TAX+BUSINESS ALERT
Newsletter by Hawkins Ash CPAs
In this edition
June 5, 2018

How to Be Tax-Smart When It Comes to Mutual Funds

Tax Insights Podcast:
How Tax Reform Affects Individuals and Businesses

Mark Your Calendar:
Wisconsin Sales Tax Holiday August 1-5

3 Common Types of IRS Tax Penalties

How to Be Tax-Smart When It Comes to Mutual Funds
Mutual funds are so common these days that many people overlook the tax considerations involved. Here are some tips on how to be tax-smart with these investment vehicles.

Avoid Year-End Investments
Typically, mutual funds distribute accumulated dividends and capital gains toward the end of the year. It’s generally wise to avoid investing in a fund shortly before such a distribution. Why? Because you’ll end up paying taxes on gains you didn’t share in.

Don’t fall for the common misconception that investing in a fund just before a distribution date is like getting “free money.” True, you’ll receive a year’s worth of income right after you invest, but the value of your shares will immediately drop by the same amount, so you won’t be any better off. Plus, you’ll be liable for taxes on the distribution as if you had owned your shares all year.

You can get a general idea of when a fund anticipates making a distribution by checking its website periodically. It’s also important to make a note of the “record date” — because investors who own shares of the fund on that date participate in the distribution.

Invest in Tax-Efficient Funds
When it comes to tax efficiency, not all funds are created equal. Actively managed funds tend to be less tax efficient — that is, they buy and sell securities more frequently, generating a greater amount of capital gains, much of it short-term gains taxable at ordinary-income rates. To reduce your tax liability, consider investing in tax-efficient funds, such as index funds, which generally have lower turnover rates, and “passively managed” funds (sometimes described as “tax managed” funds), which are designed to minimize taxable distributions.

Another option is exchange-traded funds (ETFs). Unlike mutual funds, which generally redeem shares by selling securities, ETFs are often able to redeem securities “in kind” — that is, to swap them for other securities. This limits an ETF’s recognition of capital gains, making it more tax efficient.

But Don’t Ignore Tax-Inefficient Funds
Tax-inefficient funds may have a place in your portfolio. In some cases, actively managed funds may offer benefits, such as above-market returns, that outweigh their tax costs.
If you invest in actively managed or other tax-inefficient funds, ideally you should hold them in nontaxable accounts, such as traditional IRAs or 401(k) plan accounts. Because earnings in these accounts are tax-deferred, distributions from funds they hold won’t have any tax consequences until you withdraw them. And if the funds are held in a Roth account, qualifying distributions will escape taxation altogether.

Make No Assumptions
It’s important to do your due diligence on mutual funds. Don’t assume that a fund that historically has been tax efficient will stay that way in the future. Feel free to contact our firm for help.
Dana
Contact: Dana Balciar
Direct: 715.748.1342
Email: dbalciar@hawkinsashcpas.com
Tax Insights Podcast
In this introduction to Tax Reform, Jeff Dvorachek, CPA, provides an overview of the big changes individuals and businesses can expect.
Mark Your Calendar: Wisconsin Sales Tax Holiday August 1-5
In order to purchase certain items without sales tax, be sure to get your child's school shopping done between August 1st and 5th.
 
Tax exempt items for this five-day period include:
 
  • Clothing, if the sales price of any single item is $75 or less
 
  • A computer purchased by a consumer for the consumer's personal use, if the sales price of the computer is $750 or less
 
  • School computer supplies purchased by the consumer for the consumer's personal use, if the sales price of any single item is $250 or less
 
  • School supplies, if the sales price of any single item is $75 or less
 
More information can be found on the Wisconsin Department of Revenue website.
3 Common Types of IRS Tax Penalties
Around this time of year, many people have filed and forgotten about their 2017 tax returns. But you could get an abrupt reminder in the form of an IRS penalty. Here are three common types and how you might seek relief:

  1. Failure-to-file and failure-to-pay: The IRS will consider any reason that establishes that you were unable to meet your federal tax obligations despite using “all ordinary business care and prudence” to do so. Frequently cited reasons include fire, casualty, natural disaster or other disturbances. The agency may also accept death, serious illness, incapacitation or unavoidable absence of the taxpayer or an immediate family member. If you don’t have a good reason for filing or paying late, you may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for relief, you must have: 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due. Despite the expression “first-time,” you can receive FTA relief more than once, so long as at least three years have elapsed.
  2. Estimated tax miscalculation: It’s possible, but unlikely, to obtain relief from estimated tax penalties on grounds of casualty, disaster or other unusual circumstances. You’re more likely to get these penalties abated if you can prove that the IRS made an error, such as crediting a payment to the wrong tax period, or that calculating the penalty using a different method (such as the annualized income installment method) would reduce or eliminate the penalty.
  3. Tax-filing inaccuracy: These penalties may be imposed, for example, if the IRS finds that your return was prepared negligently or that there’s a substantial understatement of tax. You can obtain relief from these penalties if you can demonstrate that you properly disclosed your tax position in your return and that you had a reasonable basis for taking that position.

Generally, you have a reasonable basis if your chances of withstanding an IRS challenge are greater than 50%. Reliance on a competent tax advisor greatly improves your odds of obtaining penalty relief. Other possible grounds for relief include computational errors and reliance on an inaccurate W-2, 1099 or other information statement.
Contact: David Howell, EA
Direct: 920.337.4550
Email: dhowell@hawkinsashcpas.com
More Resources from CPA-HQ
Choosing Between a Calendar Tax Year and a Fiscal Tax Year
Limitations on the Rehabilitation Credit

The Changing Face of Personal Exemptions and the Standard Deduction
Hawkins Ash CPAs
www.HawkinsAshCPAs.com | info@hawkinsashcpas.com