What investment expenses are deductible?

Whether you're a stock market bull or bear, you have investment expenses - and you may be wondering if they're deductible on your federal income tax return.

Here's a quick review.

* What are investment expenses? Investment expenses are amounts you pay to produce or collect taxable income, or to manage, conserve, or maintain your investments.

Professional investment advice or financial newspaper subscriptions are examples of deductible items, as is safe deposit box rent when you use the box to store investment papers. You can also claim fees you incur for replacing stock certificates.

* How much is deductible? Investment expenses are miscellaneous itemized deductions, meaning your total costs generally have to be greater than 2% of your adjusted gross income before you benefit. Other limits may also apply.

* What isn't deductible? Some investment costs, such as broker's commissions for buying and selling stocks, are considered part of your basis and affect your gain or loss when you sell the investment instead of being currently deductible.

Travel and fees you pay to attend seminars, conventions, or other meetings - including stockholder meetings - are not deductible, nor are expenses related to tax-exempt income.

Other rules govern certain costs related to your investments, such as interest paid on money you borrow to buy stocks.

Please give us a call to discuss investment-related expenses. We'll be happy to help you get the greatest benefit.

Avoid growing pains in your business

One way to kill your business is to grow it too fast. Many profitable small businesses have expanded at the wrong time and at the wrong level of increased costs. The result is that they never again make a profit. How does this happen?

A given amount of building, equipment, employees, and the associated maintenance, insurance, and taxes will allow your business to operate at a certain maximum sales volume. If you want to grow, say double or triple your current sales, you will need more of all the above items. When you commit to that new larger building with more equipment and employees, you have increased your "breakeven point" (the level of sales you need at which you make your first dollar of profit).

Take this example. Assume that you are a local carpet store. You occupy a 4,000 square foot building. You have a fairly fixed amount of inventory, equipment, and employees. Let's say you are doing $1 million in sales, your gross profit is $300,000, and your fixed costs (building, etc.) are $250,000 with a net profit of $50,000. Since you have an established local customer base, you are convinced that a shop three times this size would make you even more money. Here is what to look out for.

Let's assume that your new 12,000 square foot building and associated higher expenses have raised your fixed costs to $650,000. If you double your sales to $2 million, your gross profit will be $600,000. That leaves you $50,000 in the hole for the year. You would need sales of $2.3 million to get back to the same net profit you had before you tripled your floor space.

Before you go down a permanent road of no return, play a few games of "what if."

A job change can change your taxes

Planning to change employers this year? As you look forward to starting your new job, you're probably not thinking about taxes. But actions you take now can have an impact next April - and beyond.

Here are three tax-smart tips:

           

* Roll your retirement plan. You may be tempted to cash out the balance in your employer-sponsored plan, such as a 401(k). But remember that distributions from these plans are generally taxable.

Instead, ask your plan administrator to make a direct rollover to your IRA or another qualified plan. If you're under age 59½, this decision also avoids the additional 10% penalty on early distributions. Bonus: Your retirement money will continue to grow tax-deferred.

* Adjust your withholding. Assess your overall tax situation before you complete Form W-4 for your new employer. Did you receive severance pay, unemployment compensation, or other taxable income? You might need to increase your withholding to avoid an unexpected tax bill when you file your return.

* Keep track of your job-related expenses. Unreimbursed employment agency fees, résumé preparation costs, and certain travel expenses can be claimed as itemized deductions.

Are you moving at least 50 miles to your new job? You may be able to reduce your income even if you don't itemize. Eligible moving expenses are an above-the-line deduction.

More tax issues to consider when you change jobs include stock options, employment-related educational expenses, and the sale of your home. Give us a call. We'll be happy to help you implement tax-saving strategies.

Make the most of your professional advisors

Who's on your team? No, not your sports or reality-show dancing team, your business team, that group of professional advisors who are ready and willing to help you tackle tough financial decisions.

Those decisions can have an effect on your taxes this year as well as in the future, so you want to be sure your advisors know each other - and are working together for your benefit.

As you begin your midyear planning review, here are three areas where coordinating the advice you receive can pay off.

* Investments. Capital gains and losses from sales of your securities affect your taxes, of course, but the kind of investments you make can also have an impact. For instance, buying municipal bonds to generate tax-free interest may result in the unintended outcome of creating income subject to the alternative minimum tax.

* Insurance. The type of health insurance plan you select can have tax implications. An example: A Health Savings Account (HSA), used in conjunction with a high-deductible health plan, can save premium and tax dollars. You fund an HSA with pre-tax cash and take tax-free withdrawals to pay medical expenses.

* Estate planning. Wills, trusts, and beneficiary designations provide the framework for carrying out your wishes after your death. Communication between your tax and legal advisors helps ensure that these documents offer the greatest protection for your heirs while minimizing estate tax consequences.

Taxes and your child's summer job

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

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

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

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

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

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

Summer employment can be your teen's first exposure to the real world. Help them make it a tax-smart experience.

Taxes apply to children's summer jobs

If your child takes a job this summer, you'll want to know about the following tax issues.

For 2013, your child can earn as much as $6,100 and not pay a dime in federal income taxes. If your child's earnings won't exceed this amount, consider having the child claim "student - exempt" when completing the federal withholding allowance certificate (Form W-4). If this is the child's only income and the total is below the $6,100 limit, he or she then won't have to file a 2013 tax return.

If the child makes a maximum deductible traditional IRA contribution for 2013 ($5,500), he or she can earn as much as $11,600 without incurring any federal income tax. If your child earns over $400 of self-employment income, the filing requirements change.

There will still be withholding from your child's paycheck for social security and Medicare taxes. But those payments are not income taxes, and they cannot be refunded to the child.

As long as you provide more than half of your child's support, you can continue to claim the child as an exemption on your tax return. Your child will lose his or her exemption, but that exemption deduction is typically more valuable to you than to your child.

If you own your own business, consider hiring your child this summer. Your business can deduct the wages you pay the child, as long as the wages are appropriate for the work performed. If your business is a sole proprietorship or family partnership, you are not required to withhold social security or Medicare taxes on your child's wages if he or she is under 18 years of age.

Deductions reduced for those with higher incomes

As you start your 2013 tax planning, you may have to

deal with the loss of certain deductions you've become

used to taking.

PERSONAL EXEMPTIONS. A previous tax rule based on

adjusted gross income (AGI) has been reinstated for

2013: the phase-out of the deduction for personal

exemptions. Your deduction for yourself, your spouse,

and your dependents (each worth $3,900) will be reduced

if you're married, filing a joint return and your AGI

is greater than $300,000. For singles the threshold

amount is $250,000.

For every $2,500 of AGI over the threshold amount,

exemptions are reduced by 2%; at $422,500 for joint

filers, the exemptions are completely phased out.

ITEMIZED DEDUCTIONS. Itemized deductions for higher-

income taxpayers will again be limited in 2013. They

will be reduced by 3% of that portion of AGI exceeding

the thresholds mentioned above ($250,000 for singles

and $300,000 for couples). The amount of your itemized

deductions won't be phased out completely, however.

They can't be reduced by more than 80%, and certain

deductions are not affected (medical expenses,

investment interest, theft and casualty losses,

for example).

With these changes to the tax rules, an early start on

tax planning for 2013 is essential.