Robert Lepson, a certified financial planner representing the Financial Planning Association of Massachusetts, took questions live from Boston.com readers on tax issues. Below is an edited transcript of his chat.
Question: Is there anything I can do now to lessen my previous year’s tax burden?
Robert Lepson: This is an important question this time of year. Your options are somewhat limited but if you are eligible for a deduction for an IRA contribution, that would be one way. If you are a business owner, you could open a SEP and make a contribution to that plan.
Question: I just inherited a few million dollars and would like to pass $300,000-$400,000 to my kids as sort of an advance inheritance. Is there a way to do this without a big tax hit?
Lepson: Wow… a few million dollars. That can certainly be life changing both for you and your kids. There would be no income tax burden to making a gift to your kids, but potentially you would be subject to gift tax.
Fortunately, the gift tax rules are fairly liberal at this point. Each person is permitted to gift up to $5.25 million during their lifetime with no tax. This is in addition to the annual gift exclusion amount of $14,000. Depending on your kids and who they are and how old they are, you may want to set up a trust instead of gifting outright.
Question: I had to cash my 401(k) because I was unemployed last year. I have a good job now, is there any way to retroactively pay it back?
Lepson: I am sorry to hear that you were unemployed and had to use your 401(k) to handle expenses. But the good news is that you have found a new job and seem able to pay things back.
Unfortunately, you can not pay back a 401(k). You will be subject to the income tax and a 10 percent penalty unless you were able to put the money into an IRA within 60 days of cashing in the 401(k).
Question: Can I deduct my cellphone bill if I the phone use it for work?
Lepson: Yes, you can — as long as you are a business owner or your employer does not reimburse for the costs.
Question: Is there any way to write off paying for college for my grandchild?
Lepson: Your grandkids (and your kids) are fortunate that you are able to help pay the cost of college. There are tax deductions and credits that can be claimed, but the child must be a dependent of yours and not their parents. There are also income limitations that phase out at higher income levels. You can look into the American Opportunity Tax Credit, Life Learning Credits as well as a couple of limited tuition deduction options.
Question: Why are Roth 401(k)’s important?
Lepson: Roth 401(k)s can be terrific options for folks who are in lower tax brackets and don’t mind forgoing the tax deduction that one gets with a regular 401(k) contribution. The great thing about Roth 401(k)s or Roth IRAs is that all future growth is not just tax deferred, but also tax free. They work out great for people who think they will be in a higher tax bracket when they withdraw the money than they are when they contribute the money.
Question: What are the IRA contributions limits for people over 50?
Lepson: 2013 limits are $5,500 + $1,000 over age 50 catch up.
Question: I’ve use a tax prepaper that I think does a good job. He’s reasonable in price. I can call him year round for advice. However I’m concerned that he’s not a CPA. How much more does a CPA cost and where can I get a list of them?
Lepson: First and foremost, working with someone you can trust is important. If the person is not a CPA, he/she might be an enrolled agent and that would be good. CPAs can be helpful for complex issues. You can find a list of them from the Mass. Society of CPAs. You can also check the Massachusetts State Board of Public Accountancy website for further details such as licenses, etc. www.mass.gov/ocabr/licensee/dpl-boards/pa/
Question: If I own a business that loses money, should I file taxes for it separately?
Lepson: Assuming you are a sole proprietor or a single member LLC, you can include it on your individual return (Schedule C) and not have to file a separate return.
Question: Can you explain Roth vs. traditional IRA?
Lepson: The major difference between a Roth IRA and a Traditional IRA is the tax treatment on the way in and upon distribution. Roth contributions are never tax deductible, but traditional IRAs may be depending upon income and/or whether or not a person is an active participant in an employer sponsored retirement plan. Both have the same limits for annual contributions. Both are tax deferred.
Roth withdrawals are tax free (post age 59½ and as long as the first contribution was made at five years prior to the withdrawal). Traditional IRA withdrawals are subject to ordinary income tax on all the growth as well as on all the deductible contributions. At age 70½, distributions are required from traditional IRAs but none are required from Roths.
Question: How much of my paycheck should I be saving each year? Does that impact my tax hit?
Lepson: The amount one should save for retirement depends upon how old a person is, how much they have saved already, where the money is invested and what lifestyle a person envisions they would like down the road. For people first staring out, a good target would be 10-15 percent of income. For people who are starting later or who are behind in their savings, the percent should be much higher.
If you save in an employer sponsored plan like a 401(k), you can save on a pre-tax basis and that will reduce your current income and provide you with a tax break. Traditional IRAs can also be deductible and are often terrific places to save as well.
Question: I am starting a new job and was curious what taxes I would have to pay if I withdrew from my Annuity Savings Account.
Lepson: If possible, I would highly recommend against withdrawing from your retirement plan. But if you must, you will have to pay taxes at your current tax rate and if you are under 59½, you will also have to pay a 10 percent penalty tax. It’s best to keep the money in the plan or roll it to an IRA so it will be there for you in the future.
Question: Last year, my wife and I paid $14,000 in daycare expenses, but found out we only can apply for a $200 tax credit due to our combined income. Since we’re both working, I believe we can deduct up to $5,000 of this expense. Why is this deduction so far below the real cost of daycare, especially since this helps both parents to be productive members of society?
Lepson: Day care is expensive, and the IRS sets the rules. Employees may receive up to $5,000 tax free benefits under a dependent care benefit (DCB) plan. The plan may be paid with employee’s pre-tax earnings. These dependent care benefits are reported in box 10 of the employees W-2 and are not included as wages in box 1. Check with your employer to see if they offer such a plan
Question: I made a fair amount of money through legal (and illegal) poker games. Should I declare it?
Lepson: Wow — winning at the poker table — good job. But, yes, you should declare the income.
Question: My self-employed husband hit upon hard times recently and owes several years of back taxes to IRS. With penalties, it’s up to $70,000. Since we file jointly, my name is on it, though my taxes are paid through my employer. We submitted an offer of compromise four months ago and are waiting to hear the outcome. Should we hire a tax adviser to help us navigate this precarious situation? A tax attorney? We’d love to discuss with an expert on how to proceed, but are not sure where to turn?
Lepson: Tough stuff, Julie. You should absolutely look to a professional for help and guidance. A good CPA and/or tax attorney can certainly help. They will be able to navigate the system much better than any of us could on our own. See my answer above for finding a qualified professional from the Mass. Society of CPAs.