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Actual Taxes for Virtual Money

Virtual currency is the latest product of the global internet-connected marketplace we live and work in today.  The most popular form of virtual currency is called Bitcoin. Now the IRS has issued new guidance ensuring the same old tax rules apply to this new kind of money.

Bitcoins are under scrutiny for a variety of reasons.  First, let’s look at what virtual money is and how it works.  Bitcoin is a payment network where a user can anonymously use their country’s currency to quickly purchase any amount of bitcoins on an exchange.  The digital bitcoins may then be used to buy any kind of product or service that accepts virtual money payments.

Bitcoin_bigToday, everything from webhosting services, to pizza and even manicures can be purchased with bitcoins. Bitcoins make international payments easy and cheap because this kind of currency has not yet been subject to any country’s regulations nor is it controlled by a Central Bank.

Think about how you and your family may attend a local fair.  In order to ‘purchase’ a seat on the latest spinning carnival ride, you must use your cash to purchase a ticket at a booth.  Then you give the ticket to the ride’s operator in order to take your seat.  Some rides cost more tickets than others and price adjustments can be made seamlessly and quickly.  Virtual money operates in the same way. 

When you exchange your currency for bitcoin, you have proof of the bitcoin value in what is called a “digital wallet” which you can choose to set up on your own computer, mobile device or in the cloud. You may now use the virtual account to send or accept bitcoins for selling or buying products and services.  The wallet ID is all a buyer or seller sees, so the purchase is virtually anonymous.

More merchants nationwide are beginning to accept these kinds of virtual currency payments, because they avoid paying the 2% to 3% credit card transaction fees or other transaction costs charged by their ‘middle man’ bank.  The bitcoins received can be exchanged right away for deposit as the business’ currency of choice.  This kind of payment is rapidly growing in popularity for companies who provide technical and online services to a worldwide client base.

Bitcoins are becoming so popular that even money market investors are buying and selling the bitcoins as a commodity.  In fact, speculators are now fueling price volatility because they are buying and selling bitcoins at a far greater rate than the rate of general commercial use.

That leads us to the downside.  Because of the anonymous nature of purchases, bitcoins have become the currency of choice for the online purchase of illegal drugs, illicit activities and paying for legitimate services with the provider expecting to be able to avoid taxes.  There is also a warning about investing in currencies like this that have no Central Bank authority to guarantee or insure values.  

Now, as bitcoins are making a noticable impact in the marketplace, the IRS is issuing new warnings to end any questions about the taxability of bitcoins and virtual money payments.  In a new IRS guidance, the agency makes it clear that, for U.S. federal tax purposes that the same general tax principles that apply to property transactions also apply to transactions using virtual currency.

The Journal of Accountancy explains that “in computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value (FMV) of the virtual currency (measured in U.S. dollars) as of the date the virtual currency was received.”

There are also several tax rules affecting virtual currency transactions and income.  For example, some people participate in what’s called “mining” to earn bitcoins.  It is a type of reward system for solving complex math problems.  This kind of bitcoin income is reportable.

Some global service providers and contractors are accepting bitcoins for payments to employees or themselves.  Wages paid to employees are taxable to the employee and independent contractors also face the same self-employment tax rules with payers required to issue Form 1099.

Experts say some form of virtual money is here to stay as our internet-connected world provides global accessibility 24 hours a day.  Your decision about how and when you choose to use virtual money should be carefully considered, especially if you are considering whether to accept bitcoins as payment for goods or services.  For more information on how this issue may affect you or your business, please contact us at McRuer CPAs for a review of your goals and the possible tax consequences.


IRAs Need Updated Designated Beneficiary Forms

Individual Retirement Accounts have been around long enough now that many Americans are learning what happens when they inherit an IRA. It’s not always good news.  If the owner has not filed an up-to-date beneficiary form, the heir of the estate risks losing a major portion of the IRA value to taxes and fees. IRA-nest-egg

The Employee Benefit Research Institute (EBRI) reports the average IRA value is close to $94,000. The EBRI also says there are nearly 15 million IRA accounts held by more than 11 million people.  With total assets of more than $1 trillion, it’s important to make certain that, should the owner die, the IRA doesn’t lose its value upon transfer to a new owner.

Advisors warn that many IRA owners mistakenly believe because they have a will, the person(s) they list as their heir(s) will automatically receive the IRA to use as a savings tool or turn into cash in whatever manner they wish.  Yet, without a specific and up-to-date IRA beneficiary designation form for each IRA, the beneficiary may be forced to empty the account right away risking taxes and penalties; and may even be bumped into a higher income tax bracket.   Some states require the accounts to go through probate court when there is no beneficiary form.

IRA owners should fill out what is a very simple beneficiary form separate from their will.  That way, when the owner dies, the designated beneficiary is able to determine the best distribution strategy over his or her lifetime.  A new beneficiary form is needed any time an IRA account is changed or updated, or the account is moved to a new custodian.

Typically, IRA beneficiaries must take distributions during their lifetime.  Inherited traditional IRAs require taxes to be paid on distributions.  Rollover, SEP, and SIMPLE IRAs are treated the same way. Beneficiaries are not required to pay taxes on distributions from an inherited Roth IRA.

Generally, surviving spouses have several choices including even disclaiming up to 100% of the IRA assets, which, besides avoiding extra taxable income, enables their children to inherit the IRA assets.  But, if the spouse decides to take a lump sum distribution, or begins distributions on a traditional IRA, taxes must be paid.

Non-spouse beneficiaries have fewer choices.  Among them, including taking the lump sum amount and paying a large share in federal taxes; disclaiming all or part of the assets for up to 9 months after the previous owner’s death; or begin taking taxable distributions from the account.

If you inherit an IRA, you cannot roll it over into your own IRA. You must also make certain it is re-titled as an inherited IRA.  If you move the IRA to a new custodian, make certain it is made as a “trustee-to-trustee” transfer or it will be considered as a taxable total distribution, thereby, ending the account as an IRA.  There are deadlines for your actions and you can even face the dreaded 50% penalty if you don’t make a required withdrawal in time.

To ensure you leave as much of your IRA asset as possible to whom you choose, or if you inherit an IRA, consult your financial advisor for the best steps to take to lessen the taxes and maximize the advantages of these retirement accounts.

If you have any questions about your financial savings plans, beneficiaries and the tax consequences of your choices, please contact us at McRuer CPAs.


4% Retirement Spending Rule - is it Outdated?

Is the “4% Rule” meaningless for retirement planning today?  Many financial planning experts say a combination of extreme marketplace fluctuations, unpredictable inflation, decreasing income growth and increasing taxes prove the spending rule for retirement is antiquated.

Retired couple 1In a recent survey by The Conference Board, thousands of 45 to 60 year old Americans were asked
about their retirement plans.  Nearly two-thirds of the respondents expect they will have to work well into their retirement years in order to afford to pay basic expenses. The majority said this is because their ability to save is too low and the general living expenses that their savings will have to cover are too high.  They also expect to live longer and endure higher health costs.

Many of tomorrow’s pending retirees say they wouldn’t be able to afford to be sick, make a repair or upgrade to their home, nor be able to make a purchase like an updated vehicle, without making a major dent in their retirement savings.

In the past, the conventional wisdom said you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year.  This practice was supposed to keep you from running out of money for at least 30 years.

In a recent online Wall Street Journal article, Say Goodbye to the 4% Rule, financial reporter Kelly Greene wrote the 4% rule was conceived by a financial planner in the 1990s who, quoting from the article, “analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15%, and adjusted each year for inflation, for every 30-year span going back to 1926-55.”

But the article shows had you retired with the above portfolio and then endured the actual market drops of the past decade, your accounts would have declined by a third and you would have less than a 30% chance of having enough money.

So, what is the answer?  Most experts agree that today, more than ever before, a customized approach is best.  You must determine realistic retirement goals and develop a spending plan that matches your lifestyle expectations with your ability to earn and save.

Because there are so many unknowns and changes, planning for how taxes will affect your savings and your retirement income has become an annual ‘must do’.  No matter how close you are to retirement, consider these common-sense tips offered through Investopedia as you schedule your retirement investment planning session with McRuer CPAs:

  • Avoid too much risk.
  • Avoid too little risk.
  • Don’t retire too soon.
  • Try not to retire all at once.
  • Buy long-term care insurance.
  • Do live within your means.


What's the Plan, Tax Man

It’s hard to plan for income taxes with the outcome of the presidential election still undetermined. Whether the Democrats remain in office or Gov. Romney wins the election determines how many Americans will be taxed and also if tax credits that will or will not expire by the end of the year. According to Tom Herman in his Wall Street Journal article, Tax Tips for the Next Two Months, the best strategy may be simply to procrastinate.


Here are 6 more ideas to consider.

1. Tax-loss harvesting. If you own stocks or securities that are worth less than your costs, consider using the capital losses to offset capital gains.

2. Don’t be penalized for wash-sale rules. If you sell a stock at a loss, be careful not to buy the same stock within the wash-sale period (usually 31 days or more). See Internal Revenue Service Publication 550 or seek advice from your CPA.

3. Consider donating highly appreciated stock to charity. Rather than selling and donating the proceeds, think about donating stock that you have owned for more than a year and that has risen in value. You may have no taxable gain on the appreciation while you may claim the entire value as a charitable contribution.

4. Watch mutual fund purchases now. Many funds distribute capital gains to shareholders late in the year, especially December. Sometimes it can pay to delay investing in a fund until after the date on which investors qualify for distribution.

5. Consider bunching deductions. You might consider combining charitable donations and deductions into a year when they will be worth the most to you.

6. Cash in on long-term winners. Upper-income investors could benefit from divesting big investment winners before December 31 to take advantage of this year’s unusually low capital-gains tax rates. Consult your CPA.

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