FindAGoodCPA.com - Not a healthcare professional? Find a CPA or EA who understands the tax issues specific to you.
Nanny Taxes - Find out what's involved with complying with the Nanny Tax Rules
IRS Web Site - for
tax forms, publications, and general tax information.
MONTHLY TAX NEWSLETTERApril 2012
Tax season is always interesting. Each winter, I have 45-minute conversations about taxes and financial planning issues with more than 500 clients. With some clients, I've maintained an ongoing dialog for more than 20 years. For others, this winter was the first time that we've ever talked.
Speaking with so many taxpayers each winter helps me keep current with what's on people's radar with respect to taxes and basic financial planning. Below are some interesting observations I made during the 2012 Tax Season.
Mortgage Interest Rates are Down
This year's hot topic by far is that home mortgage rates are extremely low. I would say that pretty much all my clients with mortgages refinanced last year. Some even refinanced multiple times.
Lower interest rates means lower itemized deductions. Many people who refinanced earlier in the year saw a sizable decrease in the mortgage interest they paid in 2011, which translated into either a smaller tax refund or a larger balance due.
Higher taxes due to lower mortgage interest is okay, though. Your goal is to pay as little mortgage interest as possible. While the mortgage deduction is most taxpayer's largest deduction, please remember that $1 in mortgage interest paid only saves you at most $.35 in federal income taxes. Wouldn't you are better off paying less interest, remitting higher taxes due to the reduced deduction, and then pocketing the difference?
If you did refinance last year, make sure to account for all the interest paid during the year. You'll get this information from the multiple 1098 forms that you receive from the various lenders.
For a sanity check, compare the mortgage deduction you claimed on your 2011 Schedule A with what you claimed in 2010. Or, if you refinanced early in the year, multiply your outstanding mortgage balance by your new mortgage rate to get a good approximation of the total mortgage interest you should have paid last year.
For your real estate taxes, you need to be even more careful. When you refinance, often times you pay real estate taxes as part of the closing on the new loan. Even though the interest paid at the closing would generally be picked up on the 1098, the real estate taxes are not.
For that reason, when you gather your tax info, compare the real estate taxes you paid last year with what you claimed on the prior year's tax return. If the total taxes reflected on all the 1098s appear to be too low, then dig up the HUD1 Settlement Statement from the refinancing, and you'll probably find the missing real estate taxes on that document.
Low Interest Loan From the Government
Tax returns are due April 17th this year. Prior to that date, you can file for an extension, which gives you until October 15th to submit your tax returns. The government also lets you borrow up to 10% of your total tax liability for these six months and will only charge you interest on the taxes you owe.
Let's say that you report $200k of income and your total federal tax liability is $40k. In this case, you would be able to hold off paying $4k of your federal taxes until October. The higher your tax liability, therefore, the more you can borrow. Expect the IRS to charge you interest at 3% on the amount you owe, but they should not charge you any penalties.
What happens if the amount you owe exceeds 10% of your total tax liability In this instance, you will owe interest plus a .5% per month penalty. For that reason, please don't cut your extension payment too close to 10% of your total tax liability in case you made an error in your calculations.
Get Interested In the Election
Many of the 2001 Bush Tax Cuts plus the current AMT patch are expiring at the end of 2012. And it doesn't appear that Congress can get anything done in the near future. To complicate matters further, we are in the middle of a national election cycle.
What does this mean to you and your colleagues? Anyone paying any amount of federal income taxes should take some interest in the current political landscape. However, with the election not until November, and then the new Congress and the (new or current) President not being sworn in until January, who knows when the uncertainty surrounding the current tax code will be addressed?
Interested In Listening To These "Interesting" Observations?
Check out Radio 92.9 Greater Media Boston - Interesting Observations From the 2012 Tax Season with Andrew Schwartz. It's only about 9 minutes long.
Your tax guy or financial advisor may have told you, “you can’t do an IRA.” But what they really meant to say is that you can’t deduct your contribution to your IRA, so why bother contributing in the first place? Here’s my answer.
1. You need some place to stash your bond fund. When you put a bond fund (or bonds) in a taxable account, the dividends (and interest) are taxed as ordinary income. You can shelter and defer that income by keeping your bond fund in your IRA, making your portfolio more tax-efficient.
2. You can’t (exactly) do a Roth IRA. But you can make a contribution to your Traditional IRA and then convert the Traditional IRA to a Roth IRA. If you already have a big fat Traditional IRA, this strategy won’t work very well for you, but if you have a little Traditional IRA or none at all, this is probably the only way you’ll get money into a Roth since most doctors don’t qualify to make direct contributions to a Roth IRA.
3. Your 401k is full. You can squeeze $17,000 ($22.5k if 50 or older) into your 401k or 403b this year, or up to $50,000 ($55.5k if 50 older) if you’re self-employed. Maxing out your IRA means more tax deferral and more money for retirement.
4. You might need the money later… like when you retire. The more you save, the more you’ll have when you need it. Why not max out your IRA? The limit for most doctors is $5,000 per year, or $6,000 per year if you’re 50+. If you’re married but you don’t have earned income, you can still make an IRA contribution based on your spouse's wages or other earned income.
5. You might go bankrupt some day. You may be saying to yourself, “Not me!” And you’re probably right, but what if you’re wrong? The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 exempts your IRA contributions from the reach of creditors through the process of bankruptcy. Having guided one physician family through bankruptcy myself, I can tell you that the asset protection benefit from the IRA may make all the difference if something bad financially happens to you.
It’s not too late!
Right now, a physician family can stash as much as $20,000 in their IRA’s. That’s $5,000 for you and $5,000 for your spouse for 2011, and the same amount for each of you for 2012. You can make your IRA contributions for 2011 right up until the time when you file your 2011 tax return, which are due on Tuesday, April 17.
If you’re thinking about contributing to your IRA, do it NOW. It takes time to open an account and it takes time for your check to find its way into your account.
W. Ben Utley CFP® is a fee-only financial advisor and the president of Physician Family Financial Advisors Inc. Check out his website at www.physicianfamily.com or call him at 541-463-0899.
Each January, and then again in the spring, financial institutions that hold your IRAs send you a Form 5498. When you get this form, take a minute to consider whether you have named the correct beneficiaries for each of your IRAs.
The most popular options are to name individuals or a trust. A less common but tax efficient option is to name charities. In most cases a “primary beneficiary” and a “contingent beneficiary” should be named.
For married couples with adult, competent children, a common beneficiary designation is to name the owner’s spouse as primary beneficiary and the children as contingent beneficiaries. This allows the surviving spouse to elect a rollover and the children to inherit the IRA and “stretch out” receipt of the IRA benefits over their life expectancies, therefore deferring the taxes due on these Inherited IRAs for as long as possible.
However, there may be tax or non-tax reasons for naming a trust as IRA beneficiary, as follows:
If a trust is named as primary or alternate beneficiary of an IRA, special care must be taken in drafting the trust. Otherwise all of the IRA benefits must be withdrawn into the trust, and the income taxes on the IRA benefits must be paid within five years of the death of the IRA owner at the trust’s income tax rates. Through the use of a “circle trust”, which is a type of “look through” trust, the receipt of the benefits by the trust can be stretched out over the life expectancy of the oldest trust beneficiary.
Naming the correct beneficiaries for your IRAs can be complicated, so please seek the assistance of your CPA and/or estate planning attorney.
The law firm of Woodman & Eaton, P.C. founded in 1980, has a long history of assisting families and business owners with their estate, business and financial planning needs. Personal service and close relationships, resulting in uniquely designed estate and business succession plans, and effective and efficient administration of estates and trusts remain a hallmark of Woodman & Eaton's Practice.
|Copyright 2012 The MDTAXES Network by CPANiche, LLC Email us at firstname.lastname@example.org|