December 2013 Letter

With the outcome of Congressional action as uncertain as ever, what can be done to manage your own affairs as the 2013 tax year winds down? Besides the annual list of things to consider before December 31st, included in this month's letter are planning considerations for those in Health FSA programs and those who wish to plan for their retirement contributions in 2014. Finally, there is a general interest article about the dangers of free Wi-Fi hot spots and some ideas to keep your information safe. As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Understand the New Health FSA Limits 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 are 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. New rules The maximum annual amount that can be set-aside in Health FSA's is now set at $2,500 (indexed to inflation after 2012). Old rules allowed this account level to be set by employers offering the benefit (usually $5,000). By reducing funds available for this benefit, the government is hoping it will 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. 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 Health 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. A Health Savings Account (HSA) is usually a better option. Don't confuse the Health FSA with the HSA benefit. If you are in a qualified high deductible health insurance plan, you may also be an active participant in an HSA. This pre-tax savings account can be used to pay for qualified medical expenses AND unused funds can be carried over into future years. As long as the funds are used for qualified expenses, there is no tax obligation. This type of savings account is usually preferential over the Health Care FSA option. 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.

Plan Your 2014 Retirement Contributions As the end of the year rolls around, if you have not already done so, now is the time to plan for contributions into your retirement accounts in 2014. Unlike changes from 2012, most of the annual limits are unchanged in 2014. Retirement Program 2014 2013 Change Age 50 or over catch up IRA: Traditional $5,500 $5,500 none add: $1,000 IRA: Roth $5,500 $5,500 none add: $1,000 IRA: Simple $12,000 $12,000 none add: $2,500 401(k), 403(b), 457 plans $17,500 $17,500 none add: $5,500 Don't forget to account for any matching programs offered by your employer as you determine your various funding levels.

FREE Wi-Fi Hotspots = Lurking Danger In an effort to seem customer friendly, many coffee shops, hotels and other retailers advertise free internet access for their customers. This free access could be your undoing as hackers use these places to steal bank passwords, credit card information and more. Here is what is happening now. The Thieving Techniques Man in the Middle (MITM). In this scenario the hacker places his device between you and the Wi-Fi network. Each of your keystrokes is downloaded, your communication is tracked, and often changed. The hacker could then take your bank account information, drain your balances and be on their way before you were aware your money has been stolen. The Rogue Wi-Fi. This technique is a lot like fishing. The hackers enter a place that you think would have free Wi-Fi. They set up a Wi-Fi network with an appropriate name such as Free Wi-Fi. As unsuspecting victims log into the fake connection their data and computers become compromised. The Packet Stealers. The would be thieves sit at a table near you and use software to steal the information packets you are sending through the Wi-Fi network. In this case, they don't even need passwords as their device is simply reading what you are sending. Later the stolen data can be read and the sensitive information can be pulled from the stolen packets. What They Steal Banking information   E-mail Credit Card details   Social Media Access On-line Shopping Accounts   Your identity What Steps to Take Avoid using Free Wi-Fi if at all possible. A better alternative is to use a VPN (Virtual Private Network) instead of a public network. However, if you do find the need to use this free service; Only use Free Wi-Fi that require a password from the proprietor for access. Double check the Wi-Fi name with someone who is clearly an employee Never enter your passwords when using someone else's Wi-Fi Turn off your computer's file sharing services Make sure your anti-virus and firewall software are installed and up to date Make sure sites you visit start with "https" While no one can ever ensure your security, it is almost always best to transact sensitive transactions over a trusted closed network.

Using Multi-factor Verification for Added Security As data thieves develop more clever ways to steal your identity, what is being done to enhance security? The current trend is to add multiple ways to verify that you are who you say you are. This security feature, known as multi-factor verification, is being deployed in many ways. Here are some common examples: Requiring a PIN and a valid ATM card to withdraw cash at an ATM Using "Captcha" to verify on-line requests. Captcha requires you to enter a code off an image (versus a readable font) making it nearly impossible to capture via a computer program. Using a secret image that you assign to your account that must be verified prior to logging into a service. Using a cell phone call to give you a second or third password to log into a bank account. Using pass code devices that change every few minutes to provide a rotating second or third password. Adding secret questions that only you know the answer to in order to access your account. Multi-factor verification is quickly replacing the simple login id and password as a form of online security. Look for these features when choosing an online retailer or online bank. These added steps could just be the needed barrier to protect your identity and banking information.

It's That Time Again: Year-end Tax Moves While 2013 will be full of surprises as new tax laws are felt for the first time, there are still opportunities to reduce your tax obligation now and into next year. Here are some ideas worth looking at. 1. Make effective use of capital gains and losses. Remember short-term capital gains (assets held less than one year) have a maximum tax rate of 39.6% while the maximum long-term capital gain tax rate moves to 20%. Plus there is a potential bonus Medicare tax of 3.8% if your income exceeds $200,000 single and $250,000 married. Action to take: Review your portfolio and consider the appropriateness of taking long-term gains now versus holding the investment. Net capital losses against short-term capital gains if possible. Also remember you can net up to $3,000 in excess capital losses against ordinary income. Consider maximizing your child's unearned income potential prior to the impact of the "kiddie tax" (usually up to $2,000 of unearned income can be taxed at your child's rate). 2. Last minute charitable donations. Now is the time to finalize your charitable donations. Remember you must always have a receipt (cash donations are no longer deductible without one) and only donate non-cash items in good or better condition. Donations of $250 or more also require an acknowledgement from the charitable organization. Action to take: Make any last minute donations and collect all applicable receipts. Consider donating appreciated stock to gain additional tax benefits. If you are considering this alternative, it is always best to seek qualified advice prior to making this donation. 3. Fund your retirement accounts. Remember you can still make donations to qualified retirement accounts. Some accounts, like Traditional IRAs and Roth IRAs allow making contributions through April 15th as long as you qualify. Action to take: If possible, fund your accounts up to the maximum allowable. Don't forget to take advantage of the catch-up provisions if you are age 50 or over. Consider making contributions this year versus next to minimize your taxable income. 4. Run through other year-end checklist items. Action to take: Take Required Minimum Distribution from retirement accounts if you are over the age of 70½. Rebalance your investment portfolios as necessary Review any medical and dependent care spending accounts to ensure you do not lose any unspent funds Make contributions to your retirement savings accounts, especially if you are self-employed Consider last minute retirement account conversions, if appropriate Consider donating appreciated stock versus writing a check to a favorite charity Estimate your tax liability and make any required estimated tax payments Make any final gift payments while being aware of the annual gift giving limits Start collecting and organizing your tax records As a final note, please consider that the unsettled atmosphere in Congress is sure to result in additional tax changes in 2014. So stay alert to those that may impact you.

Should you have any questions or concerns regarding your situation please feel free to call or email.

November 2013 Letter

As the year winds down, will you be ready for the application of all the new tax laws incorporated into 2013? Please take a moment to review your situation while there is still time to act prior to year-end. As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Tax Change is Coming While a distant memory, in January of 2013 Congress passed sweeping tax legislation. Many of these tax law changes will now be felt as you file this year's tax return. Here are five worth noting. Self-employed FICA. Wage earners have already felt the impact of the social security tax rate reset to the traditional 6.2% (temporary rate in 2012: 4.2%). However, self-employed workers may feel this impact when filing their annual tax return. action: If receiving self-employed income, review your quarterly filings to ensure you have accounted for this incremental tax hike. Higher Taxes. If your income is above $200,000 single or $250,000 married filing jointly, your taxes will be going up. In some cases it may be up dramatically. Why? Your tax return may be subject to the following increases; a new 39.6% tax rate, itemized deduction phase-out, personal exemption phase-out, increase in long-term capital gains taxes, and more. action: Conduct an income tax forecast to review the potential impact on your situation. This is especially true for small business owners in sole proprietorships, Sub Chapter S Corporations, and partnerships as your business profits will be taxed on your individual tax return. Medicare Surtax. To help pay for the health care initiatives, 2013 marks the first year of new Medicare surtaxes for those whose incomes surpass $200,000 single or $250,000 joint. The extra tax may have been applied to your paycheck, but because of the marriage penalty in this part of the code, you may be subject to the additional tax when your income is combined with your spouse's income at tax filing time. action: Conduct a 2013 tax forecast. This is especially important for married couples whose individual incomes do not pass the threshold, but when combined with a spouse do. Dividends and Long-term Capital Gains. While qualified dividends will not be taxed as ordinary income, the maximum tax rate goes up 33% (from 15 to 20%). The maximum tax rate on qualified capital gains also goes from 15 to 20%. action: Year-end planning is now more important to determine whether to sell investments. Try to offset gains with losses wherever possible. Medical Expense Threshold Moves to 10%. For those under the age of 65, the medical expense threshold is now 10% of your Adjusted Gross Income (AGI). You may only deduct qualified medical expenses that exceed this percentage of your AGI. The threshold remains 7.5% if you are 65 years old or older. action: Avoid the tendency to stop tracking medical expenses because you think you will never hit the threshold. Remember it often only takes one major medical emergency to make all other medical, dental, and vision care expenses deductible. While the impact of these changes will not be felt until you file your 2013 tax return, it may make sense to review your situation and be prepared for these upcoming changes.

2013 Filing Status Change for Married Same-sex Couples The U.S. Treasury Department and the IRS issued new regulations as a direct result of the recent Supreme Court ruling regarding same-sex couples. Under the ruling any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, or a U.S. territory that recognizes same-sex marriage will be treated as married for all federal tax purposes. This includes: filing status personal deductions dependency exemptions standard deductions employee benefits tax credits retirement plans and contributions More importantly, this ruling applies regardless of where the same-sex couple currently lives. In other words, if the same-sex couple is legally married in one state, but then moves to another state that does not recognize the marriage, they are still married for Federal Income Tax purposes. Things to note Beginning in 2013, same-sex couples within this ruling must file either married filing jointly or married filing separately. You may no longer file as single taxpayers. You may choose to, but are not required to, file amended tax returns as being married for any prior tax years that are still open under the statute of limitations. This usually means three tax years (2010, 2011, and 2012). This ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships. If you paid for same-sex health insurance coverage from an employer in after-tax dollars you may be able to shift these premiums into pre-tax dollars. State laws are more complex and are currently evolving so try to keep informed of any new developments on this front. More information will be forthcoming on this subject from the IRS and other government agencies.

Avoid These Common Financial Mistakes Throughout life there are many ways to achieve financial success. Some of that success can be achieved by avoiding these common financial mistakes. Under-insuring your property. Often policy owners hold an insurance policy for 10 years or more and never conduct a review to ensure their coverage is still adequate. This is made more complicated each year as insurance companies change the details of coverage within legal documents. Your best defense is to review homeowner, life, and auto insurance with your agent one month prior to your renewal dates. Paying too much interest. If you carry a balance on a credit card you are probably paying some of the highest interest rates in the country. Try to get in the habit of paying enough to cover your current monthly purchases, PLUS the minimum monthly payment, PLUS a little extra. You'd be surprised how much money you can save in credit card interest expense. A costly divorce. A divorce that goes to trial can easily cost thousands of dollars. Using a lower cost mediation option or settling amicably can be a financially wiser way to go. During this emotional time, financial analysis often takes a back seat. Conducting a tax review of the proposed divorce settlement prior to signing could also save you thousands. Unhealthy living costs. Bad health habits can not only hamper and shorten your life, but they can also cost you plenty in the form of higher life-insurance premiums and higher out-of-pocket medical expense. This can be especially expensive with higher insurance policy deductibles and the new 10% medical expense itemized deduction threshold. Consider slight health changes now to pay you dividends in the future. Insufficient emergency savings. If you lost your job or became unable to work, how many months of bills could you pay? Often one major accident is all that is between you and financial hardship. Try to accumulate between six months and one year of financial resources to keep on hand in case this happens to you. Review and consider appropriate short-term and long-term disability insurance. Purchasing with credit. Consider saving enough money to purchase bigger items versus buying on credit. Do you remember saving money as a child to buy a bike or a favorite toy? For some reason, we have now decided we should buy it first and then pay the bill. Why not return to the old way of purchasing? It might just keep you out of a financial hole. Protecting against fraud. With advances in technology have come more devious ways to steal your identity. This includes theft of tax information, social security numbers and credit cards. Conduct a regular review of your online profile and credit reports to identify suspicious activity before it gets out of hand. While it is hard to account for every possible financial pothole in the drive-through of life, by paying attention to the obvious ones, the risk of a large financial surprise can be reduced.

State Business Tax Burdens Announced Where does your state rank? The tax climate for businesses varies dramatically depending on the state in which the business resides. State business environments are constantly shifting as some states readily enact changes made at the federal level, while others do not. Each year the non-profit Tax Foundation organization announces a ranking of tax burdens for businesses. The results of their 2014 ranking are noted here. Some Observations The 10 best states in this year's Index are: The 10 worst business tax burden states are: Wyoming South Dakota Nevada Alaska Florida Washington Montana New Hampshire Utah Indiana Maryland Connecticut Wisconsin North Carolina Vermont Rhode Island Minnesota California New Jersey New York Most of the above states are favorable for businesses because they lack one of the common tax revenue types. Some states lack corporate taxes while others have no sales tax or individual income taxes. Indiana is unique in that is has all the major tax classifications but they are just lower rates than most other states. The common themes within these non-friendly business states are high tax rates with complex tax code. Minnesota stands out here as recently enacted tax changes will impact the cost of doing business within the confines of this state. Want to learn more? The full study is available at www.taxfoundation.org

Should you have any questions or concerns regarding your situation please feel free to call or email.