Saturday, October 31, 2015

Retirees can stretch their savings with Roth IRAs

Are you afraid of running out of money in retirement?

That fear is so great among retirees that it exceeds the fear of dying, according to one AARP survey. And it intensifies when the stock market plunges and leaves IRAs looking thin, when a big medical expense or home repair comes along or when the end of the year rolls around and Uncle Sam makes people over 70 1/2 remove money from IRAs and pay taxes on it.

The nest egg that looked so impressive the day you retired starts to look more and more feeble as you are forced to pull money out to pay bills and then send a chunk of it to Uncle Sam for taxes.

Retirees are continually shocked by the impact of income taxes on their savings. When they retired, a $1 million nest egg might have looked huge, but given a 25 percent tax bracket, it should have looked like only $750,000. A $500,000 nest egg in the same tax bracket should have looked like $375,000 — or about $425,000 for a person in the 15 percent tax bracket.

When people look at their 401(k)s and IRAs "they should recognize that it's not all theirs," said IRA adviser Ed Slott.

While people often try to conserve their savings by not tapping 401(k)s or IRAs early in retirement, the tax bill ultimately comes due. Once you hit 70 1/2, Uncle Sam subjects your retirement accounts to a formula that requires you to take out a certain amount each year and pay taxes on that money. One result: When you need the money late in life, your wealth might be depleted. Try this calculator to see what are called "required minimum distributions" by age and dollars.

Retirees who conserved savings early in retirement are frequently surprised by the tax consequences later. The more that's sitting in an IRA, the more you are forced to remove and share with the government each year at tax time.

"The larger an IRA grows, the greater the risk that it will have to be liquidated in the higher tax brackets in the future," said financial planner Michael Kitces, who trains other advisers to cut that risk among their clients. "Eventually, huge required minimum distributions actually force the taxpayer into the upper brackets."

That's why Kitces says this is the time of year when retirees in their 60s should be thinking hard about tax planning. Rather than deferring taxes year after year, as people are often instructed to do, Kitces says individuals should focus instead on timing when they take income so it comes in the lowest tax years. Often incomes are low early in retirement when paychecks no longer are rolling in from jobs.

With the end of the year drawing near, Kitces suggests that 60-somethings in retirement move some money out of an IRA and into a Roth IRA. It's called a conversion. When you do a conversion, you will owe taxes for that year on the money you shifted from the IRA to Roth IRA. But once the money is in the Roth IRA, you won't ever owe taxes on it again. It can grow by thousands or even millions of dollars, and it will all be yours. Uncle Sam won't ever force you to remove any money from a Roth, because he won't get a penny of taxes from any withdrawal you make.

Also, conversions need to be done strategically, so you don't move such a big chunk from your IRA that it puts you into a higher tax bracket that year, Kitces said. He suggests moving a little money each year from an IRA into a Roth IRA, while trying to keep your income within your usual tax bracket. See the leeway you have to maneuver within brackets here.

Be aware of the impact on Social Security, too. That part of your income can be taxed.

Sometimes people worried about future taxes will convert a full IRA at one time, but Kitces warns people about setting off a huge tax. He notes a couple who would typically have just $60,000 in income after deductions. If they convert a full $500,000 IRA in a single year, their taxable income would pop up to $560,000 that year and bump them from the 15 percent bracket into the top 39.6 percent bracket for a good portion of the income. The taxes would be painful. Kitces' solution: Convert just $14,900 of the IRA to a Roth IRA in a single year. The couple then stays within the 15 percent bracket — saving themselves from unnecessary taxes.

Friday, October 30, 2015

Can I use my IRA to buy a home?

Even though home prices have recovered somewhat over the past few years, it might still be a good time to buy a house. Mortgage interest rates have remained at historic lows. If you are under age 59½ you will pay a 10 percent penalty on the taxable portion of withdrawals from a traditional IRA unless you meet one of the penalty exceptions.
One of those exceptions is a withdrawal of up to $10,000 to buy, build or rebuild a “first home.” This same penalty and penalty exception applies to withdrawals of earnings from a Roth IRA, and the $10,000 is a cumulative lifetime limit that applies to all your IRA accounts. You can’t withdraw $10,000 penalty-free from your traditional IRA and another $10,000 penalty-free from your Roth IRA. For purposes of this penalty, the IRS considers you as a first-time homebuyer if you have not owned a home for at least two years. Any money you withdraw from a traditional IRA is taxed except for your “basis” in the IRA. Your basis is the amount that you contributed that you could not deduct on your tax return when you made the IRA contribution. You keep track of your basis on IRS Form 8606. When you make a withdrawal, you prorate it to find the taxable and nontaxable amounts. For example, if you have $50,000 in your IRA with a $10,000 basis, 20 percent of your withdrawal is nontaxable. If you withdrew the entire $50,000 you would pay tax on $40,000 and if you were under 59½ you would also pay a 10 percent penalty on $40,000. If you used the money to buy a first home, you would pay taxes on $40,000 and a 10 percent penalty on $30,000.
The rules for taxing withdrawals from Roth IRAs are different. You won’t pay any tax or penalty on a qualified withdrawal, which is defined as a withdrawal after you meet a five-year holding period that starts on the first day of the first year during which you first made a Roth IRA contribution and you were either 59½ or older, or the distribution is due to death or disability, or the distribution is eligible for the first-time homeowner exception to the 10 percent penalty tax on early distributions.
Withdrawals from Roth IRAs are not prorated like they are for traditional IRAs. Withdrawals are considered to come first from contributions and then from earnings. No income tax or penalty applies until total withdrawals exceed total contributions (except in the case where the money was from an IRA conversion within the last five years). As an example, let’s assume you have contributed $20,000 to your Roth IRA and it has grown to $24,000. Since distributions are not taxed to the extent they represent a return of contributions, you can withdraw $20,000 tax and penalty free. If you withdrew the entire $24,000 you would owe income tax on $4,000 and a $400 penalty (no penalty if you used the money for a first-time home purchase).

Thursday, October 29, 2015

Tax Tips for Starting a New Business

Many people dream of owning their own business. It probably goes without saying that dream does not include paying taxes. Yet for new entrepreneurs, how you plan for taxes can greatly determine whether or not your new business can survive and, ultimately, grow. 
“Thomas Edison said that genius was 1% inspiration and 99% perspiration. The percentages might be a little different for becoming an entrepreneur, but tax planning would definitely fall into the perspiration category,” “When you start a business, a key to your success is to know your tax obligations. You may not only need to know about income tax rules, but also about payroll tax rules.” 
For getting a new business venture off to a good start, I recommend several initial steps. The first is deciding on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you will file. 
You will also need to clarify the types of business tax you need to pay. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. 
Another question new business owners have is whether or not to get an Employee Identification Number (EIN). The IRS has several criteria for whether or not you need one. Those can be found at
New business owners must also choose an accounting method.  An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year. 
If you have employees and you provide healthcare benefits, you are eligible for tax credits. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. 
The employer shared responsibility provisions of the Affordable Care Act affect employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees). These employers’ are called applicable large employers. ALEs must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full-time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS. The vast majority of employers will fall below the ALE threshold number of employees and, therefore, will not be subject to the employer shared responsibility provisions. 
Employers also have information reporting responsibilities regarding minimum essential coverage they offer or provide to their fulltime employees. Employers must send reports to employees and to the IRS on new forms the IRS created for this purpose.
“There are two parts to any business. First, there’s the actual business—e.g. selling widgets—and then there’s the business of running the business—all the bookkeeping, bill-paying and, of course, paying taxes,” . “Most entrepreneurs don’t think too much about the latter, even though they know it comes with starting a new venture. That’s why it’s recommended that new businesses include a consultation with a tax planning professional prior to opening their doors.” That’s why it’s recommended that new businesses include a consultation with a tax planning professional prior to opening their doors since taxes will typically be their biggest expense.”

Wednesday, October 28, 2015

Tips for Starting a Business

· Choice of entity is a key decision.
· Corporations, partnerships, LLCs and sole proprietorships are common options.
· Seek advice from an attorney and CPA before making this critical decision.
· Create a written business plan that outlines financing, marketing, operations and other key elements.
· Develop and follow a cash flow budget.
· Keep a rainy day fund for unforeseen circumstances.
· Consider the need for a business line of credit to mitigate cash flow fluctuations.
· Think big but start conservatively. Consider buying used equipment or running the business from home initially.
· Learn from your mistakes. Errors are inevitable. Learning from mistakes allows you to innovate.
· Learn from others so you may benefit from their experiences.
· Networking with other business owners and professionals can expose you to best practices that have worked for others.
· Use separate bank accounts and checks for personal and business activities.
· Use separate debit or credit cards for personal and business expenditures.
· Software packages like QuickBooks and Sage 50 can be helpful if set up properly.
· Commingling business and personal transactions can become very messy and produce nebulous financial records.
· A CPA can provide valuable tax guidance in addition to other bookkeeping, accounting and business activities.
· You will likely need an IRS Employer Identification Number (EIN).
· Payroll tax payments and related compliance will be required if you have employees.
· Your business may be required to pay personal property or real estate property taxes.
· Federal, state and possibly local income taxes will be due on any taxable income generated by the business.
· Set aside funds for quarterly estimated tax payments. Penalties will be assessed on late or insufficient payments.
· Be sure to consider all allowable deductions such as the home office deduction or vehicle mileage expense.
· Tax planning is a proactive and critical strategy for minimizing income tax liabilities and preventing surprises.
· Ensure that your business has sufficient liability and property insurance coverage.
· Consider an umbrella liability policy.
· Other types of insurance, such as workers' compensation insurance, may be required.
· Ensure that you have operating and buy-sell agreements, particularly if there are multiple business owners.
· Strongly consider seeking the advice of an attorney regarding formation and operation of the business.

Tuesday, October 27, 2015

End of year financial planning strategies

It is the season to do some year-end financial planning. If you haven’t spoken with your adviser in awhile, this may be a great time to engage in a conversation about any changes in your financial life.
Throughout my career I’ve seen a number of opportunities lost because of a lack of coordination between clients’ different advisers. Don’t let this happen to you.
To prod you forward, I recommend you first review any major changes in your financial life during 2015. For example, did you incur unusually large medical expenses this year? Have you sold something that resulted in an extraordinary gain or loss? Has your income increased considerably? Or has it possibly decreased due to a job loss or job change? The list of possible changes in your life is vast.
With this information in hand, there are many opportunities to save money. Unfortunately, many are connected to a deadline of December 31 involving our overly-complex and often unforgiving tax code. It’s clearly too much for a normal, busy person to follow. Encouraging a coordinated level of service can work wonders if you’ve engaged advisers for your investments, tax planning and legal affairs.
For example, did you know that federal capital gains are taxed at a 0 percent rate if your taxable income falls below the 15 percent federal tax bracket threshold? If you are sitting on unrealized capital gains from a year’s worth of gains, you may be able to take advantage of super low capital gains taxes in a year in which you earn less than usual.
It also may be intelligent to consider a partial Roth IRA conversion from part of your regular tax-deferred retirement accounts if you are able to show less taxable income this year than normal. Of course, the analysis required for Roth conversions is not simple. It involves making a reasonable set of assumptions about the unknowable future. Doing that analysis is a smart move.
Another possible retirement savings strategy is available to self-employed individuals who have the desire to save more and pay less tax today. If you qualify, a high-earning small business person can save much more through a little-known vehicle called an Individual 401(k) than they can through a regular IRA. Unlike a regular 401(k) plan for a small business, these special use 401(k) plans are not complex or costly to set up or maintain.

But you stand to miss out on these planning opportunities and more if you don’t make the right moves with this information by December 31. As the famous Nike ad once said, just do it — before the busy holiday season. Amazingly, it’s once again just around the corner.

Monday, October 26, 2015

9 Tax Breaks Every Parent Needs to Know About

Having kids will enrich your life -- but not your bank account. Parents need to save every penny. But the good news is that Uncle Sam can help. Vanessa Borges, enrolled agent and tax preparation supervisor at Tax Defense Network, says, "There's one benefit to having children besides the joy they can bring you: tax breaks."

In fact, many moms may not know they could qualify for thousands of dollars of deductions, exemptions, and credits. Here, the top ways you can save, according to the pros.
1. Taking advantage of the dependency exemption. Claiming your child as a dependent allows you to deduct $4,000 of your income. "First things first, make sure you get a Social Security number for your new child," says Borges. "You'll need one to claim your child as a dependent on your tax return." And make sure you request one at the hospital, because it may be a hassle to get one later if you don't. Consider including a note about this in your birth plan.
2. Changing your withholdings and filing status. Reduce your withholdings on your paycheck by filing a new W-4 at work. If you are unmarried, you may also be able to claim head of household status if you are paying for more than half of the cost of providing a home for your child.
3. Claiming your $1,000 child tax credit. If your income is less than $110,000 for your household or $75,000 for a single head of household, you get a credit of $1,000 if your child, stepchild, or foster child is less than 17 years old.
4. Claiming your Earned Income Tax Credit (EITC). This credit is dependent on your income and number of children. For example, as a family with three children, you would qualify for a $6,242 credit if you make $47,747 singly or $53,267 jointly.
According to Lisa Greene-Lewis, tax expert from TurboTax, "The IRS reports many people miss out on the EITC. Some people may earn lower than the minimum for filing taxes ($10,300) but could still be able to get the credit."
5. Updating your information in the health-care marketplace. Greene-Lewis also points out that many parents who purchase their own insurance through the new marketplace may miss out on some savings by not changing their information to include any new additions to their family. Adding more to your household may help you get additional deductions.
6. Keeping track of medical expenses. Don't lose those receipts for prenatal visits, prescriptions, and other medical expenses. If they total more than 10 percent of your income, you can deduct what is left, and don't forget your child's health-care costs can be included in that as well.
Now, you can even deduct your breastfeeding and pumping supplies! Moms can write off the cost of items such as breast pumps and other lactation supplies.
7. Bearing in mind the tax credit for adoption. Just because you didn't give birth to your child doesn't mean you didn't incur a lot of costs by adding to your family. This is one of the biggest credits worth over $13,000, and if your child is special needs, you automatically qualify for the full amount.
8. Deducting childcare. Depending on how much you make and spend on childcare, you could get some reimbursement ranging from 20–35 percent of costs. The catch: The childcare must be needed because the parent or parents are unable to care for the child due to work.
Some employers also offer another option, the Childcare Reimbursement Account. This account allows you to deposit pre-tax money into a savings account to pay for childcare. Greene-Lewis reminds parents not to miss this opportunity if they can as the end of the year approaches, because if you miss the open enrollment period, you may have to wait a whole year to enroll.
9. Saving for college. Choosing a savings plan like a 529 state savings plan can help. Gabe Lumby, CPA, says, "In all 50 states, parents can get a deduction on their state return, and pay no tax on the gains."
Many of these will phase out for the highest earners, but most families will be able to take advantage in some way. And, as we all know, all savings -- large and small -- count!

Sunday, October 25, 2015

Opening a business? Beware tax burdens

In today's economy, many people are starting new businesses. For some people, they are converting a hobby or passion into a business. For others, it is a trade or professional experience they have that they feel now it is time to become their own boss. Usually, the last group of people who start businesses sees a need or hole in the marketplace that they try to fill.
Whatever your desire to start a new business, from a bookkeeping and tax perspective you need to do it right from the start. First, you need to consult an attorney on the legalities of your business, such as data security risks, liability risks, protecting intangible property and what type of entity you should be. If you need a referral to some good attorney's in the area, feel free to contact me. Next, you should contact a competent person in the tax area. My recommendation is to see a certified public accountant or an enrolled agent..
Now most people start as a sole proprietor. You do this by using your own name as the business name or get a fictitious name from the state. In operating as a sole proprietor, you generally do not create a separate legal entity. Here are some things you need to know or consider if you start your business as a sole proprietor.
Your bottom-line profit (net income, which is income less deductible expenses) is subject to self-employment tax. That tax is the equivalent of the Social Security and Medicare taxes that you have taken from your paycheck as an employee, plus what your employer matches. Except in this case, you are the employee and the employer. This tax rate is about 15.3 percent of net income. Plus the income is also subject to income taxes. So assuming you are in the 15 percent income tax bracket, your rate is about 30 percent of the income.
So, if you have a profit, you need to make estimated tax payments, increase any federal withholding you may have on other income payments (retirement payments or other W-2 income), or at least be prepared to pay the tax due by April 15. My rule of thumb is to set aside 30 percent of your gross income to cover the tax bill.
Make sure that you have a separate business bank account. This is one of the things that can help you avoid the hobby loss rules. This is assuming that you are truly running it as a business and it is not actually a personal hobby you are trying to get away with deducting the expenses.
Make sure you keep good records. This means keeping all of the receipts and invoices of the items you purchase. Use a software like Quickbooks or Xero to keep track of your accounting. I highly recommend you hire a professional to help you with keeping the books up to date and reconciled. This is not a place in which you should looking at saving a buck. Save your time by outsourcing this function.
If you are going to have payroll, then you should get an employer identification number to report the payroll activity (versus using your Social Security number). This is to reduce potential identity theft.
Remember to report all payments you receive for your products and services, including cash. If you don't report everything, there are ways for the IRS to find out what the cash transactions are. Not to mention, this will make your income less (or losses bigger) and make it more difficult to get business loans or buy a house in the future.
One other consideration to help save taxes is to consider creating a separate legal entity in which you can elect to become an S corporation for tax purposes. This will allow you to reduce the effect of the self-employment tax. The drawback to this is you have to pay to have a separate business tax return prepared and you need to involve a payroll company, because you are owner and employee that needs to receive a reasonable salary. This is why I usually say that your bottom-line profit needs to exceed $25,000 regularly to elect S corporation status.
Always seek professional advice before opening a business. I have seen too many people make very costly mistakes trying to save a buck and I don't want you to be one of them.

Saturday, October 24, 2015

Earn Tax-Free Rental Income. No, Really.

It isn’t often that the Internal Revenue Service says that income of any kind doesn’t have to be reported, but for clients who rent out their primary or vacation homes, that may be the case.
The IRS instructs those who rent out their homes for 14 days or less in a year not to report that rent money as income.
“There is a special rule if you use a dwelling as a personal residence and rent it for fewer than 15 days. In this case, do not report any of the income and do not deduct any expenses as rental income expense,” according to the IRS website under Topic 415.
“It’s sort of a loophole, but it can be big if you happen to live in a venue where there is some big event like the Super Bowl where you can rent out your home for thousands of dollars a week to families or groups,” says Rob Stephens, a co-founder at Avalara MyLodge tax services in Greenwood Village, Colo.
The trick is to make sure not to rent for more than 14 days, he says.
Go over by even one day and the IRS requires that all rent received be reported as income, Stephens says.
And then things get complicated because expenses for the same property need to be calculated and allocated based on the number of days a house was rental property and the number of days it was a home.
“It doesn’t matter how much the rent is for those two weeks,” Stephens says.
“It could be a $1 million and the IRS still doesn’t require you to report it as income,” he says. “But if it’s 15 days, you have to report it all.”
Mark Luscombe, principal analyst at the tax and accounting group of Wolters Kluwer in Riverwoods, Ill., suggests that depending upon the state, there could be state and/or local taxes that might need to be paid.
“Some states, like Pennsylvania and New York, have you start with the federal adjusted gross income figure,” he says. “If they do that and then there is no specific adjustment for rental income, you wouldn’t have to pay state tax either.”
Philadelphians may have recently made out well with this loophole.
According to HomeAway, an online vacation home leasing firm, short-term home rentals ahead of Pope Francis’ short visit to the City of Brotherly Love were running at an average of $1,690 per night, tax-free.

Friday, October 23, 2015

Tax Year 2015: Top 10 Tax Planning Issues


As 2015 draws to a close, a turbulent economic and legislative environment means taxpayers need to keep a close eye on several major planning issues, according to Grant Thornton LLP.

For example, more than 50 popular tax provisions expired at the end of 2014 and Congress has yet to extend them. Without legislative action, businesses won’t get a credit for research activities or be able to immediately deduct one-half of the cost of new business equipment. Individuals would lose benefits like the ability to deduct tuition or state and local sales taxes.

“Congressional inaction on tax extenders is not only causing headaches for businesses, but individual taxpayers as well,” said Mel Schwarz, partner and director of tax legislative affairs in Grant Thornton's National Tax Office in Washington, D.C.

“This climate of economic uncertainty is already making business and investment planning difficult, and Congress isn’t offering much help,” added Dustin Stamper, director in Grant Thornton’s Washington National Tax Office.

While lawmakers did manage to enact several pieces of tax legislation this year, that’s not necessarily good news – the most significant provisions are all tax increases. Congress attached several revenue raisers to a pair of trade bills and an even larger package of revenue raisers was used to finance a short-term extension of highway funding.

Grant Thornton’s Year-end Tax Guide for 2015 discusses these and all the issues taxpayers and taxpaying entities should be thinking about right now. Below are 10 of the most important 2015 tax planning considerations for individuals, executives and business owners. Taxpayers can also test their year-end planning knowledge with Grant Thornton’s interactive quiz.

1. Check on Congress. The most important thing you can do this year for your tax planning is to keep an eye on Congress to see whether lawmakers manage to extend popular tax provisions before the end of 2015. Some notable provisions must be extended in order to allow:

Taxpayers aged 70½ and over to make tax-free charitable contributions from individual retirement accounts (IRAs);
Businesses to deduct up to half of eligible equipment placed in service this year;
Teachers to receive an above-the-line deduction for $250 in classroom expenses;
Students and parents to receive an above-the-line deduction for tuition expenses;
Companies to receive a credit for qualified research expenses; and
Taxpayers in states without an income tax – like Washington, Texas and Florida – to deduct state sales taxes.

2. Document your business activities. You may not need to pay a 3.8 percent Medicare tax on your business income if you participate in the business enough so that you are not considered a “passive investor.” Participation is almost any work performed in a business as an owner, manager or employee as long as it is not an investor activity. Even so, you must document your activities, and the IRS will not let you make ballpark estimates after the fact. Make sure you document the hours you’re spending with calendar and appointment books, emails and narrative summaries.

3. Prepare your information reporting. You should start gathering information early this year to make sure you can complete your mandatory reporting on time. Congress has enacted new legislation that more than doubles most penalties for late or incorrect information returns. This includes the Form W-2 employers must provide to all employees and the Form 1099 a business must provide to any contractor it pays at least $600 for services. These returns are due to recipients by Feb. 1 and the IRS soon after.

4. Get your charitable house in order. If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented in order to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

5. Remember your state and local tax obligations. Don’t forget that state and local governments impose their own filing and payment responsibilities with various income, sales and property taxes. Recently, states have become more aggressive in taxing corporations that are not physically present in their states, but have significant sales to customers in those states.  While there may be exceptions for limited business activities in particular states, it is wise to check on your activities of your salespeople that often travel to different states to ensure you are filing all state corporate tax returns as needed.

6. Take a closer look at your state residency status.  For individuals who split their time in two different states throughout the year, now is an excellent time to consider where you may be taxed as a resident for 2015. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction. Generally, if you reside in a state for 183 days or more, that state will assert residency and the ability to tax all of your income. Furthermore, if you move to a new state but you maintain significant contacts with the old state (including driver’s license, residences, bank accounts and the like), you could run the risk of being taxed as a resident in the old state.

7. Accelerate deductions and defer income. Why pay tax now when you could pay later? The time value of money can make deferring tax almost as valuable as escaping it. Generally, you want to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

8. Manage your gains and losses. Capital gains and losses present excellent opportunities for deferral because you have nearly complete control over when you sell them, but be careful when harvesting losses. You generally cannot use capital losses against other kinds of income, and if you buy the same security within 30 days before or after you sell it, you cannot use the loss under the wash sale rules.

9. Bunch itemized deductions. Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

10. Make up a tax shortfall with increased withholding. Don’t forget that certain kinds of taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

Thursday, October 22, 2015

It Isn't Too Early to Start Planning Your Tax Strategy


Welcome to the third quarter, when it's time to start thinking of 2015 as a tax year rather than the buffer between yourself and your next filing.
Though the end of the year is still a little more than two months away, financial advisors would like to remind you that there are a bunch of year-end tax moves you can make to reduce the bill you'll get from Uncle Sam. If you're lucky, a couple of them just might even send some more money your way. them move those assets back into your pocket.
“As we enter the end of the year, taxes are on many of our clients’ minds,” says Mike Lynch, vice president of strategic markets at Hartford Funds. “We encourage reps and clients to think about this all year long, so that we aren't scrambling at the end of the year by discussing being tax diversified.”
Granted, this year Congress is making advanced planning for the 2015 tax season a little more difficult than it has to be. With no budget in place and the threat of a government shutdown still looming, a whole lot of your potential deductions are still in limbo.
“We're still waiting on Congress to extend the budget, so a lot of things that we typically have we don't right now,” says Mike Greenwald, partner at Friedman, LLP. “We don't have bonus depreciation and we're waiting on Congress to see if they'll re-enact the state and local sales tax deduction. We don't have that, we don't have the $250 educator deduction and we don't have a lot of the student loan deductions, because they expired at the end of '14.”
Just don't use Congress's intractability as an excuse. It typically helps if you've been taking a sound approach to your taxes year-round. Rebecca Pavese, a certified public accountant and financial planner with Palisades Hudson Financial Group’s Atlanta office, notes that a healthy first step involves getting organized and taking a look at tax contributions you may not have changed since your employer hired you. Even if you have tinkered with your withholdings, make sure the IRS is getting enough of a cut to keep them from looking for more after you're filed.
”If you adjusted your tax withholding during the year in order to keep a cash buffer on hand, make sure you haven’t fallen short of meeting your obligations for the year,” Pavese says. “If necessary, adjust your December withholding, which may help eliminate the prospect of estimated tax penalties and interest. You can adjust your withholding by submitting a new W-4 form to your employer.”

Even if you've taken that step, the simple matter of spreading money around to taxable, tax-deferred, and tax-free accounts can likely be solved at the workplace as well. Pavese suggests starting off by maximizing your retirement savings to minimize the tax hit.
“Increasing contributions to many sorts of retirement plans, including 401(k)s and IRAs, will reduce your adjusted gross income,” she says. “If your per-paycheck contributions are not enough to hit the contribution limit for the year, you can ask your employer to deduct a one-time lump sum to catch up. At a minimum, 401(k) plan participants should contribute enough to take full advantage of any company matching.”
The easiest way to knock down that adjusted gross income by beefing up your “above the line” deductions across the board. Yes, that includes IRA contributions, but it also encompasses health savings account contributions and qualified moving expenses. Even if you pay state income taxes before December 31, you can deduct them on your federal return after sending an estimated payment.
Why do this, you ask? Well, if you can hold your adjusted gross income to $74,900 for a married couple filing jointly or $37,450 for a single filer, you will pay 0% tax on sales of assets you’ve held longer than one year and 0% on dividends. Even if you can’t get your AGI that low, you may be able to step down to the next lowest capital gains tax rate. Since many deductions are calculated by your adjusted gross income, knocking it down can make those less daunting.
“Unreimbursed medical expenses can only be deducted if they exceed 10% of AGI, for example,” Pavese says. “On the other hand, if you expect to be in a higher tax bracket next year than you are this year, deferring deductions where possible can potentially help you pay less tax in the long run.”
Beyond that, you may also want to look into your broader investment portfolio for some savings. The Hartford Fund's Lynch notes that selling out of a fund or stock by the year's end can help diversify holdings and, at the very least, can give you a loss to deduct.
“Is this a long-term investment or something I might be better off without and no longer fits my long-term needs?” he says. “Can I take advantage of a loss, or do I already have a prior loss in something that I can take advantage of? These exact questions should be covered with both tax and financial professionals.”
Those losses can eventually add up to big savings. If you're attentive enough to recognize your losses on a yearly basis, loss selling can help you whittle down future tax hits even if you're not particularly worried about this year's numbers.
“Simply put, tax loss selling is a strategy to minimize capital gains on one asset by realizing a loss to offset it,” Pavese says. “You can also carry tax losses forward indefinitely, so if you don’t end up needing to offset capital gains right away, you can use the loss to offset a gain in a future year.”
“Keeping inventory of donations should ideally be done throughout the year, but for those of us that may have given goods or money early in the year, tracking the receipts can be difficult,” Lynch says. “Now might be time to look at the junk drawer, that drawer in the corner of the kitchen where old receipts go to die. Make a folder and start putting those receipts in it.”
You can donate cash, sure, but there's also a way to get a deduction by giving away your high-performing assets. If you purchased shares for $1,000 and they are now worth $10,000, giving those shares to a qualified charity would give someone in the 28% tax bracket a $2,800 tax deduction based on the current market value of the shares. Also, if you're over 70.5 years old and have an IRA account, you're going to have to make your required minimum distribution before the end of the year to avoid penalties. However, if that's going to put you in dire straits with the IRS, Lynch says you may want to see if you can give your required minimum distribution directly to the charity of your choice.
Failing all of that, keep in mind that the upcoming season of giving extends beyond charities. Yes, even certain presents are deductible.
“We like to remind clients of the gift tax exclusion: you can give $14,000 per donor without incurring a gift tax,” Greenwald says. “If you want to give money to your kids or you're fortunate enough to have rich kids who want to give money to their parents, you want to make sure you don't miss that at the end of the year, because you can't use this year's exclusion next year.”

Wednesday, October 21, 2015

Taxing Issues for Independent Contractors and Freelancers


Independent contractors and freelancers may have income and expenses that fluctuate wildly over months or years, so financial advisors need to know how to counsel those clients on the best strategies for planning their cash needs for tax purposes

Employees who have income withheld are less likely to run into problems over timely tax payment, but independent contractors need to plan their estimated installments.
“They should consider their expected tax liability as an expense, and they should budget for it like they budget for anything else,” says Rosemarie Moeller, a certified financial planner and managing director at Freedom Divorce Advisors, a division of AEPG Wealth Strategies in Warren, N.J.
Advisors and accountants must work closely with clients to estimate their expected tax liability for the year, which is 100% or 110% of the previous year’s taxes, depending on earnings.
Accountants advise their clients to take that amount and treat it like a mortgage or any other fixed expense, setting aside the money each month to pay for the quarterly installments to the government.
“You’re estimating, and the government knows that, but they want it evenly distributed, unless you didn’t pay three-quarters of your taxes because you didn’t expect this huge check to arrive in the fourth quarter of the year,” Moeller says.
Large fluctuations in income or deductions should balance out, if the projections are accurate.
“If you keep ending up under or over the projections, then we’ll want to talk about it and do an updated projection,” says Jeffrey M. Mutnik, a certified public accountant and director of taxation and financial services at Berkowitz Pollack Brandt with three offices in Florida.
“It always gets me when people say they’re so happy they are getting a refund they didn’t know they were getting or they’re so upset that they owe money and they didn’t know that they owed it,” he says. “That’s something they should have known at some point during the year; they should have had some type of projected income versus income taxes.”
For independent contractors, that knowledge can be crucial in obtaining tax savings. Especially toward the end of the year, independent contractors may be able to exercise some leeway over when they are paid or when they make payments.
“Maybe they can withhold making a payment until January and get a deduction the next year when they’re expecting to have a larger boom,” Mutnik says.
He warns that clients need to understand that payments are considered received when they are collected, not when they are deposited in the bank.
“If somebody pays you on Dec. 28 by check and you just put it in a drawer and deposit it in the bank on Jan. 3, that’s still a December collection,” Mutnik says. “The fact that you didn’t deposit it doesn’t mean anything.”

Tuesday, October 20, 2015

5 Tax Tips for Home Sellers


For home sellers, times changed dramatically almost two decades ago in the tax-planning world.

No longer -- indeed not since 1997 -- do they need to buy a new house in the same year as they sell theirs to have any capital gains from the sale qualify as tax-exempt.
Under the post-1997 rules, homeowners each may receive a maximum of tax exemptions on the capital gains from the sale of a residence or $500,000 per couple, says Chad Smith, a wealth management strategist at HD Vest Financial Services, which is based in Irving, Texas. 
To qualify for the tax break, the home sellers must each meet Internal Revenue Service-set tests of ownership and use, in other words, owning and using the home during two of the five years prior to the transaction.
“Keep track of any remodeling,” as those upgrades may be deducted from a client’s basis when calculating the capital gains, Smith says. 
Notably, however, maintenance costs may not be similarly deducted from a client’s basis.
The remodel of a kitchen or bathroom may be deducted, as would an addition, the replacement of a roof, the paving of a driveway, the installation of central air conditioning or a rewiring of home. But the replacement of a water heater wouldn’t.
Homeowners should consistently keep track of their remodeling expenditures, so that they have them all in one place when it is time to report the gains on a sale, Smith says.
Sellers of rental residences who fail to meet the IRS’ use test, should consider buying another
real estate-related asset to avoid the capital gains tax and consider specifically what is known as 1031 exchanges, named after a section of the tax code that allows for the exemption, Smith says.
Under Section 1031 of the tax code, as interpreted by the courts, the seller of a non-residential property may execute a deferred exchange and within a set period invest in a like property, meaning U.S. real estate.
The 1031 option has grown in attractiveness for clients who want to extricate themselves from the hassles of renting real estate, who won't want to be landlords with tenants calling in the middle of the night, Smith says.
One other, often-forgotten caveat is that home sellers who expect to sell their residence for less than they paid -- at a loss – shouldn’t look to Uncle Sam for help.
“There is no relief in the tax code for those people, and we are seeing quite a bit of that these days,” says Mark Hyma, president of Professional Financial Services of San Diego, which uses HD Vest as its broker-dealer.

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Monday, October 19, 2015

Issues to Consider with Irrevocable Trusts


Financial advisors should counsel their clients on the issues related to irrevocable trusts, as these tend to be complex.
When a grantor makes a transfer into an irrevocable trust, the individual essentially gives up their rights of ownership of the assets and the trust becomes a separate taxable entity, says Anjali Jariwala, founder of FIT Advisors in Chicago.
The trust may be subject to the 3.8% net investment income tax, which is triggered at relatively low levels for trusts by comparison with individuals, she says.
The threshold for the 3.8% surtax is $250,000 for a married couple but just $12,300 for a trust.
“Although the trust threshold is indexed for inflation, unlike the threshold for individuals, the level is still very low,” Jariwala says. “It is very easy for the income in the trust to reach the threshold amount.”
One way to mitigate the tax impact is to distribute the income out of the trust to avoid the 3.8% surtax, Jariwala says.
Assume that Trust A has $100,000 of interest and dividend income and $200,000 of capital gains. If the trust makes no distributions, the net investment income subject to surtax will be $287,700 ($300,000 income, less the $12,300 threshold).
If the beneficiary of the trust is an individual with adjusted gross income of $50,000, the trust can distribute the interest and dividend income of $100,000, Jariwala says.
The individual won’t be subject to the surtax because his income of $150,000 is below the threshold for an individual at $200,000, and the trust will avoid the surtax on $100,000 of its income.
Irrevocable trusts have to file their own tax returns on Internal Revenue Service Form 1041 instead of a 1040, says David D. Holland, chief executive and planner at Holland Financial Inc. in Ormond Beach, Fla.
An irrevocable trust is subject to the same tax breaks as an individual, but the difference between brackets is very short, he says.
A trust can get to the highest bracket of 39.6% with just $12,301 of taxable income this year, while a married filing jointly couple would need more than $464,850 to be in the same bracket.
“The tax law is written in a way to encourage individuals or families with these trusts to disburse the income out to the trust beneficiaries who then pay tax on it. Given the difference in tax treatment, it’s often better to be taxed at the individual level and not at the trust level,” Holland says.

Sunday, October 18, 2015

Creating And Building A Roth IRA

FROM Reinhart Boerner Van Deuren S.C.

Roth IRAs are powerful estate, financial and tax planning devices. Given their power for wealth transfer planning, it is important to understand the rules that apply to how Roth IRAs are formed and funded. This article will address these two issues.
The first important concept is that Roth IRAs are funded on an after-tax basis. That is, contributions to Roth IRAs are not deductible against your income tax and so eventually the amounts contributed can be withdrawn without being subject to income tax either.
There are four basic ways to fund a Roth IRA:
  • Annual contributions.
  • Rollover from Roth 401(k) plan.
  • Conversion of funds from traditional IRA.
  • Surviving spouse's rollover of deceased spouse's Roth IRA.
* * * * * * * * * *
  1. Annual Contributions. The first approach to funding a Roth IRA is to make annual contributions. Only specified taxpayers are allowed to make contributions to Roth IRAs. Single taxpayers must have adjusted gross income of less than $131,000 (in 2015). Joint filers can make contributions, provided their adjusted gross income is under $193,000. In addition, the taxpayer must have earned income at least equal to the amount of the Roth IRA contribution. Finally, the annual contribution is limited to $5,500 for taxpayers who have not attained age 55 during the calendar year in which the contribution is made. For taxpayers who have attained age 55 in the calendar year, an additional $1,000 annual "catch-up" contribution is allowed, subject to the other limits described above.
  2. Rollover from Roth 401(k) Plan. Some qualified plan sponsors permit participants to open a Roth 401(k) account. The operation of Roth 401(k) accounts is beyond the scope of this article, but for those participants who have Roth 401(k) accounts, the funds in the Roth 401(k) accounts can be rolled over to a Roth IRA at the same time and under the same circumstances as the pretax assets in the regular 401(k) account can be rolled over to a traditional IRA. Generally speaking, these rollovers will occur at the participant's retirement or other separation from service from the employer.
  3. Conversion from Traditional IRA. The most typical approach for substantial funding of a Roth IRA relates to converting a traditional IRA to a Roth IRA. The rules for converting a traditional IRA to a Roth IRA have changed over the years, but at this time, there are no limits on the age of the IRA owner who can convert a traditional IRA to a Roth IRA, or the gross income of the owner in the year of the conversion. The only rule that applies is that the conversion will trigger ordinary income tax on the full amount that is converted from the traditional IRA to the Roth IRA, and therefore the person making the conversion must be prepared to pay that income tax liability. Although the owner of a traditional IRA can use funds from the traditional IRA to pay the income tax created by the conversion, financial planning generally suggests that optimal tax planning is achieved by using funds other than the traditional IRA to pay the income tax.

    Prior law created special rules to allow the income tax liability triggered by a Roth IRA conversion to be spread out over two years, or, in one case, over four years. These special tax rules no longer apply for Roth IRA conversions after 2010.

    Under certain circumstances, a taxpayer may wish to "undo" a Roth IRA conversion. For example, if the value of the assets that were moved from the traditional IRA to the Roth IRA substantially declined in value, the taxpayer may wish to "recharacterize" the funds back into the traditional IRA in order to avoid paying income tax on value that has "disappeared." A taxpayer can make a recharacterization of a converted Roth IRA provided the assets are moved back to the traditional IRA before the taxpayer files his or her income tax return (including extensions) for the year of the conversion. Only one conversion and recharacterization can be made for any calendar year. Recharacterizations can be made after the taxpayer's death provided that the decedent's income tax return has not been filed at the time of the recharacterization.
  4. Surviving Spouse's Rollover. If a Roth IRA owner dies and leaves the Roth IRA to his or her surviving spouse, the surviving spouse can roll over the Roth IRA into his or her existing Roth IRA, or can open a Roth IRA and roll over the funds into his or her Roth IRA. As mentioned in a prior article, the surviving spouse is not required to take any distributions from the Roth IRA, but is free to do so if desired.

Saturday, October 17, 2015

The year-end estate plan review

It’s like cleaning the basement for a yard sale — you don’t want to do it, but it feels great when it’s done.
I’m talking about a year-end estate planning review. There is no better time to do an estate planning review than December — now just a few weeks away.

A year can bring significant changes. For example, you could have had a job change, moved to a new state, received an inheritance, had a marriage, birth or death in the family, and started, bought or sold a company. Consider the annual review like regular car maintenance. Without it, you could find yourself in trouble at the worst possible time.

A current estate plan is essential for the preservation, management, and transfer of your wealth for tax and nontax reasons. It should include a full risk management review from how assets are owned or titled, to the type of insurance coverage and amounts you have. For example, you could have purchased a boat earlier this year, but forgot to update your insurance coverage to include it.

The first step is a review of your documents including wills, revocable and irrevocable trusts, power of attorney, health care powers of attorney, advanced directives, letters of direction, and life, property and disability insurance policies.

Review your documents

It sounds obvious, but individuals frequently neglect a document review for years at a time. Read them once a year to make sure they reflect your objectives. Questions you might ask include:

• Are there changes to the family structure this past year?
• Are you and your partner now married? Divorced?
• Are you reconsidering how you want your assets distributed?
• Have you changed your state of residence?
• Are your beneficiaries capable of managing a financial windfall on their own?
• Have you discussed your estate plan with your family?
• Does your family have adequate financial protection in case of death or disability?

Review your fiduciaries

For example:

• Are all fiduciary roles (executor, guardian, trustee, agent) filled by individuals who have the time, willingness and ability to serve in this capacity?
• Do the fiduciaries understand their roles and responsibilities?
• Would a corporate executor and/or trustee be appropriate as part of your fiduciary team?

Review for potential tax issues

At the federal level, there is an estate tax and generation-skipping transfer tax that can drain as much as 80 percent of your estate at death.  Income taxes can further erode your estate for assets, such as a 401(k)and individual retirement accounts, which may require planning. Planning for taxes is important.

• Have your assets increased so that federal and state tax planning may be needed?
• Does a decrease in assets call for a change in bequests, tax planning or distributions?
• Have you purchased real estate in another state?
• Are your assets titled appropriately to work with your estate plan?
• Are the beneficiary designations on assets like life insurance and individual retirement accounts current and working properly with your estate plan?
• Have you started, acquired or sold a business?
• Have you received an inheritance or expect one in the near future?
• Do you own your assets in a manner that maximizes asset protection opportunities?

It doesn’t have to be in December, but once a year, block out a few hours to review your estate plan. Your family will benefit from a well-maintained and up-to-date plan.

Plus, it gets you out of cleaning the basement, at least for a little while.