Planning can help you achieve a comfortable retirement. Here are five suggestions to consider.
Start a retirement savings program as early as possible and contribute regularly. The longer and more consistently you contribute, the larger your nest egg will become, even before the compounding provided by growth and earnings. Regular, reasonable deposits wisely invested will easily outgrow sporadic and insignificant contributions.
Deposit your funds in tax-deferred accounts. Invest in tax-deferred accounts to the greatest extent possible. If your employer offers a tax-deferred plan, such as a 401(k), contribute as much as you can, particularly if the plan provides matching funds. Investigate individual options, such as IRAs, for additional planning opportunities. Why? One of the advantages of tax-deferred accounts is that investments that aren’t reduced by taxes will grow and compound at a faster rate. Other advantages include the ability to control your withdrawal rate and the amount of any accompanying tax, and the opportunity to postpone recognition of taxable income until retirement, when you’ll likely be in a lower tax bracket.
Establish an investment plan. As funds within your retirement accounts accumulate, you’ll have to decide how to invest them. Establish an investment plan as early as possible. Then follow your plan consistently, revising only enough to keep matters on course, correct for deviations, and respond to unexpected events.
Track your portfolio and rebalance as needed. Maintain a balance among growth, income, and short-term investments, and adjust the ratios as you age. The standard rules of thumb: When you’re under forty, consider investing more heavily in moderately aggressive growth vehicles. In your forties and fifties, you might want to become more conservative, shifting your balance toward income-generating investments such as high-dividend stocks.
Once you’re retired, plan withdrawals so your funds will last the rest of your life. To avoid running out of funds, plan for a long retirement. Postpone withdrawals as long as possible, and pay them out carefully. Calculate a workable percentage to withdraw from your portfolio on an annual basis. Assume your funds will need to last at least thirty years. Continue to revisit your investments each year to monitor and rebalance as needed.
In May, the Department of Labor updated the rules for paying overtime. Under the new rules, salaried employees who earn less than $913 per week ($47,476 per year) will be eligible for overtime pay. That’s double the annual exempt amount of $23,660 from previous rules. In addition, the total annual pay for an exempt highly compensated employee is $134,004 (up from $100,000 previously). These amounts will be updated automatically every three years beginning in 2020.
The changes take effect December 1, 2016, which means you need to begin reviewing your payroll now, as penalties and fines can be assessed for noncompliance. One important step is to begin tracking hours for your salaried employees. You’ll also want to review your payroll practices so you can determine the best options for your business as you get ready to implement the new rules.
According to recent statistics, budget cuts, staff attrition, and a heavy workload for IRS employees mean your chances of undergoing a tax audit are less than 1%. Does that sound like a non-event to you? Don’t be lured into a false sense of security. The statistic is a blended rate covering many types of incomes and taxpayers. Here are some of the reasons returns were audited.
No adjusted gross income (AGI). For AGI of zero, audit risk jumped to over 5%. The IRS benchmarks AGI because it is total income including losses from businesses and investments.
Large adjusted gross income. Audit risk was nearly 2% for returns with AGI over $200,000. Audit risk climbed to 16% when AGI was $10 million or more.
International returns. Due to a focus on offshore tax evasion, the audit rate of international returns was almost 5%.
Estate taxes. Approximately 8.5% of estate returns were audited. Gross estates of $10 million or more were tagged with a 27% audit risk.
Corporate returns. Small corporations experienced up to a 2% audit risk. The risk for large corporations with assets over $20 billion was 85%.
Be aware that even if you don’t fit into any of these categories, your return may still be selected for audit. That’s one reason it’s essential to keep good records to support all deductions and credits you claim on your tax return for at least three years after filing. Examples of required recordkeeping include:
When you deduct expenses for meals and entertainment, the written evidence must show who was in attendance and what business was discussed.
A home office deduction must be supported by evidence showing your home office is used regularly and exclusively as the principal place of business.
Certain non-business property that you gift, donate, or intend to distribute through your estate requires an appraisal.
Did you know that you can claim a federal income tax credit when you pay someone to care for your kids while you’re at work or school? The Child and Dependent Care Credit is valuable because it reduces the amount of tax you owe dollar-for-dollar. Here’s an overview of the rules.
Child care expenses must be work-related. This requirement means you have to pay for child care so you can work or actively look for work. If you’re married, you and your spouse must both work. Exceptions to this “earned income” rule include spouses who are full-time students or who are not able to care for themselves due to mental or physical limitations.
Expenses generally must be paid for care of your under-age-13 child. However, expenses you pay to care for a physically or mentally disabled spouse or adult dependent may also count.
Expenses must be paid to someone who is not your dependent. Amounts you pay your spouse, your child’s parent (such as an ex-spouse), anyone claimed as a dependent on your tax return, or your own child age 18 or younger do not qualify for the credit. For example, if you pay your 17-year-old dependent child to watch a younger sibling, that expense doesn’t count for purposes of claiming the credit.
The care provider has to be identified on your tax return. You’ll typically need to show the name, address, and taxpayer identification number. You can request this information by asking your provider to complete Form W-10, Dependent Care Provider’s Identification and Certification.
The amount you can claim depends on how much you spend for the care up to a dollar limit of $3,000 of expenses for one dependent and $6,000 for two or more dependents.
Check your advance payments of the premium tax credit.
Did you choose to reduce your monthly health insurance premium by having advance payments of your federal income tax credit sent to your insurance company? If you’re getting married this summer, having a baby, or changing jobs, you need to estimate the impact of those events on the advance payments. Otherwise you may end up with a surprise in the form of a smaller refund or a required repayment next year when you file your federal income tax return.
The latest credit cards have a new feature: a half-inch square on the card’s face that looks like a mini circuit board. The square is a small computer chip called an EMV. The acronym stands for Europay, MasterCard, and VISA, the developers of the technology. Over the next several years, these chip-embedded cards are expected to replace the familiar magnetic strip technology on cards that you now swipe at point-of-sale devices. When you use your EMV card, you’ll need to “dip,” or insert, it into a new type of reader.
Why the change? The new chips are expected to improve credit and debit card security. Data on cards with the older technology is much easier for crooks to steal because the information on the magnetic strip is static and can be copied. As a result, a thief can use your card for multiple fraudulent transactions. Cards with the new chip are different. Every time you use an EMV card, the chip creates a unique transaction code. As a result, the newer cards aren’t as useful to counterfeiters and card thieves.
June 30, 2016, is the deadline for filing the 2015 Form 114, Report of Foreign Bank and Financial Accounts, known as the FBAR. Not sure if you need to file? The general rule is that a return is due when you have a financial interest in, or signature authority over, foreign financial accounts if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year. The requirement applies to both individuals and entities such as trusts and businesses, and you may need to file even if your foreign account produces no income.
Be aware that June 30, 2016, is a “hard” deadline. Your 2015 Form 114 must be filed electronically with the Treasury Department no later than that date. No filing extension is available for 2015 forms – even if you filed an extension for your federal income tax return.
How to respond to an IRS notice
If you find yourself on the IRS mailing list, here’s what to do.
Scan the heading. The first line, generally printed in bold type and centered beneath your name and address, will tell you why the IRS is contacting you. Questions about missing information, additional taxes owed, or payments due mean you’ll want to take prompt action to avoid more notices or assessments of interest and penalties.
Review the discrepancy. You’ll find the tax form and the year to which the notice applies printed in the upper right corner. Pull out your copy of the corresponding tax return, along with the supporting documents, and compare what you filed with what the IRS is questioning.
Prepare your explanation. Are the proposed changes correct? Did the IRS misapply a payment? Whatever the issue, there’s usually no need to file an amended return. However, the IRS typically wants a response, either by phone or mail, in order to clear the notice from your account.
Do not delay. Ignoring IRS correspondence will not make it go away. Reply to the IRS in a timely manner even if you don’t have all the information being requested.
Please contact us if you receive a notice from the IRS, or your state or local taxing authority. We’re here to set your mind at ease by helping you resolve the matter as quickly as possible.
Discussing finances with your parents may be a talk none of you are eager to tackle. But addressing the topic can benefit your entire family by clarifying your parents’ wishes and enabling you to help establish a joint plan for carrying those wishes to fruition. Here are questions that can start the dialogue.
Legal – Do your parents have a will and an estate plan? Have they executed a trust, a durable power of attorney for finances, or an advance healthcare directive? Will they allow you to review the documents and/or speak with their attorney?
Medical – What medical insurance policies are in place? Do your parents have long-term care insurance? Who is their personal physician and what significant medical issues exist?
Income, expenses, and debt – What are the sources and amounts of your parents’ income and expenses? To whom do your parents owe money, and how much do they owe?
Records – Where do your parents keep tax returns, bank and brokerage statements, and similar records? Who are their tax preparers, financial advisors, and/or stockbrokers? Will your parents allow you current access to those records and advisors?
Talking about finances with your parents can be a daunting prospect. Give us a call if you’d like us to be part of the conversation. We’re here to help.
The “time value of money” is a critical concept in handling personal finances. The same basic premise can be applied in making decisions for your business.
Here’s how it works: Typically, the money you currently have in your hands is worth more than it would be years from now. That’s because you’re able to spend or invest the funds now instead of waiting to receive them. In other words, there’s an “opportunity cost” attached to any delay.
For example, let’s say you’re entitled to a $100 payment. If you receive the $100 now and you’re able to invest it at a 5% annual interest rate, you’ll have $105 after one year. Assuming you don’t need the money for expenses, it will be worth $110.25 after two years, and so on. This amount is known as the “future value” of the money.
Similarly, you can compute the “present value” of money. Suppose you won’t receive the $100 payment until one year from now. The value of the money must be discounted due to the opportunity cost. Using the same 5% interest rate, the present value of the $100 you’ll receive a year from now is $95.24 ($100 value divided by 1.05).
It’s easy to see how this concept can affect your business. Accelerating payments from customers will enable you to better meet your current obligations and provide reserves for investment. On the other hand, delays hamper cash flow and reduce the opportunity for investment. Computing the time value of money may also encourage you to lease, rather than buy, assets.
The time value of money is an important factor in business decisions. For help running the numbers and analyzing the results, give us a call.
