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BlackStar Investments

Tax and Financial Services

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10 Things Prepaid Card Issuers Won't Tell You

Posted on February 22, 2012 at 12:13 AM Comments comments (448)

Big tax mines that could blow up your return

Posted on January 27, 2012 at 11:05 PM Comments comments (138)
Missing these tax changes could bring some IRS attention, hefty penalties
Congress’s relative gridlock last year means there aren’t a slew of complex tax changes to deal with when you file this year — but there are some doozies that may trip up taxpayer

New cost-basis reporting rules may trip up investors when they go to report their capital gains and losses, come tax time.
For instance, thanks to a law passed in 2008, investors now face new rules and a new form for reporting cost basis for stocks sold in 2011. And now that brokers are reporting your cost basis to the IRS, too, it’s all the more crucial that you get it right.
Also, taxpayers with financial assets overseas need to make sure they’re on the right side of new rules, and a new form, for reporting those assets. The penalty for failing to file the new Form 8938 starts at a flat $10,000 and rises to as much as $50,000, and that doesn’t include other potential penalties.
Payback time
Meanwhile, the tax breaks for homeowners who made energy efficient improvements shrank last year, and those rules are labyrinthine and easy to get wrong. Plus, homeowners who took part in the 2008 first-time home-buyer tax credit — for that year, that tax break was an interest-free loan, not a grant — face their second year of loan repayments.
And taxpayers who converted their individual retirement account (IRA) to a Roth IRA in 2010 and chose to spread the tax payment over 2011 and 2012 (that was an option thanks to a one-time tax break) must pay one-half of the income taxes owed on that conversion on their 2011 return.
“That conversion you did? Now the chickens are coming home to roost,” said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based tax publisher and unit of Wolters Kluwer.
“People seem to have fairly short memories, and something they did in 2010, they’ve forgotten about by 2011 and tend to assume it’s a dead issue,” he said.
While making an honest mistake doesn’t necessarily land you in hot water or steep penalties, why risk a letter or call from the IRS?
The payroll tax cut
One major tax issue going forward is the payroll tax cut and whether Congress will extend this tax break — a two-percentage-point reduction in the Social Security taxes paid by workers — beyond the two-month extension through February that lawmakers enacted in December. The payroll tax cut essentially replaces the Making Work Pay credit — that credit expired, and is no longer reflected on Line 63 of Form 1040.
While there’s no tax-return pitfall here to worry taxpayers, some workers are confused by their changing paycheck amounts. And since employers have until Jan. 31 to implement the two-month extension, workers may see additional paycheck adjustments.
“If I had to pick one thing that we’re hearing grousing about, it’s the payroll changes,” said Cynthia Jeanguenat, an enrolled agent in Virginia Beach, Va. “People want to know, ‘How come my check changed this week? I worked the exact same hours.’”
Be prepared for more changes as Congress revisits this tax break.
New rules to report foreign assets
You’ve heard about the IRS going after money held in offshore accounts? That’s related to taxpayers failing to file the Report of Foreign Bank and Financial Accounts, or FBAR.
But this year, some taxpayers need to steel themselves for a new, broader reporting requirement, thanks to the Foreign Account Tax Compliance Act, or FATCA, passed by Congress in 2010.
This new requirement is in addition to the fact that taxpayers with accounts overseas worth $10,000 or more generally are required to report those funds to the U.S. Treasury on the FBAR form.
Put simply, the new rules require that if you have overseas accounts worth more than $100,000 if you’re married filing jointly, or $50,000 if single, you must report those assets on the new Form 8938 and attach that to your tax return. And the new rules encompass more types of financial assets than the FBAR.
“This was actually passed to, in essence, catch a bigger potential group of taxpayers,” said Ryan Losi, a certified public accountant and partner in charge of the international practice at Piascik & Associates in Richmond, Va. “They want to expand the web of reporting.”
The failure-to-file penalty for this new form starts at $10,000 and can rise to as high as $50,000 for people who fail to come into compliance, Losi said.
The rules are complex and more detailed than described here, so find a tax professional with expertise in this area
Cost-basis confusion
Investors reporting their capital gains and losses face new reporting requirements this year. And your broker must also report your cost basis to the IRS.
The goal of the new rules is to make sure taxpayers pay their capital-gains taxes, and this way the IRS will be able to compare and contrast your claims to your broker’s.
The new rules phase in over three years, so brokers are required to report cost basis on only a limited number of stock-sale transactions for the 2011 tax year. As part of the changes, the IRS now requires that investors fill out a new form, Form 8949, and Schedule D has been revised.
And that new form is not easy to decipher.
Surprise tax hit on inherited assets
Speaking of capital gains, people who inherited assets from someone who died in 2010 may find themselves with a bigger-than-expected tax bill, Luscombe said.
In 2010, when reporting the cost basis of assets, estates could opt for the usual stepped-up basis; that is, the asset’s value at the time of death. (That date-of-death cost basis is then subtracted from the sale price to calculate a capital gain or loss.)
Or estates could opt out of the estate-tax rules and go with rules that used carryover basis — that is, put simply, the price the decedent paid for the asset. That means a much higher tax bill, potentially, than a date-of-death basis; if, say, the person purchased the asset decades earlier the cost likely was much lower.
Traditionally, if heirs sold the assets soon, Luscombe said, “they’d have limited gain because they have a basis for date-of-death value.
“But because of the way 2010 was handled, with people being able to elect to not be subject to the estate tax and therefore subject to carryover basis,” he said, “the heir could be subject to a very significant gain on the sale of the inherited asset.”
For 2010 deaths, executors soon will send out Form 8939 noting the basis, Luscombe said. Some taxpayers may be surprised how low that basis is — and how much capital-gains tax they owe.
Also, that cost-basis figure noted on Form 8939 might not be enough to satisfy the IRS if you get audited. Heirs “might want to go back to the executor and get any support the executor has for determining that basis so if they get audited they’ll have that to show the IRS,” Luscombe said.
Payments due
Remember that IRA-to-Roth conversion you did back in 2010? Taxpayers had the option then of spreading out their income-tax hit over 2011 and 2012. Time’s up, at least for the first half of that bill.
It’s a similar story for anyone who took a 2008 home-buyer tax credit, which was really an interest-free loan rather than a credit. Taxpayers had to start paying back that loan in 2010 (15 equal payments over 15 years).
This year, at least, those home buyers don’t have to fill out Form 5405 again, as long as you filled it out last year and your situation hasn’t changed. (Generally, that means you still own the home and it’s your main residence.) There’s a new line on Form 1040 to report your loan payment: Line 59b.
Energy efficient home improvements
Making your home more green with energy efficient windows and appliances used to pay off at tax time — as much as $1,500. But that tax credit shrank considerably in 2011.
In 2011, the maximum credit for eligible projects is $500 — and that’s essentially a lifetime total. 
If you tapped the credit in previous years, “you may not have anything left to take in 2011,” Jeanguenat, the enrolled agent, said. “I don’t think people generally are aware that this was a cumulative credit.”
Until 2016, there is still a separate tax credit in effect for bigger-ticket home-improvement projects, such as installing solar panels, wind turbines or geothermal heat pumps. Homeowners can reap up to 30% of their materials and installation costs back at tax time — and there’s no dollar limit on the credit.

How to Make Your 401(k) Plan Work Harder

Posted on January 14, 2012 at 10:19 PM Comments comments (142)
Write your post here.
Chances are you have a 401(k) plan at work. And the chances are you're not making nearly enough of it. A new year means a new leaf: This is as good a time as any to start turning that around.
If you're letting your 401(k) languish, a report released over the holiday season shows that you're not alone. According to the latest study by the Employee Benefits Research Institute, a think tank in Washington, most of us continue to neglect our 401(k) plan. The median account contains a balance of just $18,000, says EBRI.
Good luck with that.
Here's a five-step plan to fix your 401(k).
1 Take control.
Take a look at the full range of investment choices available to you. That should include, at a minimum, a handful of low-cost domestic and international stock and bond funds. If your plan doesn't even offer those you should talk to the people in charge at your employer and insist that they move to a better plan.
Many people are too intimidated, or busy, to choose their portfolio. If you're in that camp, your plan will have dumped your money into a default portfolio—such as a low-yielding but "stable" fund, or a target-date fund ostensibly designed for someone of your age.
There is nothing inherently wrong with these funds. But that doesn't mean you can rely on them, either.
These default options aren't designed for your best interests, but for the best interests of your plan provider. Instead of maximizing your likely returns, they are designed to minimize the provider's risk of a nasty lawsuit.
As a result, your money may well be sitting in a poorly designed portfolio that guarantees mediocre performance. Target-date funds, for example, are a great idea in theory. In practice, most are far too heavily weighted toward U.S. stocks, and they use a cookie-cutter approach to investing.
Consider the alternatives available to you.
You also should understand if your company makes matching contributions, and, if so, how much it will match. There's no good reason for missing out on a company match. It's also a good idea to find out if your plan allows such things as personal loans: This may offer you access to cheaper capital than a bank, although there are risks in borrowing from your plan.
2 Cut your costs.
Many 401(k) plan providers stock their plans with high-fee mutual funds. That's great for them, and bad for you. Most mutual funds are far too mediocre to justify hefty fees, which just soak up a lot of your investment returns. A fund that charges you an extra 1% a year may end up costing you most of the tax benefits of your plan.
There are managed investment funds out there that are worth the money, but few of them—if any—are likely to find their way into a 401(k) plan. If you're stuck with plain-vanilla funds, you are going to be better off going for the ones with the lowest costs. Nearly all the time your best options will be the low-cost index funds.
3 Lighten up on U.S. stocks.
Most people keep most of their stock-market investments in the U.S. It's safer, right? I mean, it's the home market so it's less risky than foreign stocks, yes?
That's what conventional wisdom says, but it's hooey. Investors sell themselves short by investing too much in the U.S.A. You're already overinvested here anyway—you have your life and career here.
And U.S. equities start 2012 looking relatively expensive. U.S. stocks today are somewhere between modestly and heavily overpriced when compared to such metrics as average earnings or the value of corporate assets, according to data from the Federal Reserve and data tracked by Yale University economics professor Robert Shiller.
The dividend yield on the Standard & Poor's 500-stock index, at just 2.1%, is very low by historical standards.
Predicting future stock-market returns is notoriously difficult. But based on current valuations, the U.S. stock market seems to offer a mediocre bet.
4 Look internationally.
Many 401(k) plans go light on international investment options. The real reason is simply the incompetence and complacency of plan sponsors.
But if your plan offers international options, take advantage. The turmoil of 2011 has left many overseas stock markets looking like a good value.
Western European markets fell nearly 30% from last year's peak. Japan's Nikkei 225 index is now lower than it was during the tsunami panic nearly a year ago. Emerging markets from Brazil to India, the investment hotshots of 2010, have dropped dramatically out of fashion again. Their stock markets crashed last year.
These offer some excellent buying opportunities.
Emerging markets account for about a third of the world economy, and their share is growing. Developed overseas markets, meaning Europe, Japan and Australasia, account for about two-fifths. They are on sale, and most people are underinvested there.
5 Review your bond funds.
As a general rule, your 401(k) and other tax shelters are where to hold the bond portion of your portfolio. That's because bonds are much more vulnerable to taxes than stocks.
Bonds generate most of their returns through coupons, and those are usually taxed at ordinary-income tax rates. By contrast, stock dividends and capital gains generally get taxed more lightly.
Right now is, admittedly, a risky time to invest in U.S. bonds. Yields on U.S. Treasurys have slumped to historic lows. Any pickup in the economy, and inflation, could send bond funds tumbling.
While Treasury bonds offer meager yields here, look at any corporate bond funds. That includes investment-grade bonds and more volatile high-yield bonds.Both offer somewhat better yields. Emerging-markets bonds offer particularly good opportunities, argues investment guru Rob Arnott, chairman of Research Affiliates. They pay higher interest rates than those in the U.S., while their governments' finances are actually in better shape.
It's crazy that most 401(k) plans offer such a limited range of investment options. Paradoxically you don't get full control of your money unless you leave your employer, when you can roll the plan over into a self-directed individual retirement account. But your 401(k) still represents a great investment asset, and this is a good time to get it into shape

What You Need to Know for Your 2011 Tax Filing and What’s New for 2012

Posted on January 11, 2012 at 11:44 PM Comments comments (164)
Tax season is here again! While the filing deadline might be a couple of months away, this month you will receive all required third-party reporting documents: W2s, 1099s for interest and dividends, 1099s for nonemployee compensation if you are an independent contractor, 1099-Bs from your broker reporting proceeds from the sale of stocks and bonds, 1098s from your mortgage holder, K-1s from partnerships, S Corps, estates, and trusts. Hopefully, you’ve set up a file to store all these documents to make data gathering for tax preparation a snap. If not, now’s the time to create one.

Note that the due date for filing this year is April 17. If a tax due date falls on a weekend or a holiday, the next business day becomes the due date. This year April 15 is a Sunday and Monday, April 16 is a federal holiday so the due date falls on Tuesday, April 17. If you are unable to file by the deadline, you may obtain an extension to Oct. 15. Bear in mind that the extension is for filing, not paying. All taxes must be paid by April 17 otherwise you may suffer penalties and interest.

If you pay estimated tax payments throughout the year, the due date for your next quarterly installment for prepayment of 2011 income taxes is Tuesday, Jan. 17. Estimated tax payments for 2012 will be due on April 17, June 15, Sept. 17 and Jan. 15, 2013.

Beginning in 2011, brokerage firms are required to report to the IRS not only proceeds from sales of stocks and mutual funds, but also the cost basis of the investments that are sold. The IRS has designed a new Form 8949 for reporting capital gains and losses. A summary of the information listed on this form is carried over Schedule D. A couple of new columns are added to Form 8949 reporting – one for adjustments to basis (in case your broker has an incorrect figure) and one for coding the transaction to identify the type of sale.

Business mileage rates for 2011 were changed mid-year, so when calculating your mileage for 2011 use the rate of 51 cents per mile for miles driven up to June 30, 2011 and 55 ½ cents per mile from July 1 to Dec. 31.

Mileage rates for 2012 are as follows: 55 ½ cents per mile for business, 23 cents per mile for moving and medical, and 14 cents per mile for charitable purposes.

The temporary payroll tax cut has been extended to Feb. 29; employees will enjoy a continued savings of 2% of wages withheld for Social Security – from 6.2% to 4.2%. The Social Security wage base for 2012 is $110,100 up from $106,800 in 2011. Once your wages exceed this amount, Social Security will not be withheld but Medicare will continue to be withheld.

The self-employment health insurance deduction no longer offsets the self-employment tax. In 2010 only, self-employed workers were able to reduce the amount subject to self-employment tax on Schedule SE by the amounts paid for health insurance premiums. You can still take the deduction on Form 1040 as an adjustment to income.

Foreign financial assets are reported on a new Form 8938. The foreign asset disclosure form is separate and different from the foreign bank account report. Taxpayers with foreign assets may need to file both documents.

The first-time home buyer’s credit is now only available to members of the military or Foreign Service. If you are repaying the first-time home buyer’s credit, you may not need to complete and attach Form 5405.

Also gone for 2011 is the Making Work Pay Credit. For the past few years we enjoyed $400 per year single and $800 married filing joint credit against our tax liabilities.

How to Save for Retirement on a Low Income

Posted on December 30, 2011 at 6:52 AM Comments comments (227)
You don’t need a large paycheck to begin building a nest egg
Saving for retirement is especially difficult for workers with small salaries. Many low-income workers don't have access to a retirement account at work and simply have less money to build a nest egg after paying their monthly bills. Here are some strategies to save for the future on a small wage:
Set up a direct deposit. Have a portion of each paycheck automatically deposited into a 401(k), IRA, savings, or investment account. "Payroll deduction is one of the easiest ways for a worker to actually save," says David John, a senior research fellow for the Heritage Foundation. Start with as little as 1 percent of your pay and as you receive raises, direct a portion of each one into a retirement or investment account.
Take advantage of tax breaks. Saving in a retirement account has the added bonus of reducing your current or future taxes. Traditional 401(k)s and IRAs give you a tax break in the year you make the contribution, but income tax is due upon withdrawal. If you expect your income to grow significantly in the future, it can be smart to contribute after-tax dollars to a Roth 401(k) or Roth IRA. Roth accounts allow you to pay tax on your nest egg now while you are in a low-tax bracket, then withdrawals, including earnings, will be tax-free in retirement.
Claim the saver's credit. There is a tax credit specifically for low-income workers who save for retirement. If you contribute to a retirement account such as an IRA or 401(k) and your modified adjusted gross income is less than $28,250 ($56,500 for couples) in 2011, you may be able to claim the saver's credit. This credit is worth up to $1,000 for individuals and $2,000 for couples and can be used to reduce the federal income tax you pay, but is not refundable.
Redirect your tax refund and tax break. If you don't need your tax refund for immediate expenses or debts, consider saving a portion of it for retirement. Workers are also currently receiving a temporary 2 percent tax break on their Social Security payroll taxes in 2011. For someone who earns $30,000 annually, the tax break is worth $600. Consider directing that tax savings into a retirement account.
Minimize investment costs. The expenses and fees associated with an investment are deducted from your returns. "An IRA charges a fee to open the IRA, it charges annual fees, it charges closing fees if you decide to change jobs, it charges a trade commission if you trade. If you get a fund of funds, like a target-date fund, you are being charged for a management fee and then the underlying mutual fund fees," says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research. Avoiding as many of these fees as possible and choosing funds with low expense ratios will allow your nest egg to grow faster.
Delay retirement. Longer life spans mean even more years of retirement that need to be financed. Workers without traditional pensions may not be able to retire at the same age their parents stopped working. "Postponing retirement is an extremely powerful tool for those who are able to do it," says Mark Iwry, deputy assistant secretary for retirement and health policy at the U.S. Department of the Treasury. "You've got more years of earning. You've got fewer years of consuming as a retiree." Working longer doesn't mean you will need to work indefinitely. "People are living longer, healthier lives and fewer of them are working in physically demanding jobs," says Barbara Butrica, senior research associate at the Urban Institute. "Working an additional year, we found, raises retirement income by 9 percent overall and by 16 percent for low-wage workers."
Learn about Social Security. Social Security payments are the biggest source of retirement income for low-wage workers. "Social Security benefits are much more important to people with low income than private savings probably ever will be," says Butrica. The age when you decide to start your benefit can make a big difference in how much your monthly payments will be for the rest of your life. "Think carefully about whether you want to start that Social Security benefit right away when you hit 62, or whether it's really more valuable to you to wait until age 70 if you can do so," says Iwry. Monthly payouts increase for each year you delay claiming up until age 70.
Seek a job with good retirement benefits. Finding a job that offers a traditional pension, a significant 401(k) match, or a profit-sharing plan can significantly improve your retirement security. But only about half of the workforce has access to retirement benefits at work, and low-income workers are the least likely to have them. "About four in every ten 25- to 29-year-olds who are working are working in jobs that don't offer retirement plans," says Margery Austin Turner, vice president for research at the Urban Institute. "Low-income workers aren't accumulating the assets they are going to need for a secure retirement." When an employer contributes to a retirement plan, you can build a significant nest egg faster.
Don't spend your savings early. Once you begin to build a nest egg, try not to spend any of it before retirement. "Many of the withdrawals from 401(k)s and IRAs were associated with job loss and disability and investment sorts of things, like home purchases," says Butrica. For these types of emergencies you can sometimes tap your IRA savings early without being hit with the typical 10 percent early withdrawal penalty. But early withdrawals also mean that you won't have that money and the valuable compound interest it could have generated in retirement. "I think we need to encourage people to avoid unnecessarily dipping into their savings before retirement," says Butrica. "Workers must consistently make large contributions to their accounts to accumulate significant savings. This is going to be very difficult for low-wage workers to do."

Yes, You Can Overcome Your Investing Fears

Posted on December 28, 2011 at 10:48 PM Comments comments (28)
Negative headlines, 500-point-plus swings in the Dow Jones Industrial Average and economic uncertainty continue to fuel investors' fears. While some of those fears may be justified, financial advisers say you can harm your financial future if you let your fear keep you on the investing sidelines.
Here are five big fears that haunt investors and what financial advisers say you can do to overcome them:
1. Indexes Zeroing Out
Financial adviser Kurt Rozman recently met with a client who was convinced that the Standard & Poor's 500-stock index was going to end up at "zero by year-end" and that he would "go broke" if he didn't sell out of the market immediately.
"He envisioned an extremely unrealistic scenario," says the Brookfield, Wis.-based adviser.
Mr. Rozman explained to the client that for the S&P 500 to go to zero, all of the 500 largest companies in America would need to "go bust" at the exact same time and that was very unlikely to happen.
When a client is convinced of a "doomsday" scenario, Brad Klontz, a financial psychologist in Kapaa, Hawaii, encourages him or her to take a few deep breaths and repeat silently a phrase such as "relax." The client can then evaluate the accuracy of his or her thinking and look for evidence to support or refute that position. "Just because a thought comes into your mind, it doesn't mean it's true," Mr. Klontz says.
He also encourages clients to put some time between their initial impulse to react and the actions they wish to take so emotions play less of a role in their investment decisions.
2. Short-Term Volatility
After losing $400 in three months, the 24-year-old son of one of Ben Sullivan's clients decided he wanted to "bail out on stocks." Some clients' young-adult children are hesitant to invest in their company's 401(k) because their co-workers' fear of the market's volatility has affected their perspective, says the certified financial planner based in Scarsdale, N.Y.
While 500-plus point swings can be difficult to stomach, swearing off stocks or not investing in a 401(k) can be a big mistake, says Mr. Sullivan.
"When you have a 20- to 40-year time horizon," he says, "waiting to invest is likely riskier than losing a small amount in the short term."
Mr. Sullivan says he encouraged the 24-year-old to hold on to his investment strategy and recognize that when he retires, the $400 loss will be "long forgotten."
3. Investing in the Unfamiliar
In some cases, the fear of investing in the unfamiliar can be useful since there are some financial products that are too complex to understand and that investors may be better off avoiding, says Jared Kizer, a St. Louis-based investment adviser.
However, when taken to the extreme, investors may lack the diversification needed to meet their long-term retirement goals, he says.
Choosing investments just because they're familiar can also create unintended risk, Mr. Kizer adds.
For a client who invested nearly all of his life savings in his employer's stock, Mr. Kizer demonstrated how he would have a better chance of meeting his retirement goals if he invested in a variety of assets. Mr. Kizer also shared stories of investors who had lost their retirement savings when their employers went bankrupt.
4. Missing the Market
James Miller continues to field calls from some clients asking if they should "get out of the market now and get back in when things look safer."
The Chapel Hill, N.C.-based certified financial planner tells them that timing the market isn't the answer. He reminds them that when things look "safer," the market will likely be at a much higher level and the clients will have lost out on a significant amount of the upside by that point.
5. Not Having Enough Money to Invest
When clients have too much debt and too little cash flow, they often feel that they don't have enough money to invest, says Constance Stone, a Chagrin Falls, Ohio-based certified financial planner.
"It's often because the client's spending is irrational," she says.
Ms. Stone recently helped a couple in their early 30s with $132,000 in credit-card and school-loan debt scrutinize their monthly spending and find ways to cut back. In the end, the couple realized that by cutting down on expenses, such as meals out, they'd have money to save toward retirement.
"You can start small," she says.

How to Dodge Last-Minute Tax Traps

Posted on December 25, 2011 at 3:37 PM Comments comments (124)
The holidays are here and everything important is done, right?
Well, maybe not everything. Some will find themselves racing next week to meet year-end tax deadlines to make charitable gifts, plan taxes on investments and make annual gifts to others.
If you are one of them, don't overlook important details. The Internal Revenue Service certainly won't. And remember the underlying principle behind whether a tax move counts for 2011: It can't be undone.
Here, then, are some last-minute tips.
Charitable donations. Gifts of cash via check must be mailed to qualified nonprofits by year-end, although the checks needn't be cashed this year. What matters is the 2011 postmark.
A spokesman for the U.S. Postal Service says post offices will be open on New Year's Eve, although many will close at noon; check local schedules.
If you really want to ensure a donation counts for 2011, use certified U.S. mail and request a return receipt, says charitable-giving expert Conrad Teitell, an attorney at Cummings & Lockwood in Stamford, Conn. A postage-meter mark isn't proof, and if you use a private courier such as FedEx, the charity must receive the gift in 2011 for you to take a deduction for this year.
This standard is different from the one for mailing tax returns, which puts several private couriers, including FedEx, on a par with the U.S. Postal Service, Mr. Teitell says.
If you charge a donation on a credit or debit card, the charge must be posted in 2011, although you don't have to have paid the bill this year.
Charitable gifts of appreciated securities, often a tax-wise move, can be tricky. For those held over a year, the deduction is the average of the high and low price on the date it is electronically transferred to the charity—or, in those rare cases where the security is mailed, the date of mailing.
Charitable-donation specialist Laura Peebles of Deloitte Tax in Washington recommends checking with your broker to find out the lag time between your instruction and the transfer, especially if the gift is large or the price is volatile.
Taxpayers up against a deadline may want to give securities to a donor-advised fund, which many brokerages offer. These are charitable funds that serve as holding pens for future gifts. Donors can make a gift before year-end, take a 2011 deduction and choose recipients later. Payouts from the fund aren't deductible, but the donation may grow tax-free until then.
Individual retirement accounts owners at least 70½ years old may donate up to $100,000 of account assets to qualified charities in 2011. Such gifts aren't deductible, but neither do they raise income in a way that might trigger income tax on Social Security payments or raise Medicare premiums. The gifts also count as part of the owner's required payout if he or she hasn't already taken one.
IRA proceeds must be transferred directly to the charity by the account administrator, and the charity should receive it in 2011. Use extreme caution here, Mr. Teitell says: A misstep could cause the donor to miss out on this year's benefit, and the provision expires Dec. 31.
Then there are gifts of personal property, such as clothing or furniture to a thrift shop. In general, the items must be in good used condition to be deductible.
Single items not in good condition worth $500 or more may be deductible with an appraisal. An appraisal is also needed for an item or group of items totaling $5,000 or more, regardless of condition, even if the items go to different charities. Gifts of artwork and non-traded securities are subject to different rules that may require expert help. For more information, see IRS Publications 526 and 561.
Investments. If you are making year-end trades, such as for tax-loss harvesting, note that the IRS looks to the trade date, not the settlement date, to determine when a transaction occurred.
With Congress in deadlock, some investors may want to start the clock ticking for long-term capital gains next year. In 2013 the current 15% top rate on long-term gains—a historic low—is scheduled to rise to 20%, and a new 3.8% tax on investment income takes effect for most joint filers with adjusted gross income above $250,000 ($200,000 single).
The upshot: Investors hoping to realize long-term gains by the end of 2012 should own the asset by Dec. 30 of this year, says Andy Mattson, a CPA with Mohler, Nixon & Williams in Campbell, Calif. Long-term gains and losses are those held longer than a year.
"Given current market values and higher taxes on the way, investors with stock options may also want to consider an exercise," he says.
Noncharitable gifts. Details also matter for taxpayers hurrying to make annual exclusion gifts—those up to $13,000 a year that a person may make to an unlimited number of recipients.
Be careful with checks. Either the recipient should deposit the check in 2011 or it should be certified. Gifts of securities are final once they are transferred electronically. Paper transfers of assets may require expert help.
The same holds true if Grandma wants to give her granddaughter heirlooms before year-end. The recipient must take possession of the items. "It helps to have Grandma write a letter describing the gift," Mr. Teitell says.

Biggest Tax Stories of 2011

Posted on December 23, 2011 at 11:57 AM Comments comments (48)
There was not a ton of tax news this year, due to a welcome lack of legislation. So for one year in a row, the Internal Revenue Code was not a constantly moving target. Thank you Congress. Still, there were two significant developments and one significant non-development. Here, in my opinion, are the three biggest tax stories for 2011.
1. No Grand Tax Compromise
Earlier this year, when it became obvious to even the most jaded observers that the federal debt load had reached and exceeded the point of extreme scariness, it looked as if "tax reform" combined with "spending cuts" might be combined in a "grand compromise." No such luck. When push came to shove, the Democrats and Republicans couldn't even agree on where to go to lunch, much less on big changes in tax policy. So the deficit reduction problem was punted to a "super committee" which then failed to reach a consensus. As a result, automatic spending cuts are supposed to kick in to the tune of about $1.2 trillion (a number that looks increasingly inadequate) over 10 years. There are no automatic tax increases in the super committee deal, and none may be needed -- because the so-called Bush tax cuts are scheduled to expire (again) at the end of 2012. If that is allowed to happen, massive tax increases will take effect in 2013.
2. Temporary Social Security Tax Cut
For 2011 only, the withholding rate for the employee's share of the Social Security tax was reduced from the usual 6.2% to only 4.2%. For self-employed individuals, the Social Security tax component of the self-employment tax was also reduced from the usual 12.4% to 10.4%. For 2011, the Social Security tax hit the first $106,800 of wages or self-employment income, so the maximum savings from the cut was $2,136 (2% x $106,800). A married couple can save as much as $4,272 (2% x $2,136). Anyone with wages and/or self-employment income benefits to some degree from this arrangement.
For 2012, there's still a good chance the Social Security tax reduction will be extended and maybe even increased to 3%. But there will apparently be a lot of political gamesmanship before that happens. (For 2012, the Social Security tax will hit the first $110,100 of wages and/or self-employment income.)
3. New Estate and Gift Tax Regime Takes Effect
Legislation enacted in 2010 established a favorable new federal estate and gift tax regime that took effect in 2011 and continues through 2012.
* For estates of individuals who died in 2011 or made gifts in 2011, there's a $5 million unified federal estate and gift tax exemption.
* For estates of individuals who die in 2012 or make gifts in 2012, there will be a $5.12 million unified exemption.
* The estate and gift tax rates are both a flat 35%.
* Married individuals who die in 2011 or 2012 can pass along their unused federal estate and gift tax exemptions to their surviving spouses. In other words, unused exemptions are "portable." The ability to effortlessly pass along unused exemptions to surviving spouses allows both spouses' exemptions to be utilized without having to set up trusts or engage in other tax planning maneuvers that were previously necessary.
* For heirs of decedents who die in 2011 and beyond, the familiar rule that allows the federal income tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect fair market value on the date of death was reinstated. With the restoration of the unlimited basis step-up rule, heirs won't owe any federal capital gains taxes on appreciation that occurs through the date of death -- as long as that date is in 2011 or later.
* All but one of these beneficial changes will expire at the end of 2012 unless Congress takes further action. The unified gift and estate tax exemption will fall back to a paltry $1 million, the maximum estate and tax rate will go up to a punitive 55%, and the portable exemption deal will die. The only taxpayer-friendly provision that will survive is the basis step-up rule for inherited capital gain assets (it's permanent, until Congress changes its mind).
Stay Tuned for the 2012 Action
As I said at the beginning of this article, there was only limited tax news this year, and we will probably not see any really big developments until after the 2012 election -- unless you consider an extension of the Social Security tax reduction a really big development. For next year, we already know what the biggest story will be. We just don't know the final outcome. Will the Bush tax cuts really be allowed to expire at the end of 2012 or will they be extended once again? Will the current estate and gift tax regime really be allowed to expire at the end of 2012 and be replaced by a harshly anti-taxpayer regime? The answers to these questions will almost certainly depend on how the election turns out. Whatever happens, I'll do my best to keep you informed.

Year-end tax tips to maximize your money

Posted on December 19, 2011 at 8:02 PM Comments comments (43)
Good year for gifting
But there is some uncertainty around estate planning, Duggan said. Here’s why: When the congressional supercommittee in November was working to cut the government’s deficit, rumors swirled that the committee would slash the current $5 million lifetime gift-tax exclusion, currently in place through 2012. While the supercommittee failed to come to agreement, the possibility lingers that lawmakers might tinker with that exemption in 2012. That means high-net-worth taxpayers who haven’t yet devised estate plans to maximize that benefit should act sooner rather than later.
“I am recommending to clients, to the extent their intent is to use the provision anyway, it may be prudent to use it this year versus next year,” Duggan said. “We at least have certainty this year.”
It’s not too late to give cash or property this year, though the giver must provide the IRS with a formal appraisal of the property, he said. “We have plenty of clients who review the assets with an appraiser,” even though the documents don’t come until January.
Maximize tax breaks
Traditional year-end planning generally means bunching your deductions into the current year — paying next year’s property-tax bill in December, for instance — and pushing income into the following year, if possible. Basically, do what you can to reduce your current-year tax hit.
Business owners, too, should consider maximizing deductions. “Take an inventory of what you expect to purchase in the first couple months of the following year,” Duggan said. “If you know with relative certainty what those purchases might be, there’s nothing wrong with prepaying them in December.”
Alternatively, he said, “If the owner has the ability to defer billings for a month, that’s another way to reduce income in the current year.”
Whether a business owner or employee, another way to make the most of tax breaks at year-end: Try to max out contributions to your retirement plan. And consider a Roth IRA, said Allison Shipley, a principal with PricewaterhouseCooper’s private company practice.
Starting in 2010, the income limits were removed on Roth conversions. Now anybody can elect to convert a pre-tax IRA to a Roth IRA. “We’ve found generally that converting to a Roth makes a lot of sense if you don’t think you’re going to need the money during your lifetime and you intend to leave it to your heirs,” Shipley said.
Even those who will need the money in their lifetime might consider a Roth, if only because income-tax rates may be higher when they retire. Roth IRA may be in your future
A Roth IRA “can provide you some tax-free income later on,” said Tim Courtney, chief investment officer with Burns Advisory Group in Oklahoma City, Okla.
You must pay ordinary income tax on the money you convert. But doing that this year or next makes sense, given that tax rates are slated to rise when the Bush-era cuts expire at the end of 2012.
Tax breaks set to expire
A valuable tax perk that lets people age 70 1/2 or older donate from their traditional IRA to a charity ends this month, unless Congress opts to extend it. Eligible taxpayers can donate up to $100,000 without recognizing that distribution as income. And that money still counts as a required minimum distribution from the IRA. The donation is not tax-deductible, however.
If you’re not eligible for that perk, now is still a good time to donate — not only does it help the charity at a crucial time of year, but it also lets itemizers ramp up the value of their deductions.
Also, if you make certain energy-efficient home improvements, you might be able to claim a tax credit for part of the cost. But hurry: those credits end this year. Go green before tax credits expire
And teachers, this may be your last chance to take advantage of the above-the-line deduction for school supplies: you can deduct up to $250 for out-of-pocket costs, but that tax perk is set to expire, too, unless Congress intervenes.
Make the most of stock gains — and losses
Another way to give: Donate to your favorite charity stock that has gained in value since you purchased it (and that you’ve held more than a year). That way you avoid capital-gains tax on the increase in value, and generally you can claim a charitable-contribution deduction for the fair-market value of the stock on the day you donate it.
If you want to donate shares that have lost value, sell them first so you can claim the tax loss, and then donate the money.
Even if you don’t plan to donate the proceeds, don’t forget to make the most of your stock losses. Think of them as a tax asset, Courtney said.
Losses are like “a get-out-of-jail-free card for the future,” Courtney said. You can offset your capital gains, and up to $3,000 in ordinary income, plus carry additional losses forward to future years.
Say you own a stock that’s taken off, and you want to rebalance. “A lot of people say, ‘I need to rebalance and get back to my original allocation, but I can’t because if I sell it I’m going to have this huge taxable gain, but if you booked your losses earlier when the market was down, you’d have a loss carry-forward that you can use to offset that gain,” he said.
Don’t forget to mind the wash-sale rule: If you exit an asset, wait 30 days before re-investing in the same stock, or you lose your ability to harvest the losses. Consider investing in a similar investment. “It just can’t be the exact same investment,” Courtney said.
Don’t forget the AMT
The alternative minimum tax turns traditional year-end strategies on their head, for the most part, since many deductions are unavailable to taxpayers who fall into this parallel tax.
“If I have a client who is going to be in AMT in 2011, for example, and they haven’t paid their property taxes yet and they have the ability to defer the payment to 2012, it might be good to defer,” Shipley said. Otherwise, they lose the benefit of that deduction. “If they defer making that payment until 2012, they might not be in AMT next year.”
And that traditional year-end strategy, for those not in the AMT? Keep in mind that may not be a smart move come year-end 2012. At the end of that year, the Bush-era income-tax rates and lower rates on capital gains are set to expire.
If you think Congress will let the tax code revert to higher rates, you’ll want to pull income into 2012, from 2013, and push deductions out, as much as possible. Of course, that’s still a big “if.”

Check If You're Missing a Refund

Posted on December 16, 2011 at 9:08 PM Comments comments (111)
Internal Revenue Service officials are hunting for nearly 100,000 people. But for a change, those people should be hoping the IRS finds them.
The government isn't trying to squeeze more taxes out of this missing group. It's the other way around: The IRS is trying to return more than $153 million in undelivered tax-refund checks, which couldn't be delivered because of mailing-address errors. The checks average $1,547 apiece.
This is a perennial problem—and one that can easily be avoided.
Taxpayers "can put an end to lost, stolen or undelivered checks by choosing direct deposit" when they file their federal income-tax returns either on paper or electronically, the IRS says. Last year, more than 78.4 million taxpayers chose to get their refund by direct deposit, according to IRS data.
Another suggestion: File your return electronically.
Electronic filing generally results in fewer errors on tax returns. It also means taxpayers typically will get their refunds more quickly than if they file paper returns and rely on snail mail. Last year, nearly eight out of 10 taxpayers filed electronically, according to the IRS.
If you were expecting a refund check and fear it might have been returned to the IRS as undeliverable, go to the IRS website ( and use the "Where's My Refund?" tool. This will give you the status of your refund. In some cases, it will also provide "instructions on how to resolve delivery problems."
Taxpayers also can get a phone version of "Where's My Refund" at 800-829-1954.
One warning: Watch out for con artists posing as IRS agents. At first glance, some phony emails may look like they're from the IRS.
"The public should be aware that the IRS does not contact taxpayers by email to alert them of pending refunds and does not ask for personal or financial information through email," the IRS says. These are "common phishing scams." Ignore them. The IRS says it "urges taxpayers receiving such messages not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that can infect their computers."