Monthly Archives: May 2015

Winning the Lottery, What is the Best Payment Option?

2015_05_20 Lottery2Did you win the lottery? If you are reading this, I will assume you did. You are asking yourself whether to take the lump sum or the 20 year payout option. Our Weymouth office is on the opposite end of Columbian Street Lottery office so we get more than our fair share of lottery winners around our office. To be fair, most are lost and looking for directions.

Lottery Payment Options

If you won a large sum, say $1M or more, you have the option of taking a lump sum or a 20 to 30 year payout on your winnings depending on the lottery and state involved. I believe Massachusetts offers a 20 year payout. The 20 years are guaranteed so if you die, someone else gets to spend it.

Lump Sum

The pros to the lump sum include a boatload of money right now! The cons are that you won’t get the full prize. You might get 60% of the prize money. In addition, you will be thrown into a higher tax bracket, This means a bigger chunk of money will go to taxes.

Annual Installment

In this case, if you take annual payments, you do not have a boatload of money burning a hole in your pocket. You will eventually receive the full prize. And, you may save a chunk on money on taxes.

Which one is better?

On smaller prizes, say $1M to $3M, you may be better off with the payment option. It is very easy to spend the lump sum of money and paint yourself into a corner financially with a house and grown up toys that are too expensive to maintain. They payment option can provide an income stream for many years after your prize. Additionally, because the annual payments are smaller, they will be likely be taxed at lower rates.

On larger prizes, say greater than $20M, you may be better off with the lump sum. Even the reduced amount is difficult to spend down and should be able to provide an income stream on its own. Because the annual payments are larger, the tax becomes more equalized between the lump sum and the payment options.

I crunched a few numbers on a $2M prize and a $50M prize. I also made the following assumptions: 5% rate of return, $20K spent per year on the small prize and $120K per year spent on the larger prize. On the $2M prize, the payment option is better after year 13. On the $50M prize, the payment option does not catch up until year 16. That being said, the greater the rate of return, the better the lump sum is.

Other Lottery Considerations

How old are you? Remember, you cannot take it with you.

Do you still want to work? Are you working for the weekend, do you have a meaningful career, or would you prefer neither?

How responsible are you? Are you going to make it rain like you are insane in the brain, or would Homer chide you as ‘Boring!’?

Do you have questions about Winning the Lottery?

WorthTax can help you work through all the IRS and State rules. If you have any questions, please call Alex at 781-849-7200 and make an appointment today.

Maybe you know someone who can benefit from this information, feel free to share:
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Kiddie Tax: Getting Around and How to Avoid It

Kiddie TaxGetting Around the Kiddie Tax
Article Highlights:
• Reason for the Kiddie Tax
• Legal Ways to Avoid It
• Investments that Avoid the Kiddie Tax
• Other Tax-advantaged Moves for Children
Congress created the “Kiddie Tax” to prevent parents from placing investments in their child’s name to take advantage of the child’s lower tax rate. Kiddie Tax rules apply most often to children through the age of 17, although children aged 18 through 23 who are full-time students may also be affected. Under the Kiddie Tax, a child’s investment income in excess of an annual inflation adjusted floor amount ($2,000 for 2014) is taxed at the parent’s tax rate rather than the child’s. These rules do not apply to married children who file a joint return with their spouse.
Depending upon your circumstances, this can be either a tax return preparation nuisance or a penalty tax – or, maybe, both. Parents have the option of including their children’s investment income on their own return and thus avoiding the hassle and cost of filing a separate tax return for the children. For higher-income taxpayers who are subject to the net investment income tax, electing to include a child’s income on their own return may subject the child’s investment income to this new, punitive 3.8% surtax on net investment income tax.
Many insightful parents seek tax-advantaged ways to put money aside for their children’s education, first home, etc. They should not be deterred by the Kiddie Tax, as there are legal ways to avoid it. This is generally accomplished by making investments that produce tax-free income or that defer income until the year the child reaches age 18 (age 24 if a full-time student). If, at that time, the child has little or no other income, the deferred income could be realized with little to no income tax.
The following are examples of investments that either defer income or generate tax-free income. However, you must also consider that some of these might have a lower rate of return than a taxable investment
• U.S. savings bonds – Interest can be deferred until the bonds are cashe
• Municipal bonds – Generally produce tax-free interest income for federal taxes. Most states with a state income tax also permit tax-free treatment of interest from bonds of that state or local governments within that state.
• Growth stocks – Stocks that focus more on capital appreciation than current income. The child could wait to sell them until after attaining age 18 (or age 24 if a full-time student) at a time when he or she has little or no other income. Another technique is for the parents to gift appreciated stock to their children, thereby shifting gain to the children when the stock is sold. Thus, each parent could gift appreciated property, such as stock, value not to exceed the annual gift tax exclusion amount ($14,000 for 2014) to each child without current tax consequences. Later, when the child sells the appreciated property, the child would pay the tax on the parent’s appreciation.
• Mutual funds – Mutual funds that focus on growth stocks or municipal bonds. Although they might throw off some taxable income, their primary goal is capital appreciation or tax-free income.
• Unimproved real estate – This provides appreciation without current income.
If the family has a business, the business could employ the child. The child’s earned income is not subject to the Kiddie Tax rules and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child’s earned income can offset the standard deduction for a dependent and the excess income will be taxed at the child’s rate (not the parent’s). In addition, the child would also qualify for an IRA, which provides additional income shelter.
If you have questions related to the “Kiddie Tax,” please give this office a call.

2015_05_13 Getting Around the Kiddie Tax and How to Avoid ItCongress created the “Kiddie Tax” to prevent parents from placing investments in their child’s name to take advantage of the child’s lower tax rate. Kiddie Tax rules apply most often to children through the age of 17, although children aged 18 through 23 who are full-time students may also be affected. Under the Kiddie Tax, a child’s investment income in excess of an annual inflation adjusted floor amount ($2,000 for 2014) is taxed at the parent’s tax rate rather than the child’s. These rules do not apply to married children who file a joint return with their spouse.

Depending upon your circumstances, this can be either a tax return preparation nuisance or a penalty tax – or, maybe, both. Parents have the option of including their children’s investment income on their own return and thus avoiding the hassle and cost of filing a separate tax return for the children. For higher-income taxpayers who are subject to the net investment income tax, electing to include a child’s income on their own return may subject the child’s investment income to this new, punitive 3.8% surtax on net investment income tax.

Many insightful parents seek tax-advantaged ways to put money aside for their children’s education, first home, etc. They should not be deterred by the Kiddie Tax, as there are legal ways to avoid it. This is generally accomplished by making investments that produce tax-free income or that defer income until the year the child reaches age 18 (age 24 if a full-time student). If, at that time, the child has little or no other income, the deferred income could be realized with little to no income tax.

The following are examples of investments that either defer income or generate tax-free income. However, you must also consider that some of these might have a lower rate of return than a taxable investment

  • U.S. savings bonds – Interest can be deferred until the bonds are cashed
  • Municipal bonds – Generally produce tax-free interest income for federal taxes. Most states with a state income tax also permit tax-free treatment of interest from bonds of that state or local governments within that state.
  • Growth stocks – Stocks that focus more on capital appreciation than current income. The child could wait to sell them until after attaining age 18 (or age 24 if a full-time student) at a time when he or she has little or no other income. Another technique is for the parents to gift appreciated stock to their children, thereby shifting gain to the children when the stock is sold. Thus, each parent could gift appreciated property, such as stock, value not to exceed the annual gift tax exclusion amount ($14,000 for 2014) to each child without current tax consequences. Later, when the child sells the appreciated property, the child would pay the tax on the parent’s appreciation.
  • Mutual funds – Mutual funds that focus on growth stocks or municipal bonds. Although they might throw off some taxable income, their primary goal is capital appreciation or tax-free income.
  • Unimproved real estate – This provides appreciation without current income.

If the family has a business, the business could employ the child. The child’s earned income is not subject to the Kiddie Tax rules and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child’s earned income can offset the standard deduction for a dependent and the excess income will be taxed at the child’s rate (not the parent’s). In addition, the child would also qualify for an IRA, which provides additional income shelter.

Do you have questions about the Kiddie Tax?

WorthTax can help you work through all the IRS and State rules. If you have any questions, please call Alex at 781-849-7200 and make an appointment today at one of our locations.

Maybe you know someone who can benefit from this information, feel free to share:
Linkedin - Joseph Cahill / WorthTaxTwitter - Joseph Cahill / WorthTax / WorthTaxPrepFacebook - Joseph Cahill / WorthTaxGoogle+ - Joseph Cahill / WorthTaxalignable_logo - Joseph Cahill / WorthTax

 

If you have questions related to the “Kiddie Tax,” please give this office a call.

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Refund Statute Has Expired, Did You File?

2015_05_06 Refund Statute3Regarding the IRS Refund Statute of Limitations, we have good news and bad news. The bad news is, if you have not yet filed your 2011 federal tax return time has run out, meaning the refund you expected is not going to happen! Now that does not mean you do not have to file you 2011 federal return, because you do. However, there is good news about the refund statute of limitations. You have until April 15, 2016 to file your 2012 tax return.

IRS Projections – Refund Statute

The IRS estimates that there are more than 1.1 million taxpayers who have not filed their 2012 tax returns. There is approximately $1.1 billion dollars of unclaimed refunds available for those taxpayers. If you fall in this category, you need to act within the year because the return must be filed by April 15, 2016. Otherwise, the money becomes the property of the U.S. Treasury.

What if I failed to file a return?

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2012. Many low and moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families with incomes below certain thresholds. For unmarried individuals in 2011 that was $40,964 for those with two or more children. For people with one child it was $36,052. For those with no children it was $13,660. Each amount is $5,080 more for married joint filers. In addition, parents eligible to claim the refundable portion of the child tax credit will forfeit that benefit if they do not file a return.

When filing a 2012 return, the law requires that the return be properly addressed, mailed and postmarked by the April 15, 2016. And here is more good news, there is no penalty for filing a late return qualifying for a refund.

As a reminder, taxpayers seeking a 2012 refund should know that their checks will be held if they have not filed tax returns for 2010 and 2011. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past-due federal debts such as student loans.

Do you have questions about the Refund Statute?

WorthTax can help you to bring your tax filings up-to-date. If you are not being with your tax filing obligations, please call Alex at 781-849-7200 and make an appointment today at one of our locations.

Maybe you know someone who can benefit from this information, feel free to share:
Linkedin - Joseph Cahill / WorthTaxTwitter - Joseph Cahill / WorthTax / WorthTaxPrepFacebook - Joseph Cahill / WorthTaxGoogle+ - Joseph Cahill / WorthTaxalignable_logo - Joseph Cahill / WorthTax

 

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