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April 2013


by Andrew D. Schwartz, CPA

Tactful tax talk: Tax Time, a Tax Trap, a Tax Trend, and a Terrific Tax Trifecta. 


April 15th is just a few weeks away.

Anyone born before 1970 and living in New England remembers the Blizzard of 1978.  Because my father was a practicing CPA at the time, I remember that the the tax filing due date was pushed back one week that year due to the blizzard.  (My neighbor Bill who is from Kewanee, IL told me about the Blizzard of '79 that hit the Midwest the year after the Blizzard of '78, but I'm not sure if he's telling me the truth or was just trying to one-up me.)

And a few years ago, due to the March ice storms in New England, the federal once again extended the tax filing due date - this time all the way back to May 11th. Remember those storms?

Well, this year we had some crazy weather in the Boston area, including one of the biggest blizzards in recorded history. So the tax filing due date must have been extended past April 15th this year, right?

The answer is No. That means that you need file something by 4/15. Make sure to either file your tax return or file for an automatic extension by using a Form 4868.

If you owe taxes for 2012, not filing either your tax return or an extension on or before April 15th can get expensive in a hurry. While the "Failure to File" penalty is 5% per month based on the balance due as reflected on the tax return you ultimately file, the "Failure to Pay" penalty is .5% per month.  Submitting your return or an extension prevents you from being hit with the Failure to File penalty as long as you file your returns by October 15th.

For example, what happens if you owe $10k in federal income taxes and ignore the April 15th filing deadline?  By not submitting your your tax return or extension request, expect to pay a Failure to File penalty of $500 per month on the $10k you owe.  By filing something, the penalty would have been reduced by 90% to $50 per month.

Some people file an extension to get a cheap loan from the federal government. As long as you owe less than 10% of your total federal tax liability when you submit the extended tax return prior to October 15th, you shouldn't get hit with the Failure to Pay penalty.  Expect to be charged interest at a rate of 2 or 3 %.

Let's say you earn $200k, and your total federal tax liability is $40k.  You can hold off paying the IRS up to $4k with the filing of the extension, and then pay that amount when you file your returns in the fall.  The cost of borrowing that money from the IRS is just interest of a few percent per year.  That's cheaper interest than what most credit cards charge.


Have you ever gotten an IRS notice?

This past December, I had two non-clients who prepare their own tax returns get notices from the IRS.  One was my neighbor Bill (yes the guy from Kewanee IL) and the other was a friend from college.

The notices said they owed $5k in one case and $10k in the other. Neither owed these taxes, but didn't know what to do. My office deciphered what was going on and then responded on their behalf, helping both got their respective  issues cleared up.  In my neighbor Bill's case, instead of owing $5k to the IRS, the IRS now owes him $85.

For starters, if you ever get an IRS notice, don't assume the IRS is correct. Before you pay any money, have someone who knows taxes take a look at the notice.  We see a lot of these automatically generated notices from the IRS that our clients receive, and most of the time the IRS is not correct and our clients don't owe any additional taxes.

You generally have 30 days from the date of the IRS notice to respond, but you can generally always call the phone number on the notice to get the due date extended. Whatever you do, don't ignore the notice!  And please don't automatically pay the additional taxes reflected on the notice without fully understanding why additional taxes are being assessed.  Consider seeking help from a tax professional if you have no idea why the IRS is proposing a change to the tax returns you filed.  An hour or two of their time could save you thousands in unnecessary taxes.


The biggest trend I've seen this tax season is the number of people who now have Health Savings Accounts. These are tax-advantaged accounts available only to people with qualifying high-deductible health insurance plans.

H.S.A.'s offer tax-deductible contributions, tax-deferred growth, and tax-free withdrawals to pay for your family's health costs. Any money remaining in your account when you turn 65 can be used to subsidize your retirement.

For 2012, married couples could contribute $6,250 to an H.S.A. and single individuals could contribute $3,150.

We wrote about H.S.A'.s in our May 2012 newsletter.


In the world of horse racing, a Trifecta is picking the first three horses in order of finish.  It's tough to win a Trifecta, but if you do win, the payout tends to be quite large.

Here is how to win the Tax Trifecta:

  • Max out your retirement savings at work.

  • Own where you live

  • Contribute to a Roth IRA if your income is below the thresholds, or consider contributing to an IRA and converting that account to a Roth IRA if you have no other IRA accounts.


Tax time, tax trap, tax trend, and a terrific tax trifecta.



by Attorney Neil Cohen

In response to what was referred to as the “fiscal cliff” Congress passed and the President signed The American Taxpayer Relief Act of 2012 into law earlier this year.  For estate planning attorneys and their clients, the Act responds to many of the uncertainties that we have been dealing with for the past several years related to the “sun-setting” of the Bush-era tax cuts which Congress extended for two additional years in 2010.

For the past two years, the estate and gift tax exemption amounts have been $5,000,000 and the top tax rate has been 35%.  These temporary rates were scheduled to return to a $1,000,000 exemption amount and a top tax rate of 55% first in 2011 and then again on January 1 of this year.  This uncertainty has made planning difficult during the last few years.

The Act has permanently set the exemption amount at $5,000,000 (with an inflation index so the amount is currently $5,250,000) for gifts made and individuals dying after December 31, 2012.  It also set the top estate and gift tax rate at a compromise level of 40%. 

The fact that the Act made these amounts and rates permanent is good news; however, recent history has demonstrated constant flux in our federal tax laws with significant legislation enacted approximately every two years.  It is because of this we are wary that “permanent” only means that the law no longer has an expiration date.  It is always possible that the law could change when new legislation is enacted.

In a discussion of the gift and estate tax system it is important to understand that the exemption amount is different from the annual exclusion amount and the use of one does not reduce the availability of the other. 

  • The exemption amount is the value of assets that each person can give away during their life or at their death without have that amount being subject to transfer taxes (gift or estate taxes). The exemption amount of $5,250,000 means that a husband and wife can give away a total of $10,500,000 during their lives or at their death.  Using some of the exemption amount for a large gift during life reduces the amount available at death by an equal value.

  • The annual exclusion amount is the amount that a person can give away each year to as many people as desired without having to file a gift tax return or use any of their exemption amounts.  The annual exclusion amount was indexed for inflation several years ago and increased to $14,000 for 2013. 

Making gifts using the annual exclusion amount is a very potent estate planning tool.  It is common practice for grandparents to make annual exclusions gifts to children and grandchildren to reduce the value of their estate.  This means a husband and wife with four married children and ten grandchildren can each make 18 annual exclusion gifts a year and reduce their total estate by a combined $504,000 each year.  This also reserves the full amount of their exemption amounts at death.

When Congress extended the Bush-era tax cuts in 2010, the concept of portability was added to the arsenal of estate planning tools.  The Act made portability permanent.  Portability allows a surviving spouse the opportunity to elect to apply any unused exemption amount to their own transfers during life and at death.  In other words, if Wife dies in 2012 survived by Husband and only $4,000,000 of her exemption amount is used an election can be made allowing the husband to benefit from her unused exemption of $1,250,000 during his life or at his death.  This is in addition to his own $5,250,000 exemption amount which will allow him to shelter upwards of $6,500,000 of assets from gift taxes during his life or from estate taxes at his death.  In order to retain the unused exemption amount the proper elections must be made and documentation filed with the IRS at the death of the first spouse. 

Portability only applies to the federal gift and estate tax exemptions and not to any state gift or estate tax exemptions.  Portability was intended to provide additional relief in many circumstances, but it should not be confused as a substitute for proper estate tax planning.  In fact, the $5,250,000 exemption amount removes many people from the federal estate tax system but it does not change their state estate tax liability.  Many states moved away from the old estate tax system years ago and now have their own estate tax laws.  Many states also have a much lower estate tax exemption amount; in a great deal of states that amount is only $1,000,000 so it is still important to plan for state estate taxes. 

For example, in states like Massachusetts, people that are close to but not over the federal exemption amount may suffer from improper or no planning and may unintentionally subject their heirs to an unexpected state estate tax bill in excess of $400,000.  A properly drafted estate plan can at the very least delay that tax bill and at best, avoid it altogether.

Estate tax and gift tax planning is a process that evolves as your financial needs and concerns change over the years. An attorney with a focus on estate planning is an important part of your team of financial and wealth advisors.

Woodman & Eaton, P.C. is an independent law firm providing personalized, objective advice and counsel to individuals and families, with a stated goal to help their clients achieve peace of mind that they have developed a plan to accomplish their objectives.




Income Taxes

Saving and Investing




  • Due date for funding your 2011 Roth or Traditional IRA, or Education Savings Account (ESA) is 4/15/13
  • Due date for self-employed individuals to fund their retirement plans is 4/15/13
  • Self-employed individuals who need additional time to fund a retirement plan should file a Form 4868 with the IRS by 4/15/13


2012 & 2013 TAX FACTS

  • For 2012, the standard deduction for a single individual is $5,950 and for a married couple is $11,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2012, the personal exemption is $3,800. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $113,700 for 2013, up from $110,100 for 2012.
  • The standard mileage rate is $.565 per business mile as of January 1, 2012, up one cent from $.555 per mile since July 1, 2011.
  • The maximum annual salary deferral into a 401(k) plan or a 403(b) plan is $17,500 in 2013, up from $17,000 in 2012.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2012, increasing to $5,500 in 2013.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2013 to make your 2012 IRA contributions. 


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This Month's Topics

Timely and Tactful Tax-Alliteration

Cohen's Estate Tax Update

The FICA Refund for Medical Residents 

2012 & 2013 Tax Facts

Tax and Financial Planning Calendar for April 2013


Browse our index of previous months' newsletter topics

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In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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