May 2014 Letter

With the 2013 Tax filing season behind us, the 2014 tax planning season is just beginning. Included this month are two areas where advanced planning can reduce your tax bill. There is also an update from the IRS on the tax treatment of virtual currencies like Bitcoin for those of you using or contemplating their use. A checklist of ideas on how to improve security of your identity rounds out this month's newsletter.
Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Planning: Leverage Kiddie Tax Rules

Now is the time to take action on reducing next year's tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the "kiddie tax" rules.

Background

The term "kiddie tax" was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child's lower tax rate. In 2014 the law requires a child's unearned income (generally dividends, interest, and capital gains) above $2,000 be taxed at their parent's tax rate.

Applies to

	Children under the age of 19
	Full-time students under the age of 24 and providing less than half of their own financial support
	Children with unearned incomes 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 half 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)

Planning thoughts

So while your child's unearned income above $2,000 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

	Maximize your lower tax investment options. Look for gains in 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 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.

Planning: Leverage Kiddie Tax Rules

Now is the time to take action on reducing next year's tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the "kiddie tax" rules.

Read full article

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2015 Health Care Savings (HSA) Account Limits Announced

The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes.

What is an HSA?

An HSA is a tax advantaged savings account to pay for qualified health care costs. The account consists of wages contributed on a pre-tax basis. There is no tax on the funds contributed or investment earnings as long as the funds are used to pay for qualified medical, dental and vision expenses. To qualify for this tax-advantaged account you must be enrolled in a "high deductible" health insurance program as defined by HSA rules.

The limits

Health Savings Account (HSA) Limits		2014	NEW! 2015	Change
Maximum Annual Contribution	Self	$3,300	$3,350	+$50
	Family	$6,550	$6,650	+$100
	Add: 55+ catch up contribution	$1,000	$1,000	nc
Health Insurance Requirements
Minimum Deductible	Self coverage	$1,250	$1,300	+$50
	Family coverage	$2,500	$2,600	+$100
Out-of-pocket Maximum	Self coverage	$6,350	$6,450	+$100
	Family coverage	$12,700	$12,900	+$200

Note: HSAs require a qualified High Deductible Health Plan (HDHP). To qualify, a health insurance plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.
Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential tax benefits.

2015 Health Care Savings (HSA) Account Limits Announced

The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes.

Read full article

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Virtual Currency is Property per IRS

In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know;

	As property. Property is subject to gains and losses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is short-term or long-term.
	As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Virtual currency income received as an independent contractor has self-employment tax rules applied and must follow Form 1099 reporting requirements.
	A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin.
	Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars.
	Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who "mines" virtual currency, you create income upon receipt of the currency. This is a taxable event.

As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.

Virtual Currency is Property per IRS

In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know.

Read full article

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Check your Credit

...Change your Passwords

As consumers in the digital age we have repeatedly had our confidence in the security of our identity and financial information tested. First it was the dramatic increase in identity theft at the IRS. Then the major data breach at companies like Target, Neiman Marcus, Yahoo and others. Now we hear that a bug called Heartbleed has made secure web sites anything but secure. Here is a checklist of things to consider;

Change your user ids every three to six months Change your passwords every three to six months Close potentially compromised accounts Replace compromised debit and credit cards Understand your risks of theft (for instance your financial risk on credit theft is different than debit card fraud) Consider a credit monitoring service Monitor your social media footprint Update your computer security software Review your credit reports Correct any errors on your credit reports Review your children's accounts and credit reports Report suspicious activity in your accounts

	Shred confidential information before tossing it
	Do not share logins and passwords
	Create separate credit card and banking accounts for internet transactions
	Consider using a PO Box for mail

Other resources

	FREE credit report. Each year you are entitled to receive a FREE credit report from the major credit report companies. To receive yours go to: AnnualCreditReport.com
	IRS Identity Theft: Tips for taxpayers
	Federal Trade Commission: Identity theft help

Check your Credit

...Change your Passwords

As consumers in the digital age we have repeatedly had our confidence in the security of our identity and financial information tested. First it was the dramatic increase in identity theft at the IRS. Then the major data breach at companies like Target, Neiman Marcus, Yahoo and others. Now we hear that a bug called Heartbleed has made secure web sites anything but secure. Here is a checklist of th

Read full article

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As always, should you have any questions or concerns regarding your situation please feel free to call.

April 2014 Letter

Happy tax filing month. To help celebrate, this month's newsletter includes a fun tax quiz. In addition, there are articles outlining state revenue department's new strategy of harassing out-of-state businesses to collect their sales/use tax for them and an article outlining the risks children can place on parents with their internet behavior.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Tax Quiz

How well do you know tax facts?

As April is tax month, included here is a short quiz to see how well you know your taxes. Since everyone tends to think they have it worse than their neighbors, this year's quiz revolves around state imposed taxes. Enjoy!

Can you name the seven states that impose no individual income taxes? The seven states with no individual income taxes are: Alaska, Florida, Texas, Wyoming, South Dakota, Washington, and Nevada. If you live in this state, your state government actually sends you a check each year. Can you name the state and the amount of the check you would receive for 2013? The state that provides a check to its residents each year is Alaska. Qualified residents in 2013 received $900 as an Alaska Permanent Fund dividend. The amount of the check depends on the income received in the fund. In 2008, residents received a record $2,069. The fund was originally established in 1976 as a means to save 25% of the oil revenue from the Trans-Alaska Pipeline System. The idea was to have funds for future generations when the resource would no longer be available.

Seven states have no individual income taxes. Can you now name the seven states with the highest marginal state individual income tax rate in 2013? Here they are in order of highest to lowest: #1 California (13.3%), #2 Hawaii (11.0%), #3 Oregon (9.9%), #4 Minnesota (9.85%), #5 Iowa (8.98%), #6 New Jersey (8.97%), #7 Vermont (8.95%) State tax burdens include a combination of many types of tax including income taxes, corporate taxes, property taxes, sales tax, excise taxes and other taxes. Per the nonpartisan group, Tax Foundation, what seven states tax their citizens the most as a percent of their state sourced income? Here they are ranked from the highest level; #1 New York: 12.6%, #2 New Jersey: 12.3%, #3 Connecticut: 11.9%, #4 California: 11.4%, #5 Wisconsin: 11.0%, #6 Minnesota: 10.7%, and #7 Maryland: 10.6%. Source: taxfoundation.org. Please see their reports for more information and their methodology for their findings. Can you name the state that recently became the first state in the U.S. to tax gifts? Minnesota. There is a long-standing gift giving tax on the federal level if an individual gives more than $14,000 to any one person ($28,000 for a married couple) in a single year. But until 2013, no state imposed this tax. Minnesota's law requires gifts made within three years of death be considered part of your estate and subject to potential estate taxes. Thanks Minnesota. Will others follow suit?

Kids Say the Darndest Things

But the impact today can be far-reaching

Art Linkletter (from 1945 - 1969) and Bill Cosby (from 1998 - 2000) hosted popular radio and television shows that featured kids aged 5 to 10 answering interesting questions. The answers were unrehearsed and often led to hilarious entertainment. Here is an example;

Q. What is the first thing you would do if you were president?

"I'd keep my mouth shut."

"That husbands would have to kiss wives a hundred times."

[See more examples]

Unfortunately, in today's social media environment what was once a cute/innocent means of entertainment can quickly become a nightmare.

Example: $80,000 discrimination settlement is lost after a daughter announced the settlement on her Facebook account.

In this example, a former head of a preparatory school in Miami, FL won an age discrimination suit against his former employer. As is normal in cases like this, the results of the settlement were legally required to be kept confidential. However, in expressing her happiness for her father, his daughter posted this on Facebook:

"Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer..."

That was all it took to have the settlement check canceled.

Example: Dad is fired after his son posts a video of the new phone he brought home from work.

The 15 year old son of an employee at HTC took his dad's phone. This phone was a prototype of a yet to be released model. He thought it would be cool to video the features of the new phone and post it on the internet. The video went viral. The phone's serial number was visible on the video so it was only a matter of time before the company could trace it back to its source. Since employees are required to sign non-disclosure (confidentiality) agreements, this employee got in big trouble and lost his job.

What can be learned

	Know your obligations. We seem to be signing agreements every day. Do you know what they say? What must you keep confidential? Once you know this, it is wise to keep this confidential information from your children whenever possible. If you bring work home, keep it in a separate area away from where the kids work and play. When finished, put your work away. Try to keep a separate work computer from the ones your children use. Or if not possible, set up separate accounts on your computer with password protection to separate your work from theirs.
	Pass those obligations to your kids. Better still, tell your kids what your obligations are. Stress to them the importance of confidentiality. Give them examples of things they cannot talk about. But then try not to put your children in a position to have to keep secrets.
	Monitor. Monitor. Monitor. Know what social media vehicles your children are using. Kids under the age of 13 need parent's consent to use most of these tools. Require your kids to give you access to their electronic devices and periodically check the activity on their accounts.
	Teach the value of identity. Tools like Facebook, Linkedin, and Twitter have thrived on providing their services "free". Most of us are now starting to understand these services are never free. We have paid for them with the value of our identities and with our privacy. Understanding this, help your children be deliberate in choosing the media they use and the material they make available on that media.

Why's Everybody Picking on Me?

States now harassing small out-of-state businesses for use tax collection

Many revenue starved states are now using a new strategy of harassing small out-of-state businesses for tax collection. Here is what you need to know.

Sales/use tax obligation

Whenever you purchase an item that has a sales/use tax obligation attached to it, the purchaser is required to pay the tax. To enable the collection of this tax, states have passed this collection obligation to the retailer. The seller must then collect the sales tax on behalf of their customer and send it in to their state revenue department. When your purchase is made from an out-of-state business, if that business does not have a physical presence in your state (called nexus), the purchaser (you) is required to send the correct tax to your state by complying with the state's use tax laws.

What is happening now

As no surprise to anyone, widespread self-reporting of use tax is not being done. To combat this challenge there is pending Federal legislation called the Marketplace Fairness Act that would create requirements for the collection of these internet and interstate sales. No one is sure this bill will see the light of day. In the meantime, many states are taking matters into their own hands by sending notices to out-of-state businesses. States are telling these businesses they must fill out forms to show they adhere to their state tax laws. These forms are often complicated and the unwary business owner could inadvertently create a tax liability if they are unsure how to respond. Here are some things to know:

	Understand nexus rules. In order to have the responsibility to collect sales tax for a state that is not your own, you must have a physical presence in that state. These nexus laws are there to protect small businesses from the complex nature of state and local tax laws that vary dramatically from place to place. If you do not have a physical presence in a state you generally do not need to figure out and collect their taxes for them.
	Common carrier is key. If you ship product into a state, you still do not have nexus if you use a common carrier like USPS, Fed Ex or UPS. If you use your own trucks you could be creating a sales/use tax collection obligation despite the fact that you do not have a physical presence in a particular state.
	Careful about trade shows. If you attend trade shows in a state, you could be creating nexus. This is especially true if you sell product at your booth while at the trade show. Your safest bet is to display only and not sell your product if you wish to avoid the need to collect sales and use tax.
	Certain states are active harassers. States like California and Michigan are sending out complicated forms and demanding small businesses fill them out or they provide thinly veiled threats of penalties for non-reporting. These states are "reminding" you of their nexus laws, that may or may not comply with the nexus laws established through Supreme Court tax cases.

Unfortunately, small out-of-state businesses are readily identified during state sales tax audits of other in-state businesses. State auditors follow the invoice trails and send out their notices. The paperwork burden this is putting on out-of-state small businesses that already follow sales tax laws can become overwhelming. If you receive any of these notices from out-of-state revenue departments, please call for help.

In the News:

Severance Pay is Subject to Employment Taxes

In a recent Supreme Court decision, pay received as severance is subject to Social Security and Medicare tax. The case involved an employer who went out of business but paid severance checks to employees based on their seniority and pay. The company's position was that this pay was not wages.

In the unanimous decision, the Supreme Court ruled that the severance payments were deemed wages and the employment taxes were owed. The impact of this ruling is far reaching. It is estimated that there are pending claims for refunds of over $1 billion from similar tax cases.

What you need to know

While you may never find yourself in this situation, should you receive a severance check please pay special attention to how the payment is treated. If you receive a Form 1099, or receive a W-2 without Social Security and Medicare withheld you could have a problem. Should this happen to you, immediately ask your former employer why they believe Social Security and Medicare payments are not required. Seek advice as soon as possible. If you delay you might be required to pay the employer's portion of this tax as well as your own.

As always, should you have any questions or concerns regarding your situation please feel free to call.