Happy June!  As you are reading this, I'm probably at a 2 1/2 day Tax Continuing Education course.  Yes, I'm that weird.  But, it is important to me and for my clients that I stay up to date on the many changes in the Tax Code.  I'm sure I'll have some insight for this newsletter come July.

My first article talks about a nuanced portion of the Tax Code...Wash Sales.  On the surface Wash Sale rules seem pretty simple.  But, if you don't pay attention you can mess up your tax plans without realizing it and you might not know until it is time to fill out your tax return.

I think I've mentioned the ABLE act in my Quick Comments before.  The second article starts to explore how those planning for Special Needs individuals can use a 529(A) account to plan for his or her future.

My quick comment covers a way you can virtually "lock-down" your identity.  It will take some time, but it can be pretty successful.

Finally, the articles from the presses cover topics I found interesting.  The first covers deductibility of mortgage interest.  As I've said before, it isn't as simple as it seems.  The article doesn't cover mortgage interest and AMT, but you can read more at my blog.  The second article covers the tax implications in investment income.

I hope you have a great summer.  I might even try to get away for a day or two (and not work while I'm doing it).  By the way, we're past halfway between the Super Bowl and the first game of the regular season.  Go Packers!

 

You've heard it when you were a kid. "Wash before dinner!" "Don't Forget to Wash!"  "Wash your face!"  One would think that washing is a pretty good idea, but it isn't when it comes to the Tax Code.

As you may know, you can deduct (subject to limits) losses on sales of capital assets.  But, if you buy back the assets too soon, the loss is disallowed, or washed.

A wash sale occurs when a taxpayer sells or exchanges stock or securities at a loss, and within 30 days before or after the sale the taxpayer buys substantially identical stock or securities, acquires substantially identical stock or securities in a fully taxable trade (plus other limitations).  So the solution is pretty simple right?  Don't buy back the security within 30 days.  But with all things Tax Code related there are "gotchas".

• Remember, the rule applies for 30 days before and after the sale.  This one is likely to catch you in December.  Let's say you're sitting on a mutual fund that has a loss.  You decide to take the loss on December 31st to reduce your tax bill.  What you forgot is that your mutual fund, even though the share price went down, paid out dividends and capital gains on December 20th and you reinvested your income back into the mutual fund.  Congratulations.  You have a wash sale!
• Another gotcha includes the words "substantially identical stock or securities".  So if you sell the Schwab S&P 500 Index Fund and replace it with the Vanguard S&P 500 Index Fund you most likely have a wash sale even though you bought the new mutual fund with from a different company.
• Don't try to be too smart.  If the IRS is one thing, it isn't stupid.  The last gotcha has to do with Roth IRAs.  If you sell an asset at a loss from your taxable account and then in a separate transaction purchase a substantially identical asset in your Roth IRA, guess what, you have a wash sale

If there is bright side to the wash sale rules, it is that you are allowed to add the disallowed loss to the basis of your new asset.  So at least, at some point you'll get the tax benefit of the tax loss.  Of course, make sure you track the updated basis in the new asset, there is no guarantee that your broker/mutual fund will do it for you.

 

Taxes are never simple and they're a whole lot easier to control before the transaction occurs.  Make sure you understand rules like the wash sale rules or let us do it for you.

Late last year President Obama signed into law legislation aimed at giving disabled Americans and their families the opportunity to save for education and other related expenses in a tax-friendly vehicle without jeopardizing their federal benefits.

 

What ABLE Offers

 

Modeled after 529 college savings plans, money invested in "Achieving a Better Life Experience" (ABLE) accounts can be withdrawn tax free to pay for qualified expenses including education and job training, transportation, health care, and housing.(1) Individuals can amass as much as $100,000 in such accounts without affecting their eligibility for Social Security Income (SSI) and other federal benefits. Further, Medicaid coverage will not be affected by how much money is accrued in an ABLE account.

 

This legislation marks a major departure from the financial constraints that -- up until now -- prevented people with disabilities from doing what the rest of us take for granted: setting aside money for future use. Prior to this law, to remain eligible for government assistance individuals had to report to the IRS any savings in excess of $2,000. (Assets placed in special needs trusts to be used for the benefit of the disabled person continue to be an exception, and do not disqualify that individual from receiving his or her government benefits.)

 

Not a Cure-All

 

Still, some restrictions apply. For instance, to qualify for an ABLE account, an individual must have experienced the onset of his or her disability prior to the age of 26. Each beneficiary can have only one account, and while there are no limits on how many family members and friends can contribute to the account, there are limits on how much can be contributed annually. For 2015, the total annual gifting limit allowed is $14,000, an amount that is adjusted for inflation each year. Any account accumulation totals in excess of $100,000 would trigger a suspension of the recipient's SSI benefits, but Medicaid benefits would continue.

 

States Must Get On Board

 

ABLE accounts can be set up starting this year, but as with 529 plans, individual states must take the lead in making them available to individuals and families. Some states, including California, Maryland, and Pennsylvania already have plans in the works.(2) Generally beneficiaries must belong to their home-state plan -- and spending of account assets can occur only in the individual's state of residence -- although exceptions (and individual state tax benefits) may apply.(2) If the ABLE account beneficiary dies, any funds remaining in the account may be claimed by the state to recoup expenses paid by Medicaid.

 

While the ABLE Act is by no means a cure-all, it does take a small, important step toward helping millions of disabled Americans live a more independent, fulfilling life.

 

Source/Disclaimer:

 

(1) Disability Scoop, "Obama Signs ABLE Act," December 22, 2014.

(2) AARP, "New 529 Plan Created for People With Disabilities," December 22, 2014.

 

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