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Client Newsletter
1040
Federal
Sch. A
540
California
Itemized
Deductions
2106
Sch. B
Employee Business
Expense
Dividend &
Interest Income
3903
Sch. C
Moving Expense
Business
706
4684
Sch. D
Casualty Losses
Stock Sales
Estate
709
Gifts
Sch. E
8582
Passive Losses
Rentals &
Partnerships
LEONARD W. WILLIAMS, C.P.A.
A PROFESSIONAL CORPORATION
1307 South Mary Ave., Suite 250 • Sunnyvale, CA 94087
(408) 736-1566 (phone) • (408) 733-8190 (fax)
www.LWWilliamscpa.com
December 2014
Reminder: We
Have Moved
Personnel
Changes
2014 Tax
Legislation
We’ve put the word out a couple of
times, but we still get cell phone
calls from clients who are at our
old location and wonder why there
is only vacant land there.
We welcome the following new
employees.
So far there has been no new tax
legislation for 2014, although there
were truckloads of new tax laws
at the end of 2013. Those were
highlighted in the December 2013
Client Newsletter.
The move was forced because the
prior building was sold and demolished. Simultaneously, office rents
increased dramatically, far more
than we had anticipated, so we’re
looking for more clients to take up
the slack. The new CPAs listed under Personnel Changes in the next
column are available to see more
clients, and your recommendations
will be appreciated.
Once again, our new address is 1307
South Mary Avenue, Suite 250 in
Sunnyvale. We’re just south of Fremont Avenue, the next building over
from the Indian restaurant. Enter
via the Mary Avenue entrance.
There’s an elevator just inside, on
the right, and we’re on the second
floor, just a few steps to the right
as you step off of the elevator. Alternatively, there’s a stairway just
inside the door, and our office is to
the immediate left as you reach the
second floor.
There is no mail slot in our door, so
‘homework,’ IRS notices, etc. should
be delivered to us via snail mail,
fax, or e-mail.
James Park, CPA, EA, has joined
us to take the place of Elaine Raitt
and Paul Schechter. He has an
accounting degree from San Jose
State University and a M.S. in
Taxation from Golden Gate University. He began his career with
one of the international CPA firms
and has worked in the tax departments of some well-known Bay Area
companies. He also has developed
a specialty in estate and fiduciary
matters, which qualified him to
fill Elaine’s boots. For continuity,
Patti Cohen, EA, who was Elaine’s
technical assistant, will also be assisting James.
In February, we will welcome back
Bruce Pajak, CPA, to replace Keith
Kreider. Keith had originally come
to replace Bruce when Bruce’s late
wife contracted cancer and Bruce
left to care for her.
Keith Kreider moved to Montana,
and Mary King left for a job that
would require fewer hours.
Also in February, Jenny Barnes, EA
will join us. Jenny has a M.S. in
Tax, as well as engineering degrees.
She will replace Mary King.
1
Table of Contents
Topic
Page
Reminder: We Have Moved
1
Personnel Changes
1
2014 Tax Legislation
1
Safe and Sane Year-End Tax Planning 2
Tax Planning / Tax Projections
3
What to Do with an Old Car
3
The Affordable Care Act and Its Fallout 3
Business Licenses
3
Minimum Required Withdrawals from 4
IRAs, 401(k)s, Keoghs, Pensions
IRA Custodian or Advisory Fees
4
FDIC Insured Bank Accounts
4
A Bank Account for Your Business
4
Wills, Trusts, and Property Titles
5
Electronic Tax Organizers
5
Moving? Be Sure to Tell Us
5
Our Web Site and Newsletters
5
Laughter Is the Best Medicine
6
Appointments January - April
6
Speaker Available
6
Storage Space Available
6
Yes, We’re Taking New Clients
6
Seasons Greetings
6
Safe and Sane Year-End Tax Planning
No Universally Applicable Rules
There are virtually no universally
applicable rules anymore when it
comes to year-end tax planning.
Because of the booby traps of the
alternative minimum tax, the 3.8%
surtax on investment income, the
.9% Medicare surtax on incomes
above a certain level, and even
the change in the capital gains tax
rate above a certain income level,
year-end tax planning is more of
an individual thing than it ever
has been before.
At one time there was a whole
industry of those who advocated
aggressive planning via ‘tax sheltered’ investments. However,
Congress, the IRS, and the courts
have aggressively fought most of
those to a standstill. In addition,
the overwhelming majority of those
who bought those syndicated limited partnerships never saw their
money again, because the so-called
investments actually were of little
or no investment value.
401(k), SEP, Pension, and/or
Profit Sharing Plan
For those in the working world,
whether salaried or self-employed,
maximizing your contributions to
your 401(k), SEP, pension, and/or
profit sharing plan is the best.
Prepaying Property Taxes
For those who own rental property
that shows a profit for tax purposes,
prepaying property taxes and recurring operating expenses is a
good move. The same applies if the
property shows a loss and one qualifies as a ‘real estate professional.’
However, pre-paying the taxes on
one’s home or vacant realty held
solely for investment might exacerbate an alternative minimum tax
problem. To estimate the likelihood
of whether or not you’re in the alternative minimum tax, look at your
2013 Form 1040, page 2, line 45. If
that is blank, and you have no longterm capital gains for 2014, then
it’s unlikely that you will be in the
alternative minimum tax for 2014,
so it probably won’t hurt you if you
prepay your April property tax. On
the other hand, if there is a number
on that line, then you were in the
alternative minimum tax for 2013,
and there’s a high likelihood that
you’ll be in it for 2014, so don’t prepay
your April property tax installment.
Charitable Contributions
Charitable contributions usually
don’t have any untoward side-effects unless one’s adjusted gross
income is over $305,050 for married
couples filing jointly or $254,200 for
singles. At that point, additional
computations must be made to determine whether or not there will be
a phrase-out (i.e., reduction) in the
total of one’s itemized deductions.
Watch out for these booby traps
in receipts from charities, because
many charities seem to be unaware
of it: The receipt must state, ‘no
goods or services were exchanged in
return for the contribution.’ There
have been several court cases, involving both large and small contributions, where the taxpayer lost
the deduction because the receipt
from the charity didn’t have those
words. Sounds petty, and it is, but
it nevertheless is the law and has
to be followed.
Taxpayers must have receipts in
hand when their returns are filed.
Receipts obtained later, in preparation for an audit, may cause taxpayers to lose the deduction.
Cash contributions are limited to
50% of one’s adjusted gross income
for the year, but the excess will
be carried forward to subsequent
years.
2
Charitable Contributions
from an IRA
The provision that allowed those
over age 70.5 to make charitable
contributions directly from their
IRA accounts has not been extended
for 2014 tax returns yet, but it might
be before year’s end.
Donation of Appreciated
Assets to a Charity
Not many clients have used this
provision, but the donation of appreciated assets to a charity is more
tax-efficient than selling the asset
and giving the charity a check.
Warning: If donating unlisted securities, books, or a ‘thing’ valued
at more than $5,000, an appraisal
is required.
Gifts to One’s Children
or Other Individuals
There is much confusion about gifts
to one’s children or other relatives,
but there is not now, nor has there
ever been, a deduction for gifts to
individuals.
The $14,000 gift tax exclusion that
is broadcast far and wide simply
means that a taxpayer may give
away that much without having to
file a gift tax return, but there is no
deduction for that $14,000. That’s
$14,000 per individual, so a married
couple may make a gift(s) totaling
$28,000 without having to file a
gift tax return, but the details are
beyond the scope of this newsletter.
If the total gift or gifts exceed those
levels, then one is eating into his or
her lifetime $5,340,000 (for 2014;
5.43 million in 2015) exemption from
estate & gift taxes. A gift tax return
must be filed, but no check has to be
written until the cumulative total
of all gifts exceeds $5.34 million.
Tax Planning / Tax
Projections
This time of year, our office does
tax planning and/or tax projections. In two recent examples, we
helped clients determine whether
they needed to make or increase
estimated tax payments to avoid
underpayment penalties.
What to Do with an Old Car
Should I trade-in my old car when
I buy a new one, or donate it to a
charity? That’s a common question.
Here are some guidelines for making an informed decision.
Get the price for the new car with
and without a trade-in. The difference, of course, equals the value of
the trade in.
If you donate the car you’re disposing of, you may deduct, as a
charitable deduction, the value
stated on the Form 1098-C that the
charity gives you, but that’s not a
dollar-for-dollar reduction in taxes.
The actual tax savings will equal
your tax bracket (federal + state)
multiplied by the value.
One client had considerable income
this year from short-term stock
trading and wanted to increase her
estimates to cover the tax liability.
We started the projection by looking
at her 2013 tax return, which we
had online. As it turned out, the
client had a substantial capital loss
carry-forward from 2013, which was
adequate to offset the gains she had
so far in 2014. There was no need
to increase her estimates.
In the second example, the clients
had a lot of income from various
sources and questioned whether
to make estimated tax payments.
Their tax picture was more complicated, requiring more than a
quick look at their 2013 tax return.
However, using a tax projection program, we were able to look at their
2014 tax picture and allay their
fears of underpayment penalties.
You can find your tax bracket by
looking at the ‘Income Tax Summary’ that came in your 2013 tax
package from us. Your marginal
tax bracket is at the bottom of those
sheets (one for federal and one for
state). Use the ‘marginal’ tax rate,
not the ‘effective’ tax rate.
The Affordable
Care Act and Its
Fallout
Something new for 2014 will be
a tax on people who don’t have
health insurance that meets the
requirements of the Affordable
Care Act. Those on Medicare are
exempt. To avoid the tax, people
need to have been covered by an
approved policy for 9 months during
2014. The penalty is either a flat
amount or 1% of income, whichever
is greater, subject to certain limits.
For a list of exemptions, go to the
IRS website, www.irs.gov. See Fact
Sheet 2014-09.
3
For example, assume that one’s
marginal rate is 25% for IRS purposes and 8% for California purposes. Then one’s total marginal
tax rate is 33%. So if the car being
donated is valued at $4,500, the tax
saving will be $1,485 (.33 x $4,500 =
$1,485). (If the value is more than
$5,000, an appraisal is required.)
Compare the trade-in value with
the after-tax saving from the contribution, and go with the one that
saves the most money.
In another example, a client recently went through the calculation
above when replacing his car. The
trade-in value of the old car was
$10,000. If he wanted to donate the
car, he would have needed a charitable valuation of over $23,000 to
save $10,000. Since that valuation
would have been unlikely, trading
in the car instead turned out to be
the best option.
Business
Licenses
Not all cities require business
licenses, but the City of San Jose
requires them for all businesses,
including rental properties. So if
you own a business or rental in San
Jose, contact the City of San Jose
Business Tax Office at (408) 5357000 for the requirements.
If you have a business or rental
property somewhere other than
San Jose, check with the applicable
city treasurer’s office to determine
if a city business license is required.
Jurisdictions are getting lists from
the Franchise Tax Board, which
has gleaned who owns a business
or rental in which city. Those jurisdictions then contact those owners
for licenses, penalizing them if they
don’t have one.
Minimum Required Withdrawals
from IRAs, 401(k)s, Keoghs, Pensions
Taxpayers must begin withdrawing
from most types of pension, profit
sharing, and IRA plans by April 1
of the year following the year in
which they turn 70.5. Taxpayers
who turned 70.5 in 2014 will have
to begin those withdrawals in 2014.
They may postpone that until April
1, 2015, but then they’ll have to take
two distributions in 2015: one for
2014 and one for 2015.
Computing the required withdrawal used to be complex, but the IRS
has simplified the process and also
lowered the amount that must be
taken each year. To compute the
minimum required withdrawal for
any year, take the balance in the
account as of December 31 of the
prior year, then divide it by the applicable divisor from the table below.
The divisor for other ages may be
obtained by request from this office.
(Use the December 31, 2013 balance
for 2014 computations, but use your
December 31, 2014, age.)
Note: There is one booby trap.
This isn’t new; it’s been around
for years. Although the minimum
required withdrawal from one’s
IRA accounts may be taken from
a single IRA account, the required
withdrawal from a 401(k), Keogh,
or corporate pension plan may not
be taken from an IRA account. It
must be taken from one of the latter plans.
There is a different table if the
spouses are over ten years apart
in age.
If you’re about to begin your minimum
required withdrawals, and you have
had both deductible
and nondeductible
IRAs, we’ll need to
know how much
was contributed to
each. Also, there
may be differences between what
was deductible for IRS and what
was deductible for California. So
we need a history of your IRA
deductions for federal and state
purposes. Don’t wait until the last
minute to compile the information.
Start now, and contact us if you’re
having trouble.
IRA Custodian or
Advisory Fees
FDIC Insured
Bank Accounts
A Bank Account
for Your Business
IRA custodian and/or financial
advisory fees are deductible on
Schedule A of one’s Form 1040, but
there are two catches. First, the
fees must be paid via check or cash;
if they merely are deducted from
the account, they aren’t deductible.
(This first rule does not apply to
non-IRA accounts.) The second one
isn’t new, and that is the fact that
the fees are miscellaneous itemized
deductions, and the total of one’s
miscellaneous itemized deductions
must exceed 2% of one’s adjusted
gross income to be deductible.
There are many misunderstandings abut how much is covered by
FDIC (Federal Deposit Insurance
Corporation) insurance bank accounts and under what circumstances. The FDIC has a pamphlet
on it, available on line at http://
www.fdic.gov/deposit/deposits/insured/print/yid_english.pdf.
Are you starting a new business
or forming an LLC, corporation, or
partnership? By all means, open
a new bank account in the name
and tax identification number of
the venture. When IRS audits a
business, the fact that there’s no
separate business account weighs
against the taxpayer and can result
in the loss of the tax benefits sought
via the LLC, corporation, or whathave-you. Be especially careful to
avoid paying personal expenses or
expenses for another business from
a corporate account.
The IRS may levy penalties for failing to take the minimum required
withdrawal. It is usually best to
begin in the year that one turns
70.5 because postponing it to the
following year means that two withdrawals must be taken that year.
The impact of that could be moving
into a higher tax bracket.
Age Divisor
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22.0
77 21.2
78 20.3
79 19.5
Age Divisor
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12.0
4
Wills, Trusts, and
Property Titles
This is a
reminder
that everyone needs to
keep his or her
will, living trust,
joint tenancy designations, beneficiary designations, and property
titles up to date.
An attorney is the proper person
to write a will and/or living trust
and also to give advice regarding
property title forms. To have anyone
other than an attorney write such
documents or give advice in these
areas falls into the same category
as having golf pros do brain surgery.
If you don’t have an attorney, we
can give you the names of several
with whom we’ve worked over the
years. They all are bright and honest. Any referrals that we make are
just that—referrals; we receive no
kickbacks, finder’s fees, or anything
else other than freeing ourselves of
headaches downstream when those
documents have been prepared by
amateurs instead of lawyers.
Horror stories abound of people who
have been divorced for years, but
estate documents still designate
their ex-spouses as the beneficiary
of their IRAs or as the joint tenant
on the real estate, bank accounts,
or stock brokerage accounts. Joint
tenancy with right of survivorship
(JTRWS) will override any other
title form, living trust designation,
or will. The property will pass to
the person(s) designated as being
the joint tenant(s) irrespective of
any other legal document.
In a marriage, there generally is a
tax benefit to the surviving spouse
for appreciated property held in the
title form of ‘community property.’
California added a new property
form a few years ago of “Community
Property with Rights of Survivorship.” This has produced some
unintended consequences so, once
again, it isn’t the quick-and-dirty
answer to all situations.
The bottom line is see an attorney to
get your estate planning documents
prepared properly and/or updated.
Electronic Tax
Organizers
Moving?
Be Sure to Tell Us
Electronic tax organizers will be
available in January. This Windowsbased program is a convenient way
to fill in your organizer and email
it back to your preparer.
Be sure to notify Paula Holcomb,
the office administrator, of any
change of address. She will send
you the appropriate forms to sign
and mail to the IRS and Franchise
Tax Board.
If you would like an electronic tax
organizer this year, please notify
your preparer. You can email your
preparer using his or her last
name at our domain (for example,
[email protected]).
If you received an electronic tax
organizer last year but don’t want
one again this year, let your tax
accountant know that also.
Every once in a while, some poor
soul winds up having a lien placed
on his or her bank account by the
tax authorities because correspondence went to the wrong address.
Then it takes a lot of time and
money to unravel the mess.
5
Our Web Site
and Newsletters
Send Us Your
Ideas and Requests
Our newsletters often contain articles requested by our clients. If
there’s a subject you would like to
see addressed on the web site or in
future issues of the client newsletter, send your idea to Leonard at
[email protected]
or mail it to the office. Jokes are
always welcome as well.
Articles of Interest from
Previous Newsletters
You can obtain recent client
newsletters by downloading them
from our web site or by requesting
them from Paula Holcomb at
[email protected].
View previous newsletters at
www.LWWilliamscpa.com
Disclaimer
The information in our newsletters
and web site is general in nature;
no transaction should be completed
without a professional consultation
on its ramifications.
Please Pass It Along
Please pass this newsletter along
to a friend or colleague when you
have finished. You can also print it
from our web site, send your friends
or colleagues a link to the web site,
or phone the office for an extra copy
of the newsletter.
Laughter Is
the Best Medicine
and Assorted
Words of Wisdom
A bank is a place that will lend you
money if you can prove that you
don’t need it.
✦
How is that one careless match
can start a forest fire, but it takes
a whole box to start a campfire?
✦
✦
✦
All the politicians running for office are promising change to the
American people. We send them
billions and billions of tax dollars
and they send us the change.
✦
✦
✦
We could certainly slow the aging
process down if it had to work its
way through Congress.
– Will Rogers
✦
✦
✦
Whenever I fill out an application,
in the part that says “In case of
emergency, notify:” I put “a very
good doctor.”
✦
✦
✦
Storage Space
Available
Leonard and a friend rent a warehouse to store their fire engines and
surplus equipment. There is space
available for antique autos, RVs,
boats, etc. If you are interested,
contact Cliff Smith at (408) 5594842 or [email protected].
✦
✦
Why does someone believe you
when you say there are four billion
stars, but check when you say the
paint is wet?
✦
✦
✦
Lexophile is a word used to describe
those who have a love for puns, such
as “you can tune a piano, but can’t
tuna fish,” or “to write with a broken
pencil is pointless.” The following
are other examples:
•A boiled egg is hard to beat.
•When you’ve seen one shopping
center you’ve seen a mall.
•A bicycle can’t stand alone; it’s
just two tired.
•When a clock is hungry, it goes
back four seconds.
Appointments
January - April
To accommodate clients in a
timely manner, we pre-schedule
tax appointments and notify you
by mail. If the scheduled time is
not convenient, please phone the
office and we will gladly schedule
something else.
Yes, We’re Taking
New Clients
As noted on page 1, we are seeking
additional clients this year. This
business was built primarily by
referrals, and your continued referrals are appreciated.
Seasons
Greetings
We extend our greetings for the
holiday season.
We will not be closed over the December holidays, although some
staff members will be taking vacation time.
Speaker Available
Do you need a speaker for your
civic, professional, or church group?
Leonard Williams is a well known
speaker on almost any tax subject.
His most popular tax talk is an
estate tax update in lay persons’
language. Alternatively, Leonard
has a slide show on his fire engine
collection; over the years, groups
have found that fascinating.
Note: Due to the demands of tax season, this service is generally available only from April 16 through the
third week in January.
6
May your troubles be less, your
blessings be more, and nothing but
happiness come through your door!