Harless Tax Blog
Exchange-traded funds (ETFs) have become popular in this century, due largely to relatively low expenses and tax efficiency. As the name indicates, ETFs trade like stocks, on an exchange, as opposed to mutual funds, which typically are bought from and sold to the sponsoring company. Often, ETFs track a particular market index.
Less publicized these days are what might be considered the original exchange-traded funds, known as closed-end funds. Closed-end funds also issue a certain number of shares, which trade between investors on a stock exchange. Rather than mimic an index, closed-end funds usually are actively managed, in an effort to deliver superior returns to investors.
The case for closed-ends
Should investors put money into closed-end funds? Perhaps. Some closed-end funds have excellent long-term records, including some that specialize in a certain area, such as a single foreign country’s stocks.
In addition, specific features of these funds might appeal to investors. For instance, closed-end funds frequently trade at a premium or a discount to net asset value (NAV).
Example 1: CEF closed-end fund holds stocks of various companies; the current market value of those shares is $100 million. Ten million shares of CEF are outstanding. Thus, the NAV of CEF is $10 per share ($100 million divided by 10 million).
Nevertheless, CEF now trades at $9.25 a share: a 7.5% discount to its NAV. Over the past year, CEF has sometimes traded at a larger discount, sometimes at a smaller discount, and sometimes even at a premium to its current NAV.
Among the universe of closed-end funds, it’s typical for investors to see a range of premiums and discounts, which can change at any time. Some investors will study a desirable closed-end fund for some time, observing its discount/premium range. When the fund is nearest its widest discount to NAV, there may be a buying opportunity, and a chance to profit if the discount narrows, beyond the normal profit potential of investing in securities. There’s also risk, if the discount should become even larger, in addition to the usual market risk that a share price might drop.
In addition, buying closed-end shares at a discount can raise the dividend yield to investors. If CEF holds companies with an average dividend yield of, say, 4%, and investors can buy at a 10% discount to NAV, the dividend yield would go up to 4.44%: an annualized 40 cents a share, on a $10 NAV, if CEF is purchased at $9 a share.
Some closed-end funds go even further to boost yields to investors. They use leverage to buy more shares, perhaps by borrowing money or issuing preferred shares or using other tactics. Closed-end bond funds may be likely to follow such a plan.
Example 2: LEV closed-end fund issues $100 million worth of common shares and leverages the fund by issuing $50 million of preferred shares, paying 3% to investors. Then, LEV uses the total $150 million raised to buy municipal bonds with an average yield of 5%.
The $150 million of municipal bonds will pay $7.5 million a year in interest at 5%. LEV will pay $1.5 million to its preferred shareholders: 3% of $50 million. That will leave $6 million ($7.5 million minus $1.5 million) for investors in the common shares. The latter investors will get a 6% return on their $100 million outlay, even though LEV holds bonds yielding 5%. Leverage can benefit investors, but such practices also can add to losses in a down market, so investors should proceed with care.
Information about these funds is available from the Closed-End Fund Association at cefa.com.
About 84% of large employers will offer high-deductible health plans in 2017. Indeed, 35% of large employers will offer only high-deductible plans to their workforce. Some workers’ deductibles will be offset by employers’ contributions to health savings accounts: tax-free funds that workers can use to pay for out-of-pocket health care costs.
[FEB 1] IRA REMINDER: For 2016 and 2017, total contributions to traditional and Roth IRAs cannot be more than $5,500, or $6,500 for those age 50 or older.
[FEB 3]: REMINDER: IRA contributions can’t exceed taxable compensation for the relevant year.
A new year begins with celebrations, resolutions, and dual IRA opportunities. Most workers and their spouses have until April 18, 2017 (April 19 in some states), to contribute to an IRA for 2016. At the same time, contributions to 2017 IRAs are now permitted; the earlier money goes into the account, the more time for tax-deferred investment buildup.
While you consider IRA contributions, you should also take this time to review IRA investments. Virtually any investment can go into an IRA, other than life insurance and collectibles. In recent years, questionable outlooks for stocks, bonds, and savings accounts have encouraged many IRA owners to consider—or put money into—nontraditional IRA assets.
For Social Security, Medicare, and withheld income tax, file Form 941 for the fourth quarter of 2016. Deposit or pay any undeposited tax. If your tax liability is less than $2,500, you can pay it with the return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Consequently, IRA owners can invest in real estate, venture capital pools, even their nephew’s Internet startup that hopefully will become the next Google. Such outlays may or may not prove to be good uses for retirement funds. In any case, however, some tax-related issues will arise.
IRAs must be valued for certain purposes, and illiquid assets are not as easy to value as listed securities or mainstream savings instruments. The IRS, which views undervaluation as a potential problem, has made some changes in reporting requirements, in order to spotlight alleged transgressions. IRA owners face painful consequences if they trigger IRS displeasure in this area.
Lower value, less tax
IRAs need to be valued for purposes such as required minimum distributions (RMDs) and Roth IRA conversions.
Example 1: Bill Carson, an experienced real estate investor, has most of his traditional IRA money in private real estate partnerships. Now that he is past age 70½, Bill must take RMDs from his IRA each year and pay tax on the distributions. The lower the value of the real estate, the less tax Bill will pay on his RMDs.
There is no readily visible market for the properties held by these private partnerships, and, thus, no way to easily value Bill’s IRA. The IRS may suspect Bill of lowering the valuation to reduce taxable distributions.
A similar situation may appear if Bill wants to convert his traditional IRA to a Roth IRA. Converting a traditional IRA with $500,000 in mutual funds to a Roth IRA will generate $500,000 of income to be taxed, but how much income will be generated when an IRA holding real estate assets is converted?
To prevent undervaluation that can lead to tax underpayments, the IRS is requiring more information from IRA custodians on Forms 5498 and 1099-R for 2015 and later years. On Form 5498, which is filed annually with information on IRA account value and whether a distribution is required, IRA custodians must reveal the presence of hard-to-value assets and the asset type. The same information is required on Form 1099-R, which reports the amount of any IRA distribution. (For Form 1099-R, this rule affects in-kind distributions of hard-to-value assets.)
With this information, the IRS will be able to focus on IRAs that hold illiquid assets, which are subject to RMDs. The agency can follow up to see if the reported valuation was arrived at fairly.
Impact on IRA owners
Individuals who want hard-to-value assets in their IRA, for their growth potential, should be vigilant about providing reliable valuations.
Example 2: Bill Carson’s IRA holds $100,000 in liquid assets as well as private real estate investments. Bill’s IRA custodian has listed Bill’s cost—$400,000—as the value of the real estate.
This year, Bill will be 71, so the IRS Uniform Lifetime Table gives him a “distribution period” of 26.5 years. Using the historical $400,000 cost of the real estate, Bill would divide the total account value ($500,000) by 26.5 to get an RMD of $18,868.
Now, however, Bill’s IRA custodian requires him to get a current appraisal of the real estate holdings in the IRA. Suppose the appraiser finds the real estate interests in Bill’s IRA are worth $750,000. This would drive the account value up to $850,000, as reported on Form 5498, and the RMD to more than $32,000. If Bill withdraws less, he could owe a 50% penalty on the shortfall.
For IRA owners, finding an IRA custodian that will hold hard-to-value assets can be a challenge. Once that’s accomplished, the next step may be discovering the custodian’s valuation policy. A custodian could require an IRA owner to provide a valuation once per year, from an independent source. A valuation might come from the sponsor of the deal, from an executive of a private company with stock in the account, or a reputable third party. For real estate, an annual comparative market analysis might be required.
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Source CNBC.com. Read Original Article
If your refund is delayed this year, you can thank the IRS — and identity thieves.
Millions of low-income Americans who rely on their annual tax refund to help pay their bills are going to have to wait a few weeks longer to get their check this year as the agency cracks down on fraudsters.
The delays impact 40 million working poor families claiming the earned income tax credit and the additional child tax credit.
For 2016, the maximum earned income tax credit is from $506 for no qualifying children to $6,269 for three or more qualifying children.
"For most of these people it's the biggest check they are going to get all year," IRS Commissioner John Koskinen told the Associated Press in an interview. "We are sensitive to that."
Under the 2015 PATH Act that goes into effect this year, the IRS must delay these refunds to have more time to screen the returns. Scammers and organized crime syndicates have been filing fraudulent returns and claiming tax payers refunds before they have a chance to file, according to the IRS.
The agency has been reminding taxpayers and prepares about the change in news releases since this summer.
Tax filing starts January 23. The IRS says most direct deposit e-filers usually receive their funds within 21 days. So those filing on day one might see their refund by mid-February. But now the additional processing time will delay those refunds until the end of February, Koskinen said.
Source CNBC. Read Original Article
Putting your RMD to work Make the most of your required minimum distribution Thursday, 19 Nov 2015 | 7:00 AM ET | 01:08 The clock is running out on retirees who haven't taken enough from their retirement accounts this year.
IRS rules on the so-called required minimum distributions generally kick in once you reach age 70½. For 401(k) plans and other defined contribution plans, it's either when you turn 70½. or you retire, whichever is later. If you've inherited an IRA, you might also be subject to RMDs, even if your own retirement is years away.
How much you need to take is usually based on the account balance at the end of the previous year, and your life expectancy based on your age. Fail to withdraw enough, and there's a 50 percent penalty on the shortfall.
Despite that steep penalty, retirees tend to procrastinate. As of Dec. 2, about 41 percent of Fidelity customers required to take an RMD hadn't yet withdrawn the full amount they need to.
"People get busy at the end of the year, with holidays and other family obligations," said Maura Cassidy, vice president for retirement at Fidelity. "The time flies and they could forget."
Aim to line up your distribution ASAP, if you haven't already. It can take a few days for trades to settle so your withdrawal can be processed, Cassidy said, and a few days with early market closings and closed markets can further tighten the time frame.
Figuring out how much you need to take is generally easy, said Timothy Speiss, partner in charge of the personal wealth advisors group at EisnerAmper LLP in New York.
Retirement plan administrators often automatically compute the number and track it against any withdrawals you make throughout the year — look for it on your online account dashboard and in your mailed statements.
Financial advisors typically calculate RMDs for their clients, too, communicating with them early in the year and nudging procrastinators as needed, said Kevin Meehan, a certified financial planner and the regional president of Wealth Enhancement Group in Itasca, Illinois.
Even if you think you have that number nailed down, it can help to strategize with an advisor. If you don't need the full distribution, for example, you might be able to re-invest the funds or make a charitable donation directly from your account.
You'll also want to make sure you're following the rules.
"There are different rules for the different types of accounts," Cassidy said.
IRAs are aggregated, she said — whether you have one IRA or six, your required withdrawal is based on the total across all the accounts, and you can pull from one or more to hit that number. (If you're married, though, you can't take an RMD on behalf of one spouse from the other's account.)
RMDs from employer-sponsored accounts like a 401(k), on the other hand, are specific to the account. So if you have three plans from different former employers, you'll have three separate RMDs, one for each.
Retirees facing the RMD for the first time may also have a little more leeway to procrastinate. The first year you're subject to RMD rules, you can take a qualified withdrawal by April 1 of the following year, Cassidy said.
If you turned 70½ in October 2016, for example, you'll need to make that first withdrawal by April 1, 2017. But taking advantage of the grace period is not a recommended strategy, she said. You'd still need an RMD for 2017, and double withdrawals that year could have a significant tax impact
If you do forget, the IRS may not hit you with that 50 percent penalty. Take the RMD as soon as you realize the error, Cassidy said. Then file a Form 5329 with your next tax return along with a letter explaining whatever it was that led to the misstep — you were wrapped up in the medical care of a spouse, for example, misunderstood the rules, or simply forgot.
"In the past, they have been pretty forgiving," she said.
Source Gunster Private Wealth Services. Read Original Article
After a good deal of debate and undoubtedly no shortage of bargaining with powerful online service providers, Florida finally enacted law covering access to digital assets by others – the Florida Fiduciary Access to Digital Assets Act. This Act allows an individual to grant access to his or her “Digital Assets” upon death or incapacity. Digital Assets are electronic records in which someone has a personal interest or right and include digital 4 Tallahassee 215 South Monroe Street Suite 601 Tallahassee, FL 32301-1804 Phone Number: (850) 521-1980 Tampa 401 East Jackson Street Suite 2500 Tampa, FL 33602 Phone Number: (813) 228-9080 The Florida Keys 35 Ocean Reef Drive Suite 145 Key Largo, FL 33037 Phone Number: (305) 367-2324 Vero Beach 4733 N. Highway A1A Pelican Plaza, Suite 301 Vero Beach, FL 32963 Phone Number: (800) 451-3761 West Palm Beach 777 South Flagler Drive Suite 500 East West Palm Beach, FL 33401-6194 Phone Number: (800) 749-1980 Winter Park 280 West Canton Avenue Suite 330 Winter Park, FL 32789 Phone Number: (407) 647-7645 photographs, files stored in the cloud, electronic bank statements, social media or social network accounts, and, importantly, electronic communications and records such as emails. You can now add provisions to your Last Will and Testament, Revocable Trust Agreement and Durable Power of Attorney permitting your fiduciaries to access, handle, distribute, delete, dispose of and otherwise exercise control over your Digital Assets. This authority may specifically authorize your fiduciaries to have the right to receive and access the “catalog” (information that identifies each person with which a user has had an electronic communication, the time and date of the communication, and the electronic address of the person), and/or the “content” (information concerning the substance or meaning of the communication which has been sent or received by a user) of electronic communications with respect to any Digital Assets. If your estate plan does not include language authorizing access to Digital Assets, your fiduciaries will not have any such access unless you make use of an “online tool” offered by certain service providers to grant such access. In keeping with federal privacy laws, the Act prevents service providers that store electronic communications from releasing such communications to fiduciaries unless the user has affirmatively consented to the disclosure.
Many people save money for retirement in a traditional IRA. The funds might have come from annual IRA contributions, or from rolling over an employer sponsored retirement account such as a 401(k). Either way, the dollars in your traditional IRA are probably pretax, so they’ll be taxed on withdrawal.
You can leave the money in your traditional IRA for ongoing tax deferral. However, you might need cash now, especially if you’re retired or have had unexpected expenses. In another scenario, you may expect your traditional IRA to be extremely large by the time you reach age 70½ and RMDs begin. Those RMDs might be so large that they’ll be heavily taxed in a high bracket.
Therefore, you might want to take withdrawals from your traditional IRA before year-end 2016, so they’ll count in this year’s taxable income. With savvy planning, you can minimize the tax bite by staying within your current tax bracket.
Example 1: Greg and Heidi Jackson’s taxable income last year was $100,000. They expect their taxable income to be about the same this year. In 2016, the 25% bracket goes up to $151,900. Thus, the Jacksons can take as much as $50,000 from their traditional IRAs before December 31 this year, without moving into a higher tax rate. They might withdraw, say, $20,000 from their IRAs, pay $5,000 in tax at a 25% rate, and have $15,000 left for other purposes.
The right spot
If you’re taking money from a traditional IRA, the best time may be between ages 59½ and 70½. After age 59½, the 10% early withdrawal penalty won’t apply; before 70½, you won’t be subject to RMDs, which will restrict your flexibility about IRA withdrawals.
If you’re younger than 59½, you still might avoid the 10% penalty by qualifying for an exception. Several exceptions are available, including one for higher education expenses.
Example 2: Suppose Greg and Heidi Jackson from example 1 are both younger than 59½. If they take $20,000 from their IRAs this year, as indicated in that example, a $2,000 (10% of $20,000) penalty will be added to their $5,000 (25%) tax bill. However, if the Jacksons pay at least $20,000 in 2016 for their daughter’s college bills, they can take that $20,000 from their IRAs and owe the 25% income tax but not the penalty.
After withdrawing funds from a traditional IRA at a low tax, un-penalized rate, you can use the after-tax dollars to pay college bills or for living expenses in retirement. If there is no immediate need for cash, you can move the money into a Roth IRA. After five years and age 59½, all withdrawals from a Roth IRA will be tax-free.
Converting traditional IRA money to a Roth IRA will trigger income tax. That might not be a major issue if you’re staying in the 15%, 25%, or 28% tax brackets. However, if you convert too much, you could wind up moving into a higher bracket and paying more income tax than you’d like.
Fortunately, the tax code offers a solution to this potential problem. You can recharacterize (reverse) a Roth IRA conversion, in whole or in part, by October 15 of the following year, and owe tax only on the amount that stays in the Roth IRA.
Example 3: In the previous examples, Greg and Heidi Jackson expect to have around $100,000 in taxable income this year. Their 25% tax bracket goes up to $151,900 in 2016. The Jacksons, hoping to convert as many dollars as possible at the 25% tax rate, convert $50,000 of Greg’s IRA to a Roth IRA by year-end 2016.
When the Jacksons prepare their income tax return for 2017, they learn that their 2016 taxable income was higher than expected. Not including the Roth IRA conversion, their taxable income was $118,500. A full $50,000 Roth IRA conversion would put part of the conversion amount into the 28% bracket, generating more tax than the Jacksons want to pay.
In this situation, the Jacksons could recharacterize enough of Greg’s Roth IRA conversion to wind up with a $33,400 conversion, retroactively. They would use up the full 25% tax bracket while the recharacterized dollars would return to Greg’s traditional IRA, untaxed. If you are interested in this type of lookback fine tuning, our office can help you with a year-end Roth IRA conversion and a possible 2017 recharacterization.
The 2016 contribution limit for 401(k) plans is $18,000 per participant plus $6,000 if you’re 50 or older by year-end. If you are not maximizing your 401(k) contributions and wish to put more into the plan this year for increased tax deferral, contact your plan administrator. Meanwhile, keep in mind that many retirement plans impose RMDs after age 70½. Make sure you’re withdrawing at least the minimum amount, if you’re required to do so, in order to avoid a 50% penalty on any shortfall.
A majority of 401(k) plans offer only one source of investment advice to participants. However, it appears that plan sponsors are starting to reconsider this approach. Some sponsors are adding new forms of advice: 27% are likely to start offering access to an adviser and 25% are likely to give participants access to one-on-one advice from a third party.
From CNBC. Read Original Article
Tax reform will be a top priority for the Trump administration.
Though nobody knows exactly how presidential and congressional proposals will play out, financial advisors are recommending clients take steps now to prepare for any tax changes that may lie ahead.
"We think this a policy shift of enormous magnitude. If Reagan was a Richter 8, this is a Richter 9," said Leon LaBrecque, a certified public accountant and a certified financial planner as well as managing partner and CEO of LJPR Financial Advisors.
Given what we know about these proposals, the tax advice is "very simple," said Roger Stinnett, a CFP, CPA and director of financial planning at Westmount Asset Management. "Defer income and accelerate deductions. Rates will likely go down," he said.
Proposals by President-elect Donald Trump and House Republicans have many similarities. Both plans call for simplifying the personal income tax code from seven to three brackets: 12, 25 and 33 percent.
The tax plans also want to more than double the standard deduction from $6,300 to $15,000 for single filers and from 12,600 to $30,000 for married couples filing jointly.
The Urban-Brookings Tax Policy Center has estimated how much taxpayers would save annually based on their income under tax plans from Trump and the House GOP.
Annual average federal tax savings by income
The Urban-Brookings Tax Policy Center estimates what people would save annually on their federal taxes by income under President-elect Donald Trump's tax plan and the tax plan proposed by House Republicans.
The trade-off for taxpayers is that deductions are capped at $100,000 for single filers and $200,000 for married couples filing jointly under Trump's proposal.
"This could be a problem for those that have a big mortgage, property taxes and big state taxes," Stinnett said. However, the lower overall tax rate may reduce the financial effect of losing the deductions, he said.
Here are some tax moves advisors are telling their clients to make before the Trump administration begins:
Alternative minimum tax
The alternative minimum tax would be repealed under the Trump and the House GOP tax plans.
The AMT repeal would benefit people who have large property taxes and large state income taxes, such as those who live in California, Connecticut, New Jersey, New York and Massachusetts.
Many upper-middle-class households are hit by the AMT. Last year, about 27 percent of households with incomes between $200,000 and $500,000 were affected by the AMT, according to estimates from the Tax Policy Center.
"This might be the most beneficial item to many of our clients," Stinnett said. However, the size of the benefit depends on how lawmakers limit itemized deductions.
High-income people who regularly contribute to charity should plan for a possible limit on deductions by creating a donor-advised fund at a public foundation this year if they haven't done so already, said Thomas O'Connor, a CFP, CPA and a financial planner at WorthPointe.
A donor-advised fund allows you to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time.
Trump has proposed ending the estate tax while taxing capital gains on assets upon the owner's death, with a $5 million exemption for single filers and a $10 million exemption for married couples filing jointly.
"It's way too early know if the estate tax will be abolished," said Adrienne Penta, an estate lawyer and executive director of Brown Brothers Harriman's Center for Women & Wealth.
Most high-net-worth clients already have estate plans in place and should stick with those until the Trump administration and lawmakers work out more details about what a repeal of the estate tax would look like, Penta said.
If lawmakers decide to end the estate tax through the budget reconciliation process in the Senate, which only requires a simple majority instead of 60 votes to prevent a filibuster, the ban could be easily overturned in the future.
"We are not putting a hold on clients' wealth transfer plans unless it involves paying gift tax currently," said Brian King, a CPA, CFP and director of financial planning at Plancorp. Tax plans from Trump and the House GOP have proposed eliminating the gift tax.
Net investment income tax
The 3.8 percent Medicare surtax — technically called the net investment income tax — is on the chopping block in Trump and Republican tax plans.
The tax applies to investment income of taxpayers with a modified adjusted gross income of more than $200,000 for single filers and $250,000 for married couples filing jointly.
If you are subject to this tax, "consider deferring capital gains and any other portfolio income if possible to next year," Stinnett said.