April 2013 Newsletter


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April 2013 Newsletter

  1. 1. Estate Tax After the Fiscal CliffRBC Wealth Management After threatening to GST tax exemptionJeffrey C. McFarlin, Senior Vice go over the fiscal You have a GST tax exemption that can protectPresident cliff, the gift tax, a certain amount of property from the GST tax. estate tax, andFinancial Advisor The GST tax exemption was $5,120,000 in generation-skipping601 Carlson Parkway 2012 ($5 million as indexed for inflation), but transfer (GST) taxSuite 500 was scheduled to drop to $1 million (as indexed have come in for a for inflation) in 2013. ATRA 2012 permanentlyMinnetonka, MN 55305 soft landing. The extends the GST tax exemption at $5 million as952-476-3749 American Taxpayer indexed for inflation (it is $5,250,000 in 2013).800-284-2321 Relief Act of 2012 (ATRA 2012), State death taxesjeff.mcfarlin@rbc.com enacted on January 2, 2013, permanently In 2012, your estate could take an estate tax extended the $5 million (as indexed) gift tax deduction for death taxes (estate tax or and estate tax applicable exclusion amount and inheritance tax) paid to a state. In 2013, it was GST tax exemption. It also permanently scheduled to change back into a credit for state extended portability of the gift tax and estate death taxes, as available back in 2001. tax applicable exclusion amount between However, ATRA 2012 permanently extends the spouses. However, it also increased the top deduction for state death taxes. gift, estate, and GST tax rate to 40% starting in 2013. A number of other provisions were also Conservation easement exclusion permanently extended. An estate tax exclusion is available for qualified Top gift, estate, and GST tax rate conservation easements. In 2012, the exclusion was generally available if the property was In 2012, there was a 35% top tax rate for gift, located anywhere in the United States. In 2013, estate, and GST taxes. It was scheduled to the exclusion was scheduled to be available, as increase to 55% in 2013. ATRA 2012 provides in 2001, only if the property was located within a permanent 40% top rate, starting in 2013. a limited number of miles from a National Applicable exclusion amount Wilderness Preservation System or an Urban National Forest. ATRA 2012 permanently You have an applicable exclusion amount that extends the provision that the property can can protect a certain amount of property from generally be located anywhere in the United the federal gift tax and estate tax. The basic States and the mileage requirements do not exclusion amount was $5,120,000 in 2012 ($5 apply. million as indexed for inflation), but was scheduled to drop to $1 million in 2013. ATRA Estate tax deferral for closely held 2012 permanently extends the basic exclusion business amount at $5 million as indexed for inflation. Where the value of a closely held business Portability of exclusion exceeds 35% of the value of the adjusted gross The estate of a person who died in 2011 or estate, payment of estate tax attributable to the 2012 could transfer the decedents unused business can be deferred for up to 5 years andApril 2013 applicable exclusion amount to his or her then paid in installments over 10 years, all atEstate Tax After the Fiscal Cliff surviving spouse, who could use the unused favorable interest rates. In 2012, a closely held exclusion, along with his or her own basic business could have 45 partners orUnderstanding the New Medicare Tax on shareholders. In 2013, the permissible numberUnearned Income exclusion amount, to shelter property from gift and estate tax (referred to as portability). The of partners or shareholders was scheduled toFinancial Tips for Obtaining a Mortgage Loan drop to 15, as in 2001. ATRA 2012 permanently provision was scheduled to sunset in 2013.I dont think Ill be able to file my tax return by ATRA 2012 has permanently extended the extends the provision allowing up to 45 partnersApril 15. Is there any way to file my return at a portability provision. or shareholders.later date? Page 1 of 4 See disclaimer on final page
  2. 2. Understanding the New Medicare Tax on Unearned Income Health-care reform legislation enacted in 2010 the extent you were a passive owner), and included a new 3.8% Medicare tax on the gains from the sale of investment real estate unearned income of certain high-income (including gains from the sale of a second individuals. The new tax, known as the home thats not a primary residence). unearned income Medicare contribution tax, or Gains from the sale of a primary residence may the net investment income tax (NIIT), took also be subject to the tax, but only to the extent effect on January 1, 2013. the gain exceeds the amount you can exclude Who must pay the new tax? from gross income for regular income tax purposes. For example, the first $250,000 The NIIT applies to individuals who have "net ($500,000 in the case of a married couple) of investment income," and who have modified gain recognized on the sale of a principal adjusted gross income (MAGI) that exceeds residence is generally excluded for regular certain levels (see the chart below). (Estates income tax purposes, and is therefore alsoHealth-care reform and trusts are also subject to the new law,legislation passed in 2010 excluded from the NIIT. although slightly different rules apply). Inincluded a new additional general, nonresident aliens are not subject to Investment income does not include wages,0.9% Medicare tax on the new tax. unemployment compensation, operatingwages, compensation, and income from a nonpassive business, interest onself-employment income Filing Status MAGI over ... tax exempt bonds, veterans benefits, orover certain thresholds. Thisnew tax also took effect on Single/Head of $200,000 distributions from IRAs and most retirementJanuary 1, 2013. The 0.9% household plans (e.g., 401(k)s, profit-sharing plans,tax does not apply to defined benefit plans, ESOPs, 403(b) plans, Married filing jointly/ $250,000 SIMPLE plans, SEPs, and 457(b) plans).income subject to the NIIT.So while you may be Qualifying widow(er) Net investment income is your investmentsubject to both taxes, the Married filing $125,000taxes do not apply to the income reduced by certain expenses properly separately allocable to the income--for example,same types of income. investment advisory and brokerage fees, What is MAGI? investment interest expenses, expenses related to rental and royalty income, and state and For most taxpayers, MAGI is simply adjusted local income taxes. gross income (AGI), increased by the amount of any foreign earned income exclusion. How is the tax calculated? AGI is your gross income (e.g., wages, salaries, The tax is equal to 3.8% of the lesser of (a) tips, interest, dividends, business income or your net investment income, or (b) your MAGI loss, capital gains or losses, IRA and retirement in excess of the statutory dollar amount that plan distributions, rental and royalty income, applies to you based on your tax filing status. farm income and loss, unemployment So, effectively, youll be subject to the additional compensation, alimony, taxable Social Security 3.8% tax only if your MAGI exceeds the dollar benefits), reduced by certain "above-the-line" thresholds listed in the chart above. deductions (see page one of IRS Form 1040 for Example: Sybil, who is single, has wages of a complete list of adjustments). $180,000 and $15,000 of dividends and capital Note that AGI (and therefore MAGI) is gains. Sybils MAGI is $195,000, which is less determined before taking into account any than the $200,000 statutory threshold. Sybil is standard or itemized deductions or personal not subject to the NIIT. exemptions. Note also that deductible Example: Mary and Matthew have $180,000 of contributions to IRAs and pretax contributions wages. They also received $90,000 from a to employer retirement plans will lower your passive partnership interest, which is MAGI. considered net investment income. Their MAGI What is investment income? is $270,000, which exceeds the threshold for married taxpayers filing jointly by $20,000. The In general, investment income includes interest, NIIT is based on the lesser of $20,000 (the dividends, rental and royalty income, taxable amount by which their MAGI exceeds the nonqualified annuity income, certain passive $250,000 threshold) or $90,000 (their net business income, and capital gains--for investment income). Mary and Matthew owe example, gains (to the extent not otherwise NIIT of $760 ($20,000 x 3.8%). offset by losses) from the sale of stocks, bonds, and mutual funds; capital gains distributions Note: The NIIT is subject to the estimated tax from mutual funds; gains from the sale of rules. You may need to adjust your income tax interests in partnerships and S corporations (to withholding or estimated payments to avoid underpayment penalties. Page 2 of 4, see disclaimer on final page
  3. 3. Financial Tips for Obtaining a Mortgage Loan In January 2013, the Consumer Financial student loans, credit cards, and car Protection Bureau released a new mortgage payments--any loans that wont be repaid within regulation, which sets forth stricter underwritinga year. Try to make it a priority to pay down requirements for mortgage lenders. The your long-term debts as quickly as possible. regulation requires lenders to ensure a This may require you to review your budget and borrowers ability to repay a loan by taking a make adjustments. If you are having trouble variety of underwriting precautions, including coming up with the extra money, take a look at verifying income and assets and increasing your discretionary spending. By cutting back on debt-to-income ratios. discretionary expenses (e.g., going out to eat or The regulation implements sections of the 2010 to the movies), you may be surprised at how Dodd-Frank Act, and is aimed at protecting quickly you can free up money to put towards consumers by providing for a standardization of paying down your debt. the mortgage loan underwriting process. Another way to improve your debt-to-income However, some mortgage-industry experts fear ratio is to increase your income. Perhaps you theres a chance that the regulation may end up can earn extra income by taking a second job making obtaining a mortgage loan more difficult or performing part-time consulting work in yourYoure entitled to a free than it has been in the past. And while lenders chosen profession or field of expertise. If youcopy of your credit report have until January 2014 for final compliance are married and either you or your spouse isonce a year from each of with the regulation, some have already begun currently not working, you or your spouse maythe three major credit to tighten up their mortgage lending want to consider the possibility of reentering thereporting agencies. Visit requirements. As a result, you may want to workforce.www.annualcreditreport.com consider the following tips when applying for afor more information. Increase the size of your down payment mortgage loan. While it is possible to obtain a mortgage with a Clean up your credit report minimal down payment--for example, Federal A borrowers credit history is the cornerstone to Housing Administration (FHA) mortgages any lenders underwriting process. As a result, require down payments of as little as 3.5% of its important to make sure that your credit the homes purchase price--a larger down report is in good shape before you apply for a payment will usually assure you a more mortgage loan. Your credit report contains attractive mortgage loan. In addition to requiring information about your past and present credit private mortgage insurance (PMI), lenders transactions and is used by mortgage lenders generally offer lower loan limits and higher to evaluate your creditworthiness. A positive interest rates to borrowers who have a down credit history will not only make it easier to payment of less than 20% of a homes obtain a mortgage loan, but can also result in a purchase price. lender offering you a lower interest rate. If you find that you dont have enough for a You should review your credit report and check down payment, you may want to consider it for any inaccuracies. If necessary, you may holding off on purchasing a home to give you need to take steps to improve your credit time to increase your down payment fund. In history. To establish a good track record with the meantime, you can invest your down creditors, make sure you always pay your payment in a low-risk, interest-bearing account monthly bills on time. In addition, try to avoid such as a money market deposit account. having too many credit inquiries on your report, Or, consider looking into alternative ways to which are made every time you apply for new fund your down payment, such as: credit. • Converting/liquidating assets to cash. Improve your debt-to-income ratio • Using gifts. In the past, lenders looked for borrowers to • Borrowing from a cash value life insurance have a debt-to-income ratio of no greater than policy or employer-sponsored retirement 36%. The new mortgage regulation suggests plan. (Keep in mind, however, that if you take that borrowers have a debt-to-income ratio that a loan against your cash value, the death is less than or equal to 43%. That means you benefit available to your survivors will be should be spending no more than 43% of your reduced by the amount of the loan. In gross monthly income on longer-term debt addition, policy loans may reduce available payments. If you find that your debt-to-income cash value and can cause your policy to ratio is too high, there are a couple of steps you lapse. Finally, you could face tax can take to lower it. consequences if you surrender the policy with Your first step should be to look at your an outstanding loan against it.) long-term debt payments. These include Page 3 of 4, see disclaimer on final page
  4. 4. RBC Wealth Management I dont think Ill be able to file my tax return by April 15.Jeffrey C. McFarlin, Senior Vice Is there any way to file my return at a later date?President If you dont file your federal • If you are a U.S. citizen or resident and, onFinancial Advisor income tax return on time, you the due date of your federal income tax601 Carlson Parkway could be subject to a return, you either: (1) live outside the U.S. orSuite 500 failure-to-file penalty. Puerto Rico (with your main place of businessMinnetonka, MN 55305 Fortunately, you can file for and obtain an or post of duty outside the U.S. or Puerto automatic six-month extension by using Rico as well), or (2) are in the military or952-476-3749 IRS Form 4868. naval service outside the U.S. or Puerto Rico,800-284-2321 you may be allowed an automatic two-month You must file for an extension by the originaljeff.mcfarlin@rbc.com due date for your return. Individuals whose due extension of time to both file your federal date for filing a return is April 15 would then income tax return and pay any federal income have until October 15 to file their return. tax due. Interest will be assessed on any unpaid taxes due as of the regular due date.The information contained herein is based on It is important to note, however, that in mostsources believed to be reliable, but its accuracy • If you serve in a combat zone (or qualifiedcannot be guaranteed. Professional Trustee Services cases this six-month extension is an extension hazardous duty area), your due date for bothare offered to RBC Wealth Management clients by to file your tax return and not an extension todifferent entities who may serve as trustee. RBC filing a federal income tax return and payingWealth Management will receive compensation in pay any federal income tax that is due. federal income tax is automatically extendedconnection with offering these services. Neither RBCWealth Management nor its Financial Advisors are You should estimate and pay any federal by at least 180 days from the last day you areable to serve as trustee. RBC Wealth Management income tax that is due by the original due date in a combat zone or the last day of qualifieddoes not provide tax or legal advice. All decisionsregarding the tax or legal implications of your of the return without regard to the extension. hospitalization for injury related to service in ainvestments should be made in connection with your Any taxes that are not paid by the regular due combat zone. No penalties or interest will betax or legal advisor. RBC Wealth Management is not date will be subject to interest, and possiblya mortgage lender or broker. Nothing herein should assessed for failing to file a return or to paybe construed as an offer or commitment to lend. Any penalties. federal income tax during this extensioncalculations are provided as educational tools, and period.are not intended to provide investment advice or There are a couple of instances, however,serve as a financial plan. The result of any where the IRS allows both an extension to file acalculation performed is hypothetical and does notassume the effect of fees, commissions, tax rates, or tax return and an extension to pay any federalchanges in interest rates or the rate of inflation, and income tax due:is not intended to predict or guarantee the actualresults of any investment product or strategy. Theseresults depend wholly upon the information providedby you and the assumptions utilized within. Inselecting an anticipated investment return, you After filing my tax return, I found out that Ill be getting ashould consider factors affecting the potential return, large refund this year. What should I do with it?such as investment objectives and risk tolerance.The articles and opinions in this advertisement, Its easy to get excited at tax long term--freeing up money to work for you inprepared by Broadridge Investor Communication time when you find out youll more beneficial ways, such as saving andServices, Inc., are for general information only andare not intended to provide specific advice or be getting a refund from the investing.recommendations for any individual. IRS--especially if its a large You may also consider putting your refund sum of money. The prospect of taking your towards increasing your cash reserve. Its aRBC Wealth Management, a division of RBC Capital family on a dream vacation, purchasing thatMarkets, LLC, Member NYSE/FINRA/SIPC. good idea to have at least three to six months 60-inch LCD television youve had your eye on, worth of living expenses in your cash reserve. or going on a shopping spree at the mall all Without adequate savings, a period of seem like great ways to spend the money. But unemployment or an unexpected illness could what about doing something a bit more be financially devastating. practical with your refund, such as putting it towards improving your overall financial Keep in mind that a refund is essentially an picture? interest-free loan from you to the IRS. If you find that you always end up receiving an While it may not seem as exciting as a vacation income tax refund, it may be time to adjust your to a tropical island, consider putting your refund withholding. When determining the correct in a tax savings vehicle such as a retirement or withholding amount, your objective should be to education savings plan. To make it even easier have just enough withheld to prevent you from for you, the IRS allows direct deposit of refunds incurring penalties when your tax return is due. into a variety of accounts, including IRAs and Coverdell education savings accounts. Finally, to avoid any surprises at tax time (either in the form of a refund or tax bill due), its a Another option is to pay down any existing debt good idea to periodically check your you may have, especially if it is in the form of withholding, especially when your lifestyle or credit card balances that carry high interest employment circumstances change. Visit rates. Paying off any outstanding balances will www.irs.gov for more information. reduce the interest you pay each month in addition to the total interest youd pay over the Page 4 of 4 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013