Taxes & Your Savings

5 Questions to Ask Your Tax Adviser Now

The end of another year is rolling up fast. With the year-end comes your last opportunities to minimize your 2013 tax bill and make changes to your benefit plans for 2014. Here are some questions, posed by Forbes magazine, to ask your financial and tax adviser while there is still time.

1. Should you defer income or accelerate it in 2013? What about deductions?

The answer depends on whether you expect to be in a higher tax bracket next year. Tax rates stayed the same for 2014, but tax brackets are altered. Take a look at the new tax brackets and see if your situation has changed.

Higher bracket next year: Consider accelerating your income, pulling it into 2013, to minimize your current year tax.

Lower bracket next year: You may want to defer income if possible to pay less taxes in 2014. If you are age 70 ½ or older, you could save taxes by taking only the minimum required IRA distribution in 2013, and wait till January to take more. You can also prepay 2014 deductions – like property tax and estimated state income tax – and claim them in 2013 while your tax bracket is higher.

2. Should you recognize gains and losses now?

If you have gains on investments and you’re in a lower tax bracket this year than next, this might be an advantageous time to sell. If you are in the 10% or 15% tax bracket, you’ll pay zero capital gains tax.

If you are in a higher tax bracket this year, taking your unrealized losses now should reduce your 2013 tax bill.

3. Should you convert a traditional IRA to a Roth IRA?

Roth IRAs require you to pay tax on your contributions now, but distributions are tax-free. If your tax bracket in 2013 is lower, and you can afford it, pay the tax now. That will set you up for tax-free retirement funds later. Just remember, if you convert to a Roth IRA you’ll need to pay all the tax on those tax-deferred contributions you’ve made. So ask your tax adviser to run the numbers before you decide.

4. What about year-end charitable giving?

You already know you can lower your tax bill by making charitable gifts before January. However, if you expect a higher tax bracket next year, the donation will benefit you more in 2014. Consider holding your donation till January.

If you are at least 70 ½ years old , you can donate up to $100,000 directly from your IRA to a charity. This doesn’t give you a charitable deduction on your taxes, but it will allow you to avoid the required minimum distribution, up to $100,000. Note: This tax provision may disappear after 2013 unless Congress acts to renew it.

5. Should you change your benefit plans?

If you have a flexible spending account, now might be a good time to increase your contributions to the max, which is $2,500. Chances are with rising deductibles, co-pays and premiums expected for all of us, you’ll need the financial help of paying for these expenses with pre-tax dollars. Also make full use of your childcare flexible spending account (maximum of $5,000) to save some tax money and evenly spread out the cost of childcare.

A good tax/financial adviser can steer you in the right direction when preparing for 2014. Contact Optima Tax Relief for help with these important matters before it’s too late.

One more thing: as the year ends, fraud ramps up. You may get unwelcome offers from “financial advisers” who promise “guaranteed” “risk free” or “secret” investment deals. If that happens, don’t walk away… run! To ensure you are dealing with a legitimate adviser, use FINRA’s Broker Check.

Photo: Dave Dugdale

3 Special Gifts That Will Earn You Money Back

It’s better to give than to receive, except when it comes to taxes.

Fortunately, the holiday season provides the perfect opportunity to give more to those you care about and less to greedy Uncle Sam. Here are a few options for tax-deductible gifts.

Build a Child’s College Fund

A great gift that fits the bill is a contribution to a 529 plan. These plans allow a child’s college fund to grow tax free, and reduce state income taxes for contributors across the country.

Under federal law, individuals can contribute up to $14,000 a year to a 529 plan, and married couples can give as much as $28,000 a year. When their child is ready for college, parents can withdraw money from the plan and pay no taxes on it. They just have to be sure to use the money for tuition and other expenses required to attend college.

Parents and grandparents are the ones who most often contribute to the plans, and they can receive multiple tax breaks. Working parents are able to avoid paying a federal gift tax and in many states, can deduct the contribution from their state income tax. Retired grandparents can reduce the estate tax their children will have to pay.

There is even the opportunity for married parents or grandparents to contribute a lump sum of $140,000 for the next five years. This lump sum option can generate a much larger return on investment. But it could also leave money on the table if the IRS increases the maximum allowable contribution during the next five years.

Send Gifts to your Business Contacts

Parents and grandparents, though, aren’t the only ones who can benefit from giving money during the holidays. The federal government allows individuals to deduct as much as $25 per gift to business associates and customers during the holidays. That means if you want to give to those who have helped you at your job this year, feel free. And you will also receive something special: a reduction in income taxes. Just remember that the maximum deduction is $25 per recipient each year, so if you sent someone a $25 business gift earlier in the year, you won’t be able to deduct your holiday gift to them.

Donate to Charity

Making a donation to charity, whether it’s giving a bag of old clothes or some cash, is often a tax write-off. Of course, not every charitable gift will give back to you. Donating to political causes and candidates, purchasing raffle tickets for a fundraiser and in-kind donations of your talent and expertise are not tax deductible.

So when you make your list this Christmas, check it twice. Once to make sure you bought all the gifts for your family, and again to make sure you’ve set yourself up for every tax break tyou can get. After all, it is the giving season.

Photo: Oxclock

Two Education Credits Help Pay Higher Education Costs

Source: IRS Newswire

The American Opportunity Credit and the Lifetime Learning Credit may help you pay for the costs of higher education. If you pay tuition and fees for yourself, your spouse or your dependent you may qualify for these credits.

Here are some facts the IRS wants you to know about these important credits:

The American Opportunity Credit

  • The AOTC is worth up to $2,500 per eligible student.
  • The credit is available for the first four years of higher education at an eligible college, university or vocational school.
  • The credit lowers your taxes and is partially refundable. This means you could get a refund of up to $1,000 even if you owe zero tax.
  • An eligible student must be working toward a degree, certificate or other recognized credential.
  • The student must be enrolled at least half time for at least one academic period that began during the year.
  • You generally can claim the costs of tuition and required fees, books and other required course materials. Other expenses, such as room and board, do not qualify.

The Lifetime Learning Credit

  • The credit is worth up to $2,000 per tax return per year. The yearly limit applies no matter how many students are eligible for the credit.
  • The credit is nonrefundable. This means the amount you can claim is limited to the amount of tax you owe.
  • The credit is available for all years of higher education. This includes courses taken to acquire or improve job skills.
  • You can claim the costs of tuition and fees required for enrollment or attendance. This includes amounts you were required to pay to the institution for course-related books, supplies and equipment.

You cannot claim either of these credits if someone else claims you as a dependent on his or her tax return. Both credits are subject to income limitations and may be reduced or eliminated depending on your income.

Keep in mind that you can’t claim both credits for the same student in the same year. You may not claim both credits for the same expense. Parents or students claiming either credit should receive a Form 1098-T, Tuition Statement, from their educational institution. You should make sure it is complete and correct.

Find out more details about these credits and other college tax benefits in Publication 970, Tax Benefits for Education. You can get the booklet at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)

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House Damaged In a Natural Disaster? Claim Your Loss!

Via LearnVest By Alden Wicker ~

House Damaged In a Natural Disaster? Claim Your Loss!

Let’s face it: 2012 wasn’t a great year for homeowners and we’re not even talking about foreclosures.

There were wildfires, tornadoes, flooding, mudslides, more wildfires, more tornadoes and, oh, yeah, Hurricane Sandy.

Even if you have homeowner’s insurance, it may not have covered all of the damage to your home if you fell victim to one of these disasters. You may even have lost your house, along with other possessions. If so, you should know that you can deduct the damage not covered by your insurance to reduce your tax bill.

However, as with most things in the tax code, it’s not a super-simple process. Here’s what you need to know if you’re claiming a natural disaster loss.

What It Is

The official term for damage done to property is known as “casualty loss.” The I.R.S. says that you can take this deduction if you suffered the damage, destruction or loss of property from an identifiable event that is sudden, unexpected or unusual. This includes car accidents, fires, floods, storms and hurricanes. (Plus some odd things, like sonic booms. Anyone live near an Air Force base?) Read I.R.S. Publication 547 to see if you qualify.

How It Works

This deduction isn’t just for your home. It can also apply to the loss of a car, furniture, jewelry or anything else that you could have gotten money for had you sold it. You can even apply this to landscaping if you had to hire someone to remove downed trees and branches.

Hurricane Sandy tax deduction

If insurance renter’s, homeowner’s or automobile reimbursed you partially for the loss, your casualty loss only applies to what the insurance company didn’t cover. So if your loss was $21,000, and your insurance company gave you $10,000, then your casualty loss is $11,000. (This is why the deduction is especially useful for homeowners who realized too late that they weren’t covered for flood insurance.) And if you’re still waiting to find out what your insurance company will reimburse,  ask for an automatic, six-month extension to file your taxes.

RELATED: What Hurricane Sandy Taught Me About Money

If you received payments from the Federal Emergency Management Agency (FEMA) for repairs or a replacement of your damaged or destroyed home, those must also be subtracted from the casualty loss. But other FEMA payments for food and temporary housing don’t have to be deducted. So think of your casualty loss as what you’ll have to pay out of pocket to get your home back to where it was before disaster struck.

You can only deduct your losses if they are worth more than 10% of your adjusted gross income, plus $100. So, for example, if your AGI is $75,000, you can only deduct your losses if they’re worth more than $7,600. You also can only deduct your loss if you’re itemizing.

How to Determine the Value of the Loss

This all begs the question: How do you figure out your loss in the first place?

You can only base your loss on what the property was worth right before the storm. Let’s say your car was flooded, and it’s now unrecoverable. If the Kelley Blue Book value of the make, model and year of the car is $10,000 meaning you could have sold it for $10,000 before the flooding then that’s what you base the car’s value on, and not what you paid for it in the first place. The same goes for furniture and other property. Note: Sentimental value doesn’t count it’s only what you’d get on the market for an item.

Alternatively, you can also base the loss on how much it takes to repair the property. Drywall replacement is a good example: Your loss is what it costs to replace all of the drywall in your flooded home, plus other necessary repairs. Just don’t upgrade while you’re at it and then try to claim that expense as a loss.

Oh, and there is one hitch: You can’t claim more than what you originally paid for the property, plus improvements. So if you bought your house for $300,000 in 1990, and then added an addition that cost you $75,000, you can’t claim more than $375,000 in loss if your house was destroyed. And that’s even if it had a market value of $500,000 in 2011. The I.R.S. wants you to start with the number that’s smaller either adjusted basis ($375,000, in this example) or fair market value.

How to Calculate What You Can Deduct

We just covered how to determine the value of your loss, but it’s not the same as what you can deduct. To figure this out, multiply your AGI by 10%, and then subtract that figure and $100 from the amount of damage that’s not reimbursed.

Let’s say your home sustained $20,000 in hurricane damage, but you were only reimbursed $10,000 by your insurance company:

$20,000-$10,000 = $10,000 in unreimbursed damage

Your AGI is $75,000, so $70,000 x 10% = $7,500

$10,000 $7,600 = $2,400 in deductible damage

You’ll make this calculation on Form 4684. From there, the amount is carried to Schedule A of Form 1040, where itemized deductions are listed.

However, after some previous devastating hurricanes, Congress removed the requirement that a casualty loss be reduced by 10% of your AGI, and there’s a chance that they could do so again in light of Hurricane Sandy. So this is yet another reason to request an extension to see if that happens. In fact, the I.R.S. announced on February 1 that it is extending tax relief by postponing various penalties and payment deadlines that occurred starting in late October, such as fourth-quarter individual estimated taxes, which are normally due January 15. Those affected by the storm can get more details here.

Should You File an Amended Return?

If your income in 2012 was lower than it was in 2011, it might be a good idea to file an amended 2011 return, and claim your loss for that year. That’s because you’ll be charged less in taxes for 2012 because of your lower income, so you’d want to put your losses against your higher 2011 income.

If your loss is so large that the deduction is equal to or more than an entire year’s income, you can file amendments going back three years or carry forward the loss for up to 20 years to reduce your taxable income in the future.

Photo credit: Flickr/Randy Le’Moine Photography

LearnVest is the leading lifestyle and personal finance website for women.

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