Keeping Up With Your Retirement

If you’re approaching retirement, it may seem like your hard work is almost done. You’re probably getting ready to relax and enjoy yourself. However, there are still a few more things you should do to complete your retirement planning. Doing them now, before you retire, can help you transition from saving to spending your savings. Here are a few ways to get the ball rolling.

Review Your Investments

First, look at your investment portfolio’s asset allocation. Your ability to recover from market downturns is generally reduced when retirement is getting closer. You may decide to shift a larger portion of your portfolio out of stocks. But keep in mind that inflation can reduce the buying power of your retirement assets. You’ll probably want to keep some stock investments in your portfolio since they have the potential to generate returns that outpace inflation.

Consider Your Distribution Options

Retirement_JarNext, take some time to learn about your plan distribution options. If you cash out your account balance, you’ll owe income taxes in the year you receive the distribution, leaving you with less money to spend or reinvest.* Instead, you may have the option of keeping the funds tax deferred in your plan account and taking periodic payments. Or you can arrange for the distribution to be transferred directly into a tax-deferred individual retirement account (IRA). With either option, you can spread out your tax liability by withdrawing the money over time.

Keep Contributing

Finally, continue contributing to your plan. Even if retirement is only a short time away, continuing to save can make a difference in your account value at retirement. If you’re age 50 or over, your employer’s plan may allow you to make “catch-up” contributions. If possible, take advantage of this opportunity so you can accumulate even more money for your retirement.

* Qualified distributions from a Roth account are not subject to federal income taxes.

Don’t Stop Saving

Continuing to save even as you near retirement can help your account grow.

                                                             Still Saving               Stopped Saving

Account Value at Age 57                      $100,000                                 $100,000

Average Annual Total Return                6%                                                6%

Annual Amount Contributed

from Age 57 to Age 67                                $3,600                                        $0

Account Value at Age 67                 $226,536                       $179,085

This is a hypothetical example used for illustrative purposes only and does not represent any specific investment product. Annual compounding is assumed. Your investment performance will be different.

Source: DST

Putting Your Tax Refund To Good Use

Are you expecting a tax refund from the IRS this year? Although it may be tempting to spend your refund on the newest electronic gadget, consider using it to meet one or more of your financial goals

Pay Down Debt

Credit card debt can grow quickly if left unpaid. Credit card interest typically accrues at a relatively high rate. Any unpaid interest is added to the principal balance each month, and interest then accrues on the new, higher balance. And on top of that, interest on personal credit card debt is not tax deductible.

You also may want to consider allocating part of your refund to an unpaid car loan. Like credit card interest, interest on a personal car loan is not tax deductible.

Save for Retirement

Money5The longer you delay saving for retirement, the less time you’ll have to benefit from any investment gains on your savings. You might consider using your tax refund to cover current expenses and then allocating an equivalent amount to a pretax retirement savings plan, such as a 401(k). This way, you would reduce your taxable income for the year and increase your investable savings, which can potentially compound tax-free until you retire. With this strategy, compounding works for you rather than against you.

Add to Your College Funds

Although the IRS does not allow a deduction for contributions to a Section 529college savings plan account, the tax law does provide that any earnings on your contributions will be tax deferred and ultimately tax free if applied to qualifying education expenses.

Create an Emergency Fund

Consider putting aside part of your refund in an account you can easily access to pay for unexpected expenses, such as car or plumbing repairs.


Your Child & Taxes

Education_Students3Even though junior is still your dependent, he may have to file a federal income tax return. This may be true even if junior have a job.

Your dependent child will be required to file an income-tax return for the 2015 tax year if he or she meets any one of the following criteria:

  • Your child has unearned income (investment interest, gains, dividends, etc.) of more than $1,050.
  • Your child’s gross income is more than the standard deduction, which is the greater of (1) $1,050 or (2) $350 plus the child’s earned income ($6,300 maximum deduction).child
  • Your child’s net earnings from self-employment (such as babysitting, yard work, etc.) are $400 or more.

Your child won’t be required to file a return if you elect to include your child’s income on your tax return. This election may be available if your child’s investment income from interest, dividends, and capital gains distributions is more than $1,050 and less than $10,500.

Tax Implications For Rental Property

Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

Rental Taxes

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and, therefore, available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual owns at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples provided by the IRS of management decisions include approving tenants and deciding on rental terms.

Selling the Property

Gain realized on the sale of residential rental property held for investment is generally taxed as capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.


The 3.8% Medicare Surtax — Will It Affect You?

When filing 2015 tax returns, higher income taxpayers might have to pay the 3.8% Medicare surtax on net investment income.

How Does the Tax Apply?

This tax is imposed on the lesser of (1) net investment income or (2) the amount by which modified adjusted gross income (MAGI) exceeds a threshold amount: $200,000 (unmarried), $250,000 (married filing jointly), or $125,000 (married filing separately). Because the tax applies to “the lesser of” net investment income or the amount by which the applicable threshold is exceeded, taxpayers want to take steps to minimize either MAGI or net investment income, or both.

Healthcare_BillsWhat Does Net Investment Income Include?

Generally, net investment income includes all taxable income from the following sources: interest, dividends, capital gains, nonqualified annuities, royalties, rents, and passive trade or business activities. Note that net investment income includes gain from the sale of a personal residence but only to the extent the gain exceeds the amount excluded from income for regular tax purposes. The gain exclusion can be as much as $250,000 — or $500,000 for a married couple filing jointly or a qualifying surviving spouse.

Net investment income does not include wages, income subject to self-employment tax, or active trade or business income. It also does not include distributions from qualified retirement plans or traditional or Roth individual retirement accounts (IRAs).

How Do You Plan?

  •  Going forward, possible planning steps for reducing exposure to the new tax include the following:
  •  Increasing contributions to qualified retirement plans
  •  Rebalancing portfolios to increase the percentage of tax-exempt bonds and non-dividend-paying growth stocks
  •  Transforming passive business activities into active business activities
  •  Deferring capital gains through the use of installment sales
  •  Giving income-producing properties to children in lower tax brackets (“kiddie tax” rules may apply)
  •  Contributing to Roth IRAs and Roth retirement plans (sole proprietors may want to consider a solo Roth 401(k))

Business Auto Deductions

Do you drive your car for business purposes? The costs of operating and maintaining your vehicle are potentially deductible. Here are some guidelines.

Two Methods

The IRS provides two basic methods for computing deductions for the business use of an automobile.

Actual expense method. With the actual expense method, you deduct the actual costs of operation, including licenses, registration fees, garage rent, repairs, gas, oil, tolls, and insurance. Additionally, you may claim depreciation deductions (and/or elect expensing under Section 179). If the car is leased, you deduct your lease payments rather than depreciation. (Certain limits apply.)

Standard mileage rate. Alternatively, you may choose to use an IRS-provided standard mileage rate. With this method, you multiply the number of business miles you drive during the year by the applicable rate (57.5¢ per mile for 2015). When you use the standard mileage rate, you don’t separately deduct expenses such as gasoline, oil, insurance, repairs and maintenance, depreciation, or lease payments. However, business-related parking fees and tolls are separately deductible.

Which Should You Use?

Transportation_Car2Generally, you will want to use the method that produces the largest deduction. If your vehicle is costly to own and operate, the actual expense method may be more advantageous. Conversely, if your vehicle is fuel efficient and/or inexpensive, the simpler standard mileage rate method may be a better choice.

With either method, the IRS requires that you keep records that substantiate your business use of the car: the date, place, business purpose, and number of miles you travel. When you use the actual expense method, you’ll also need records substantiating the amount and date of car-related expenditures. You can avoid having to retain receipts by using the standard mileage rate.

If you decide to use the standard mileage rate for a car you own, you may switch to deducting your actual business-related car expenses in a later year. However, you won’t be able to claim accelerated depreciation deductions for the car. With an auto tax deduction on a leased car, you have less flexibility. If you choose the standard mileage rate the first year, you must use it for the entire lease period.

Personal and Business Use

If you use your car for both personal and business purposes, you must keep track of your mileage for each purpose. To figure the percentage of qualified business use, you divide the business mileage by the total mileage driven. Then multiply that percentage by your total expenses.

Capitalizing on a Tax Holiday

GiftNet long-term capital gain is generally taxed at a relatively low 15% or 20% rate in 2015. But low-bracket taxpayers enjoy an even better deal: Their net capital gain is tax-free (i.e., the tax rate on the gain is 0%) to the extent it would have been taxed at the 10% or 15% rate if it had been ordinary income instead of capital gain.

Are tax-free capital gains out of your reach if your marginal tax rate is higher than 15%? Maybe not. Here are a few family gifting strategies that could save you money:

Gift to parent. If you’re helping your folks financially, a gift of appreciated stock might be a tax-smart way to do it. As long as your parents’ taxable income stays below $74,900* in 2015, they can sell the stock and a 0% rate would apply to the capital gain.

Gift to child/grandchild. Until children reach age 19 (24 if they’re full-time students), the 0% rate generally would apply to only a limited amount of capital gain because of the “kiddie tax” rules.** But these rules aren’t an issue for older children (or for children ages 18-23 who have earned income exceeding one-half of their support).

You can make tax-free gifts of up to $14,000 (per recipient) in 2015 without using up any of your $5.43 million estate- and gift-tax exemption amount.

* Substitute $37,450 for $74,900 if your parent is a single taxpayer. These figures represent the top of the 15% bracket for single and married-joint taxpayers, respectively.

** Under the kiddie tax rules, children pay tax at their parents’ highest rate on unearned income over $2,100 (in 2015).

IRS Identity Letter 5071C

The IRS has been dealing with an increasing wave of tax scams this year in which fraudsters have been leaving messages on taxpayers’ phones claiming to be from the IRS demanding payment, and have been sending phishing emails to taxpayers purporting to come from the IRS. On Thursday, IRS Commissioner John Koskinen met with leaders of several of the major tax software companies, tax preparation chains, state tax commissioners and other officials to coordinate an approach to deal with identity theft. In an effort to protect taxpayers from identity theft, the IRS is releasing the Identity Letter 5071C to taxpayers whose return is deemed “suspicious” upon filing.

Fraud_IdentityTheft3The letter asks taxpayers to verify their identity in order to complete processing of their return if the taxpayer did file it or reject the return if the taxpayer did not file it. The letter gives taxpayers two options to contact the IRS and confirm whether or not they filed the return. Taxpayers may use the site or call the toll-free number provided in the letter. Due to the high-volume on the toll-free numbers, the IRS-sponsored website,, is the safest, fastest option for taxpayers with web access.

The website will ask a series of questions that only the real taxpayer can answer. Taxpayers should have available their prior year tax return and their current year tax return; if they filed one, including supporting documents, such as Forms W-2 and 1099 and Schedules A and C.

Please note that the IRS does not request such information via email, nor will the IRS call a taxpayer directly to ask this information without you receiving a letter first. The letter-number can be found in the upper corner of the page. If you have questions regarding your letter, please visit the IRS website.


Active Versus Passive Appreciation

When Jed Clampett went to shoot at a critter, he missed his target but tapped into an oil gusher. Old Jed, the lead character in TV’s “The Beverly Hillbillies,” got rich and moved to the land of swimming pools and movie stars. The “Jed Clampett defense” is what some court pundits are calling the position an oil billionaire took in his recent divorce case, according to an article in The New York Times. The defense is based on the “active versus passive appreciation” concept in divorce law.

divorce valuationLuck versus skill: In some states, if a spouse owns an asset before the marriage, the increase in value of that asset is not subject to division if the increase was due to “passive” appreciation, that is, if the asset’s value increases due to factors outside of either spouse’s control. But if the value increases due to the efforts or skills of a spouse, it is considered “active” and is thus subject to division in a divorce. So the question comes down to luck versus skill.

If this correlates with you, make sure you discuss “active versus passive appreciation” with your attorney and valuator. Depending on the state your case is in, this could have a large impact on your financial outcome.

By: Ryan Leininger, CPA, CVA

Frequent Asked Questions About Form 1099 Misc

Each year, I receive multiple questions during the first few months regarding issuing 1099 Misc forms. Many of the questions are general in nature. For example, “when are the forms due?” However, there are always some questions that are not a quick one or two-word answer.

Do we need to send a 1099 Misc to a company if they are an LLC?Answer: It depends on how the LLC is being taxed by the IRS? The best way to find out is to ask the company to complete a Form W-9, or Request for Taxpayer ID number. In Box 3, if the vendor checks the first box Individual/Sole Proprietor or single member LLC or the Partnership box, then you must issue a 1099 Misc form.

1099If the company checks the C or S Corporation or Trust/estate, you would not have to issue a 1099 form, UNLESS the company you paid is an attorney and you paid $600 or more for business-related services (not personal legal services).

If you ask vendors to complete the W-9 when you begin doing business, it will save time at the end of the year filing a 1099 Misc, since you will already have the information.

Do we need to issue a 1099 to someone who earned less than $600?Answer: A company is not required to send a 1099 Misc to a vendor who was paid less than $600. There are sometimes when a company may still choose to send a 1099 for less. Legally, the vendor should still be reporting the income on their taxes, whether or not they received a 1099.

Do we need to correct a 1099 when the vendor notifies you their address has changed after you have sent them their 1099 Misc form?Answer: No, you do not have to go through the process of correcting the 1099 form just for an address change. The IRS tracks the forms by the Social Security/Federal ID number and name associated with the number. You should update your software records with the new address and you could give them an updated vendor copy with the new address for their records, but the IRS does not need to receive a corrected copy with the new address.

By: Sandra Stone, Accountant