Wednesday, October 1, 2014

Financial Well-Being — Retirement and Tax Planning



Saving for retirement can be a lot more complicated than just socking away money for later. By strategically coordinating your income, retirement accounts and investments to maximize tax savings, you may be able to reach your retirement goals more efficiently.

Assemble Your Team

It’s common to work with several professionals to manage different aspects of your financial affairs, such as CPAs for tax guidance, estate-planning attorneys, insurance agents and others. But are they working as a team to help you? Be sure to provide your advisor with contact information for your other professionals. This helps your advisor to be part of a coordinated financial team, ensuring everyone is working in concert to help you attain your financial goals.

Diversify Accounts For Tax Purposes

Having a mix of taxable, tax-deferred and tax-free retirement and investment accounts can provide a measure of control over taxable income as well as flexibility as tax laws change. Many people approaching retirement already have taxable and tax-deferred accounts. To add a tax-free account, you can contribute to a Roth 401(k) account or convert assets in tax-deferred accounts to a Roth IRA.

Investigate Tax Strategies

Don’t wait until year-end — talk to your financial advisor and CPA now about ways to minimize taxes or defer taxable income.

If you hold investments with unrealized taxable gains or losses from the current year, always be sure to share this information with your financial advisor before making any significant financial decisions. Strategically harvesting gains and losses in taxable accounts can lessen your capital gains tax. Selling underperformers can generate capital losses that can be used to offset your gains, plus up to $3,000 of ordinary income. If you’ve already sold some investments at a loss, you might consider taking capital gains on appreciated stock. As long as the gains aren’t more than your available losses, there may be no tax liability.

Next, you will want to work with your financial advisor and CPA to determine your expected income for the year, your adjusted gross income (AGI) and your tax bracket. Knowing this, you’ll be able to identify deductions and tax credits you can take advantage of, and you can examine strategies to minimize your tax responsibility.

One tax strategy is to delay a portion of your income — and defer taxes on that income — until the following year. For example, if an expected year-end bonus might propel you into a higher tax bracket, you can ask your employer to delay your bonus to the following year. You can also delay distributions from a traditional 401(k) or IRA, but at age 70½ you must take required minimum distributions (RMDs). On the other hand, if you have a large tax-deferred account balance, your RMDs might be more than you need for living expenses, and come with a significant tax impact. In such a situation, you may want to take distributions earlier. It’s imperative to work with a tax professional to determine the correct tax strategy for you.

Even if retiring seems far away, takings steps now to maximize your savings will help you prepare for the retirement you desire.

Tuesday, September 30, 2014

A Tax Strategy for Multiple Income Streams

Successful folks are always in demand, which is why they often pick up board seats, consulting assignments and speaking fees. On top of that, there is the condo in, say, Aspen or Miami that is rented out half the year, producing yet more income. And so, without thinking about it, a problem of success arrives—a much higher tax bill.

Take "self-employment" gigs like consulting. On top of federal and state income taxes and a 0.9% Medicare tax, income may also be subject to the 15.3% self-employment tax, which includes FICA's Social Security and Medicare taxes. When it comes to self-employment income, you're responsible for all the FICA taxes that are normally split by employer and salaried employee.


So what's the most tax-efficient way to receive secondary income? Consider a seat on a company's board, a stimulating part-time job, particularly during semiretirement. Board members are usually paid with cash and shares in the company, typically restricted stock that vests after a few years.

You can reduce the tax impact by deferring the cash portion of your board fee through the company's deferred-compensation plan. Most companies have "nonqualified" plans that allow directors to funnel fees to 401(k)-like plans without contribution limits. The funds aren't tax-deductible, but they grow tax-deferred until retirement.

"If a member of the board who lives in New York moves to another state with no or low income taxes in retirement, they're going to pay a lot less tax," says Mitch Drossman, national director of the Wealth Planning Strategies Group at U.S. Trust. To avoid paying income tax in the original state, you must put the money in a 401(k) and take the income over at least a 10-year period in your new state.

Directors receiving restricted stock that vests over a number of years can accelerate rather than defer the taxes. Usually taxes are owed after stock is vested, based on the value of the stock at that point, but a director can opt to be taxed on its value when first received. This is a bet the stock is going to appreciate in excess of what you're paying in taxes now, usually in cases where "the company is going public or it's a good candidate to be acquired," says Drossman.

If you are generating a substantial self-employed income stream, consider creating your own "defined-contribution plan," similar to a 401(k). They're known as a Keogh or a SEP IRA, and they allow you to sock away 25% of your earnings, either pre-tax or tax deductible, up to $52,000.

A defined-benefit plan, meanwhile, works more like a pension plan, but is more complicated and currently limits maximum retirement payouts to $210,000 a year. But contributions are tax deductible in the year they're made, and that can go a long way toward blunting your current tax blow.

If your extracurricular business generates a profit, structure your windfall for a tax advantage. A limited liability company, or LLC, protects your assets outside the vehicle from lawsuits filed against the LLC, but S corporations can be sweeter for tax purposes. The S corporation owner is usually paid a salary and takes profit distributions. The owner pays taxes on the salary as is normal—including the self-employment FICA charge totaling 15.3%—but the profit distributions aren't subject to the self-employment tax.

But make sure to strike the right balance between salary and profit distributions. "The IRS' position is that the owner must receive reasonable compensation in the form of income. A tax return that shows zero cash income is an automatic red flag for an audit," says Stephen Kirkland, a tax specialist at Atlantic Executive Consulting Group in Columbia, S.C. Furthermore, to legitimately claim S corporation profits, the company must either have equipment, merchandise, or one or more employees.

What that means is, if your extra income is generated by personal services that can't arguably generate profits, such as board membership fees, you can't benefit from an S corporation. And here's another caveat: The IRS keeps a close, skeptical eye on S corporations after a U.S. Government Accountability Office report estimated that these entities, some four million in 2006, underpaid taxes by $23.6 billion in the 2003 and 2004 tax years.

So if you go down the S corporation path, make sure you keep detailed records of your journey.

Monday, September 29, 2014

How 30 Minutes Now Can Save You $1,000 Later in Taxes

With a headline like that, you might be prepared for a bait and switch. But we’re serious here. You really can save up to $1,000 in only a half-hour.

However, there is a catch. We have to talk about taxes.

I know! Who wants to talk about taxes in September? Not me, that’s for sure.

While tax planning isn’t anyone’s idea of fun, it doesn’t have to be long, difficult or painful. In the amount of time it would take to find out if the family on “House Hunters” is going to pick the perfect home or compromise for the obviously inferior property (hint: they always compromise), you could have done something to ensure you’ll have an extra $1,000 next April.

Find Deductions Hiding in Your Closets

The first way to put that half-hour to good use is by cleaning out your closets and taking the contents to your favorite thrift store for a tax deduction.

Set the timer for 30 minutes and go wild. Be ruthless. It’s like “Supermarket Sweep,” but you’re cruising through your home rather than running through the grocery aisles.

Those skis Junior never used? Gone. The baby clothes from your 4-year-old? Outta here. The scrapbooking supplies that haven’t seen the light of day in two years? Sayonara.

This strategy has a double benefit. Not only do you get a deduction that can lower your tax bill next year, you’re also making space just in time for the rush of holiday gifts that will be arriving shortly.

Beef Up Your Retirement Savings

Another way to use those 30 minutes is to review your retirement accounts and see if you can afford to contribute a little more.

For 401(k) and 403(b) accounts through your workplace, you can contribute up to $17,500 this year, an amount that can be deducted from your taxable income. If you’re 50 or older, you can contribute up to $23,000.

Even if you don’t have an employer-sponsored retirement fund, you can contribute money to your own IRA and get the same tax benefits. IRA contributions for most workers are maxed out at $5,500 in 2014, with those 50 and older eligible for a deduction on up to $6,500 in contributions.

Depending on your tax bracket, you could save 30 cents in taxes for every dollar you contribute to an eligible fund. Remember, there are income caps for some of these deductions, and you get an immediate tax benefit only if you have a traditional 401(k), 403(b) or IRA. If you have a Roth account, you still get tax benefits, but not until after you retire.

Friday, September 26, 2014

Limits On Tax-Free Lifetime Gifts Projected To Rise For 2015

It keeps getting less taxing to die rich. Based on inflation data released today by the Department of Labor, Wolters Kluwer , CCH has projected inflation-adjustments to various tax figures that affect financial planning for the well-off: the federal and gift tax exemption amount, the annual gift tax exclusion amount and the kiddie tax threshold.

The federal estate tax exemption—that’s the amount an individual can leave to heirs without having to pay federal estate tax—is projected to be $5.43 million, up from $5.34 million for 2014. That’s another $90,000 that can be passed on tax-free. The top federal estate tax rate is 40%. Talk about tax savings.

The gift tax is tied to the estate tax, so the inflation indexing helps the wealthy make the most of tax-free lifetime giving too. You can make the gifts during your lifetime; just you have to keep track of them as they count against the eventual estate tax exemption amount. In other words, you can’t double dip. So a woman who set up a trust for her kids with $5 million a few years ago could make new gifts to add to the trust and bring it up to the $5.43 million amount. A husband and wife each get their own exemption. So a couple would be able to give away $10.86 million tax-free in 2015 (assuming they haven’t made prior lifetime gifts).


Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount. Wolters Kluwer, CCH projects it won’t budge at $14,000 a year for 2015, the same as 2014, up from $13,000 a year in 2013. But it can be leveraged to add up. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.

If you want to make gifts and not have to bother to keep track for gift tax purposes, you can make gifts for medical, dental, and tuition expenses for as many relatives (or friends) as you’d like if you pay the provider directly. These gifts don’t count towards any of the limits.

With the federal estate tax exemption rising, most people won’t need to use the annual gift exclusion to whittle down their estates. But it’s a tool you can use if you live in one of 19 states plus the District of Columbia that impose separate state death tax levies. Forbes has an interactive map showing the states with death taxes (estate and inheritance taxes) in 2014 and in 2015.


One thing to watch out for if you’re making gifts to younger members of the family is the federal kiddie tax. The kiddie tax, which covers students through the age of 23, puts investment income, above small amounts, into the parents’ tax bracket. For 2014, the kid pays no tax on the first $1,000 of unearned income and then a 15% rate on the next $1,000. Wolters Kluwer, CCH projects the $1,000 base will go up to $1,050 for 2015–a little help.

The Internal Revenue Service will release the official figures in the fall.

Thursday, September 25, 2014

Obamacare complicates the coming tax season

Obamacare's individual mandate is going to affect personal tax filings for the first time in the upcoming tax season, and the impact just might be a doozy.
"At a recent convocation of enrolled agents, I found that a good many of the veteran preparers are considering retiring because of the health care confusion and complexity," says Ken Shirk, founder and president of Lebanon-based Sonrise TagsAnd-Tax LLC.
There are two main issues. The first requires that filers prove they had qualifying health care coverage in 2014, or an exemption; if not, they'll be subject to a penalty.
The second centers on the federal subsidies for those with income between 138 percent and 400 percent of the federal poverty level who purchased health insurance through the Obamacare marketplace. These subsidies were based on enrollees' income estimates for the year and could be received via payments to the insurer throughout the year or as a lump sum upon filing 2014 tax returns.
"Receiving too much or too little in advance can affect your refund or balance due," the IRS says. If your income estimate was too low and you chose to receive the subsidy throughout the year, you'll end up owing the government for the difference between what you got and what, in retrospect, you were actually entitled to.
According to the U.S. Department of Health & Human Services, subsidies dropped monthly premiums 74 percent for eligible Pennsylvania enrollees.
What that means for preparers
Shirk says this addition to the tax-filing process is going to require numerous new forms, and he and other preparers expect that many clients will not initially have all the necessary information and documentation.
"Add to that the likelihood of people trying to scam the system to get undeserved credits, which the preparer must guard against due to the sanctions and fines that the preparer is subject to, and it's not a nice picture," he says. "Fees will increase dramatically in some cases because of the extra work and the increased liability for an improperly prepared return."
The IRS Volunteer Income Tax Preparation program, which in Lancaster County is offered through the United Way and is available to individuals and families who make less than $50,000, won't see fees increase, because it's free. But Steve O'NeillUnited Way of Lancaster County's VITA adviser, does expect an increase in demand.

Last year, O'Neill says, about 185 volunteers prepared 4,850 returns in the county, saving participants an estimated $200 in preparation fees per return. The program has drawn mostly people from the lower end of the eligibility range, with average income of participants at about $18,000.
But because other services may be more complicated and more expensive this year, he thinks people who have gone to another preparer or done their own returns in the past may seek out VITA this year.
As usual, VITA is seeking new volunteer preparers, who don't need to be accountants but must pass an IRS certification program annually. This year, O'Neill says, they will be getting extensive training on the changes, but he doesn't think it will scare off veteran volunteers.
"I think they're looking forward to a new challenge and helping people with something that is difficult," he says.
One challenge VITA can't help people with directly is renewing or selecting health insurance through the Obamacare marketplace. Volunteers got lots of questions about that last year and referred them to other organizations with trained Obamacare navigators and assisters. This year, he says, the organizations might work together to have navigators and assisters at some VITA sites so they can answer questions immediately. <
"I think they're looking forward to a new challenge and helping people with something that is difficult."

Wednesday, September 24, 2014

Getting A Tax Benefit From Capital Losses

    As volatile as the stock market has been, you probably have some underperforming investments which have lost value that you are considering selling. Tax planning is especially important when you are considering selling at a loss. Why? Although you will be getting a potential tax benefit by reducing your taxes, locking in your losses will also lead to an economic loss when those investments bounce back after you sell. It is very important to consider both the tax and economic impact before you decide to sell underperforming investments.
The Short and Long of ItCapital losses — as well as capital gains — are reported in two categories:  Short term and long term (referring to investments held up to one year or investments held longer than one year, respectively). Short-term gains are taxed the same as ordinary taxable income, and long-term gains generally are taxed at a federal maximum individual income tax rate – either 15% or 20% –depending on the overall taxable income in a tax year.
Capital gains and losses are calculated on a net basis. For example, if you have $5,000 of long-term gains and $7,000 in long-term losses (for a net loss of $2,000), as well as $3,000 in short-term gains and $5,000 in short-term losses (for another net loss of $2,000), you would have an overall net capital loss of $4,000.
You are allowed to use up to $3,000 in capital losses each year to offset your ordinary taxable income (such as from salary and interest). Married taxpayers filing separately must split this amount and each can claim up to $1,500 per year. So, the above example would allow you to claim a $3,000 loss against your taxable income in the same tax year as the losses, as well as save the remaining $1,000 to carry forward to future years.
Choose CarefullyBear in mind that it may be difficult to determine which investments to sell at a loss. Selling investments that have declined the most in value relative to your purchase price will give you the biggest tax benefit. However, you will miss out on a potential recovery and the opportunity to add to your positions at favorable prices. One alternative is to buy back the stock after 30 days have passed. The IRS disallows losses under “wash sale rules” if you buy replacement stock within 30 days before or after the date of the sale because it assumes your only intention was to create tax losses.
It is important not to lose the tax deduction by replacing or buying “substantially identical investments” within the 30 days of the original sale. A common way to meet this rule is to swap one type of investment for a similar performing investment. For example, you can sell shares in one mutual fund and buy shares in a fund managed by another provider, or sell one company’s stock and buy the stock of its competitor. This approach can help you to realize a loss while maintaining your exposure to a similar investment type.
If you opt to buy back the investment you sold after 30 days have passed, there is another risk — if the investment performs well in the interim you may miss appreciation in fair market value. Alternatively, you can purchase more of the same security and then sell 30 days later, but your exposure is that the price may decline further while you own twice as much.
Only Part of the StoryWhile tax losses provide you with a valuable tax-management tool, they are just one of many decisions and considerations to keep in mind. Your tax and investment advisors can help as you determine which purchases and sales will help you pursue your financial goals. Often these decisions are made at the end of the tax year when the tax benefits and the investment results are clearer. You should always consult your advisors so you understand your best options.
Always Check Your Cost BasisTo determine your capital losses, you need to keep track of your cost basis, which is the original price you paid for securities plus any commissions, reinvested capital gains or reinvested dividends.
When your entire investment in the security comes from a single purchase date, this is a relatively simple calculation. But if you buy the same security at various times or prices, or if you reinvested dividends or capital gains, the calculation can become more difficult. If this is the case, you may have to choose a specific method for reporting cost basis by:
  • Using the average purchase price;
  • Choosing specific shares (a more detailed approach that provides maximum flexibility but that must be identified when the shares are sold); or
  • Using the “first-in, first-out” method, in which the first shares you purchased are considered to be the first shares you sold.
Each approach will provide a different tax impact, so be sure to get qualified advice about which specific method is best for your personal situation. 

Tuesday, September 23, 2014

Four hot business tax issues in 2014

When it comes to tax planning for your businesses, there are always income projections to consider, deductions to look into and tax credits to research. But each year-end also has a few prominent issues all its own. Here are four for 2014.
• Payroll tax management
Statistics show that payroll taxes and penalties are putting an increasingly heavy burden on small-business owners (and likely the owners of many midsize businesses as well). For example, the “NSBA 2014 Small Business Taxation Survey,” published by the National Small Business Association, found that payroll taxes were the No. 1 financial burden on owners and their businesses. And the administrative challenges of payroll taxes ranked second, behind only income taxes.
So, as you sit down with your managers and tax advisers to discuss year-end tax planning, also discuss the impact of payroll taxes. If you have, for instance, failed to deposit withheld taxes in a timely manner, you may be subject to late-deposit penalties and interest. Factor such penalties and interest into your total tax liability and look for ways to minimize or eliminate them.
Other year-end payroll activities to carry out include checking federal, state and local electronic tax filing requirements for this year, and reviewing accounts payable and general ledger records for unreported taxable items. Whether you handle payroll in-house or use a third-party provider, be sure you are aware of these responsibilities.
• Property and asset repairs
The final IRS regulations for tangible property repairs versus improvements took effect this year. In a nutshell, costs incurred to acquire, produce or improve tangible property must now be depreciated. But you can deduct expenses incurred on incidental repairs and maintenance of such property.
There are a couple of helpful safe harbors to consider. First, you may be able to deduct certain routine activities dedicated to using property and keeping it in efficient operating condition. These are activities that your business reasonably expects to perform multiple times during the property’s “class life,” under the IRS definition.
Second, for buildings that initially cost $1 million or less, qualified small businesses (generally, those with gross receipts of $10 million or less) may elect to deduct the lesser of $10,000 or 2 percent of the adjusted basis of the property for repairs, maintenance, improvements and similar activity each year.
The final regulations cover many other aspects of property repairs and improvements, as well. For example, they increase the dollar threshold for property that is exempt from depreciation from $100 to $200. And they address how to identify “units of property” when distinguishing repairs from improvements in relation to commercial buildings.
• Mergers and acquisitions
It’s been a booming year for mergers and acquisitions activity. In fact, the first half of 2014 was the busiest period of activity since the financial collapse of 2008, according to the July issue of FactSet Flashwire US Monthly (an M&A data tracking publication). Aggregate deal value shot up to $210.3 billion in June from $151.7 billion in May. As of this writing, the rest of the year is generally expected to follow suit.
All of this action means more and more companies are considering the ramifications of an M&A deal in their year-end tax planning. Even if you are only pondering the possibility of buying another company or entering negotiations to be acquired by a larger business, it’s important to have an early heads-up on the potential tax impact.
For starters, business structure plays a huge role in M&A tax planning. With a corporation, for instance, sellers usually prefer a stock sale for the capital gains treatment and to avoid double taxation. Buyers, on the other hand, generally want an asset sale to maximize future depreciation write-offs and avoid potential liabilities.
Another key issue is whether a deal should be set up as a tax-deferred transfer or taxable sale. Looking again at a corporation, ownership can be tax-deferred if it’s exchanged solely for stock or securities of the recipient corporation in a qualifying reorganization. But these types of transactions are strictly regulated.
For cash flow purposes, it’s typically better to postpone tax liability. There are, however, some valid reasons for agreeing to a taxable sale. The parties don’t have to meet the technical requirements of a tax-deferred transfer. Also, the seller doesn’t have to worry about the quality of buyer stock or other business risks of a tax-deferred transfer. The buyer benefits from a stepped-up basis in its acquisition’s assets while keeping the seller out of the picture as a continuing equity owner.
Naturally, the tax effects of a sale or acquisition are just one component of the deal’s viability. And, again, we’ve looked only at some of the aspects of a corporation’s sale here – other entity choices will involve different challenges and degrees of complexity.
• Additional Medicare tax
The additional 0.9 percent Medicare tax on the excess earnings of some highly compensated employees is nothing new. A provision of the Affordable Care Act, the tax took effect in 2013. But the IRS didn’t issue final regulations on the additional Medicare tax until earlier this year, and the agency even issued a follow-up FAQ about it in June.
Essentially, taxpayers with wages over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay the additional 0.9 percent on their excess earnings. Unlike regular Medicare taxes, the additional Medicare tax doesn’t include a corresponding employer portion. But, as an employer, you do need to withhold the additional tax to the extent that an employee’s wages exceed $200,000 in a calendar year. (Various other stipulations and exceptions may apply. Talk with your tax adviser about them.)
Withholding doesn’t have to begin until the first pay period when wages for the year exceed the $200,000 threshold – and that could very well be year-end. So now is a good time to learn more about the additional Medicare tax as well as assess which of your staff members may be subject to it.