Category Archives: Financial Planning Tips

Why Do I Always Owe (or Get Back) So Much in April?

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Some people are surprised to learn that they owe more taxes than they expected. Others are surprised they’re due a large federal income tax refund when they file their taxes.  When this happens, it’s a good idea to check your federal tax withholding or payments. Doing so now (prior to the due date of the third quarter estimated payment) can help avoid a tax surprise when you file your 2013 tax return next year.

Here are some tips from the IRS to help you bring the tax you pay during the year closer to what you’ll actually owe.

Wages and Income Tax Withholding

  • New Job.   Your employer will ask you to complete a Form W-4, Employee’s Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
  • Life Event.  Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W–4 anytime.
  • IRS Withholding Calculator.  This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.

Self-Employment and Other Income

  • Estimated tax.  This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
  • Form 1040-ES.  Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
  • Change in Estimated Tax.  After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.
  • Additional Medicare Tax.  A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status.
  • Net Investment Income Tax.  A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.

If you would like an assessment of your 2013 tax liability, contact Steve Siesser for additional assistance at ssiesser@verizon.net

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Revisiting Roth Conversions

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If you’ve been thinking about whether to convert a traditional IRA or 401(k) account to a Roth account, it’s worth giving the matter another hard look before the end of the year. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are subject to federal income tax in the year that you make the conversion (except to the extent the funds represent nondeductible after-tax contributions). With tax rates set to go up next year, waiting to do a conversion could mean that your immediate tax hit for doing the Roth conversion goes up as well. Converting now can also have a long-term benefit–future qualified distributions from Roth IRAs and Roth 401(k)s will be free from federal income tax. That could make a big difference in retirement if you’re paying income tax at a higher rate at the time. Whether a Roth conversion makes sense for you depends on a number of factors; but if it makes sense for you, it might pay to think about acting this year, rather than waiting. One more thing to consider : If you convert a traditional IRA to a Roth IRA and it turns out to be the wrong decision (e.g., current tax rates get extended, and you think you would have been better off waiting to convert), you can recharacterize (“undo”) the conversion. You’ll have until October 15, 2013, to recharacterize a 2012 Roth conversion–effectively, treating the conversion as if it never happened for federal income tax purposes.

If you need assistance, please contact Steve Siesser at ssiesser@verizon.net

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Why You Need Guardians If You Have Small Children

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If you have young children, the most important part of your estate plan is naming the guardians to raise your children if something happens to you and your spouse.

Typically, the guardians are named in the will. If the estate plan has a revocable living trust, the guardians are named in the pour-over will.

Naming guardians is not easy.  But if you have young children, you have to do it. If you don’t name guardians and something happens to you and your spouse, the court will have to decide who will raise your children.

Some of my clients have an easy time naming guardians. They have parents or siblings who are well qualified.

But many of my clients aren’t so lucky. They have a hard time deciding on the right people.

Here’s what I tell my clients who can’t decide on a guardian.

First. No one will be as good as you. No one is perfect (except you of course). If you are gone, someone you choose is better than the court choosing.

Second. The only people you can really choose from are those already in your personal network. Your network consists of your family and close friends. Be realistic and make the best choice of those in your network. That’s all you can do.

Third. You can always change your mind later.  Be prepared to change your guardians every few years as your situation changes. You may meet someone with similar nurturing skills or your relatives may have matured into better parents.

Just know your choice is not permanent. Every decision we make today can only be made based on what we know today. If tomorrow changes, you can change your plan.

If you need assistance, please contact Steve Siesser at ssiesser@verizon.net

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Year-End Gift Planning Strategies

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There is much uncertainty surrounding the estate-planning options that may be available in 2013.  Until the end of this year it’s possible to give away up to $5.12 million per person ($10.24 million per couple), without incurring a gift tax of up to 35%. Currently you can give up to $13,000 each year ($14,000 beginning in 2013) to as many recipients as you would like without even dipping into the $5.12 million exclusion amount. Spouses can double up on annual gifts to jointly give $26,000 to any person tax-free.  However, once you’ve succeeded these limits you do you start drawing down the $5.12 million.

The easiest way to use the annual exclusion is to give cash or other assets each year to each of as many individuals as you want. Another possibility is to put money in Section 529 education savings plans. Establishing these plans for relatives could relieve siblings or children of the need to save for college at a time when they are overwhelmed with current expenses.

You can set up a separate account for each family member whom you wish to benefit. Although your contributions to a 529 account are considered gifts, there are two unusual benefits: money in these accounts grows tax-free and can be withdrawn tax-free, provided it is used to pay for college, a graduate, vocational or another accredited school, or for related expenses.

Unless Congress acts before year-end, at the end of this year the current $5.12 million per-person exclusion from the federal estate and gift tax will automatically drop to $1 million and the tax on transfers above that amount will go up to 55%. There is a question as to whether gift or estate tax could be owed on the value of the previously gifted asset if the exemption returns to $1,000,000 in 2013 or future legislation results in a gift and estate tax exemption in an amount less than $5,000,000.  This is referred to as the potential for “claw back.”

In the simplest terms, an individual can make a large gift in 2012 without owing any gift tax, while the same gift in 2013 would result in a large gift tax liability. For example, for a single person or married couple with a taxable estate of $3 million, the scheduled estate tax changes could mean a $945,000 federal estate tax bill next year, versus zero under current law.  That’s why it’s important to think about your estate and gifting strategies over the next few months, and to talk with your attorney about a plan that you can execute as the tax-law changes get closer. Future uncertainty should weigh into any decision you make.

For additional assistance, please contact Steve Siesser at ssiesser@verizon.net.

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What You Need to Know When Starting a Business

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The IRS wants you to know there are some things to consider when starting a business:

  • Type of Business One of the first decisions you need to make is what type of business you are going to establish. The most common types of businesses are sole proprietorship, partnership, corporation, S corporation, and Limited Liability Company. The type of business you establish determines which tax forms you will need to file.
  • Types of Taxes The type of business you operate also determines what types of taxes you will pay and how you will pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
  • Employer Identification Number A business typically needs to get an Employer Identification Number to use as an identifier for tax purposes. Check IRS.gov to find out whether you will need this number, and, if so, you can apply for an EIN online.
  • Recordkeeping Good records will help you keep track of deductible expenses, prepare your tax returns and support items that you report on your tax returns. Good records will also help you monitor the progress of your business and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.
  • Tax Year Every business taxpayer must figure taxable income on an annual basis called a tax year. Your tax year can be either a calendar year or a fiscal year.
  • Accounting Method Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

If you have any questions or need assistance, please contact Steve Siesser at ssiesser@verizon.net or call 301-593-6766

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