Tag Archives: tax strategies

How to Avoid Probate

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Few estate planning subjects are as misunderstood as probate. But circumventing the probate process is usually a good idea, and several tools are available to help you do just that. Keep reading to learn how to avoid probate and why it’s beneficial to do so.

Why You Want to Avoid Probate

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs.

Depending on applicable state law, probate can be expensive and time consuming. Not only can probate reduce the amount of your estate due to executor and attorney fees, but it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.

Is probate ever desirable? Sometimes. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

How to Avoid Probate

There are several tools you can use to avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The right strategy depends on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, you should be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and IRAs, and other retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind, though, that while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

What If You Have a Complicated Estate?

For larger, more complicated estates, a revocable trust (sometimes called a living trust) is generally the most effective tool for avoiding probate. A revocable trust involves some setup costs, but it allows you to manage the disposition of all your wealth in one document while retaining control and reserving the right to modify your plan. It also provides a variety of tax-planning opportunities.

To avoid probate, it’s critical to transfer title to all your assets, now and in the future, to the trust. Also, placing life insurance policies in an irrevocable life insurance trust can provide significant tax benefits.

The Bigger Picture

Figuring out how to avoid probate is just part of estate planning. The knowledgeable team at Ramsay & Associates can help you develop a strategy that minimizes probate while reducing taxes and achieving your other estate planning goals. Contact us today to learn more.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

What to Know When Donating Appreciated Assets

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What-to-Know-When-Donating-Appreciated-Assets

Are you charitably inclined? If so, you probably know that donations of long-term appreciated assets, such as stocks, have an advantage over cash donations. But in some cases, selling appreciated assets and donating the proceeds may be a better strategy. That’s because adjusted gross income (AGI) limitations on charitable deductions are higher for cash donations. Plus, if the assets don’t qualify for long-term capital gain treatment, the deduction rules are different. Here’s what to know when donating appreciated assets.

Tax Treatments by Type of Gift

All things being equal, donating long-term appreciated assets directly to charity is preferable. Not only do you enjoy a charitable deduction equal to the assets’ fair market value on the date of the gift (assuming you itemize deductions on your return), you also avoid capital gains tax on their appreciation in value. If you were to sell the assets and donate the proceeds to charity, the resulting capital gains tax could reduce the tax benefits of your gift.

But all things aren’t equal. Donations of appreciated assets to public charities are generally limited to 30 percent of AGI, while cash donations are deductible up to 60 percent of AGI. In either case, excess deductions may be carried forward for up to five years.

Work the Math

If you’re contemplating a donation of appreciated assets that’s greater than 30 percent of your AGI, crunch the numbers first. Then determine whether selling the assets, paying the capital gains tax, and donating cash up to 60 percent of AGI will produce greater tax benefits in the year of the gift and over the following five tax years. The answer will depend on several factors, including the size of your gift, your AGI in the year of the gift, your projected AGI in the following five years, and your ability to itemize deductions in each of those years.

Before You Donate

Before making charitable donations, discuss your options with us. The tax professionals at Ramsay & Associates can help you understand what to know when donating appreciated assets so that you can make charitable gifts at the lowest tax cost.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Maximize your 401(k) plan to save for retirement

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Maximize your 401(k) plan to save for retirement

Contributing to a tax-advantaged retirement plan can help you reduce taxes and save for retirement. If your employer offers a 401(k) or Roth 401(k) plan, contributing to it is a smart way to build a substantial sum of money.

If you’re not already contributing the maximum allowed, consider increasing your contribution rate. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a major impact on the size of your nest egg at retirement.

With a 401(k), an employee makes an election to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2020 is $19,500. Employees age 50 or older by year-end are also permitted to make additional “catch-up” contributions of $6,500, for a total limit of $26,000 in 2020.

The IRS recently announced that the 401(k) contribution limits for 2021 will remain the same as for 2020.

If you contribute to a traditional 401(k)

A traditional 401(k) offers many benefits, including:

  • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8 percent net investment income tax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

If you already have a 401(k) plan, take a look at your contributions. Try to increase your contribution rate to get as close to the $19,500 limit (with an extra $6,500 if you’re age 50 or older) as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pretax — so, income tax isn’t withheld.

If you contribute to a Roth 401(k)

Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. Your ability to make a Roth IRA contribution for 2021 will be reduced if your adjusted gross income (AGI) in 2021 exceeds:

  • $198,000 (up from $196,000 for 2020) for married joint-filing couples, or
  • $125,000 (up from $124,000 for 2020) for single taxpayers.

Your ability to contribute to a Roth IRA in 2021 will be eliminated entirely if you’re a married joint filer and your 2021 AGI equals or exceeds $208,000 (up from $206,000 for 2020). The 2021 cutoff for single filers is $140,000 or more (up from $139,000 for 2020).

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can discuss the tax and retirement-saving strategies in your situation.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Getting around the $25 deduction limit for business gifts

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deduction limit for business gifts

At this time of year, it’s common for businesses to make thank-you gifts to customers, clients, employees and other business entities and associates. Unfortunately, the tax rules limit the deduction for business gifts to $25 per person per year, a limitation that has remained the same since it was added into law back in 1962. Fifty-five years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions.

The exceptions

Here’s a quick rundown of the major exceptions to the $25 limit:

Gifts to a business entity.

The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.

Gifts to a married couple.

If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.Incidental costs of making a gift. Such costs aren’t subject to the limit. For example, the costs of custom engraving on jewelry or of packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself.

Gifts to employees.

Although employee gifts have their own limitations and may be treated as taxable compensation, an employer is generally allowed to deduct the full cost of gifts made to employees.

Gifts vs. entertainment expenses

In some situations related to gifts of tickets to sporting or other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. Under current law, entertainment expenses are normally 50% deductible, so the gift deduction is a better deal for lower-priced tickets. But once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.

Be aware, however, that the elimination of the entertainment expense deduction has been included in proposed tax reform legislation. If legislation with such a provision is signed into law, it likely won’t go into effect until 2018.

Track and document

To the extent your business qualifies for any of these exceptions, be sure to track the qualifying expenses separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.

In addition, you must retain documentation of the following:

  • A description of the gift,
  • The gift’s cost,
  • The date the gift was made,
  • The business purpose of the gift, and
  • The business relationship to the taxpayer of the person receiving the gift.

If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact us.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

7 last-minute tax-saving tips

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year-end tax planning tips

The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2017 tax liability — you just must act by December 31:

  1. Pay your 2017 property tax bill that’s due in early 2018.
  2. Make your January 1 mortgage payment.
  3. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the 10% of adjusted gross income floor).
  4. Pay tuition for academic periods that will begin in January, February or March of 2018 (if it will make you eligible for a tax credit on your 2017 return).
  5. Donate to your favorite charities.
  6. Sell investments at a loss to offset capital gains you’ve recognized this year.
  7. Ask your employer if your bonus can be deferred until January.

Many of these strategies could be particularly beneficial if tax reform is signed into law this year that, beginning in 2018, reduces tax rates and limits or eliminates certain deductions (such as property tax, mortgage interest and medical expense deductions — though the Senate bill would actually reduce the medical expense deduction AGI floor to 7.5% for 2017 and 2018, potentially allowing more taxpayers to qualify for the deduction in these years and to enjoy a larger deduction).

Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results. (Even with tax reform legislation, some taxpayers might find themselves in higher brackets next year.)

If you’re unsure whether these steps are right for you, consult us before taking action.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.