Tag Archives: legal issues

Selling your car? You may be entitled to a refund on your car warranty

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You found a buyer for your car and you have worked out all the details: purchase price, exchange of title, cancellation of your insurance, but have you thought about the warranties you may have on your car? If the car you are selling has an extended warranty, service agreement, guaranteed auto protection or tire coverage and these warranties have not been transferred to the buyer, you could be entitled to a refund for the remainder of the warranty.

Call your provider, with your VIN handy, and request a refund. Refunds are processed in about 30 days.

Planning for the inevitable – online end-of-life services

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What would happen if today were your last day? How would your survivors know how to administer your estate? Even if you have a will, would the personal representative or executor of your will know where to find your life insurance policy, estate documents, and the passwords to your accounts? There are many ways you can plan for this inevitable event and provide your survivors with the support they need to carry out your wishes.

In recent years, new websites have been created for end-of-life planning and documents storage like www.AfterSteps.com and www.principledheart.com. These websites provide a one-stop solution where you can store all your end-of-life documents, from wills and trusts to instructions for basic matters like cancelling your cellphone plan, or to lists storing all you passwords. These websites also organize your asset information and communicate relevant information to your beneficiaries at death.

Of course, whenever you store sensitive information online, you have to be able to trust that the service provider will keep your information secure. Generally, these websites provide bank-level security and encryption services, but as you well know, even the most “secure” websites can be vulnerable. You have to weigh the convenience these websites provide against the risk of having your account compromised.

If an online solution does not work for you, you can always choose a more traditional route. There are resources available, such as the “What if…” workbook that can help you formulate your plan. Alternatively, you can compile a binder with all of your instructions, passwords and estate documents and store your binder in a secure location, either in paper form or as an encrypted document (and be certain to communicate that location).

Whatever you choose, it is important to discuss with your estate planner to determine the best solution is for you. In the end, you want a choice that provides peace of mind for you and clarity for your survivors.

Some interesting statistics on risk of an IRS audit, from The Kiplinger Tax Letter, 1-17-14

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“IRS is struggling on the enforcement front. 2013’s individual audit rate fell to 0.96%… one out of every 104 filed returns. It’s the first time in seven years that this key statistic dipped below 1%. And we expect this figure to sink even lower for 2014 as the agency’s resources continue to shrink. The number of enforcement personnel has decreased to its lowest level in years, partly due to budget cuts and reassigning agents to work identity theft cases.”

The Tax Letter breaks down to .88% for below $200,000 of income, 2.7% for above that level but below $1 million, and 10.85% for over $1 million of income (down from 12.14%)

The Tax Letter indicates certain red flags (some text omitted)
“Claiming 100% business use of a vehicle. They know that it’s extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.
“Deducting business meals, travel and entertainment on Schedule C.
Big deductions here are always ripe for audit. A large write-off will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don’t satisfy the strict substantiation requirements.
“Writing off a hobby loss. Chances of losing the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the activity sounds like a hobby…dog breeding, car racing and such…IRS’ antennas go up higher.
“Failing to report a foreign bank account. The agency is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success in getting foreign banks to disclose account owner information. This is a top IRS priority. Keeping mum about the accounts can lead to harsh fines.
“Taking higher-than-average deductions. IRS may pull a return for review if the deductions shown are disproportionately large compared with reported income. But folks who have proper documentation shouldn’t be afraid to claim the write-offs.”

The last phrase is the key: if you have a proper reporting position with full documentation, then the risk of any adverse determination is drastically reduced (but you have the time lost responding if the IRS does raise a question).

Let me know if this raises questions for you.

Planning ideas for the impact of tax law changes in 2013

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The only way that the American Taxpayer Relief Act of 2012 provides relief to high income taxpayers is by ending uncertainty. The wait is over and we now know what we can for tax planning; guessing based on the last news from Washington is over.
So, what planning can you do? Start with reviewing all the changes below. Then consider how they apply to you and what you can affect to bear less of a tax burden in this or future years – see the “action” items below in each section.
**Payroll**
**Social Security:** The payroll tax holiday ended so that the Social Security tax rates have returned to 6.2% (up from 4.2%) for 2013 wages up to the taxable wage limit of $113,700.
**Action:** //not much to do on this one, because it ends a set maximum each year, unlike the Medicare tax below.//
**Health insurance funding via additional Medicare tax:** The Patient Protection and Affordable Care Act adds a .9% tax applies to single individuals earning over $200,000 and married couples who earn over $250,000 and file jointly. This raises the rate from 1.45%, will rise to 2.35%. However, employers must withhold the Additional Medicare Tax from **all** workers, regardless of marital status, from wages exceeding $200,000.
Action: bunch income in one year (defer/accelerate if you can get below the range – see rates below).
**New Ordinary Income Tax Rate:**
For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with adjusted gross income (AGI) above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
**Action:** //bunch income into one year (defer/accelerate if you can get below the range – especially if you coordinate earned income with net realized gains). The goal is to shift income (and deductions, as discussed below) from one year to another so that the total tax for both years is less. This is easier for self-employed or owners of private companies, as they can shift income within reasonable limits. Also, with large portfolios, there is some ability to put net gains in one year rather than another. As stated below, you can move all dividend and taxable interest paying investments into qualified plans, keeping your asset allocation but lessening the tax burden.//
**New Long-Term Gains and Dividends Tax Rate:**
The tax rates on long-term capital gains and dividends are the same as last year for most taxpayers. However, the rate goes to 20% (up from 15%) for singles with AGI above $400,000, married joint-filing couples with income above $450,000, heads of households with AGI above $425,000, and married individuals who file separate returns with AGI above $225,000. When you add in the new 3.8% Medicare surtax, you get a combined rate of 23.8% on long-term gains and dividends.
**Action:** //Once again, shift net gains into one year and put dividend paying investments in qualified plans.//
**Stealth rate increases:**
**Personal and Dependent Exemption Deduction Phase-Out:** The 2009 phase-out rule for personal and dependent exemption deductions has been restored, so your personal and dependent exemption write-offs are reduced if not even completely eliminated. This phase-out starts at the following AGI thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
**Itemized Deduction Phase-Out:** As above, the 2009 phase-out rule for itemized deductions has been restored, so you can potentially lose up to 80% of your write-offs for mortgage interest, state and local income and property taxes, and charitable contributions if your AGI exceeds the applicable threshold: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, or $150,000 for married individuals who file separate returns. The itemized deductions are reduced by 3% of the amount by which your AGI exceeds the threshold, up to a maximum of 80% of the total affected deductions.
**Medical Expenses:** The floor above which medical expenses can be deducted goes from 7.5% to 10%.
**Action:** //for each of these, try to move deductions into one year, and bunch income to another, so that the total tax for both years is less.//
**Alternative Minimum Tax Help**
The AMT “patch”, which prevented millions having this add-on tax, has higher exemptions and allows various personal tax credits. The new law makes the patch permanent, starting with 2012. The change will keep about 30 million households out of the AMT.
**Action:** you can identify which AMT items affect you and bunch them into one year, to save taxes on another.

//**Gift and Estate Tax Rules Made Permanent**//
For 2013 and beyond, the new law permanently installs a unified federal estate and gift tax exemption of $5 million (adjusted annually for inflation, making it $5,250,000 for 2013) and a 40% maximum tax rate (up from last year’s 35% rate). Also, you can still leave your unused estate and gift tax exemption to your surviving spouse (the “portable exemption”).
**Action:** //review your assets to see if you can gift any now, even if in a trust for future ownership change, and also check to see if any such gifts help on state estate taxes. You may want to consider a second-to-die policy in an irrevocable trust, if your assets will exceed the credits after gifts.//

**Other changes**
**Action:** //see if any apply, then shift income and deductions so you benefit from them.//
**American Opportunity Higher Education Tax Credit Extended:** The American Opportunity credit, providing up to $2,500 for up to four years of undergraduate education, was extended through 2017.
**Higher Education Tuition Deduction Extended:** While this deduction was set to expire at the end of 2011, the new law restores it for 2012 and 2013, allowing for as much as $4,000 or $2,000 for higher-income folks.
Option to Deduct State and Local Sales Taxes Extended*: This option also expired in 2011 but is restored for 2012 and 2013, giving taxpayers with little or no state income taxes the option to claim an itemized deduction for state and local sales taxes.
**Charitable Donations from IRAs Extended:** This option also expired in 2011 but is restored for 2012 and 2013, allowing IRA owners who had reach age 70½ to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions.
For 2012, you can still act if you do so this month – it will be treated as a December 2012 transaction.
**$250 Deduction for K-12 Educators’ Expenses Extended:** Yet another deduction that expired in 2011 is restored for 2012 and 2013, allowing teachers and other K-12 educators a $250 “above the line deduction” for school-related expenses that they paid.
**$500 Energy-Efficient Home Improvement Credit Extended:** Finally, another credit that expired in 2011 is restored for 2012 and 2013, allowing taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.

2012 year-end tax planning – 2012 vs. 2013 tax strategies requiring action now

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The goal for tax planning, as always, is to minimize the total that you pay for 2012 and 2013. However, this year is tricky. Here is why:
First, if your 2013 income is expected to be over $250,000 ($200,000 for singles), you cannot just accelerate write-offs from 2013 into 2012 and defer income to 2013 because your taxes will be higher in 2013. There is a new 3.8% tax that works like this, for example: recognizing a capital gain in 2012 avoids that tax in 2013 and also reduces your 2013 adjusted gross income, which may keep it below the threshold for imposing that tax next year. (See below for more details on the new tax.)
Second, regardless of who becomes President, Congress is likely to reduce the amount or value of itemized deductions. Thus, you may want to accelerate what you can into 2012.
Third, as always, combine your tax planning with your investment strategies, such as tax loss harvesting and rebalancing (see explanations at the end).
Last, there are other issues to review for 2012, including converting your Roth IRA; gifting to children and grandchildren for estate planning purposes (to use the $5 million unified credit); and funding college for children or grandchildren.
However, if you will owe the alternative minimum tax (AMT), you may have to revise your strategy. Many write-offs must be added back when you calculate the AMT liability, including sales taxes, state income taxes, property taxes, some medical and most miscellaneous deductions. Large gains can also trigger the tax if they cost you some of your AMT exemption.
The best tool for planning is to do a projection for both 2012 and 2013, then see what items you can affect to reduce the total tax for both years.
Assuming you will not have an AMT problem in either year, then in 2012 you could:
• Take a bonus this year to save the 0.9% for a high-income earner;
• Sell investment assets to save the 3.8% tax next year so the gain or income is in 2012 (e.g., sales of appreciated property or business interests, Roth IRA conversions, potential acceleration of bonuses or wages);
• Defer some itemized deductions to 2013 (but, be wary of the possibility that these will be capped in 2013 and can affect your AMT for either year);
• Accelerate income from your business or partnership, depending on whether it is an active or passive business; and
• Convert Roth IRAs in 2012 as noted above.
Then in 2013 and future years, you could:
• Purchase tax-exempt bonds;
• Review your asset allocation to see if you can increase your exposure to growth assets, or add to tax-exempt investments, rather than income producing assets. Also, place equities with high dividends and taxable bonds with high interest rates into retirement accounts;
• Bunch discretionary income into the same year whenever possible so that some years the MAGI stays under the threshold;
• While we do not recommend tax-deferred annuities, they can help save tax now to pay taxes in the future when the payments are withdrawn. (These are not recommended due to high fees, illiquidity and often poor performance);
• Add real estate investments where the income is sheltered by depreciation;
• Convert IRA assets to a Roth. Even though the future distributions from both traditional and Roth IRAs are not treated as net investment income, the Roth will not increase the threshold income; and
• Reduce AGI by “above-the-line” deductions, such as deductible contributions to IRAs and qualified plans, and health savings accounts and the possible return of the teach supplies deduction.
Note, however, Congress has not finalized the 2012 rules. Some expected steps are:
• An increase in the AMT exemption to $78,750 ($50,600 for singles), raising it from 2012 rather than dropping back to 2001 rates;
• Teacher $250 supplies deduction on page 1 of 1040, as mentioned above; and
• IRA $100,000 tax free gifts to charities.
Here are the details on the 2013 tax increases, enacted to help fund health care:
• A new 3.8% Medicare tax on the “net investment income,” including dividends, interest, and capital gains, of individuals with income above the thresholds ($250,000 if married and $200,000 if single);
• 0.9% increase (from 1.45% to 2.35%) in the employee portion of the Hospital Insurance Tax on wages above the same thresholds;
• Increase in the top two ordinary income tax rates (33% to 36% and 35% to 39.6%);
• Increase in the capital gains rate (15% to 20%);
• Increase in the tax rate on qualified dividends (15% to a top marginal rate of 39.6%).
• Reinstatement of personal exemption phase-outs and limits on itemized deductions for high-income taxpayers (effectively increasing tax rates by 1.2%).
• Reinstatement of higher federal estate and gift tax rates and lower exemption amounts.
If these changes take effect, the maximum individual tax rates in 2013 could be as high as follows:
2012 vs. 2013
Wages: 36.45 vs. 43.15%
Capital gains: 15 vs. 20%
Qualified dividends: 15 vs. 46.6%
Other passive income: 35 vs. 46.6%
Estate taxes: 35 vs. 55%
*Includes 1.45% employee portion of existing Hospital Insurance Tax.
**Estate and gift tax exemption also drops from $5.12 million to $1 million, if Congress does not act soon.
Explanations:
Tax-loss harvesting:
>Review your investments to find stocks, mutual funds or bonds that have gone down so that selling now will create a loss. This loss shelters realized gains and up to $3,000 of other income.
N.B. – If you replace the stock, mutual fund or bond, wait 30 days or use similar, but not identical, item. Otherwise, the “wash sale” rules eliminate realization of the loss.
Rebalancing:
>review your asset allocation to see if any portion is over or under-weighted. Then sell and buy to bring the allocation back in line. However, if you sell and re-buy now, before a dividend is declared, you will receive a 1099 for a taxable dividend in the new fund for investment returns in which you did not participate.

Thanks to the Kiplinger’s Tax Newsletter, Sapers & Wallack and others for ideas and information.