Tax Tip: Saving for Retirement Series – Part 1: Traditional IRAs

Posted on October 27, 2010 by taxblogger

Tax Tip:  Saving for Retirement Series – Part 1: Traditional IRAs | Tip of the Week | October 27, 2010 | No. 14Saving for Retirement Series We are beginning a series of Tax and Money Tips to take a look at ways that you can save for retirement in a tax advantaged way. As we approach year-end, now is a good time to review your current retirement plan and consider any moves needed to maximize your tax savings.In this series we will cover over the next few weeks:
    1.  IRAs – both Traditional and Roth options
    2.  SEP Plans (Simplified Employee Pension)
    3.  Uni-k for Sole Proprietors
    4.  Profit Sharing and 401(k) Plans
   
This week we will highlight the Traditional IRA. An individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits. In fact IRAs are one of the most powerful retirement savings tools available to you. Even if you are contributing to a 401(k) or other plan at work, you should also consider investing in an IRA.  Even if the IRA is not deductible, you should consider still making the contribution in order to get as much money each year into a tax-advantaged account.

A traditional IRA allows you to make annual contributions of up to $5,000 in 2010. Generally, you must have at least as much taxable compensation as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to made additional “catch-up” contributions. In total, they can put up to $6,000 in their IRAs in 2010.

Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70 ½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount you earned.

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pretax) contributions lower your taxable income for the year, savings you money in taxes. Even if neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct may be limited.  Call us to discuss your own situation.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Does Staying the Course still work for you?

Posted on October 20, 2010 by taxblogger

Does Staying the Course still work for you? | Tip of the Week | October 20, 2010 | No. 13
 

Many current investment strategies direct the client to invest assets while reducing risk through sensible diversification.  This approach assumes that the best performing asset class will change each year and cannot be predicted.

We learned in 2008, when nearly all asset classes realized losses, that this approach may not work.  Clients are fatigued with the current conditions of the investing marketplace and are demanding a more active approach to better protect their wealth.  They have ridden the ride of the past decade of bubbles, then following corrections, and are questioning the traditional buy-and-hold approach.  We can agree that the nature of investing has dramatically changed over the past 10-20 years.  Specifically, the advances in technology have allowed for increased trading volume and volatility.

One solution to the buy-and-hold approach may be a tactical investment strategy that utilizes active management.  Active investment strategies are ones that allocate assets to markets that are trending well and avoiding areas that are declining.  These strategies consider Cash as a viable investment option, allowing for wealth preservation and reduction of risk.  Investors should consider active tactical investing a permanent component of a well-diversified portfolio.  With a large defensive cash position, investors will appreciate the proactive nature of tactical management the next time there is a large market decline.

Call us to find out more…… 

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Using IRAs to Cover College Expenses

Posted on October 13, 2010 by taxblogger

Using IRAs to Cover College Expenses| Tip of the Week | October 13, 2010 | No. 12

It’s time for college students to head back to school.  But how are you going to pay for this next year of college?  Some people will be able to write the check.  But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills.  What if it isn’t enough?  Can you use your retirement savings to help pay the bill?

First of all, consider whether you should use your retirement assets.  Are you putting your retirement at jeopardy to give your student a chance to have a good life?  Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement.  The message is to look for all possible sources of cash before you consider using your retirement funds.

If you are over the age of 59 1/2, you have access to your retirement funds without penalty.  You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish.

A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty.  Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception.  The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse.  You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment – in other words, the expenses minus any financial aid.  Room and board are qualified expenses if the student is enrolled on at least a half-time basis.  The expenses must be paid in the same year that a distribution is taken from the IRA.

So good luck to all those students returning to college this fall.  And good luck to those that are footing the bill.  Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!

If you should have any questions, call us.

Questions or Comments?

Give us a call, 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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The Small Business Jobs Act of 2010

Posted on October 6, 2010 by taxblogger

The Small Business Jobs Act of 2010 | Tip of the Week | October 6, 2010 | No. 11
 

What you need to know – The Small Business Jobs Act of 2010 passes 9/27/2010

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (H.R. 5297).  The legislation contains several provisions designed to ensure that small businesses have access to adequate credit.  The Act also contains targeted short-term tax relief for small businesses.

Specific tax changes include:

Increased IRC Section 179 expense limits – Effective for 2010 and 2011, the maximum amount that a business is able to expense under IRC Section 179 is increased to $500,000 (without the legislation, the expense limit would have been $250,000 for 2010 and $25,000 for 2011).  The $500,000 limit is reduced if capital expenditures exceed $2 million.  The Act also temporarily expands the application of Section 179 to up to $250,000 of certain real property (for example, qualified restaurant property).

First-year “bonus” depreciation extended – The Act extends the additional 50% first-year depreciation deduction that was in effect for 2008 and 2009 for one year, to qualified property acquired and placed in service during 2010.

Small business stock exclusion increased – The Act temporarily increases the exclusion percentage for qualified small business stock purchased by individuals to 100%, and does not treat the excluded gain as an alternative minimum tax preference item.  Therefore, subject to certain limits, you’ll pay no regular tax or alternative minimum tax on the sale of qualified small business stock acquired at original issue after September 27, 2010, and before January 1, 2011, provided you hold the stock for at least five years.

Small businesses get enhanced general business credit – Eligible small businesses (generally, non-publicly traded corporations, partnerships, or sole proprietorships with gross receipts averaging $50 million or less) will be able to carry back excess general business credits up to 5 years (instead of 1) in 2010, and will be able to use the general business credit to offset both regular and alternative minimum tax liability.

Health insurance costs will reduce self-employment tax – If you’re self-employed and pay health insurance premiums for you and your family, you get a break on your 2010 self-employment tax (the tax that you calculate on form 1040, Schedule SE).  That’s because, for 2010 only, the deduction you get for the cost of health insurance for yourself and your family will apply in calculating your earnings for purposes of self-employment tax, as well as, in reducing your income for income tax purposes.

Cell phones no longer listed property – Effective 2010, cell phones are not considered listed property, significantly reducing the substantiation rules and depreciation limits that apply when cell phones are used for business purposes.

New reporting requirements for rental property expenses – With some exceptions, starting in 2011, if you receive rental income from real property, you’ll be required to file an information return (Form 1099) when you make payments totalling $600 or more to a service provider (such as a plumber, painter or accountant) for rental property expenses.

Portion of nonqualified annuity can be annuitized – Beginning in 2011, if you have a nonqualified annuity (an annuity that is held outside of a qualified retirement plan or IRA), you can annuitize only a portion of the annuity, provided the annuitization period is for 10 years or more, or is for the lives of one or more individuals.  The portion of the annuity or contract that is annuitized will be treated as a separate contract, and the investment in the annuity will be allocated on a pro-rata basis.

If you should have any questions, call us.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Is QuickBooks Helping the IRS Audit Your Books?

Posted on September 29, 2010 by taxblogger

Is QuickBooks Helping the IRS Audit Your Books? | Tip of the Week | September 29, 2010 | No. 10
 

Preparation is key if you are audited

Editor’s Note:  First part of this Tax Tip is for general knowledge.  Experienced QuickBooks users may want to read this Tax Tip until the end.

In the past, an IRS agent would request printed reports and back-up paper documents during an audit.  There is now the possibility that they will request an actual copy of your QuickBooks file – not just your printed general ledger.  The IRS recently purchased several thousand QuickBooks licenses in preparation of up-coming audits.

According to the National Association of Tax Professionals, IRS auditors are now being instructed to obtain a copy of the taxpayer’s QuickBooks data file for audits for any taxpayer that uses QuickBooks.  If the taxpayer refuses to provide the file and the auditor deems it necessary, they can issue a Summons for the file!

Government agencies are in desperate need of money, so they will be scrutinizing your records more than ever – keep it clean!

Give us a call if you have general or specific questions about increasing audit activities.

For Experienced QuickBooks Users:

Here are some things you need to keep in mind:

1.  In the newer versions of QuickBooks, you CANNOT turn off the audit trail.  Therefore, once you enter it in QuickBooks, it is NEVER gone.  You can’t undo it.  So use caution as you enter things and forget about delete.

2.  When you need to void a transaction make sure you memo why you voided it.  Did the customer refuse to pay the invoice, did you give away the product, did the bookkeeper double enter something?  Put a memo because you won’t remember in a few years why you did it.

3.  DO NOT MAKE CHANGES TO TRANSACTIONS IN A  CLOSED FISCAL PERIOD.  If your taxes for last year have been prepared – don’t make changes to that information.  If you do, it won’t match what was filed with the state and federal government and will present an issue should an audit be performed.  Prevent changes by setting the closing date password under Edit>Preferences>Accounting>Company Preferences>Set Date/Password.  Check your closing date exception report (on accountant versions of QuickBooks only) or have your bookkeeper and/or accountant pull that report for you.

4.  At your year end, consider making a copy of your QuickBooks data file and keeping it permanently as a “final backup” so that if a certain year is audited, you can condense prior years’ data and there will be no future years’ information in the data file for the auditor to see.  The auditors are instructed to review only the information for the year under audit, but why not make it possible for them to ONLY see the year in question.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Watch Out: Expiring Tax Rates and Breaks

Posted on September 27, 2010 by taxblogger

Tip of the Week | September 22, 2010 | No. 9
 

Watch Out:  Expiring Tax Rates and Breaks

Without action by Congress by Dec. 31, 2010, lots of tax rates and breaks expire.

Capital gains taxes will revert to the levels of the 1990s.  Capital gains taxes on long term capital gains will go from 15% Federal to 20% or more Federal; taxes on dividends, currently at 15% Federal, will potentially go to the individual’s ordinary income tax marginal bracket as high as 39.6%.
Strategy:  If you have highly appreciated stock or land, 15% Federal tax may be the lowest rate you may see for a while; consider selling in 2010 rather than 2011 only after checking alternative minimum tax and all other tax ramifications of your situation.
Strategy:  Consider keeping dividend-paying stocks in tax qualified vehicles like IRAs or qualified pension and profit sharing plans until the tax law becomes clearer later this year or early next.  Consider growth stocks versus dividend paying stocks if you feel taxes are going up.

Taxes on ordinary earned income, with no action by Congress by December 31st, or soon thereafter, would rise for all taxpayers as the Bush tax cuts expire.  Current proposals by the White House and Congress have the top 2 tax brackets rise from 33% to 36% and 35% to 39.6% respectively.

Estate taxes will skyrocket.  Starting in 2011, all taxable estates $1 Million and over in value would be taxed up to 55%; in 2010, there is no federal estate tax.

My best guess:
Congress is unlikely to get tax legislation accomplished by the elections, with a last-minute compromise by parties involved.  And, I wouldn’t rule out last-minute compromises.  Progress after November 2, 2010 is more likely.  But, tax planning in November and December 2010 will be important.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Don’t Miss the October 15 Deadline

Posted on September 15, 2010 by taxblogger

Tip of the Week | September 15, 2010 | No. 8
 

Don’t Miss the October 15 Deadline

If you need to file a Form 1040 (individual return), the deadline to file is October 15, 2010.  This assumes you had filed for an extension prior to April 15, 2010.  You also have until October 15, 2010 to fund a SEP-IRA for tax year 2009.
  
As a reminder, putting your tax returns on extension can be a good thing – but penalties to miss the extension deadline can be steep, up to 25% penalty of taxes owed, so make sure that you make the October 15th deadline.

Give us a call if you need help meeting your deadline.
 

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Dissecting the Healthcare Bill | Part 4 of 4| No. 7

Posted on September 8, 2010 by taxblogger

What’s in store….Maybe

Good Morning!  This week we will look at provisions of the Healthcare Bill that take effect in 2013 – 2018. 

Looking this far ahead is unpredictable.  Who knows how many changes may take place within Congress and the Federal Administration during this time period–or how the winds of politics may shift.  However, these highlights give us a roadmap of what to expect:

  

2013

  • Maximum health Flexible Spending Account (FSA) contributions capped at $2,500/year and increased annually by inflation.
  • Increases Medicare Part A payroll tax rate by 0.9% on earnings over $200,000 for individuals and $250,000 for married filing joint returns.  Note: this increase is only on the employee share of Medicare and not the employer’s share.
  • Self-Employed individuals and couples will also pay an additional 0.9% Medicare care tax with incomes above these levels.
  • An added Medicare tax (3.8% total) will be assessed on the investment income of individuals and couples meeting the above-stated thresholds.   This means there will be an additional tax on all interest, dividend and capital gains income.
  • The ability to deduct medical expenses on your Schedule A personal tax return will increase from the current “floor” of 7.5% of AGI to a 10% “floor”.  Note:  taxpayers over 65 will keep the 7.5% level until 2016.

2014

  • Employer and individual mandate to buy health insurance begins.  Both self-employed and W-2 employees must buy individual polices if their employer does not provide coverage.
  • For low-income individuals, a premium assistance credit becomes available.
  • Businesses with 50 or more employees must provide health coverage or pay a $2,000 penalty per employee.
  • Penalties will also be assessed against individuals who do not buy health coverage.
  • Various “Voucher Programs” will be introduced to help pay for health coverage.

2017 – 2018

  • A 40% excise tax will be assessed to employers offering “Cadillac Insurance Plans”.  Currently, this is defined as plans where the cost of health coverage for individuals exceeds $10,200 or exceeds $27,500 for family plans.
  • States may allow large groups (greater than 100 employees) to purchase coverage through Exchanges.

Questions or Comments?

Call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Don’t Miss the September 15 Deadline| Tip of the Week | No. 6

Posted on September 1, 2010 by taxblogger

Don’t Miss the September 15 Deadline

Pardon the interruption!  We were scheduled to send you the fourth tip from our series on Dissecting the Heathcare Bill, but with these September tax deadlines looming in a couple of weeks, we thought it best to send you a reminder.

If you need to file a Form 1065 (partnership return), Form 1120S (S corporation return) or Form 1041 (fiduciary return) the deadline to file your 2009 return is September 15, 2010.  This assumes you had filed for an extension prior to April 15, 2010.

The IRS shortened the extension period for all pass-through entities that issue K-1s a couple of years ago.

If you put your personal tax return on extension (Form 1040), you still have until October 15, 2010 to timely file your 2009 return.

As a reminder, putting your tax returns on extension can be a good thing—but penalties to miss the extension deadline can be steep.

Give us a call if you need help meeting your deadlines.

Stay tuned for next week’s final segment on the Healthcare Bill where we’ll talk about the provisions of the Healthcare Bill that take effect in 2013-2018.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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The 1099 Nightmare | Dissecting the Healthcare Bill – Part 3 of 4 | Tip of the Week | #5

Posted on August 25, 2010 by taxblogger

On page 737 of the Healthcare Bill is a three-paragraph section that has nothing to do with hospitals, doctors, drugs or health insurance.  Starting January 1, 2012 all business entities will be required to issue 1099s to all individuals and business with which they spend $600 or more annually for goods and services.

Currently, businesses must file 1099-MISC forms only to individuals and unincorporated business for goods and services provided.  For example, a small business contracts with an individual to design a web site for the company.  The cost is $1,200 to perform the work.  A 1090-MISC is issued to that contractor to insure the income is reported on that contractor’s personal tax return.

The intent of the new reporting requirements is to capture an estimated $2 billion in taxes on income that currently goes unreported each year.

So starting in 2012, if a small business purchases a computer from Staples, they will need to get Staples’ federal identification number and address in order to issue them a 1099.  Same goes for the provider of their internet services, office supply company, software vendor, utility company, etc.

These reporting requirements will add a HUGE compliance problem for American businesses. Small companies, especially, just don’t have the manpower to track down the information and submit 100 or more 1099s each year.  And what about all the companies on the receiving end?  There is going to be a flood of 1099s pouring into Office Max, Apple, Procter & Gamble, etc. each year.

Fortunately, Representative Dan Lungren (R- Calif.) has introduced a bill to roll back this provision.  We offer him our support!

Questions or Comments?
You can add comments here, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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