Understanding Tax Terms: Wash Sales – Surprise! Your stock loss is not deductible.
Understanding Tax Terms
If selling a stock or mutual fund to book a loss for your tax return, the Wash Sale rules are worth knowing. For the unaware, this rule could cost you your loss deduction.
As you look for year-end tax moves to save on your bill from Uncle Sam, you may consider selling stocks that have lost value. This can be a great strategy when up to $3,000 in stock losses can offset your ordinary income. However, there is a little known rule called the Wash Sale rule that could surprise the unwary taxpayer.
Wash Sales
If the Wash Sale rule applies, you cannot report a loss you take when you sell a security. Per the IRS,
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade,
- Acquire a contract or option to buy substantially identical stock or securities, or
- Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.
Why the rule?
Many investors were selling stock they liked simply to book the loss for tax reasons. They then turned around and immediately re-purchased shares of the same company or mutual fund. If done repeatedly, shareholders could constantly be booking short-term losses on a desired company while still owning the shares in a chosen company’s stock indefinitely. Clever shareholders would even purchase the replacement shares prior to selling other shares in the same company to book the loss.
Some ideas
How does one take action to ensure the Wash Sales rule works to your advantage?
- Check the dates. If you decide to sell a stock to book a loss this year, make sure you haven’t inadvertently acquired the same company’s shares 30 days prior to or after the sale date.
- Dividend reinvestment. If you automatically re-invest dividends you will want to make sure this doesn’t inadvertently trigger the Wash Sale rule.
- It is only losses. Remember the Wash Sale only applies to investments sold at a loss. If you are selling stock to capture gains, the rule does not apply.
- Consider similar transactions. The Wash Sale rule applies to buying and selling ownership in the same company or mutual fund. With the exception of some common versus preferred stocks in the same company, buying and selling similar (but not identical) shares does not apply to the Wash Sale rule.
If your loss is ever disallowed because of the Wash Sale rule you can add the disallowed loss on to the cost of the new security. When the security is eventually sold in the future, the forfeited loss will be part of the calculation of future gain or loss. This also includes the original stock’s holding period to help define the transaction as a short-term or long-term sale.
2014 Mileage Rates
2014 Mileage Rates
After a long delay, the IRS finally announces the standard mileage rates for travel during 2014.
The IRS recently announced mileage rates to be used for travel in 2014. The Business, Medical, and Moving mileage rates decrease one half cent versus 2013 while charitable rates remain unchanged. Business mileage decreases 1/2 cent per mile.
2014 New Mileage Rates
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Here are 2013 rates for your reference as well.
2013 Mileage Rates
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With 2014 right around the corner, please plan accordingly.
Consider Donating Appreciated Stock & Mutual Funds
Consider Donating Appreciated Stock & Mutual Funds
In some rare cases, making a tax savings move can benefit you in more than one way. This is the case with direct contribution of qualified investments, such as stock, owned more than one year that have appreciated in value.
One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus writing a check. This part of the tax code provides a tax benefit to you in two ways:
- Higher deduction. Your charitable gift deduction is the higher Fair Market Value of the appreciated stock on the date of your donation and not what you originally paid for it.
- No capital gains tax. You do not have to pay tax on the profits you made on the stock. As long as you have owned the investment for over one year, you can avoid paying long-term capital gain tax on the increased value of your stock.
A Sweet Example
Winnie and Christopher each own 100 shares of Honey, Inc. that they purchased for $1,000 three years ago. Today the stock is worth $5,000. Winnie sells the stock and donates the proceeds to “Save the Bees” while Christopher donates his stock directly to “Honey Overeaters: Finding a Cure”. Assuming a 15% long-term capital gains tax rate*, a 25% income tax bracket, and no other limitations:
Not only does Christopher see $750 in additional federal tax benefit by donating his appreciated stock, but Honey Overeaters has $600 in additional funds to use for their charitable program.
* Long-term capital gains tax rates on this type of investment can be as high as 23.8% for those in the 39.6% income tax bracket.
Other benefits
- The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.
- Remember this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes.
- This tax benefit could be worth even more in 2013 with the increase in the maximum long-term capital gain tax rate from 15% to 20% and the introduction of the potential 3.8% Medicare surtax for investments.
- This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.
Things to consider
- Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.
- Consider this a replacement for contributions you would normally make to qualified organizations.
- Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.
- This benefit also works for mutual funds and other common investment types, but be careful as many investments such as collectibles, inventory and other property do not qualify.
- Contribution limits as a percent of Adjusted Gross Income may apply. Excess contributions can often be carried forward as deductions for up to five years.
- How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.
If you think this opportunity is right for you, please contact a trusted advisor to ensure you handle the donation correctly.
Research Your Preferred Charities
Often during an audit, what you thought was a qualified deduction to a charitable organization is ruled non-deductable. How can this happen? Here are some hints to make sure your charitable contributions are put to good use, both at the charity and on your tax return.
November and December seem to be the months we are rained upon with charitable organization solicitations. Some of the groups, such as the American Red Cross, the Salvation Army, United Way, and the American Cancer Society are household names. Others are less known. Here are some tips on how to research these organizations prior to donating funds.
1. Charitable organization efficiency. For every dollar you donate, only a percentage of it is actually used to fund programs. Much of your money is used for fundraising and administrative costs. So how do you know which charitable organization is using your contribution most effectively? Here are three web sites that can help you assess potential charities.
2. Avoid Fraudulent Solicitations. It is often best to avoid donating over the phone or via email solicitations. These are two common ways thieves target their victims. Instead of reacting to a phone call or email, a better idea is to pro-actively plan who you wish to give money to each year. An additional benefit of this approach is that you avoid the fees paid to these middlemen fundraisers out of your donations.
3. Confirm the Deductibility. Many smaller organizations will represent themselves as a qualified charitable organization, but have not kept their non-profit status up to date. If unsure whether your desired charity has kept their records up-to-date, you can check the IRS web site for a full list of qualified organizations. Here is the link:
4. Needing a receipt. Remember cash donations $250 or more require a written confirmation from the charitable organization of your donation in addition to your canceled check or bank receipt. If you are not sure whether a confirmation will be forthcoming, limit your deduction to some amount under this $250 threshold.
Understanding Tax Terms: the kiddie tax – What you know can help you
In 1986, a tax law was introduced to block parents from transferring investments to their children as a technique to lower their taxes. This law, commonly known as the kiddie tax, ensures that this unearned income is taxed at a parent’s, usually higher, tax rate. But there is still a tax planning opportunity.
The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The IRS introduced this rule to keep parents from shifting their investment income to their children and have this income taxed at their child’s lower tax rate. The law requires a child’s unearned income (generally dividends, interest, and capital gains) above a certain amount ($2,000 in 2013) to be taxed at their parent’s tax rate. Here is what you need to know.
Who it applies to
- Children under the age of 19
- Children under the age of 24 if a full-time student and providing less than ½ of their own financial support
- Children with unearned income above $2,000
Who/What it does NOT apply to
- Earned income (wages and self-employed income from things like babysitting or paper routes).
- Children that are over age 18 and have earnings providing more than ½ of their support.
- Older children married and filing jointly
- Children over age 19 that are not full-time students
- Gifts received by your child during the year
How it works
- The first $1,000 of unearned income is generally tax-free
- The next $1,000 of unearned income is taxed at the child’s (usually lower) tax rate
- The excess over $2,000 is taxed at the parent’s rate either on the parent’s tax return (Form 8814) or on the child’s tax return (Form 8615)
What to know/do now
- Maximize your low tax investment options. Look to generate gains on your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.
- Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit.
- Leverage gifts. If your children are not maximizing their tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.
Properly managed, the “kiddie tax” rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.
2014 Social Security Benefits Announced
Social Security recently announced planned benefit increases for 2014. Now is the time to plan for these changes.
The Social Security Administration recently announced monthly social security and supplemental security income benefits (SSI) will increase in 2014 by 1.5%. This increase is based upon the Consumer Price Index over the past 12 months ending in September 2013. In addition, other figures based on the national average wage index will also be changed. A recap of the key amounts is outlined here:
2014 Key Social Security Benefits
What does it mean for you?
- Up to $117,000 in wages will be subject to Social Security Taxes (up $3,300 or $205 in additional Social Security tax per employee and per employer)
- The average Social Security retirement beneficiary will receive an additional $228 in 2014.
- For all retired workers receiving Social Security retirement benefits the average monthly benefit of $1,275/mo. in 2013 will become $1,294/mo. in 2014.
- SSI (Supplemental Security Income) is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
- A full-time student who is blind or disabled can still receive Supplemental Security Income (SSI) benefits as long as earned income does not exceed the student exclusion amounts listed above.
Social Security & Medicare Rates
After temporary payroll tax rate cuts that ended in 2012, the rates do not change from 2013 to 2014.
Note: The above tax rates are a combination of 6.20% Social Security and 1.45% for Medicare. There is also a Medicare .9% wages surtax that began in 2013 for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please recall that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.
Use it or Lose it! – Health Flex Spending Arrangement Rules Changing
Worried about losing your unspent FSA health funds prior to the end of the year? A new IRS notice in late October, 2013 provides hope of a new $500 carryover law.
Here is what you need to know.
Do you have funds in an employer provided Health Flexible Spending Arrangement (FSA)? If you worry about the long-standing rule of using up those funds or you’ll lose them, then a new notice from the IRS could be helpful for you this year.
Background
Millions of Americans take advantage of their employer’s cafeteria plan that allows setting aside pre-tax dollars to be used to pay for qualified health care expenses. The problem with these plans has always been that if you do not use the funds in the account by the end of the year they would be forfeited. Some employers have established an allowable “grace period rule” that gives an additional two months and 15 days to use the funds before they are forfeited.
The maximum annual amount that can be set-aside in Health FSA’s was recently set at $2,500 (indexed to inflation after 2012). This new limit is meant to help pay for the new Health Care Law. With this law change, the IRS agreed to reconsider the long-standing “use it or lose it” rules within FSA’s.
New rules
Effective in 2013, employers can opt to change their Health FSA plans to allow up to $500 in unused funds to be carried over into the following year. If an employer opts to do this, they need to forgo any allowable grace period rules currently within their FSA plan.
What you need to know
- Don’t assume you can carry over $500. With all the press around this rule change, many run the risk of assuming you don’t have to spend all your FSA funds by the end of the year. Remember, your employer must first make the rule change in their FSA plan before you can carry over unspent funds.
- Look for a notice. Ask your employer’s human resource department what the company’s plan is with the new rule. You will need to plan for next year’s withholding based on their answer.
- Contributions and spending must match. Just because you carry over $500 into next year, do not assume you can ask for expense reimbursements over the $2,500 limit during any one year. You cannot. So if you carry over funds, you may need to reduce your contribution into your FSA the next year.
Sound confusing? It can be. Until you receive definitive word your employer is changing their plan, it is best to use up your FSA funds prior to the end of your plan year.
Document those Non-cash Charitable Donations! – Tips to ensure their deductibility
Too often taxpayers lose out on the opportunity to reduce their income by the value of their donations. Here are some tips to make sure this does not happen to you.
One often over-looked way to reduce your tax obligation is to donate gently used items to a favorite charity. Too often this is done without the necessary forethought to ensure you can deduct the value of these donations on your tax return. Here are some tips to ensure you can receive this tax benefit.
- Good or Better Condition. Remember only items donated that are in good or better condition can be used as a charitable contribution on your tax return.
- Document your donation. Fill out a donation sheet each time you donate. The sheet should include the name of the charitable organization, address, date, and types of items donated. It should also include a detailed list of the items donated, their initial value and the donated value. Note the value you are assigning to each item donated.
- Take a Photo. Use this photo as a visual documentation of what you donated.
- Get an acknowledgement and receipt. Even if the donation is small, always ask for an acknowledgement of your donation. Even churches should be ready and willing to do this for you.
- Establish reasonable value. Do not overstate the value of the items you donate. Use places like e-bay, Amazon, the Salvation Army and used book/consignment stores to establish the used values of your items.
- Donate entire ownership. The IRS does not like donation of part ownership of items. It is always best to make donations with no strings attached.
- Track your mileage too. Remember even your miles driven to and from the charitable location are deductible too.
- Have your warning antenna go up. The IRS has special rules for charitable donations. While they can be complex, here are some red flag items that should warrant consultation prior to donating the following:
- Any stocks and investments owned for one year or longer
- Any items valued over $250 or $500 or $5,000. Each of these levels can introduce new documentation requirements and a potential requirement for appraisals.
- Cars, boats, RVs, and other major assets
- Giving items to unfamiliar charitable organizations
Review Your Social Security Earnings Report
You are the only one that can confirm the accuracy of your Social Security earnings record. Without timely correction of any errors, you may be short-changing yourself when benefit checks start. Thankfully SSA’s on-line tools make it easier than ever to check your statement.
Most of us go through life without being concerned with, or ever checking on, our Social Security records. We assume the money deducted each payday and an equal amount paid in by our employer is applied properly to this valuable retirement benefit.
The Social Security Administration receives a vast amount of paperwork each year. They can and do make errors and omissions. It is up to each of us to follow up and make sure our work history is being credited properly. Waiting until retirement may be too late to correct an error made 10 to 20 years back.
It is to your advantage to review your Social Security statements each year. Thankfully, it is now easier to do so as the Social Security Administration has an online tool that allows you to review your historic earnings statements online at www.ssa.gov.
The online signup process includes many safety measures to ensure your identity is protected.
The online tools also estimate your potential benefit using your current wages. If you see an error on your statement you should immediately correct it. You can do this by contacting the Social Security Administration:
| Telephone: | 1.800.772.1213 |
| By mail: | Social Security Administration Office of Earnings Operations PO Box 33026 Baltimore, MD 21290-3026 |
Caution: The law sets a time limit of 3 years, 3 months, and 15 days after the year your wages are paid or that self-employment income was earned to report earnings. This limit is especially important to note if you are self-employed or have not filed a tax return. The best protection? Conduct an annual review of your earnings report and make timely corrections.
What Should Your Margins Be?
What Should Your Margins Be?
Benchmarking Your Business with Financial Ratios
By Dennis Fredrickson, CPA
A client recently called me with a question: “What should my margins be?” That’s a great question. Frequently, many small business owners don’t know how their business compares to their industry or competitors.
There are resources available to help with this. They can provide a wealth of information regarding financial ratios. You can go to resource desk at a larger library and look for the following periodicals (there are others available, this is just a sample):
- RMA Annual Statement Studies (Risk Management Association)
- Industry Norms and Key Business Ratios (Dun & Bradstreet)
- Almanac of Business and Industrial Financial Ratios (CCH)
- Standard & Poor’s NetAdvantage
- For Nonprofits, use GuideStar.com. Download 990s from Nonprofits similar in size, scope and mission
- Trade associations
These sources can provide general guidelines for comparative financial ratios that you can use to benchmark your business within your industry.
Use caution, however, because businesses in these surveys may have material differences in revenue and cost structures. Additionally, firms can also use different accounting procedures. Or customer mix may be different.
If you would like to find out more or learn how we can make your business more efficient, please call Hallmark CPA Group, LLC at 813-283-0642.