Every U.S. person (citizen, resident or entity) who has a foreign financial account or has signature authority over a foreign financial account containing $10,000 or more at any time during the calendar year must electronically file a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts.

A foreign financial account can be a bank account (checking or savings), a brokerage account, mutual fund, trust or other type of foreign financial account such as a retirement account or a foreign-issued life insurance or annuity contract with a cash value.

A person who participates in online gambling is required to set up an offshore account in order to participate in the gambling activity. For purposes of this report, that person has a foreign account that must be included in this annual report if the account balance meets or exceeds the $10,000 level.

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Please send us your foreign account information by January 15, 2016 so that we can get these reports filed for you prior to the onslaught of tax season filing.

Thank you in advance for helping us get these reports done timely.

ROTH IRA CONVERSION

If your taxable income is lower this year than past years it may be a good time to convert or move some funds to a Roth IRA. The amount of the conversion will be taxable in 2015 yet there are advantages to performing this action. Withdrawals from a Roth IRA, including earnings, will be tax-free if you

• have held the account at least 5 years, and 
• are age 59.5 or older, disabled or deceased.

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NEED MORE DEDUCTIONS?

If you itemize deductions and are looking for additional write-offs, one of them could be paying that second installment of your property taxes before 12/31/2015. However, a word of caution – if you paid Alternative Minimum Tax (line 45) in 2014 and your income is about the same this year as it was last year then this deduction may not be beneficial.

You may also want to review your list of charitable contributions and find one or more of your favorite recognized U.S. charities to which you’d like to contribute. Go to www.irs.gov and in the Search box enter “Recognized U.S. charities” and follow the link.

NOT WAITING ON CONGRESS…

We are recommending to taxpayers over age 70.5 who are interested in contributing their RMD to charity to go ahead and set that up. The limit is $100,000. Congress may not renew legislation until late this year. If Congress fails to renew this provision, you will be treated as having received your RMD and also making a charitable donation.

IDENTITY THEFT

According to the National Taxpayer Advocate, Nina Olson, this has become one of the fastest growing problems in our nation. If you have been a victim or think your identity may have been stolen, contact us, the IRS and the Federal Trade Commission. There are well written articles at www.irs.gov about what to do if you’re a victim.

REMEMBER

The IRS will never contact you by phone or e-mail or ask for identifying information from you through either of these actions. If there is a tax issue with your account, you will receive a notice through the U.S. mail service. Contact us if you receive any communication from the IRS or from someone saying they are from the IRS.

If you have a question about any item in this newsletter, please contact either Tina (tina@reddelltax.com) or Don (don@reddelltax.com).

HAVE A WONDERFUL THANKSGIVING

Download this newsletter

SAME SEX MARRIAGE

Effective for tax returns to be filed for 2013, same sex married couples may be able to file their Federal returns with a Married Filing Joint filing status. The key criterion is that the couple was married in a state that allowed same sex marriage at the time they were married. It is not necessary that the couple currently reside in a state in which same sex marriage is allowed. Registered Domestic Partners are not considered to be married for purposes of filing a joint Federal tax return.

3.8% MEDICARE TAX ON INVESTMENT INCOME

Check with us to see if some tax planning may reduce the impact of this tax. The 3.8% surtax will be imposed on the lesser of your net investment income for the tax year, or the amount by which your modified adjusted gross income (MAGI) exceeds the “threshold amount” for the year. The threshold for married filing jointly is $250,000, $125,000 if you are married filing separately and $200,000 for everyone else.

Although the IRS issued more than 100 pages of regulations to define ”net investment income” the term basically includes interest, dividends, annuities, rents, royalties and capital gains. Interest on tax-exempt bonds and distributions from qualified retirement plans are not included, nor is any gain excludable from income on the sale of your primary residence.

THE 0.9% MEDICARE SURTAX ON EARNED INCOME

This tax applies to wages and self-employment income. The income thresholds are the same as the tax on net investment income above: $250,000 for couples filing jointly, $125,000 for those married filing separately and $200,000 for other filers. The surtax applies only to the employee’s portion of the Medicare tax. Employers are required to withhold the surtax once an employee’s wages exceed $200,000 in a calendar year.

CAUTION: If filing jointly, each spouse could earn less than the $200,000 threshold and have no extra withholding on their wages during the year, however, if their combined wages exceed the $250,000 threshold on their tax return, they will pay the surtax owed when filing their tax return. On the other hand, if one spouse’s wages are over $200,000 and the employer withholds the additional tax, but the other spouse earns less than $50,000, then any extra surtax withheld would be credited on their tax return.

ANNUAL GIFT TAX EXCLUSION

The amount of money that a taxpayer may gift to someone without having to file a Gift Tax return (Form 709) remains at $14,000 for 2014. Please be aware that such a gift is not deductible on your personal income tax return.

PENSION PLAN LIMITATIONS

Although many limitations remain unchanged for 2014, it is worth noting the maximum amounts that one may contribute to the various retirement plans for 2013 and 2014.

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*Adjusted Gross Income limitations apply; please contact us for more details.
**Compensation limits or phase-outs may apply; please contact us for more details.

*Adjusted Gross Income limitations apply; please contact us for more details.
**Compensation limits or phase-outs may apply; please contact us for more details.

IRS WARNS OF PHONE SCAM

Another nationwide phone scam has begun. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card or wire transfer. Refusal to pay is countered by threats of arrest, deportation or loss of a business or driver’s license.

NOTE: The IRS will NOT ask for payment using a pre-paid debit card or wire transfer and will NOT ask for a credit card number over the phone.

Usually, but not always, the initial contact from the IRS will be by mail. Any time you are contacted by someone claiming to be from a tax agency, tell the caller that they should speak to your representative, give the caller our contact information, and let us know about it.

Be alert for phone and e-mail scams that use the IRS name. The IRS will never request personal or financial information by e-mail, texting or any social media. You can forward scam e-mails to phishing@irs.gov. Do NOT open any attachments or click on any links in those e-mails.

You may read more about tax scams on the genuine IRS website, IRS.gov.

You may download NEWSLETTER-Dec2013.pdf here.

The purpose of this newsletter is to bring you up to date on changes to California and Federal tax law.

CALIFORNIA

Proposition 30 adds additional income tax rates retroactive to January 1, 2012. If you are affected by this provision, the proposition also contains a waiver of underpayment penalties for this retroactive assessment.

If your California taxable income for 2012 is less than $250,000 ($500,000 for a married couple filing jointly) you are not affected by the increased rates. The marginal rates for all taxpayers up to the previous highest rate of 9.3% were not changed by Prop. 30. If your California taxable income for 2012 is over the $250,000/$500,000 thresholds, marginal rates on income over those amounts will be –

Rate Single MFJ Head of Household

10.3% $250,000 $500,000 $340,000
11.3% $300,000 $600,000 $408,000
12.3% $500,000 $1,000,000 $680,000

Proposition 30 also increased the statewide sales tax rate by ¼% effective January 1, 2013.

FEDERAL

I’m writing this on December 21, so any of the following is subject to change by Washington, but this is what we know now.
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The gift exclusion remains at $13,000 for 2012 but increases to $14,000 for 2013.

The election to deduct sales tax in lieu of state income tax expired 12/31/11.
The option to deduct tuition instead of using a tuition credit expired 12/31/11. The credit is still available for 2012 for Singles with adjusted gross income up to $90,000 and married couples with adjusted gross income up to $180,000. For 2013 the available tuition credits will be available to Singles with adjust gross income up to $63,000 and married couples with adjusted gross income up to $127,000.

The $250 deduction available to all classroom teachers (whether or not they itemized) expired 12/31/11. Teachers who itemize can continue to deduct qualifying employee expenses.

Effective 2013 FICA tax will go up for some. FICA is made up of two parts – social security (6.2%) and Medicare (1.45%). Effective 1/1/13 the Medicare portion will increase to 2.35% for a Single person with earnings over $200,000 and married couples with combined earnings over $250,000. Earnings are wages or net self-employment income. Employers will withhold this extra on employees earning over $200,000. Any balancing of this amount will be reconciled on the 1040 at year end.

Also effective 1/1/13 is a 3.8% Medicare tax on the lesser of net investment income or modified adjusted gross income in excess of $250,000 (married couples) or $200,000 (singles). Rather than try to explain this here, I will review your individual situation with you.

Effective 1/1/13 medical expenses in excess of 10% of adjusted gross income are deductible. Previously this threshold was 7.5% of adjusted gross income.

Maximum IRA contributions increase to $5500 for 2013 (plus $1000 for those over 50).

Effective 1/1/13 capital gains rates increase from 0% to 10% for those in the 10% and 15% tax brackets. They increase from 15% to 20% for those in the 25% tax bracket and above.