Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
May 2013 Tax Newsletter
What's New in Taxes:
Gifting Appreciated Stock Has Varying Tax Consequences
Here are a few things to consider when making gifts of appreciated stock.
If you are gifting to a qualified charity, you get a deduction for the fair market value of the stock even though your basis (cost) is less than the current value. When the charity sells the stock, there are no taxes due since qualified charities pay no taxes on contributions they receive. This is a win-win for both parties since the donor also pays no taxes on the appreciated value of the stock.
If you are making a gift to an individual, the rules are different. The person who receives your gift also takes your basis (cost) and holding period as his own. When he sells the stock, he will report the gain on his income tax return. If the recipient is in a low enough tax bracket, there may be no tax on the gain.
Take this example. Let's assume you purchased $2,000 worth of XYZ stock four years ago, and the stock is now worth $10,000. If you gift that stock to a qualified charity, you will get a deduction for $10,000, completely avoiding tax on the $8,000 of built-in profit. If you gift the stock to someone who sells it, that individual will report a gain of $8,000 on his or her income tax return. The tax, if any, is determined by the recipient's income tax bracket.
Which stocks you give away, which stocks you sell, and those which you hold for another time should be determined by your long-range financial plans. Contact us for assistance in determining the best tax advantage of selling or gifting stocks.
Some Tax Benefits Have a Past and a Future
Like a page from a science fiction novel, your tax return can reach into the past and future. How? Through the use of tax carryforwards and carrybacks. Here is what you should know about these time-traveling tax perks.
Some tax deductions have a maximum amount that you can use in any one year. In these situations, the rules generally allow you to apply the unused tax deduction to a past or future tax return. One of the most popular examples of this is the "net operating loss" or NOL. Business owners whose qualified expenses exceed their income are allowed to apply the NOL to taxable income earned in the second prior year, and if there is still loss available, to apply it to last year's income. Any further unapplied NOL can be used to offset future taxable income.
But there are a few twists to the NOL rules. If your NOL is the result of a theft or disaster, you can carry it back three years. An NOL from farming can be carried back five years. And you may opt to apply all your NOL to future years only, which might not be a bad strategy if you expect to be taxed at higher rates in future years.
Net capital losses, such as from the sale of stocks, can be carried forward (but not back) to offset future capital gains and up to $3,000 of ordinary income. You can also carry forward charitable contributions that exceed 50% of taxable income for up to five years.
It's important to save all records related to carryback and carryforward deductions for at least three years after the year they are applied. If you have any questions about your potential for tax carryback and carryforward deductions, contact our office. We'll help you keep an eye on your tax situation, past, present, and future.
Foreign Asset Reporting: You May Need to File Two Forms
Do you know where your money is? If some of it is offshore, you might have tax reporting responsibilities - and those responsibilities generally go further than checking the familiar box on the Schedule B you submit with your federal income tax return. Here are two.
1. FBAR. Foreign bank account reporting has been required since 1970, so you may be familiar with "Form TD F 90-22.1," commonly known as "FBAR." Unless you qualify for an exception, that's the form you fill out when you control assets in a foreign financial account and the total value of your account exceeds $10,000 at any time during the calendar year.
The FBAR is an annual information form, filed separately from your federal income tax return. You may need to file it even if you receive no taxable income from your foreign account.
The due date for the FBAR differs from Form 1040 as well. Your 2012 FBAR must be received by the Treasury Department no later than June 30, 2013. No extension is available. "Received by" means you'll need to mail the FBAR before June 30. Since June 30 is a Sunday this year, your return must reach its destination by Friday, June 28.
You can also file electronically.
2. Form 8938. The requirement to file "Form 8938 — Statement of Specified Foreign Financial Assets" began in 2011. Whether you have to complete Form 8938 depends on your federal income tax filing status, and if you're living in the U.S. or abroad.
For example, say you're married filing a joint return, and live in the U.S. You may be required to file Form 8938 if the total value of your reportable foreign assets is more than $100,000 on December 31, or more than $150,000 at any time during the year.
Reportable foreign assets include accounts at foreign banks and financial institutions, as well as certain stocks, bonds, and foreign investments. When determining if you meet the threshold for filing, consider the entire value of accounts you own jointly with someone other than your spouse, as well as assets owned by your dependent children.
File Form 8938 with your federal income tax return. Depending on the amount and type of your foreign accounts and other assets, you might need to file both the FBAR and Form 8938.
Please call if you need details or assistance with these filing responsibilities.
What's New in FINANCE:
Teach Your Children Five Financial Lessons
It's important to impart life's lessons to your children. Prime example: Will your children be able to handle their finances when they became adults? Don't assume they will.
"Financial illiteracy" appears to be rampant in the younger generation. The same kid who is adept at using a smart phone or iPad may have trouble with basic math skills, balancing a checkbook or managing money. And, if your youngster can't control financial impulses now, it could be a harbinger of crushing debt in the future. Consider these five tips.
1. Curtail spending. Rein in children inclined to indulge in spending sprees. Take the "weekly allowance" to the next level by helping a child develop a monthly budget. Review the results with your child to reinforce good habits.
2. Emphasize savings. Part of the budgeting process is setting aside money. It's important for your children to learn, at an early age, about the power of compounded interest. Use online calculators to demonstrate the true value.
3. Dip into investments. Introduce your child to investment basics by having him or her acquire shares of one or more stocks or mutual funds. Your child can learn a lot by charting the investment's progress on a regular basis.
4. Take out a loan. Even if you act as the lender, your child can learn valuable lessons by borrowing a small amount of money. Again, an online calculator will indicate how compounded interest piles up. Your child may be encouraged to avoid debt.
5. Factor in taxes. Finally, it's not what you earn, but what you keep, that matters. Show how taxes can erode earnings and why they must be factored into financial decisions.
These five steps can benefit your children in the future. Start them on the right path.
All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. The information contained in this newsletter is provided by Mostad& Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Mosted& Christensen, Janell Israel & Associates and NPC are separate and unrelated companies.
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Rep is not an attorney. Rep can help review the documents and recommend a local attorney that specializes in Estate Planning. Estate planning can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing any strategy.
* Municipal Bonds are subject to interest rate, inflation, credit and default risks. Interest income generated by municipal bonds is generally expected to be free from federal income taxes and, if the bonds are held by an investor resident in the state of insurance, state and local taxes. Such interest income may be subject to federal and/or state alternative minimum taxes. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets.