The investment interest expense deduction: Less beneficial than you might think

1-24-17

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.

Limits on the deduction

First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.

However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.

Changing the tax treatment

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.

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Explore all of your options when appointing the executor of your estate

1-12-17

The executor’s role is critical to the administration of an estate and the achievement of estate planning objectives. So your first instinct may be to name a trusted family member as executor (also referred to as a personal representative). But that might not be the best choice.

Important duties

Your executor has a variety of important duties, including:

  • Arranging for probate of your will (if necessary) and obtaining court approval to administer your estate,
  • Taking inventory of — and collecting, recovering or maintaining — your assets, including life insurance proceeds and retirement plan benefits,
  • Obtaining valuations of your assets,
  • Preparing a schedule of assets and liabilities,
  • Arranging for the safekeeping of personal property,
  • Contacting your beneficiaries to advise them of their entitlements under your will,
  • Paying any debts incurred by you or your estate and handling creditors’ claims,
  • Defending your will in the event of litigation,
  • Filing tax returns on behalf of your estate, and
  • Distributing your assets among your beneficiaries according to the terms of your will.

Typically, family members lack the skills and time to handle all of these tasks on their own. They’re entitled, of course, to hire accountants, attorneys, financial planners and other advisors — at the estate’s expense — for assistance. But even with professional help, serving as executor is a big job that requires a substantial time commitment during an already stressful period. Plus, if your executor is also a beneficiary of your will, other beneficiaries may view that as a conflict of interest.

A few alternatives

So, what are your options? One is to name a trusted advisor, such as an accountant or lawyer, as executor. Another is to appoint an advisor and a family member as co-executors. The advisor would handle most of the executor’s day-to-day responsibilities, while your family member would oversee the process and ensure that the advisor acts in your family’s best interests.

We can help you decide who would best serve as your estate’s executor. Please contact us with questions.

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Help prevent tax identity theft by filing early

1-10-17

If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 18 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 16.

But there’s another date you should keep in mind: January 23. That’s the date the IRS will begin accepting 2016 returns, and filing as close to that date as possible could protect you from tax identity theft.

Why early filing helps

In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Another important date

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2016 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2016 interest, dividend or reportable miscellaneous income payments.

Delays for some refunds

The IRS reminded taxpayers claiming the earned income tax credit or the additional child tax credit to expect a longer wait for their refunds. A law passed in 2015 requires the IRS to hold refunds on tax returns claiming these credits until at least February 15.

An additional benefit

Let us know if you have questions about tax identity theft or would like help filing your 2016 return early. If you’ll be getting a refund, an added bonus of filing early is that you’ll be able to enjoy your refund sooner.

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Going back to basics with asset protection strategies

1-5-17

Asset protection trusts — both offshore and domestic — can be effective vehicles for protecting your wealth in today’s litigious society. But these trusts can be complex and expensive, so they’re not right for everyone. For those seeking simpler asset protection strategies, there are several basic, yet effective, tools to consider.

Some of these strategies involve transferring assets to another person or entity, or changing the way property is titled. Here are a few common asset protection strategies:

Insurance. For many people, insurance is the first line of defense against liability claims that expose their assets to risk. It includes personal or homeowners liability insurance, as well as professional liability insurance for doctors, lawyers and other professionals who are common targets for lawsuits.

Lifetime gifts. The most effective asset protection strategy may also be the simplest: giving your assets away to your children or other loved ones. After all, a creditor can’t come after assets you don’t own. The disadvantage of this approach is that you must relinquish control over the assets.

Tenancy by the entirety. Many states permit married couples to hold their homes or other real estate as “tenants by the entirety.” This form of ownership protects assets against claims by either spouse’s separate creditors. So, for example, it can be effective when one spouse is exposed to professional liability risks. It doesn’t, however, protect couples against claims by their joint creditors. Tenancy by the entirety, if available, may be a good option for people who aren’t comfortable transferring title to their spouses.

Retirement accounts. Qualified retirement plans — such as 401(k), 403(b), and 457 plans, as well as certain pension and profit-sharing plans — are excellent asset protection vehicles. IRAs offer more limited protection. Assets held in most qualified plans enjoy unlimited protection from creditors’ claims — both in bankruptcy and outside of bankruptcy — under the Employee Retirement Income Security Act.

Keep in mind that, for these strategies to work, you must implement them at a time when there are no pending or threatened claims against you. Otherwise, you may run afoul of fraudulent conveyance laws.

Before you weigh your asset protection options, we can help you conduct a risk assessment to evaluate your level of exposure. Armed with this information, you can determine which asset protection tools are right for you.

 

 

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A difficult decision: Having an elderly parent declared incapacitated

12-29-16

If your elderly parent’s mental state is deteriorating to the point where he or she is unable to manage day-to-day activities, it may be time to make the difficult decision to have him or her declared incapacitated. But how do you know if such action is necessary?

2 key questions

Knowing the answers to these two key questions can help you determine whether it’s necessary to have a parent declared incapacitated:

1. What’s the difference between capacity and incapacity? The legal definition of “capacity” varies from state to state, but generally it’s the mental ability to adequately function. A person is presumed competent unless an adjudication process determines otherwise. That is, a judge must declare a person incompetent. Factors leading to such a decision will depend on the circumstances.

One barometer of whether someone is able to adequately function is the person’s ability to understand basic financial matters. Another is whether a person is able to attend to his or her own health needs.

2. What’s the role of a guardian/conservator? If you make the decision to have an incapacity determination and the judge agrees that your parent is no longer competent, the court will appoint a guardian/conservator. He or she will be responsible for managing your parent’s affairs.

More often than not, an incapacitated person’s child is appointed guardian/conservator, but the guardian/conservator doesn’t have to be a family member. In some states a person can designate whom he or she wants to act as his or her guardian/conservator.

The guardianship/conservatorship will specify if the guardian/conservator has been appointed for the management of all aspects of your parent’s life or a specific aspect of it, such as for solely financial matters. Whatever the decision, the guardian/conservator will owe a duty of care to your parent and will be held accountable by the court for showing that his or her actions are appropriate.

Estate planning strategies

An estate planning technique that may be worth exploring is to have your parent execute a durable power of attorney for property or a living trust. If your parent executes one of these documents, generally the agent or trustee named can manage your parent’s financial affairs.

Similarly, a durable power of attorney for health care, or health care proxy, can allow the agent named to make health care decisions on behalf of your parent. These documents can provide the criteria under which your parent will be considered incapacitated so that a guardianship/conservatorship proceeding isn’t necessary.

Deciding whether to have your parent declared incapacitated can be excruciating. If you’re in this situation, please don’t hesitate to reach out to us for guidance.

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