If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don’t owe any taxes.
Is your file cabinet overflowing? Do you hesitate to purge tax information because you’re not sure what to keep and what to discard? Here’s a quick guide to help you cut through the clutter.
- Substantiation for deductions includes charitable donation acknowledgments, receipts for employee business expenses, and automobile mileage logs. Retain these at least seven years after you file the return claiming them.
- The same seven-year rule also generally applies to common tax forms such as 1099s showing interest, dividends, and capital gains from banks or brokerages, and Schedule K-1s from partnerships and S corporations. The IRS recommends holding on to your W-2s until you start collecting social security.
Tip: Shred interim income reports once you’ve compared the totals to annual forms.
- Retirement accounts. You may have to calculate the taxable portion of distributions, so keep records detailing your contributions until you’ve recovered your basis.
- Tax returns. The statute of limitations is usually three years but can be six years if underreported income is involved. In cases of fraud or when no return is filed, the IRS has an indefinite time period for assessing additional tax.
As a general rule, keep federal and state returns a minimum of seven years.
For additional information, including how long you should store business papers and payroll reports, please call. We’ll be happy to help you establish a records retention schedule.
How to determine if you need to worry about estate taxes
Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. Those assets qualify for the marital deduction and avoid potential estate tax exposure until the surviving spouse dies. The net number represents your taxable estate.
You can transfer up to your available exemption amount at death free of federal estate taxes. So if your taxable estate is equal to or less than the estate tax exemption (for 2015, $5.43 million) reduced by any gift tax exemption you used during your life, no federal estate tax will be due when you die. But if your taxable estate exceeds this amount, it will be subject to estate tax. Many states, however, now impose estate tax at a lower threshold than the federal government does, so you’ll also need to consider the rules in your state.
If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.
If you itemize deductions, you may be able to deduct some of the miscellaneous expenses you pay during the year. These miscellaneous deductions can be taken only if their total exceeds two percent of your adjusted gross income. Deductions include such expenses as the following:
- Unreimbursed employee expenses.
- Job hunting expenses (in your same line of work).
- Certain work clothes and uniforms.
- Tools needed for your job.
- Union or professional dues.
- Work-related travel and transportation (not commuting costs).
Are you familiar with the charges imposed by the mutual funds you own? Since fund expenses affect your investment return, understanding the costs is an important step in making sound investment decisions.
Here are some common charges you’ll want to know about before you invest.
- Load- A load is a sales charge imposed by the fund. You might think of it as similar to the fee you pay a broker to purchase a stock. Mutual funds fit in two broad categories: load and no-load.
Load funds include front-end, back-end, and level-load. A front-end load, as the name implies, is charged when you make your initial investment. A back-end load is charged when you sell your investment before a specified period of time has passed. A level-load charges you an ongoing fee (for instance, 1% per year) as long as you own the shares. A no-load fund has no sales charge. Keep in mind that no-load is not the same as no-fee. No-load funds can still charge purchase fees, redemption fees, exchange fees, and account fees. Look for information on fees and charges in a fee table located near the front of a fund’s prospectus under the heading “Shareholder Fees.”
- Expense ratio- The expense ratio tells you the cost of operating and managing the fund. These costs include marketing fees (sometimes called 12b-1 fees), management fees, administrative fees, operating costs, and other asset-based costs incurred by the mutual fund. A high expense ratio can hurt your overall return.
- Turnover and taxes- A fund’s turnover ratio indicates how often the fund buys and sells stocks. A high turnover ratio reflects active trading. Because funds pass capital gains through to shareholders, active trading could result in taxable income for you. A low turnover ratio indicates a “buy and hold” strategy that can postpone the tax bite.
If you have questions about mutual fund terminology, give us a call.
Did you convert all or part of a retirement account to a Roth during 2014? And do you now wish you hadn’t? Here’s some good news: You have until October 15, 2015, to change your mind, even if you already filed your federal income tax return.
The tax term for undoing the conversion and switching your funds back to a traditional IRA from a Roth is “recharacterization.” You can recharacterize any amount of your original conversion, no matter your income, and for any reason. When you recharacterize the entire conversion amount, you put yourself back in the position you were in originally.
Why would you want to recharacterize? Perhaps you’re now in a higher tax bracket than you expected and reconverting will reduce your income. Or maybe your investments didn’t do as well as you anticipated and the value in your account has declined. Leaving the money in the new Roth means you pay tax on the original amount you converted. Recharacterizing means you save tax dollars.
Here’s another beneficial recharacterization rule: You don’t need to worry about being locked out of future transfers. You can reconvert the same funds to a Roth after a waiting period.
If you’re considering undoing last year’s Roth conversion, please call for more information. We’re here to help you make the right decision.
The fourth quarter is often make-or-break time in sports. Likewise, tax-cutting steps you take in the last three months of the year can transform a financial plan into a bona fide winner.
Late-year tax planning is often a matter of reviewing your inflows and outflows. For instance, income from capital gains can be subject to both capital gains tax and the 3.8% Medicare surtax. To offset capital gains, you might sell investments that have lost value since you purchased them. Net capital losses can be used to reduce ordinary income by up to $3,000. A tax-saving examination of your portfolio is also a good time to rebalance your holdings between asset classes.
Interest and dividend income can be subject to the 3.8% Medicare surtax too. Plan for this by considering investments in municipal bonds that pay tax-free interest. If you are contemplating a mutual fund investment between now and the end of the year, check the fund’s expected dividend date. Purchasing a mutual fund now could bring an unwanted taxable dividend before December 31.
On the outflow side, look for opportunities to maximize deductions. Accelerate your charitable donations and consider donating appreciated securities you have owned for more than one year. This strategy can offer double value – you get the benefit of a deduction and you don’t have to pay tax on the gain.
Take advantage of increased retirement plan contribution limits for 2015. This year you can contribute as much as $5,500 to a Roth or traditional IRA ($6,500 if you’re age 50 or over). The limit for 401(k) plans is $18,000, plus an additional $6,000 if you’re 50 or older. While checking on the status of your retirement plan contributions, review your list of beneficiaries too.
Another important fourth quarter exercise is an analysis of your income tax withholdings and estimated payments. These can be affected by personal events such as a change in marital status, the sale of property, or a new job.
Effective tax planning is a matter of finishing well. Contact our office to discuss steps you can take to make the fourth quarter a strong one for you.
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You might, if your circumstances have changed. For example, say the value of the assets in your new Roth account is currently less than when you made the conversion. Changing your mind could save tax dollars.
Recharacterizing your Roth conversion lets you go back in time as if the conversion never happened. You’ll have to act soon, though, because the window for undoing a 2014 Roth conversion closes October 15, 2015. Before that date, you have the opportunity to undo all or part of last year’s conversion.
After October 15, you can change your mind once more and put the money back in a Roth. That might be a good choice when you’re recharacterizing because of a reduction in the value of the account. Just remember you’ll have to wait at least 30 days to convert again.
Give us a call for information on Roth recharacterization rules. We’ll help you figure out if going back is a good idea.