You May Be Able to Sell Profitable Stocks Without Paying Any Tax

Taxpayers whose top marginal tax bracket is lower than 25% enjoy a long-term capital gain tax rate of zero. Yes, you read correctly: the tax on any long-term capital gains for taxpayers within the 10% or 15% tax bracket is zero! This can provide you with the opportunity to sell some of your winner stocks and pay no tax on the resulting gain. Long-term capital gains apply to stocks and other capital assets you have owned for a year and a day or longer.

Even if you want to hold on to the stock because it is performing well, you can sell it and immediately buy it back, allowing you to include the current accumulated gain in this year’s return with no tax while also reducing the amount of taxable gain in the future. If you are concerned about the so-called wash sale rules that require a taxpayer to wait 60 days before buying back stock, don’t be—the wash sale rules only apply to stocks sold at a loss.

To see if you can take advantage of this tax-saving strategy, you must determine if your taxable income without the potential sale is below the 25% tax bracket. The following table shows the point at which income becomes taxable at 25% for different filing statuses in 2017.

25% Tax Bracket Threshold for 2017
Filing Status
Single
Head of Household
Marrried Filing Jointly
Married Filing Separately
Taxable Income $37,950
$50,800
$75,900
$37,950
Example: Suppose you are filing married joint and your taxable income for the year is projected to be $50,000. From the table above, we find that the 25% tax bracket threshold for you is $75,900. This means you could add $25,900 ($75,900 − $50,000) in long-term capital gains to your income and pay zero tax on the capital gains.

Of course, this strategy must be worked out based upon your projected taxable income for the year, and your actual income could be more or less than the estimated amount, meaning that some of the gain may end up getting taxed if your income is greater than projected. Or if you overestimated your income, you will not have taken advantage of as much tax-free long-term capital gains as you might have been able to.

In addition, if you have any loser stocks, you can sell them for a loss, allowing you to bring in that much more zero-taxed long-term capital gains.

There are also somewhat rare situations where the increase in your adjusted gross income as a result of the added long-term capital gains could have unanticipated adverse effects on your taxes that could reduce the overall benefit of this strategy.

If you would like to take advantage of this strategy and need assistance in projecting your 2017 taxable income, checking for adverse effects of the strategy, and determining the approximate amount of long-term capital gains you can assimilate with zero tax, please give this office a call.

Ignoring Those IRS Notices Only Makes It Worse

Remember those 1099s, W-2s, K-1s and other informational forms you receive each year reporting your interest, dividends, sales, wages, retirement income, IRA withdrawals, health insurance forms and other items having to do with your tax return? Well, the IRS also gets this information and feeds it into its computers. Thanks to modern computer technology, the IRS is able to match that information to what you reported on your tax return, and if something significant is omitted or there’s a discrepancy with the numbers, the IRS is going to send you a letter asking for an explanation or a tax payment. You will also receive correspondence if you don’t file a return and the data the IRS has indicates that you should have filed. It has form letters for just about every possible situation.

Most frequently, these notices will include a proposed tax due, plus interest and/or penalties, along with an explanation of the examination process and how you can respond. However, the letters must, by law, advise you of your rights and other information. Thus, these letters can become overly lengthy and are sometimes difficult to understand. That is why it is important to have a trained eye review them before you take any action.

Do not procrastinate or throw the letter in a drawer hoping the issue will go away. After a certain period of time, another letter will automatically be produced. And, as you might expect, each succeeding letter will become more aggressive and more difficult to deal with, and it may reach the point where you might have to go to tax court to argue your case or pay whatever amount of money the IRS is demanding.

Most importantly, don’t automatically pay an amount the IRS is requesting unless you are positive it is correct. Quite often, you really do not owe the amount being billed, and it will be difficult and time consuming to get your payment back.

It is always good practice to have a tax professional review the correspondence and respond to the IRS in a timely manner. Also, note that these “love letters” from the IRS will come by regular mail, not email. If you receive an email from someone claiming to be from the IRS and demanding a tax payment, this communication will be a fraud, since the IRS does not use email for this purpose. Please call this office immediately in regards to any notice you receive about your tax returns.

Habits That Can Threaten Your Identity and Pocketbook

They’re just old habits. You likely to do them without even thinking. But these are habits that can threaten your identity and pocketbook — making you vulnerable to hacks, scams, ID theft and Internet phishing schemes out to separate you from your hard-earned money.

1. What’s in Your Wallet or Purse? Does it contain items that include your Social Security Number (SSN) and birth date? For instance, does it contain your driver’s license and either your Social Security card or Medicare card? If it does, and the wallet or purse falls into the wrong hands, the thief will have both your SSN and birth date, the two key items that can be used to compromise your identity. If your ID gets hacked, you are in for a long-running and expensive nightmare. Make sure your wallet or purse isn’t a jackpot for an ID thief.

2. Your Fear of the IRS. It is common for most folks to have a natural fear of the IRS. Get a letter in the mail from the IRS, and the adrenalin kicks in and your pulse rate quickens. Scammers play on that emotion to ply their scams on the unsuspecting who don’t want to have any problems with the IRS. These range from e-mail messages to personal calls threatening arrest, property seizure or other dire consequences. But wait a minute! The IRS only initially communicates by U.S. mail, so any other form of communication is fake, and you can hang up on the caller or delete the e-mail without fearing you’ll incur the IRS’s wrath. Still unsure? Call your tax preparer. Don’t be a victim!
3. Using Public Internet Connections. These days you can find public Internet connections almost anywhere – at the airport, your favorite coffee house and even shopping malls. Getting work done or taking care of financial dealings while you are out and about may seem like a good idea, but remember the cyber thieves also have access to that Wi-Fi and they have the know-how to access your computer through that Wi-Fi connection. Only use secure Internet connections to get work done or conduct financial transactions, and save public connections for personal browsing purposes.
4. Not Screening Your E-Mails. ID thieves send out e-mails trying to entice you into clicking on an imbedded link within the e-mail, which will then allow them access to your computer and whatever is on it. They will try to sucker you into clicking on the imbedded link by promising free this and that, or even telling you that you have won a monetary prize and need to go to a website to claim it. Don’t be tempted; just remember, if it’s too good to be true it probably isn’t true. Just delete the e-mail!
5. E-Mailing and Texting Sensitive Information. What we all forget is how easy it is for e-mail and text messages to get hacked. You have to worry not only about your end getting hacked but also about the one to whom you are sending the message. Never send documents that include sensitive information. A common error is to inadvertently send a document with your SSN, birth date, passwords, or other information. The best practice is to always assume your e-mails and texts can be seen by others and act appropriately.
6. Being Free and Easy with Passwords. It may not seem like a big deal to share your password with a family member that you’re close to, but even if that person is completely trustworthy, they may not be as safety conscious as you and may accidently leak the password. You should always keep your passwords completely confidential to ensure that they don’t fall into the wrong hands.
7. Using Identical Passwords. It is easier to remember one password than several, and in today’s digital world just about everything needs a password. But if you use just one and it gets compromised, then all your accounts are compromised. It is a best practice to use a different password for every account. In addition, it is a good idea to periodically change your passwords.
Bottom line, stop and think before you act, always be skeptical of unsolicited and unexpected communications, guard your sensitive information like you are guarding Fort Knox and when in doubt call this office for assistance.

Tips for Holiday Charity Giving

The holiday season is the favorite time of the year for charities to solicit donations. It is also the time of year when scammers show up in force, pretending to be legitimate charities in hopes of swindling you. It is also a festive and very busy time of the year, and you may inadvertently overlook the documentation needed to verify your generosity for tax purposes. Here are some tips for charitable giving.

Documentation – To claim a charitable deduction, you must itemize your deductions; if you don’t, there is no need to keep any records of your donations. There are two types of charitable gifts: monetary and property.

Monetary donations include those made by cash, check, credit card, or other means. This type of contribution is only deductible if the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution. In addition, if the contribution is $250 or more, the donor must also get an acknowledgment from the charity for each deductible donation. Keep in mind that dropping cash in a holiday donation kettle without any documentation is not deductible.

Non-cash holiday contributions to organizations such as Toys for Tots and to seasonal food drives by recognized charities are also deductible. The deductible amount is the fair market value (FMV) of the items at the time of the donation, and you must document your donation with a detailed list of what was given and the name of the charity receiving the gift. Where the FMV of your gifts is $250 or more, you must also obtain an acknowledgment from the charity for each deductible donation. When gifts of property are $500 or more, there are additional record keeping requirements, so please call for details if you plan to make gifts of this value.

Watch Out for Charity Scams – To avoid scammers getting your charitable donations, make sure you are contributing to a legitimate charity and not to a bunch of crooks who work overtime during the holidays to trick you out of money.

Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations.

When in doubt, you should take a few extra minutes to ensure your gifts are going to legitimate charities. IRS.gov has a search feature—Exempt Organizations Select Check—that allows you to find legitimate, qualified charities to which donations may be tax deductible.

Disaster Scams – In the wake of significant natural disasters, such as Hurricane Matthew, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists use a variety of tactics including contacting people by telephone or email to solicit money or financial information, and they may even set up phony websites that claim to solicit funds on behalf of disaster victims.

Watch Out for ID Thieves – Don’t give out personal financial information such as your Social Security number or passwords to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. Using a credit card to make legitimate donations is quite common, but please be very careful when you are speaking with someone who called you; don’t give out your credit card number unless you are certain the caller represents a legal charity.

Don’t be a victim; make sure you are donating to recognized charities. Deductions to charities that are not legitimate are not tax deductible. If you have questions, please give this office a call.

Grandchild IRA Gift Idea

If you have a young grandchild, we have a gift suggestion for you that can provide a lasting legacy between you and your grandchild.

Many teens and young adults work during the summer months, and the wages they earn qualify them to make a contribution to either a traditional or Roth IRA. However, most young people are reluctant to fund an IRA account with their hard-earned summer income, and few are concerned with retirement, which is probably the last thing on their minds at their age.

This is incentive for a grandparent, or anyone for that matter, to gift the child money to fund an IRA. The maximum that can be contributed to an IRA is the lesser of the child’s earned income or $5,500 (the 2016 limit for an individual under age 50). Although that is the maximum amount, a lesser amount can be contributed.

If you take our suggestion, you will also need to decide whether the IRA should be a traditional or Roth IRA. Traditional IRA contributions are tax deductible, but the withdrawals at retirement are taxable. Most youngsters working during the summer months or part time year-round may not earn enough to even have any taxable income, and even if they do, the income is likely to be in the lowest tax brackets, so an IRA deduction would provide little if any tax benefit.

On the other hand, a ROTH contribution is not tax deductible and the distributions, including earnings, are tax-free at retirement, making it the best option in most cases.

Accomplishing this gifting will require cooperation from the child, as he or she will need to actually set up the IRA account so you can fund it. This may entail getting the child’s parents involved as well. What you don’t want to do is just make a check out to the child, who could then cash the check without actually putting the money into the IRA.

Your contribution to the IRA would be treated as a gift for gift tax purposes, but since the contribution amount would be below the annual $14,000 (2016) gifting exemption, it would not be subject to any gift tax reporting unless additional reportable gifts were given to the child during the year.

Unfortunately, you won’t get any benefit on your own income tax return for your generosity, but knowing you’ve made a long-term investment in your grandchild’s future will probably be benefit enough. If you need assistance determining the contribution amount or the type of IRA, please give this office a call.

Find Your Unclaimed Money

Each year literally billions of dollars go unclaimed from federal and state governments, financial institutions and companies no longer generating activity. These can include tax refunds, savings or checking accounts, stocks, uncashed dividends or payroll checks, traveler’s checks, trust distributions, unredeemed money orders or gift certificates (in some states), insurance payments or refunds and life insurance policies, annuities, certificates of deposit, customer overpayments, utility security deposits, mineral royalty payments, and contents of safe deposit boxes.

  • Currently, states, federal agencies and other organizations collectively hold more than $50 billion in unclaimed cash and benefits. CNNMoney
  • About $2 billion in lottery prizes go unclaimed every year. CNNMoney January 12, 2016
  • The IRS has nearly $1 billion in unclaimed tax refunds from 2012 alone. IRS unclaimed refunds 2012
  • You might be eligible to claim the earned income tax credit, or EITC, for that tax year when you finally send in the return. For 2012, the credit is worth as much as $5,891. IRS 2012 data
  • The State of California is currently in possession of more than $8 billion in Unclaimed Property belonging to approximately 32.5 million individuals and organizations. California State Controller Office 8/02/2016

Start Your Search for Your Unclaimed Property at USA.gov.

Find unclaimed money

Billions of dollars go unclaimed each year—does any of it belong to you?

Do You Need a Mid-Year Tax Checkup?

If you are inclined to procrastinate until the end of the year or, even worse, until tax-filing season to worry about your taxes, you may be missing out on opportunities to reduce your tax and avoid certain penalties. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them.

  • Did you get married, get divorced, or become widowed?
  • Did you change jobs or has your spouse started working?
  • Did you have a substantial increase or decrease in income?
  • Did you have a substantial gain from the sale of stocks or bonds?
  • Did you buy or sell a rental?
  • Did you start, acquire, or sell a business?
  • Did you buy or sell a home?
  • Did you retire this year?
  • Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?
  • Are you taking advantage of the IRA-to-charity transfers (age 70.5 or older)?
  • Did you refinance your home or take out a second home mortgage this year?
  • Were you the beneficiary of an inheritance this year?
  • Did you welcome a new child into your family? Time to consider a tax-advantaged savings plan!
  • Are you taking advantage of tax-advantaged retirement savings?
  • Have you made any significant equipment purchases for your business?
  • Are you planning to purchase a new business vehicle and dispose of the old one? It makes a significant difference whether you sell or trade in the old vehicle.
  • Are your cash and non-cash charitable contributions adequately documented?
  • Did you, or are you planning to, make energy-efficiency improvements to your main home or install a solar system for your main or second home this year?
  • Are you paying college tuition for yourself, your spouse or dependent(s)?
  • Are you keeping up with your estimated tax payments or do they need adjusting?
  • Did you purchase your health insurance through a government insurance marketplace and qualify for an insurance premium subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy.
  • Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments.
  • Did you make any unplanned withdrawals from an IRA or pension plan?
  • Have you stayed abreast of every new tax law change?

If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to schedule a mid-year tax checkup and consult with this office—preferably before any of the events listed, and definitely before the end of the year.