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Financial, Accounting & Tax Advice

   How to Secure a Valuable Tax Credit for Hiring Designated Workers

Before you interview the next group of job candidates for your small business, whether it’s to fill a full-time position or just for the summer, keep in mind that long-term unemployment recipients and other workers certified by a state agency may qualify for the Work Opportunity Tax Credit (WOTC).

This isn’t just chicken feed: The credit is generally equal to 40 percent of the worker’s first-year wages up to $6,000, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be available for the first $24,000 of wages, for a maximum credit of $9,600 per worker. And remember that tax credits, as opposed to tax deductions, offset tax liability on a dollar-for-dollar basis.

The WOTC is a long-standing income tax benefit that encourages employers to hire designated categories of workers who face significant barriers to employment.

This credit is usually claimed on Form 5884, Work Opportunity Credit. However, to qualify for the credit, an employer must first request certification by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with the state workforce agency within 28 days after the eligible employee begins work. Other requirements and further details can be found in the instructions to Form 8850.

Currently, there are 10 categories of WOTC-eligible workers. The latest category to be added, effective Jan. 1, 2016, covers long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and have received state or federal unemployment benefits during part or all of that time.

According to the IRS, the other categories include certain veterans and recipients of various kinds of public assistance, among others. The 10 categories are:

  • Qualified IV-A Temporary Assistance for Needy Families recipients
  • Unemployed veterans, including disabled veterans
  • Ex-felons
  • Designated community residents living in empowerment zones or rural renewal counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in empowerment zones
  • Food stamp recipients
  • Supplemental Security Income recipients
  • Long-term family assistance recipients
  • Qualified long-term unemployment recipients

Note that a special summertime credit is available for hiring youths who are 16 or 17 years old and reside in an empowerment zone or enterprise community. This credit equals 40 percent of the first-year wages of $3,000, up to a maximum of $1,200, for a youth working at least 400 hours. But the credit is limited to wages paid for services performed between May 1 and Sept. 15.

Eligible businesses claim the WOTC on their income tax return. First, the credit is calculated on Form 5884, and then it becomes a part of the general business credit claimed on Form 3800.

These rules are complex, so small business owners may require guidance from their professional tax advisor.


Ken Berry

   How to Play All the Right Tax Angles for Hobbies

Millions of people enjoy hobbies that also provide a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing – no matter what your passion is, there will likely be tax repercussions.

Some taxpayers are surprised to learn that they must report income earned from hobbies on their tax return. The exact rules for reporting income, as well as deducting expenses, depend on whether the activity is a hobby or a business. In fact, you may bump up against obstacles in this area.

Accordingly, the IRS has focused on the following points for hobby enthusiasts to consider:

Business vs. Hobby
If an activity is a hobby, not a business, your deductions are generally limited to the amount of hobby income. Conversely, a business might be able to claim a loss. The key distinction is often whether you’re engaging in the activity to turn a profit.

Traditionally, the IRS and the courts have relied on nine factors to make this determination:

  1. The manner in which the taxpayer carries on the activity.
  2. The taxpayer’s expertise.
  3. The time and effort expended by the taxpayer in carrying out the activity.
  4. Any expectation that assets used in the activity (e.g., land) may appreciate in value.
  5. The taxpayer’s success in other activities.
  6. The taxpayer’s history of income or losses from the activity.
  7. The relative amounts of the profits and losses.
  8. The taxpayer’s financial status.
  9. Whether the activity provides recreation or involves personal motives.

Don’t discount any of these factors. All nine of them may come into play.

Allowable Hobby Deductions
Within certain limits, taxpayers can usually deduct “ordinary and necessary” hobby expenses to offset hobby income. An ordinary expense is one that is common and accepted for the activity, while a necessary expense is one that is appropriate for the activity. Typically, your deductible expenses might include production and advertising costs.

Limits on Hobby Expenses
Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses exceed the income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income like a business loss can.

Method of Deducting Hobby Expenses
Taxpayers must itemize deductions on their tax return in order to deduct their hobby expenses. Generally, hobby expenses are deducted on Schedule A of Form 1040 as miscellaneous expenses, subject to the usual limits. Thus, if you do not itemize deductions, or if your expenses fall below the threshold for deducting miscellaneous expenses, you may get no tax benefit from your hobby.

Note that the IRS follows a special presumption when determining whether an activity is a business or a hobby. If an activity turns a profit in three of five consecutive years, the activity is presumed to be a business, although this presumption can be rebutted by evidence.

The presumption applies if you show a profit in only two out of seven years for activities related to the breeding, training, showing, or racing of horses.

   Some of the Biggest Estate-Planning Mistakes People Make

Will your legacy be a benefit or a burden to your loved ones? It depends on how well you’ve planned.

There are some things we just don’t like to think about, much less speak about. The universal truth is we are all going to pass away one day. The legacy you leave can either simplify the process of dealing with your personal and financial property, or it can be a worrisome burden for those you leave behind.

Legacy planning is as important as your final wishes. So, as much as you avoid the topic, it can’t be — and shouldn’t be — ignored.

When discussing this subject, I like to point out to people that it is often the smallest things that can come back to bite you. I’m reminded of the proverb that says, “For want of a nail, the kingdom was lost.”

So let’s take a look at what you should discuss with a qualified attorney to help make sure your kingdom — and your legacy — isn’t lost.

There are several common mistakes people can make when planning — or not planning — for what will happen with their estates when they die. A few of those mistakes include:

Lack of a see-through provision on a trust.

This can prove very costly. For example, consider a couple who has a $1 million Individual Retirement Account (“IRA”) and the beneficiary of the IRA is a trust. If there is no see-through provision on the trust, the couple’s estate could potentially owe several hundred thousand dollars in taxes when the IRA is passed to beneficiaries due to the higher tax rates trusts are often subject to. In certain circumstances, a trust may be an appropriate beneficiary for an IRA.

A “see-through trust” refers to a trust that meets specific legal requirements and serves as the named beneficiary of an IRA. In this scenario, The IRS will “see through” the trust and treat the trust’s beneficiaries as if they were the IRA’s direct beneficiaries. The beneficiaries’ life expectancies will then be used to determine the IRA’s required minimum distributions. Additionally, a see-through provision allows these distributions to be taxed at the individual beneficiary’s tax rate rather than at the trust’s tax rate.

Oftentimes, a trust’s tax rate is higher than an individual’s. Therefore, a see-through provision could help prevent a large tax bill when the owner of the IRA dies, depending on the individual beneficiary’s tax situation.

A blank or incomplete Schedule.

Schedules are attachments to the trust document that contain important details concerning the trust (most commonly a Schedule A). For example, most trusts have a schedule that is the inventory sheet of the trust, and it typically details what assets you have transferred into the trust. As such, it’s important to make sure all schedules are complete and accurate — it shouldn’t be blank! It is important to confirm with your attorney that your trust actually owns the assets you intend for it to own.

If it’s not clear what assets the trust owns on the statement, you should be concerned and meet with an attorney who can review your trust to help ensure your wishes are accurately reflected.


POD means “payable on death.” TOD stands for “transfer on death.” These designations allow the beneficiary to receive assets without going through probate. Does every bank account, including all your checking, money market, savings and CD accounts, have POD and TOD instructions on them? Probate can be an expensive process. Laws governing attorney fees for probate are decided by individual states and can vary. For example, consider a savings account with $200,000. In Florida, attorney fees to probate this account could be as high as 3%, or $6,000. Having a POD or TOD on this account could help save on these administrative expenses.

Having too many accounts.

The FDIC places a limit of $250,000 per depositor, per bank on the amount that it will insure. As such, you may consider consolidating some of your bank accounts if you have more than you actually need to ensure you are protected. Otherwise, you might overcomplicate your estate.

Leaving no inventory of assets.

So where is everything? Even if you have been meticulous about having all the right documents, it does no one any good if they can’t find them after you die. So leave your loved ones a checklist to tell them where they can find your birth certificate, Social Security card, marriage license, pre-nuptial agreement, military records, will, burial instructions, cemetery plot deed or cremation agreement, bank and credit documents, mortgage papers, personal financial documents, and safe deposit box and keys.

Your legacy is the last impression you leave behind. The last thing families want to do is leave their children or beneficiaries 1,000 puzzle pieces scattered all over the floor. A legacy is not a 1,000-piece puzzle scattered to the wind but a picture worthy to be framed.


Andrew McNair

   How To Pay Less In Taxes On Your Investments

In some cases, you can hold a stock for less than a year and avoid short-term capital-gains rates

The current federal income-tax rates on long-term capital gains recognized by individual taxpayers are still low by historical standards. The rates range from a minimum of 0% to a maximum of 20% depending on your tax bracket. But the rates on short-term gains aren’t so low. They currently range from 15% to 39.6% for most investors. That’s why, as a general rule, you should try hard to satisfy the more-than-one-year holding period requirement for long-term gain treatment before selling winner shares (worth more than you paid for them) held in taxable brokerage firm accounts. That way, the IRS won’t be able to take more than 20% of your profits (or 23.8% if the dreaded 3.8% net investment income tax applies).

However, you may think that today’s somewhat frothy stock market valuations aren’t conducive to making such long-term commitments, even though short-term gains are heavily taxed. What to do? Here are some thoughts on how to rake in short-term gains without getting hosed with much higher taxes.

Sell unlovable losers to create capital losses

Usually I talk about “harvesting” capital losses, by selling loser stocks (worth less than you paid for them), in the context of year-end tax planning. But it works earlier in the year too, like now. Capital losses from selling unlovable losers can be used to shelter short-term gains collected anytime this year. If you have any leftover capital losses at year-end, you can carry them forward to 2018 and use them to shelter short-term gains collected next year and beyond. In other words, to the extent you have capital losses, there’s no need to hang onto winner shares for at least a year and a day in order to pay a lower tax rate.

Consider trading in broad-based stock index options

One popular way to place short-term bets on broad stock market movements is by trading in ETFs like QQQ (which tracks the NASDAQ-100 index) and SPY (which tracks the S&P 500 index). Unfortunately when you sell ETFs for short-term gains, you must pay your regular federal tax rate, which can be as high as 39.6% (or 43.4% if the 3.8% net investment income tax applies). Ditto for short-term gains from precious metal ETFs like GLD or SLV. Under a special unfavorable rule, even long-term gains from precious metal ETFs can be taxed at up to 28% (plus another 3.8% if the net investment income tax applies), because the gains are considered collectibles gains. Rats!

Thankfully, there is a way to play the market in a short-term fashion while paying a lower tax rate on your gains: consider trading in broad-based stock index options.

Favorable tax rates on short-term gains from broad-based index options

Our beloved Internal Revenue Code treats broad-based stock index options, which look and feel a lot like options to buy and sell comparable ETFs, as Section 1256 contracts.

Section 1256 contract treatment is a good deal for investors because gains and losses from trading in Section 1256 contracts are automatically considered to be 60% long-term and 40% short-term. So your actual holding period for a broad-based stock index option doesn’t matter. The tax-saving result is that short-term profits from trading in broad-based stock index options are taxed at a maximum effective federal rate of only 27.84% [(60% × 20%) + (40% × 39.6%) = 27.84%], or 31.64% if the 3.8% net investment income tax applies. If you’re in the top 39.6% bracket, that’s a 29.7% reduction in your tax bill (ignoring the possible impact of the net investment income tax).

The effective rate is lower if you’re not in the top bracket. For example, say you’re in the 25% bracket. The effective rate on short-term gains from trading in broad-based stock index options is only 19% [(60% × 15%) + (40% × 25%) = 19%]. That’s a 24% reduction in your tax bill.

Bottom line: With broad-based stock index options, you pay a significantly lower tax rate on gains without having to make a long-term commitment. That’s a nice advantage.

Favorable treatment for losses too

If you suffer a net loss from trading in Section 1256 contracts, including losses from broad-based stock index options, you can choose to carry back the net loss for three years to offset net gains from Section 1256 contracts recognized in those earlier years, including gains from broad-based stock index options. In contrast, garden-variety net capital losses can only be carried forward.

Year-end mark-to-market rule

As the price to be paid for the aforementioned favorable tax treatment, you must follow a special mark-to-market rule at year-end for any open positions in broad-based stock index options. That means you must pretend to sell your positions at their year-end market prices and include the resulting gains and losses on your tax return for that year. Of course if you don’t have any open positions at year-end, this rule won’t affect you.

Finding broad-based stock index options

A fair number of options meet the tax-law definition of broad-based stock index options, which means they qualify for the favorable 60/40 tax treatment. You can find options that track major stock indexes (like the S&P 500 and the Russell 1000) and some major industry and commodity sectors like biotech, oil, and gold. One place to find options that qualify as broad-based stock index options is tradelog. While trading in these options isn’t for the fainthearted, it’s something to consider if you want better tax results for your profitable short-term stock market bets.

Bill Bischoff


   When You Should Establish An IRA As A Trust

A trusteed IRA offers provisions beyond a custodial plan, but is it a good strategy for clients? That answer depends on several factors, including how much control — or not — the client wants their beneficiaries to have.

Under the tax code, an IRA can be established as a trust or custodial account. With a trusteed IRA, a financial organization adds trust terms and language to the plan. Thus, the IRA itself becomes a trust, with the financial organization acting as the trustee.

The account is then administered under the trust provisions both before and after the IRA owner’s death. In general, this will mean greater control for the IRA owner and less for beneficiaries.

As a trusteed IRA is, in essence, a conduit trust; the trustee must pay out the annual required minimum distributions to beneficiaries. In addition to ensuring the stretch IRA for beneficiaries, some trusteed IRAs allow distributions beyond the RMDs for health, education and other support. However, because trusteed IRAs are standardized documents, there will likely be some limits on the post-death control options.

Here’s what advisers should know about this increasingly available option, so they can help clients make the most educated choice.

Clients who have large IRAs as well as other extensive assets will probably already be using trusts as part of their overall estate planning strategy. For those clients, costs are not a concern and they would likely be best-served by naming a trust as their IRA beneficiary.

For other clients, whose IRA is their largest asset by far, a trusteed IRA may make sense. A trusteed IRA will generally cost less than hiring an attorney to draft a trust. However, there will still be a set-up fee, as well as ongoing fees.

One advantage of a trusteed IRA is that, if the IRA owner becomes incapacitated, trusteed IRAs often have a provision that allows the trustee to take the RMD on their behalf.

Some trusteed IRAs allow distributions beyond the required minimum distributions for health, education and other support.

This would not be possible with a trust or an individual named on the IRA’s beneficiary designation form. In those cases, a power of attorney would likely be needed to get the RMD paid out. A trusteed IRA eliminates this complication. The trustee can also make lifetime investment decisions, as well as pay any IRA-related fees or expenses.

Trusteed IRAs usually include provisions limiting how much freedom a beneficiary has regarding how much they can take from the inherited IRA.

A trusteed IRA may be a good strategy for clients whose primary concern is preserving the stretch for their beneficiaries. The trusteed IRA may limit yearly distributions to the amount of the RMD, preserving the stretch IRA.

If, instead, a trust is named as the beneficiary of an IRA and the trust meets the look-through rules, the beneficiary of the trust can use the stretch and take RMDs over the life expectancy of the oldest trust beneficiary.

However, there is a risk that requirements of the look-through rules may not be met by a particular trust. An attorney drafting a trust may make an error that causes the trust to not meet these requirements, with the resulting loss of the stretch for beneficiaries. Going with a trusteed IRA mitigates this risk.

Even if a trust is drafted in such a way as to meet the requirements of the look-through rules, there can still be problems with achieving the maximum stretch if there are multiple trust beneficiaries.

The separate account rules for multiple beneficiaries do not apply to trusts. This means that all trust beneficiaries must honor the beneficiary with the shortest life expectancy.

This may not matter so much if the beneficiaries are close in age. However, if beneficiaries include a surviving spouse as well as children, this severely limits the stretch available for the children.

The work-around for this problem is to create and name sub-trusts for each beneficiary directly on the IRA beneficiary designation form. This format allows each trust beneficiary to use their own life expectancy.

Using a trusteed IRA eliminates this complication, because they are generally drafted in such a way as to ensure each beneficiary may use their own life expectancy.

When an IRA owner names a beneficiary outright, the owner will have no say in what happens to the funds after the death of the beneficiary. A beneficiary may choose their own successor beneficiary.

A trusteed IRA would give the IRA owner the ability to name successor beneficiaries. This may be helpful in second-marriage situations in which the IRA owner would like to provide for a spouse during their lifetime but then ensure that the IRA funds go to children from a prior marriage.

This could also be achieved by naming a trust as the IRA beneficiary, although at greater expense.

In many cases, after the death of the IRA owner, a surviving spouse will want to do a spousal rollover. This option is available if the spouse is named directly as the sole beneficiary on the beneficiary designation form.

Frequently, when a trust is named as the IRA beneficiary, this option becomes more complicated, and sometimes requires the time and expense of requesting a private-letter ruling from the IRS. There have been many PLRs allowing a spousal rollover when the spouse is the trustee of the trust, is the sole beneficiary and has complete control over the trust assets.

A spousal rollover would likely not be possible with a trusteed IRA, however. Clients who are looking for the ability of a surviving spouse to do a spousal rollover should strongly consider simply naming that spouse on the beneficiary designation form. They would not be well-served by either a trust as beneficiary or a trusteed IRA.

Some clients may have concerns about creditor protection of IRA assets for their heirs. For example, a parent might be concerned that, if a child is having financial trouble, creditors could access the inherited IRA funds.

There are good reasons for this concern. In Clark v. Rameker, for example, the U. S. Supreme Court ruled that inherited IRAs are not protected in bankruptcy.

A trusteed IRA would offer a higher level of protection from creditors than leaving assets outright to a beneficiary. However, the protection would be limited by the fact that the trusteed IRA would be required to pay out the RMDs each year to the beneficiary. There would be no way to protect those RMD funds.

By naming a trust as the IRA beneficiary, a higher level of protection could be achieved, because a trust could be drafted to give the trustee discretion to keep the RMDs in the trust instead of paying them out to the trust beneficiaries.

Of course, there is a downside to using a trust to protect the RMDs from creditors. RMD funds held in the trust will be taxed at trust tax rates, which quickly reach the top 39.6% income tax bracket. A Roth IRA left to a trust could eliminate this trust tax problem.

Clients who are considering trusts often want to appoint an individual, usually a family member, as a trustee. Frequently, the individual may be a co-trustee with a financial organization.

This will not work with a trusteed IRA for two reasons:

1) The trustee will be the financial organization offering the trusteed IRA.

2) The tax code does not permit an individual to be a trustee of an IRA.

One big downside for trusteed IRAs is the lack of ability to move the inherited IRA assets. While there is no reason that a trusteed IRA could not allow the movement of inherited IRA funds after the death of the IRA owner, these documents are generally drafted in such a way that, if not outright prohibited, it is certainly not guaranteed.

This would be something for clients to seriously consider, because these accounts will be in existence for many years. Even if the institution is sound, if beneficiaries feel they are getting poor service or would prefer different investment choices, they may not be able to vote with their feet.

Trusteed IRAs are not for everyone. Consider the alternatives of simply naming a beneficiary directly on the IRA beneficiary form or naming a trust that has been drafted specifically for the client by a knowledgeable attorney.


Ed Slott

   Taxpayer Tips: Best Practices for U. S. Tax Court

Taxpayers contesting IRS assessments of additional taxes, penalties and interest have a number of different options to contest and appeal those assessments. One of those options includes bringing a case to the United States Tax Court (Tax Court). Here are some Tax Court practice tips for taxpayers:

1. Know What Tax Court Is

Congress created the Tax Court as an independent judicial authority for taxpayers disputing certain Internal Revenue Service (IRS) determinations. Tax court is not controlled by or connected to the IRS even though the Tax Court’s authority, or jurisdiction, is limited to resolving taxpayer issues with the IRS. Similar to other Federal courts in the U.S., it is a court of record and records are made of all proceedings.

To initiate a case, a taxpayer files a petition with the Tax Court. Once proceedings begin, the taxpayer is then referred to as the “petitioner” and the Commissioner of the Internal Revenue is referred to as the “respondent.”

2. Understand How the U.S. Tax Court Operates

Tax Court operates on a calendar basis with its 19 presidentially appointed judges traveling the nation to conduct trials in a number of different cities. The judges themselves have expertise in matters of U.S. taxation and are qualified to apply U.S. tax law. There are no juries at these trials and the matter is tried by one judge. After the trial, a report is issued by that judge who sets forth the findings of fact and an opinion. The case is then closed based on the judge’s opinion.

3. Access Helpful Tools Specifically Created for Taxpayers by the Tax Court

The Tax Court website can be very helpful and provides a number of resources.  Recently, the Tax Court created a series of videos to educate taxpayers on Tax Court procedures and rules. The video series covers the following:

  • An overview of the U.S. Tax Court
  • Understanding the Process
  • An Introduction to the Unites States Tax Court
  • Filing the Petition
  • Pretrial Matters
  • Calendar Call and the Trial
  • Post-Trial Proceedings

The Tax Court website also offers a “Taxpayer Information” web page, which is structured into four sections and reads like an extensive frequently asked questions resource. The Taxpayer Information resource contains a glossary and links to Tax Court Rules and is very helpful.

4. Be Aware of Options for Taxpayers with Smaller Amounts in Dispute (under $50,000)

When the amounts are under $50,000 or the tax matter is less complex, taxpayers may consider representing themselves. It may be more cost-efficient and even more time-efficient in some cases.

For cases not in excess of $50,000, the taxpayer also has the option to choose to have the case conducted under the “small tax case” procedures. These procedures are simpler and less formal than those for regular cases. They are typically speedier too. This choice is made when the taxpayer files their petition with the Tax Court. However, and importantly, a small tax case may not be appealed to a Court of Appeals by the IRS or the taxpayer.

Low-income taxpayers should also be aware that low-income tax clinics exist in almost every U.S. state as well as the District of Columbia. These clinics offer free or reduced fee tax and tax representation services to taxpayers with incomes below certain thresholds and based on family size.

5. Representation Considerations When the Amount in Controversy Exceeds $50,000 or the Issue Is Complex

When the amount in controversy before the U.S. Tax Court is large or if the tax matter is complex, taxpayers may wish to seek seasoned representation from a tax professional, such as a tax attorney admitted to practice before the U.S. Tax Court.

While the Tax Court provides many resources for self-representation, the Internal Revenue Code and its accompanying regulations and procedures can be overwhelming. The IRS assigns attorneys from their Office of Chief Counsel to represent them who are well versed in both tax law and the rules and procedures of Tax Court. (Tax Court has just under 350 rules, which are updated and changed on a somewhat frequent basis.)

   Which Retirement Income Tax Strategy Is Right for You?

For many people, thinking about retirement simply means contemplating enjoyable ways of spending time during their golden years. What some people may not account for, however, is the impact taxation can have on savings, investments, and cash withdrawals.

Just as it is important to plan your investments—and it is never too soon to start—it is also wise to consider your strategy for withdrawals before you actually retire. This can help you align your anticipated tax burden with your financial goals, as well as give you ample time to consider your options.

In planning withdrawals from one or more retirement accounts, it is important to have a defined strategy for maintaining income and minimizing the impact of taxes, all while keeping your portfolio balanced appropriately for your risk tolerance. This is an excellent time to work with your financial advisor and/or tax professional, and no one strategy is right for everyone. With that in mind, here are four general strategies you may consider as you plan for retirement. (Please note that these are informational overviews only, and that the author does not provide legal or tax advice.)

1. Withdraw From Tax-Exempt Retirement Account Last

The least complex strategy of these four involves withdrawing from your accounts in an order that leaves tax-exempt accounts for last. In this scenario, you would first take required minimum distributions (RMDs) from your retirement accounts—thus avoiding any penalties for failing to withdraw your full RMDs.

Next, you would withdraw from taxable accounts until you have exhausted their balances. Utilizing taxable investments keeps more of your money parked where it has the potential to grow tax-deferred; any growth would enjoy higher potential for compounding interest, as taxes would not be levied until withdrawal.

Third, you would withdraw from tax-deferred traditional retirement accounts. This leaves your remainder, in this hypothetical scenario, invested in Roth accounts from which qualified withdrawals won’t be taxed, making them available without tax liability for predictable income, unexpected expenses, or passing on to your heirs.

This simple approach may be appealing, but it does come with at least one potential drawback: while withdrawing from tax-deferred accounts, your tax liability may increase enough to impact other aspects of your financial plan. If this concerns you, you may contemplate minimizing the likelihood of a shift in your tax bracket.

2. Withdraw From Multiple Account Types

If avoiding a higher tax bracket is important to you, you may consider dividing up each of your withdrawals among several account types. By withdrawing from multiple accounts at a time, taking a portion of your needed money from each, you may be able to balance potential gains with tax liabilities on withdrawals from tax-deferred accounts. The goal here is maintaining a targeted marginal tax rate—one you would select before with withdrawals and which you would likely have to revisit before each tax year.

Another consideration you may want to plan for: Social Security benefits, for which the IRS maintains a unique taxation formula. To limit tax liability on these benefits, you may want to organize your withdrawals around a strategy built for this purpose.

3. Minimize Tax Liability on Social Security Benefits

If you intend to minimize tax liability on Social Security benefits, you may consider distributing your withdrawals among multiple account types as you might if your goal was maintaining a targeted tax bracket. Social Security benefits are treated differently than ordinary income or investment gains by the IRS; as such, strategies for minimizing tax liability on Social Security benefits must account for additional income, whether from non-investment sources, retirement accounts or otherwise.

The same principle outlined in strategy #2 is at play here, but with one key difference: instead of targeting a specific tax bracket, you would focus on IRS thresholds for taxation on Social Security benefits. Your goal would be organizing withdrawals and resulting taxable income around maintaining your chosen bracket. As with each of the hypothetical scenarios here, this is a complex matter you should discuss with your tax professional and/or financial advisor.

If you find yourself wondering how these approaches could impact your capital gains tax rate, you might consider a strategy centered on capital gains tax liability.

4. Keep Capital Gains Taxation to a Minimum

Any increase in the value of your portfolio may be subject to capital gains taxes. As of the 2016 tax year, individuals in the 10% and 15% tax brackets were able to realize long-term capital gains or receive qualified dividends free of taxes. This means individuals with taxable income in these brackets for the 2016 tax year could have sold investments held longer than one year at a tax advantage during this period.

If a large percentage of an investor’s retirement assets were held in taxable accounts during this period, they could have incurred a potentially favorable tax scenario by selling longer-term stock holdings. This may not be true in any given year, and it is critical to keep abreast of IRS regulations on each aspect of your financial plan, as well as on each potential strategy you consider.

These are just a few of many potential strategies, and they are presented merely to help you start considering your options as you begin to outline a financial plan. Consult with a tax professional of your choice when considering the role that present and future taxes may play in your plans for retirement or otherwise.

Dellovo, Mateo

   IRS and Security Summit Partners Warn of Fake Tax Bills


WASHINGTON — The Internal Revenue Service and its Security Summit partners today issued an alert to taxpayers and tax professionals to be on guard against fake emails purporting to contain an IRS tax bill related to the Affordable Care Act.

The IRS has received numerous reports around the country of scammers sending a fraudulent version of CP2000 notices for tax year 2015. Generally, the scam involves an email that includes the fake CP2000 as an attachment. The issue has been reported to the Treasury Inspector General for Tax Administration for investigation.

The CP2000 is a notice commonly mailed to taxpayers through the United States Postal Service. It is never sent as part of an email to taxpayers. The indicators are:

  • These notices are being sent electronically, even though the IRS does not initiate contact with taxpayers by email or through social media platforms;
  • The CP2000 notices appear to be issued from an Austin, Texas, address;
  • The underreported issue is related to the Affordable Care Act (ACA) requesting information regarding 2014 coverage;
  • The payment voucher lists the letter number as 105C.

The fraudulent CP2000 notice included a payment request that taxpayers mail a check made out to “I.R.S.” to the “Austin Processing Center” at a Post Office Box address. This is in addition to a “payment” link within the email itself.

IRS impersonation scams take many forms: threatening telephone calls, phishing emails and demanding letters. Learn more at Reporting Phishing and Online Scams.

Taxpayers or tax professionals who receive this scam email should forward it to  and then delete it from their email account.

Taxpayers and tax professionals generally can do a keyword search on for any notice they receive. Taxpayers who receive a notice or letter can view explanations and images of common correspondence on at Understanding Your IRS Notice or Letter.

To determine if a CP2000 notice you received in the mail is real, see the Understanding Your CP2000 Notice, which includes an image of a real notice.

A CP2000 is generated by the IRS Automated Underreporter Program when income reported from third-party sources such as an employer does not match the income reported on the tax return. It provides extensive instructions to taxpayers about what to do if they agree or disagree that additional tax is owed.

It also requests that a check be made out to “United States Treasury” if the taxpayer agrees additional tax is owed. Or, if taxpayers are unable to pay, it provides instructions for payment options such as installment payments.

The IRS and its Security Summit partners — the state tax agencies and the private-sector tax industry — are conducting a campaign to raise awareness among taxpayer and tax professionals about increasing their security and becoming familiar with various tax-related scams. Learn more at Taxes. Security. Together. or Protect Your Clients; Protect Yourself.

Taxpayers and tax professional should always beware of any unsolicited email purported to be from the IRS or any unknown source. They should never open an attachment or click on a link within an email sent by sources they do not know.

   Ten Income Tax Benefits for Farmers


Farming has often been viewed as the backbone of the American economy. While technology and other recent developments may have changed this thinking, farmers still enjoy a preferred status, at least as federal income taxes are concerned. For instance, there are several special tax code provisions relating to farming, most of them beneficial. At the same time, taxpayers in the agriculture field may be in line for the same tax breaks available to businesses in general.

What sort of tax provisions are we talking about? Periodically, the IRS provides insights through online postings. Here are ten items that may be of interest.

1. Depreciation deductions: Like other businesses, farmers can take advantage of enhanced writeoffs for property placed in service in 2017. Specifically, a farmer may claim a maximum expensing deduction of $510,000 under Section 179, subject to a phase-out for acquisitions above $2,030,000, plus 50% “bonus” depreciation on qualified property.

2. Crop insurance proceeds: Crop insurance may be purchased by farmers to protect against losses caused by natural disasters –such as hail, drought and floods — or lost revenue due to declines in prices of agricultural commodities. However, the proceeds generally have to be reported as income in the year they are received.

3. Sales due to weather: On a related note, if a farmer sells more livestock and poultry than would normally occur in a year because of weather-related conditions, the business gets a reprieve: It can postpone reporting the gain from sales of the additional animals due to the weather until the next year.

4. Farm income averaging: Regular income averaging has gone by the boards, but farmers may still average all or some of the current year’s farm income by allocating it to the three prior years. This may lower tax for the current year tax if current income from farming is high and taxable income from one or more of the three prior years was low.

5. Deductible farm expenses: As with other businesses, farmers may write off ordinary and necessary costs of operating a farm for profit. An “ordinary” expense is one that is common and accepted in the farming business, while a “necessary” expense must be appropriate for the business.

6. Employees and hired help: Similarly, a farmer can deduct reasonable wages paid for labor hired to perform farming operations. This includes both full-time and part-time workers. Of course, the business is responsible for withholding income and payroll taxes for its employees.

  1. Items purchased for resale: Not all farm products are home-grown. Farmers may to deduct the cost of items purchased for resale in the year the sale occurs. This includes livestock and freight charges for transporting the livestock to the farm.

8. Net operating losses: If the deductions claimed by a farming operation exceed its profits, it may report a net operating loss (NOL) for the year. The NOL can be carried back for two years and then forward for up to 20 years to offset income in other years. As a result, the farm business may be entitled to a refund from a prior year or benefit from a tax reduction in a future year.

9. Loan repayments: When a taxpayer takes out a personal loan, he or she can’t deduct interest on the subsequent loan repayments. However, if loan proceeds are used in a farming business, the taxpayer may deduct the interest paid on the loan on the farm’s tax return.

10: Fuel and road use: Finally, farmers may be able to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes. Other taxpayers often illegally claim this off-road credit, but it’s legitimate for those in the farming industry.


Ken Berry

   How Will the Proposed Healthcare Reform Affect Reporting?


Most Americans are aware that the House of Representatives recently passed the “American Health Care Act” (AHCA).  But what does this mean? First of all, the Affordable Care Act (ACA), or Obamacare, is not necessarily going away.

There is a process that the AHCA (and any House-approved bill) must first complete before becoming law.  This process includes a review and likely revisions by the Senate.  If the Senate passes a bill different from the House version, either the bill goes to Committee to address the differences or the House would have to pass the Senate’s bill. Only after these steps could an ACA replacement bill be forwarded to the President for his signature, and then to the Internal Revenue Service (IRS) for proper implementation of the law.

Most significant to note is the fact that as written, the AHCA does not eliminate the 1094 and 1095  reporting requirements implemented by the ACA. As it currently stands, businesses and issuers will still be required to report employee and individual healthcare coverage to the IRS.

The AHCA immediately eliminates the penalties associated with both the individual and employer mandates originally required by ACA.  However, replacing the individual mandate would be a new continuous coverage requirement. Issuers offering plans in the individual market will be required to assess a 30 percent penalty on policyholders who either had a gap in coverage that exceeded 63 days in the prior 12 months or who aged out of their dependent coverage (young adults up to age 26) and did not enroll in coverage during the next open enrollment period. This provision would be effective for coverage obtained during special enrollment periods for plan year 2018 and for all coverage beginning plan year 2019.

The AHCA also modifies the premium tax credit for 2018 and 2019 so that the premium tax credit can be used to purchase qualified health plans sold outside of the Exchange.  If minimum essential coverage provided to an individual consists of a qualified health plan not enrolled through an Exchange, a return must be issued that includes: a) a statement that the plan is a qualified health plan; b) the premiums paid with respect to the coverage; c) the months during which the coverage is provided to the individual; and d) the adjusted monthly premium for the applicable second lowest cost silver plan for each month for the individual.

Starting in 2020, the ACA’s Exchange subsidies will be replaced with an age-banded tax credit:

    • $2,000/year for anyone under age 30
    • $2,500/year for ages 30-39
    • $3,000/year for ages 40-49
    • $3,500/year for ages 50-59
    • $4,000/year for age 60 and over

Additional AHCA Updates Include:

  • Delays the “Cadillac Tax” until 2026. ACA’s Cadillac Tax was to begin in 2018 and impose a 40% excise tax on high-cost employer-sponsored coverage.
  • Form W-2 may include information that tracks each month an employee is eligible for a group plan.
  • The annual tax-free contribution limit on HSAs can be increased to match the maximum out-of -pocket costs on high-deductible health plans.

The bill’s next stop is the Senate, where it will be considered, or even more likely, they may draft their own version of a bill and ultimately vote. While it is certainly possible that the employer and individual mandates will be repealed, there is also the possibility of alternative scenarios where individuals must prove coverage to avoid a penalty or qualify for a credit.


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