Anderson ZurMuehlen Blog

Are you meeting the ACA’s additional Medicare tax withholding requirements?

Under the Affordable Care Act (ACA), beginning in 2013, taxpayers with FICA wages over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) had to pay an additional 0.9% Medicare tax on the excess earnings.

Unlike regular Medicare taxes, the additional Medicare tax doesn’t include a corresponding employer portion. But employers are obligated to withhold the additional tax to the extent that an employee’s wages exceed $200,000 in a calendar year. The $200,000 amount doesn’t include the employee’s income from any other sources or take into account his or her tax filing status.

In November 2013, the IRS released final regulations regarding the additional Medicare tax and the employer withholding requirements. The only substantial change from the proposed regulations is that employers no longer have access to relief from payment liability for any additional Medicare tax that was required to be withheld but that they didn’t withhold — unless the employer can provide evidence that the employee in question has paid the tax.

Please let us know if you have questions about the requirements. We’d be happy to answer them and help you ensure you’re in compliance with these as well as other ACA requirements. Contact Kyla Stafford, Shareholder, at 406.556.6160 for more information.

© 2014 Thomson Reuters

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Learning World 2014

Staff from across the firm participate in Learning World, internal training courses held three times a year. Here is a picture from the January 9th class. During this training, staff learn about business transactions, networking, preparing tax returns, audit services and much more.

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Should you increase your retirement plan contributions in 2014?

With the new year upon us, it’s time to start thinking about 2014 retirement plan contributions. Contributing the maximum you’re allowed to an employer-sponsored defined contribution plan is likely a smart move:

  • Contributions are typically pretax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

Also consider contributing to a traditional IRA. If you participate in an employer-sponsored plan, your IRA deduction may be reduced or eliminated, depending on your income. But you can still benefit from tax-deferred growth. Consider your Roth options as well. Contributions aren’t pretax, but qualified distributions are tax-free.

Retirement plan contribution limits generally aren’t going up in 2014, but consider contributing more this year if you’re not already making the maximum contribution. And if you are already maxing out your contributions but you’ll turn age 50 in 2014, you can put away more this year by making “catch-up” contributions.

Type of contribution 2014 limit

Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $17,500

Contributions to SIMPLEs $12,000

Contributions to IRAs $5,500

Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $5,500

Catch-up contributions to SIMPLEs $2,500

Catch-up contributions to IRAs $1,000

For more ideas on making the most of tax-advantaged retirement-savings options in 2014, please contact Bill Hughes, Shareholder, 406.782.0451.

© Thomson Reuters

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Year-end Tax Planning for Your Investments

While tax consequences should never drive investment decisions, it’s critical that they be considered — especially this year: Higher-income taxpayers may face more taxes on their investment income in the form of the returning 39.6% top short-term capital gains rate and 20% top long-term capital gains rate and a new 3.8% net investment income tax (NIIT).

Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:

  • Use unrealized losses to absorb gains.
  • Avoid wash sales.
  • See if a loved one qualifies for the 0% rate.

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.

Questions about year-end tax planning for your investments? Contact Dan Miller, Shareholder, at 406.245.5136.

Copyright ©Thomson Reuters

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Smart timing of business income and expenses can save tax — or at least defer it

By projecting your business’s income and expenses for 2013 and 2014, you can determine how to time them to save — or at least defer — tax. If you’ll be in the same or lower tax bracket in 2014, consider:

Deferring income to 2014. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

Accelerating deductible expenses into 2013. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if it looks like you’ll be in a higher tax bracket in 2014, accelerating income and deferring deductible expenses may save you more tax.

Accurately projecting income and expenses can be challenging. For help, please contact Erin Stockwell, Senior Manager, at 406.727.0888. We can also provide additional ideas for timing business income and expenses to your tax advantage.

Copyright ©Thomson Reuters

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Tony DiLello video on why he became an accountant

Tony DiLello, Manager, was featured in a video at the Montana Society of CPAs. Watch his interview to learn how he got involved with the profession, what his mama had to do with it and what he thinks of women in the profession.

Tony works in the Great Falls office and was the MSCPA President from 1990-1991.

Tony DiLello Interview with MSCPA

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Audits Are Essential To Your Organization’s Health

Audits have become more important due to increased public and government scrutiny of not-for-profit organizations, their management, and their boards. Audits serve the purpose of determining whether an organization’s financial information is fairly stated in accordance with prescribed accounting standards.  Audits can also be a valuable tool in determining whether an organization’s internal controls are effectively designed and operating as intended, which in turn enhances the reliability of financial information. Perhaps most importantly, regular audits provide a level of assurance to donors, members, and other stakeholders who are relying on your financial information.

Ins and Outs

Audits come in two forms, serving different purposes:

1. Internal audit. This type of audit is a function of your board’s fiduciary responsibility to the organization and is typically performed by an independent individual or department within the organization, or by an independent third party.

The auditor examines whether your financial policies and processes meet your standards and those of outside agencies. He or she may look at how well your nonprofit’s accounting and financial policies conform with Generally Accepted Accounting Principles (GAAP) and applicable state and federal laws. The auditor also may review the accuracy of financial information, assess how efficiently your organization handles money matters, and test your internal controls.

2. External audit. An external audit is conducted by a financial professional outside of your organization. This type of audit is completely separate from an internal audit. Although external audits are optional for not-for-profits in some states, they’re required in others and may also be required by third parties, such as donors or federal agencies.

In an external audit, a CPA examines your organization’s financial statements and issues an opinion on whether those statements offer a fair picture of your finances and adhere to GAAP. To support this opinion, the auditor tests underlying records, such as bank reconciliations, accounts payable records, and contribution classifications. The auditor also evaluates your organization’s internal controls.

It’s essential to choose an external auditor who has no ties to your organization. For example, a board member’s spouse who happens to be a CPA — no matter how qualified the spouse may otherwise be to perform an audit — wouldn’t be able to accept an engagement to perform your audit.

Audit Committee

Another major component of the not-for-profit audit process is your organization’s audit committee, financially knowledgeable people who provide oversight of your organization’s reporting and internal controls. Some states mandate who can serve on an audit committee. Others allow board members, as well as non-board member volunteers, to serve. Depending on the size and complexity of the not-for-profit organization, the committee generally has three to five members.

The audit committee’s primary role, besides selecting external auditors, is to maintain open communication with internal and external auditors to discuss audit processes and results. The committee also should ensure internal controls are in place throughout the year. The key to a successful audit committee is its independence and ability to bring to the table financial expertise specifically related to nonprofits.

Preparing for an Audit

To help ensure you get the most useful results from an external audit, carefully assemble the relevant documents. This includes financial statements, bank correspondence, budgets, board meeting minutes, and payroll, accounts receivable and accounts payable records. Your auditor also may ask to review records related to loans, leases, grants, donations and fundraising activities. Typically your auditor will provide a detailed list of required documentation.

Expect the auditor to ask questions during the audit process. He or she also will want to question board or staff members about your internal controls, including procedures for fraud prevention and detection. Among the issues likely to be reviewed are how money and other resources are received and spent, what the organization does to comply with applicable laws, and how financial transactions are recorded.

Ideally, you should keep a running file of appropriate paperwork so you’re prepared when the audit takes place. You also should communicate with your auditor as questions arise during the year about (for example) launching a program to sell items to raise funds or accepting a large grant. This ongoing approach can make the annual audit smoother and faster.

Good Reasons

Audits take considerable time and effort, but are well worth it, especially in light of the increased focus on transparency and accountability in recent years. Although the IRS Form 990 doesn’t mandate audits, it does ask organizations to discuss their audit activities, as well as the role their boards play in that process.

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Substantiating Charitable Contributions

By Shirlee Walker, Shareholder

Most 501(c)(3) organizations place great importance on cultivating and nurturing donors. Individuals contribute to charitable organizations for many reasons. However, the tax benefit of making a contribution is often a key factor in a donor’s decision. The Internal Revenue Service has tightened the rules for taxpayer deductions of charitable contributions, making it imperative for charities to be proactive in ensuring their donors receive the tax benefits they deserve.

All deductible donations must be supported by bank records or written receipts from the charity. If the amount of the gift is $250 or more, the donor must obtain a written acknowledgement from the charity. This written acknowledgement must be “contemporaneous.” It must be obtained no later than the due date of the donor’s tax return for the year the contribution is made. The donor must possess the written acknowledgement at the time the tax return is filed to meet the “contemporaneous” requirement.

If the donation is in cash, the written acknowledgement must state the amount contributed and whether the organization provided any goods or services in consideration for the contribution. If goods or services were provided, the organization must provide a good faith estimate of their value. The importance of this statement on goods and services cannot be overemphasized. Recently the IRS has disallowed numerous (and substantial) charitable contribution deductions due to the absence of the required statement.

The donor—not the charitable organization—is responsible for obtaining proper written acknowledgement. However, organizations that fail to provide donors with written acknowledgements in compliance with the IRS rule could lose substantial donors if the IRS disallows deductions for their contributions. IRS publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements, provides the rules for documenting charitable deductions.

For more information, please contact Suzanne Severin, Shareholder, or Shirlee Walker, Shareholder to discuss your particular circumstances.

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QuickBooks Lunch & Learn December Trainings

Plan to attend an informative two-hour presentation designed to help you get the most out of your QuickBooks® software. Topics include, Affordable Care Act Updates and how the law will affect your 2013/2014 reporting, payroll and much more.

The presentation is $40 and includes lunch. All Lunch & Learn Trainings are scheduled from 11:30 a.m.-1:30 p.m.

Monday, December 16, Missoula

Tuesday, December 17, Billings and Helena

Wednesday, December 18, Great Falls

Reserve your space today.

Anderson ZurMuehlen QuickBooks® News

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Planning Around the New Medicare Tax on Investment Income

The new 3.8 percent Medicare tax on net investment income took effect at the beginning of this year. It only affects higher-income individuals, but that can include anyone who happens to have big one-time taxable income or gains in one year. This article covers some planning strategies that individuals can implement between now and year end to avoid or minimize the new tax for 2013.

Net Investment Income Tax Basics

The following types of income and gain (net of related deductions) are generally included in the definition of net investment income and thus potentially exposed to the 3.8 percent tax.

  • Gains from selling assets held for investment including gains from selling investment real estate and the taxable portion of gains from selling personal residences.
  • Capital gain distributions from mutual funds.
  • Gross income from dividends and interest (not including tax-free interest such as municipal bond interest).
  • Gross income from annuities and royalties.
  • Gross income and gains from passive business activities (in which you do not materially participate) and gross income from rents. Gross income from non-passive business activities is excluded from the definition of net investment income and so is gain from selling property held in such activities.
  • Gains from selling passive partnership interests and S corporation stock (meaning you do not materially participate in the partnership or S corp’s business activities).
  • Gross income and gains from the business of trading in financial instruments or commodities (whether you materially participate or not).

Affected Individuals

You are only exposed to the 3.8 percent Medicare tax if your modified adjusted gross income (MAGI) exceeds: $200,000 if you’re unmarried, $250,000 if you’re a married joint-filer or qualifying widow or widower, or $125,000 if you use married filing separate status.

The amount subject to the 3.8 percent tax is the lesser of:

  1. Your net investment income or
  2. The amount by which your MAGI exceeds the applicable threshold.

For this purpose, MAGI is defined as regular AGI from the bottom of page 1 of your Form 1040 plus certain excluded foreign-source income net of certain deductions and exclusions (relatively few individuals are affected by this add-back).

Note: The 3.8 percent tax can also hit estates and trusts that have investment income but we will not cover them in this article.

Planning Strategies Must Aim at Proper Target

Since the 3.8 percent Medicare tax hits the lesser of: your net investment income or the amount by which your MAGI exceeds the applicable threshold, planning strategies must be aimed at the right target.

  • If your exposure to the tax mainly depends on your net investment income, focus first on strategies that will minimize that amount.
  • If your exposure to the tax mainly depends on your MAGI, concentrate on strategies that will reduce that number.

Here are three examples to illustrate different taxpayers’ situations.

Example 1: Target Net Investment Income

In 2013, you will file as an unmarried individual. Unless something changes, you will have $370,000 of MAGI, which includes $95,000 of net investment income. You will owe the 3.8 percent Medicare tax on all net investment income (the lesser of your excess MAGI of $170,000 or your net investment income of $95,000).

Your exposure to the 3.8 percent tax mainly depends on your net investment income level. Therefore, you should focus first on strategies to reduce that amount. For instance, you could sell loser securities from your taxable brokerage firm investment accounts to offset earlier gains. Additional strategies are explained later in this article.

In contrast, strategies that would lower your MAGI would not reduce your exposure to the 3.8 percent tax unless they reduce your MAGI by a whole lot. For instance, making an additional $15,000 deductible contribution to your tax-favored retirement account would not by itself reduce your exposure to the 3.8 percent tax.

Example 2: Target MAGI

In 2013, you and your spouse will file jointly. You plan to have $325,000 of MAGI, which includes $100,000 of net investment income. You will owe the 3.8 percent Medicare tax on $75,000 (the lesser of your excess MAGI of $75,000 or your net investment income of $100,000).

Your exposure to the tax mainly depends on your MAGI level. Therefore, you should focus there first. For instance, making $25,000 of additional deductible contributions to your tax-favored retirement accounts would reduce your MAGI by $25,000 and therefore reduce the 3.8 percent tax. Selling loser securities from your taxable brokerage firm accounts to offset earlier gains would also reduce your MAGI.

In contrast, using a method that allocates more deductions to offset your investment income would not reduce your bill for the 3.8 percent tax unless the method reduces your net investment income amount by a great deal, which is not likely.

Example 3: Reduce the Impact of One Big Transaction

In 2013, you and your spouse will file jointly. Between now and year end, you expect to sell a greatly appreciated vacation home, which you’ve owned for many years. The whopping $650,000 gain will be fully taxable for federal income tax purposes and will also count as investment income for purposes of the 3.8 percent tax. Let’s assume you’ll have no other investment income and no capital losses. But you’ll have $150,000 of MAGI from other sources (salary, bonuses, self-employment income, and so forth).

Due to the vacation home profit, your net investment income will be $650,000 (from the sale) and your MAGI will $800,000 ($650,000 from the vacation home plus $150,000 from other sources). You would owe the 3.8 percent tax on $550,000, which is the lesser of: your net investment income of $650,000 or your excess MAGI of $550,000. In this case, that means $800,000 minus the $250,000 threshold for joint-filing couples. The 3.8 percent tax would amount to $20,900 (3.8 percent times $550,000). Ouch!

In this example, the sole source of your exposure to the tax is the vacation home gain. Therefore, consider the following strategies:

  • Sell the vacation home on an installment plan to spread the gain over several years and thus minimize or maybe even eliminate exposure to the tax.
  • If possible, swap the vacation home in a Section 1031 “like-kind exchange,” which would defer the big gain and completely eliminate your exposure to the 3.8 percent tax for now.
  • Take other steps (described below) to reduce your net investment income, which would reduce your exposure to the tax.

lores_heart_dollar_gift_mbStrategies to Reduce Net Investment Income and MAGI

  • Sell loser securities held in taxable accounts to offset earlier gains from such accounts.
  • Gift soon-to-be-sold appreciated securities to children or grandchildren and let them sell the securities to avoid including the gains on your return. But beware of the Kiddie Tax, which can potentially apply until the year your child or grandchild turns age 24. Talk with your tax adviser to ascertain if the Kiddie Tax might be an issue in your case.
  • Instead of cash, gift appreciated securities to IRS-approved charities. That way, the gains won’t be included on your return.
  • If possible, defer gains subject to the 3.8 percent tax by making installment sales or Section 1031 like-kind exchanges.

lores_rental_property_residential_home_real_estate_mbStrategies to Reduce Net Investment Income

  • Select a method for determining deductions allocable to gross investment income that will maximize such deductions and thereby reduce your net investment income. Your tax adviser can help find the best method.
  • If possible, become more active in rental and business activities (including those conducted through partnerships and S corporations) to “convert” them from passive to non-passive by meeting one of the material participation standards. That would make income from the activities exempt from the 3.8 percent tax, because it doesn’t apply to income from non-passive business activities (including non-passive rental activities). Ask your tax adviser for details.
  • To facilitate the preceding strategy, consider taking advantage of the one-time opportunity to regroup activities for purpose of applying the passive activity rules. Once again, your tax adviser can provide details.

Strategies to Reduce MAGI

  • Maximize deductible contributions to tax-favored retirement accounts such as traditional IRAs, 401(k) accounts, self-employed SEPs, and self-employed defined benefit pension plans. Note: You can make a deductible contribution to a traditional IRA right up until the April 15, 2014 filing date and still benefit from the resulting tax savings on your 2013 return. Small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan for 2013 up until the 2014 due date for their returns, including extensions.
  • If you’re a cash-basis self-employed individual, defer business income into 2014 and accelerate business deductions into 2013. Consult with your tax adviser for specific information.

 

lores_tax_reduction_push_reduce_mbFive Long-Term Strategies to Avoid or Reduce the New Tax

The following ideas may not reduce or eliminate this year’s exposure to the new 3.8 percent Medicare tax, but they could help a lot over the long run.

  1. Convert traditional retirement account balances to Roth accounts, but watch out for the impact on your MAGI in the conversion year. That’s because the deemed taxable distributions that result from Roth conversions aren’t included in your net investment income figure, but they increase MAGI, which may expose more of your investment income to the 3.8 percent tax.  Over the long haul, however, income and gains that build up in a Roth IRA will usually avoid the 3.8 percent tax, because qualified Roth distributions are tax-free. Because qualified distributions are not included in your MAGI (unlike the taxable portion of distributions from other types of tax-favored retirement accounts and plans), they will not increase your exposure to the 3.8 percent tax by increasing your MAGI.
  2. Invest taxable accounts in tax-exempt bonds. This would reduce both net investment income and MAGI. Use tax-favored retirement accounts to invest in securities that are expected to generate otherwise-taxable gains, dividends, and interest.
  3. Invest in life insurance products and tax-deferred annuity products. Life insurance death benefits are generally exempt from federal income tax and are thus exempt from the 3.8 percent Medicare tax too. Earnings from life insurance contracts are not taxed until they are withdrawn. Similarly, earnings from tax-deferred annuities are not taxed until they are withdrawn.
  4. Invest in rental real estate and oil and gas properties. Rental real estate income is offset by depreciation deductions, and oil and gas income is offset by deductions for intangible drilling costs (IDC) and depletion. These deductions can reduce both net investment income and MAGI.
  5. Invest taxable accounts in growth stocks. Gains are not taxed until the stocks are sold. At that time, the negative tax impact of gains can often be offset by selling loser securities held in taxable accounts. In contrast, stock dividends are taxed currently, and it may not be so easy to offset them.

Proactive Planning Can Pay Off

Some of the strategies described above, and in the right-hand box, are doubly effective because they can reduce your regular federal income tax bill as well as the 3.8 percent Medicare tax. If you’re self-employed, some of the ideas can amount to tax-saving triple plays because they can also reduce your self-employment tax bill. Finally, they might reduce your state income tax bill as well. However, some of these strategies take time to implement. So talk with your tax adviser now. Waiting until later in the year could prove to be too late.

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