Charitable Donations of Appreciated Stock

If you are considering making a charitable donation of cash to a charity, college, etc., you may want to consider donating appreciated stock from your investment account rather than that cash.  Your deduction for tax purposes will be the fair market value of the stock.  You will then avoid paying tax on the gain you have realized on that stock.

Example:  You hold a stock you have had for years that is worth $12,000 that you originally paid $3,000 for more than a year ago.  If you sell the stock and donate the cash, you will have to report a capital gain of $9,000 and a charitable deduction of $12,000.  However, if you donate the stock you will have no capital gain yet still a charitable deduction of $12,000.  The charity will sell the stock and get its $12,000.

Note that this only works for stock you have held for more than one year.  Please call or email should you have any questions on how this strategy may work for you.


S Corp Shareholder Compensation

In almost all cases the S Corp. shareholder-employee prefers to minimze W-2 compensation in favor of distributions from the corporation. As payroll taxes are not due on such distributions this will lower the tax and increase cash flow. This tax advantage has only increased over the years as the employment tax obligation on compensation has climbed. This is becoming an issue of importance as the Internal Revenue Service is paying closer attention to the spread between low wages and high distributions. Recent court cases have shown that the Service is looking at all of the following…the shareholder-employee’s responsibilities, time and effort devoted to business, compensation of non owners, what comparable businesses pay for similar services, compensation as a percentage of profits and the total compensation to distributions for the year. As Washington is out of money, this could become a red flag issue that may need to be addressed.

Beneficiary Designations

Yes, we are all busy and have more than enough to do. Often regarding a financial decision, we put it off until tomorrow. However, tomorrow may be to late with certain retirement accounts or life insurance policies. Due to divorce or some other life changing event, beneficiary designations made years ago can very easily become outdated. A person who has been divorced may never “get around” to changing the beneficiary of certain assets from their old spouse to their children or new spouse. This could lead to a tragic outcome as the assets will pass according to the beneficiary designation and not the will. Please take the time to verify your benefciary designations, both primary and secondary beneficiaries. Should you have any questions, please contact our office on how to maximize tax deferral benefits for certain retirement accounts.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) have become increasingly popular over the last few years. Opening one up is the ultimate expression of taking responsibility for your own healthcare costs instead of relying on an employer or the government.

Plus, HSAs have tax advantages. For 2011, you can make a deductible HSA contribution of up to $3,050 if you have qualifying self-only high-deductible health coverage or up to $6,150 if you have qualifying family high-deductible coverage. The contribution ceiling is increased by $1,000 if you are age 55 or older as of year-end. However, no contribution is allowed after you reach the Medicare eligibility age—currently age 65.

Deductions are not phased out for those with high incomes, and you don’t have to itemize to benefit. However, you must have a qualifying high-deductible health insurance policy (and no other general health coverage) to be eligible for the tax-saving HSA contribution privilege. For 2011, a high-deductible policy is defined as one with a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage. For 2011, qualifying policies can have out-of-pocket limits of up to $5,950 for self-only coverage of $11,900 for family coverage.

The HSA earnings are allowed to build up federal-income-tax-free. You can then take federal-income-tax-free HSA withdrawals to cover most out-of-pocket medical costs, even after you reach the Medicare eligibility age. However, if you can afford it, it is better to leave the HSA balance untouched. That way, you can build up a substantial tax-free reserve for future medical expenses.

If you take money out of your HSA for any reason other than to cover qualified medical expenses, you will generally owe federal income tax plus a 20% nonqualified withdrawal penalty tax. However, the 20% penalty tax does not apply after you reach the Medicare eligibility age.

Please contact us if you have questions or want more information about tax-saving HSAs.