Financial future as a graduation gift? It’s easier than you think!

As you begin to shop for the new graduates in your life, consider the case below and think about giving them a step in the right financial direction. While many advisers look for Millionaires (I don’t mind working with them either ha-ha) I would love to woIMG_0716_-graduation-gifts-webcopy-1030x687rk with someone just starting out.  I have been though many of the life changes they are about to experience. I can help them plan effectively!

Last week I had an interesting meeting on my schedule. It was with a daughter of long time clients. Now this alone was not the interesting part. I have had these meetings before, they usually show up as part of a favor to the parents to talk about credit card debt while at school or help fill out a fasfa. This meeting was different. This girl was not just dependent of her parents. She was the client. This was her annual review to go over a plan, we implemented a year ago. Again, not an abnormal meeting for me to have on my schedule, especially in the summer.

What was interesting is the way this girl became a client in the first place. As a graduation present when she graduated from a prominent and very expensive Ivy league school, her parents bought her a meeting with their financial advisor.

When we first met for the fact finding meeting (the where are you now and where would you like to be meeting) she flat out told me that she was only meeting to make her parents happy and she thought this was the worst graduation present she had received, “by far.”

Reluctantly we discussed where she was currently (swimming in some serious Ivy league debt) and where she wanted to be in 1 year, 5 years and 10 years. We developed a plan to save an emergency savings fund along with refinance her student loans (there were 6 of them) into one consolidated loan for interest rate relief as well as ease of paying. We discussed how to allocate her new employer’s 401k as well as how much to contribute, but still be able to fund her goals.

After a few meetings (she never missed one! I was definitely thinking I might never see her again after the first one ha-ha) I could see her attitude change and she actually looked forward to coming in and implementing the plan we developed together.

The meeting last week was so satisfying for both of us as she saw the benefits of planning and is exactly where we planned to be or even a little ahead.

So as you consider gifts for a graduate in your life, please consider a meeting with a financial advisor (hopefully me, but any good one willing to work with someone just starting out, there are not too many of us). The graduate might not think it is the best gift now, but when they realize where they are in a year, 5 years, 10 years in comparison to their friends, your gift will be the most valuable gift they received.

Kevin Murray is a financial advising, tax accountant, whose office is located in Wilbraham, MA. While he works with clients of all means and ages, he especially enjoys working with individual and couples who are just starting out. He has been through many of the life changes these clients are about to experience and can truly help them plan effectively. He can be reached at kevin.murray@murraytaxservices.com.  When Kevin is not working you will see him at various playgrounds and pools throughout Western MA spending time with his most important clients Christa (wife of 7 years), Jameson (6), Adalyn (4), Maggie (yellow lab) and Chase (chocolate lab).

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Start Planning Now for Next Year’s Taxes

You may be tempted to forget all about your taxes once you’ve filed your tax return. Do not give in to that temptation. If you start your tax planning now, you may avoid a tax surprise when you file next year. Now is a good time to set up a system so you can keep your tax records safe and easy to find. Here are some IRS tips to give you a leg up on next year’s taxes:

Take action when life changes occur.  Some life events can change the amount of tax you pay. Some examples that can do that include a change in marital status or the birth of a child. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. Use the IRS Withholding Calculator tool on IRS.gov to help you fill out the form.
Report changes in circumstances to the Health Insurance Marketplace.  If you enroll in insurance coverage through the Health Insurance Marketplace in 2015, you should report changes in circumstances to the Marketplace when they happen. Report events such as changes in your income or family size. Doing so will help you avoid getting too much or too little financial assistance in advance.
Keep records safe.  Put your 2014 tax return and supporting records in a safe place. If you ever need your tax return or records, it will be easy for you to get them. For example, you may need a copy of your tax return if you apply for a home loan or financial aid. You should use your tax return as a guide when you do your taxes next year.
Stay organized.  Make tax time easier. Have your family put tax records in the same place during the year. That way you won’t have to search for misplaced records when you file next year.
Think about itemizing.  If you claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. A donation to charity could mean some tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.
Stay informed.  Subscribe to Murray Tax Services Blog to get emails about tax law changes, how to save money and much more.

Planning now can pay off with savings at tax time next year.

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Tax Issues Related to Marriage

What are tax issues related to marriage?

If you’re married (or about to be married), financial planning is certainly important. It’s also important for you to be aware of the income tax ramifications of your decisions. Although there are a number of tax issues related to marriage, you should pay particular attention to your selection of an income tax filing status. Thorough familiarity with the filing status rules applicable to married couples requires some knowledge of the rules for innocent spouse relief and injured spouse claims. Along with filing status, married couples might wish to know how to perform a second income analysis, which measures the after-tax benefit of both spouses working.

A same-sex couple legally married in a jurisdiction that recognizes their marriage will be treated as married for federal tax purposes, even if the couple lives in a jurisdiction that does not recognize same-sex marriages . However, marriage does not include registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

Why is filing status so important?

Your filing status is important because it determines, in part, the deductions and credits available to you, the amount of standard deduction that you may be entitled to, and your correct amount of tax. Therefore, you need to know which filing statuses are available to you and which one will best fit your needs. There are five possible filing statuses:

  • Single
  • Married filing jointly
  • Married filing separately
  • Head of household, or
  • Qualifying widow(er) with dependent child

For tax purposes, whether you’re considered married or unmarried depends on a number of rules and your legal status as of the last day of the tax year.

What is innocent spouse relief and what are the rules for injured spouse claims?

Although many married couples opt to file their tax returns jointly, it is wise for you to become familiar with both the advantages and disadvantages of joint filing. Generally speaking, if you sign a joint return, you take full responsibility for the accuracy of the information contained in your return. Therefore, if your spouse intentionally underreports his or her income, you, too, could be held liable if the IRS sends a deficiency notice with accompanying interest and penalties.

In some cases, however, you can be relieved of responsibility for your spouse’s errors. This relief is known as innocent spouse relief. If you file a joint tax return, it’s also possible that the entire tax refund due on your return will be used to offset certain debts of your spouse, including student loans, taxes, and child support arrearages. Because it may be inequitable for you to lose your portion of the tax refund simply because your spouse owes money, the IRS allows you to file an injured spouse claim (in some cases) to claim your money.

What is a second-income analysis?

Another decision facing many married couples today is whether both spouses should work outside of the home. This decision often arises when a couple has children or when a retiree collecting Social Security considers a re-entry into the workforce. If you wish to consider whether a second income is advisable, you need to consider the personal ramifications, as well as the financial and tax aspects of your decision. A second-income analysis involves an evaluation of the net benefit derived from a second income, with a particular emphasis on the tax cost associated with the second income.

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Avoid These Common Tax Mistakes

Nobody’s perfect. Mistakes happen. But if you make a mistake on your tax return, it will likely take the IRS longer to process it. That could delay your refund. The best way to avoid errors is to use IRS e-file. Paper filers are about 20 times more likely to make a mistake than e-filers. IRS e-file is the most accurate way to file your tax return.

Here are eight common tax-filing errors to avoid:

1. Wrong or missing Social Security numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.

2. Wrong names.  Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.

3. Filing status errors.  Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right status. If you e-file, the tax software helps you choose.

4. Math mistakes.  Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.

5. Errors in figuring credits or deductions.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.

6. Wrong bank account numbers.  You should choose to get your refund by direct deposit. Be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.

7. Forms not signed.  An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return.

8. Electronic filing PIN errors.  When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If you don’t know it, enter the Adjusted Gross Income from the 2013 tax return that you originally filed with the IRS. Do not use the AGI amount from an amended return or a return that the IRS corrected.

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The Individual Shared Responsibility Provision – The Basics

The individual shared responsibility provision requires that you and each member of your family have qualifying health insurance, a health coverage exemption, or make a payment when you file. If you, your spouse and dependents had health insurance coverage all year, you will indicate this by simply checking a box on your tax return.

Here are some basic facts about the individual shared responsibility provision.

What is the individual shared responsibility provision?

Starting in 2014 the individual shared responsibility provision calls for each individual to have qualifying health care coverage – known as minimum essential coverage – for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return.

Who is subject to the individual shared responsibility provision?

The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have coverage or an exemption.

When does the individual shared responsibility provision go into effect?

The provision went into effect on Jan. 1, 2014. It applies to each month in the calendar year.

What do I need to do if I am required to make a payment with my tax return?

If you have to make an individual shared responsibility payment, you will use the worksheets located in the instructions to Form 8965, Health Coverage Exemptions, to figure the shared responsibility payment amount due. The amount due is reported on line 61 of Form 1040 in the Other Taxes section, and on the corresponding lines on Form 1040A and 1040EZ. You only make a payment for the months you did not have coverage or qualify for a coverage exemption.

What happens if I owe an individual shared responsibility payment, but I cannot afford to make the payment when filing my tax return?

The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment. However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.

For more information about the Affordable Care Act and your income tax return, visit IRS.gov/aca.

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Five Key Points about Children with Investment Income

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five key points to keep in mind if your child has investment income:

1. Investment Income.  Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.

2. Parent’s Tax Rate.  If your child’s total investment income is more than $2,000 then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.

3. Parent’s Return.  You may be able to include your child’s investment income on your tax return if it was less than $10,000 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more.

4. Child’s Return.  If your child’s investment income was $10,000 or more in 2014 then the child must file their own return. File Form 8615 with the child’s federal tax return.

5. Net Investment Income Tax.  Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax. For more on this topic, visit IRS.gov.

Refer to IRS Publication 929, Tax Rules for Children and Dependents, for complete details on this topic.

Please call or email if I can help with anything.

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Leaving Assets to Your Heirs: Income Tax Considerations

An inheritance is generally worth only what your heirs get to keep after taxes are paid. So when it comes to leaving a legacy, not all property is created equal–at least as far as federal income tax is concerned. When evaluating whom to leave property to and how much to leave to each person, you might want to consider how property will be taxed and the tax rates of your heirs.Leaving Assets to Your Heirs: Income Tax Considerations

An inheritance is generally worth only what your heirs get to keep after taxes are paid. So when it comes to leaving a legacy, not all property is created equal–at least as far as federal income tax is concerned. When evaluating whom to leave property to and how much to leave to each person, you might want to consider how property will be taxed and the tax rates of your heirs.

Favorable tax treatment for heirs

Roth IRAs

Assets in a Roth IRA will accumulate income tax free and qualified distributions from a Roth IRA to your heirs after your death will be received income tax free. An heir will generally be required to take distributions from the Roth IRA over his or her remaining life expectancy. (Of course, your beneficiaries can always withdraw more than the required minimum amounts.) If your spouse is your beneficiary, your spouse can treat the Roth IRA as his or her own and delay distributions until after his or her death. So your heirs will be able to continue to grow the assets in the Roth IRA income tax free until after the assets are distributed; any growth occurring after funds are distributed may be taxed in the future.

Note:  The Supreme Court has ruled that inherited IRAs are not retirement funds and do not qualify for a federal exemption under bankruptcy. Some states may provide some protection for inherited IRAs under bankruptcy. You may be able to provide some bankruptcy protection to an inherited IRA by placing the IRA in a trust for your heirs. If this is a concern of yours, you may wish to consult a legal professional.

Appreciated capital assets

When you leave property to your heirs, they generally receive an initial income tax basis in the property equal to the property’s fair market value (FMV) on the date of your death. This is often referred to as a “stepped-up basis,” because basis is typically stepped up to FMV. However, basis can also be “stepped down” to FMV.

If your heirs sell the property with a stepped-up (or a stepped-down) basis immediately after your death for FMV, there should be no capital gain (or loss) to recognize since the sales price will equal the income tax basis. If they sell the property later for more than FMV, any appreciation after your death will generally be taxed at favorable long-term capital gain tax rates. If the appreciated assets are stocks, qualified dividends received by your heirs will also be taxed at favorable long-term capital gain tax rates.

Note:  If your heirs receive property from you that has depreciated in value, they will receive a basis stepped down to FMV and will not be able to claim any loss with respect to the depreciation before your death. You may want to consider selling depreciated property while you are alive so that you can claim the loss.

Not as favorable tax treatment for heirs

Tax-deferred retirement accounts

Assets in a tax-deferred retirement account (including a traditional IRA or 401(k) plan) will accumulate income tax deferred within the account. However, distributions from the account will be subject to income tax at ordinary income tax rates when distributed to your heirs (if there were nondeductible contributions made to the account, the nondeductible contributions can be received income tax free). An heir will generally be required to take distributions from the tax-deferred retirement account over his or her remaining life expectancy. (Of course, your beneficiaries can always withdraw more than the required minimum amounts.) If your spouse is the beneficiary of the account, the rules may be more favorable. So your heirs will be able to defer taxation of the retirement account until distribution, but distributions will generally be fully subject to income tax at ordinary income tax rates.

Note:  Your heirs do not receive a stepped-up (or stepped-down) basis in your retirement accounts at your death.

Even though distributions are taxable, your heirs will nevertheless generally appreciate receiving tax-deferred retirement accounts from you. After all, they do get to keep the amounts remaining after taxes are paid.

Toxic or underwater assets

Your heirs might not appreciate receiving property that is subject to a mortgage, lien, or other liability that exceeds the value of the property. In fact, an heir receiving such property may want to consider disclaiming the property.

Always nice to receive

Life insurance and cash

Life insurance proceeds received by your heirs will generally be received income tax free. Your heirs can generally invest life insurance proceeds and cash they receive in any way that they wish. When doing so, your heirs can factor in how the property will be taxed to them in the future.

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