BHB Advisors LLC, CPAs and Consultants

 

Based in Minnesota, BHB Advisors, LLC is a full service tax and accounting practice, offering the following services:

  1. Tax – planning and compliance work for individuals, corporations and partnerships
  2. Accounting Services and Financial Statements
  3. Consulting and Management Advisory Services

Our mission is to communicate, collaborate and cooperate with our clients to help get them where they want to be financially.

Our specialty is working with individuals and small to midsize companies in the Minneapolis and St. Paul area.

We hope that our website will offer you a glimpse of our expertise and help answer tax and accounting questions you may have.

Tax Planning 2014

It's time to consider your end of the year tax plans.  The laws for 2014 have not been finalized yet, however most analysts are expecting the expiring provisions to reinstate for 2014 and 2015.

A few of those provisions include:

  1. Tuition and fees deduction: this is an above the line deduction for up to $4,000 of qualifying education expenses.
  2. State sales tax deduction: this is a deduction you can take in lieu of a state income tax deduction on Schedule A.
  3. Charitable IRA transfers: where taxpayers ages 70 ½ or older can make direct transfers to charities of up to $100,000 from their IRA.

The tax rates are not expected to change in 2015, though due to time-value of money, most people will benefit by accelerating write offs in 2014 and deferring income to 2015. Here are a few ways to accelerate your write-offs:

  1. State & Local Income Taxes:  if you make estimated payments or expect to owe state income tax, we recommend making your estimated payment by December 31st; doing so will allow you to take the deduction for taxes paid in 2014 instead of 2015.
  2. Donations: You can make charitable contributions that are planned for 2015 in 2014.  As long as the payment is made or mailed by December 31st, it qualifies.  One strategy would be to charge a donation on your credit card, that way you can claim the deduction in 2014 while deferring the cash payment to 2015.
  3. Medical Expenses: If you have reached 10% of your AGI in medical expenses (7.5% for those over 65) take advantage of qualified elective procedures in 2014.
  4. Mortgage Interest:  you could make your January 2015 mortgage payment early and deduct 13 months of mortgage interest in 2014. However in 2015, unless you use the same strategy, you’ll only have 11 months of interest to deduct.

These four strategies really only help you if you can itemize deductions.  If you just barely qualify to itemize in 2014, using these strategies will should increase your itemized deductions in 2014, but be aware they may cause you to revert to the standard deduction in 2015.  The 2014 standard deduction will be $12,400 (MFJ), $13,600 (MFJ over 65), $6,200 (Single), $7,750 (Single over 65), and $9,100 (HOH).

AMT

Those of you who would like to accelerate you state and local income tax deductions be aware if you are in the AMT.  There is an add back of state and local income taxes for AMT so accelerating your deduction won’t help you at all.  Also exercising incentive stock options will cause the discount to hit AMT unless you sell the shares by December 31st.

Changes for 2015

The limit on retirement contributions will increase in 2015 to $18,000 or $24,000 if 50 or older.   The phaseout of AGI for Roth IRA contributions will be $183,000 to $193,000 for couples and $116,000 to $131,000 for singles.  The phaseout of AGI for regular IRA's will be $98,000 to $118,000 for couples and $61,000 to $71,000 for singles.

 

Make sure you consult your tax advisor for any tax planning considerations, and we will do our best to let you know of any changes in the law as they occur.  Happy Planning!

 

 

Leaf

Estate Planning Awareness Week 2014

Estate planning awareness week is October 20-26, this is when we take the time to remind all of you how important it is to continuously update your estate plan.

Here are some basic steps in estate planning to consider:

  1. Make a listing of your assets or update your list for completeness and accuracy.
  2. Determine and understand the effect of each assets transfer upon death.
  3. Make sure to review and update your will and your beneficiary designation forms.
  4. Legal documents – the main, 3 documents you need are as follows:

-Power of attorney – for both your financial and medical affairs

-Healthcare directive

-Will

  1. Consider taking advantage of the $14,000 annual gift tax exclusion this year.
  2. The top federal gift and estate tax is 40% on estates/ (lifetime) gifts over $5,340,000 in 2014 and set to index for inflation here after. Consider how this will affect your estate, and what you can do to minimize your liability.
  3. MN estate tax may be due on estates in 2014 with over $1,200,000 in assets. The MN threshold is set to increase $200,000 per year until hitting a ceiling of $2,000,000 in 2018.  Consider how this will also affect your estate.

Revisiting your estate plan on a regular basis with your attorney and tax advisor can ensure a smoother process for your beneficiaries and can assist in making sure your wishes are honored.  Your advisors can also help you enact strategies so that your estate does not pay any more tax than is necessary.  Take the time to sit down and review your estate; it will be worth it.

“Forewarned, forearmed; to be prepared is half the victory.” – Miguel de Cervantes

Death & Taxes: What to do When a Loved One Dies

Continuing with our estate tax theme for October we come to the topic of what to do in the sad event of a spouse or family member's death.  Aside from planning memorial services, there are some tasks that are less commonly thought of.  Below is a list of some things that need to be considered to make this traumatic event less stressful.

  1. Death Certificates – these typically are obtained from the funeral home. Get multiple copies; you'll need them for financial institutions, government agencies, and insurers.
  2. Legal – locate the will and any other legal documents, such as a trust.  Contact an attorney and CPA for next steps on both validating the will and transferring the assets to the heirs.   This will be the first steps to obtain the legal documents to work on behalf of the deceased.
  3. If they were working, contact the person's employer.  Request information about any pay due to the deceased, any retirement funds and if there are any benefits due, such as life insurance.
  4. Banking and Credit Cards – Reach out to their bank to find any accounts and/or a safe deposit box.
  1. Life Insurance – Contact the life insurance agent to begin the claims process.
  2. Postal Service – Provide change of address information for mail forwarding.
  3. Government Benefits – Contact Social Security at 800-772-1213, socialsecurity.gov – and/or any other agencies from which the deceased received benefits, such as Veterans Affairs at 800-827-1000; va.gov – to stop payments and ask about applicable survivor benefits.
  4. Pension – Connect with any other agencies providing pension services to stop monthly checks and get claim forms.
  5. Investment Advisors – Contact the person's investment adviser for information on holdings.

Since we are a CPA firm we will go into more detail regarding taxes.  Below is a list of forms the IRS may require in the event of someone's death.

Prior year income tax return – IRS Form 1040 & Minnesota Form M1

  1. Required if decedent passes before filing taxes for the prior year.
  2. Prior year return is due April 15th of year of death.

Year of death income tax return – IRS Form 1040 & Minnesota Form M1

  1. Due April 15th of the following year.
  2. This will report income from 1/1 to date of death.

Fiduciary income tax return – IRS Form 1041

  1. Required if the estate had income greater than $600.
  2. This return reports the income earned from date of death to end of either fiscal year or 12/31.
  3. Due the 15th day of the fourth month following close of tax year

Estate tax return – IRS Form 706 and Minnesota Form M706

  1. IRS Form 706

-Required if the gross (total) estate of the decedent is worth more than the IRS's applicable exclusion amount  ($5,340,000 for 2014).

-Taxable lifetime gifts must be added to the gross estate for applicable exclusion amount calculations.

-Due nine months after date of death.

  1. Minnesota Form M706

-Required if federal gross estate plus federal taxable gifts made within three years of decedent's death exceed $1.2 million.

-Due nine months after date of death.

Gift tax return – IRS Form 709

  1. Required if decedent made a taxable gift in year of death.
  2. Due earlier of April 15th of the year following gift, or due date of Form 706.
  3. There is currently no gift tax for the state of Minnesota.

Every situation does not necessarily create a filing requirement for each of the above forms.  Please consult your tax advisor should you have any questions regarding your specific situation.

Trusts, Wills, and Probate…. Oh My!

First of all, I need to reiterate that we are not lawyers, we are CPA's.  The purpose of this article is to give you a general overview of these topics from a CPA's perspective, not to give legal advice.  If you have questions about how these concepts could affect you, please consult your lawyer and tax advisor.

Probate

Probate is a court proceeding to validate a will and transfer ownership of property from the decedent to others.  In most places, probate is required when certain assets exceed an applicable threshold.  In Minnesota, probate is required when probate assets exceed $50,000 or when real estate is involved. Probate assets include:

  1. Assets owned individually by the decedent
  2. Assets owned in tenancy
  3. Life insurance, annuities, and retirement accounts with no beneficiary designation, if the estate is named beneficiary, or if the beneficiary has deceased or disclaimed their interests

Probate may still be required even if a will is made if the probate assets exceed the applicable thresholds.

Wills

A will is a legal document that allows the decedent to name a representative of their estate, determine the division of property, and nominate a guardian for minor children.  Should a will not be made, the determination of these factors will fall to intestacy laws. Most intestacy laws rank the heirs in the following:

  1. Spouse, children, and other descendants
  2. Parents
  3. Siblings and children of deceased siblings
  4. Other kin
  5. The State

Wills have no effect on non probate assets.  They cannot override beneficiary designations or determine ownership by joint tenants.  In most cases a will cannot be used to disinherit a surviving spouse but can be quite effective in disinheriting adult children.

Trusts

A trust is a legal entity that holds title of property by one person for the benefit of the other. The terms and conditions of a trust are determined by a legal document such as a will or trust agreement. Trusts can be used to postpone a gift or receipt of inheritance or provides asset management for those unable to perform the management function.

There are three parties to a trust:

  1. A Grantor- creates the trust, determines the terms, and transfers the assets to the trust.
  2. The Trustee – holds the title to the assets and is responsible for their management and distribution
  3. Beneficiaries – persons selected by the grantor to benefit from the trust

A revocable living trust is a common way to avoid probate and provide for your beneficiaries.  Typically in a revocable trust the taxpayer is all three parties.  The assets should be titled in the trusts name, but as the trustee and beneficiary you control and benefit from the assets the same as you did before creating the trust. It is called revocable because you have the power to change or revoke assets or conditions at any time. The trust agreement in a revocable living trust provides for the management and distribution of assets after a grantor's death.  Upon death, the revocable trust becomes irrevocable.

In the case of a revocable trust as with all trusts, it is absolutely essential that the trust is funded per the will or trust agreement.  This generally means that the assets that are meant to belong in the trust need to be retitled to the trusts name and identification number.  Failure to retitle the assets will result in a failure to avoid probate and control of the assets potentially outside of the taxpayers intended action.

The choice of assets to fund your trust should be decided by your estate plan.

Your advisors will be essential in considering how these concepts will affect you.  A complete estate plan will create the greatest assurance that your values and wishes will be respected and acted upon in the case of your death.  Like the old proverb says, “Make hay while the sun shines;” take the time now while you can and feel comforted in knowing that you have provided well for your loved ones.

Health Care Directives

It can be hard to imagine on a beautiful day, when you feel great that anything bad could happen to you.  But the truth is accidents happen all the time. People, previously in the prime of their life, can be found in ICU’s around the world.  When tragedy strikes every family is going to have a different response.  Many people still remember the story of Terri Schiavo, who unexpectedly had a medical condition that left her in a vegetative state on life support.  Terri’s husband spent almost 15 years in a court battle against her parents about whether or not she should be taken off of life support.

That entire battle could have been prevented with a Health Care Directive.

A Health Care Directive is a form that states the person’s health care wishes at end-of-life and in the case of incapacity.  A Health Care Directive may also include a person’s health care power of attorney appointing a health care agent to act on their behalf.  A health care agent is required to follow the directions requested in directive.

Minnesota does not require that their suggested form be used.  They will accept many other kinds of forms including those provided by hospitals, religious organizations, or other national organizations.  Once your Health Care Directive is created it should be distributed to your doctor, health care agent, and anyone who may need to reference it.

This form is an essential part of any estate plan, but should be considered by people of all ages.  Being specific and straight forward will save all involved pain should the worst happen.

Hobbies and taxes – when your pastime generates income

Did you know that if you make money from your hobby you are required to report it on your tax return?  Here are some facts about hobbies:

Business or Hobby?

First of all, how do you tell if your activity is a business or a hobby? The main feature of a hobby is that you do it for recreation, not to make a profit. But you should consider other factors and ask yourself the following questions:

  1. Do you perform the activity in a businesslike manner?
  2. Do you put in enough time and effort to indicate that you intend to make it profitable?
  3. Do you depend on the income for your livelihood?
  4. Are your losses due to circumstances beyond your control, or are they normal in the course of the activity?
  5. Do you change your methods to improve your profitability?
  6. Do you or your advisors have the knowledge necessary to carry on the activity as a successful business?
  7. Have you been successful in making a profit in similar activities in the past?
  8. Does your activity make a profit in most years? And how much does it make?
  9. Do you expect to be profitable in the future from appreciation of assets used in the activity?

If you are unsure whether your activity is a business or a hobby you should consult your tax advisor to discuss your unique situation.

Hobby Expenses

Even if you are engaged in a hobby activity you are allowed to deduct ordinary and necessary expenses.  This means the expenses must be regular and appropriate for the activity.  You are only allowed to deduct hobby expenses up to the amount of your hobby income.  If you have more expenses than income, you are not allowed to deduct the loss from your other income. Also you must itemize deductions on your tax return to deduct your hobby expenses as they are reported on Schedule A of your tax return.

 

If you have additional questions about hobby activities please consult your tax preparer.

Deductible Moving Expenses

Moving expenses can be deductible, under the following conditions:

  1. You must be moving because of your job, starting a new one, or working at a new location.
  2. You must move close to the day you start your new job, generally within 1 year of your start date.
  3. Your new job must be 50 miles farther than your commute from your old home to your old job.  If your commute from your old home to your old job was 12 miles, then your new job must be 62 miles from your old home.
  4. You must plan to stay at your new job full-time for at least 39 weeks the first year or if you are self-employed your must plan to work full-time for at least 78 weeks during the first two years.

If you qualify under these conditions, you may deduct:

  1. Travel Expenses- this includes transportation and lodging for your household while moving to the new location but not meals.  The mileage rate for moving expenses is 23.5 cents per mile in 2014.
  2. Household Goods and Utilities: You may deduct the cost of packing, crating, and shipping your things as well as temporary storage if necessary.  You are also allowed to deduct the cost of disconnecting or connecting utilities.

You are NOT allowed to deduct any part of the purchase price of you new home or the cost of entering or breaking a lease.

If you are reimbursed for any of these expenses from your new employer, you may have taxable income.  Consult your tax preparer for your unique situation or if you have any questions about the deductibility of your expenses.

Lastly, CONGRATULATIONS and GOOD LUCK on your new endeavor!

moving

Audit Triggers

Around 1% of individual tax returns are audited annually.  If you have prepared you return truthfully, there is no reason to fear an audit.  Even in cases of math errors, or a mistake, most people will not be subject to a full blown audit.  Most returns that are audited contain one of the following triggers:

  1. High income – Taxpayers with income over $200,000 or higher are more likely to be audited. With 1 out of 9 audited for taxpayers that report one million or more.
  2. Failing to report income – The IRS computers are pretty proficient at matches W-2's and 1099's to your individual return.  Make sure you save these forms and give them to your tax preparer.  If you receive one in error, contact the issuer immediately.
  3. Large charitable deductions – if you claim charitable deductions that are out of proportion of your income you could be audited. The IRS compares these deductions with the average of those at the same income level.  Also failing to file the correct forms for non-cash charity over $500 or when an appraisal is necessary can make you a target. Solution: document well and save your documentation.
  4. Day traders – If you claim day-trading losses on Schedule C you may be subject to an audit just because of the sheer complexity of the rules.
  5. Rental losses – especially when the taxpayer claims to be a real estate professional; are more likely to be audited, again because of the specificity of the rules.
  6. Schedule C filers – Statistics have shown that the most underreporting of income and overstating expenses is done by the self-employed.  Because of this the IRS looks closely at Schedule C filers, especially at meals & entertainment and travel expenses.  Record keeping and documentation are essential in this area.
  7. 100% business use of a vehicle – keep a detailed calendar and mileage log to prevent the IRS from disallowing or reducing your deduction.  Also if you claim a mileage rate you may not also claim actual expenses for a vehicle.
  8. Writing of losses for a hobby activity – hobby expenses are only allowed up to hobby income.  Only business losses are allowed to offset other income.  If you have questions on whether your activity is a business or hobby see our article titled Hobbies & Taxes. (link to article)
  9. Claiming the home office deduction – a home office can only be deducted if it is used regularly and exclusively for business. It may not double as a playroom, guest room, etc.  The IRS may check out your claim so make sure you can prove the exclusivity of your space.
  10. Alimony Deduction – to qualify for this deduction the payments are subject to specific rules.  For instance the payments must be made pursuant to a divorce or separation agreement and must end on the occurrence of the former spouse’s death. Many divorce decrees do not specify the payments appropriately and thus the IRS makes them a target.
  11. Cash based businesses – if the nature of your business is cash based such as a bar or salon you could be targeted for audit.  Cash based businesses have statistically been likely to inaccurately report income and therefore the IRS likes to keep a close watch on them.
  12. Failing to report a foreign bank account – if you have a foreign bank account that totaled more than $10,000 USD in a year, you are required to report and file specific forms to the IRS.  From the amnesty programs the IRS has used the last few years, they have been gathering information and targeting certain foreign banks to get information on US account holders.  Make sure you are in compliance with your reporting requirements.
  13. Large currency transactions – the IRS gets reports from banks, car dealers, casinos etc of large currency transactions over $10,000.  Banks also tend to report suspicious activity that seems to try to escape notice by making many deposits just under the $10,000 threshold.  If your reported income seems inconsistent with these large deposits you may be in store for an audit.
  14. Higher-than-average deductions – the IRS publishes average itemized deductions for taxpayers in certain brackets.  If your deductions seem out of proportion to your income, you may be scrutinized.  To see how you compare to the 2012 preliminary data see our article Comparing your itemized deductions.

 

Remember you are only obligated to pay the tax you legally owe, you should not fail to take deductions that you are truly due because you fear an audit.  Documentation is vital and if you have questions consult a tax preparer.

It's all about attitude

I can still hear my mother's voice in my head telling my 14 year old self to watch my attitude.  And though she was threatening recriminations for my continued crabby tone, her advice goes way beyond my adolescent angst.  Don't we, as a general rule, tell ourselves to think positively, out of some subconscious superstitious fear of our negative thought suddenly materializing into absolute reality?  And while that one chipper neighbor may drive us a little crazy, there is great value to watching your attitude.

Most business owners work hard to maintain a positive attitude with their clients, but what about their employees? While perusing one of the accounting publications I follow, I found the following article…

Art of Accounting: My Boss Hated the Client By Edward Mendlowitz

Early on my boss took me to a client that I was to work on. He started to explain what needed to be done and what the client did, but then he said, “I hate this client—everything is always messed up and nothing ever makes sense.”

He also told me my work area was in the factory. I would probably have to move a chair next to a carton that would serve as a desk, and he warned me the lighting wasn’t too good.

His remarks were like a kiss of death. For the next five or six months, I dreaded going to the client, always thinking how messed up they were and nothing ever made sense. Then it dawned on me that I was the person doing the work, and things were in order. The carton I worked on was a few feet from where the client packed his shipments. When he did, he always chatted with me about his business, customers, employees and pricing strategies.

He also told me things he liked to do, such as going to the opera (which I did too) and vacations he took or would like to take. The client also would buy me a sandwich to have lunch with him. I got very friendly with him. And then I asked myself why I dreaded going there. I loved working there! It became my favorite client that I eagerly looked forward to visiting.

My boss's idle remark prejudiced me against the client, and it took me months to get over it.

The takeaway for me was that when I became a boss, I only said great things about a client, influencing the staff to like the client and eagerly look forward to working with them. Negative remarks about a client never left my lips! Actually, negative remarks were never applicable—my clients are all great!

And while I feel like I have the opportunity to work with great people, this article was a good gut check for me to take stock on my attitude.  And while the occasional bad day can always be forgiven, it's important not to let your bad attitude ruin your day or anyone else's.

“A bad attitude is like a flat tire. If you don't change it, you'll never go anywhere.” – Unknown

 

Small Business Health Insurance Tax Credit: Update

Though this tax credit has been available since 2010 the rules have changed.

To be eligible for this credit and employer is required to:

  1. Pay employee health insurance premiums under a qualifying arrangement.  A qualifying arrangement would require the employer to pay at least 50% of the premium for each employee enrolled in the coverage provided by the employer.  The employer is not required to pay the same percentage for each employee.
  2. Employers must obtain the insurance through the Small Business Options Program (SHOP).
  3. The employer's premium contribution is limited to the average cost of health insurance determined by area or state. For 2013 Minnesota's average cost for singles was $5,588 and $14,077 for families.
  4. Have fewer than 25 full time equivalent employees, and
  5. Pay average annual wages of less than $50,800 per full time equivalent employee.

The maximum credit is 50% of the employer's contribution to toward the employee's premiums, and can be claimed for up to two years.  The credit begins to phase out with annual wages starting at $25,400 and/or 10 full time equivalent employees, and is completely phased out at $50,800 and/or 25 full time equivalent employees.  The credit can be claimed using Form 8941, but any credit received must reduce the company's health insurance premium expense deduction.

If you think you qualify for this credit or have questions, please consult your tax advisor.