2017 Newsletter for individuals
(Revised November 2017)


Averages on itemized deductions
Debt compromise - is it part of your income
Donations - do your spring cleaning early 
Donations - get your proof now
Donations - giveth stock not cash
Donations - planning for large donation
Donations - older donors & their IRAs
Estimated tax penalty - avoiding it
Home-based business - starting one and losses
Itemizing & the standard deduction - get the best deal

Illinois residents working in Indiana (& vice versa)
Investments that lower taxes

Identity theft - act now
IRAs - maximize them
Legislation - plan now  

Older taxpayers and their IRA
Married Couples - year-end tax planning
Medicare premiums - high income = higher premiums
Mutual funds - year-end purchases could raise your taxes
Obamacare and your taxes
Refunds are bad, breaking even is better
ROTH IRA conversion - do it before year-end
Saver's credit – great deal if you qualify
Year-end tax planning - see me now

Before acting on any of these topics,
consult with your professional advisor.

 Compromise of debt  - is it taxable?

If you compromise a debt for less than the face amount you recognize a type of income generally called 'discharge of indebtedness,' and unless there is a specific statutory exception this income is subject to Federal income tax. If you were involved with a 'short sale' or a mortgage foreclosure on your principal residence you will probably have income due to 'discharge of indebtedness'.

Prior law (through 2016) contained an exclusion for income from a discharge of debt involving qualified mortgage debt on a principal residence. It is possible that this provision will be extended through 2017, but not likely.

Compromising credit card debt will also result in income from 'discharge of indebtedness'. If you were able to settle a credit card balance for less than the total balance you will be receiving a Form 1099 for the amount of the balance that was discharged.

Unless an exception applies, the 'discharge of indebtedness' will have to be included in income on your tax return. If you ignore the Form 1099 that you receive, you will eventually get a bill from the IRS for back taxes, penalties, and interest.

There are a number of exceptions that mitigate or totally eliminate the amount of taxable income from discharge of debt. One of the primary exceptions involves the insolvency exception of IRC Code Section 108. The actual rules are complicated. In simple terms, a comparison is made of the extent of your net worth (or lack of it) both before and after the debt compromise. If you are still not solvent (the fair market value of your assets exceeds the remaining liabilities) after the debt compromise, the 'discharge of indebtedness' does not have to be included as income on your tax return.

If you receive a Form 1099 concerning 'discharge of indebtedness' you need to talk to me or your tax professional. My contact information is on the left hand side of this page.

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Refunds are bad, breaking even is better

Many employees claim either 'zero' or 'one' allowance on the W-4 turned into their employer, and you may be one of them. The lower number of allowances will result in more withholdings and probably a larger refund on your tax return. Most likely you could claim more allowances based upon the exemptions for children, itemizing, and other factors on your Federal tax return. The reasoning behind claiming either 'zero' or 'one' is usually not wanting to owe any taxes or not being a good saver throughout the year. In this case, I would classify you as a '0/1 allowance filer'.  

A larger refund may feel good once you have actually received it; however, you could have already had your refund last year in your paychecks.  

Look at it this way. If you get a large refund on your tax return and you carry credit card balances, you are borrowing money (at a very high interest rate) from the credit card company and loaning the money (interest free) to the IRS. Do you really want to make an interest free loan to the IRS?

If you received your refund now in your paychecks (through lower withholding) you could possibly pay off your credit card charges each month or at least pay down your credit card balances faster and reduce your finance charges.

Furthermore, by reducing your withholding, you could be building up a savings account for an emergency. Current economic conditions are challenging, and many people feel that job security has disappeared with the new century. If you get laid off or lose your job a savings account in hand is far more valuable than waiting for your tax refund in the following year.

Raising your allowances on your W-4 will probably not help much this year. Since year 2017 is almost over the additional allowances will affect your future paychecks. Changing your withholding allowances now, however, will affect all of next year’s paychecks. I suggest that you deposit the additional take home pay into your savings account. You can arrange with your employer to have the take home pay increase automatically deposited into your savings account on each payday, or you could also set up your own savings account and make the deposits yourself. Once you open your savings account and get started, the routine should become almost automatic.

If you are a '0/1 allowance filer' and you claim young children as exemptions on your tax return, you  probably saw even bigger tax refunds on your 2009 through 2014 Federal tax returns. But if you had less taxes withheld, by claiming more exemptions, your take home pay would have been higher due due to lower payroll deductions. You could have used the extra take home pay to pay down those (high interest rate) credit card balances. Also, when you do finally file your tax returns next year, your Federal or state refunds could be delayed for a number or reasons.  For Illinois refunds, there could be a very long delay.

 Recent developments and Ilinois income tax withholding (Indiana too)

I suggest that you pay more attention to your Illinois withholding. The news media is full of articles concerning the financial problems the state is facing, and it is possible  that individuals expecting large Illinois income tax refunds next year may get a letter from the state  similar to the one I recently received for one of my business clients. 

Illinois tax refunds often exceed $1,000 due to these two credits:

  1. If your principal residence is in Illinois, you receive a tax credit for 5% of the real estate taxes you pay against your Illinois income taxes.

  2. Illinois allows for a tuition credit of up to $500 per return. This credit applies primarily to grammar and high school expenses for tuition and fees.

Both of these credits will reduce your Illinois taxes and probably increase your refund. However, many people do not take these credits into consideration when they fill out their Illinois W-4 withholding form. These credits could also be treated the same as additional exemptions for purposes of withholding allowances on your Illinois W-4. While an increase of your withholding allowances on your Illinois W-4 won’t have much effect for this year, it could dramatically change next year’s income tax withholding.

In late 2005, Illinois revised the interest rates for both assessments and refunds for periods starting next year. Unless overall interest rates rise dramatically, the interest  rate for Illinois refunds on 2017 returns will probably be only 2% to 3%.  If you mail your Illinois tax return to the state instead of using electronic filing you could be waiting a long time before you receive your refund. Illinois has serious budget problems; the state may not staff personnel to process mailed in returns until late next year.   If you choose electronic filing, however, you will probably get your refund in less than two weeks. Over the last few years, Illinois has been very prompt with refunds on filed electronically tax returns, and hopefully this performance will continue.

Risk of penalties

There are risks of penalties and interest if you claim too many allowances on your Federal or Illinois W-4; you could even end up owing taxes you cannot afford. However, if you deposit the increase in your take home pay (through lower withholding) into a savings account, you should not have any problem paying any taxes due as the likelihood of owing any significant taxes is very remote. If this is one of your concerns you could also go halfway as in the following example:


If your withholding allowances for you, your children and itemized deductions work out to 8 withholding allowances, you could change your allowances from 0 or 1 to say 4 or 5. Your take home pay will be higher, and you should still receive a refund (albeit a smaller one).  

Owing taxes at year-end does not mean that you will automatically be subjected to underpayment penalties as there are a number of exceptions to these penalties.

If you are interested in reducing your withholding, you should contact us or your personal tax advisor before making any changes.  If you are one of our clients, we will review your withholding when you come in for tax preparation. Our contact information is on the left hand side of this page.  

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Donations to charities - get receipts now

Charitable contributions over specific amounts are not deductible unless strict substantiation requirements are met. For your 2017 Federal tax return the IRS requires some type of written proof of all your charitable donations.  

If you get audited by the IRS on your charitable contribtuions, and you do not have the proper documentation, you will lose your deduction.   

Arguing with the IRS on this issue is not a good option; they have won every case on this issue.

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Donation Substantiation Requirements

All donations - regardless of the amount
Any single donation of $250 or more
Non-cash donations exceeding $500
Non-cash donations exceeding $5,000
Donations of cars, boats and (of course) airplanes

All charitable donations - regardless of the amount

For all contributions you will need some type of external written document (such as your cancelled check or a written receipt from the charity) proving that you made this contribution; an estimate or self-made diary can no longer be used as evidence to support a charitable deduction. Cash donations dropped into the Salvation Army kettles at Christmastime cannot be deducted since no receipts are given, and the same result applies to anonymous cash donations dropped into the basket at church services.

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Any single charitable contribution - $250 or more

For any single contribution that is over $250 you will also need a written statement from the charity stating that you did not receive anything of commercial value. If you make charitable contributions through payroll deductions at work, totaling annual contributions of $250 or more (even if each payroll deduction is less than $250) you will need this written statement as well (IRS Notice 2006-110).

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Non-cash contribution exceeding $500

If you take a deduction for more than $500 on your tax return for non-cash contributions, your reporting requirements increase. In addition to the above requirements you will have to attach to your Federal income tax return Form 8283, Non-Cash Contributions. On this form, you need to provide details including a description of the items contributed and the method of valuation used.

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Donations of autos, boats, and (of course) airplanes 

If you are planning on donating a car, boat, or airplane to a charity do not expect any large tax deduction regardless of radio and television advertisements claiming otherwise. The rules for claiming deductions for vehicle donations  were severely tightened back in 2005. In most cases your tax deduction will be limited to the actual selling price by the charity when they sell your donation. If you are planning on taking a tax deduction of $500 or more for donating a car, boat (or airplane), you will need to attach Form 1098-C, sent to you by the charity, to your income tax return.

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Non-cash contribution exceeding $5,000

For any contribution of property exceeding $5,000 you will probably need an appraisal from a qualified appraiser. If you are planning to donate (or have already donated) property with a value that exceeds $5,000, you need to talk to your tax advisor. Donations of marketable securities (those traded on national exchanges) are exempt from this requirement.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.

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Donations to charities - do your spring cleaning early

Does this look like the toaster in your basement?

The time to clean out your closets, basement, and garage of unneeded clothing and household items is now. Either take all of the goodies you find in these storage spaces down to Goodwill, Salvation Army, Amvets, or a local resale shop run by a charity or call to see if the charity will come to your home and pick up your items. If you itemize your deductions on your federal income tax return these donations can be real tax dollar savers. The fair market value of the donated items should qualify for a charitable deduction.

To help you determine the value of your non-cash donations for your tax return, here are some helpful hints:

  1. Make a list of the donated property, being sure to make a separate detailed list for each bag or box of items that is donated.

  2. At the top of this list write the name and address of the charity along with the date the donation was made.

  3. Divide your list into several columns to collate other as completely and as accurately as possible.

I suggest that the columns in your list include the following information:

  1. Descriptions of all donated items.

  2. The quantity of each type of donated item (number of shirts, slacks, sweaters, etc).

  3. The approximate purchase date and cost of each donated item.

  4. The condition of each donated item (e.g.. new or good). If the item is in poor condition, throw it away. The used item must be in good condition or better for a tax deduction.

  5. The value of each donated item at a resale shop (there is a lot more on this later).

Finally, get a letter from the charity acknowledging your charitable contribution. If you plan on taking a tax deduction of $250 or more you need to get a written statement from the charity that states you did not receive anything of commercial value for your donation. Finally, if you plan on taking a tax deduction exceeding $5,000 you may need a written professional appraisal; you need to seek professional advise.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Give stock (if appreciated) not cash

If you itemize you should consider making your charitable contributions in the form of publicly traded stock that has gone up in value instead of contributing cash. Doing this is advantageous for two reasons:

  1. As long as you have held the stock for more than twelve months, you can take a charitable deduction for the stock's fair market value on the date of the gift.

  2. You also escape paying any Federal income tax on the paper gain; most states (e.g. ILL and IN) won't tax the paper gain either.

The only disadvantage with gifts of stock are the service charges in splitting up the stock.

Never use stocks that have gone down in value for charitable contributions as your tax deduction will be limited to the smaller fair market value, and you will not get any tax deduction for the drop in the stock's value. If the value of the gift is over $250, you need to obtain a letter from the charity, which must acknowledge your contribution and that you did not receive anything in return that has any commercial value.

If you plan on making any large non-cash contributions to charities (whether the donated items are stock or other assets) you need to talk to us or to your personal tax advisor. There are a few complicated restrictions that are behond the scope of this page.  Our contact information is on the left hand side of this page.  

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Charitable contributions - planning for large donations

If your current income is much higher due to a non-recurring item (e.g. a ROTH IRA conversion) you could benefit from compressing the next two to five (or even 10) years worth of contributions into the current year. With higher income comes a higher tax bracket, but the deductible contribution this year will produce higher tax savings. The deductions reduce the amount of income subject to tax at the highest tax brackets. When your income drops back to the normal levels, your marginal tax bracket will be lower. Therefore, the same contribution will produce lower benefits, because the tax bracket is lower.

Loading up in one year on charitable contributions, however, has a major drawback. Once you make the contribution, you generally lose control over how the funds are spent. One solution to the problem is to set up a private foundation. This solution works when you are considering contributions exceeding $100,000. The major drawback to setting up a private foundation is the cost which will easily exceed $2,500.

There is a second solution (with a much lower cost) -- the 'donor advised' fund. This type of fund is a charitable trust that is generally operated by a stock broker, mutual fund or charity. The benefits to this are:

  1. Your charitable contribution to the fund is tax deductible.

  2. You are able to keep control over future charitable contributions.

  3. Your contribution continues to earn investment income tax-free until all of the funds are distributed.

  4. The fund holds and invests your charitable contribution.

  5. The fund makes charitable contributions (upon your direction) after verifying that the recipient qualifies as a charity.

You can use publicly traded stock as your charitable contribution to a 'donor advised' fund. Assuming the stock has shot up in value, and you have held the stock for over one year, you should receive a tax deduction for the stock's fair market value.

There are a number of investment houses (e.g.. Charles Schwab, Fidelity and Vanguard) that have "donor advised" funds. The initial minimum contribution to their funds ranges from $5,000 to $25,000.  The costs of several of these funds are very low.  For example, some of them charge a fee of less than 1% of total assets.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Estimated tax penalty - avoiding it

Now is the time to compare your estimated 2017 Federal and state tax liabilities to your credits for withholding and any estimated tax payments made for this year. There are usually 3 possible scenarios:

  1. You will either get a small refund or you will owe a small balance.

  2. You expect to receive a large refund.

  3. You will have a large tax balance (say over $500).

Over-withholding to get a large tax refund is rarely recommended as you could have had the funds in your paycheck all year if your withholdings were less. Also, if you are expecting a large state income tax refund you could experience a very long delay. Over-withholding is discussed in more detail in another section.

Owing a large tax balance could have some serious financial consequences; however, assuming that you have the funds available to pay this balance, the only disadvantage is the Federal and State underpayment penalties. The actual rules are very complicated and beyond the scope of this page, however the following discussion is a very simplified version of the rules.

In computing the underpayment penalties, the year is broken down into four quarters of three months per quarter. The withholding and estimated tax payments for each quarter are compared to the prorated tax liability of each quarter. If a quarter's tax payments are less than 90% of the prorated tax liability for the quarter, you are subject to a potential underpayment penalty. For the current year, the Federal underpayment penalty approximates a simple interest rate of 5.5%. The Illinois underpayment penalty ranges from 15% down to 2% depending upon the time period involve; Illinois also imposes a minimum $150 late payment penalty in certain circumstances.

Simply because your tax return indicates a balance due does not mean that you will be assessed underpayment penalties as there are a number of exceptions to avoiding these penalties. If you meet the requirements of any of these exceptions you will not be liable for an estimated tax penalty. Furthermore, the exceptions are applied to each quarter. Therefore, even though you may not meet any of the exceptions for a particular quarter, you could use one of the exceptions for the other quarters.

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Underpayment Penalty Exceptions

Threshold exception
90% exception
Last year's tax exception
Annualized exception 
Fourth quarter state estimate 

The threshold exception

There is no Federal underpayment penalty, if you owe less than $1,000 on your tax return. The Illinois and Indiana thresholds are $500 and $ 1,000 respectively.

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90% exception

There are underpayment penalties at the Federal or Illinois/Indiana State levels, if the withholding and estimated tax payments are at least 90% of the current year's tax liability. This exception is applied on a quarterly basis. For example, for the first quarter (January through March 31st) the taxes are annualized based upon the actual income and deductions for the quarter. The amount equal to 22.5% or the annualized taxes is compared to the following amount:

  • The sum of the estimated tax payments made by April 15th (the due date for the first quarter's estimate) plus 25% of the total for income tax withholding during the first three months.

For the second quarter 45% of the annualized taxes (based upon the first 6 months of actual income and deductions) is compared to the following amount:

  • The sum of the estimated tax payments made by June 15th (the due date for the second quarter's estimate) plus 50% of the total for income tax withholding during the first six months

The third and fourth quarters use the same formula substituting the longer time span.

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Last year's tax exception

There is no Federal underpayment penalty if withholding and estimated tax payments equal to or exceed the tax liability on last year's tax return; this exception also applies to Illinois and Indiana returns, assuming that resident or non-resident returns were filed for both years.

This exception is computed on a quarterly bases. Similar to the 90% test discussed above, for the second, third and fourth quarters, the test is applied to the aggregate tax liability (based upon last year's tax) and the withholding and estimated tax payments from the beginning of the year to the end of the quarter being tested. Year-end estimated tax payments do not count for earlier quarters.

There are two special rules involved with claiming "last year's exception":

  1. If your 2016 income was more than $150,000 ($75,000 for married filing separately status), your 2017 witholding and estimated tax payments on a quarterly basis need to exceed 110% of your 2016 tax. The same rules will probably apply to next year's estimates for 2018.

  2. If you own a small business, and more than half last year's total income is from that business, and last year's total income does not exceed $500,000, you only need to pay in (through quarterly withholding and estimated tax payments) 90% of last year's tax.

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Annualized exception

There is no Federal underpayment penalty, if your withholding and estimated tax payments through the end of the quarter are at least 90% of your actual tax liability through the quarter. This exception is complicated and beyond the scope of this webpage.   

Generally, this exception is useful when income and deductions fluctuate during the year. For example, large dividend distributions from mutual funds could be the cause of your tax liability. Mutual fund distributions usually occur (for tax purposes) in the month of December. If your tax liability is due to your mutual fund income, an estimated tax payment in the fourth quarter could eliminate any penalty. For the prior three quarters, the penalty would probably be eliminated using this 'annualized exception'.

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Fourth quarter state estimated tax payments

If you need to make a fourth quarter estimated payment to the state you may want to make it before the end of the year even though the fourth quarter installment is due in January of the following year. Making the payment this year will result in a deduction on your 2017 Federal tax return, if you itemize deductions. If you are not planning on itemizing this year, you could defer payment of the fourth quarter estimated tax payment until next year. However, proposed legislation will probably eliminate this itemized deduction; press here of this topic.  Finally, if you could be subject to the alternative minimum tax for 2017. You need to contact your tax advisor .

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.

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Look at investments that lower taxes

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Tax Sheltered Investments

Equity investments
Series E bonds
Tax deferred annuities
Municipal bonds

Except where noted, the following rules involve Federal income taxes, not state income taxes.

Equity investments

There are two general classes of equity investments, dividend paying stock and growth stocks, which historically pay little or no dividend. Both types of equity investments have strong tax advantages.

Starting with year 2003, dividends from publicly traded corporations have been taxed at the same tax rates as long term capital gains. Therefore, if your marginal tax bracket exceeds 15% (e.g. 28%), the tax rate on your qualifying dividend income for this year will be 15%. If your marginal tax bracket for the year is 15% or less, the tax rate on your qualifying dividend income for the year will be only 5%. These tax rates were extended through year 2017.  The term 'marginal tax bracket' is the rate at which any part of your income is taxed. For example if you are a single filer and your 2017 taxable income is $37,951, $1 is taxed at the 25% bracket (your 'marginal tax bracket'), and the remaining taxable income is tax at the lower 10%, 15% and 25% tax brackets. 

You may be getting an unpleasant surprise if your dividend paying stocks are held in a margin brokerage account. All or part of your dividend income may not qualify for the lower tax rates. In many margin accounts the stock is not actually owned by the account holder. Instead, the brokerage firm 'loans' the stock to the account holder. In that situation, the dividend income credited to your margin account actually belongs to a different person. The special lower dividend tax rates only apply to stock actually owned by the account holder.

Equity investments and municipal securities have a major non-tax drawback in that They can and many times do go down in value. A good example was the market reaction to Italy's financial problems. If you are retired or near retirement, we feel that you should be concentrating on keeping your capital or net worth intact, and therefore low yielding savings accounts or short term FDIC insured CDs might be your best option. The interest rates are terribly low right now, but you will not lose your principal.

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Series E bonds

Series E bonds are tax advantageous because the interest on them is generally taxable in the year the bonds are redeemed rather than in years earned. When the bonds are ultimately cashed in the interest is exempt from state income taxes as well.  

Series E bonds may be attractive to you if you are retired, receiving security benefits, and part of your social security benefits are being taxed. You could live off of the principal of your other investments while the Series E bonds build up interest, free of any current tax. Eventually, the Series E bonds will become part of your estate, and subject to possibly lower taxes when the bonds are redeemed.

Series E bonds are suitable also if you are saving for your child's college education as you can buy the bonds in your child's name rather than yours. While the interest income will be taxed when your child redeems the bonds, your child will probably be in a lower tax bracket than you and thus pay tax at a lower rate. Unfortunately, buying the bonds in your child's name may be counterproductive if he or she applies for college financial aid. 

Finally, in some cases Series E bond interest are exempt from Federal tax if a family member has tuition expenses for year.

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Tax deferred annuities

Tax deferred annuities also offer tax advantages. Unfortunately, many times the commissions and other load charges outweigh their tax advantages. Many times, the brokers touting this type of product are more interested in their financial future than in your financial future. You need to ask the broker for an analysis of expected yields after taking into account all commissions and other load charges. If the broker is unwilling to give you this information, go someplace else.

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Municipal bonds

Municipal bond interest is generally totally exempt from Federal income taxation. I generally do not recommend investments in municipal bonds. This is because yields, credit quality and maturities of your municipal bonds are generally related. Therefore, the better the interest rate, either the longer the maturity and/or the lower the credit worthiness of the borrower. If interest rates in general go up or the borrower runs into financial problems, you will lose money on your municipal securities. Additionally, municipal bond interest is usually subject to state income taxes.

Before making any major changes in your investments you should consult with an investment counselor that you trust such as a certified financial planner or your CPA. Also, be extra cautions when you follow the advice of financial advisors who work on a commission basis. They may be making recommendations based upon the potential commissions they will earn, if you buy. They may be more interested in their retirement, than your retirement. Nme I sell stocks, securities, insurance, or receive commissions.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.

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Mutual funds - year-end purchases could raise your taxes

Many mutual funds distribute all of their annual investment income and trading gains during either November or December of each year even though the gains and investment income were earned throughout the entire year. If you buy the mutual fund late in the year you will become the owner of record for purposes of the entire year's dividend and capital gains distributions.

Even though your tax return income will increase due to these year-end distributions your economic income will not change (other than the additional taxes you will pay). Generally, the mutual fund's value will decrease an amount equal to the dividend payout. Disregarding any other market fluctuation, you would probably end up with the same number of shares if you purchased the shares the day after the 'dividend date'. The dividend date is the date used to determine 'owner of record' for purposes of the year-end dividend distributions.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Maximize your IRA

It is quite possible that Social Security may be 'broke' in the future, so do not count on it when doing your retirement planning. Maximum contributions to your traditional IRA make sense even if you or your spouse are covered by an employer retirement plan, and you are not entitled to any deduction for the contribution.

  1. The income accumulation is free from all income taxes until you receive the income in the form of IRA distributions.

  2. If the contribution is deductible, Uncle Sam is in effect subsidizing part of your contribution in the form of the tax savings from the contribution.

Your deduction may be limited if you are an active participant in an employer pension or profit sharing plan. Depending upon your income level, your deduction for your contribution to a “traditional IRA” will be limited and possibly totally eliminated. The limits for 2015 are based upon the following filing status and income:

  1. For single filers who are covered by a company retirement plan in 2015 the deduction is phased out between $60,000 and $70,000 of adjusted gross income.

  2. For married filers if you are covered by a company retirement plan in 2015 the deduction is phased out between $96,000 and $116,000 of adjusted gross income.

  3. For married filers where you are covered by a company plan but your spouse is not, in 2015 the deduction for your spouse is phased out between $181,000 and $191,000 of adjusted gross income.


You have a choice of contributing to a traditional IRA or a ROTH IRA. If you are able to contribute to a ROTH IRA instead of a traditional IRA your contributions will not be deductible; however, this could be a real rainbow when you start taking distributions, as all of your distributions could be totally tax-free.

ROTH IRAs are not available to everyone; above certain income levels ROTH IRA contributions are allowed only in part or not at all. A comparison of income levels for year 2014 and 2015 is listed below:

Filing Status

2014 Income Levels

2015 Income Levels

Single head of household

$114,000 - $129,000

$116,00 - $131,000

Married filing joint return

$181,000 - $191,000

$183,000 - $193,000

Married filing separately

$0 - $10,000

$0 - $10,000

ROTH IRA CONTRIBUTIONS are not allowed if your income exceeds the above-described upper ranges. If your income falls within the above-described income ranges the allowable contribution into a ROTH IRA has to be reduced by twenty-five cents for each dollar that your income exceeds the beginning of the income levels.  If your 2015 income exceeds the above described income levels no contribution to a ROTH IRA is allowed.  

In one situation, a Roth IRA contribution may be the only one allowed. If you or your spouse is over 70½ years old at year-end, the only IRA contribution allowed is a ROTH IRA contribution.

Regardless of how high your income is for year 2014 you can still contribute to a traditional IRA (assuming that you have enough earned income and you are under 70 ½ at year end). Prior to 2010 you could not generally convert a traditional IRA into a ROTH IRA if your income exceeded $100,000,

The ROTH IRA conversion rules are very complex, and beyond the scope of this webpage. It might appear that you can contribute to a traditional IRA (no income limitation) and then immediately convert the traditional IRA into a ROTH IRA; however, if you have other traditional IRAs, there could be a significant amount of income recognized. We discuss ROTH IRAs further elsewhere on our website, but again, the rules are complicated and you need to discuss this topic with us or your personal tax advisor.

Maximum Annual Contributions

In general, you can contribute a maximum of $5,500 into an IRA for the year 2015. If you are married and you file a joint income tax return, you can also contribute up to $5,500 for your non-working spouse (as long as you have enough earnings). Also, if you are at least fifty-years-old at year-end, you are entitled to a maximum contribution of $6,500. The same rule applies to your spouse with no earnings for the year, assuming that you are married and you file a joint tax return. However, the total IRA contributions for both you and your spouse cannot exceed your combined earnings.

Your 2015 IRA contribution will be due by April 15, 2016. However, the earlier you make your 2015 IRA contribution the longer the funds will be working to earn you tax deferred income (or tax-free in the case of the ROTH IRA). If you have college-bound children and you plan on applying for financial aid you may want to make your IRA contributions earlier. 

Also, starting on January 1, 2016 you can fund your 2016 IRA. The sooner you fund your IRA in the year, the sooner the funds will start earning tax-deferred earnings. The maximum contributions for 2015 are the same as for 2014.

Many financial institutions assess a service charge for setting up IRAs and other retirement plans and are not particularly customer friendly on explaining the available options. These institutions should be avoided.

Finally, on your 2015 return you may be able to take a credit of up to $1,000 against your taxes by claiming a "saver's credit". If you are married filing a joint tax return, the "saver's credit" could be as high as $2,000.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Sell your stock losses by year-end

Stock losses are subject to the capital loss rules. These rules limit such losses to a maximum of $3,000 against other income; however, if you do not sell the stock, the loss is never deductible. Also, your capital loss deduction can offset your income, which is subject to regular tax rates. For example, if you are in a 28% tax bracket, a $3,000 capital loss deduction could save you more than $900 taking into consideration your tax savings on your Federal and state income tax returns.

With the new lower capital gains tax rates segregating gains and losses into separate years can result in significant tax savings. For example, if stocks with offsetting long-term capital gains and losses are sold in the same year, the maximum tax savings is only 15%, the maximum tax rate on long-term capital gains. If your marginal tax rate is lower than 15% the tax savings rate goes down to only 5%. However, if the losses are all sold in one year up to $3,000 of the losses are deducted at your higher marginal tax rate.

Finally, if you feel that the particular stock has long-term value consider selling the stock by year-end, waiting at least 30 days, and then buying it back; based upon the circumstances the tax savings may outweigh the double commissions.

We discuss the capital gains rules more deeply elsewhere on our website, but if believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Year end tax planning for married couples

If you are married, both of you work, and either of you incurs employee business expenses, you should be looking at the tax filing status of married filing separately. Unreimbursed employee business expenses are included in a category of deductions called 'miscellaneous deductions,' which are subject to a 2% exclusion based on income. In general, the tax deductions that are allowed for this category of expenses must be reduced by 2% of the total income, but by filing separate tax returns, the total income is smaller since one spouse's income is excluded, thus the 2% exclusion is smaller.

If it looks like filing separate returns may be beneficial, the spouse with the employee business expenses should consider paying any unpaid employee expenses before year-end. This spouse should also pay out of his or her own funds other expenses that qualify as 'miscellaneous deductions' (e.g. investment publications and safe deposit boxes). Many times education courses and job seeking expenses also qualify for the 'miscellaneous deduction' category.

Another reason to consider the filing status of married filing separately is the new "saver's credit".

Getting married before year-end could cost you more in taxes. If you are a client, call me and I will go through the computations with you. Possibly, you could hold off on the marriage plans until the first of next year. Finally, if you are a single parent with children who are college bound, getting married could adversely affect their college financial aid.  If you have college-bound children, you need to talk to us or your personal financial advisor.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Itemizing or standard deduction - getting the best of both worlds

The standard deductions for 2017 will be slightly higher than the amounts for 2016. The annual increases can be seen in the following table:

Filing Status

2015 Deduction

2016 Deduction

2017 Deduction





Head of household




Married filing jointly




Married filing separately




There are also additional standard deductions for either blindness or being at least age sixty-five; for 2015 these additional standard deductions are $1,200 for married persons and $1,500 for single and head of household filers.

In most cases, itemized deductions include:

  • State and local income and real estate taxes (less the amount discussed above)

  • Mortgage interest on your residence

  • Charitable contributions

In some cases, itemized deductions may include:

  • Medical expenses

  • Un-reimbursed employee business expenses

  • Tax preparation costs

  • Investment expenses

In most cases, if you do not own a residence that has a mortgage, you will be better off taking the standard deduction. There are exceptions including situations involving large deductions for medical expenses, charitable contributions, and employee business expenses. Regardless of all of this though, the tax rules governing itemized deductions are very complex, very individualize and beyond the scope of this discussion; as such they should be discussed during an appointment with us or with your personal tax advisor.

Assuming that nobody else can claim you, you can elect to take the standard deduction instead of itemizing; taking the standard deduction is more beneficial; however, if you can be claimed by someone else you have to itemize. Also, each year stands on its own; therefore, you can take a standard deduction in one year and then switch to itemizing the following year.

If your itemized deductions are close to the amount you could claim for a standard deduction, you should consider accelerating itemized deductions into this year. By accelerating itemized deductions into 2017, you can save taxes now by itemizing. On your 2018 return, you can always take a standard deduction. Also, the pending "tax-cut?" legislation will eliminate part or all of the state & local income taxes, medical deductions and employee business expenses.  For more information on this topic, press here.

Taking (or not taking) a standard deduction is not affected by your choice in an earlier year.

For example, pay some of the charitable contributions you would normally make next year, this year.  Second, assuming that you own a home in either Will or Cook County, you can pay your first installment of next year's real estate tax payment, this year. Your first installment for next year is equal to 55% of the current year's taxes.  This recommendation assumes that you will not be subject to alternative minimum tax.  

If all of the state and local tax deductions are repealed for post-2017 years, prepayment of your 2018 real estate taxes could be your last opportunity for a tax deduction.

Finally, you may want to look at filing separate returns if you are married, both of you work, and one of you incurs employee business expenses and the other does not. Employee business expenses are treated as 'miscellaneous deductions' that are subject to a 2% exclusion based on income. There may also be an additional benefit to take a filing status of married filing separately. One of those benefits is the opportunity to take advantage of the "saver's credit".

If it looks like filing separate returns may be beneficial,  press here for more information.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Illinois residents working in Indiana (& vice versa)

Before January 1, 1998, Illinois and Indiana had a reciprocity agreement whereby cross-border residents working in the other state filed only one state income tax return with their resident state. The cross border resident could treat the out of state withholding the same as resident income tax withholding. Illinois residents working in Indiana were only subject to Illinois tax; also, they could treat the Indiana withholding as Illinois income tax withholding. The opposite rule applied to Indiana residents working in Illinois. This was how the rule worked until Illinois terminated the reciprocity agreement with Indiana. For the current year, there is still no reciprocity agreement worked out between the two states. Expect another tax preparation nightmare if you lived in Illinois and worked in Indiana (or vice versa) during 2015, as you will have to prepare both Illinois and Indiana income tax returns.

While both states are taxing the same income, the resident state will give you a credit for the state income taxes paid to the non-resident state where you worked. The net result will be two tax returns taxing the same income; however, the resident state gives you at least a partial credit for the income taxes imposed by the other state.  While each state has different rules on how the tax credit is computed, the result usually is a credit based upon the lesser of the tax rate of the resident or employment based state.  

If your employment income is subject to a county tax (e.g. Lake County Indiana), you probably won't get any tax credit for the county tax on your state tax return of your resident state.

If you work in Illinois and live in Indiana and your only income are your Illinois wages, you will be paying more in taxes than if the same wages were earned in Indiana. The Illinois tax rate is higher, 5% versus 3.2% for Indiana. Illlinois won't give you a credit for any of the Indiana county taxes.

If you gamble across the border, you are going to lose even if you win. You will probably have to file multiple state income tax returns. Both Indiana and Illinois share with the IRS the gambling winnings reported on the W-2G forms. Also, both states require withholding on winnings as low as $600. Indiana, in particular, has been very active in taxing Illinois residents on their Indiana gambling winnings.

As for 2016, it does not look any more promising than this past year. Visit our website periodically for updates on this topic.

If you believe that this topic could affect you, you need to talk to me or to your personal tax professional. My contact information is on the left hand side of this page.

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See me before year-end

Make an appointment with us for your year-end tax planning, and you will probably save on your taxes next year. As always, there is never a charge if we prepared your previous year's tax return.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.

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The older taxpayer and charity

If you are at least 70½ years old and you have funds in a retirement account, you are most likely subject to the 'Required Minimum Distribution (RMD) Rules'. These complex rules require distributions based up either a single or joint life expectancy.

If you need to take an RMD from your IRA this year (2017) and you plan on making charitable donations, have your IRA trustee pay amount of your RMD directly to your favorite  charity. By directing the RMD payment to charity, the payment was not included on your Federal tax return. In effect, you received a tax deduction for the charitable donation even if you did not itemize. Also, if you live in a state that taxes IRAs and pensions (e.g. Indiana) you would save on state income taxes.

There is a lifetime limit of $100,000 of direct IRA donations, and the exclusion only applies to amounts required to be taken as RMDs.

If you are not required to take a distribution from your IRA, due to the RMD rules,  the exclusion does not apply.

The RMD to charity provision were originally enacted only for year 2011, but each year Congress extended this provision. Last year, this RMD provision was extended in mid-December. This year, this provision was made permanent. RMD now and the RMD to charity is again extended, you probaaly won't be able to reverse the transaction.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional.  Our contact information is on the left hand side of this page. You need to also contact your IRA trustee to find out when the cutoff is for initiating current year RMD distributions.

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ROTH IRA Conversions - the pros outweigh the cons

If you have a traditional IRA and it has has lost value due to the stock market or just bad luck in choosing stocks, converting it to a ROTH IRA before year end should be considered.

The primary advantages to a ROTH IRA over a traditional IRA are:

  • All of the distributions out of a ROTH IRA could be tax-free

  • Older individuals are not required to take any "Required Minimum Distributions"

I have a more detailed discussion of this topic in the sections on both ROTH IRAs and the rules concerning 'required minimum distributions' (RMD) by older individuals.

The main drawback to a conversion of a traditional IRA to a ROTH IRA is the fact that the entire value of the IRA account (less your after-tax-cost in the IRA) has to be included on your Federal income tax return in the year of the conversion. The term 'after-tax-cost' refers to any contributions to IRAs that you did not deduct on your tax return. Assuming that your IRA is composed of common stocks, the timing of a conversion of a traditional IRA into a ROTH IRA is usually a matter of luck. The best time to convert is when the IRA account value is the lowest. If your IRA account composition mirrors the stock market, then the best date to convert is the date the stock market is at the lowest level of the year. If I were able to predict this date, I would be retired living on a tropical island! All you can do is give it your best shot.

If the stock market stays down or even goes lower between now and year end (and you feel that the market will recover) that is probably the best time to convert your traditional IRA to a ROTH IRA. The lower the value of the traditional IRA, the less income to be included on your tax return, and a lower Federal income tax cost.

If your decision turns out to be a wise one (the value of the account goes up), the gain from the date the IRA was converted will generally be tax-free. However if your decision turns out otherwise (the value of the IRA account keeps going down), you can essentially unwind the original conversion at no tax cost. You have until the extended due date of your tax return to re-characterize the ROTH conversion back to a traditional IRA.  Pending "tax-cut?"  legislation may eliminate this tax planning tool after this yeas.

In some cases, distributions from 401Ks and other retirement plan can be directly rolled into a ROTH IRA. The tax consequences are similar to the rules for converting traditional IRAs to ROTH IRAs. Finally, you can convert a Simple IRA or a SEP-IRA to a ROTH IRA, however, at least two years of participation in the plan is required.

If you believe that this topic could affect you, you need to talk to us or to your personal tax professional. Our contact information is on the left hand side of this page.  

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Saver’s Credit – plan now for
the most benefit

If your annual income is less than $20,000, the “saver's credit” could be a major benefit to you. The “Saver's Credit” could be as much as a $1,000 credit on your tax return to qualify for this credit, you need to make a contribution to either a either deferred compensation plans (e.g. 401K plan) or an IRA. Assuming that you qualify for this credit, the government is paying for part of your retirement contribution.

If your employer has a 401k plan, your voluntary contributions to the plan need to be made before year end. For an IRA contribution, you have until April 15, 2018 to make your 2017 contribution.

The saver’s credit for year 2017 can be claimed by:

Joint return filers with incomes up to 60,000

Head of Household filers incomes up to $45,000

All other filers incomes up to $30,000

As the income rises, the savers credit goes down. Also, prior year IRA and pension disttributions could reduce the “saver's credit”.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $2,000 for married joint return filers and $1,000 for other filers, the credit is usually much less (e.g. $200).

Other special rules that apply to the saver’s credit include the following:

Eligible taxpayers must be at least 18 years of age.

Anyone claimed as a dependent on someone else’s return cannot take the credit.

A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

There may be a big non-tax benefit to making a contribution to your 401K plan. The 401K contribution could reduce your W-2 income for purposes of Obamacare health insurance. If you qualify for a subsidy or possibly Medicaid, the 401K contribution reduces you income and therefore could raise your subsidy offsetting the cost of your insurance.  IRA contributions may also reduce your income for purposes of the Obamacare subsidy. This conclusion is based upon information on the Kaiser Organization website (www.kff.org). However, more clarification on this point is needed.

Obamacare and your taxes

Most individuals will not dividuals will not feel the sting of the tax increases that were enacted to partially fund the cost of Obamacare.

For all practical purposes, if your total income is less than $200,000, the new "Obamacare taxes" will not affect you.

For 2014 and future years, the income tax rates for most individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% for most individuals.

For high income individuals, there is a new tax bracket of 39.6% in addition to two new medicare taxes. These three changes are discussed in the following sections  

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The 39.6% tax bracket

The .09% tax on high wages

The 3.8% tax on "investment income


The 39.6% tax bracket

This new tax bracket affects incomes above the following thresholds:

$450,000 for joint filers and surviving spouses;

$425,000 for heads of household;

$400,000 for single filers; and

$225,000 for married taxpayers filing separately

For subsequent years, the thresholds for the new 39.6% tax bracket will be adjusted for inflation.

Medicare tax on earnings

Starting with 2103 returns, earned income in excess of $200,000 ($250,000 for joint return filers) will be subject to an additional . 09% Medicare Tax. Therefore, earned income in excess of the above thresholds will be subject to a combined medicare tax of 2.35%. Earned income is defined as salary and earnings from self employment.

Employers are required to withhold the new medicare tax once an employee's salary exceeds $200,000 for the year even if the employee is married and subject to a higher $250,000 threshold. The employee can treat the additional medicare tax withheld as income tax withholding when he files his Federal income tax return.

With the new .09% Medicare tax, there are now four separate tiers of Federal withholding

Tier 1 – Federal income tax withholding

Tier 2 – FICA withholding – 6.2% on salary up to $117,000 (for year 2014)

Tier 3 – Medicare tax withholding – 1.45% on all salary

Tier 4 – New Medicare tax withholding - .09% on salary above $200,000

3.8% Medicare Surtax on “Unearned Income”

Starting with 2013, there is a second new tax called the “Medicare Contribution Tax”. Essentially, this 3.8% tax that is assessed on individuals, estates and trusts on certain types of income. This tax does not have any effect unless our income for the year exceeds the following gross income thresholds:

  1. $250,000 for joint return filers

  2. $200,000 for all other individual filers.

  3. The threshold for estates and trusts is much less, only $11,950.

The following discussion is a simplistic explanation of a very complicated topic. If you are subject to the “Medicare Contribution Tax” you will need to seek professional advise.

In general, the “Medicare Contribution Tax” is assessed on the smaller of the following two items:

  1. the net investment income for the tax year, or

  2. any excess of adjusted gross income (with certain modifications) for the tax year over the threshold amount determined by your filing status

The tax is assessed on net investment type income (e.g. interest, dividends, annuities and gains on investment sales), and income subject to the passive income rules including rental income. For example, rental income from a building leased to your business could be subject to this tax in certain circumstances. Finally, you are allowed deductions for any itemized deductions relating to the investment income (e.g. legal fees and state income taxes relating to the investment income)

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Identity theft in the past - act now

If you experienced identity theft, e.g. credit card fraud or someone filing a tax return with your info, you need to send the IRS a request for a PIN numbeer. With this number, only you will be able to file your Federal income tax return under your name and Social Security Number.

This form (14039) is on the IRS website.  It is also on my website by pressing this link.

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