Have a financial talk with elderly parents

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One day you may find yourself taking care of an elderly parent who is in declining physical or mental health. This can be stressful, both emotionally and financially. On the financial side, there are steps you can take to prepare for this situation.

* Talk to your parents about their financial affairs. Parents may be reluctant to discuss their finances, but someone needs to know the names of their lawyer and accountant. Someone needs to know where their important financial papers are located. If they are still fit, encourage your parents to make a detailed financial list for you, including information about bank accounts, investments, insurance policies, retirement plans, location of safe deposit boxes, etc. Getting familiar with important information now will be much easier than trying to find this information after a parent becomes physically or mentally impaired.

* Review your parents’ financial picture together. Do your parents have enough retirement income and savings to provide for their needs? Should steps be taken to help stretch their assets over their life expectancies? What if they eventually need nursing home care? Assess whether long-term care insurance makes sense for them.

* Consider these important documents. A durable power of attorney allows another person to make financial decisions on a parent’s behalf if he or she becomes incapacitated. A medical directive or living will is a document stating a parent’s wishes about medical treatment in case he or she becomes too ill to communicate these wishes.

* Help put your parents’ estates in order. Does each parent have a will, and if so, where are the wills stored? When were their wills last updated? The 2001 Tax Act made major changes to the estate and gift tax rules. Have their estate plans taken these changes into account? Encourage your parents to review their beneficiary designations on insurance policies, annuities, and retirement plans to make sure their choices are still suitable.

Talking finances with your parents now can make caring for your parents in the future much easier. For assistance, give us a call.

Progress and Delays for Small Business Health Exchanges

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According to the U.S. government, small business employees today pay an average of 18% more in premiums than those in large firms with the same benefits and their deductibles are more than double.* The underlying cause for this payment discrepancy lies in simple math. Small businesses do not have the numbers to support and spread out the insurance risk leading to greater costs for small business owners. To help small business owners and try to put an end to the insurance bleed out that many business owners are facing, state-based Small Business Health Options Programs or SHOP Health Insurance Exchanges were created with the signing of the Patient Protection and Affordable Care Act (PPACA). These exchanges are a place where small business owners and other uninsured can join together to increase their purchasing power and reduce their premiums.

How will the exchanges work?

Between 2014 and 2016, businesses with up to 50 employees will be permitted to participate in the Exchange. Small businesses with fewer than 50 employees will be exempt from the bill’s shared responsibility requirement. In an effort to cover more small businesses and their employees, these small enterprises will have the option to participate in a Health Insurance Exchange where they can join other businesses to achieve greater purchasing power for lower health insurance premiums and better health coverage.

The Bill also provides $40 billion in tax credits for small businesses. These tax incentives include:

· A sliding scale tax credit for businesses with fewer than 25 employees and an annual wages of less than $50,000 that purchase health insurance for their employees of 35% of the small business’ premium costs. Small businesses with 10 or less employees and annual average wages of $25,000 or less will be eligible to receive the entire credit which can constitute up to 50 percent of the total premium cost. These credits began in 2010 and continue through 2013.

· Non-profits are also eligible for a tax credit worth up to 25 percent of the non-profit’s premium costs between 2010 and 2013. Effective January 1, 2014, the rate increases to 35 percent.

As of this article’s printing, health care exchanges are facing another round of hurdles – more delays in their launch and operations. Scheduled to be up and operational by October 2013 for a January 1, 2014 benefit effective date, the Small-business Health Options Programs (SHOPs) were approved to be self-managed in 18 states with another 17 states schedule to run their own insurance exchanges for individuals. According to a report released on June 22, 2013 by the Government Accountability Office, it looks like those exchanges will be delayed. While good progress has been made in many states, the report revealed that “many activities remain to be completed and some were behind schedule.” Primary areas of concern include enrollment, technological infrastructure such as electronic data interfaces and exchanges (EDI), plan management and consumer education.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

Passing Down the Business – and NOT the Tax Burden

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Family-owned businesses have a long-standing tradition of becoming generational businesses that are handed down from founder to children to grandchildren and great-grandchildren. But what the Internal Revenue Service has in store for many family-owned companies is more than just a passing of the office door keys, but also a larger take of the company’s profits through the ‘gift tax.’ Learn the ins and outs of the Estate and Gift Tax rules and how you can hand down your small business to a family member.

Changes in the American Taxpayer Relief Act of 2012 brought about a change to existing ‘gifting rules’ as they relate to businesses and their transfer to family members. In mid to late 2012, there was the threat that the existing rules would revert back to pre-2002 Bush-era tax exemptions of $1 million. The Estate and Gift Tax is a unifed tax, meaning that assets transferred as gifts during a person’s lifetime are combined with those transferred at death. These ‘gifts’ are subject to a single rate schedule. The associated gift tax was slated to rise from 35 percent to 55 percent. However, Congress did act and under the ATRA of 2012, the new tax exemption amount was changed to $5.12 million per person ($10.24 for married couples) for 2013. Additionally, the gift tax rate was increased from its original 35 percent to 40 percent. The amount for deaths in 2013 was raised to $5.25 million.

The inside track is that all gifts made to a spouse are tax-free as long as he or she is a U.S. citizen. Other family members must abide by the 2013 rules. Report all gifts on Form 709 regardless of whether a tax is owed. This is so the IRS can track what percentage of the $5.12 million has been used. As part of this reporting requirement, taxpayers must also report how the gift will be used; classified as ‘a present of interest’, meaning that the recipient can use the gift immediately. Any time a gift is made that is not a ‘present of interest’ it must be reported, no exceptions.

Review Capital Gains Tax Issues

Should you give the business to an individual child, split it equally among all children or create a family trust in which the business will reside?

Individual gifts

One popular method of ‘gifting’ is to establish a 529 college savings plan, creating an individual account for every applicable family member. Gifts can be made to the accounts for as much as five times the annual exclusion in a lump sum. The catch is that while you can elect to spread this gift out over five years, during that five year period, you cannot make any additional contributions/gifts to the beneficiary of the 529 plan. The ‘gift’ also falls under the Estate Tax rules in the event that you pass away during the five year period, reverting the remaining years of your five-year gift to be treated as part of your estate tax.

· Separately, gifts can be made to individuals to a maximum of $14,000 per year in 2013, and are not counted as part of the annual exclusion maximum of $5.25 million mentioned above. Spouses can join you in this gift to double the amount.

· You can transfer property or money to a spouse for a combined exemption of $10 million. Additionally, any other estate tax deductions, such as those for contributions are also retained and a spouse can inherit any unused exemptions. For example, if a husband dies and leaves an estate of $2.5 million, the remainder of his $5.25 million exemption can then be used by his wife, increasing her exemption by the remaining $3.25 million.

Trusts

· Establishing a trust can provide increased asset protection from creditors and potential divorce.

· The Generation Skipping Transfer Tax Exemption addresses estate tax avoidance through gifts and bequests to a later generation. When generation-skipping transfers are made to a trust, “the estate tax exemption applicable to them also exempts the associated earnings during the trust lifetime[i].” Historically, trusts have been limited to a twenty-one year life but most of these rules have been eliminated.

· Grantor trusts establish an individual as the owner for income tax purposes. With regard to the Estate and Gift Tax, these two entities are treated as separate individuals.

Estate and Gifting rules are very complicated and decisions shouldn’t be made with regard to tax and legal implications without seeking the advice of the tax or legal professional.

 

Taxes and your child’s summer job

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With the school year over, your teenager might be taking a summer job. If so, you both may have questions about taxes. Here are some of the common concerns.

If your child chooses a typical wage-paying job, he or she will soon be confronted with the task of calculating withholding allowances on Form W-4. Claiming zero allowances and thereby withholding the maximum amount is the safest option, but it might also unnecessarily tie up hard-earned cash until this year’s tax return is filed. However, claiming too many allowances, especially if the child holds multiple part-time jobs, might cause underwithholding. For help figuring the right number, try the withholding calculator at www.irs.gov. (Look under “Filing Information for Individuals.”)

If your child decides to mow lawns or perform other tasks and be his own boss, there are a few more tax issues to consider. Such activity will likely generate taxable income, on which federal and state income taxes might be due. If net earnings are $400 or more, self-employment taxes will also be owed. These taxes can often be paid at the time that the child files a 2013 tax return, but if the income is substantial enough, estimated tax deposits might be necessary.

Being self-employed also means keeping detailed records of income and business expenses. Encourage your teen to purchase a simple low-cost ledger book to help organize the records. And when tracking income, remind the child that tips received are not just tokens of gratitude – they are considered taxable income by the IRS.

Summer jobs can provide tax breaks for some parents. Business owners can hire their own children and deduct the wages paid to them, effectively shifting income from the parent’s higher income bracket to the child’s lower bracket. What’s more, if operating as a sole proprietor, you do not have to pay FICA taxes if your teen is under age 18 nor pay federal unemployment taxes if the child is under age 21. Just remember, the wages you pay your child must be appropriate for the services actually rendered.

Looking for a little icing on the summer employment cake? When your child receives earned income, he or she can also qualify for a Roth IRA. The lower of $5,500 or the child’s annual earned income can be contributed to a Roth by the teen, parent, or someone else.

Summer employment can be your teen’s first exposure to the real world. Help them make it a tax-smart experience. If you have questions about taxes and summer jobs, give us a call.