Young investors are often told to embrace risk in their portfolios. The ups and downs of the markets are an ally in the pursuit of long-term growth, and losses only matter when they’re realized. Rarely is this common and often correct advice applied to investors that are nearing retirement. But indeed it should. Not because sixty is the new forty, but because investment allocation decisions should be based on when the invested funds will be needed, not on how old you happen to be. Continue reading
The Roth IRA has become a popular planning tool since it was established by the Taxpayer Relief Act of 1997. Originally envisioned as a way for Americans of more modest means to efficiently transfer wealth to the next generation, the Roth IRA offers a number of potential advantages over a Traditional IRA that are particularly attractive to those that are more affluent. While there are many variables to consider when determining which type of IRA is best suited to an individual’s needs, the removal of income limits on Roth IRA conversions has made this tool available to wealthier individuals that would otherwise not qualify to make a Roth IRA contribution because of income-based restrictions. Continue reading
Ask a financial planner whether to save for retirement using a Traditional IRA or a Roth IRA and you may receive an unsatisfying answer: it depends. While the Roth IRA is a much-loved planning tool, whether it’s the best option for you will depend on several factors, but math is not one of them. Continue reading
As the end of the year draws to a close, it is a great time to consider some planning strategies that can help lower your tax bill. While good tax planning may help save you money, it can also you achieve a variety of other financial goals.
Here are a just a few benefits that year-end tax planning may provide: Continue reading
Over 25 Million Americans work from home, but only 3.4 Million claim the home office deduction. Whether you’re a homeowner or a home-renter, if you work at home or use your home for business at all, you may be eligible to claim a home-office deduction this tax season.
There are some new home-office deduction rules that apply. But before we dive into those, let’s go over the requirements for claiming the tax deduction.
If you use your home for business, in order to claim a home-office deduction, the home–office:
1. Has to be used regularly and exclusively for business
2. Has to be your principal place for business
What do these two requirements mean?
1. Has to be used regularly and exclusively for business. You must use the area on a regular basis as your place for doing business and the area must be used exclusively for that business. It doesn’t need to be an entire room, but it does need to be an area that has clear boundaries (for example, the desk set-up in the corner of a room). Merely working at your kitchen table filing paperwork because you couldn’t get all your work finished in the office does not qualify.
2. Has to be your principal place for business. The rule of thumb here is that no substantial portion of your business is carried out in another fixed location (i.e. office). If you’re having face-to-face meetings at home or use it for the administrative portion of your business, even if you carry out business elsewhere, you can still qualify for the deduction for that room that is regularly and exclusively for business (for example with a carpenter or an interior designer who spends most of their time in other people’s homes).
- If you have a separate, freestanding building – a studio, barn, garage behind your house, that too, can qualify.
- For Freelancers: You may have a full-time job at an office, but freelance on the side (writer, blogger, entrepreneur). Good news: you can still qualify for their business as long as it is regularly and exclusively for business and used as your principal place of that business.
- If you are an employee and you use part of your home for business, you also may qualify for a deduction, but, in addition to the two tests above, you also have to prove that: 1) it is for the convenience of the employer (there are no hard and fast rules for that) and 2) you must not rent any part of your home to the employer and use the rented portion to perform services as an employee for that employer
There are 2 methods for calculating the home-office deduction.
1. Simplified method. Effective, January 1, 2013, this is a new simplified option (outlined methodology in detail in IRS Revenue procedure 2013-13) which significantly reduces the record keeping burden by allowing you to multiply a proscribed rate by a percentage of square footage used by the home-office. The proscribed rate is $5 per square foot for a maximum of 300 square feet or $1500 dollar of tax savings.
2. Regular method. This method has been around for many years, whereby you must determine the actual expenses for your home office. The expenses that can be allocated towards home office use can include things such as insurance, light, heat, power, repairs, depreciation, real estate taxes, and mortgage interest.
We suggesting calculating both ways to see which method will result in a bigger deduction.
For more information, call us.
Tax Audit. Just saying the words is enough to make most people cringe. With the April 15th tax-filing deadline rapidly approaching, we’re going to discuss the red flags that could trigger a tax audit.
Sometimes audits are chosen as part of a random sample. The rest of the time, there are a number of things you can avoid doing so as not to raise red flags. In order to avoid the likelihood of a government audit, follow these guidelines:
- Report all of your income. Make sure to file any 1099s received (from brokerage houses, miscellaneous income). The government conducts a matching audit from the payers with what you report: discrepancies are a red flag that will trigger an audit.
- A major red flag is if your business (owned) has had a loss for more than 2 out of 5 years. A business must satisfy rule of profitability (3 of 5 years) to avoid being considered a hobby (in which your profit motives are called into question).
- Avoid situations where someone might call the IRS. For example, situations may arise with disgruntled former employees (i.e. recently fired) or spouses (i.e. in the middle of a divorce) acting as whistleblowers.
- Do not exaggerate your expenses. Claiming too much for deductions (medical, charity, miscellaneous) and not having substantiation for those types of expenses can be a major red flag for the IRS.
- Additionally, if your deductions are much higher than average for your income level in your geographic area, a deviation from the mean could trigger an IRS examination.
- If you’re in a cash-basis business, it is crucial to be especially careful in properly reporting your income and expenses.
- Avoid consistently filing returns late or paying your taxes late. This is one of the most sure-fire ways to trigger an examination.
Ultimately it is your responsibility to make sure that your return is filed accurately and correctly (even if a CPA files for you). Make sure never to ignore any sort of letter from the government (and if you do get correspondence from the government, make sure to follow proper procedure as to how to respond). If you need an extension of time, you can ask for it. You may want to consider hiring a CPA for handling any audits/examinations.
As you’re preparing your returns for this year, check this list of red flags and make sure to set yourself up for success in avoiding a tax audit.
If you have any questions, contact us.
If you’re closer to retirement, there are certain decisions that will be required for you to make as it relates to your employer sponsored retirement plan such as a 401K or 403 B plan. For the most part, these monies have accumulated as tax-deferred in these types of accounts. Tax-deferred accumulation means that when you withdraw the money in retirement:
1. The withdrawn money will count as income
2. The withdrawn money will be subjected to income tax (federal and state)
In order to avoid paying income taxes, you generally have two options:
1. Leave the money in the plan
2. Roll the money over into an individual retirement account (IRA)
In order to determine which option makes the most sense for you, you will need to explore the pros and the cons that accompany each of these choices.
Option 1: Leave your money in a 401K or 403B account
Pros & Cons:
The benefit of leaving the money in the 401k or 403b account is that you aren’t required to do anything until you need to withdraw the funds from the accounts. However, you also will not be able to add any money or deposit additional funds into the accounts once you have retired/are no longer working.
Even if you are retired, a benefit of leaving your money in your employer’s plan is that you can continue to manage your money by the plan administrator just as you did when you were an employee.
In order to determine whether or not to leave your money in the account, you will need to check your options as it relates to your withdrawal options. Some companies will limit both the minimum amount you can withdraw at any given time as well as how frequently you can make withdrawals. It is important to make sure that the regulations around frequency of withdrawals and withdrawal amounts matches your future needs. In other words: you need to read the fine print.
It is also important to ensure that you know when you are required to begin taking distributions from your employer-sponsored retirement plans.
Another important factor to consider is, in the event of death, what plan distribution options are available to your beneficiaries.
Lastly, consider the investment options for your employer-sponsored plan. Typical 401ks and 403b plans have a limited number of investment options to the employee.
Option 2: Rollover your money to an IRA
Pros & Cons:
Typically, rolling over employer-sponsored retirement accounts to an individual retirement account will provide you with the greatest amount of control and flexibility. It will enable you to access your money at any point, as frequently as you wish.
Most financial institutions will provide a plethora of options from which IRA holders may choose. In contrast to an employer-sponsored plan, you won’t be limited to a small number of investment options.
You will want to analyze or examine the costs and fees associated with an IRA such as mutual fund internal expense ratios, money management fees, fees for maintaining an IRA and any fees incurred for rolling your money over.
However, remember that once you reach age 70.5 you must begin withdrawing funds in accordance with the IRS tables and can no longer defer taking contributions.
Lastly, be sure to check your state statutes to understand whether your money will be protected from creditors.
To rollover or not rollover? It all comes down to determining your goals and objectives.