Monthly Archives: July 2013

Estate executors have tax filing responsibilities

Part of your responsibility as the executor or personal administrator of an estate involves making sure the necessary tax returns are filed — and there might be more of those than you expect.

Here’s an overview.

  • Personal income tax. You may need to file a federal income tax return for the decedent for the prior year as well as the year of death. Both are due by the following-year April 15 due date, even if the amount of time covered is less than a full year. You can request a six-month extension if you need additional time to gather information.
  • Gift tax. If the individual whose estate you’re administering made gifts in excess of the annual exclusion ($14,000 for 2013), a gift tax return may be required. Form 709 is due April 15 of the year following the gift. The filing date can be extended six months.
  • Estate income tax. Income earned after death, such as interest on estate assets, is reported on Form 1041, “Income Tax Return for Estates and Trusts.” You’ll generally need to file if the estate’s gross income is $600 or more, or if any beneficiary is a nonresident alien. For estates with a December 31 year-end, Form 1041 is due April 15 of the following year.
  • Estate tax. An estate tax return, Form 706, is required when the fair market value of all estate assets exceeds $5,250,000 (for estates created in 2013). One thing to watch for: Spouses can transfer unused portions of the $5,250,000 exemption to each other. This is called the “portability” election. To benefit, you will need to file Form 706 when the total value of the estate is lower than the exemption.

    Form 706 is due nine months after the date of death. You can request a six-month extension of time to file.

Give us a call for checklists and information about administering an estate. We’re here to help make your task less stressful.

Don’t miss required minimum distributions

They’re coming your way — required minimum distributions, that is, if 2013 is the year you’ll reach age 70½ and you own certain retirement accounts, such as a traditional IRA.

You may be familiar with RMDs, which are the minimum amount you must withdraw from your traditional IRA each year. For example, you might know RMDs are calculated by dividing the balance in your account at the previous December 31 by a life expectancy based on your age. If you have more than one IRA, each is calculated separately, though you can take the distribution from any account, or multiple accounts. There’s also a 50% penalty for failing to take an RMD.

Other rules are less well known, such as the one involving Roth conversions. The amount you’re required to take from your traditional IRA is not eligible for conversion to your Roth. Instead, you withdraw your RMD and convert the remainder of the account. If you forget, you’ve made an excess contribution to your Roth. You can withdraw the extra before October 15 of the year after the conversion. If you leave it in the Roth, you may have to pay a 6% penalty tax.

A different situation arises when you make a charitable contribution from your traditional IRA. In that case, the amount you donate is part of your RMD. Unlike regular RMDs, when the distribution is made directly to the charity, the income you report on your federal return is not affected.

Other rules apply to inherited IRAs, and marriage or divorce may change the amount you’re required to withdraw from your account each year. Please give us a call for details and planning suggestions.

A tax credit is available for adoptions

Together you make a family.

Is this the year you’ll become an adoptive parent? In addition to the benefits of family togetherness, you might also qualify for a special break on your income tax return. The federal credit for qualified adoption expenses became permanent in January.

As you know, tax credits save you money by reducing the amount you owe dollar-for-dollar. In the case of the adoption credit, you may be able to save up to $12,970 on your 2013 federal income tax return for expenses you pay during the process of adopting a child.

Be aware the credit is subject to a phase-out — that is, the amount you can claim is reduced once your 2013 modified adjusted gross income (MAGI) reaches $194,580. No credit is available when your MAGI is $234,580 or more.

In general, the credit is based on total out-of-pocket expenses including adoption fees, amounts you paid your attorney, court costs, and your meals and lodging while away from home. However, when you adopt a special needs child and qualify for the credit, you can claim the full $12,970, regardless of how much you spent during the adoption process. In addition, you may also be able to exclude from income certain adoption benefits provided by your employer.

The credit is typically available for both foreign and U.S. adoptions. For domestic adoptions, you can claim it even if your attempt to adopt was unsuccessful.

Other tax breaks are available for new parents. Please call us if you would like details.

Check out Coverdell ESAs for college savings

You’re probably familiar with 529 college savings plans. Named for Section 529 of the Internal Revenue Code, they’re also known as qualified tuition programs, and they offer tax benefits when you save for college expenses.

But are you aware of a lesser known cousin, established under Section 530 of the code? It’s called a Coverdell Education Savings Account and it’s been available since 1998.

The general idea of Coverdell accounts is similar to 529 plans — providing tax incentives to encourage you to set money aside for education. However, one big difference between the two is this: Amounts you contribute to a Coverdell can be used to pay for educational costs from kindergarten through college.

Generally, you can establish a Coverdell for an under-age-18 child — yours or someone else’s. Once the Coverdell is set up, you can make contributions of as much as $2,000 each year. That maximum is reduced when you’re married filing jointly and your modified adjusted gross income reaches $190,000 ($95,000 when you’re single).

Anyone, including trusts and corporations, can contribute to the account until the child turns 18. There are no age restrictions when the Coverdell is established for someone with special needs.

While your contribution is not tax-deductible, earnings within the account are tax-free as long as you use them for educational expenses or qualify for an exception. In addition, you can make a tax-free transfer of the account balance to another eligible beneficiary, to a different custodian, or to a 529 plan.

Qualified distributions from a Coverdell are tax-free when you use the money to pay for costs such as tuition, room and board, books, and computers.

Please call for information about other rules that apply to Coverdell accounts. We’ll be happy to help you decide whether establishing one makes sense for you.

Reducing everyday expenses is the other half of the money equation

As the old adage goes, “The more you make, the more you spend.” Unfortunately, that saying seems to have become accepted wisdom for many American households. In fact, getting that long-awaited raise or moving across the country for a better-paying job may not solve your money worries. That’s because household income makes up only one side of the budget ledger.

The other side consists of expenses, all those routine costs that eat away at your bank account. Over the long run, prudently reducing ongoing costs — when coupled with disciplined saving and investing — often leads to greater wealth accumulation than climbing the corporate ladder or snagging a larger paycheck. Here are a few suggestions for cutting back on routine household expenses.

  • Learn to live without. How many cable television channels do you really need? If you’re paying for premium service, but only watch a handful of shows, perhaps it’s time to revise your service plan. Trips to the gourmet coffee shop may become an expensive habit as well. Consider brewing a pot at home once in a while. Buying books at the local bookseller may be convenient, but the library may offer your favorite author’s books at no cost.
  • Avoid late fees and interest. Whether it’s a bill from the doctor or an automobile repair shop, get in the habit of paying on time. If you don’t routinely pay off credit card balances every month, it may be time to cut up those cards and learn to pay with cash. True, you may not get the latest and greatest electronic gadget or kitchen appliance, but learning to control impulse buying is key to developing financial discipline and long-term wealth.
  • Control hunger. Carry snacks and a bottle of water everywhere you go. When hunger strikes, down some trail mix and take a swig from the bottle. You’ll be less tempted to turn aside to the drive-through lane at your local fast food restaurant. You may even lose some weight in the bargain. It’s also a good idea to eat a meal before you shop for groceries.
  • Shop around. Whether you’re spending money on insurance premiums, auto maintenance, or building materials, it’s wise to check several sources.

Striving to increase your income is a worthy goal. Just remember to take a hard look at the other side of the ledger.

Manage wait times to improve customer satisfaction

Whether you’re sitting in a busy dentist’s office or standing in line at the airport, waiting for service can be frustrating, stress-producing, and downright annoying. As the owner or manager of a business, it’s crucial that you mitigate such frustration. Handle wait times effectively, and even grumpy customers may become loyal to your business. Handle wait times poorly and those same customers may complain to their friends and spend their dollars elsewhere.

Of course, most consumers do not expect immediate service in every venue. When a grocery store has ten counters and all are operating at full capacity on a busy Saturday afternoon, customers typically expect to be waiting in line for some period of time. The key is to manage their wait time and, if possible, turn a potentially negative experience into a positive one. With that goal in mind, consider the following two strategies used by successful companies.

  • Let customers know what to expect. When you enter a busy restaurant and the hostess informs you that you won’t be seated for at least an hour, you’re given options. You can provide your name, shop at a nearby store, and return for dinner. Or you can decide to eat at another establishment. The business has managed your expectations.

    Consider the same transaction without such communication. You wait and wait and wait. Frustrated and annoyed, you finally approach the podium to ask when you’ll be seated. The hostess responds with a shrug and says, “Not any time soon.” Will you return to this restaurant? Will you tell your friends about the experience?

  • Provide distractions. Why are Mickey Mouse and Snow White hovering near waiting lines at Disney theme parks? The business wants to turn your negative experience (standing in line in the hot sun) into a positive one (capturing memories of your kids with cartoon characters). The same idea works for waiting rooms at a local business. Provide magazines (current issues only, please), video games, or television (preferably with the sound muted and captions turned on). Or give clients a view into the service bay. Distract them and the wait will seem shorter.

When customers must wait an excessively long time for service, be sure to offer a timely apology. Don’t forget also that service recovery efforts — for example, willingness to write off part of a bill — may mean the difference between repeat business and lost sales.