kitces.com | Nerd's Eye View - Taxes

Forget Harvesting Losses! It's Time To Harvest Gains!

nospam@example.com (Michael Kitces) — Wed, 14 Mar 2012 09:12:00 -0400

Prior to the implementation of the so-called "second Bush tax cut" - the Jobs Growth and Tax Relief Reconciliation Act of 2003 - the long-term capital gains tax rate was 20%, which was reduced to 10% for those in the lowest tax bracket. With the 2003 tax legislation, the maximum long-term capital gains rate was reduced to 15%, with a tax rate of 5% for the bottom two tax brackets, and in 2008 the latter rate was reduced to 0%. Those 15% / 0% long-term capital gains rates remain in effect today, and are scheduled under the Tax Relief Act of 2010 to continue until the end of 2012. After that point, the current laws expire, and the long-term capital gains rate reverts to its prior 20% / 10% rates... with the addition of another 3.8% for high income clients under the new Medicare unearned income tax! Not only does the scheduled increase in long-term capital gains rates represent a rising potential tax burden for clients in the future, but it also creates a surprisingly counter-intuitive but beneficial tax planning strategy - instead of the traditional approach of harvesting capital losses, in 2012 it's time to harvest long-term capital gains!
Continue reading "Forget Harvesting Losses! It's Time To Harvest Gains!"

IRS Revamps Schedule D, Introduces New Form 8949 For 2011 Tax Reporting

nospam@example.com (Michael Kitces) — Tue, 21 Feb 2012 11:10:00 -0500

On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008. Although it was widely known as the "bailout" bill - it was the legislation that authorized the Treasury Secretary to use $700 billion under the Troubled Asset Relief Program (TARP) - the legislation also contained a number of measures to help bring in additional revenue to the Federal government. Amongst those provisions was the establishment of a new requirement for financial intermediaries to track and report cost basis on securities transactions to the IRS on an updated Form 1099-B, to better ensure that taxpayers properly their gains and losses on investments and pay taxes as appropriate, and the new rules took effect for stocks that were purchased in 2011. Over the long run, the new rules will make it easier for clients to track the cost basis for most of their investments, simplifying reporting and preparing returns during tax season. However, in the near term, the introduction of cost basis reporting brings new complexities and challenges to manage. To help support taxpayers through this process, the IRS has revamped Schedule D, and introduced the new Form 8949 - which may have to be done three times for many individuals! - for reporting capital gains and losses for the 2011 tax year.

Continue reading "IRS Revamps Schedule D, Introduces New Form 8949 For 2011 Tax Reporting"

Deduct Them Or Not, But Don't Capitalize Investment Management Fees

nospam@example.com (Michael Kitces) — Thu, 05 Jan 2012 09:40:37 -0500

While the tax code offers a deduction for investment management fees paid by an investor, it is a less than ideal tax deduction. Characterized as a miscellaneous itemized deduction subject to the 2%-of-AGI floor, in practice it is not deductible unless the taxpayer both itemizes deductions in the first place, and has enough miscellaneous itemized deductions in total to exceed the required threshold. In addition, all such miscellaneous itemized deductions are disallowed for AMT purposes - especially problematic since the AMT is somewhat more likely to affect those with sufficient income and assets to be paying such fees in the first place. To avoid this tax result, some clients and their accountants have been going an alternate route: capitalizing the investment management fee into the cost basis of the assets being managed, which at least provides some tax benefit, by increasing the cost basis and reducing future capital gains (or increasing the losses). Unfortunately, though, the IRS has already responded to the strategy: Just Don't Do It.
Continue reading "Deduct Them Or Not, But Don't Capitalize Investment Management Fees"

"I Hate Capital Gains Taxes" - Except When I Don't (Guest Post)

nospam@example.com (Michael Kitces) — Thu, 09 Jun 2011 07:54:00 -0400

When it comes to my personal taxes I am a chronic late filer. In my own defense, it is usually because some partnership or another could not get me my K-1’s by the deadline so I go ahead and file the extension. Or maybe it’s because the pain of actually seeing my tax bill is too great and I find a way to defer that decidedly unpleasurable experience to a later date. This year I had a large tax liability associated with capital gains in my managed accounts, and since 100% of my money is invested in the Pinnacle DMG portfolio I couldn’t help but think of other Pinnacle clients in the same boat. Since cutting a check to the IRS has the remarkable ability to focus my thinking about tax planning, I thought I would share a few of the thoughts that crossed my mind at the time.
Continue reading ""I Hate Capital Gains Taxes" - Except When I Don't (Guest Post)"

IRS Re-Affirms Paying IRA Wrap Fees With Outside Dollars

nospam@example.com (Michael Kitces) — Thu, 17 Feb 2011 09:59:57 -0500

Although we often think of the IRA as simply another account, the tax law generally regards it as a quasi-entity that is separate from the individual who owns it. Both the individual and the IRA have their own separate tax rules that apply; intermingling money is not allowed (due to contribution limits), and even paying each others' costs can get a client into some hot water. Accordingly, clients must be very careful when they use their own "outside" dollars to pay any form of expenses that are associated with the IRA itself. Fortunately, in a recent private letter ruling, the IRS did (re-)affirm that an IRA's wrap fee expenses are an acceptable cost to pay on behalf of an IRA with outside dollars, while not running afoul of the IRA rules and limitations.

Continue reading "IRS Re-Affirms Paying IRA Wrap Fees With Outside Dollars"

AMT Repeal Could Be Coming - But At What "Cost"?

nospam@example.com (Michael Kitces) — Sun, 14 Nov 2010 12:37:15 -0500

Earlier this week, the National Commission on Fiscal Responsibility and Reform released a draft version of its proposals on how to take control of our nation's deficit challenges, including suggestions for comprehensive tax reform. The good news in the proposal is that it includes a repeal of the highly unpopular Alternative Minimum Tax (AMT). The "bad" news is that the proposal also includes a repeal of many popular tax credits and deductions as well. But the reality is that we can't really have one, without the other.

Continue reading "AMT Repeal Could Be Coming - But At What "Cost"?"

Alternative Minimum Tax: "Dreaded" AMT Is Not Always Bad News

nospam@example.com (Michael Kitces) — Sat, 06 Nov 2010 14:06:52 -0400

Given the wild unpopularity of the Alternative Minimum Tax, and the implicit higher tax burden it carries, it's no great surprise that most people wish to avoid the AMT. However, the reality is that while the actual higher tax burden of the AMT may not be desirable, the tax impact - at the margin- of having more income subject to the AMT can actually be good news!

Continue reading "Alternative Minimum Tax: "Dreaded" AMT Is Not Always Bad News"

Planning For Higher Taxes in the Future - But What Kind?

nospam@example.com (Michael Kitces) — Fri, 22 Oct 2010 10:18:33 -0400

It's difficult to go far in the world of financial planning these days without hearing a discussion about the "inevitability" of higher taxes in the future, leading to a broad range of tax planning strategies to dodge the anticipated increase in the income tax brackets. But in practice, it seems that we might be confusing the idea that the government will need to collect more tax dollars in the aggregate from us - a higher tax burden - with the belief that today's income tax brackets are at a low point that must rise. One does not, necessarily, lead to the other.
Continue reading "Planning For Higher Taxes in the Future - But What Kind?"

Using average cost accounting for Exchange-Traded Funds?

nospam@example.com (Michael Kitces) — Fri, 05 Sep 2008 16:33:01 -0400

The average cost accounting method was first created to allow a taxpayer to simply report the gain on partial sales based on the average cost of all shares purchased (instead of the default FIFO treatment, or by using specific share identification), but was reserved exclusively for mutual funds and not for individual equity securities. However, it appears now that the rules may be a little broader than anyone realized - because technically, an exchange-traded fund (ETF) may also be eligible, notwithstanding the fact that it trades more like a stock than a mutual fund.

Continue reading "Using average cost accounting for Exchange-Traded Funds?"

Single-State Municipal Bond Funds Dodge a Bullet! But What About 529 Plans?

nospam@example.com (Michael Kitces) — Mon, 19 May 2008 18:25:47 -0400

Earlier today the Supreme Court issued its ruling in the case of Department of Revenue of Kentucky v. Davis, stating that Kentucky's tax rules which exempt the interest earned on Kentucky muncipal bonds while taxing the interest of other state's bonds is not a violation of the so-called dormant commerce clause of the Constitution. The ruling spared what may have been a tumultuous disruption to the municipal bond market, but the Supreme Court's decision still leaves the door open for several issues...

Continue reading "Single-State Municipal Bond Funds Dodge a Bullet! But What About 529 Plans?"

Should you be doing 2008 tax planning for your rebate check?

nospam@example.com (Michael Kitces) — Thu, 03 Apr 2008 12:10:03 -0400

With the Economic Stimulus Act rebate checks set to start mailing out to taxpayers next month, based on their 2007 tax filings, many believe that no tax planning remains for the rebate checks. However, for the many individuals who will receive less than the full maximum of the rebate check (or possibly as little as nothing), tax planning opportunities do remain!
Continue reading "Should you be doing 2008 tax planning for your rebate check?"

New guidance on fixing a botched IRA stretch after it's "too late"

nospam@example.com (Michael Kitces) — Tue, 25 Mar 2008 10:28:21 -0400

To preserve the ability to stretch IRA distributions for a beneficiary, that individual must start taking withdrawals based on his/her life expectancy in the year after death. If those required withdrawals don't start on time, can you still rectify the situation to preserve the tax deferral? A recent private letter ruling indicates the answer is "yes."

Continue reading "New guidance on fixing a botched IRA stretch after it's "too late""

IRS delays for AMT patch may not be as bad as first feared!

nospam@example.com (Michael Kitces) — Mon, 07 Jan 2008 09:07:55 -0500

Taxpayers awaiting a refund may be delayed in their ability to file early and receive that refund, due to Congress' late passage of an AMT patch - but apparently, the delay won't impact as many taxpayers as first feared.

Continue reading "IRS delays for AMT patch may not be as bad as first feared!"

IRS steps back on non-spouse beneficiary concession!

nospam@example.com (Michael Kitces) — Fri, 04 Jan 2008 17:23:52 -0500

In its list of required plan amendments for 2008, the IRS has failed to include any mandatory requirement that plans provide for non-spouse beneficiary rollovers to IRAs. This implies a change in position from their Interim and Discretionary Amendments release issued in the fall of 2007, which suggested that the IRS intended to acquiesce in advance of a Congressional Technical Corrections bill that non-spouse beneficiary rollovers from employer retirement plans to inherited IRAs would be mandatory, as covered earlier in this blog.

Continue reading "IRS steps back on non-spouse beneficiary concession!"

IRS shuts down wash sale evasion technique!

nospam@example.com (Michael Kitces) — Fri, 21 Dec 2007 12:41:58 -0500

The IRS has just released Revenue Ruling 2008-5, cracking down on a perceived loophole in the so-called "wash sale" rules where an individual sells a security at a loss and purchases a substantially similar security in his/her IRA.
Continue reading "IRS shuts down wash sale evasion technique!"