beerman said.
Wealthy families should consider setting up trusts under current rules that can benefit grandchildren or future generations and set them up in states such as Delaware, which let the entities exist in perpetuity, said Johnson of JPMorgan. The Obama administration has proposed curtailing the benefits of such trusts as well as limiting discounts taken when transferring illiquid assets in its most recent budget proposal.
Decisions about making charitable contributions this year are more complicated, Beerman said. While deductions for donations probably will be more valuable next year if rates are higher, limits on itemized deductions for those with higher incomes are scheduled to be reinstated next year, she said.
“They need to start crunching some numbers,” PwC’s Saccacio said of wealthy taxpayers. “This year, year-end tax planning takes on a heightened significance given the fact that we’re going to have this jump in rates next year unless we have an 11th-hour adjustment.”

IDENTIY FRAUD AND YOUR TAX RETURN ( from irs.gov, creditcard.com)

Taxpayer Guide to Identity Theft





What is identity theft?
Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes.

How do you know if your tax records have been affected?
Usually, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Generally, the identity thief will use a stolen SSN to file a forged tax return and attempt to get a fraudulent refund early in the filing season.

You may be unaware that this has happened until you file your return later in the filing season and discover that two returns have been filed using the same SSN.

Be alert to possible identity theft if you receive an IRS notice or letter that states that:

More than one tax return for you was filed,
You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return, or
IRS records indicate you received wages from an employer unknown to you.
What to do if your tax records were affected by identity theft?
If you receive a notice from IRS, respond immediately. If you believe someone may have used your SSN fraudulently, please notify IRS immediately by responding to the name and number printed on the notice or letter. You will need to fill out the IRS Identity Theft Affidavit, Form 14039.

For victims of identity theft who have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free, at 1-800-908-4490.

How can you protect your tax records?
If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, etc., contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.

How can you minimize the chance of becoming a victim?
Don’t carry your Social Security card or any document(s) with your SSN on it.


Don’t give a business your SSN just because they ask. Give it only when required.


Protect your financial information.


Check your credit report every 12 months.


Secure personal information in your home.


Protect your personal computers by using firewalls, anti-spam/virus software, update security patches, and change passwords for Internet accounts.


Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with


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ID Theft Tool Kit
Are you a victim of identity theft?
If you receive a notice from the IRS, please call the number on that notice.

If not, contact the IRS at
800-908-4490


Fill out the IRS Identity Theft Affidavit, Form 14039

(Please write legibly and follow the directions on the back of the form that relate to your specific circumstances.)


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Credit Bureaus
Equifax
www.equifax.com
1-800-525-6285

Experian
www.experian.com
1-888-397-3742

TransUnion
www.transunion.com
1-800-680-7289


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Other Resources

Visit the Federal Trade Commission or call the FTC toll-free identity theft helpline:
1-877-ID-THEFT
(1-877-438-4338)

Visit the Internet Crime Complaint Center (IC3) to learn more about their internet crime prevention tips


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Report Suspicious Emails
Report suspicious online or emailed phishing scams to:
phishing@irs.gov

For phishing scams by phone, fax or mail, call:
1-800-366-4484


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For More Information
IRS.gov/identitytheft
IRS.gov/phishing


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Tax ID theft skyrockets; thieves feasting on a refund bonanza

They steal your identity and go on a spree with Uncle Sam's debit card

By Susan Ladika
Published: March 26, 2012



If it can happen to a slain police officer, it can happen to anyone.

Taxpayers are having hundreds of millions -- or perhaps billions -- of dollars in tax refunds swiped by crooks who file fraudulent tax returns using the victim's Social Security number, then pocket the refunds. The victim has no idea the fraud has occurred until they try to file their own return and it bounces back.

"Nobody's immune from this crime," says Sal Augeri, a police detective in Tampa, Fla. The Tampa Bay area, along with South Florida, appear to be ground zero for the crime. But Florida is by no means alone. Just in the last week of January, the Internal Revenue Service (IRS), working with various other agencies, cracked down on suspected fraudsters in 23 states from New York to California.

The situation is so bad, Augeri testified March 20 before the U.S. Senate Subcommittee on Fiscal Responsibility and Economic Growth about what he's observed. During the hearing it was revealed one of the tax fraud victims was Tampa police officer David Curtis, who was gunned down in 2010. His widow is still struggling to get the tax refund.

"It's a growing problem that undermines confidence in the tax system," says Mark Steber, chief tax officer at Jackson Hewitt Tax Service and chairman of the IRS Electronic Tax Administration Advisory Committee.

Problem runs into billions
While it's impossible to get a handle on exactly how much money is swiped, in the Tampa Bay area alone Augeri estimates it totals up to $1 billion and could be as high as $10 billion nationwide.



HOW THE SCHEME WORKS

While the methods employed can vary, in Tampa the scheme generally works like this:
• Fraudsters find willing accomplices who have access to Social Security numbers at places such as doctor's offices and insurance companies or from credit card applications. The accomplices may steal 100 names and Social Security numbers, and get paid $1,000.
• The thieves use that information to file a fake tax return in your name -- usually beating you to the punch and filing early in the tax season.
• They take the refund -- which may come in the form of a check or prepaid debit card -- and bring it to a business they're in cahoots with.
•The business cashes the check or cashes out the debit card, gives the fraudster a cut, then keeps the rest, laundering it through the business.


At the IRS, the agency caught 262,000 fraudulent returns in 2011, seeking $1.45 billion in refunds, an agency spokesman says. That's an 81 percent increase since 2010, when the agency identified 49,000 suspicious returns, seeking $247 million in refunds. But if the fraudulent return isn't caught and slips through the system, the burden will fall on you to prove your identity, and the problem can take months to resolve, the IRS representative admits. Ultimately, you'll receive your refund, with the federal government coughing up the cash.

No one can pinpoint precisely why the crime is booming, but Steber says, "identity theft goes hand in hand with tax fraud."

A Federal Trade Commission report says that of the 1.8 million complaints it received in 2011, 15 percent involved identity theft. Of those, almost one-quarter were related to tax or wage fraud.

Criminals also are drawn to it because it's less risky than many other types of crime, Augeri says. Rather than trying to sell a kilo of cocaine for a few thousand dollars, and running the risk of being shot by other bad guys, the crooks can sit in their living room and crank out returns, netting tens of thousands or hundreds of thousands of dollars. "It's more lucrative and the punishment isn't as bad."

The 'TurboTax' scheme
On the street, it's a scheme known as "TurboTax" and evidence of the fraud can be found when police show up at all kinds of cases, Augeri says. In one recent suicide, the dead teen was found with two prepaid tax refund debit cards in his pocket.

The problem started popping up in Tampa in the second half of 2010. Police would pull over vehicles and find ledgers filled with Social Security numbers and stacks of prepaid debit cards.



The U.S. Postal Service also started noticing stacks of IRS mailings going to certain addresses, and the names on the envelopes didn't correspond with the names of the residents, Augeri says. That led postal inspectors to confiscate stacks of refund checks and debit cards.

"Over the past few years, the IRS has seen a significant increase in refund fraud schemes in general and schemes involving identity theft in particular," said Steven T. Miller, deputy commissioner for services and enforcement for the agency, in written testimony to the Senate committee. "Fighting identity theft will be an ongoing battle for the IRS and one where we cannot afford to let up. The identity theft landscape is constantly changing, as identity thieves continue to create new ways of stealing personal information and using it for their gain."

Steps to prevent tax ID fraud
While there's no way to guarantee you won't fall victim to tax return fraud, you can take steps to try to prevent it.

Rather than joining the crush of millions of Americans filing at the last minute, Steber recommends submitting your tax return early. "You effectively lock out people from trying to file your (fraudulent) return."

If you try to e-file your return and it bounces back, you'll have to file a paper return, and the IRS spokesman recommends you immediately fill out an Identity Theft Affidavit and submit it to the agency so it flags your account.

The agency has begun issuing special identification numbers called Identity Protection PINs to taxpayers whose identities are known to have been stolen. That prevents others from using their identities. As of mid-March, the agency had issued more than 250,000 such IP Pins in the 2011 filing season, says Miller.

Don't let your SSN out
If you successfully file your return, it's crucial that you keep the information stored somewhere safe. Steber says he often stops at various tax preparers' offices while traveling, and he'll invariably finds taxpayers have tossed their completed returns in the dumpster. That's like handing fraudsters a treasure trove of personal information.

You also need make sure to keep your Social Security number, as well as those of family members, safe and secure. Often the IRS will give less scrutiny to the Social Security number of a deceased person or a child than to an adult filing a return, and it's not unusual for fraudsters to scour obituaries and birth announcements, trying to obtain information, Steber says. The IRS's Miller says that so far, 66,000 returns for the 2011 filing year have been stopped for review because they appear to come from recently deceased taxpayers who have no filing requirements

Steber cautions consumers to guard their Social Security numbers at all costs. "You should protect that information like you would a valuable piece of jewelry or other asset."


Read more: http://www.creditcards.com/credit-card-news/id-identity-theft-steal-tax-refunds-returns-1282.php#ixzz1qe6786Ie
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What to Do If You Get a Letter from the IRS (Forbes)

Forbes Magazine
Expert View
How To Stop The IRS Machine
Claudia A. Hill, 08.30.10, 12:00 PM ET


It's document matching time at the Internal Revenue Service. Millions of taxpayers are opening their mailboxes to find a boldly stated notice shouting "Summary of Proposed Changes" identifying an increase to their 2008 taxes, penalties, interest and a whooping Proposed Balance Due. These notices are often more than 10 pages long, and not until you've gotten to page five do you find out what the IRS alleges created the problem: discrepancies between the amounts reported to them by others and what you included in your return. This is the meat of the letter (known as a CP-2000 notice) and often where you will find what led to the notice "mis-match."

Do not reach for your check book in defeat. Do not immediately scream obscenities about your tax preparer. These letters are often wrong. They are directed at getting your attention. They are machine-generated, generally unseen or untouched by human eyes or hands until the taxpayer responds to the notice. Until a response is received and logged in by IRS personnel, the machine will control the process. Uninterrupted, this automation will lead the IRS to be legally entitled to collection of the balance being proposed. Here are a few examples illustrating the variety of issues on notices I've seen recently:

Shock and Awe Proposed Balance Due: $54,871; Actual Balance Due: Zero

The IRS computers concluded the taxpayer had an IRA distribution of $198,981, but showed a taxable IRA distribution of just $40,000 on the return. The real story is this: The taxpayer converted a pre-tax IRA worth $198,981 to a Roth IRA early in 2008, and he correctly reported this as an IRA distribution on his 2008 return. The stock market dropped dramatically toward the end of 2008. Not willing to pay taxes on an amount well in excess of the account value in early 2009, he properly "re-characterized" (returned to his traditional IRA before filing) all but $40,000 of the converted amount, reporting that amount as taxable on the return. He correctly disclosed this and included Form 8606 on his return. It was all explained, but the IRS machines had not checked for those entries.

Shock and Awe Proposed Balance Due: $524; Actual Balance Due: Zero

The taxpayer authorized $2,000 of her 2008 IRA distribution to be donated to her local church. Her tax return correctly indicated a $21,690 distribution with $19,691 taxable. As the IRS instructions dictated, the code "QCD" (for qualified charitable distribution) was indicated on the return. But the IRS' "automated underreporter" systems apparently did not notice the code.

Shock and Awe Proposed Balance Due: $609; Actual Balance Due: Zero

The Social Security Administration had issued an incorrect 1099-SSA for double the gross amount the taxpayer had received. The taxpayer had received a "corrected" statement (fortunately he kept it), but the IRS apparently had not received a similar document, or had not adjusted the records in their computers to reflect it.


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Shock and Awe Proposed Balance Due: $10,080; Actual Balance Due: $5,420

The taxpayer had overlooked a rather large qualified stock dividend. Although he agreed he should have included it in income, the IRS had computed taxes on the dividend at ordinary income rates, which top out at 35%; as a qualified dividend, the lower capital gains rate, which tops out at 15%, should have been used.

This taxpayer reached for his checkbook first and called his tax advisor (me) later. He paid the full amount, and when we saw the letter we filed an amended return to correct the tax computation. He will receive a $4,680 refund.

Shock and Awe Proposed Balance Due: $1,867; Actual Balance Due: $165

The IRS computers said the taxpayer had an unreported state tax refund and had taken a deduction for mortgage interest she wasn't entitled to. The taxpayer was able to provide Form 1098 for her primary residence loan showing the amount she had (accurately) claimed and her name, address and social security number. She was able to sustain her full deduction. She did, however, overlook the state tax refund, which was taxable and the reason she owed $165.

Here's the message: Don't panic when you open the IRS notice. Reach for your tax return and look to see if the income was included. If it wasn't, don't reach for your check book until you have computed the correct tax. Often the IRS includes an accuracy related penalty of 20% of the additional tax. If you believe your error was based on a reasonable position or cause, explain the situation and ask the penalty not be asserted. If your return was prepared by a professional, get the IRS letter to that professional as soon as possible.

Most important, respond as promptly as you can. The IRS expects a response within 30 days. If you don't send one, or don't call or fax to request additional time to gather documents for your response, the IRS "automated systems" (again, untouched by human hands) will proceed to the next steps legally required to be able to collect the proposed tax. You must respond to stop the machine!

Amazingly, far too many people fail to respond or simply write checks in defeat without determining whether the amount the IRS requested was correct. This sends the "false positive" message to IRS that its automated system is correctly assessing large amounts of tax on scofflaws who are failing to report their income. It can also create large tax assessments against people who don't owe the original tax, but later find themselves fighting IRS collection efforts and expending even more time and money asking for professional assistance. Don't ignore the notice!

Claudia Hill, E.A., M.B.A., is president of TaxMam, in Cupertino, Calif., and editor of the Journal of Tax Practice & Procedure published by CCH, a Wolters Kluwer company.

Looking for Work? Some Tax Deductions (irs.gov)

Six Tax Benefits for Job Seekers


Did you know that you may be able to deduct some of your job search expenses on your tax return?

Many taxpayers spend time during the summer months updating their résumé and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return. Here are six things the IRS wants you to know about deducting costs related to your job search.

To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.


You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.


You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.


If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.


You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.


You cannot deduct job search expenses if you are looking for a job for the first time.

For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

THE TAX CENTER TO ASSIST THE UNEMPLOYED

Your State Tax: Municipal Bond Interest (The Bond Buyer)

Dividends and Taxes (Morningstar)

Dividends and Taxes: Dos and Don'ts

DividendInvestor editor Josh Peters goes over the basics of dividend tax treatment and highlights some potential pitfalls for MLP investors.

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. It's that time of year again, that investors are worrying about their taxes, and a question on a lot of people's mind is how dividends are taxed.

Here to discuss it with me is the editor of Morningstar DividendInvestor, Josh Peters. Josh, thanks for joining me.

Josh Peters: Happy to be here.

Glaser: Could you talk a little bit about the different types of dividends and income that investors could see and how those are going to be taxed?

Peters: Sure. When you're looking at common equities, they really fall into three categories. The first is the largest category by far, which is common stocks of traditional, what we call C corporations.

These corporations themselves pay federal income taxes. If they pay a dividend, because that corporation is paying income tax before it even has the opportunity to send a dividend to you, they're what are known as qualified dividends. And for federal income purposes, the tax rate is capped at 15%.

Then there is another group of very popular higher-yielding stocks, perhaps not so popular after the crash, but real estate investment trusts, or REITs. These are not eligible for the qualified dividend treatment because REITs themselves don't pay federal income taxes.

They're exempt from income taxes as long as they pay out at least 90% of their taxable income to their shareholders, so it's the shareholders who wind up being taxed on that income. Those dividends you have to pay tax at your ordinary tax rate, whatever your marginal tax rate is for the particular year.

And then there's another category called master limited partnerships. And these technically are not corporations at all and what you get are actually not even called dividends, they're just called generically cash distributions. In this case, like REITs, master limited partnerships don't pay federal income taxes.

Instead, what they do is they divvy up their taxable income to shareholders, actually technically partners, via a schedule K-1 that you receive in the mail, usually sometime in March. And it's those figures that you consolidate onto your tax return and that is the basis for what you might have to pay tax on, and if you owe tax, then it's paid at your marginal tax rate.

Glaser: What happens if you own these companies in an IRA or some other tax-advantaged account?

Peters: Well, with both the qualified dividend payers and the REITs, to own them in a tax-deferred account is advantageous because you're not obliged to pay tax on those earnings when you receive them. You have the opportunity to reinvest the whole thing and increase your income by owning more shares of a particular company, particular REITs, whatever the case may be, and you are only taxed when you make a withdrawal from the account.

Master limited partnerships, though, it's a little different story. Even though REITs are allowed to pay dividends into tax-deferred accounts and they themselves are not paying federal income taxes, master limited partnerships are taxed in a very, very different way, a whole different part of the tax code. And the government doesn't like for those income allocations to be made to tax-exempt entities. And it isn't just IRAs, it's even things like charitable trusts, are really not able to receive that partnership income.

It's not technically illegal, but in a worst-case scenario, if you receive more than a certain amount of master limited partnership-allocated income in an IRA, your IRA would owe tax and have to file its own tax return. You might have to cut a check from your IRA to pay tax that you would've owed as a regular taxable shareholder of a master limited partnership. So it gets very messy. My recommendation is to just not do it.

Glaser: So even if your broker says that you can do it, definitely something to stay away from?

Peters: Anybody who says that you can do it or there's a good way to get away with it, I would check with a tax advisor first because the way that master limited partnerships work is that you may be allocated, in fact, taxable losses, have no taxable income even though you're receiving cash distributions in the first couple of years you own a partnership because there's all these big depreciation charges that are front-loaded and you get the benefit of those up-front.
But later on, as those depreciation deductions become less valuable, that taxable loss that you might be allocated is turning into taxable income. And then if you should sell, all of a sudden there's a big catch-up provision where all of the excess depreciation deductions that you might've had or losses that you might've been allocated any particular year, those are all trued up to what you actually got for selling and you could find yourself with a big one-time gain just from a purely tax book perspective. And that's not the kind of situation that you want to run into.

I'm not going to say it's illegal, I'm not even going to say, you know, don't do it ever, ever, ever, but you have to be very, very careful because the limit, $1,000 a year worth of non-qualifying income in an IRA, is low. Even a relatively modest investment, if it turns out to be successful, could bump up against that limit.

Glaser: OK, great. Josh, thanks so much for talking with me today.

Peters: Yeah. Sorry this is so complicated, but just keep in mind, if you remember that MLPs really don't belong in IRAs or 401(k) plans, Roth accounts, things like that, you might save yourself some big headaches down the road.

Tax Savings to Use Now ( from H R Block)

Tax Tips: 5 Things To Know This Tax Season


Life changes can mean tax savings. From the home-buyer credit to parenthood, to higher education and buying a new car, changes in the tax code affect the complexity of the 2010 tax filing season and could mean more money in taxpayers’ pockets.

Overall, the changes help taxpayers in five key areas:

Buying a home
Workers
Parenthood
Higher education
In the garage

Buying a home
More American homebuyers will get tax relief thanks to changes and expansions made to the homebuyer credit.

From seniors looking to downsize, to families wanting to move, to those shopping for their first home, this credit paves the way for more people to positively impact their taxes through the benefits of homeownership.

There are two major provisions of the homebuyer credit to keep in mind.

There is a tax credit worth up to $6,500 for existing homeowners in the market to move.
There is a new closing deadline for both first-time and repeat homeowners of April 30, 2010 – extended from Nov. 30, 2009. Also, a special provision gives taxpayers two extra months to close if they’ve entered into a contract by April 30, 2010.

Workers
Millions of taxpayers, depending upon other tax breaks they may qualify for, could find themselves with a tax surprise because of the Making Work Pay tax credit unless they adjusted their withholding last year, according to analysis by The Tax Institute.

Ninety-five percent of taxpayers automatically started taking home more money in their paychecks last year thanks to a change in the IRS withholding tables, triggered by the Making Work Pay credit. Taxpayers who should take special care in understanding the implications when filing a tax return include:

Married couples with two incomes
Individuals with multiple incomes
Retirees who have taxes withheld from a pension or social security benefits
Individuals who work but who can be claimed as a dependent on someone else’s tax return.

The credit, which taxpayers actually claim when filing their 2009 returns, could mean up to $400 for individuals and $800 for couples in 2009 and 2010. There is a phase out of the credit starting at modified adjusted gross income (MAGI) of $75,000 for single filers and for married filers at MAGI of $150,000. It’s completely phased out at MAGI of $95,000 for singles and $190,000 for married filers.

Parenthood
The recovery act expands the Child Tax Credit, allowing families to begin qualifying for the credit with every dollar earned over $3,000. For taxpayers, this change translates into a refundable credit of up to $1,000 for each qualifying child under 17 – even if the taxpayer has no tax liability.
The act also increases the Earned Income Credit for families with at least three or more children, where previously EIC benefits were capped at two children. The credit also would increase the beginning of the phase out for all married couples filing a joint return. That’s good news for married couples regardless of the number of children they have.

Higher education
Taxpayers getting a higher education or supporting a dependent in college should be aware of several tax credits and deductions. More taxpayers will be able to qualify for the American Opportunity Tax Credit, with a new, partially refundable $2,500 tax credit for college tuition paid in 2009. Nearly 4 million low-income students now will be able to qualify for the credit – because the credit is partially refundable.

Also, computer and technology costs qualify under the Section 529 Education Plans, which are tax-exempt college saving plans. Previously, eligible expenses included only tuition, room and board, books, supplies and equipment that were required for attendance at the school.

Whether you’re saving for education or paying school-related expenses now, help is out there. These tax savings are available to reduce your tax liability and help cover the out-of-pocket expenses for college.

In the garage
Taxpayers may have gotten a great deal on a new car in 2009 – especially if they took advantage of the cash for clunkers program – and they'll want to take advantage of a sales tax deduction on their taxes.

For those who purchased a new car, motorcycle, or even motor home may be able to deduct the state and local sales and excise taxes paid on the purchase of vehicles. The vehicles must have been purchased between Feb. 17 and Dec. 31, 2009.

Quick Tax Info: Codes in the Box in 1099 R (retirement withdrawal)

On my 1099-R, what do the codes mean?

1—Early distribution, no known exception (in most cases, under age 59 1⁄2 ).

2—Early distribution, exception applies (under age 59 1⁄2 ).

3—Disability.

4—Death.

5—Prohibited transaction.

6—Section 1035 exchange (a tax-free exchange of life insurance, annuity, or endowment contracts).

7—Normal distribution. Over 59 1/2 years old.

8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2009.

9—Cost of current life insurance protection (premiums paid by a trustee or custodian for current insurance protection, taxable to you currently).

A—May be eligible for 10-year tax option.

D—Excess contributions plus earnings/excess deferrals taxable in 2009.

E—Excess annual additions under section 415 and certain excess amounts under section 403(b) plans. Report on Form 1040/1040A on the line for taxable pension or annuity income. If the IRA/SEP/SIMPLE box is checked, you have received a traditional IRA, SEP, or SIMPLE distribution.

F—Charitable gift annuity.

G—Direct rollover to a qualified plan, a tax-sheltered annuity, a governmental 457(b) plan, or an IRA. May also include a transfer from a conduit IRA to a qualified plan.

J—Early distribution from a Roth IRA, no known exception (in most cases, under age 59 1⁄2 ). Report on Forms 1040 and 8606 and see Form 5329.

L—Loans treated as distributions.

N—Recharacterized - IRA contribution made for 2009 and recharacterized in 2009. Report on 2004 Form 1040/1040A and Form 8606, if applicable.

P—Excess contributions plus earnings/excess deferrals taxable in 2009.

Q—Qualified distribution from a Roth IRA. You are age 59 1⁄2 or over and meet the 5-year holding period for a Roth IRA.

R—Recharacterized IRA contribution made for 2009 and recharacterized in 2009.

S—Early distribution from a SIMPLE IRA in first 2 years, no known exception (under age 59 1⁄2 ). May be subject to an additional 25% tax.

T—Roth IRA distribution, exception applies. (You may not meet the 5-year holding period.) You are either age 59 1⁄2 or over or an exception (code 3 or 4) applies.

Tax Changes for 2010 - Tax Free 1035 Exchange (Smartmoney.com)

The Tax Guy by Bill Bischoff
Published September 30, 2009

Swapping Annuities Tax-Free

Barely a year since the Dow Jones Industrial Average marked its largest single-day drop in history, the memory of watching their savings evaporate still makes many folks shiver. It’s no surprise that interest in annuities is on the rise. These investments tout guaranteed income in retirement and, in the case of variable annuities, even promise market gains without the risk.

Tax-wise, the advantage of investing in annuities is you don’t have to report any of the accumulated income on your tax return until you actually receive a payout.

But when you surrender an annuity contract (or turn it in for cash), the general rule says you must report the entire difference between the cash received and your basis in the contract as ordinary income – at a federal tax rate as high as 35%. (Your basis equals your investment in the contract minus any basis included in earlier payouts. If you haven’t received any payouts, your basis equals your entire investment.) To add insult to injury, the income from surrendering an annuity before age 59½ will generally get socked with a 10% penalty tax, too. This unfavorable treatment will apply even to a variable annuity with accumulated stock and mutual fund gains that would have been taxed at low capital gains rates in a taxable brokerage firm account.

One way to get a tax-free deal is to exchange your existing annuity contract for another one. Why would you want to do that? Maybe you’re unhappy with the expense charges built into your current annuity and have found one with lower costs. Or you changed your mind about the type of annuity that best fits your needs. (Whatever your reasons, keep in mind that taxes are just one factor to consider with annuity swaps. For example, a tax-free exchange may not make financial sense if your current annuity still has surrender charges built in. So it’s best to run this decision by an independent financial advisor.)

Here’s what you need to know about swapping annuities without taking a tax hit.

The Basics
Section 1035 of the Internal Revenue Code allows you to exchange one annuity contract for another without triggering any taxable income. Note, however, that there must be an actual exchange of contracts for this tax-free treatment to apply, meaning that no cash should be passing through your hands. If you simply cash out the old contract and use the money to buy the new contract, it’s treated as a taxable surrender of the old contract.

Also, the old annuity contract and the new one must both be payable to the same person.

Even when you successfully arrange for a tax-free exchange, the insurance company that issued the old contract may send you (and the IRS) a Form 1099-R that reports in Box 1 the total amount paid out from the old contract. However, if the old company knows you made a tax-free exchange, Box 7 of the Form 1099-R should show Distribution Code 6 (indicating you made a tax-free Section 1035 swap). If the old and new contracts are both from the same company, there's no requirement to issue a Form 1099-R.

Exchanges Qualifying for Tax-Free Treatment
You can make a tax-free exchange of an annuity contract issued by one company for one issued by a different company.

You can also make a tax-free exchange of one type of annuity contract for another -- say a garden variety fixed annuity for a variable annuity or vice versa.

You can even make a tax-free partial exchange of one annuity contract for another contract by arranging for a direct transfer of a portion of the balance from the old contract to purchase the new contract. However, if you only exchange part of the old contract and cash out the rest, the cash-out part of the deal will be a taxable transaction. If you’re interested in making a partial tax-free exchange, please don’t pull the trigger before consulting with your tax adviser. (Tell him or her to check out IRS Revenue Procedure 2008-24 for the government's guidelines on how to accomplish a partial tax-free exchange.)

Starting in 2010, tax-free treatment will also be allowed for an exchange of an annuity contract for a qualifying long-term-care contract. That’s something to keep in mind for next year.

You’re also allowed to make a tax-free exchange of a life insurance contract for an annuity contract, but it’s a one-way street. You can’t make a tax-free swap of an annuity contract for a life-insurance contract. That would be treated as a taxable surrender of the annuity contract.

Use These Tax Breaks Before the End of the Year (Kiplingers)

Take Advantage of These Stimulus Breaks Soon
Posted Thu Sep 3, 11:05 am ET
Provided by:


The economic-stimulus plan that President Obama signed into law February 17 includes several tax breaks that will expire in the next few months. Some of these breaks are for big purchases, which may require a few months' worth of planning. And people who lose their job in 2010 won't be able to take advantage of some stimulus-related benefits. Here's a reminder about a few key provisions that are scheduled to end soon -- including a major credit that disappears before the end of the year.

First-time home-buyer credit. The stimulus plan provides a tax credit of up to $8,000 for purchasing a first home between January 1 and November 30, 2009. Keep in mind that this break does not last through the end of the year -- you must close on the home no later than November 30.

You don't have to pay back the credit, as long as you live in your home for at least three years. You're considered a first-time home buyer if you (and your spouse, if you're married) haven't owned a home in the past three years. The credit begins to phase out if your modified adjusted gross income is more than $75,000 (or $150,000 if married filing jointly), and it disappears if your income exceeds $95,000 if you're single (or $170,000 if married filing jointly).

You don't need to wait until next April to get the money. After you close on the house, you can get the $8,000 refund quickly if you claim the credit for a 2009 purchase on an amended 2008 tax return (file Form 1040X.

Tax break for new-car purchases. If you're thinking about buying a new car, it may pay to do so before the end of the year. The stimulus plan lets you write off state and local sales taxes and excise taxes paid on up to $49,500 of the cost of a new car you buy between February 17 and December 31, 2009. If you live in a state that doesn't have a sales tax, you still get a tax break if your state imposes a flat fee on the purchase of vehicles or a fee based on the price you pay. The tax break applies to new (not used) cars, light trucks, motor homes and motorcycles. To qualify, your modified adjusted gross income must be less than $135,000 if you're single, or $260,000 if married filing jointly (the deduction starts to phase out if you earn more than $125,000 if single, or $250,000 if married filing jointly).

Two breaks for the unemployed will expire
COBRA subsidy. When you lose your job, you can generally remain on your employer's health-insurance coverage for up to 18 months, as long as you pay the full premium yourself. The stimulus provides a subsidy that covers 65% of the COBRA premiums for up to nine months after you lose your job. But this break applies only if you lose your job by December 31, 2009. You won't get the break on premiums if you lose your job in 2010.

Breaks for unemployment benefits. The stimulus also provides an extra $25 in weekly unemployment checks until December 31, 2009, and lets you exclude up to $2,400 in unemployment benefits from your taxes in 2009. But neither of these provisions has been extended yet to apply to 2010.

Some of these breaks could be extended into 2010, but it seems unlikely at the moment. "Extension of these items has not yet been included in any major tax bills," says Mark Luscombe, principal analyst with CCH, a tax-publishing firm. "As talk continues of the recession ending this quarter, it appears more likely that at least the new tax breaks on the list may be allowed to expire, as was just done with the 'cash for clunkers' program. If, however, as the fall progresses, concern about the health of the economy continues, some of these provisions could be considered for extension."

Tax Breaks for Saving Energy

TAX INCENTIVES ASSISTANCE PROJECT

WWW.ENERGYTAXINCENTIVES.ORG


Consumer Incentives
Home Shell: Insulation, Windows, Sealing
Homeowners can get credits for energy improvements to their homes, such as windows, insulation, and envelope and duct sealing.

Home Heating & Cooling Equipment
Homeowners can get credits for installing efficient air conditioners and heat pumps; gas or oil furnaces and furnace fans; and gas, oil, or electric heat pump water heaters in new or existing homes.

Passenger Vehicles
Credits are available to buyers of hybrid gasoline-electric, diesel, battery-electric, alternative fuel, and fuel cell vehicles.

On-Site Renewables
Credits are available for qualified solar water heating and photovoltaic systems, small wind and geothermal heat pump systems.

Fuel Cells and Microturbines
Credits are available to homeowners and businesses who install qualifying systems. Fuel cells are an advanced technology to generate electricity at the site of use, but they are expensive for commercial buildings and are not widely available for homes.

Obama Kids Tax Shelter 529 College Plan (WSJ)

FAMILY FINANCES APRIL 18, 2009

Obamas Pump Up College Savings
Parents Make Big Upfront '529' Investment for Their Daughters' Tuition
Article

By JANE J. KIM
Malia and Sasha Obama's college education appears to be taken care of in a massive contribution that the president and first lady made to a "529" college-savings plan in 2007.

But like everyone else, they have likely suffered big losses.

According to their 2008 tax returns, the Obamas took advantage of a unique feature of 529 plans that allows account owners to front-load five years' worth of contributions, $240,000 in total for the two girls. They did so without triggering gift taxes -- now levied on any gift exceeding $13,000 a year. Form 709, the federal gift-tax form, shows that Barack and Michelle Obama made equal contributions of $120,000 each, or $60,000 to each of the two children in 2007.

Senate disclosure forms released last year show that the contributions were made to Illinois's adviser-sold Bright Directions College Savings Program, in two age-based growth portfolios, which are designed to become more conservative the closer the child is to attending college. Assuming that the Obamas haven't changed their investments, one of those portfolios has lost roughly 35% in the past year through March, while the other one is down about 27%.


The filings offer a peek into how the Obamas are planning to pay for college for their daughters, Malia, now 10, and Sasha, seven. College tuition has soared in recent years, with average tuition and fees at private four-year colleges hitting $25,143 for the 2008-2009 academic year, according to the College Board. Meanwhile, average in-state tuition and fees at four-year public universities jumped to $6,585, up 6.4% from the previous year.

In recent years, tax-advantaged 529 plans have become a popular college-savings vehicle for many parents. In a 529 plan, savers put after-tax dollars into an account that typically offers a wide range of mutual funds.

Distributions and earnings are tax-free as long as they are used for higher education. Investors can invest in any plan, although they may get an additional state tax break if they invest in their own state's plan. The Illinois 529 plan, for example, offers a state-tax deduction for contributions.

A spokesman for the White House confirms that a payment was made in 2007 and that the payment, for reporting purposes, will be prorated over five years.

By front-loading five years' worth of contributions, the Obamas also are cutting possible future taxes on their estate since they have gotten $240,000 -- and any future appreciation on that amount -- out of their estate, says Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, or AICPA.

To be sure, not every family has the means to sock away as much money into 529 plans. The five-year gift election is typically used by wealthy individuals or grandparents who want to help pay for college while reducing their taxable estates, says Joe Hurley, founder of Savingforcollege.com. "Most parents don't have that kind of money to put in all at once."

While the Obamas' investments are down with the bear market, there is a silver lining for investors in these plans. Investors who are underwater can liquidate the plan without penalties or taxes. Losses can be claimed as a miscellaneous itemized deduction, which can help reduce investors' taxes to the extent those deductions exceed 2% of their adjusted gross income, Mr. Hurley notes. Those who are in the alternative minimum tax, however, are out of luck since miscellaneous itemized deductions aren't usable under the AMT.

Write to Jane J. Kim at jane.kim@wsj.com

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

Don't Overlook These Last Minute Tax Tips (Turbotax & Kiplingers)

The 11 Most Overlooked Tax Deductions
Don't overpay taxes by overlooking tax deductions. See the most common errors taxpayers make on their tax returns. TurboTax helps you find tax deductions you may have overlooked. If you miss claiming a tax break, you are overpaying the IRS.


Get your share of the $1 trillion
Every year, the IRS dutifully reports the most common blunders taxpayers make on their returns. And every year, at or near the top of the list, is forgetting to enter a Social Security number or making a mistake when entering the nine digits that identify us to IRS computers.

Before you bemoan such foolishness, ask yourself a simple question: Is that the most common error, or just the most easily noticed goof?

Who knows how many people forgot—or never knew about—a deduction that could save them money? That’s not the kind of thing over which government bean counters lose a lot of sleep.

No doubt about it: The opportunity for mistakes is almost unlimited. The most recent numbers show that about 46 million of us itemized deductions on our 1040s—claiming nearly 1 trillion dollars’ worth of deductions. That’s right: $1,000,000,000,000! Another 85 million taxpayers claimed more than half a trillion dollars’ worth of standard deductions. Some of those who took the easy way out probably shortchanged themselves. (If you turned 65 in 2008, remember that you deserve a bigger standard deduction than younger folks.)

Years ago, the head of the IRS told Kiplinger’s Personal Finance magazine that he figured millions of taxpayers overpaid their taxes every year by overlooking just one of the money-savers listed below. Without further ado, here are our 11 most overlooked tax deductions. Claim them if you deserve them, and keep more money in your pocket.

1. State sales taxes
This write-off makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes, or state and local sales taxes. For most citizens of income-tax states, the income tax deduction usually is a better deal. IRS has tables for residents of states with sales taxes showing how much they can deduct. But the tables aren’t the last word.

If you purchased a vehicle, boat or airplane, you get to add the state sales tax you paid to the amount shown in IRS tables for your state, to the extent the sales tax rate you paid doesn’t exceed the state’s general sales tax rate. The same goes for home building materials you purchased. These items are easy to overlook. The IRS even has a calculator on its Web site to help you figure out the deduction, which varies by your state and income level.

2. Reinvested dividends
This isn’t really a deduction, but it is a subtraction that can save you a lot of money. This is the break former IRS Commissioner Fred Goldberg told Kiplinger’s that lots of taxpayers miss. If, like most investors, you have mutual fund dividends automatically invested in extra shares, remember that each reinvestment increases your “tax basis” in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares.

Forgetting to include the reinvested dividends in your basis—which you subtract from the proceeds of sale to pinpoint your gain—means overpaying your tax. TurboTax Premier and Home & Business tax preparation solutions include a very cool tool—Cost Basis Lookup—that will figure your basis for you and make sure you get credit for every dime of reinvested dividends.

3. Out-of-pocket charitable contributions
It’s hard to overlook the big charitable gifts you made during the year by check or payroll deduction. But the little things add up, too, and you can write off out-of-pocket costs you incur while doing good deeds. Ingredients for casseroles you regularly prepare for a nonprofit organization’s soup kitchen, for example, or the cost of stamps you buy for your school’s fundraiser count as a charitable contribution. If you drove your car for charity in 2008, remember to deduct 14 cents per mile(if driving to aid victims of the floods and tornadoes in the Midwest, you can deduct 35 cents per mile for driving during the first half of the year, and 41 cents per mile for driving during the last six months).

4. Student loan interest paid by Mom and Dad
Until recently, if parents paid back a student loan incurred by their children, no one got a tax break. To get a deduction, the law held that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. If Mom and Dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by Mom and Dad.

5. Moving expense to take first job
Here’s an interesting dichotomy: Job-hunting expenses incurred while looking for your first job are not deductible, but moving expenses to get to that first job are. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 19 cents per mile for moves during the first six months of 2008, and 27 cents per mile for job move-related driving after June 30 (plus parking fees and tolls) for driving your own vehicle.

6. Military reservists' travel expenses
If you are a member of the National Guard or military reserve, you may earn a deduction for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles and be away from home overnight. If you qualify, you can deduct the cost of lodging, half the cost of your meals, 50.5 cents per mile for qualifying driving during the first six months of the year and 58.5 cents per mile for qualifying driving after June 30, plus any parking or toll fees for driving your own car. You get this deduction whether or not you itemize.

7. Child care credit
A credit is so much better than a deduction—it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.

But it’s easy to overlook the child care credit if you pay your child care bills thorough a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses. The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.

Now, however, up to $6,000 can qualify for the credit, but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would cut your tax bill by at least $200.

8. Estate tax on income in respect of a decedent
This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax. Basically, you get an income tax deduction for the amount of estate tax paid on the IRA balance.

Let’s say you inherited a $100,000 IRA and the fact that the $100,000 was included in your benefactor’s estate added $45,000 to the estate tax bill. As you withdraw the money from the IRA and pay tax on it, you also get to deduct a proportional amount of the estate tax paid. If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A.

9.State tax you paid last spring
Did you owe tax when you filed your 2007 state tax return in the spring of 2008? Then remember to include that amount with your state tax deduction on your 2008 return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

10. Refinancing points
When you buy a house, you get to deduct points paid to obtain your mortgage in one fell swoop. When you refinance a mortgage, however, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Doesn't seem like much, but why throw it away?

Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense, which is pro-rated over the life of the new loan.

11. Jury pay paid to employer
Some employers continue to pay employees’ full salary while they are doing their civic duty, but ask that they turn over their jury fees to the company coffers The only problem is that the IRS demands that you report those fees as taxable income. You’ve always had a right to deduct the amount so you weren’t taxed on money that simply passed through your hands.


Updated for tax year 2008