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Advanced Individual Taxation

Advanced Individual Taxation

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Advanced Individual Taxation

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  1. Advanced Individual Taxation

  2. Advanced Individual Taxation
  3. Advanced Individual Taxation
  4. Chapter 1

    Tax-Wise College Financing for Middle-Class Clients

  5. Preface – Medicare Surtaxes 0.9% on earned income Individuals with earned income > $200,000 or $250,000 for MFJ Applies to each dollar in excess of the threshold amounts. MAGI is irrelevant Includes W-2 wages and net self-employment income. Additional tax will be withheld by employer when applicable or, if required, should be paid via estimated taxes.
  6. Preface – Medicare Surtaxes 3.8% on unearned income Applies to individuals, trusts, and estates. For individuals, the unearned income tax is applied to the lesser of: Net investment income (“NII”), or The excess (if any) of their modified adjusted gross income (MAGI) over the threshold amounts - $200,000 for single filers and $250,000 for MFJ For estates and trusts, the tax is applied to the lesser of: Undistributed net investment income, or The excess (if any) of the adjusted gross income over the dollar amount at which the highest tax bracket for trusts and estates begins ($11,950 in 2013).
  7. Preface – Medicare Surtaxes Net investment income (“NII”) includes Interest, dividends, capital gains, annuities, royalties, rents, and other gross income attributable to a passive activity. NII excludes Income from a business that the taxpayer actively participates in, rental income if the taxpayer qualifies as a real estate tax professional, tax-exempt interest, life insurance proceeds, Social Security benefits, veterans’ benefits, and distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans.
  8. Preface – Medicare Surtaxes Example: Jim, a single individual, has modified AGI of $220,000 and NII of $40,000. The tax applies to the lesser of (i) NII ($40,000) or (ii) MAGI ($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8% of $20,000, or $760.
  9. Lifetime Learning Credit The Lifetime Learning Credit equals 20% of qualified higher education expenses of up to $10,000. The maximum Lifetime Credit is $2,000.
  10. Lifetime Learning Credit The most common scenarios for claiming the Lifetime Learning Credit are for Tuition paid for continuing undergraduate education after four years of work has been completed Tuition paid by employees for work-related college courses (especially those taken at community colleges) Tuition for graduate school courses
  11. Education Tax Credits Compared
  12. Deduction for College Tuition & Related Fees The maximum deduction is $4,000 Unmarried taxpayers with MAGI between $65,001 and $80,000 can deduct up to $2,000. Joint filers with MAGI between $130,001 and $160,000 can also deduct up to $2,000
  13. Chapter 2

    Tax-Smart College Financing Maneuvers for High-Income Clients

  14. Splitting Investment Income with Children Parent makes gifts to child under annual exclusion Investment made in child’s name Income and gains taxed at child’s lower tax rate Beware of kiddie tax
  15. Kiddie Tax Rules Applies to dependent child’s unearned income exceeding $2,000 Age is key issue Can apply to children Ages 19 – 23 Student Earned income less than half of support
  16. Deductible Payments from Parent’s Business Employ under age 18 child Not subject to Social Security & Medicare taxes No federal unemployment tax on under age 21 kids Shelter up to $6,100 of wages in 2013 Generally no income tax on wages Child saves & invests the money
  17. Deductible Payments from Parent’s Business Triple tax break available Business deduction for wages Lowers parent’s income, AGI, and self-employment tax No federal payroll taxes Child has minimal or no income tax on wages
  18. Suggestions for Procrastinators Take out a home equity loan (if client has not exhausted $100K limit and is not subject to AMT) Gift appreciated assets (up to the $14K limit, or $28K for joint gifts) Tap into IRA funds (10% penalty tax does not apply, but traditional IRA withdrawals will usually be fully or partially taxable) Make direct gifts to educational institution to pay tuition expenses
  19. Chapter 3

    Tax Planning Opportunities with Vacation Homes, Timeshares, and Co-Ownership Arrangements

  20. “Regular” Vacation Homes Category 1 - Rented more than 14 days (§280A) Substantial personal use Interest deductible up to $1.1 million Property tax deductible Category 2 - Rented more than 14 days Personal use not substantial Interest, property tax and operating expenses based on actual usage
  21. “Regular” Vacation Homes Category 3 - Rented < 15 days and personal use > 14 days Consider personal residence No rental days – Schedule A deductions Partial rental days – Schedule A deductions No write-offs allowed for operating expenses
  22. Timeshares and Co-Ownership Arrangements No rental days Schedule A – property tax and mortgage interest Some rental days Usually falls into Category 1 rules of “Regular” vacation homes 14-day/10% test applied to unit as whole for personal days Allocate expenses based on actual usage
  23. Timeshares and Co-Ownership Arrangements Owner right to only 1 or 2 weeks – more than 14 days or 10% test difficult to meet Qualified residence rule
  24. Example: Timeshares and Co-ownership Butch -- Unit #310, Sunny Shores Timeshare Resort Owns weeks 29 and 30 Rents week 29 and uses week 30 personally Total cost of two weeks $30,000 partly financed by a $20,000 mortgage loan Interest expense: $2,400 Annual maintenance fees for the two weeks: $1,300 Property taxes: $450 Week 29 rental income: $1,500
  25. Example: Timeshares and Co-ownership Unit 310 Owners Rent approximately half the year Use personally half the year Category 1 vacation home rules apply to any unit owners who rent some of their time Butch’s return should show $1,500 of rental income on Schedule E
  26. Example: Timeshares and Co-ownership Allocable rental expenses ($1,500 limit) can be deducted on Schedule E Allocation percentage: 50% Before considering depreciation Allocable rental expenses total $2,075 Mortgage interest: $1,200 Property taxes: $225 Maintenance fees $650 Schedule E: Butch can offset his rental income with these expenses ($1,500 limit)
  27. Example: Timeshares and Co-ownership Next-year carryover: Disallowed cash expenses ($2,075 - $1,500 = $575) plus Disallowed depreciation expense On Schedule A: Butch deducts $225 of property taxes The 50% attributable to personal use Personal use mortgage interest ($1,200): nondeductible Butch does not own enough personal days to pass the more-than-14-days-or-10% test.
  28. Cancellation of Debt Income Exclusion Allows individuals to exclude up to $2M ($1M for MFS) of qualified principal residence indebtedness through 2013 Qualifying amounts Any proceeds not used for the principal residence cannot be excluded under§108(a)(1)(E). Possible exclusion from income if the taxpayer is insolvent under §108(a)(1)(B) Forms Qualifying taxpayers should complete Form 982 using Form 1099-C
  29. Chapter 4

    Tax Planning for Marital Splits

  30. State Law Aspects of Divorce The following nine states are community property states: California, Texas, Washington, Wisconsin, Arizona, Nevada, New Mexico, Louisiana, and Idaho All other states, except Mississippi, are so-called equitable distribution states
  31. Section 66 Rule For the Section 66 rule to apply, all four conditions listed below must be met for the tax year in question: Individuals are married at year end, but lived apart for the entire year Joint return is not filed for the year One or both of the individuals had earned income for the year that is community income (i.e., income that would be shared 50/50, under general rule) There were no transfers of such earned community income between the individuals
  32. Abandoned Spouse Rule HOH status is available to married individuals meeting all conditions listed below: Separate returns filed Taxpayer lived apart from spouse during the last six months of the year Taxpayer's home served for more than half the year as principal home of taxpayer's child, stepchild, or adopted child for whom personal exemption deduction is allowed Taxpayer paid more than half the cost of maintaining home for the year
  33. HOH Status in Year of Divorce In year of divorce and later years, HOH status is available if both the following requirements are met: Taxpayer is single at year-end and maintains a home that constitutes principal residence of his child, stepchild, or adopted child for more than half of the year Child resides in same household as taxpayer during the "more than half the year" qualification period
  34. HOH Status in Year of Divorce After couple is divorced – or legally separated under decree of separate maintenance – HOH eligibility rules are more liberal than those for individuals who are still married at year-end
  35. HOH Example Fred and Wilma are separated and soon to be divorced. Fred, 2013: $60,000 from employment $7,000 FIT withheld Separate residences from June 1 through year-end. Wilma: primary custody of their two children kids after separate residences were established. Fred: weekend visitation rights Pays $1,000 temporary monthly child support.
  36. HOH Example In Fred and Wilma’s state the spouse earning the larger income owes the taxes when separate returns are filed. Standard deduction will be taken. Wilma: HOH filing status for 2013 despite being legally married at year end. Wilma’s home was the children’s primary home for more than half the preceding year Children spent more than half the year under her custody. See §152(c) and (e)
  37. HOH Example Wilma: entitled to the personal exemption deductions for both children. Despite Fred’s temporary child support payments Wilma qualified as the custodial parent for the preceding year since the children spent more than half the year under her custody. If Wilma chooses to file a separate return using HOH status, Fred would have to file using MFS status. Alternatively, they could file a joint return.
  38. HOH Example Tax Results Tax results of the filing status options (2011 rates):
  39. HOH Example Tax Results Fred wants to file jointly $1,842 refund ($13,000 in withholdings less $11,158 joint tax liability) Would split refund 50/50 with Wilma. Separate returns Fred would owe $1,429 ($8,429 MFS liability less $7,000 withheld form his salary).
  40. HOH Example Tax Results Wilma should file a separate HOH return. Refund: $2,985 Withholdings: $6,000 HOH Tax Liability: ($3,015) Protection from Fred’s tax liability His failing to report income Overstating preceding year deductions Combined separate return liabilities versus joint return liability Joint return liability: $11,158 Combined separate return liabilities: $11,444
  41. HOH Example Tax Results Wilma should give $1,842 of her refund to Fred To convince him to file separately To compensate Fred for the amount he will owe if filing separately Alternatively, she could agree to release at least one personal exemption deduction for the children to Fred for the year. Form 8332 Would reduce or eliminate Fred’s unpaid tax liability Would decrease Wilma’s refund.
  42. HOH Example Tax Results Key Point: If Wilma and Fred each had primary custody of one child from June 1 through year-end, both spouses would qualify for HOH status under the abandoned spouse exception.
  43. Qualified Domestic Relations Order QDRO is legal judgment, decree, or order (including one approving divorce property settlement agreement) that meets certain Tax Code guidelines It can be a separate document or simply language included as part of another divorce-related document
  44. Qualified Domestic Relations Order QDRO establishes that one spouse or ex-spouse has a legal right to receive all or part of other party's qualified retirement plan benefits without violating plan's benefit distribution rules
  45. Requirements for Deductible Alimony In order for a payment or stream of payments to be deductible alimony for federal income tax purposes: It must be made under a written divorce or separation instrument The instrument cannot state the payment is not alimony The payment cannot be made in a year when the payor and payee file a joint return together
  46. Requirements for Deductible Alimony After divorce or legal separation occurs, the ex-spouses cannot be members of the same household The payment must be to the spouse or ex-spouse or to a third party on behalf of the spouse or ex-spouse Payment must be in cash or cash equivalent The payor’s return must include the payee’s name and social security number
  47. Requirements for Deductible Alimony There cannot be any legal obligation for payment after the payee’s death The payment cannot be considered to be for child support
  48. Deemed Child Support-Related Contingencies Attaining age 18, 21, or local age of majority Death Marriage Completion of schooling Leaving the household Attaining a specified income level Employment
  49. Chapter 5

    All About Roth IRAs

  50. Two Big Roth IRA Advantages Qualified withdrawals are federal-income-tax-free, and usually state-income-tax-free, too Roth IRAs are exempt from the required minimum distribution rules, until the account owner dies
  51. Wide-Open Roth Conversion Opportunity For 2010 and beyond, no more income restrictions on conversions Traditional IRA balances may still be depressed, due to erratic stock market Client and spouse can operate independently Ill-fated conversions can be reversed
  52. Conversions – Variables to Consider Tax rate client expects to pay on conversion income, which will be piled on top of income from all other sources in those years Tax rates client expects to pay in future years when taking withdrawals from IRAs If client intends to leave IRA to heir, relevant future tax rate is the rate heir expects to pay upon liquidating IRA after inheriting it
  53. Conversions – Variables to Consider Expected rate of return on IRA investments Whether or not Congress will later twiddle with tax laws in ways that make conversion less beneficial
  54. When Conversions Make the Most Sense Client has long period before expecting to liquidate IRA which provides time to recover from conversion tax hit with years of accumulated tax-free earnings Expected tax rate when the IRA will be liquidated is about the same as or higher than expected rate during the client's working years
  55. When Conversions Make the Most Sense Income triggered by conversion itself is not large enough to shift client into much higher tax bracket or wipe out deductions and credits client is counting on for the conversion year Some converted balances are from nondeductible contributions, which reduces upfront tax hit
  56. Roth Conversion Case Studies Roth conversion results will vary widely, due to variables we cannot control Make projections for clients and analyze the projected results The next slides display illustrative case studies
  57. Case 1 Seven Percent Rate of Return with Same Tax Rate at Retirement in 20 Years Assumptions Convert traditional IRA with a $100,000 balance to a Roth IRA. 7% pretax rate of return on IRA balance between now and retirement in 20 years; 35% combined federal and state tax rate on income triggered by Roth conversion; 35% combined tax rate if account is kept in traditional IRA status and liquidated at the end of 20 years
  58. Case 1 Assumptions 4.90% after-tax rate of return* for 20 years on cash used to pay Roth conversion tax hit Money that could have otherwise been invested in a taxable account until retirement). *Assume cash spent to pay conversion tax hit could have been invested in taxable account at 7% annual pretax rate of return. Optimistically assume the entire 7% return is from long-term capital gains from assets held for one year and a day and from qualified dividends, both of which are taxed at an optimistic combined federal and state rate of only 25%. These tax assumptions equate to an optimistic 5.25% annual after-tax rate of return.
  59. Case 1
  60. Case 2 Seven Percent Rate of Return with Lower Tax Rate at Retirement in 20 Years Assumptions: Now assume an optimistic 25% retirement-age tax rate if the account is kept in traditional IRA status and liquidated in 20 years.
  61. Case 2
  62. Case 2 Reason: It is not so easy to conclude that converting does not pay off. Conclusion can be drawn by optimistically assuming significantly lower tax rates at retirement. Converting works best when the retirement-age tax rate is the same or higher than the tax rate on income triggered by the conversion. Compare the outcome here to the outcomes in Case 1 and Case 3.
  63. Case 3 Seven Percent Rate of Return with Higher Tax Rate at Retirement in 20 Years Assumptions: Same as Case 1, except now assume a 45% retirement-age tax rate if the account is kept in traditional IRA status and liquidated in 20 years.
  64. Case 3
  65. Case 3 Reason: Converting works really well when the retirement-age tax rate is higher than the current tax rate on income triggered by the Roth conversion. Compare the outcome here to the outcomes in Case 1 and Case 2.
  66. Reversing Ill-Fated Conversions Clients have until October 15 (adjusted for weekends) of following year to reverse Roth conversions 2013 conversions can be reversed as late as October 15, 2014 Conversions are reversed by recharacterizing the ill-fated Roth IRA back to traditional IRA status The Roth conversion tax hit goes away
  67. Annual Roth Contributions for Self-Employed Clients Lots of successful self-employed clients are eligible for annual Roth contributions, and lots fail to take advantage If already maxed out deductible contributions to tax-deferred plans, adding annual Roth contributions to the mix has no downside
  68. Handling Roth IRA Withdrawals Roth accounts have been around long enough that you are sure to have some clients who will start taking withdrawals sooner, rather than later You probably think you know exactly how Roth withdrawals are taxed
  69. Chapter 6

    Tax Tips for Investors

  70. 2013 Changes in Tax Rates Maximum federal income tax rates on long-term gains and qualified dividends are 20% beginning in 2013 Top ordinary income rate increased to 39.6% beginning in 2013.
  71. 2013 Changes in Tax Rates Post 2012, high-income individuals: Additional .9% Medicare tax on part of wages and self-employment income Additional 3.8% Medicare tax on net investment income State income tax rates are on the rise in many states
  72. Tip No. 1 Managing Capital Losses and Capital Loss Carryovers Capital losses not used this year do not go to waste Carried over to next year; potentially offset both short-term and long-term capital gains To extent short-term gains can be sheltered, investors need not worry about meeting the more-than-one-year holding period rule to obtain better tax results
  73. Tip No. 1 Managing Capital Losses and Capital Loss Carryovers Losses carried into post-2012 years may shelter gains that are possibly taxed at higher rates Post-2012, a 3.8% additional Medicare tax on high-income individuals’ net investment income. Includes unsheltered capital gains
  74. Wash Sales Not So Easy to Spot Buying substantially identical securities in the year before or after the year of the loss sale can trigger the wash sale rule E.g., January, 2014 purchase can trigger the wash sale rule for a December, 2013 loss Just asking about transactions near the end of the year is not necessarily enough to see the whole picture
  75. Tip No. 2 Managing Section 1231 Losses Fully deductible as ordinary losses (not subject to the limitations on net capital losses) Create or increase an NOL Watch out for nonrecaptured Section 1231 loss rule – causes 1231 gains to be treated as ordinary income
  76. Nonrecaptured §1231 Losses Causes net Section 1231 gains to be treated as ordinary income Expire after five years No impact on Section 1231 gains recognized in years before Section 1231 losses are recognized No impact on treatment of Section 1231 losses
  77. Trigger Tax-Saving Net §1231 Losses by Selling… Depreciable property worth less than tax basis Business real estate (including land) worth less than tax basis Rental real estate (including land) worth less than tax basis (may also “free up” suspended passive losses) Watch out for related-party loss disallowance rules
  78. Tip No. 3 Get Beneficial Tax Treatment of Day Traders Trading losses are ordinary, capital loss deduction limitations do not apply Trading losses can create or increase an NOL Wash sale rule does not apply to trading losses Beware of early election deadline
  79. Tip No. 4 Hedge Retirement Accounts Against Both Inflation and Deflation with Treasury Inflation-Protected Securities (TIPS) With inflation, TIPS in tax-favored retirement accounts will prove to be smart (but conservative) investment strategy Even with deflation, TIPS will work out okay for those who buy them carefully and hold them to maturity Therefore, they will be at least a pretty good investment in any event
  80. More Tips on TIPS Beware of buying TIPS with significant accrued inflation adjustments Adjustments are added to price of TIPS purchased in the secondary market If significant deflation, inflation adjustments can be quickly wiped out Bondholder paying for value that no longer exists Moral: Buy TIPS before significant inflation adjustments accrue
  81. Tip No. 5 Taking Advantage of Favorable Tax Treatment of Broad-Based Stock Index Options Broad-based stock index options treated as §1256 contracts 60% long-term and 40% short-term gain/loss Elect 3 year carryback for losses Report on Form 6781, Part I – Gains and Losses from §1256 Contracts & Straddles Net ST and LT amounts transfer to Sch. D
  82. Tip No. 6 Maximize Deductions for Gamblers Gambling losses limited to gambling winnings For amateurs and professionals alike For amateurs, other expenses are nondeductible For professionals, other expenses are treated as business expenses Professionals owe SE tax on net gambling winnings minus gambling expenses
  83. Chapter 7

    Planning for Employer Stock and Stock Options

  84. Buying and Selling ISO Shares For regular-tax purposes, ISOs deliver two major advantages: When option is exercised, excess of market value over exercise price (bargain element) goes untaxed When ISO shares are sold, entire profit (excess of sale price over exercise price) can qualify for preferential long-term capital gain tax rate
  85. Refundable AMT Credit Rules for 2008 - 2012 Refundable AMT credit rules benefit individuals who have big unused AMT credits, typically from exercising incentive stock options (ISOs) a few years ago Stock to which the unused AMT credits related may have turned out to be worth little or nothing, when all was said and done Now individuals can cash in their unused AMT credits – it may take a few years to complete the task
  86. Case 1 Miranda carries a $190,000 AMT credit into her 2010 tax year. $140,000 generated in 2006 (from profitable ISOs) and $50,000 in 2007 (Miranda exercised some more ISOs) 2010: Miranda’s long-term unused AMT credit amount: $140,000 (unused credit generated in pre-2007 years). Miranda’s refundable AMT credit amount: $70,000 (Under the annual limitation rule) (50% x $140,000). To collect the entire $70,000 Miranda should attach Form 8801 to her 2010 Form 1040.
  87. Case 1 “Collect”: Miranda can use the $70,000 to reduce her 2010 federal income tax bill to zero Includes any AMT Leftover refundable credit amount is either In cash or Applied to 2011 estimated federal income tax payment obligation 2011 Long-term unused AMT credit amount: $120,000 $70,000 from 2010 plus $50,000 generated in 2007 Becomes long-term in 2011
  88. Case 1 Miranda’s 2011 refundable AMT credit amount: $70,000 Greater of 50% of the $120,000 of long-term unused AMT credit amount carried into 2011 $70,000 refundable credit calculated for 2010 2012 Long-term unused AMT credit amount: $50,000 left from 2011. Under the annual limitation rule, her 2012 refundable AMT credit amount is $50,000 Greater of 50% of the $50,000 of long-term carryover into 2012 $70,000 refundable credit for 2011(limited to the $50,000 amount carried into 2012)
  89. Case 1 Key Point: 2006 AMT credit collected over two years Became long-term credit in 2011 50% in 2010 50% in 2011 2012: entire 2007 credit collected Second year after becoming long-term credit Refundable AMT credit rules guarantee no more than two years to collect a credit that becomes long-term.
  90. Refundable AMTCredit Has Expired The refundable AMT credit is allowed for the 2008 – 2012 tax years. The American Taxpayer Relief Act of 2012 didnot extend this provision into 2013.
  91. Nonqualified Stock Options (NQSOs) NQSOs – employer stock options not qualified as ISOs Advantage – Can be issued with exercise price below stock’s current market value When exercised Bargain element taxed at ordinary rates Subsequent appreciation taxed at capital rates
  92. Offsetting Benefits Net unrealized appreciation when shares are distributed qualifies for the maximum long-term capital gain rate. Capital gain tax on that unrealized appreciation is deferred until shares are sold Any post-distribution appreciation (after the shares come out of the qualified plan account) qualifies for a maximum long-term capital gain rate of 23.8% (includes Medicare surtax), if shares are sold more than 12 months after taxpayer's holding period begins
  93. Offsetting Benefits If taxpayer dies while still owning shares, heirs get basis step-up for post-distribution appreciation
  94. Chapter 8

    Estate and Gift Tax Tips

  95. Taking Advantage of Current Estate and Gift Tax Regime $5.25 million estate and gift tax exemptions 40% tax rate on excess over exemptions Married individual’s unused estate tax exemption is portable The American Taxpayer Relief Act of 2012 permanently set the rate at 40% and the exemption amount will be adjusted annually for inflation.
  96. Assess Client’s Federal Estate Tax Exposure $5.25 million estate tax exemption may not be enough For tax purposes, estate includes life insurance death benefits from policies owned by decedent unless proceeds go to surviving spouse Estate includes homes, investment real estate, investment accounts, retirement accounts, business ownership interests, and everything else including the kitchen sink
  97. Assess Client’s Federal Estate Tax Exposure Life insurance proceeds are most likely cause of unexpected exposure Beware of exposure to state estate taxes
  98. Update Estate Planning for Singles $5.25 million federal exemption Bigger exemption opens up opportunity to leave less to charity and more to relatives and loved ones Set up irrevocable life insurance trust if necessary to avoid estate tax Make lifetime gifts of cash Make lifetime gifts of appreciating assets Beware of exposure to state estate taxes
  99. Updated Estate Planning for Married Couples $5.25 million federal exemption, especially with new portable exemption deal Set up irrevocable life insurance trust if necessary to avoid estate tax Make lifetime gifts of cash Make lifetime gifts of appreciating assets Update bypass trust arrangements to reflect new $5.25 million exemption Beware of exposure to state estate taxes
  100. Generation-Skipping Transfer Tax Watch Out for the Generation-Skipping Transfer Tax $5.25 million exemption will cover vast majority No GSTT for 2010 generation-skipping gifts Watch out for GSTT exposure from indirect generation-skipping gifts Generation-skipping gifts that use up GSTT exemption also use up estate and gift tax exemptions dollar-for-dollar
  101. IRA Qualified Charitable Distributions Take Advantage of IRA Qualified Charitable Distributions (for Clients Age 70½ and Older) QCDs are not included in donor’s AGI QCDs are exempt from percentage-of-AGI limitations on charitable donations QCDs count as IRA distributions for purposes of RMD rules QCDs allow donor to leave nontaxable amounts in IRAs QCDs reduce donor’s taxable estate
  102. Estate Planning with Roth IRAs Roth IRA can be kept intact for heirs because it is exempt from RMD rules for as long as original account owner lives Roth IRA inherited by spouse can be treated as spouse’s account: no RMDs for as long as he or she lives Roth IRA inherited by non-spousal beneficiary can be kept alive for many years by taking out only annual RMD amounts In effect can create a nice tax-free annuity for client’s heir
  103. Estate Planning with 529 Accounts Can be funded with lump-sum gift that qualifies for five years’ worth of federal gift tax exclusions ($70,000 for 2013) Same deal for gift by client’s spouse Client and spouse can do this for each child or grandchild After five years, gifts are out of client’s taxable estate Client still has substantial control: can change 529 account beneficiaries and even pull back the money if desired
  104. Estate Planning for the Rest of Us With the permanent tax law changes of 2012, most folks do not have to worry about the federal estate tax Clients with kids or assets still need estate plans Wills are needed to name guardians for minor children Living trusts can avoid probate Trusts can be set up for heirs who lack financial acumen Beware of state estate taxes
  105. Chapter 9

    Tax Tips for Families

  106. Tax-Saving Arrangements at Work Encouraging Clients to Take Advantage of Tax-Saving Arrangements at Work Health insurance premium only plan (POP) Health and dependent care flexible spending accounts (FSAs) Transit passes and van pooling Parking allowance Bicycle commuting allowance
  107. Tax Benefits Pay for necessary expenses with pre-tax dollars Effect is same as federal income tax deduction (possibly state income tax deduction too) Social Security tax and Medicare tax reductions as a bonus Higher cash flow with little or no effort
  108. Deciding If Client’s Spouse Should Work Consider the following to make a legitimate analysis: Direct taxes on additional income (including employment taxes and state income tax) Indirect tax hikes caused by higher income (loss of tax breaks due to phase-out rules) Additional out-of-pocket expenses
  109. Claim Dependent Exemption Deduction for Supported Relative Allowed for qualifying children Allowed for qualifying relatives Main difference: no gross income limitation ($3,900 for 2013) for qualifying children
  110. Dependent Exemption for Relative Supported by Several Use Multiple Support Agreement to Claim Dependent Exemption Deduction for Relative Supported by Several Individuals Eligible individual with respect to supported person and pay over 10% of support Client and one or more other eligible individuals together must pay over half of support No one individual can pay over half of support
  111. Dependent Exemption for Relative Supported by Several Use Multiple Support Agreement to Claim Dependent Exemption Deduction for Relative Supported by Several Individuals File Form 2120, Multiple Support Declaration, with Form 1040 Client must get any other eligible individuals who pay over 10% of support to sign off on the deal
  112. Head of Household Filing Status Based on Supported Relative Claiming Head of Household Filing Status Based on Supported Relative Bigger standard deduction Wider tax brackets With bad economy, HOH filing status may now be available for first time due to client’s support of parent or other relative
  113. Deducting Supported Relative’s Medical Expenses Definition of qualifying relative is less restrictive than for claiming dependent exemption deduction Counting expenses paid for qualifying relative may allow client to easily clear 10%-of-AGI hurdle With bad economy, medical expense deductions may now be available for first time due to client’s support of parent or other relative
  114. Medical Expense Deductions for Continuing Care Claiming Medical Expense Deductions for Continuing Care Retirement Community Costs Extensive Contracts – Offer unlimited long‑term nursing care with little increase in the usual monthly fee level. This is the most expensive type of contract. Could prove to be the most cost-effective if lots of skilled nursing care is provided for a long time
  115. Medical Expense Deductions for Continuing Care Claiming Medical Expense Deductions for Continuing Care Retirement Community Costs Modified Contracts – Provide a specified amount of health care or long‑term nursing care. If the level of care is stepped up, additional fees are charged at that point
  116. Medical Expense Deductions for Continuing Care Claiming Medical Expense Deductions for Continuing Care Retirement Community Costs Fee-for-Service Contracts – Require residents to “pay as they go” for medical services and long‑term care at prevailing rates. The advantages of this option are a lower price and the onsite availability of medical and personal care services
  117. Questions, Wrap-Up, and Key Points/Lesson Review

  118. Advanced Individual Taxation

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