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May 2013


by Andrew D. Schwartz, CPA

Tis the season for spring cleaning.  Let's look at four spring cleaning projects for your personal finances:

  • Project #1: Clean up your IRAs, 401ks, and 403bs

  • Project #2: Clean out your tax files and records

  • Project #3: Clean up your credit report

  • Project #4: Clean out your closets, garages, and attics

Project #1: Clean Up Your IRAs, 401ks, and 403bs

As people switch jobs, change financial planners, or just move through life, it's not uncommon to leave a trail of IRA accounts, 401k accounts, and 403b accounts.  Why not take this opportunity to clean up these retirement accounts by consolidating them into one or two accounts?

Consolidating all of your retirement accounts into just a few accounts makes a lot of sense for many reasons, including:

  • The fewer the number of accounts, the easier it is to manage your investment portfolio.  There are recommended asset allocations based on your age, financial goals, and risk tolerance available on most financial websites.  Plus, make sure to either periodically rebalance your investment portfolio on your own, or seek the assistance of a financial professional to help maintain the recommended asset allocation for your portfolio.

  • You also generally have the opportunity to borrow half of the balance in your 401k or 403b account, up to $50k.  This can include a Solo 401k as well.  Please note, however, that you can only take out a loan from the account at your current employer based on that employer's rules.  For that reason, rolling old 401k and 403b money into your active 401k or 403 account could give you tax-free access to more of your retirement money in case of a financial hardship or to use as the down payment on a home.  You can also usually roll IRAs into a 401k or 403b account too thanks to one of the Bush Tax Acts. (Please note that if you leave your current job and have not paid off the full amount borrowed, the remaining outstanding balance will be treated as a taxable distribution subject to federal income taxes, state income taxes, and depending on your age, a 10% early withdrawal penalty as well.)

Consolidating your accounts should actually be quite easy.  Since one goal of every financial institution and investment advisor is to hold and/or manage as much in assets as possible, and they all love slow moving retirement assets,  they should be extremely helpful as you complete the necessary paperwork to initiate and complete these rollovers.

Caveat converter.  Anyone who contributes to a Traditional IRA each year, and then converts that IRA to a Roth IRA, probably does NOT want to roll their 401k and 403b accounts into an IRA. The way the formula works that determines how much of a Roth Conversion is taxable, the more money you have in IRAs, the higher the percentage of the conversion that is taxable.  IRA assets include Traditional IRAs, Rollover IRAs, SEP IRAs, and SIMPLE IRAs.

Why not also take this opportunity to rebalance your entire investment portfolio as part of the spring clean up?  Consider putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.

And while you're at it, why not take this opportunity to review who is listed as a beneficiary on your retirement and insurance accounts too?  No matter what your will says, the person who will receive money held in your retirement or insurance accounts when you die is the person listed as the beneficiary on that account on the day you die.  If you got married, divorced, re-married, had kids, have kids getting married, reached the point where your kids are having kids, or other circumstances to your family life, did you update the beneficiaries listed on each retirement and insurance account to direct those assets to the proper person or charity upon your death?

Project #2: Clean Out Your Tax Files and Records

With the April 15th deadline still a recent memory, most of us probably still have our tax records piled up somewhere in our homes.  Why not take this opportunity to shred all the documents that you no longer need to keep? According to the IRS:

Well organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if you receive an IRS notice.

  • What to Keep - Individuals. In most cases, keep records that support items on your tax return for at least three years after that tax return has been filed. Returns filed before the due date are treated as filed on the due date. Examples include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment and any other records to support deductions or credits claimed. You should typically keep records relating to property at least three years after you've sold or otherwise disposed of the property. Examples include a home purchase or improvement, stocks and other investments, Individual Retirement Account transactions and rental property records.
  • What to Keep - Small Business Owners. Typically, keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Also, keep records documenting gross receipts, proof of purchases, expenses, and assets. Examples include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices, credit card charges and sales slips. Forms 1099-Misc, canceled checks, accounts statements, petty cash slips and real estate closing statements. Electronic records can included databases, saved files, e-mails, instant messages, faxes and voice messages.

There is no period of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later. For filing a claim for a loss from worthless securities the time to make the claim is 7 years from when the return was due.

For more information from the IRS, check out:

  • Publication 552, Recordkeeping for Individuals, provides more information on recordkeeping requirements for individuals.
  • Publication 583, Starting a Business and Keeping Records
  • Publication 463, Travel, Entertainment, Gift, and Car Expenses, provide additional information on required documentation for taxpayers with business expenses

For a more complete listing, please check out this Record Retention Guide Compiled by the Massachusetts Society of CPAs available on my firm's website.

Project #3: Clean Up Your Credit Report

Currently, three companies, Equifax, Experian, and TransUnion, track everyone's credit histories.  Don't forget that banks, lenders, retailers, landlords, and other "credit grantors" use credit reports generated by these companies to determine your creditworthiness.  Why not take this opportunity to clean up incorrect or misleading information reflected on your credit reports?

Your credit report reflects quite a bit of information about you and your financial affairs. 

  • The bulk of your credit report focuses on your various loans and credit card accounts. Included is the name of each of your creditors, as well as the type of account, the minimum monthly payment, the account's limit or high balance, and the current outstanding balance.

  • Your credit report also reflects the most recent twenty-four month payment history for each creditor, showing whether each month's payments were current, delinquent, or in default.

  • Another section on your credit report details inquiries that were made by potential creditors.  In this section, the name of the creditor and the date of inquiry are listed for each request that has been made.

  • Your credit report also includes "public records" such as tax liens, bankruptcies, and judgments made against you.  Most public records remain part of your credit history for seven to ten years.  If you have any tax liens, they won't be removed from your credit report until they are paid off.

The best way to find out how your credit report looks is to order one from time to time.  You're allowed to order three free credit reports per year - one from each credit bureau - through  If you find errors on your credit report, or accounts listed as open that had previously been closed, reach out to each credit reporting agency to have those items cleaned up as soon as possible.

Project #4: Clean Out Your Closets, Garages, and Attics

in today's consumer driven world we live in, almost everyone builds up clutter that never sees the light of day.  Why not take this opportunity to clean out your closets, garages, and attics and generate a tax deduction while you're at it?

Donating these goods can also save you taxes, as long as you itemize your deductions instead of claiming the standard deduction.  Just make sure to make a list of what you donated, and somehow come up with the fair value of each donated item.

According to the instructions to the Form 8283 - Non-cash Charitable Contributions:

The FMV of used household items and clothing is usually much lower than when new. A good measure of value might be the price that buyers of these used items actually pay in consignment or thrift shops. You can also review classified ads in the newspaper or on the Internet to see what similar products sell for.

You cannot claim a deduction for clothing or household items you donate after August 17, 2006, unless the clothing or household items are in good used condition or better. However, you can claim a deduction for a contribution of an item of clothing or household item that is not in good used condition or better if you deduct more than $500 for it and include a qualified appraisal of it with your return.

Publication 526 - Charitable Contributions sheds more light onto this issue:

The fair market value of used household items, such as furniture, appliances, and linens, is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. For these reasons, formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value.

You should support your valuation with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items are also useful. Do not include any of this evidence with your tax return.

Properly valuing your donated clothing and household rules has become more important in the post August 17, 2006 "Good or Better" world. If you ever get audited, there is a good chance that the IRS will use these new rules as a way to greatly reduce the deduction they will allow you to claim unless you can:

  • Substantiate that the donated goods were in good condition or better, and

  • Demonstrate how you came up with the Fair Market Value you claimed

To help you put a value on the donated goods, we have created a few different tools based on the published values of used merchandise sold at the thrift shops of the Salvation Army and Goodwill Industries.  For starter, check out UDoGood, an iPhone App. Or, download our Non-cash Charitable Donation worksheet in either pdf format or as an Interactive Microsoft Excel Spreadsheet. (To download the Excel Spreadsheet, right click your mouse and hit "Save Target As", and then choose the directory on your computer where you want this file to sit.)

Simply complete either version of this worksheet, take a few photos of what you are donating, and file along with your tax records, and use this information when completing your Form 8283 next year to attach to your federal income tax return. Hopefully this information will do the trick if you ever get audited. While we don't recommend that you exaggerate the value you claim for the items you're donating, we do believe you should take the full deduction based on the fair market value of the stuff you gave away.

Spring Cleanup

Before getting caught up with the craziness of summer, take some time this spring to complete these four spring cleaning projects for your personal finances.  Maybe tackle one of these projects every few weeks, and your Spring Clean Up should be completed by the end of June, just in time for you to enjoy a great summer of 2013.



by Andrew D. Schwartz, CPA

I graduated from Wharton in 1987.  For those of you keeping score at home, that means I've been working at my practice for a score and a quarter plus one.  Now that I've been practicing for twenty-six years, many of the clients I picked up earlier in my career have children in high school or college who have part-time jobs.

One thing I continually notice is that most of these kids who work are incorrectly having federal and state income taxes withheld from their wages.  Please note that a working child will generally owe no income taxes unless wages earned exceed $5,950 (in 2012) and/or investment income exceeds $300.  Needless to say, most of the kids are getting back all the federal and state income taxes withheld during the year.

The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won't earn enough to be taxed.  All you need to do is have your child write the word "Exempt" in Box 7 of the Form W-4 that is generally completed the first day of employment.  If your child previously submitted an incorrect W-4, please have them file a corrected one with their employer as soon as they can.

Here is what the IRS says in their instructions to the Form W-4:

Exemption from withholding. If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it. Your exemption for 2013 expires February 17, 2014. See Pub. 505, Tax Withholding and Estimated Tax.

And here are the instructions on the W-4 for line 7:

I claim exemption from withholding for 2013, and I certify that I meet both of the following conditions for exemption.

  • Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and

  • This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If you meet both conditions, write “Exempt” here .

Do yourself and your kids a favor by having him or her write the word "Exempt" on Line 7 of the W-4 form.  Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal and state income taxes will be withheld from their wages.  And you won't get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back their tax refund.




Income Taxes

Saving and Investing



  • Good time to make semi-annual donation of clothing and household items to charitable organizations (and maximize this tax deduction using UDoGood.)
  • Before summer kicks in, take a look at your asset allocation of all your retirement and non-retirement accounts, and consider rebalancing your accounts.


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 $5,500 for 2013, up from $5,000 in 2012.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2014 to make your 2013 IRA contributions. 


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This Month's Topics

Spring Clean Up

Summer Job Alert: Have Your Working Children Claim "Exempt" on Their W-4 Forms

The FICA Refund for Medical Residents 

2012 & 2013 Tax Facts

Tax and Financial Planning Calendar for May 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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