Blog

One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step. 

If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement. 

Traditional 401(k)

A traditional 401(k) offers many benefits:

• Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.

• Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.

• Your employer may match some or all of your contributions pretax.

For 2017, you can contribute up to $18,000. So if your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax so income tax isn’t withheld.

If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2017). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding. 

Roth 401(k)

Employers can include a Roth option in their 401(k) plans. If your plan offers this, you can designate some or all of your contribution as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free. 

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. On the other hand, if you expect your tax rate to be lower in retirement, you may be better off sticking with traditional 401(k) contributions.

Finally, keep in mind that any employer matches to Roth 401(k) contributions will be pretax and go into your traditional 401(k) account.

How much and which type

Have questions about how much to contribute or the best mix between traditional and Roth contributions? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.

© 2017

Earlier this week, U.S. Senate Republicans declined to vote on the Graham-Cassidy health care bill because there weren’t enough votes to pass it. Yesterday, President Trump and Republican congressional leaders turned their attention to tax reform by releasing an outline of their long-awaited tax reform plan. The nine-page “Unified Framework for Fixing Our Broken Tax Code” is intended to serve as a template for the congressional committees to draft legislation to cut tax rates, simplify the tax code and provide a more competitive environment for businesses. It addresses tax issues that affect both individuals and businesses.  

Individual taxes

The framework proposes several changes to the existing tax laws for individual taxpayers, including:

Tax rates. The framework reduces the number of tax rates from the current seven to three — 12%, 25% and 35%. The highest rate now is 39.6%. The framework does, however, provide that Congress can add a fourth bracket above 35% to ensure the new tax code is “at least as progressive as the current system and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” The framework doesn’t specify the income levels that will trigger each of the three rates, but it contemplates using a more accurate measure of inflation to index the tax brackets and other tax parameters.

Estate tax and generation-skipping transfer (GST) tax. For 2017, the 40% top estate tax rate applies to estates that exceed the $5.49 million gift and estate tax exemption. The 40% top GST tax rate applies to bequests or gifts that are made to beneficiaries who are more than one generation below the giver and that exceed the $5.49 million GST tax exemption. The framework repeals both of these taxes.

Personal exemptions and standard deductions. Perhaps the most significant change for individual taxpayers is in this area. For 2017, the personal exemption is $4,050; the standard deduction is $6,350 for single taxpayers and married couples filing separately and $12,700 for married couples filing jointly. Under the proposed framework, the personal exemption is eliminated, and the standard deduction is $12,000 for singles and married couples filing separately and $24,000 for married couples filing jointly. In other words, it consolidates the personal exemption and the standard deduction into a larger deduction.

Child tax credit. The framework promises a “significant increase” in the child tax credit (currently $1,000 per child) but doesn’t specify an amount. It also will increase the income levels at which the credit begins to phase out (currently $75,000 for single parents and $110,000 for married couples filing jointly), making the credit available to more families and eliminating the current “marriage penalty.” And the framework provides a nonrefundable $500 credit for nonchild dependents to help offset the expense of caring for other dependents.

Deductions. The deductions available to individual taxpayers will undergo numerous changes. The framework eliminates most itemized deductions but retains the mortgage interest and charitable contribution deductions. (No explicit reference is made to deductions for state and local taxes). It also retains tax incentives for work, higher education and retirement savings, but encourages Congress to simplify such benefits. 

Alternative minimum tax (AMT). This tax was intended to ensure that high-income taxpayers pay at least a minimum amount of tax. Over the years, it has ensnared more and more middle-income taxpayers. The framework eliminates the AMT.

Business taxes

Many businesses are likely to see large tax cuts under the framework. Affected areas include: 

Corporate tax rate. The framework establishes a corporate tax rate of 20%. According to the outline, this rate is “below the 22.5% average of the industrialized world.” The current rate is 35%, although the effective tax rate after deductions and expenses is 23%. 

Pass-through tax rate. Smaller businesses also benefit under the framework. Instead of paying their personal income tax rate (which can currently be up to 39.6%), owners of so-called “pass-through” entities (sole proprietorships, partnerships and S corporations) will pay at a 25% rate.

However, the framework contemplates that Congress “will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”

Capital investments. Under existing tax law, capital investments generally are depreciated over several years. The framework allows companies to immediately expense such new investments — except buildings constructed after September 27, 2017 — for at least the next five years.

Tax credits and deductions. The framework keeps the research credit and the low-income housing credit, but limits the net interest expense deduction claimed by C corporations. It also discards the Section 199 domestic production activities deduction, deeming it unnecessary due to the substantial rate reduction. Numerous other deductions, business credits and special exclusions will be repealed or limited.

Foreign income. The framework envisions a “territorial” taxation system for multinational companies to remove incentives to keep foreign profits and jobs offshore. It begins by exempting foreign profits when repatriated to the United States. It also grants a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent company has at least a 10% stake.

To transition to the new system, all accumulated untaxed offshore earnings will be immediately subject to a one-time tax at a fixed rate. Different rates will apply to money held in cash or cash equivalents (for example, bonds or stocks) and money invested in less-liquid assets, such as factories, with the latter taxed at a lower rate. The tax liability will be spread over “several years.”

Finally, the framework aims to prevent the offshoring of profits to tax havens, and the resulting erosion of the U.S. tax base, by taxing the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis. The congressional committees are instructed to incorporate rules that level the playing field between U.S.-headquartered and foreign-headquartered parent companies.

Stay tuned

The framework covers many tax issues but paints with a broad brush. It will be up to the House Ways and Means Committee and the Senate Finance Committee to hash out the details, and lawmakers are certain to encounter a range of budgetary and political hurdles that might delay the process. The result could be legislation that differs in some substantial ways from those outlined in this framework.  

© 2017

A tried-and-true tax-saving strategy for investors is to sell assets at a loss to offset gains that have been realized during the year. So if you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2017 tax liability. 

But what if you expect an investment that would produce a loss if sold now to not only recover but thrive in the future? Or perhaps you simply want to minimize the impact on your asset allocation. You might think you can simply sell the investment at a loss and then immediately buy it back. Not so fast: You need to beware of the wash sale rule. 

The rule up close

The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security. 

Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA. 

Achieving your goals

Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

• Sell the security and immediately buy shares of a security of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.

• Sell the security and wait 31 days to repurchase the same security.

• Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss. Then wait 31 days to sell the original portion.

If you have a bond that would generate a loss if sold, you can do a bond swap, where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.

For more ideas on saving taxes on your investments, please contact us. 

© 2017

Are you the founder of your company? If so, congratulations — you’ve created something truly amazing! And it’s more than understandable that you’d want to protect your legacy: the company you created.

But, as time goes on, it becomes increasingly important that you give serious thought to a succession plan. When this topic comes up, many business owners show signs of suffering from an all-too-common affliction.

The symptoms

In the nonprofit sphere, they call it “founder’s syndrome.” The term refers to a set of “symptoms” indicating that an organization’s founder maintains a disproportionate amount of power and influence over operations. Although founder’s syndrome is usually associated with not-for-profits, it can give business owners much to think about as well. Common symptoms include:

• Continually making important decision without input from others,
• Recruiting or promoting employees who will act primarily out of loyalty to the founder,
• Failing to mentor others in leadership matters, and
• Being unwilling to begin creating a succession plan.

It’s worth noting that a founder’s reluctance to loosen his or her grip isn’t necessarily because of a power-hungry need to control. Many founders simply fear that the organization — whether nonprofit or business — would falter without their intensive oversight.

Treatment plan

The good news is that founder’s syndrome is treatable. The first step is to address whether you yourself are either at risk for the affliction or already suffering from it. Doing so can be uncomfortable, but it’s critical. Here are some advisable actions:

Form a succession plan. This is a vital measure toward preserving the longevity of any company. If you’d prefer not involve anyone in your business just yet, consider a professional advisor or consultant.

Prepare for the transition, no matter how far away. Remember that a succession plan doesn’t necessarily spell out the end of your involvement in the company. It’s simply a transformation of role. Your vast knowledge and experience needs to be documented so the business can continue to benefit from it.

Ask for help. Your management team may need to step up its accountability as the succession plan becomes more fully formed. Managers must educate themselves about the organization in any areas where they’re lacking.

In addition to transferring leadership responsibilities, there’s the issue of transferring your ownership interests, which is also complex and requires careful planning.

Blood, sweat and tears

You’ve no doubt invested the proverbial blood, sweat and tears into launching your business and overseeing its growth. But planning for the next generation of leadership is, in its own way, just as important as the company itself. Let us help you develop a succession plan that will help ensure the long-term well-being of your business.

© 2017

With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option, which can be especially beneficial if the children in question still have many years until they’ll be starting their higher education, is a Section 529 plan. 

Tax-deferred compounding

529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. So these plans can be particularly powerful if contributions begin when the child is quite young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

More pluses

529 plans offer other benefits as well:

•  They usually have high contribution limits.
•  There are no income-based phaseouts further limiting contributions.
•  There’s generally no beneficiary age limit for contributions or distributions.
• You can control the account, even after the child is a legal adult.
• You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions, which means you can make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse) in 2017. In the case of grandparents, this also can avoid generation-skipping transfer taxes.

Minimal minuses

One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary.
 
But whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months.

We’ve focused on 529 savings plans here; a prepaid tuition version of 529 plans is also available. If you’d like to learn more about either type of 529 plan, please contact us. We can also tell you about other tax-smart strategies for funding education expenses.

© 2017

From the baseball field to the boardroom, statistical analysis has changed various industries nationwide. With proper preparation and guidance, business owners can have at their fingertips a wealth of stats-based insight into how their companies are performing — far beyond the bottom line on an income statement.

The metrics in question are commonly referred to as key performance indicators (KPIs). These formula-based measurements reveal the trends underlying a company’s operations. And seeing those trends can help you find the right path forward and give you fair warning when you’re headed in the wrong direction.

Getting started

A good place to start is with some of the KPIs that apply to most businesses. For example, take current ratio (current assets / current liabilities). It can help you determine your capacity to meet your short-term liabilities with cash and other relatively liquid assets.

Another KPI to regularly calculate is working capital turnover ratio (revenue / average working capital). Many companies struggle with temperamental cash flows that can wax and wane based on buying trends or seasonal fluctuations. This ratio shows the amount of revenue supported by each dollar of net working capital used.

Debt is also an issue for many businesses. You can monitor your debt-to-equity (total debt / net worth) ratio to measure your degree of leverage. The higher the ratio, the greater the risk that creditors are assuming and the tougher it may be to obtain financing.

Choosing wisely

There are many other KPIs we could discuss. The exact ones you should look at depend on the size of your company and the nature of its work. Please contact our firm for help choosing the right KPIs and calculating them accurately.

© 2017

Now that we’ve hit midsummer, if you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences:

If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

If you rent it out for 15 days or more: You must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use: 

• Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.

• Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.

Look at the use of your vacation home year-to-date to project how it will be classified for tax purposes. Adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way. 

For assistance, please contact us. We’d be pleased to help. 

© 2017