Enrolled agent

The enrolled agent designation is the highest credential awarded by the IRS.  Like attorneys and certified public accountants, enrolled agents are empowered to represent clients before the IRS for all matters including audits, collections and appeals.  The details of the rights and responsibilities of enrolled agents can be found in Treasury Department Circular 230.

To become an enrolled agent, one must typically obtain a preparer tax identification number (PTIN), pass three comprehensive exams (known as the “special enrollment exams”), and pass a suitability and tax compliance check.  One may also obtain relevant experience as an IRS employee in lieu of passing the special enrollment exams.

To maintain their designation, enrolled agents must complete 72 hours continuing education requirements every three years, adhere to rigorous ethical standards, and maintain their PTIN by paying relevant renewal fees.

Cost basis reporting

How the cost basis of an investment is determined will have a significant impact on how the investment is taxed when sold.  Here we will provide an overview of some of the most common cost basis conventions which are currently being used in the tax code for the 2016 and 2017 year.

First in, first out (FIFO)

With this method, the shares or units which were purchased first are the ones which are used to determine the basis when the asset is disposed of.  Another way of looking at this is that the shares which remain are the shares which were most recently purchased.  As an example, let’s say you purchase 100 shares of XYZ stock on September 1, 2016 for $5 per share, purchase another 50 shares of XYZ stock on October 1, 2016 for $10 per share and then sell 100 shares of XYZ stock on November 1, 2016 for $15 per share.  When using the FIFO method the basis for these shares would be $5 per share, or the price paid for the first 100 shares of XYZ stock on October 1, 2016.

Specific share identification (Spec ID)

With this method, the specific shares are identified upon the disposal of those shares.  Using the example above: upon selling the 100 shares of XYZ stock on November 1, 2016, these shares could be identified as the shares purchased on October 1, 2016, resulting in a basis of $10 per share, in contrast with the basis of $5 per share which would be the result of using the FIFO method.

Average cost single category

With this method, the average cost of the shares is calculated by dividing the total dollar amount of the purchases by the total number of the corresponding shares or units.  Using the example above, the total number of shares purchased would 150 and the total dollar amount of shares purchased would be $1,000, resulting in an average cost basis of $6.67 per share.

Highest in, first out

With this method, the shares with the highest cost are the shares which are sold or disposed of.  The purpose of using this method is to minimize the taxable gain within a specified period.  Using the example above, the 100 shares sold on November 1, 2016 would be identified as the 50 shares purchased on October 1, 2016 for $10 per share plus 50 of the shares purchased on September 1, 2016 for  $5 per share.  The basis in this case  would be $7.50 per share, which is the total dollar amount of the shares purchased divided by the number of shares sold.

Minimum tax

Under the minimum tax method, shares are sold in the order which minimizes taxable gains and maximizes tax deductible losses.  Specifically, shares are sold in the following order:  maximum short term capital losses, maximum long term capital losses, minimum long term gains and finally minimum short term gains.

Maximum gain

This method is the exact opposite of the minimum tax method in that it will tend to maximize the taxable gains, and would only be used in a situation where such an outcome would be advantageous, for example to offset against losses.   Using the maximum gain method, shares are disposed of in the following order:  maximum short term gains, maximum long term gains, minimum long term losses an finally minimum short term losses.

IRA income limits


ROTH IRA and traditional IRA account contributions are subject to income phaseout limits.  In the case of the ROTH IRA the limits are related to eligibility and in the case of a traditional IRA the limits are related to deducting the contributions.  If you exceed these limits you may want to consider alternatives for deferring taxes on your retirement savings.  There are many options available depending upon your particular situation.  In general, business owners and self employed individuals have more options available to them than do W-2 employees.  The details of the income and phaseout limits are discussed in detail below.

ROTH IRA income limits

You are typically able to make a ROTH IRA contribution if your income falls below certain levels.  If you are married filing jointly, you can make a full ROTH IRA contribution if your adjusted gross income (AGI) is less than $186,000 for the 2017 tax year.  You can make a reduced contribution if your AGI is between $186,000 and $196,000, and contributions are disallowed altogether if your AGI is greater than or equal to $196,000.

If your tax filing status is single or head of household you may make a full ROTH IRA contribution for the 2017 tax year if your AGI is less than $118,000,  a reduced contribution if your AGI is between $118,000 and $133,000, and no contribution at all if your AGI is greater than or equal to $133,000.

If you are not able to make a ROTH IRA contribution due to income restrictions, you may want to investigate whether or not your employer offers a ROTH 401K plan.  If they do not, you should consider making a request to your employer that a ROTH 401K plan be implemented.

ROTH IRA income limits for 2017 tax year
filing status income limit
Married filing jointly full contribution allowed for AGI less than $186,000; phaseout for AGI between $186,000 and $196,000, no contribution allowed for AGI greater than or equal to $196,000
Single full contribution allowed for AGI less than $118,000; phaseout for AGI between $118,000 and $133,000, no contribution for AGI greater than or equal to $133,000
Head of household full contribution allowed for AGI less than $118,000; phaseout for AGI between $118,000 and $133,000, no contribution for AGI greater than or equal to $133,000
Married filing jointly (and lived with spouse at any time during year) phaseout for AGI between $0 and $10,000, no contribution for AGI greater than or equal to $10,000

Traditional IRA income limits

There are no income restrictions related to making a contribution to a traditional IRA, however you may not be able to deduct the contributions if you or your spouse participates in a retirement plan at work.  If you or your spouse participate in a retirement plan at work, the deduction begins to phaseout at $62,000 AGI for single or head of household ($99,000 for married filing jointly) and phases out completely at $72,000 AGI ($119,000 for married filing jointly).  These numbers are for the 2017 tax year.  If you are in this situation, you should consider contributing to your retirement plan at work, such as a 401K plan, as you will be able to deduct these contributions up to their limit.

Traditional IRA income limits for 2017 tax year
filing status no retirement plan at work retirement plan at work spouse has retirement plan at work (and you do not)
Married filing jointly no limits full deduction up to contribution limit if AGI less than $99,000, partial deduction for AGI between $99,000 and $119,000, no deduction if AGI is greater than $119,000 full deduction if AGI less than $186,000, phaseout for AGI between $186,000 and $196,000, no deduction if AGI is greater than $196,000
Single no limits full deduction up to contribution limit if AGI less than $62,000, partial deduction for AGI between $62,000 and $72,000, no deduction if AGI is greater than $72,000 N/A
Head of household no limits full deduction up to contribution limit if AGI less than $62,000, partial deduction for AGI between $62,000 and $72,000, no deduction if AGI is greater than $72,000 N/A
Married filing separately no limits partial deduction for AGI between $0 and $10,000, no deduction if AGI is greater than or equal to $10,000 partial deduction for AGI between $0 and $10,000, no deduction if AGI is greater than or equal to $10,000

ROTH 401K and ROTH IRA income limits

ROTH 401K and ROTH IRA accounts provide retirement savings options which are fully tax free upon withdrawal as long as they comply with certain IRS rules.  A disadvantage of ROTH IRA accounts is that they are restricted to lower income earners.  In order to contribute to a ROTH IRA for the 2017 tax year, your adjusted gross income must be less than $196,000 if you are married filing jointly and less than $133,000 if you are filing as single or head of household, and the amount of the allowable contribution phases out as it approaches these limits.

A ROTH 401K plan, unlike a ROTH IRA, has no income limits for the participant.  Regardless of income, for the 2016 tax year an individual may contribute up $18,000 to a 401K account (ROTH or traditional).  This limit increases to $24,000 for participants age 50 or older.  Unlike a traditional 401K plan, contributions made to a ROTH 401K are made on an after tax basis.  Keep in mind that employer contributions to a 401K plan, unlike ROTH 401K employee contributions, are always taxable to the plan participant upon their withdrawal.

Whether or not a high income earner should contribute to a ROTH 401K plan depends on a variety of factors.  On one side of the argument, a high income earner is in a high tax bracket and may be better off contributing to a traditional 401K as the immediate tax benefit could be significant.  On the other hand, ROTH 401K accounts have numerous advantages related to tax free withdrawals as well as limited rules related to required minimum distributions.  A careful analysis should be done of your financial situation, with particular attention paid to your tax bracket now and your expected tax bracket in retirement.


Certified financial planner

The Certified Financial Planner™ (CFP®) designation is a professional designation which is frequently held by financial planners, investment advisers and other financial advisers.  It is conferred by the Certified Financial Planner Board of Standards, Inc.  Candidates must have a bachelor’s degree (or higher) from an accredited college or university, three years of full-time personal financial planning experience and complete a course of study in financial planning topics.  These subject areas include investments, taxes, estate planning, insurance planning, employee benefits, and asset protection.

A candidate may be exempt from the course of study requirement if he or she holds a CPA, ChFC, CLU, CFA, Ph.D in business or economics, a Doctor of Business Administration, or an attorney’s license.

All candidates must successfully complete the CFP® Certification Examination, which has a reputation for being very challenging, comprehensive and arduous.

CFP® practitioners are subject to the CFP Board’s ethical standards, and must abide by a fiduciary standard.

Certificants must typically complete 30 hours of continuing education every two years, and 2 hours of these 30 hours must be in topics related to ethics.

In many jurisdictions, the CFP® designation will exempt an investment adviser representative from having to pass the Series 65 examination.


Trusts provide a way to preserve and protect assets, as well as pass assets to heirs outside of the probate process.  They are frequently utilized in estate planning to minimize estate taxes.  They can also be used to protect assets by moving assets away from the grantor.  Trusts are typically formed under state law, however unlike corporations and LLC’s they are not usually registered with the state in which they are formed.

Trusts usually have grantors, trustees, and beneficiaries.  The grantor contributes assets to the trust and executes the formation of the trust.  The trustee is designated by the grantor, who manages the trust assets for the benefit of the beneficiaries according to the terms laid out in the trust.

A trust can be revocable or irrevocable.  A revocable trust, frequently referred to as a living trust, allows the grantor to retain control of the assets while at the same time allowing those assets to pass outside of the probate process.  A revocable trust typically does not enable the trust assets to avoid estate taxes.

An irrevocable trust, on the other hand, involves the transfer assets out of the grantor’s name and typically causes the grantor to lose control of those assets.  Because these assets are transferred out of the grantor’s estate, they typically avoid estate taxes in many circumstances.

Business structure – LLC, Corporation, Partnership or Sole Proprietorship

Which business structure you choose for your small business is an important decision from an operational and administrative perspective as well as from a legal and tax perspective.  It is important to review your individual situation with the appropriate advisers.  We will provide an overview of some of the most common business structures here.


A corporation has numerous advantages.  A corporation is typically formed by filing articles of incorporation with the relevant state authorities. A corporation has directors, officers, and shareholders. Shareholders have a representative ownership interest in the corporation, and are able to exercise their rights by voting their shares. Directors are elected by the shareholders, and the directors appoint the officers, who manage the corporation on behalf of the shareholders. In most cases shareholders are shielded from personal liability related to the activities of the corporation. Corporations can be taxed as either a “C” corp or as an “S” corp at both the federal and state level. A C corp files its own tax return and pays its own taxes, whereas an S corp for the most part is taxed by passing its income through to the individual shareholders.

C corporation – taxation overview

Corporations, which are organized and filed under state law, can elect to be treated as either a C corporation or an S corporation for federal tax purposes. Corporations typically must have officers and directors who supervise and direct their business activities. Each corporate structure has advantages and disadvantages related to taxation and shareholder composition. We will provide a very basic overview of the C corporate structure here.

C corporation earnings are subject to corporate taxes at the federal level. A corporation must file its own federal tax return, and must pay its own taxes. Corporate taxes are levied at a progressive rate according to the corporation’s total earnings. An exception to this is the personal service corporation, whose earnings are taxed at a flat rate regardless of total income.

When corporate earnings are distributed to shareholders via dividend payments, the shareholders are taxed on the income received as a result of these dividends. As a result, these earnings are taxed twice: once to the corporation and again to the shareholder. This is frequently referred to “double taxation”, and is a major disadvantage of the structure of c corporations from a taxation perspective.

Advantages of c corporations include an unlimited number of shareholders as well as minimal restrictions related to the composition of these shareholders. This is in contrast to S corporations, which have more stringent rules. For example, S corporations can not have more than 100 shareholders, and those shareholders can only be U.S. citizens and residents, and must be natural persons.

In certain cases, non dividend distributions can be made by a corporation to its shareholders. This would occur, for example, in the case of a liquidation of the corporate assets. Such distributions would be treated as either return of capital or capital gains to the shareholder, depending on the circumstances.

S corporation – taxation overview

As discussed previously, corporations, which must be filed under state law and have both officers and directors, can elect to be taxed as either an S corporation or a C corporation at the federal level. We discussed the basics of C corporations previously. Here we will discuss the basics of S corporations and their advantages and disadvantages related to taxation, shareholder composition, and stock classification.

S corporations are considered pass through entities from a taxation perspective. Accordingly, the S corporation itself does not pay any taxes on its earnings, but instead passes those earnings (and gains) directly through to its shareholders. The S corporation must file its own tax return, however typically there is no tax due at the corporate level. As the income is passed though, the shareholders are responsible for paying taxes on their share of the income. This is a major advantage of the S corporation structure as there is no “double taxation” as is the case with C corporations.

S corporations have several disadvantages, however, mainly related to restrictions on the composition of their shareholders and classification of their stock. An S corporation can have a maximum of 100 shareholders, and these shareholders can only be natural persons who are U.S. residents. A married couple would count as a single shareholder. Additionally, S corporations can only issue one class of stock, and economic interests must be allocated proportionally in relation to ownership interest. Voting rights may be allocated disproportionately, however.

Limited liability company (“LLC”)

A limited liability company is a business structure which is comparatively simple and easy to administer.  Limited liability companies are formed by filing articles of organization with the relevant state authorities. LLC’s have members who possess ownership interest in the LLC, and managing members supervise, manage, direct and operate the LLC. In general, LLC formation and administration is less complex than that of a corporation.  The simplicity of formation and administration and flexibility of tax status are some of the main advantages of the LLC structure.  LLCs must elect whether to be taxed as a C corporation, S corporation, partnership, or sole proprietorship (in the case of a single member LLC).

Limited liability companies typically utilize what is known as an operating agreement to designate the ownership structure and relationships between members as relates to capital accounts, earnings and management of the LLC.

The main disadvantages of the limited liability company structure as compared with a corporate structure relates to the entity’s lifespan as well as issues related to raising capital. For example, a corporation will continue in perpetuity upon death of one of its shareholders, while an LLC will typically be dissolved. Corporations, in particular C corporations, are advantageous for raising capital in that their shares can be registered and the company can become publicly traded. This is typically not the case with LLC membership interests.

Another advantage of a limited liability company when compared with an S corporation relates to shareholder composition. An S corporation has numerous restrictions on shareholder composition as relates to the number of shareholders and the nature of those shareholders. An LLC, on the other hand, has few of such restrictions. LLC shareholders can be unlimited in number and can be individuals, corporations, partnerships, and other LLC’s.


A partnership is a business arrangement where the individuals or entities involved share in the profit and loss of the business. Unlike a corporation, and depending on the particular structure of the partnership, partners may or may not have liability related to the business activities. Earnings and other gains are typically passed through to the partners who are then responsible for reporting these gains on their individual tax returns. Similarly, expenses, assets and liabilities are assigned to the partners.

A major advantage of a partnership is that the income passes through to the partners and is thus taxed only once. This is on contrast to a c corporation which, as discussed previously, is subject to taxes once at the corporate level and again at the shareholder level, resulting in “double taxation”.

In one structure, known as a limited partnership, there are two types of partners: limited partners and general partners. Limited partners do not actively participate in the business activities of the entity and are not liable for the activities of the partnership to any extent that exceeds their ownership interest. General partners are typically responsible for managing the business activities of the entity and are subject to liability. This is in contrast to an LLC, where both the managing members and non managing members are typically protected from liability in most cases.

There are other partnership structures, including limited liability partnerships and general partnerships, which will not be discussed in detail here.

Sole proprietorship

A sole proprietorship is a small business structure where the business owner has no legal entity to separate his/herself from the business. The business is operated under the business owner’s name or a trade name and the business owner is personally responsible for the debts and obligations of the business. This is in contrast to a corporation or a limited liability company, which is separate and distinct from its shareholders or members and typically provides some amount of liability protection to the owners and operators.

A sole proprietorship may or may not have its own employer identification number (EIN). As EIN is required in certain circumstances, for example where the proprietor wishes to hire employees.

While a proprietorship may have a trade name, such a name does not create any legal distinction between the business owner and the business.

Due to its being indistinguishable from its owner, a proprietorship does not file its own tax return. Instead it typically reports business income and expenses on schedule C of the business owner’s personal tax return.

The main advantage of a sole proprietorship is simplicity and ease of formation and administration, while its main disadvantages are lack of protection from liability as well as limited ability to raise capital.

Cash basis accounting versus accrual accounting

Bookkeeping methods for managing the balance sheet and other books of a business or household include the cash basis method and the accrual method.

With the cash basis method of accounting, expenses are accounted for as they paid, and revenues are accounted for when they are received.  This method is simpler to administer but portrays a less accurate picture of the financial condition of the business or household.

With the accrual accounting method, expenses are accounted for as they are incurred, and revenues are accounted for when they are earned.  This method is more complex to administer and track but provides a more accurate picture of the financial condition of the business or household at any point in time.

The accrual accounting method gives a more accurate picture of the financial condition of a business, as it removes any inaccuracies in the balance sheet related to expenses being paid late and revenues being received early.

In order to illustrate the difference between these two methods, consider an example where an insurance policy’s annual premium is paid in advance.  In this scenario, the premium would be booked as an expense in one lump amount when the cash basis method is used.  Should the accrual method be used, the annual payment would remain on the balance sheet as a prepaid expense and would be amortized over the duration of the annual term.

Consider, similarly, revenue received in advance for a contract which is 3 months in duration.  Should the cash method be used, this revenue would be booked in one lump sum.  Should the accrual accounting method be used, the revenue would be booked piecemeal over the three month contract period.

As can be seen from both of these examples, the accrual method is a more accurate method in terms of describing the financial state of the business or household because it takes into account the effect of revenue received but not yet earned, and expenses paid but not yet accrued.

Tax exempt organizations

Tax exempt organizations are entities which qualify for tax exempt status under one of several IRS sections.  These organizations are typically corporations, trusts, or certain non incorporated entities.

The most common tax exempt organization is a charitable organization, frequently known as a 501(c)(3) organization.  Other tax exempt organizations include Social Welfare Organizations, Labor Organizations, Trade Associations, Social Clubs, Fraternal Societies, Employee Benefit Associations, and Political Organizations.

501(c)(3) organizations must be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to animals or children.

Charitable organizations are the most common type of 501(c)(3) organization and are discussed the most frequently.  Charitable organizations can be one of two types, a public charity or a private foundation.  Private foundations typically receive most of their income from investments and endowments, while public charities typically receive most of their income via contributions from individuals and the government.

Certain donors who make contributions to qualified 501(c)(3) organizations are eligible to deduct such contributions.  Additionally, these organizations are able to avoid federal income taxes on the the difference between their revenues and expenses.

Charitable organizations are typically prohibited from supporting political candidates, and are typically subject to limits on lobbying.



Municipal bonds

Municipal bonds are bonds issued by municipalities, oftentimes for the purpose of funding infrastructure or other public works projects.  One of the major advantages of municipal bonds is that their interest is exempt from federal income tax, making them especially attractive to investors in high tax brackets.

Municipal bonds can be either general obligation bonds or revenue bonds.

Revenue bonds are backed by revenue generating municipal projects including stadiums, toll roads, and transit projects such as New York State’s Metropolitan Transit Authority.  Because they are not backed by the full faith and credit of the issuer, these bonds are typically riskier and subsequently pay a higher coupon than general obligation bonds.

General obligation bonds are backed by the full faith and credit of the municipality issuing the bonds and are serviced using general municipal government revenue including income taxes and property taxes.  General obligation bonds are typically less risky than revenue bonds and subsequently pay a lower coupon than revenue bonds.

Like all fixed income instruments, municipal bonds have both interest rate risk and credit risk.  From a credit risk standpoint, municipal bonds tend to be slightly riskier than sovereign bonds and slightly less risky than corporate bonds, although this is not always the case.  As with other fixed income instruments, the interest rate risk of a municipal bond increases as the duration of the bond increases.

ROTH IRA conversion and recharacterization

Oftentimes it is advantageous from a tax planning standpoint to change an existing traditional IRA account to a Roth IRA account.  This is known as a Roth IRA conversion. Roth IRA accounts and traditional IRA accounts have different advantages and benefits.  As discussed previously, traditional IRA accounts provide an immediate tax benefit while Roth IRA accounts provide a tax benefit at the time of withdrawal.

A Roth IRA conversion would subject the IRA account owner to income taxes on the withdrawal from the traditional IRA account in the year that the conversion is made.  As Roth IRA withdrawals are tax free, the account owner will not have to pay any additional taxes on Roth IRA withdrawals once the taxes on the Roth IRA conversion have been paid.  A Roth IRA conversion should only be executed after careful analysis and tax planning has been done, with particular attention paid to income tax brackets in the current year as well as projected income tax brackets in future years.

In some other situations it becomes necessary to change IRA contributions which have already been made.  This would occur when the account owner wishes to change  traditional IRA contributions to Roth IRA contributions in order to take advantage of the benefits of the Roth IRA, or vice versa.  A common example of a recharacterization is when an individual subsequently becomes ineligible for a Roth IRA due to exceeding the relevant income limits, after the Roth IRA contributions have been made.  In this case, the account owner can recharacterize those contributions, and typically has until the tax filing deadline, including extensions, to do so.

Retirement plan limits and deadlines for the 2016 tax year

Below is a summary of key retirement plan information for the 2016 tax year.


Retirement plan deadlines and limits for the 2016 tax year
plan type  deadlines contribution limit
Traditional and ROTH IRA plan must be established and contribution must be made by the tax filing deadline, no extensions $5,500, $6,500 if age 50 or older
SEP IRA plan must be established and contribution must be made by the tax filing deadline, including extensions 25% of wage or salary compensation or $53,000, whichever is lesser
SIMPLE IRA new plan must be established by October 1 $12,500, $15,500 if age 50 or older
401K plan plan must be established by the end of the calendar year.  contribution must be made by the tax filing deadline, including extensions $18,000, $24,000 if age 50 or older for employee deferrals, $53,000 for total contributions, including employer contributions
Solo 401K plan plan must be established by the end of the calendar year.  contribution must be made by the tax filing deadline, including extensions $18,000, $24,000 if age 50 or older, plus 25% of compensation, or 20% of self employment income, up to a limit of $53,000, or $59,000 for an individual age 50 or older
Defined benefit pension plan contribution must be made by September 15 for plan with fiscal year ending December 31 of prior year benefit amount can not exceed $210,000 or average of highest 3 years of compensation.  Contribution limit is based upon actuarial computations based upon these benefit limits


IRA rollovers and transfers

IRA rollovers and transfers involve the tax deferred movement of funds between different retirement accounts.  Oftentimes there will be a need or desire to move funds from one retirement account to another.  This will occur, for example, after leaving an employer, or when moving your IRA from one financial institution to another.  If these movements of funds are conducted in accordance with IRS rules the account participant can avoid taxable events which normally occur when withdrawing funds from retirement accounts.

IRA rollovers

An IRA rollover is the movement of funds from an employer sponsored retirement plan, such as a 401K or 403B plan, to an individual retirement account (“IRA”).  If done in accordance with IRS rules, the rollover will not result in a taxable event for the account participant.

In rare cases it is possible to perform a direct, trustee to trustee transfer of funds from the 401K plan to the IRA.  Such transfers are typically initiated by the receiving financial institution or trustee.

In the majority of cases, however, rollovers are accomplished by having the 401K plan custodian generate a check payable to either the receiving financial institution which has custody of the receiving IRA account or directly to the 401K participant.  In order to comply with IRS rules and not have the 401K plan withdrawal be treated as a taxable event, funds must be rolled over to the receiving IRA account within 60 days.  This is true even in cases where the 401K plan custodian generates a check payable to the custodian of the receiving IRA account.

IRA transfers

An IRA transfer is a movement of funds from one IRA custodian to another.  These transactions can usually be executed by means of a direct, trustee to trustee transfer, typically initiated by the financial institution on the receiving end of the transfer.

Similar to how IRA rollovers are executed, a transfer can be accomplished by having the financial institution which has custody of the IRA generate a check payable directly to the receiving financial institution.  A transfer executed in this manner must be completed within 60 days in order to avoid having the withdrawal deemed to be a taxable event.

Alternatively, an indirect transfer can be accomplished by having the financial institution which has custody of the IRA generate a check payable to the account holder.  The account holder then has 60 days to roll the funds over to the new IRA account at the receiving financial institution or trustee.  Keep in mind that oftentimes when performing such an indirect transfer, taxes will be withheld by the outgoing custodian.  It is important that the full amount of the withdrawal be rolled over to the new account in order to avoid any taxable event associated with the withdrawal.

Life insurance taxation

Life insurance taxation is an important subject as relates to your overall financial situation.  Life insurance contracts have several tax features which make them unique and advantageous as an asset class.  We will discuss several aspects of life insurance taxation.  We will discuss tax advantages of life insurance here related to the death benefit, the withdrawal or surrender of the cash value, and the dividends from the policy.

Taxation of the death benefit

Death benefit payments are typically paid income tax free to the beneficiary.  They can, however, be subject to the estate tax.  There are various strategies for managing the estate tax liability including irrevocable life insurance trusts (“ILITs”).  This is a complex subject and we emphasize the importance of consulting with the appropriate advisers in carrying out such estate planning strategies.

Taxation of cash value upon withdrawal or surrender

The cash value of the life insurance policy can be withdrawn tax free up to the basis of the policy, after which point the cash value is taxed.  This is a unique and advantageous feature of life insurance and is known as the first in first out (“FIFO”) convention.  It is important that the life insurance policy meet certain requirements in order to qualify for FIFO treatment.  If a life insurance policy is over funded as per these rules it could be classified as a modified endowment contract (“MEC”) which would deem it to be treated as an annuity for tax purposes, which would include last in first out (“LIFO”) treatment of the gains as well as a 10% penalty for early withdrawals (prior to age 59 1/2).

Taxation of dividends

Unlike taxes on dividends from capital assets such as stocks, bonds, and mutual funds, taxes on dividends from life insurance policies are deferred until their withdrawal, and are subjected to first in, first out treatment.  This is another unique and advantageous feature of life insurance which distinguishes it from other investment asset classes.

Currency risk of assets held overseas

Assets held overseas or denominated in a foreign currency can expose your investment portfolio and assets to currency risk.  Here we will discuss the risks associated with holding stocks, bonds, real assets and cash denominated in a foreign currency, and options for mitigating this risk via hedging.  Overall we believe that hedging as an investment strategy is an expense which will have the net effect of reducing the return of the portfolio over time.

Currency risk of stocks and bonds

The effect which exchange rate risk has on overseas assets such as stocks and bonds is a very complex subject.  The performance of the foreign business issuing the securities is effected by currency risk due to its inventory, receivables, and other assets being denominated in the country’s currency.  When stocks or bonds are issued and denominated in a foreign currency, they typically pay interest or dividends in that currency.  The investor is therefore exposed to currency risk in a variety of ways.

A portion of these currency risks can be hedged using currency futures, however keep in mind that there are inherent costs associated with hedging.  Additionally, there may be an underlying need to own assets denominated in the currency of another country, as discussed more below.

Currency risk of real assets

There may be an underlying need to hold assets in a foreign country, and real assets held overseas, such as real estate and commodities, can serve as both a currency hedge and an inflation hedge.  An instance of this is where real property is held in a country to which the holder of the asset intends to return to at a future date, for example to retire.

Tax advantages of rental real estate

Rental real estate can be an excellent investment.  Real property offers a significant opportunity to obtain income and capital appreciation for an investor.  It also has many advantages to an investor from a tax perspective.  These advantages include the ability to exchange property on a tax deferred basis, as well as the ability to write off numerous expenses associated with the property, including depreciation and depletion of the underlying assets.

Tax deferral

Investment property can qualify for a “like kind exchange” which is known as a section 1031 exchange.  Under a section 1031 exchange, the investor can defer gains on the property as long as the proceeds from the real estate sale are re-invested in another property.  Certain requirements must be met, including the identification of a replacement property and subsequent closing on that property within certain time frames, as well as the use of a qualified intermediary to transfer the funds from one property to another.  It is important that such an exchange be done in consultation with the appropriate advisers as the rules are complex.

Deduction of investment expenses

In addition to expenses associated with operating the real property including contractor and employee expenses, real estate taxes, utilities, repair costs, and travel related to running and managing the property, real estate investors can also deduct depreciation of the property and of many of the fixtures inside the property.  There are certain IRS conventions which are used to depreciate property, including the accelerated cost recovery system (“ACRS”) as well as the modified cost recovery system (“MACRS”).  Under these systems the depreciation is calculated based upon the current basis in the property as well as the number of years remaining in the cost recovery period.  A unique feature of deducting depreciation expenses is that the cash flow of the property is not affected.  In certain situations an investor can operate a property which has positive cash flow but which shows a loss on the income statement, resulting in a tax advantage.



A summary of tax filing deadlines for 2016

Below are many of the tax filing deadlines for the 2016 tax year.

2016 tax filing deadlines
Date items due
February 2 W-2 and 1099 forms must be furnished to employees and contractors
February 29 W-2 forms must be furnished to Social Security Administration and 1099 forms must be furnished to the IRS
March 15 corporate tax returns are due
April 15 individual and partnership tax returns are due; first due date for quarterly estimated taxes
June 15 second due date for quarterly estimated taxes
September 15 due date for partnership tax return if extension was filed; third due date for quarterly estimated taxes
October 15 due date for corporate and individual tax returns if extension was filed

Gift and estate taxes

Taxes are levied upon a decedent at both the federal and state level.  At the state level, such taxes are commonly referred to as inheritance taxes while at the federal level such taxes are commonly referred to as estate taxes.

Estate taxes

The estate of the decedent is subject to estate taxes if it exceeds certain an exemption threshold, which is $5,430,000 for an individual and $10,860,000 for a married couple for the 2015 tax year.  The size of the estate can be reduced by making gifts up to the the annual exclusion limit ($14,000 per person in 2015).  Gifts over and above this exclusion limit will trigger the gift tax and will require that a gift tax return be filed.  Gifts to certain persons and entities can be unlimited and are not subject the the annual exclusion limit.  These include gifts to your spouse, gifts to certain charities, gifts related to certain higher education expenses, and gifts related to certain medical expenses.

Required minimum distribution rules for retirement accounts

Certain retirement accounts are subject to required minimum distribution rules upon reaching a certain age, typically 70 1/2.  At this point, the account participant is required to withdraw a certain amount from the account(s) each year, and these withdrawals are usually subjected to income tax.  The participant may withdrawal more than the required amount and still be in compliance with the rule.  The rules apply to IRA accounts, SEP-IRA accounts, SIMPLE IRA accounts, 401K plans, 403B plans, 457 plans, and other defined contribution plans.  Note that ROTH IRAs are not subject to the rule in most cases.

The amount of the required minimum distribution is based upon age and marital status, and is determined based upon mortality tables.  The details of the calculation will not be covered here, however most account custodians will calculate the required minimum distribution for the account owner.

Capital gains and dividends

Investments can be be taxed in several ways.  When they are held inside retirement accounts, taxes are levied upon withdrawals from the retirement accounts based upon the rules related to those accounts.  When they are held outside of retirement accounts, they can be taxed on both the income which the investments generate as well as on the gains obtained when the investments are disposed of.


We restrict discussion to dividends and interest here, and how they are treated for the recipient.  Income paid in the form of dividends and interest is typically taxable to the recipient upon being paid by the issuer or payer.  In the case where dividends are reinvested to purchase additional securities the dividends are still taxed upon being paid.  Dividends and interest are typically taxed as ordinary income, the exception being certain “qualified” dividends which are taxed at the capital gains tax rate.

Capital gains

Capital gains taxes are incurred when an asset is disposed of, and are based upon the amount of time which the asset is held.  Assets held for one year or less are taxed at the short term capital gains tax rate, while assets held for more than one year are taxed at the long term capital gains tax rate.  The amount of the gain is a function of the sales price and the cost basis of the asset.  The table below shows the capital gain tax rates for their corresponding income tax bracket.

2016 capital gains tax rates
Income tax bracket short term rate long term rate
10% 10% 0%
15% 15% 0%
25% 25% 15%
28% 28% 15%
33% 33% 15%
35% 35% 15%
39.6% 39.6% 20%

Exceptions to IRA early withdrawal penalty tax

In most cases, you will be subjected to a 10% penalty tax on withdrawals made from an IRA account (for a ROTH IRA, this penalty is levied on the earnings only) if the withdrawals are made prior to age 59 1/2.  Keep in mind that you will always pay regular income taxes on withdrawals from traditional IRA accounts if you were able to deduct all of your contributions and that there are no exceptions to this.  If you did not deduct all of the contributions the situation is a bit more complicated.  There are, however several exceptions which will allow you to avoid paying the 10% penalty tax.  In this article we will cover three of these exceptions:  an exception related to being a first time home buyer, an exception related to qualified higher education expenses, and an exception which relates to taking equal periodic payments from your account.

First time home buyer exception

If you are using the IRA funds for a down payment on your first home, you may withdraw up to $10,000 without paying the 10% penalty tax.  You will, however, still have to pay income taxes.  In order for the home purchase to qualify as a first time home purchase, you must not have owned a home within the previous two years.  If you are married you and your spouse may each withdraw up to $10,000 from your IRA for the purpose of making a first time home purchase.

Higher education expense exception

If you withdraw funds from your IRA to pay for qualified higher education expenses of yourself, your spouse or your child you will not have to pay the 10% early withdrawal penalty tax.  Qualified higher education expenses include tuition, books, supplies and equipment required for enrollment at an eligible higher education institution.

Equal periodic payments exception

There is another exception to the early withdrawal penalty which involves taking equal periodic payments from the retirement account beginning at a time prior to age 59 1/2 and continuing for 5 years or until age 59 1/2, whichever is later.  The rules for using this exception are complex and we emphasize the importance of  consulting with a financial or tax adviser when using this exception.

Tax deductions for small business owners

As a small business owner, you are able to take numerous tax deductions against your business income.  How these deductions are taken will vary depending on whether your business is structured as a sole proprietorship, corporation or partnership.  This article will restrict the discussion to the sole proprietorship situation, which includes single member LLC entities which have elected to be treated as sole proprietorships.

Mortgage interest, medical expenses, and other tax deductions

This article will cover deductions which are taken on Schedule A of the IRS form 1040.  Filers are entitled to either take the standard deduction (for 2016 these amounts are $6,300 for single and married filing separately, $12,600 for married filing jointly, and $9,300 for head of household) or itemize certain deductions.  These deductions include mortgage interest (including certain “points”), medical and dental expenses, charitable contributions, certain taxes, casualty, disaster and theft losses, and certain miscellaneous expenses.  Some of these deductions are subject to certain thresholds, for example medical and dental expenses are only deductible to the extent that they exceed 10% of adjusted gross income (“AGI”).

Income tax brackets

Below are the income tax brackets for the 2016 tax year.  These are the marginal tax rates, in that you will be taxed at each of these levels as your income rises.  For example, if you are single and had taxable income of $60,000, your tax would be the sum of 10% of $9,275, 15% of $28,375 ($37,650 minus $9,275), and 25% of $22,350 ($60,000 minus $37,650).  Capital gains tax brackets are different from income tax brackets.

2016 Income tax brackets
Rate Single Filer Married Filing Jointly Head of Household
10% $0 – $9,275 $0 – $18,550 $0 – $13,250
15% $9,276 – $37,650 $18,551 – $75,300 $13,251 – $50,400
25% $37,651 – $91,150 $75,301 – $151,900 $50,401 – $130,150
28% $91,151 – $190,150 $151,901 – $231,450 $130,151 – $210,800
33% $190,151 – $413,350 $231,451 – $413,350 $210,801 – $413,350
35% $413,351 – $415,050 $413,351 – $466,950 $413,351 – $441,000
39.6% >$415,050 >$466,950 >$441,000

Tax consequences of selling your home

Selling your home will not necessarily have an adverse impact as relates to taxes.  When you sell real estate, you are usually subject to capital gains taxes unless you perform a “like kind exchange”, or section 1031 exchange, or reinvestment of the proceeds into another piece of real property.  A 1031 exchange is limited to investment property, however, for which a primary residence typically does not qualify.

There is, however an exception, or exclusion, in the case where you sell your primary residence (up to $250,000 if you are filing single or head of household or $500,000 if married filing jointly).  In order to qualify for this exclusion, you must meet certain criteria.  Firstly, you must have owned the home and used it as your primary residence in 2 of the 5 years prior to sale.  Secondly, you must not have acquired the home through a like kind, or section 1031, exchange during the five years prior to the sale.  Thirdly, you must not have excluded the sale of a home during the 2 years prior to the sale of the home which you now want to exclude.  If these three criteria are met you can exclude $250,000 in figuring the capital gains taxon the home ($500,000 if married filing jointly).

Stock options

A stock option gives the owner the right, but not obligation, to purchase or sell shares of a stock at a certain price, for a given amount of time.  Companies frequently use stock options as a means to compensate employees.  Employee stock options can be broken down into two general categories: incentive stock options (“ISOs”) and non-qualified stock options  (“NSOs”).