Overview of Net Investment Income Tax

Any non-corporate taxpayers, such as individuals, trusts, and estates, beginning in 2013 are subjected to a net investment income tax (NIIT). The NIIT is a 3.8% tax on income and gains made through investments as long as they have a net investment income and a modified adjusted gross income in excess of $200,000 for single individuals/heads of households and $250,000 for joint filers/surviving spouses. Only about 2%-3% of all taxpayers are subjected to NIIT.

Calculating Net Investment Income (NII)

Calculating NII is a two-step process. In the first step, taxpayers add together three categories: gross income from interest, dividends, annuities, royalties, and rents; gross income from trade or business in which the individual is passive; and the net gain from disposing of property. In step two, the individual subtracts deductions designated for the types of gross income and net gain. These deductions include but are not limited to, income derived from ordinary course of trade or business in which the individual is active, gains on properties held in a trade of business in which the individual is active. This is where professionals can help you determine if the income is from active or passive investments.

Not Subjected to NIIT

The following are items that are exempt from the NIIT:

  • Tax Exempt income
  • Wages, unemployment compensation, alimony, Social Security benefits, and income subjected to self-employment taxes
  • Gain from the sale of a principal residence
  • Distributions from tax-favored retirement plans

For high-income individuals, the tax system is not two-dimensional. Taxpayers are governed by income tax and NIIT. To have a better idea how this might affect you, contact us for more information.


Paying Down Credit Card Debt

Credit Cards are a necessity in today’s society, but that does not mean that they have to rule your life. If you are facing mountains of debt, the thought of getting rid of it can be overwhelming. Unfortunately, there is not a quick fix to reducing the amount of debt. There are, however, tried-and-true methods to paying off debt that if you stay focused and committed will help you achieve your financial goals.

The Snowball Method

This method is more about behavior modification then math. The idea behind it is to pay down debt from the smallest to the largest regardless of interest rates. Once you pay off the smaller debt you take the payment from that and add it to the next smaller debt’s payment until it is paid off. The pros of this method is you are motivated every time you pay down to a zero balance. The cons of this method it is not the most financially sensible, but it does get the job done if you can stay focused.

Pay the Most Expensive Balance First

This is great for someone motivated by numbers. You find the account that has the highest interest rate. This is usually the one doing the most damage to your finances. So focus on this account by reducing the payments of the other accounts, and adding the extra to the highest interest rate account. The pros is you will save more money over time. The cons are you have to be very focused and stick to the rigid plan.

Do a Balance Transfer

When deciding to transfer money from one card to another there are several things to consider so have a calculator handy. The first is how much is the fee to transfer the money? The interest rates have to be lower than you are currently paying and the transfer fee needs to be low. The pros for this method is you will save money over time on interest and you can pay off the principal faster. The con is opening a new credit card can hurt your credit score and if not discipline you can run up more money on the newly cleared card. Stay focused and pay down the balance transfer.


Developing a Personal Cash Flow Strategy

We all know that money make the world go round. It is important to have enough money to meet your day-to-day needs and to support you current cash needs. Developing strategies to help generate the flow of cash is important in determining how much cash flow you will have. Developing a personal cash flow helps people maintain their lifestyles and focus on their needs.

There are benefits to having a personal cash flow strategy. It help maintain your lifestyle, you can increase charitable giving, or pass money to heirs. With the appropriate strategies, you can keep a cash flow regardless of the current market cycle, and meet your ongoing cash needs. There are seven steps to help increase and maintain your cash flow:

1.       Define Your Cash Goal: Focus on what you need from day-to-day, week-to-week, and month-to-month. Set financial goals that you are comfortable with and that fit your basic needs and lifestyle. You should set a target amount and establish a date when you want to reach the goals you set. You can set short term that last only months or long-term goals that could last decades.

2.       Define Your Source of Cash: List all the source you expect to receive money from, other than your financial assets, with the amounts and dates for each source. This could be a paycheck, social security, etc.

3.       Define You “Number”: This is your target number that will allow you to be comfortable and pay your bills on time. This number should also include a cushion that could sustain you for six months to two year depending on how much of a cushion you feel you need to sustain your lifestyle over the time.

4.       Define Your “Window”: The “window” is the amount of time you must be “locked-in” to your cash flow for you to feel comfortable that you will be able to maintain your lifestyle. You don’t want a down turn in the market to make an abrupt change in your lifestyle.

5.       Develop an Investment Strategy: Talk with an advisor to help you figure out what would be the best course of action for investments. Establish your risk tolerance, and what would be an acceptable minimum return for each investment. 

6.       Implement and Monitor You Wealth Plan: This is the step where you monitor and adjust you investments to get the cash flow you planned. You can allocate funds into different investments and review the performance making sure that your goals are in track and completed in the time allotted.


529 Plans and Saving for College

What is a 529 plan? Good question, right? This time of year is the perfect time to ask that question. It is back to school time and many student and parent wished that they had started a 529 plan a long time ago. The good news is you can start a 529 plan at any time, but the earlier you start the better.

Ok, back to the first question. A 529 plan is an education savings plan operated by a state or educational institution that helps family set aside money for future college costs. It is named after the section in the Internal Revenue Code that created the saving plan in 1996. A 529 plan can meet the costs for many colleges nationwide. A 529 plan is not affected by the state you saving plan is from. You can be a resident of VT, invest in a KS CA plan and send you student to a NC college.

Nearly every state has a 529 plan available, many offers more than one type and it is up to you to determine which is best for your family. Each state decides whether to offer a 529 plan and also how it looks. It is best to research the features and benefits for each plan before you invest. There are some benefits regardless of where you live. Some are:

  • The distributions that pay for the beneficiary’s college comes out tax-free
  • Many states offer tax breaks in addition to the federal treatment
  • Donor retains control of the funds
  • Low maintenance
  • Simplified tax reporting
  • Flexible
  • Substantial deposits are allowed

The 529 saving plans re categorized as either a prepaid or a savings plan. The savings plan is much like a 401K or IRA. You invest contributions into mutual funds or similar investments and your account will go up or down based on the value of the performance of the option you selected. The prepaid option lets you pay for part or all of the cost of instate public college costs. They may be converted for use at private or out-of-state colleges, but there is a separate investment plan for private colleges.


Too Much Debt

Having debt is sometimes a difficult burden. It looms over your head and follows you around like an angry cloud just waiting to rain on your parade. What happens when debt becomes too much, do you stop paying? Do you get a second job? A third job? It debt reconciliation a possibility? In a recent study by the Urban Institute, they found that around 35 percent of adults have debts in collections reported in their credit file.

So what exactly does “debt in collection” mean? Debt in collection involves a nonmortgage bill, such as a credit card balance, child support obligation, medical or utility bill, parking ticket, or library fines, that has been reported so far past due that the account has been closed and placed in collections. When bills are placed in collections, it is often with a third party collection agency. Those debts can hurt a person’s credit for seven years because every time a debt goes to collections it remains on your credit report for seven years. So consumers only become aware of this when they review their credit report.

So is there a way to avoid collections? The answer seems simple. Just pay your bills, but it is never that simple. For some people it is the difference between feeding their family and paying a bill. The bill would come last. There are many reasons why someone does not pay a bill in a timely manner, but it does not keep up from accumulating debt. Many Americans do  not even think twice about carrying some debt, many do not know how much they actually have in debt.


Preparing a Budget for a Nonprofit

For any organization, profit or nonprofit, it is important to establish a operational budget. The operational budget is the foundation for your work and how it will be carried out over the next year or even several years. You will be able to establish benchmarks for your organization, gauge the financial health from year to year, and determine what the organization’s priorities should be.

When developing your budget keep in mind the following:

  • Establish the budget period. Is it one year or multiple years? Determine how many years your budget needs to cover. If it needs to be more than a year at a time establish the intervals and reasoning for the multiple year budget.
  • Analyze financial performance and program achievements from the prior year. This gives you the opportunity to adjust your focus for programs that are doing well or other that may need a boost.
  • Set program and organizational goals. Once you determine what the performance was for last year, you can project what the performance should be for the coming budget period.
  • Estimate expenses. Every expense should be analyzed including fixed costs such as tax, rent, utilities, etc. and variable costs that fluctuate based on number of clients and environmental factors, and incremental expenses that only occur when a particular action is taken. The variable costs are the most challenging to predict, but they can be based on the last budgetary period or on a short/long range plan established by the organization.
  • Estimate anticipated revenue. Base what revenue off last budgetary period and then adjust for an increase or decrease based on prediction for the upcoming period.
  • Plan for needed cash flow and develop cash reserves. It is important to have the necessary cash for the day-to-day operation of the organization. Having a healthy cash flow and cash reserves can be beneficial for more than emergencies.
  • Adjust to align expenses and revenue. Make any adjustment necessary to maintain a positive budget and healthy cash flow for the organization.

When your budget is established, it is easy to see how the money flows through the organization and areas where refinement is necessary. The most important part to keep in mind is how much money you will raise. It is easy to say you will raise a lot of money, but it is important to be realistic when setting your goals and projections.


IRS Releases Rollover Guidelines

For many people, a 401(k) offers a way to save money for retirement. Last year was the first year that people under the retirement age were allowed to rollover investments into an IRA account. The IRS has issued guidelines to employers whose 401(k) plans offer Roth accounts rollovers for contributors younger then retirement age.

The key part that governs the rollovers for participants under the retirement age of 59 ½, is how the rollover occurs. Participants can only rollover money into an IRA account directly, and because the distribution of funds is not allowed, the 60-day rule does not apply.

The IRS is allowing time for the sponsors of such plans to amend their plans to allow rollovers. The amendments must be made by December 31, 2014. This time can also be used to allow sponsors to have participants elect to have salary deferrals into their Roth.

The IRS advises sponsors on the following to make the process simpler and easier to implement:

  • Restrict the types of contribution and eligible balances for Roth rollovers. This can help avoid the burden of tracking all the distributions for some or all of the Roth balances.
  • Have a clause where sponsors can eliminate the in-plan rollover at any time as long as it does not discriminate in favor of highly compensated employees.
  • Favorable tax treatment only applies to Roth distributions made after five years front eh date the Roth was established.

Super-Funding College Saving Plans

We all know that college is expensive. It can cost upwards of $41,000 a year for private four-year college and $18,500 for a state college. Because of the high cost of college many wealthy clients are taking advantage of 529 college saving plans and the special rule that allows contributors to front-load five years of savings in one year.

The 529 college saving plan are a great way to save for college. The plan allows a parent, grandparent, etc. to establish a college fund for each child. This fund can be used to pay for college, but does not have a timetable on which the money has to be spent or withdrawn. It is a great way to save for college and can be included in estate planning.

There is currently a special rule that governs how contributions can be made. This rule allows contributors to front-load five years of savings in one year. So for clients, that means they can set aside 14,000 at the end of one year (in December) and then in January they can contribute another $70,000 for each would-be scholar. This is a grand total of $84,000 per child.

This strategy allows wealthy clients to take substantial amounts of money out of there estate without facing penalties from the IRS. If the money or part of the money is not used then the account can be transferred to another child, or the funds can be withdrawn. If the funds are withdrawn then there is a 10% penalty and taxes on the earnings.

There is one drawback. If the account is owned by the college student or their parents this counts as an asset and reduces the need-based aid by a maximum of 5.64% of the asset’s value. If the plan is in the name of the grandparents it will not affect the federal financial aid application, but the withdrawals made on the account do count against the aid needs and have a large consequence.

While this plan is good, very few can afford to do contribute that much at a time, but contributions can be made in December and then again in the spring with tax refunds. It just matters that you do something then wait until it is too late.


Tax Tips for End of the Year

It is that time again, the end of the year is approaching and then it is tax time, but why wait to think about taxes in January, when there is still time this year for some last minute adjustments. By using last year’s tax return as a starting point, you can evaluate and make changes that could positively change your taxes for 2014. The following at steps and planning strategies to consider when review finances at the end of the year.

  • Double Check Withholdings: You do not want to pay the IRS anymore that you have to. Adjust your withholdings so just enough comes out and you break even. If you can live without the extra pay coming in, put it in a savings account or add it to you retirement account.
  • Refinance Debt: Lowering your mortgage interest rate, not only give you a lower interest rate and payment, but if you use any of the proceeds to make physical improvements to your home, the amount could be subjected to alternative minimum tax (AMT).
  • Prepay Taxes: If you are not subject to ATM, consider prepaying estimated quarterly state taxes and property taxes. If you are able to prepay, the deductions can be taken for the 2013 return if paid before December 31.
  • Avoid ATM: If you live in a high tax state, have a duel income, and have children you might want to look at your chances of paying the alternative minimum tax. To avoid paying this tax, you should talk to you tax professional, but also consider deferring payments of state and local taxes until the new year, and accelerate you income to the point where you are no longer subjected to the tax. In many situations, this is a multiyear planning, so now is a good time to start.
  • Check up on Portfolios: Harvest any losses to help offset capital gains, rebalance any tax-deferred retirement accounts by allocating funds for the accounts, and consider your cash flow.

It is important to act before the end of the year if you are wanting the deductions for January taxes, then now is the time to act. Anything paid on or after January 1 will be on next year’s taxes.


A Change to Flexible Spend Accounts

At the end of October, the Treasury Department and the Internal Revenue Services announced a change to the 29-year-old rule that requires participants of flexible spending accounts to use their balances or forfeit the balance at the end of the year. The much-needed change is a huge step forward for hard-working Americans who use the money to pay for health care expenses throughout the year.

The modification to the ‘use-it or lose-it’ rule now allows participants to rollover up to $500 at the end of each year. The Treasury Department predicts that this modification will cut back on wasteful spending at the end of each year. For many people, the rollover option will be very helpful because the accuracy of what goes into the account will not have to be so precise, they will have some flexibility.

Employers will be given an option at the end of the year. Right now, they have the option of giving flexible account participants a 2 ½ month grace period for their account. They will then lose all the money at the end of the 2 ½ months. The other option is the $500 rollover. The rollover does not have a limit on the time, and can be carried over each year as necessary.

There are a few critics of the new plan that include people who would like to see the entire balance rollover instead of just $500, but the overall response to the new proposal is surprise and pleasure. The Treasury Department and IRS are moving in the right direction, and many people are welcoming the change.