Taxes

Future of Charitable Planning

Key Takeaways

  • Studies show that one in four affluent people (23%) consulted with at least one advisor about charitable donations last year.

  • A confused donor is an unhappy donor.

  • Always review your goals and check with your advisors before whipping out your checkbook

 

Generally planned giving CRTs (charitable remainder trusts) and CLTs (charitable lead trusts) immediately come to mind. We seldom think about charitable giving in the context of non-charitable trusts, but according to Al W. King III, co-founder and co-CEO of South Dakota Trust Company, the amount of wealth that high-net-worth individuals own in trusts is surprising.

  • “The top 1 percent currently have 38 percent of their assets in trusts, and

  • The next 9 percent have 43 percent of their assets in trust,” observed King.

Some families intentionally incorporate charitable planning and provisions into trusts they create. You can too by:

  • Setting a target value for the trust that will be available for family members with any growth and appreciation above that amount being directed to charity

  • Supplementing distributions to family members who work for a charitable organization

  • Matching beneficiaries’ personal charitable contributions

Families are also discovering strategies to incorporate charitable goals and objectives into trusts that were initially created with no charitable intentions. This is often achieved by changing the trust’s situs (legal jurisdiction), reforming or modifying the trust, or “decanting” in states with flexible decanting statutes that allow trustees to change the terms of an otherwise irrevocable trust, which may include adding discretionary charitable beneficiaries.

Common trusts and trust strategies that are increasingly incorporating charitable goals, objectives and planning include:

  • Dynasty trusts—Because of the long-term nature of these trusts, families often desire to make provisions and provide flexibility for both family and charitable goals and objectives.

  • Existing non-charitable trusts—Irrevocable trusts can sometimes be reformed or modified to allow for distributions to charitable organizations. Depending on the applicable state law governing the trusts, it may be necessary or helpful to change the situs of a trust to a state that has more flexible trust decanting laws.

  • Purpose trusts—Some trusts are created for a specific purpose, often to care for “something” rather than for “someone.” For example, a trust may be created to care for a pet; to maintain family property such as antiques, cars, jewelry or memorabilia; or to maintain a family residence or vacation home. Once the pet dies or the property is sold or otherwise disposed of, the remaining assets might pass to charity.

  • Health and education exclusion trusts—These trusts provide support to beneficiaries over multiple generations for certain education and health-related costs. As long as distributions to cover such costs are made directly to an educational or health care institution, then gift taxes and generation-skipping transfer taxes can be avoided indefinitely. However, in order for the vehicle to qualify as a health and education exclusion trust, one or more charitable beneficiaries must have a substantial present economic interest.

Laura Peebles, former tax director of the national office of Deloitte and a consultant to Charitable Solutions, shared these nuggets of wisdom gained from nearly four decades in the charitable planning arena:

  • The donor’s charitable intent determines whether a gift is made. However, the tax benefits can influence the fulfillment of the giver’s charitable intent in terms of the asset that is ultimately given, when the asset is given, and the manner and structure through which the asset is given.

  • A confused donor is not a happy donor.

  • Some tax aspects of charitable giving don’t have good answers, some don’t have inexpensive answers and some don’t have any answers at all.

Charitable giving with retirement benefits

According to author and attorney Natalie Choate, an estate planning and retirement benefits consultant, advisors and many charitably inclined people are well-aware of the substantial tax advantages of giving retirement benefits to charity, particularly in a testamentary capacity. In addition to avoiding any estate tax liability that might otherwise apply, the charity also avoids tax on “income in respect of a decedent” that would otherwise result in the imposition of income tax on retirement benefits received by the owner’s children or other heirs.

In some cases planning charitably with retirement benefits can be quite simple; for example, if a charity is named as the sole retirement plan beneficiary. However, other planning scenarios can involve complex issues and obstacles that must be carefully navigated. For instance:

  • When there are charitable and non-charitable beneficiaries of the same plan

  • When using formula bequests in beneficiary designations

  • When leaving retirement benefits to charity through a trust or estate

  • When using disclaimer-activated gifts to charity.

 

Conclusion


A recent study by U.S. Trust and the Philanthropic Initiative found that one in four wealthy individuals (23%) consulted with at least one advisor about charitable donations in the past year. In addition, nearly 70 percent of charitable remainder trust donors reported learning about the planning vehicle from their advisors.

These trends indicate a growing opportunity for investors and their advisors to have a regular dialogue about charitable methods that meet personal planning goals. Call us at 303-440-2906 if you or someone close to you would like to incorporate a strategic and regular giving strategy into your overall financial plan.



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Flash Report - Five Reasons to Make Philanthropy a Family Affair.

Getting your family involved in charitable giving can create a powerful legacy

A growing number of successful people have a strong urge to “pay it forward” by financially supporting causes and organizations that are near and dear to their hearts.

Many of you already make regular and sizable charitable contributions. And we know from research that one key reason successful people like you want to become even wealthier is to help other people increase their own success and advance in the world.

But have you gotten your family involved in philanthropy? If not, you could be missing a truly massive opportunity to teach your children and other loved ones about smart financial decision making and impart key financial values that can guide them throughout their lives.

Round up the kids

If you’re like many people we work with, your deepest financial concerns are focused on taking care of your family and ensuring they enjoy lives that are financially stable and financially responsible.

 

Click here to read more:

Five reasons to Make Philanthropy a Family Affair-Flash Report

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Diversified Asset Management, Inc. – Eye on Money May-Jun 2018 Newsletter

We invite you to check out the new issue of Eye On Money! Inside are articles on:
    
The new tax law. A summary of the sweeping federal tax changes that will affect individuals this year. 
 
Financial tips for retirees that can help you meet retirement’s financial challenges. 

A tax credit for day camp. Don’t miss this one if your child will attend day camp this summer!

7 things to know about preferred stocks. 

Also in this issue, you can check out 8 reasons to participate in a 401(k) plan, learn where to find health insurance if you retire before Medicare starts at age 65, and review the 2018 retirement account contribution limits. Plus, you can vicariously explore the towns and scenery along the shores of Lake Geneva in Switzerland, plan which exhibitions you may want to see this summer, and test how much you know about some of America’s most scenic places.   

Please let us know if you have questions about anything in Eye On Money.

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To read the newsletter click on the link below:

Eye-On-Money-May-Jun-2018-Diversified-Asset-Management-Inc

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

10 Most Expensive Cities to Live In

Here is a nice article by Dan Burrows of Kiplinger:

 

By Dan Burrows, Contributing Writer / May 2017

 

Costly cities are costly for a reason. Be it climate, geography, culture, economic prosperity or all of the above, the most expensive U.S. cities to live in offer amenities and opportunities for which residents are willing to pay a premium to access. It’s simply the price of admission to enjoy the advantages a desirable place has to offer.

“It's all about trade-offs and opportunity costs when choosing to live in one place over another,” says Jennie Allison of the Center for Regional Economic Competitiveness, a nonprofit research and policy group. “In Hawaii, this is called a ‘Paradise Tax,’ and in Florida many people are likely familiar to the reference of the ‘Sunshine Tax.’” On the plus side, notes Allison: Wages are often higher in these cities, too, which makes a steeper cost of living more manageable.

We compiled our list of the most expensive U.S. cities to live in based on the Council for Community and Economic Research's calculations of living expenses in 288 urban areas. Its Cost of Living Index measures prices for housing, groceries, utilities, transportation, health care, and miscellaneous goods and services such as getting your hair done or going to a movie. Take a closer look at the nation’s most expensive cities.

(The Cost of Living Index is based on price data collected during 2016. City-level data on populations, household incomes and home values come from the U.S. Census Bureau. Metropolitan-area unemployment rates come from the U.S. Bureau of Labor Statistics and represent 2016 averages. For the purposes of finalizing this list, the New York City boroughs of Manhattan and Brooklyn were treated as separate cities; Orange County, Calif., was screened out because it contains multiple cities with large populations including Anaheim, Santa Ana and Irvine.)

 

Most Expensive U.S. Cities to Live In 2017

 

10. Seattle

 

•Cost of Living: 44.9% above U.S. average

•City Population: 684,451

•Median Household Income: $70,594 (U.S.: $53,889)

•Median Home Value: $452,800 (U.S.: $178,600)

•Unemployment Rate: 4.5% (U.S.: 4.9%)

 

Coffee isn’t the only thing that’s strong in Seattle. The local economy is, too, and that's putting upward pressure on prices. As one of the nation's fastest growing cities, Seattle’s housing market is hot, driven in part by a booming tech scene. (Microsoft and Amazon are both based in the area, as are many smaller high-tech companies.) Housing-related costs for renters and homeowners are nearly 80% higher than the U.S. average, according to the Cost of Living Index, and they're only going up. Real estate-tracker Zillow expects home prices in the Emerald City to rise another 5.6% in 2017.

 

9. Stamford, Conn.

 

•Cost of Living: 45.7% above U.S. average

•City Population: 128,874

•Median Household Income: $79,359

•Median Home Value: $501,200

•Unemployment Rate: 5.0%

 

With its close proximity to New York City, Stamford has long been home to wealthy commuters. In fact, despite its relatively small population, the Connecticut city has one of the highest concentrations of millionaires in the country. But as expensive as Stamford’s living costs are, they are still less than the Big Apple. (More on the cost of living in New York City later.) If there's another upside to be found, it's in transportation costs. Extensive commuter rail links to New York and its position in the Northeast rail corridor help make getting around only 11% more expensive than the national average, according to the Cost of Living Index.

 

8. Boston

 

•Cost of Living: 47.9% above U.S. average

•City Population: 667,137

•Median Household Income: $55,777

•Median Home Value: $393,600

•Unemployment Rate: 3.4%

 

With its unparalleled collection of universities, hospitals, historical sites, and tech and biotech employers, it's easy to see why Boston is such an appealing place to live. And while there’s no question the city’s popularity comes at a high cost, it’s not nearly as high as some East Coast cities that are often mentioned in the same breath as Boston. After all, the high concentrations of students, recent grads and young professionals require some level of affordability to get by while they’re starting out. Groceries, for example, run just 6% above the national average in Boston, far less than residents of the other cities on this list pay. The median home value, while high relative to the U.S. median, is the lowest among our expensive cities.

 

7. Oakland, Calif.

 

•Cost of Living: 48.4% above U.S. average

•City Population: 419,267

•Median Household Income: $54,618

•Median Home Value: $458,500

•Unemployment Rate: 3.8%

 

Oakland anchors one corner of a sort of Bermuda Triangle around San Francisco Bay where affordable prices go missing. The second corner is San Francisco, as famous for its sky-high real estate as it is for Alcatraz and Fisherman’s Wharf. The third corner is Silicon Valley, home to high-tech giants handing out six-figure salaries like candy on Halloween. Compared to its neighbors to the west and south, Oakland might seem a bargain. But consider this: The median household income in Oakland is about the same as the U.S. median, yet median home values are 2.5 times the U.S median. And after rising 9.6% over the last year, Oakland home prices are expected to climb another 2.9% in the next 12 months, according to Zillow estimates.

 

6. Washington, D.C.

 

•Cost of Living: 49% above U.S. average

•City Population: 681,170

•Median Household Income: $70,848

•Median Home Value: $475,800

•Unemployment Rate: 3.8%

 

The nation's capital is a tale of two cities when it comes to living costs. Housing-related expenses including rents and mortgages are by far the most burdensome at more than double the national average, according to the Cost of Living Index, but other expenses aren’t too far above average. In fact, D.C. health-care costs are slightly below the national average. A wide-ranging bus and metro system makes getting to and around the District of Columbia affordable. The Circulator bus, for example, costs just $1 and its routes reach popular spots including Georgetown, Union Station and the National Mall. Numerous museums and historical sites are free to visit.

 

5. Brooklyn, N.Y.

 

•Cost of Living: 73.3% above U.S. average

•City Population: 2,629,150

•Median Household Income: $48,201

•Median Home Value: $570,200

•Unemployment Rate: 4.8%

 

Technically, Brooklyn is one of the five boroughs that make up New York City, but in recent years it has emerged as something of a metropolis onto itself. Indeed, if Brooklyn was an independent city, its population would be on par with Chicago, the third-largest city in the nation. Not so long ago, Brooklyn was considered a viable alternative for those who couldn’t afford to live in Manhattan. Not anymore. Housing-related expenses including rents and mortgages are three times the national average. Any yet, the median household income in Brooklyn is more than $5,000 below the U.S. median and nearly $25,000 shy of the median household income in Manhattan.

 

4. San Francisco

 

•Cost of Living: 77.2% above U.S. average

•City Population: 864,816

•Median Household Income: $81,294

•Median Home Value: $799,600

•Unemployment Rate: 3.8%

 

Years of relentless growth driven by high-paid tech workers have given San Francisco some of the highest living costs in the country, meaning even those with fat paychecks can struggle to make ends meet. Home prices are famously high, an obstacle for aspiring homeowners, and renters fare little better. The average rent for an apartment in San Francisco is $3,548 a month, according to the Cost of Living Index. That’s 3.5 times the national average. or three times the national average. Yes, median household income is the second highest on this list, but even then it's easy for San Franciscans to feel the financial strain.

 

3. Honolulu

 

•Cost of Living: 90.1% above U.S. average

•City Population: 992,605

•Median Household Income: $74,460

•Median Home Value: $580,200

•Unemployment Rate: 2.8%

 

Remember the “paradise tax” that Jennie Allison of the Center for Regional Economic Competitiveness talked about? Well, it’s collected in spades in Hawaii. To enjoy the perks of living in such a remote Pacific paradise, Honolulu residents pay more than they would on the mainland for pretty much everything -- and it’s not hard to understand why. Most goods sold in Hawaii must arrive either by boat or by plane, which jacks up the price considerably. Honolulu has the most expensive groceries of all 288 urban areas surveyed for the Cost of Living Index. Eggs, for example, cost two-thirds more than the national average and margarine costs double. Gasoline goes for 30% more than it does in the continental U.S.

 

2. Sunnyvale, Calif.

 

•Cost of Living: 122.9% above U.S. average

•City Population: 151,754

•Median Household Income: $105,401

•Median Home Value: $790,300

•Unemployment Rate: 3.8%

 

Either play the lottery or brush up on your computer coding skills if you hope to survive in this pricey California city. Sunnyvale and its Silicon Valley surroundings are famous for being home to some of the biggest tech companies in the world -- and for being home to exorbitant living expenses. Yahoo is headquartered in Sunnyvale and tech behemoths such as Google, Apple, Intel and Tesla are based nearby. No wonder overall housing-related costs are the highest in the land, according to the Cost of Living Index, running 375% above average. A six-figure median income, tops in the U.S., helps Sunnyvale's citizens bear the financial burden.

 

1. Manhattan, N.Y.

 

•Cost of Living: 127.8% above U.S. average

•City Population: 1,643,347

•Median Household Income: $72,871

•Median Home Value: $848,700

•Unemployment Rate: 4.8%

 

If you’ve ever been to Manhattan, you don’t need us to tell you that it’s an expensive place to visit. It’s even more expensive to live there. With space at a premium and location paramount, the median home value in Manhattan is the highest among our expensive cities. So, too, is the rent for an apartment, which averages a staggering $4,239 a month. The budget-busting doesn't stop there. Residents pay a premium of 43% at the grocery store, health care is a third more costly than average, and transportation is 30% above average. Want to see a movie? Ticket prices are nearly 50% higher, on average, than is the norm in the rest of the country. Oh, and you’ll need to like crowds if you hope to make it in the Big Apple: Manhattan packs in nearly 70,000 residents per square mile, according to the U.S. Census Bureau.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

17 Red Flags for IRS Auditors

Here is a nice article provided by Joy Taylor of Kiplinger:

 

By Joy Taylor, Assistant Editor | March 2017

 

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.70% of all individual tax returns in 2016. So the odds are pretty low that your return will be singled out for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

 

That said, your chances of being audited or otherwise hearing from the IRS escalate depending on various factors, including your income level, the types of deductions or losses you claim, the business you're engaged in, and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, these 17 red flags could increase your chances of unwanted attention from the IRS.

 

1. Making a Lot of Money

Although the overall individual audit rate is only about one in 143 returns, the odds increase dramatically as your income goes up. IRS statistics for 2016 show that people with an income of $200,000 or higher had an audit rate of 1.70%, or one out of every 59 returns. Report $1 million or more of income? There's a one-in-17 chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 0.65% (one out of 154) of such returns were audited during 2016, and the vast majority of these exams were conducted by mail.

We're not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

2. Failing to Report All Taxable Income

The IRS gets copies of all of the 1099s and W-2s you receive, so be sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3. Taking Higher-than-Average Deductions

If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

4. Running a Small Business

Schedule C is a treasure trove of tax deductions for self-employed people. But it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all of their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones.

Special scrutiny is also given to cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) as well as to small business owners who report a substantial net loss on Schedule C.

Other small businesses also face extra audit heat, as the IRS shifts its focus away from auditing regular corporations. The agency thinks it can get more bang for its audit buck by examining S corporations, partnerships and limited liability companies. So it’s spending more resources on training examiners about issues commonly encountered with pass-through firms.

5. Taking Large Charitable Deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or façade easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all of your supporting documents, including receipts for cash and property contributions made during the year.

6. Claiming Rental Losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS actively scrutinizes rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. It’s pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real estate Schedule C businesses show lots of income. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business. The IRS started its real estate professional audit project several years ago, and this successful program continues to bear fruit.

7. Taking an Alimony Deduction

Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. The document can’t say the payment isn’t alimony. And the payer’s liability for the payments must end when the former spouse dies. You’d be surprised how many divorce decrees run afoul of this rule.

Alimony doesn’t include child support or noncash property settlements. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

8. Writing Off a Loss for a Hobby

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. Be sure to keep supporting documents for all expenses.

9. Deducting Business Meals, Travel and Entertainment

Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees.

A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, place, people attending, business purpose, and nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast

10. Failing to Report a Foreign Bank Account

The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Form 114 by April 15 to report foreign accounts that combined total more than $10,000 at any time during the previous year. And taxpayers with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.

11. Claiming 100% Business Use of a Vehicle

When you depreciate a car, you have to list on Form 4562 the percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That’s because these vehicles are eligible for favorable depreciation and expensing write-offs. Be sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

As a reminder, if you use the IRS's standard mileage rate, you can't also claim actual expenses for maintenance, insurance and the like. The IRS has seen such shenanigans and is on the lookout for more.

12. Taking an Early Payout from an IRA or 401(k) Account

The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals scrutinized made errors on their income tax returns with respect to retirement payouts, with most of the mistakes coming from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. So the IRS will be looking at this issue closely.

The IRS has a chart listing withdrawals taken before the age of 59½ that escape the 10% penalty, such as payouts made to cover very large medical costs, total and permanent disability of the account owner, or a series of substantially equal payments that run for five years or until age 59½, whichever is later.

13. Claiming Day-Trading Losses on Schedule C

People who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and are reported on Schedule C (investors report their expenses as a miscellaneous itemized deduction on Schedule A, subject to an offset of 2% of adjusted gross income), and traders’ profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and are treated as ordinary losses that aren’t subject to the $3,000 cap on capital losses. And there are other tax benefits.

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous. This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. So it’s pulling returns and checking to see that the taxpayer meets all of the rules to qualify as a bona fide trader.

14. Failing to Report Gambling Winnings or Claiming Big Gambling Losses

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). But the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. The IRS is looking at returns of filers who report large miscellaneous deductions on Schedule A Line 28 from recreational gambling, but aren’t including the winnings in income. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get extra scrutiny from IRS examiners, who want to make sure these folks really are gaming for a living.

15. Claiming the Home Office Deduction

The IRS is drawn to returns that claim home office write-offs because it has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages. If you qualify for these savings, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal.

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

16. Engaging in Currency Transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as a person depositing $9,500 in cash one day and an additional $9,500 in cash two days later).

17. Claiming the Foreign Earned Income Exclusion

U.S. citizens who work overseas can exclude on 2016 returns up to $101,300 of their income earned abroad if they were bona fide residents of another country for the entire year or they were outside of the U.S. for at least 330 complete days in a 12-month span. Additionally, the taxpayer must have a tax home in the foreign country. The tax break doesn’t apply to amounts paid by the U.S. or one of its agencies to its employees who work abroad.

IRS agents actively sniff out people who are erroneously taking this break, and the issue keeps coming up in disputes before the Tax Court. Among the areas of IRS focus: filers with minimal ties to the foreign country they work in and who keep an abode in the U.S.; flight attendants and pilots; and employees of U.S. government agencies who mistakenly claim the exclusion when they are working overseas.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

5 States Where Taxes Are Going Up in 2017

Here is a nice article provided by Sandra Block of Kiplinger:

 

By Sandra Block, Senior Associate Editor | January 2017

 

Although President-elect Donald Trump has pledged to cut federal taxes, state taxes are rising across the U.S. as financially strapped states search for funds to repair deteriorating infrastructure and close widening budget shortfalls. In their search for revenue, states have targeted everything from e-cigarettes to lottery winnings.

 

Even Alaska, long a low-tax haven and one of our 10 most tax-friendly states, is feeling the heat. Alaska currently has no income or state sales tax. But to offset a sharp decline in oil revenues, Gov. Bill Walker has proposed a 3% statewide sales tax, which he says is needed to close the state’s $3.2 billion budget deficit.

 

Raising existing state taxes or imposing new ones could backfire if they lead to fewer taxpayers. Technology has made it easier for individuals and businesses to move to states—or countries—with lower tax rates, says Joe Henchman, vice president of legal and state projects for the Tax Foundation, a policy research organization based in Washington, D.C. “Everybody is under the gun to be more competitive, whether it’s government or the private sector,” he says.

 

Here are five states—including three already on our list of the 10 Least Tax-Friendly States in the U.S.—where residents will pay higher taxes in 2017. Take a look.

 

1. Maine

Kiplinger’s tax rating: One of the 10 least tax-friendly states in the U.S.

Income tax: 5.8% (on taxable income of less than $21,050 for single filers; less than $42,100 for joint filers) - 10.15% (on taxable income of $37,500 or more for single filers; $75,000 or more for joint filers)

State sales tax: 5.5%

What’s changing in 2017: Higher income taxes on top earners

In November, Maine residents narrowly approved a 3% income tax surcharge on residents with income of more than $200,000. The tax hike, which will be used to fund public education, raises Maine’s top tax rate in 2017 to 10.15%, the second-highest in the U.S. (California’s top tax rate of 13.3% is the highest.) The surcharge will raise an estimated $142 million in the first year, according to the state’s Office of Fiscal and Program Review.

 

2. California

Kiplinger’s tax rating: One of the 10 least tax-friendly states in the U.S.

Income tax: 1% (on taxable income of less than $7,850 for single filers; less than $15,700 for joint filers) - 13.3% (on taxable income of $1 million or more for single filers; $1,052,886 or more for joint filers)

State sales tax: 7.25% (as of Jan. 1, 2017)

What’s changing in 2017: Higher taxes for smokers

Californians voted in November to increase the state tax on cigarettes from 87 cents to $2.87 a pack, effective April 1, 2017. The tax will also apply to e-cigarettes. The first year, the tax will raise an estimated $1.4 billion, which is expected to be used for health care and smoking-cessation programs.

Californians also approved a measure to extend higher income tax rates for the state’s top earners through 2030. The three highest tax rates, which start at 10.3% and top out at 13.3%, were originally scheduled to expire in 2018.

 

3. New Jersey

Kiplinger’s tax rating: One of the 10 least tax-friendly states in the U.S.

Income tax: 1.4% (on taxable income of less than $20,000) - 8.97% (on taxable income of $500,000 or more)

State sales tax: 7%

What’s changing in 2017: Higher gas taxes

In October, Gov. Chris Christie signed legislation that raised New Jersey’s gas tax from 14.5 cents to 37.5 cents a gallon. Overnight, the state’s gas tax jumped from the second-lowest in the country to the seventh-highest. Funds from the tax hike will be used to shore up the state’s deteriorating roads and bridges.

Although the state’s budget deal will increase the cost of gassing up in the Garden State, it also includes some generous tax reductions. The state will gradually increase the amount of retirement income that’s sheltered from tax through 2020, when a married couple will be able to exclude as much as $100,000. In addition, the amount of assets excluded from the state’s estate tax will rise from $675,000 to $2 million on January 1, and the tax will disappear in 2018.

 

4. Pennsylvania

Kiplinger’s tax rating: Mixed tax picture

Income tax: 3.07%

State sales tax: 6%

What’s changing in 2017: New taxes on digital content, higher taxes on smokers

The 2016-17 budget bill approved by Pennsylvania lawmakers in August extended the state’s 6% sales tax to digital streaming services and downloads. The tax package also hiked taxes on cigarettes by $1, for a total tax of $2.60 per pack, and extended the tax to e-cigarettes and smokeless tobacco.

The budget package also took a bite out of residents’ lottery winnings. Previously, Pennsylvania was one of only two states (California was the other one) that exempted lottery winnings from state taxes. The budget package scrapped that exemption, retroactive to Jan. 1, 2016.

 

5. Louisiana

Kiplinger’s tax rating: One of the 10 most tax-friendly states in the U.S.

Income tax: 2% (on taxable income of less than $12,500 for single filers; less than $25,000 for joint filers) - 6% (on taxable income of $50,000 or more for single filers; $100,000 or more for joint filers)

State sales tax: 5%

What’s changing in 2017: Higher sales taxes

In April, Louisiana increased its state sales tax by one percentage point, to 5% from 4%. The change boosted the average state and local sales tax rate to 9.99%, the highest in the U.S. The increase is scheduled to expire on June 30, 2018. Lawmakers also voted to extend the sales tax to a number of items that had been exempt, including Mardi Gras beads.

Smokers in the Big Easy will pay more, too. The April tax package hiked the tax on a pack of cigarettes to $1.08 from 86 cents.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.