Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
September 2013 Tax Newsletter
What's New in Taxes:
Dependents Can Be a Complicated Tax Issue
Most taxpayers believe that a "dependent" is a minor child that lives with them. While that is essentially correct, dependents can include children and parents, other relatives and nonrelatives, and even children who don't live with you. There is really much more to the dependent deduction than you might at first imagine.
* Exemptions and your taxable income. For 2013, each dependent deduction is worth $3,900, reducing your taxable income by this amount, though the deduction is phased out for high income taxpayers.
* Dependents defined. It's impossible to present all of the rules relative to dependents here, since they are so complicated. Generally speaking, if somebody lives with you and you provide more than half of that individual's support for the entire year, there is a good chance that person is a dependent. There are many exceptions. For example, parents don't have to live with you if they otherwise qualify, but some other relatives do. A child of divorced parents doesn't necessarily have to live with the noncustodial spouse for the dependent deduction to apply.
* People who can't be claimed. Generally, you may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.
* One dependent deduction per individual. If you claim yourself as your own dependent, anybody else who can truly meet the tests and claim you as a dependent will lose out. This is common for college students who file their own tax returns for their part-time jobs, while mom and dad really meet all of the qualifications to claim the dependent exemption.
While the dependent deduction might seem relatively minor, it can lead to other deductions on the tax return. In order to claim the child tax credit, the education credits, the dependent care credit, for example, you must claim the dependent deduction for the child that qualifies for the deduction or credit.
Finally, dependent deductions can be negotiated, which is especially important for divorced taxpayers. In the past, the IRS would accept the language of the divorce decree to allow the noncustodial parent the dependent deduction. However, under the current rules, the IRS will no longer accept a divorce decree in lieu of IRS Form 8332 (Release of Exemption).
Crowdfunding: A new Source of Business Financing
If you are trying to finance a new business venture, you might want to check into an online option known as "crowdfunding." In simplest terms, crowdfunding means many people give you money to fund your project in exchange for a reward such as a free copy of your product or a small stake in your new business.
As you explore the idea of crowdfunding, you may wonder about the tax treatment of the money you receive. Is it an investment in your business? A gift? Taxable income?
Here's a broad overview.
* Investment. In general, under U.S. law, when you offer many "investors" stock or other equity in your business, you're selling securities, and you have to comply with federal and state securities regulations. While the 2012 JOBS Act created a crowdfunding exemption to these regulations, the Securities and Exchange Commission has not yet finalized the rules. At present, calling the money you receive from crowdfunding an "investment" is not an option.
* Gift. Broadly defined, gifts are cash or other consideration you receive from someone who provides the gift freely, with no expectation of getting something from you in return. When you provide crowdfunders with a reward or other perk in exchange for financial support, the transaction typically will not meet the tax law definition of a gift.
* Income. Money you receive for your work - from whatever source - is income, and usually includable on your federal income tax return. Related expenses can be deductible.
What's New in Finances:
After you move: A Financial Checklist
Many people move during the summer months when children are out of school. If you have recently moved, take the following steps to bring your financial situation up to date:
* Notify all current year employers for all members of the family so that W-2 statements and other forms arrive on time at your new location.
* Review your insurance policies to make sure you still have the coverage you need. Your premiums may change on some insurance due to your new location. Find out when various policies expire so that you can get insurance in your new location without a lapse of coverage.
* Check on pension benefits at both your old job and your new one. If you are entitled to money from your old company's pension plan, you may want to consider getting advice on the tax consequences of the various options relating to the funds.
* Make an appointment for a tax planning session in your new location. You may be required to file tax returns in more than one state, and state tax laws vary. Schedule this session early to give yourself ample time to do tax planning.
* Review your investment portfolio. Moving may require some adjustments. For example, if you own municipal bonds issued by your old state of residence, earnings on them will probably be taxable in your new state.
* If you've moved to a new state, find out the laws governing property rights. Some states are community property states and, in general, consider husbands and wives to be joint owners of property acquired during their marriage. Other states are common law states and property ownership depends on title and the source of acquisition funds. Get the facts so you can arrange your affairs accordingly.
* Have your will reviewed to see if changes are necessary. State laws vary; be sure your will still does what you want it to do. Contact your attorney for assistance.
If you'd like more information or assistance with financial matters related to making a move, contact our office. We're here to help.
Should You Transfer Your 401(k) to an IRA When You Retire?
If you're approaching retirement, you may be wondering where to park the money that's sitting in your employer's 401(k) plan. Should you transfer the balance to an Individual Retirement Account (IRA) as soon as you retire? Should you take a lump-sum payment and reinvest the money elsewhere? Should you leave the entire balance in your employer's plan? As with most financial decisions, this one is not one-size-fits-all. Before taking action, it's wise to take a close look at your particular needs and circumstances, as well as the advantages and disadvantages of each investment option. Consider the following:
* Investment options in a 401(k) plan may be limited. Cafeteria-style 401(k) plans generally offer fewer investment options than IRAs and this, in turn, may impact long-term planning. For example, an IRA may provide the option of purchasing individual bonds instead of bond funds. With an individual bond, you may be able to get a fixed interest rate for more predictable income. On the other hand, if you don't have the time or inclination to research investment options, you may want to leave your nest egg in a solid 401(k) plan. Employers often reduce the number of investment options in a 401(k) plan to a few high-quality, well-managed options with low fees. In addition, limited selection mean less recordkeeping. For some folks, that's a real advantage.
* Some investment options may not be available in an IRA. In general, IRAs provide more investment alternatives than company retirement plans. But some options - stock ownership plans, for example - may not be available outside your employer's plan.
* IRA fees may be higher. Large companies are often able to negotiate discounted fees for their 401(k) participants. Leaving your money in an employer's plan may cut down on investment costs and put more of your money to work.
* Consider your retirement age. With an IRA, you'll incur a 10% penalty if you make withdrawals before turning age 59½. Qualified retirees can begin taking penalty-free withdrawals from a 401(k) plan at age 55. So if you're planning to retire between those ages, you might want to leave your money in the employer plan.
* Beware the transfer. If you decide to move your money to an IRA, it's generally best to have the money transferred directly to a new tax-deferred account. Unless the funds are quickly reinvested in a qualified retirement account, you could face significant tax consequences.
For guidance in making your retirement financial decisions, give us a call.
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.