by Optima Financial Group | Jun 17, 2014 | Tax News
The bonus depreciation tax break allows businesses to deduct up to 50% of the cost of capital purchases upfront, resulting in big tax savings for business owners. In May 2014, the Ways and Means Committee of the Republican-controlled House of Representatives voted 23-11 – along party lines – to renew and make permanent the tax break designed to encourage corporate business investment.
A Tax Break with a Deficit
But making the depreciation tax break permanent would add nearly $300 billion to the deficit over the next ten years, according to the Wall Street Journal. A measure to make corporate research credits permanent would increase the deficit by another $300 billion. Enacting all the corporate-friendly tax measures proposed or passed by the House would extract approximately $1 trillion from the economy. Despite these added costs to the budget, the sentiment in the House is that business owners need certainty about future tax regulations in order to feel confident about making capital investments.
Related Article: Should We Abolish Corporate Income Taxes?
A Fate Less Certain
The permanent extension of the corporate capital deductions bill is scheduled for a vote by the full House, where it is expected to pass, most likely along party lines as well. But the ultimate fate of the corporate depreciation tax credit is somewhat less certain. A version of the corporate depreciation tax credit bill under consideration in the Democratic-majority Senate limits the extension of the credit to two years. Scheduling a Senate vote for its version of the bill is also being weighed down by partisan battles concerning a number of related and unrelated issues.
The differences between the bills means that the two would have to be reconciled before they could be sent to President Obama’s desk for his signature or veto. It is not known whether President Obama would sign the measure if it passed Congress, although he did sign a similar measure in 2010 that allowed businesses to apply an accelerated rate to deductions for capital expenses on their 2010 federal income tax returns.
Renewing Expired Tax Breaks
In a typical year, Congress passes numerous pieces of legislation designed to renew or extend temporary tax measures that have expired recently. Even in the hyper-partisan atmosphere of the present Congress, many expired tax measures are expected to be renewed eventually. This includes the corporate depreciation deduction. But given that 2014 is an election year, some observers believe that no significant legislation will be passed until after November, when a lame-duck Congress will be at least temporarily freed from the pressures of campaigning.
Related article: 9 Tax Breaks That Could Expire in 2014
by Optima Financial Group | Jan 28, 2014 | Tax Planning
If you are eco-conscious, you probably sort your disposables for recycling, wash your clothes in cold water, carry reusable shopping bags to the grocery or perform other environmentally-friendly actions. But did you know that you may also be eligible to receive tax credits and deductions from Uncle Sam? While tax breaks for going green are not nearly as generous as they were in past years, it is still worth your while to investigate possible savings from the IRS for projects that you plan to carry out anyway.
Make Home Improvements
Did you recently replace one or more drafty windows or reinforce the insulation on your home? If so, you may qualify for tax credits through the Non-Business Energy Property Credit, which covers 10 percent of costs associated with purchasing and installing qualified energy-efficient insulation, doors, metal and asphalt roofs and windows.
The credit is also available for non-solar heating, ventilating and air conditioning (HVAC) systems, biomass stoves and non-solar water heaters. A maximum of $200 in credits can be claimed for window installation, with a $500 lifetime limit in total credits. The credit can only be applied to improvements made on your existing primary residence located within the United States. The Non-Business Energy Property Credit expired at end of December, 2013; new projects will not qualify unless Congress votes to renew the credit.
Update to Energy Efficient Appliances
Have you resorted to showering with cold water to save money on your utility bills? Perhaps you should consider installing an energy-efficient solar hot water heater.The Residential Energy Efficient Property Credit covers up to 30 percent of the cost of purchasing and installing a solar hot water heater, along with costs associated with solar electricity arrays, residential wind turbines and geothermal heat pumps.
There is no upper limit to the amount of tax credits you can claim, and the credit is applicable to new and existing residential construction. You can also claim up to 30 percent of the cost of installing residential fuel cells and microturbine systems up to a limit of $500 under the program. The Residential Energy Efficient Property Credit remains in effect through the end of December 2016, so you have plenty of time to make those improvements.
Optima Tax Relief has more about how you can get credit for making your home energy efficient in this post.
Green Up Your Ride
If you missed out on the recent Cash for Clunkers program, you may still have a chance to collect tax breaks for buying an energy-efficient car – as long as the car you buy is either a plug-in hybrid or an all-electric model. The Plug-In Electric Drive Vehicle Credit (IRC 30D) applies to four-wheeled passenger vehicles acquired by individuals and businesses after December 31, 2009. Some two-wheeled and three-wheeled vehicles acquired after December 31, 2011 and before January 1, 2014 also qualify for the program. Tax credits for non-plug-in hybrids, diesel-powered vehicles and alternative fuel vehicles (AFVs) expired at the end of 2010.
You may claim $2,500 for all eligible vehicles. In addition, for a vehicle that draws what the IRS calls “propulsion energy” from a battery with a capacity of at least 5 kilowatt hours, you may claim an additional $417. You may claim an additional $417 for each additional kilowatt hour capacity up to a maximum credit of $7,500.
The IRS will begin phasing out the credit over a one-year period beginning with the calendar quarter following a calendar quarter during which a specific manufacturer sells at least 200,000 qualifying vehicles in the United States. (The clock starts after December 31, 2009). During the first two quarters of the phase-out period, individuals who purchase qualifying vehicles may claim 50 percent of the applicable credit; during the second two quarters of the phase-out period, taxpayers may claim 25 percent of the applicable credit. No credit may be claimed after the end of the phase-out period.
As of January 2014, there is little danger of sales triggering the phase-out stage of the Plug-In Electric Drive Vehicle Credit program. The most popular plug-in electric car, the Chevrolet Volt, has sold approximately 56,000 units since it was introduced to the consumer market in December 2010. (Chevy representatives made an announcement at the 2014 Detroit Auto Show that mass production of the all-electric Volt has been suspended; instead, the car will be reclassified as a “niche” model targeted for specific audiences, much like the iconic Corvette.) The Ford Focus electric model had sold just under 21,000 cumulative units in the United States as of November 2013, according to the IRS website.
How to Claim Your Tax Breaks
To claim tax breaks for home improvements and energy-efficient appliances, file Form 5695, Residential Energy Credits.
To claim tax breaks under the Plug-In Electric Drive Vehicle Credit program, individual taxpayers submit Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit along with their federal income tax returns. Under the American Recovery and Reinvestment Act (the “stimulus”), individuals who purchase qualified vehicles during 2010 or later may apply the credit toward payment of the Alternative Minimum Tax (AMT), if they are subject to the tax. To claim the credit for vehicles purchased for business use, submit Form 3800, General Business Credit.
Going green doesn’t reap the same rewards it used to, but there’s still money on the table if you’ve made any of these changes. Don’t let these tax credits fall through the cracks!
Photos: Flickr, Al.com
by Optima Financial Group | Dec 6, 2013 | Tax Planning
Who wins after every lotto draw? The taxman does, of course! Optima Tax Relief wants to help you save by providing tips for lowering taxes on your lotto winnings.
How Much Are Lotto Winnings Taxed?
Not only is the lottery a tax on people who are bad at math –US lotteries generally only pay out 60% of the money players bet. The chances of winning a large lottery, such as the Powerball, is one in 175 million and the lucky winner actually has to give the IRS and state tax revenue agencies a big chunk of the prize, every time.
How big a chunk? The taxman’s share could be anything from 40% to 60%, depending on how the winner decides to cash in the prize and if they live in a state that taxes lotto winnings. The same applies even if you win a small prize, win on a game show, or participate in a community raffle.
What to do after winning the lottery
So how does paying taxes on lotto winnings work? And if you do happen to win the lottery, what is the smartest way to minimize your tax burden?
Lump Sum Vs. Annuity Payments
The first tax decision lottery winners have to make is whether to receive their prize as a lump sum or have it paid out in yearly installments, called an annuity. If you win a $10 million prize with the New York State Lottery, for instance, you get to choose between $10 million over 26 yearly payments of approximately $250,000 or a lump sum of a little less than $5 million. The full prize is only for those who choose the annual payments.
Those who choose the lump sum get the cash value in bonds that the lottery would have had to buy in order to pay $10 million over 25 years.
From a tax perspective, choosing annual payments will keep you in a much lower tax bracket, which will reduce the amount of tax you have to pay. As of 2013, taxpayers with an income between $183,251 and $398,350 pay 33 cents on the dollar to the IRS. Those with an income of more than $400,000 have to pay nearly 40 cents on the dollar, which doesn’t even include state taxes.
Similarly, business owners whose profits swing dramatically from one year to the next may benefit from spreading taxable income over multiple years.
However, there is a strong likelihood that taxes will continue to go up over time and negate the tax benefit of annuities. Also, if you choose the lump sum, you could invest the entire amount and put those lotto winnings to work, which — if your investments go well — could more than compensate for the higher initial lump sum tax rate.
“When deciding upon a lottery payment option it ultimately depends on the unique situation,” says Harry Langenberg, Managing Partner at Optima Tax Relief, who points out winners of big jackpots will be in the highest bracket either way. “If you’re a wise investor, it makes sense to take it all at once.”
Set Up a Trust
A smart move for lottery winners is to set up a trust. In states that permit it, creating a trust allows you to collect your winnings anonymously, which can avoid a lot of unsolicited attention from scammers and opportunistic long-lost friends and relatives. A well-designed trust can also allow for tax-free growth of assets, as well as reduce estate taxes for married couples.
Trusts are not just a good idea for lottery winners and the ultra-wealthy. Even families with a moderate income can reap the benefits from setting up a trust. For instance, trusts allow you to specify how and when your children inherit your estate, which can help them use their inheritance more wisely. You can also use trusts to provide funds for particular purposes, like for education and health care, or to allocate monies for a favorite charity.
Pay Taxes Like a Millionaire
Sadly, lottery winners often end in financial ruin due to bad investment choices, greedy relatives and friends, misjudging the cost of taxes or the costs of maintaining the stuff they buy. This trap can be avoided by investing all winnings in a low-risk mutual fund and living off the interest. For example, if you invest a $250 million dollar windfall in bonds and a diversified mutual fund, you could easily generate $4 million a year after taxes.
Even investing a more modest $1 million lottery prize could earn you $50,000 a year, assuming your portfolio yields a 5% interest. Earning a living from your investments, as opposed to owning a business or working for a salary is the reason ultra-wealthy people like Mitt Romney and Warren Buffet pay a lower tax rate than their secretaries. Capital gains, or the money you generate from investing in stocks and bonds, are taxed differently than regular income. This is particularly true if you avoid the trap of trying to time the stock market and hold on to your shares and bonds for the long haul. As of 2013, the long-term capital gain tax rate is 15% for taxpayers with incomes in the 25% to 33% tax brackets.
Lottery as Voluntary Taxation
The words of John Fielding, the 18th-century English satirist, hold true today.
A Lottery is a Taxation,
Upon all the Fools in Creation;
And Heav’n be prais’d,
It is easily rais’d,
Credulity’s always in Fashion;
For, Folly’s a Fund,
Will never lose Ground;
While Fools are so rife in the Nation
The quip that lotteries are a taxation on people who are bad at math is not a joke. According to The Tax Foundation, a non-partisan tax research group based in Washington, D.C., lotteries are not just a controversial way to fill state coffers, they are an actual tax. The use of lotteries to finance the government is nothing new. In 1892, A.R. Spofford, Librarian of Congress, described lotteries as the kind of voluntary tax the most reputable citizens would engage in — as part of their civic duty — to help with the financing of schools, hospitals, and courthouses.
Today, lotteries have lost most of their patriotic component, although some lotteries are centered around charities, but they still are a significant component of state revenue. As with property taxes, lottery tax can be avoided altogether by refraining from buying a ticket.
Photo: pirateyjoe
by Optima Financial Group | Mar 20, 2013 | Retirement
This post originally appeared on The Fiscal Times.
When you leave the workforce and give up a paycheck, life seems grand – endless free time, no more alarm clocks, and lower tax rates – or so it seems at first. Even if you’re raking in over a million dollars in retirement savings a year, you won’t have to pay Social Security and Medicare taxes, and some states don’t tax such income either.
But those tax savings won’t get you very far. As you start drawing Social Security checks and supplement them with tax-deferred retirement plan withdrawals and investment income, your taxable income can go up sharply. What really matters is not how much you have in retirement accounts, but what you’re left with after taxes.
Planning your income in retirement – and reducing your overall tax bill – is critical to making your money last. Here are eight ways to manage your tax bite after you leave the workforce.
1. Strategically withdraw from your IRA.
Rules on tax-deferred retirement plans like IRAs, 401(k)s, and 403(b)s allow you to take distributions starting at age 59.5, and you must start withdrawing the required minimum by age 70.5 or face stiff penalty fees. It’s usually better to pull money out when your taxable income for the year will be lower, especially when the total stays under the 25-percent tax bracket (which starts at $36,250 for singles and $72,500 for married filing jointly in 2013), says William Reichenstein, investment management chair at Baylor University.
Being strategic means you’ll pay the 10- or 15-percent rate on those withdrawals. You might take out tax-deferred money, for example, in a year when you have a lot of deductions – when you’re paying high medical expenses, for example, or are making a large charitable contribution, which would significantly reduce your taxable income. For example, you might have one year when your income from a pension is $40,000, but you have medical expenses of $20,000; this would be an excellent time to withdraw from an IRA. If you know you’ll exceed $36,250 (or $72,500 for married couples), it’s best to stay under the next tax bracket. Find the 2013 tax bracket rates here.
2. Pay estimated taxes on your Social Security benefits.
Social Security income is taxable, depending on the amount of your “combined income,” which the government defines as your adjusted gross income, plus any non-taxable interest (interest earned on tax-free municipal bonds, for example), plus 50 percent of your Social Security benefits. For an individual, if your combined income is between $25,000 and $34,000, you’ll pay normal income tax rates on up to 50 percent of your benefits; if it’s more than $34,000, you’ll pay tax on up to 85 percent. Mark Steber, chief tax officer at Jackson Hewitt Tax Service, says you can request that the Social Security Administration withhold those taxes from your checks, but it’s better to make estimated payments yourself because it’s common for combined income to fluctuate a lot, and the amount withheld would likely be too high or low.
3. Consider delaying your Social Security checks.
One benefit of waiting to collect Social Security until you’re older is that your checks will be larger. Though you can start collecting any time between the ages of 62 and 70, for every year you wait, your check will grow by roughly 6.25 percent, says Philadelphia-area financial planner Daniel White of Daniel White & Associates. But taxes also play into it.
In a paper last April for the Journal of Financial Planning, Baylor’s Reichenstein and a coauthor tested the effects of starting Social Security at different ages. They found that someone who retired in 2011 at age 62 with $700,000 in savings and started taking monthly Social Security checks of $1,125 that year would exhaust their portfolio in 30 years at a given spending level. But if they used their own assets to fund their early retirement and started taking their now-much-larger checks of $1,980 at age 70, their portfolio would last at least 40 years at that same spending level. This is in part because only 50 percent of your Social Security benefits count toward the combined-income threshold. Of course, all decisions like this are a gamble — if you die young, it would have been better to start taking Social Security earlier. However, if you have a surviving spouse, he or she would receive all or part of your benefit, depending on their age.
4. Give your children appreciated assets instead of cash.
If you’re planning to give money to the children or grandchildren, one way to do so while getting a tax benefit is instead of cash, give them a stock that’s grown since you bought it, says White. Of course, your family member will pay the capital gains tax when they sell the asset, so for both of you to benefit, the recipient should be in a lower tax bracket than you are – which is likely if you’re helping them out.
5. Convert your IRA to a Roth IRA.
If you can afford to pay the taxes, start converting your IRA to a Roth IRA, says Matthew Curfman, certified financial planner at Richmond Brothers in Jackson, Michigan. Growing your money in a Roth and then being able to withdraw it tax free will protect you against future tax increases. Also, since there’s no mandatory withdrawal on a Roth, it makes an excellent long-term contingency fund – and any withdrawals don’t count in the combined-income formula used to tax Social Security benefits, notes David Littell, co-director of the American College of Financial Services’ Center for Retirement Income.
6. Make charitable contributions from your IRA.
The New Year’s Day fiscal cliff deal resuscitated an expired provision for 2013 that allows people age 70.5 or older to donate up to $100,000 from their IRA to a qualified charity, without having to pay taxes on the transfer. That donation can help satisfy your required minimal distribution. You can’t beat that provision, Curfman says. If you donate $20,000 from your IRA to the charity, the nonprofit gets all of it. But if you withdraw $20,000 out of your IRA and then donate the cash, the IRS taxes it before you make the donation – so if the tax was $3,000, the charity gets only $17,000.
7. Raise the cost basis of your investments when your income is lower.
Low-income years in retirement are a great time to sell a stock that has appreciated and reinvest the gain in stock of a similar class, says Reichenstein. That’s because, under the fiscal cliff deal, the long-term capital gains rate is zero (yes, zero) on people whose income puts them in the 15-percent bracket or lower (up to $36,250 for a single filer and $72,500 for married filing jointly).
In years when you’re in one of those brackets, you can sell a stock you bought originally at $40,000 that’s now worth $50,000 and buy another stock worth $50,000. You’ve raised the cost basis of the stock by $10,000, reducing the taxes you’ll pay if you have to sell it in a year when you’re in the 25-percent or higher bracket. Use caution though, says Reichenstein: Make sure that $10,000 in gain doesn’t push your income for the year high enough that it would cause your combined income to rise to the point that your Social Security benefits are taxed at a higher rate.
8. Move to a tax-friendly state.
If you’re moving for retirement, consider taxes as part of your decision, says Diana Webb, assistant professor of finance at Northwood University. A report last September from Kiplinger identified Alaska, Nevada, and Wyoming as the three states with the most retirement-friendly tax laws. The worst include Ohio, California and New York.
by Optima Financial Group | Dec 11, 2012 | Tax Planning
How do you know if you need a tax attorney?
Tax attorneys are lawyers who specialize in the complex and technical field of tax law. According to this article from about.com, you definitely need a tax attorney if:
- You have a taxable estate, need to make complex estate planning strategies, or need to file an estate tax return.
- You are starting a business and need legal counsel about the structure and tax treatment of your company.
- You are engaging in international business and need help with contracts, tax treatment, and other legal matters.
- You plan to bring a suit against the IRS.
- You plan to seek independent review of your case before the US Tax Court.
- You are under criminal investigation by the IRS.
- You have committed tax fraud (such as claiming false deductions and credits) and need the protection of privilege.
But what if you’re already mired in tax debt and can’t afford to hire an attorney? Low Income Taxpayer Clinics (LITCs) represent low income taxpayers before the IRS and assist taxpayers in audits, appeals and collection disputes. These clinics, which are operated by nonprofit organizations or academic institutions, can also help taxpayers respond to IRS notices and correct account problems.
Another option is to seek assistance from a referral system operated by a state bar association, a state or local society of accountants or enrolled agents, or another nonprofit tax professional organization.
Debt settlement companies are not law firms and cannot provide legal advice. However, debt settlement can be a part of your solution to tax debt. Debt settlement means that your debt is negotiated down to a reduced amount and paid off in a lump sum. Settlement is a good choice if you have more debt than you can pay off within two to three years or are experiencing a financial hardship that has you falling behind on your monthly payments.
