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Estate and Elder Law

McNees Insights On Estate Planning


By David M. Watts, Jr.

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later). These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up to $2 million of mortgage debt forgiveness on a principal residence.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year; others should try to see if they can reduce MAGI other than NII, and still other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from some of them.

Year-End Tax Planning Moves for Individuals:

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
  • Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases it may pay to actually accelerate income into 2015. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2016 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.
  • If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
  • It may be advantageous to try to arrange with your employer to defer, until 2016, a bonus that may be coming your way.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015 if you won’t be subject to the alternative minimum tax (AMT) in 2015.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.
  • Estimate the effect of any year-end planning moves on the AMT for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses, and other itemized deductions.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70- 1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016—the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you can make yourself eligible to make health savings account (HSA) contributions by Dec. 1, 2015, you can make a full year’s worth of deductible HSA contributions for 2015.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Safeguard Your Finances From Online Threats

By Devin J. Chwastyk

Cybercrime is among the top concerns today for our business clients, but limiting the risk of identity theft should be a topic you consider at home and with your family, as well as in the boardroom. This article will provide some practical advice that you can follow to limit the risk of exposure of your financial accounts or other personally-identifiable information to hackers.

In 2014, an estimated 1.02 billion personal or financial records were exposed as a result of more than 1,500 data breach incidents nationwide. That translates to an astounding 32 records per second over the course of the year. Many of these records are deliberately hacked by criminals, largely based overseas and beyond the reach of American law enforcement. But records can also be exposed by the mere negligence of those organizations to which you entrust your financial and other personally-identifiable information, such as when records are improperly stored or discarded.

So there are good reasons why 88% of consumers say they are concerned about their online accounts being hacked. Exposure of personal information does not just risk fraudulent transactions, it also puts an enormous burden on those affected: victims of identity theft spend an average of 100 hours–and hundreds of dollars–resolving the impacts of such intrusions.

In light of these facts, many organizations are realizing that, despite their best efforts, security breaches are unavoidable. That’s why McNees has formed a dedicated Privacy and Data Security Law practice group, which combines lawyers from across our firm to assist our organizational clients in developing data security policies, managing compliance, and assisting with a response if a breach occurs.

But there are common-sense measures you and your family can take to safeguard your personal information. From our privacy lawyers, here are steps you can take to protect yourself and your assets:

  1. Consider what personal information you have to protect
    “Personally-identifiable information” generally is defined to include your name, in combination with one of the following: your Social Security number; your driver’s license or state identification number; or, your financial account information (such as a debit or credit card number or bank account number), with or without a security code or password. In some instances, other personal information, like your mother’s maiden name, your address, or your phone number, might be considered personally-identifiable information.
    Certain organizations may require such information to perform services for you, including your bank, investment advisor, lawyer, or doctor. But consider carefully before you entrust your personal information to anyone. A great way to limit the risk to your information is to limit the number of places where it is stored and could be discovered.
  2. Use strong passwords and keep them secure
    Hackers laugh at most of our passwords, and not just “weak” efforts like “password” or “12345.” They use sophisticated programs that can test thousands of English and foreign words in an instant. If your password is eight characters long and all in lower-case, such as “puppydog,” it would take under four minutes for a hacker to crack.To make your passwords more secure, make them longer and more complex. First, consider using a phrase that you will remember, i.e. “pledgeallegiancetotheflag.” Then, incorporate upper case letters, numbers, and symbols --- “PleDGEa11egiance2THEflag,” for example. This type of long, complex password would take thousands of years to crack.Then, to keep your passwords secure, do not disclose them to anyone and do not store them anywhere they might be found (like on a sticky note in your desk drawer). And use different passwords for different websites or accounts. If you might have difficulty remembering different passwords, consider using an online password manager, such as Dashlane or LastPass. You create one password for their service, and it will create randomized passwords for each website that you visit on your computer.
  3. Talk to your financial institutions about authentication procedures for business and personal account and wire transfers
    Many people think that banks are required to reimburse customers for fraudulent transactions. Although that is mostly true for fraudulent credit and debit card transactions, it is not the case for bank account and wire transfers. Under state law, financial institutions can create reasonable policies to authenticate a customer’s identity before processing a bank account or wire transfer. So long as those procedures are followed by the bank, it is the customer who is on the hook for any losses due to fraudulent transactions.One common identity theft scheme is “spoofing” such wire transfers, and it has cost victims more than $1 billion dollars in the last two years, according to the Secret Service. It works like this: your business regularly transfers funds from its bank account to your accounts, or those of your customers or business partners.

    Your bank requires some authentication before processing those transfers; most often, they will require verification by telephone or e-mail. Hackers, using information gleaned from your business’s e-mail accounts, steal account information and then are able to identify the individuals responsible for such verifications, perhaps your assistant or business manager. The hackers input a wire transfer from your business account to their sham account, often overseas. Then, the hackers find a way to spoof your verification. This could be done by faking an e-mail from you to your business manager, instructing them to approve the transaction. Hackers might even know, from illicitly accessing your electronic calendar, that you are on vacation, making it less suspicious that you are providing such instructions to employees by e-mail and ensuring that you will not be in the office to disrupt their scheme. Or, the fraudsters might electronically intercept the bank’s e-mail or telephone call to you, and provide the bank themselves with the verification password they’ve stolen from your system. The bank believes you have verified the transaction and processes the wire transfer. Once the money has left your account, it is often difficult or impossible to recover, and the bank is not required to and likely will not reimburse you for the stolen funds.How can you prevent this common scam? First, talk to your financial institution about their control processes for wire transfers. Authorize them to put as many controls as possible on transfers from your account, including two forms or sources for verifications. And make sure your employees know about this scam, and know that you will never instruct them to conduct or verify a large wire transfer by e-mail or without direct authorization.
  4. Use multiple e-mail accounts for different purposes
    Think of all the personal information a hacker would find if they broke into just your e-mail service. Most of us have in our inboxes and trash folders e-mails from our banks or investment statements, together with business and personal correspondence, which would reveal a trove of personal information, such as account numbers, addresses, phone numbers, and names of family members.To limit that risk, use separate e-mail accounts for different purposes, such as: one for friends and family, one for business correspondence, one for online shopping websites, and one for your financial institutions. Should one be compromised, your exposure will be greatly limited.
  5. Avoid unknown Wi-Fi hotspots
    Wireless data connections are a great convenience, but you cannot know whether a public hotspot is secure. When you connect your phone or laptop to a wireless network, you cannot know whether the wireless router has been updated to maintain its security. And the names of Wi-Fi networks can be “spoofed,” so the network that appears to be offered by your favorite coffee shop might instead connect to a hacker’s computer nearby.

    Accordingly, limit your use of public Wi-Fi. Turn off any “auto-connect” features on your phone and computer so that it will not connect to a network without your authorization. And never use hotspots for banking or shopping transactions, or transmitting any information that you want to keep private.
  6. Secure your home network
    If you have a Wi-Fi network at home, there are steps you should take in setting it up to protect yourself. First, change the default name and password that came installed on the router and use a complex new password instead. Make sure that encryption and the firewall are turned on, and turn off the feature that broadcasts your home network’s name to other devices. Finally, download software and firmware updates to your router on a regular basis: manufacturers use these updates to patch security flaws as they are discovered.
  7. Think before you click
    The internet offers amazing resources and tools for modern life, but it also puts you directly in touch with hackers and their malicious programs, or “malware.” Malware can allow hackers a back door into your computer through which they can steal your information. Make sure that you have installed and keep updated a virus protection program on all your devices. And do not click any links unless you are familiar with the website or download any programs if you do not need them or do not know the source. If your firewall or virus protection program alerts you to a suspicious file, follow the warnings, cancel the download, and delete the suspect file.

    Although there is no way to guarantee the safety of your personal and financial information in today’s cyber-economy, following this sampling of tips will help secure your information, as well as that of your business and family, from hackers. Contact us if you would like to have a deeper discussion about the protection of your personally-identifiable information.

© 2015 McNees Wallace & Nurick LLC

McNees Insights is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.

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