Year End Tax Planning Tips-2013

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As you go about making your Black Friday shopping list for all the good & naughty little angels in your life, don't forget to look at your finances as well. You might have re-assessed your withholdings & even explored tax-loss harvesting. Going into 2014, there are deductions that will not be extended and there will be steps you need to take to make the best use of them for the 2013 tax year.

Sales Tax Deduction on "Big Ticket Items":  If you are going to elect to claim the sales tax deduction vs the state tax deduction on your Schedule A or if you live in a state that doesn't have taxes, this is the year to accelerate your "big ticket" purchase, this election will not be available after 2013.

Energy Efficient Home Improvements: If you are a homeowner and have not availed the full extent of the energy efficient home improvements deduction, which is $500, it's time to put in any required energy efficient home improvements, such as, insulation/ installing energy-efficient windows/ heater or air conditioner before 2014. 

Tuition & Fees Deduction:  The above-the-line tuition & fees deduction is up for Congressional approval and unless it is extended, consider prepaying eligible tuition

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expenses, if this will increase your deduction. Generally, this deduction is allowed for enrollment at an institution of higher education during 2013/ for an academic period beginning in 2013/ in the first 3 months of 2014. 


Flexible Spending Account:  Increase the amount set aside for next year in your employer's health flexible spending account (FSA) if there was very little set aside for this year. 

Health Savings Account: If you become eligible to make health savings account (HSA) contributions in December of this year, a full year's worth of deductible contributions can be made for 2013. 

Defer Bonus: If getting a bonus at the end of the year will push you into the next tax bracket for 2013, you can arrange with your employer to defer your bonus. 

Purchase of Qualified Small Business Stock (QSBS):  Purchase QSBS before the end of this year. There is no tax on gain from sale of QSBS if, 

• It was purchased after September 27th, 2010 & before January 1st, 2014, and 
• Held for more than 5 years.

These sales will not cause AMT preference problems. To qualify for this break, the stock must be issued by a C Corporation with total gross assets of $50 million or less, and a number of other technical requirements are to be met. 

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Required Minimum Distributions:  If turning 70-1/2 in 2013, one is required to take minimum distributions or pay a penalty of 50% of the RMD as excise tax. (See more in my post here) The first RMD can be delayed into 2014 if turning 70-1/2 in 2013. If one is not going to continue to work as well in 2013, this would be a good strategy, as the overall income will be lower or will remain the same in 2014. If not, this will result in a higher taxable income for 2014. 

Gifts Before the End Of the Year:  You can give up to $14,000 to each of unlimited number of individuals and save on gift taxes. Read more on Gifts in my post here. 

Traditional IRA Conversions to Roth: If you expect to be in a higher income tax bracket well in to your 60's & 70's, converting your assets in a Traditional IRA to a Roth IRA would be a good tax strategy. The conversion will result in a higher income tax bracket for the current year, however, Roth IRAs are not subject to RMD and can be passed on to future generations. 

Mortgage Insurance Premiums: For years 2007 to 2013, taxpayers can treat insurance premiums on mortgage as qualified residence interest. Not so after 2013, so if you are due a re-fi on your mortgage and can get a better rate of interest or can stop paying mortgage insurance premiums, this would be a good time to explore that.

Tax-free Distributions from Individual Retirement Plans for Charity: A qualified charitable distribution (QCD) from a individual's IRA is excluded from his/ her gross income. To qualify for this, certain conditions have to be met and the total QCD for the year cannot be more than $100,000. Taking advantage of a QCD from an IRA has various advantages for higher income seniors who are drawing on Social Security & have income from other sources. This option is not available after 2013. 

Bibliography: Parker Tax Pro Library; Year End Planning Resources From Thomson Reuters; irs.gov. 

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Please read my disclaimer here. For more questions regarding this and other matters, I can be contacted at manasa@mntaxsolutionsllc.com.     

Offshore Voluntary Disclosure Program: The Basics (2013)

Let us start with the fact that the 2009 Offshore Voluntary Disclosure Program and the 2011 Offshore Voluntary Disclosure Initiative had deadlines but the new Offshore Voluntary Disclosure Program (OVDP)  does not. This new program will be available until further notice to taxpayers who wish to come forward and disclose their foreign bank assets. 

What Does the OVDP do?  This program seeks to bring taxpayers who had undisclosed foreign bank accounts or undisclosed foreign entities for the purpose of evading or avoiding tax into compliance with the laws of the United States.
This program is a counter-part of the Criminal Investigation's Voluntary Disclosure Practice. It addresses the civil side of the taxpayer's voluntary disclosure of the foreign accounts and assets by defining the number of tax years covered and civil penalties that will apply. 

Penalties that Apply for Non-Compliance with FBAR Requirements:  These penalties are

quite substantial. The FBAR penalty, which is a one-time penalty, is based on the highest aggregate balance in a taxpayer's offshore account over an eight year period. This penalty is 27.5% of the above balance. Some taxpayers may qualify for a reduced 12.5% or 5% rate. Taxpayers might also have to pay a 20%-40% accuracy-based penalty for under-payment for eight years and failure-to-file &/or failure-to-pay. 

There are also criminal charges to be faced if a taxpayer has undisclosed foreign bank accounts & doesn't qualify for the OVDP. A person convicted of such tax evasion can face up to $250,000 in fines and a prison term up to 5 years. And failing to file an FBAR could subject a person up to $500,000 in criminal penalties and a prison term up to 10 years. More details of said criminal charges are on the IRS website. 

What Forms Part of the OVDP?  The FAQ 8 of the Offshore Voluntary Disclosure Program on the Internal Revenue Service's website gives details of how the OVDP works with examples. In a nut-shell, a taxpayer will need to take the following actions: 

• File both the original and the amended returns for prior eight years that report all income & disclose foreign accounts. 
• File all missing FBAR reports. 
• Cooperate fully with the OVDP process. 
• Sign agreements to extend statute of limitations. 
• Pay the penalties set. 

Should You Make a Voluntary Disclosure?  Since this could be one of the most important decisions you could make if you have undisclosed foreign accounts or assets, please read the following paragraphs carefully. To be eligible to make a voluntary disclosure,      

• One must not be under audit or criminal investigation;
• One must not have received notices from the IRS regarding undisclosed foreign bank accounts;
• Or the IRS should not have already received your name from a cooperating bank. 

The decision to be part of the OVDP is based on each person considering it. Once entered into, all the participants are measured by the same yardstick. Moreover, the OVDP does not include any chances to offer mitigating evidence in support of a defense for non-filing which include reasonable cause and/ or good-faith reliance on advice of others. 

If the taxpayer has prior failures which are not willful but are caused by inadvertence or negligence, and is able to prove it, he may be able to reduce the amount of penalties under special circumstances. However, there is no guarantee. 


All of this will make any taxpayer apprehensive or indecisive about entering the OVDP. If you are one of those who is "willing to take a chance" and keep your foreign accounts undisclosed, know this: the IRS enforcement initiatives have taken on a very determined nature. 

The US government has entered into tax treaties (as of 11/22/2013) with France, Germany, Italy, Spain, the UK, Denmark, Mexico, Switzerland, Norway & Japan under FATCA, 2010 {Foreign Account Tax Compliance Act}. These tax treaties increase the odds of the IRS becoming aware of undeclared bank accounts of US taxpayers. If this happens, the OVDP is no longer an option. 

The banks are more than likely to comply with the FATCA notwithstanding the reputation of bank secrecy that some of the named countries have. This is because compliance guarantees immunity from prosecution from the US Govt. 

So if you have undisclosed foreign bank accounts or assets, contact a tax professional right away to make an informed decision before it is too late. 


Bibliography: irs.gov FAQs for OVDP; treasury.gov; irs.gov OVDP submission requirements; Various posts on forbes.com by expert Robert Wood. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 

More of my contact information is on my website, www.mntaxsolutionsllc.com. 

Don't Look a Gift Horse In the Mouth: All About Gifts & Taxes

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It's the proverbial time of the year when there are a lot of gifts exchanged. Some are store bought, some gift cards & there are those who just get plain ol' cash. 

What constitutes a "gift" in the eyes of the Internal Revenue Service? 

• You make a gift if you give property, including money, or the use of or income from property, without expecting anything of equal value in return. 
• You also make a gift if you sell something at less than its full value 
• There's a gift made if you give an interest-free loan or reduced interest loan

So then, what is gift tax? 

• The gift tax is a tax on the transfer of property 
• By one individual to another while receiving nothing, or less than full value, in return. 
• The tax applies whether the donor intends the transfer to be a gift or not. 

When is no gift tax owed? 

• Most gifts are not subject to the gift tax.
• There is usually no tax if you make a gift to your spouse. 
• There is no tax for gifts made to a charity. 



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• If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. 

What is the Annual Exclusion for Gift Tax for 2013 and What Are Not Considered Gifts ?  

• $14,000 is the annual exclusion for gift tax for the year 2013. 
• Tuition or medical expenses paid on someone's behalf as long as that is paid directly to the institution by the donor.
• Gifts to your spouse.
• Gifts to a political organization for it's use. 

When is a Gift Tax Return Filed & By Whom? 

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A gift tax return (Form 709) is usually filed by the donor who is a US citizen or resident of the United States, in the following situations: 

1. If you gave gifts to someone in 2013 totalling more than $14,000 (other than to your spouse).
2. Certain gifts, called future interests, are not subject to the $14,000 annual exclusion and you must file Form 709 even if the gift was under $14,000. 
3. A husband and wife may NOT file a joint gift tax return. Each individual is responsible for his or her own Form 709. 
4. You must file a gift tax return to split gifts with your spouse (regardless                                                 of their amount).
5. If a gift is of community property, it is considered made one-half by each spouse. For example, a gift of $200,000 of community property is considered a gift of $100,000 made by each spouse, and each spouse must file a gift tax return. 
6. Each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety.

Gift tax paid cannot be deducted on your federal tax return. In fact, gift taxes are completely separate from your income tax return. 

Bibliography: irs.gov; Publication 950; Form 709 & Instructions

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 

More of my contact information is on my website, www.mntaxsolutionsllc.com.