Oct 22

My friends at the IRS have announced…. wait a second, did I just call the IRS folk ‘my friends’? Well, yes. I don’t like taxes any more than the next guy, but I hpe that by now my readers know that it’s congress that has created our incomprehensible tax code. The IRS just enforces it. From where these guys (and gals) sit it’s “don’t shoot me, I’m just the messenger.” The IRS is actually doing a fine job, making information readily available on their web site and keeping us up to date in real time by offering different newsletters. As I was saying, they announced some numbers for 2013!

Gifting – If you are giving money to friends or family each year, the annual exclusion for gifts has risen from $13,000 to $14,000 per year. If you are a couple giving your partnered child a gift, this multiplies up to $56,000 from 2012’s $52,000. The 529 College Savings account permits gifting ahead up to 5 years worth of deposits, meaning you and your spouse can each gift $70,000 into the 529 account. This requires a Form 709 to declare your transaction, and then no gifts are permitted over the next 4 years (unless the gift exemption rises beyond $14,000.)

Kiddie Tax – This is the tax that uses the parents’ tax rate on a child’s unearned income. The reduction of this income has been raised to $1000 from $950. Simply put, your child can receive $1000 in unearned income with no tax due, and an additional $1000 taxed at their rate, most often, 10%, based on online tax calculators and estimators. A topic worthy of more detailed discussion.

Retirement – The 401(k), 403(b), and 457 account deposit limit has been raised to $17,500 with the same $5,500 catch-up deposit for those 50 and older. We’ve discussed whether the 401(k) decision is the right one for most investors, and it’s safe to say, grab the match. Many employers will match the first 4-6% of your income dollar for dollar, so if you earn $60,000, a 5% contribution to your account is worth 10% on day one. $6,000 deposited pretty painlessly. The IRA limit has also been increased from $5,000 to $5,500, up to $6,500 if 50 or older. Great to take advantage of the IRA especially if the fees in your 401(k) are pretty high.

Flexible Spending Account – This is the money you can have withheld pre-tax to pay for unreimbursed medical costs, including doctor copays, prescription drugs, and a number of items your insurance doesn’t cover. In 2012, there was no limit, although employers most often limited the amount you can put aside at $5,000. In 2013, Federal regulations put the limit at $2,500.

More details and comments on these changes to follow.

written by Joe \\ tags: , , ,

Apr 03

If you have no kids and don’t plan to, this may not be the riveting reading you expected today. Sorry. Today, we’re talking Kiddie Tax. I was this close (holding thumb and index finger very close) to titling today article “Hello Kiddie Tax” but readers advised than puns are the lowest form of humor and I aspire to a high level.

First, it stands to reason that few of our kids will be in a higher bracket than their parents. Exceptions, I know, but follow me. Long ago, parents took advantage of shifting wealth to their children and grandchildren. The fact is, you can gift anyone you like up to $13,000 this year and there are no tax consequences to doing so, in fact, there’s no form required at all. Since each parent can gift $13,000, that’s $26,000 a couple can pass to each of their children. As that pile of transferred wealth grows, it’s most likely to give off some income, whether it be interest, dividends, or capital gains within the account. The government wised up and implemented what is now fondly called the Kiddie Tax.

Simply put, the Kiddie Tax does not apply to earned income. For earned income, your child has her own standard deduction, and pays marginal rates starting at 10%, just as you or I would. The tax kicks in when it comes to unearned income. What we have in 2012 is the fact that children’s unearned income in excess of $1,900 will be taxed at the parents’ rate. To be specific, $950 isn’t taxed at all, and the next $950 is taxed at the child’s rate (presumably 10%), but after that, it’s the parents’ marginal rate for any money above the $1,900.

It may take a bit of planning, perhaps investing in non-dividend paying stocks, or shifting some of the funds into a Kiddie Roth, up to $5000 or the child’s earned income which ever is lower. Whether you are able to navigate around it or not, better to avoid the surprise this tax can spring on you.

written by Joe \\ tags: ,