RMDs require careful planning

fter all the advice you’ve received about saving for retirement, taking money out of your traditional IRAs and other qualified retirement plans may feel strange. Yet once you reach age 70½, the required minimum distribution (RMD) rules say you have to do just that.

Under these rules, you must withdraw at least a minimum amount from your retirement plans each year. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your tax return.

Here are two suggestions.

* Make a list of your accounts. The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum.

However, withdrawals from different types of retirement plans can’t be combined. Say for instance, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions.

Why is that important? Failing to take distributions, or taking less than is required, could result in a penalty of 50% of the shortfall.

* Plan your required beginning date. In general, you’re required to withdraw RMDs by December 31, starting in the year you turn 70½. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the following year.

Delaying income can be a sound tax move. But because you’ll still have to take your second distribution by December 31, you’ll receive two distributions in the same year, which can increase your taxes.

To discuss these and other RMD rules, give us a call. We can help you create a sound distribution plan.

David Bradsher, CPA

Great Tips – find one that you can implement today!

Summer is a good time to do business entertaining. Meet the rules and you can deduct 50% of the cost.

If you and your spouse work, the cost of sending your children to a summer day camp may qualify for the child care credit.

Combine business and pleasure on a trip this summer and you can deduct the travel costs and other business-related costs.

The number of days you use your vacation home affects the tax deductions you can take on the property.

If your boat or recreation vehicle has sleeping space, a bathroom, and cooking facilities, it might qualify for tax deductions as a second home.

Before you accelerate payments on your home mortgage, consider other uses for that cash. Do you have other higher interest rate loans?

Document money transactions between you and your company (salary, rental payments, loans) as you would with an outsider.

If you have self-employment income, consider setting up a “solo” 401(k) or a Simplified Employee Pension (SEP).

Your smart phone may contain more personal financial information than your desk top computer. Protect it from criminals who “phish.”

Start saving early. Save 10% from every dollar. Those who start at age 25 have nearly double the $ at age 65 over those starting age 35.

$500 per month invested for 40 years ($240,000) will accumulate to $760,000 at 5%. Don’t wait to start saving.

It is common for those who earn $50,000 per year to spend it all. Sadly, most of those who earn $100,000 also spend it all.

Do you think you can’t save 10% of current earnings? Suppose you lost your job and the new job paid 10% less. Start saving 10% NOW.

Borrowing from your company retirement plan will have no tax consequences if set up properly and repaid on time.

Don’t buy or start a business outside your area of expertise. Many a family inheritance has been wasted while learning a business.

If you are planning to sell business or investment property and acquire another, consider a tax-deferred exchange. No current tax bill.

If you donate a vehicle worth over $5,000 to charity, an independent appraisal is required by the IRS.

Don’t decide on either a lump sum or a retirement annuity until you have explored all the options in light of your financial condition.

David Bradsher, CPA

What investment expenses are deductible?

Whether you’re a stock market bull or bear, you have investment expenses – and you may be wondering if they’re deductible on your federal income tax return.

Here’s a quick review.

* What are investment expenses? Investment expenses are amounts you pay to produce or collect taxable income, or to manage, conserve, or maintain your investments.

Professional investment advice or financial newspaper subscriptions are examples of deductible items, as is safe deposit box rent when you use the box to store investment papers. You can also claim fees you incur for replacing stock certificates.

* How much is deductible? Investment expenses are miscellaneous itemized deductions, meaning your total costs generally have to be greater than 2% of your adjusted gross income before you benefit. Other limits may also apply.

* What isn’t deductible? Some investment costs, such as broker’s commissions for buying and selling stocks, are considered part of your basis and affect your gain or loss when you sell the investment instead of being currently deductible.

Travel and fees you pay to attend seminars, conventions, or other meetings – including stockholder meetings – are not deductible, nor are expenses related to tax-exempt income.

Other rules govern certain costs related to your investments, such as interest paid on money you borrow to buy stocks.

Please give us a call to discuss investment-related expenses. We’ll be happy to help you get the greatest benefit.

David Bradsher, CPA

A job change can change your taxes

Planning to change employers this year? As you look forward to starting your new job, you’re probably not thinking about taxes. But actions you take now can have an impact next April – and beyond.

Here are three tax-smart tips:   * Roll your retirement plan. You may be tempted to cash out the balance in your employer-sponsored plan, such as a 401(k). But remember that distributions from these plans are generally taxable.

Instead, ask your plan administrator to make a direct rollover to your IRA or another qualified plan. If you’re under age 59½, this decision also avoids the additional 10% penalty on early distributions. Bonus: Your retirement money will continue to grow tax-deferred.

* Adjust your withholding. Assess your overall tax situation before you complete Form W-4 for your new employer. Did you receive severance pay, unemployment compensation, or other taxable income? You might need to increase your withholding to avoid an unexpected tax bill when you file your return.

* Keep track of your job-related expenses. Unreimbursed employment agency fees, résumé preparation costs, and certain travel expenses can be claimed as itemized deductions.

Are you moving at least 50 miles to your new job? You may be able to reduce your income even if you don’t itemize. Eligible moving expenses are an above-the-line deduction.

More tax issues to consider when you change jobs include stock options, employment-related educational expenses, and the sale of your home. Give us a call. We’ll be happy to help you implement tax-saving strategies.

David Bradsher, CPA

Avoid growing pains in your business

One way to kill your business is to grow it too fast. Many profitable small businesses have expanded at the wrong time and at the wrong level of increased costs. The result is that they never again make a profit. How does this happen?

A given amount of building, equipment, employees, and the associated maintenance, insurance, and taxes will allow your business to operate at a certain maximum sales volume. If you want to grow, say double or triple your current sales, you will need more of all the above items. When you commit to that new larger building with more equipment and employees, you have increased your “breakeven point” (the level of sales you need at which you make your first dollar of profit).

Take this example. Assume that you are a local carpet store. You occupy a 4,000 square foot building. You have a fairly fixed amount of inventory, equipment, and employees. Let’s say you are doing $1 million in sales, your gross profit is $300,000, and your fixed costs (building, etc.) are $250,000 with a net profit of $50,000. Since you have an established local customer base, you are convinced that a shop three times this size would make you even more money. Here is what to look out for.

Let’s assume that your new 12,000 square foot building and associated higher expenses have raised your fixed costs to $650,000. If you double your sales to $2 million, your gross profit will be $600,000. That leaves you $50,000 in the hole for the year. You would need sales of $2.3 million to get back to the same net profit you had before you tripled your floor space.

Before you go down a permanent road of no return, play a few games of “what if.”

David Bradsher, CPA

Good debt or bad debt: What do you have?

You’ve got debt! The question is, do you have good debt or bad debt? Even more important, how do you tell the difference before you take on any more? Here are two questions to ask before incurring any debt.

1. What are the benefits of taking on this debt? Avoiding all debt seems like good advice. But good debt can enhance your financial situation. For instance, loans that fund a college or graduate degree may result in a higher salary. That’s debt with a lasting, tangible benefit.

Likewise, a mortgage for a home or rental property can increase your wealth by providing the opportunity for growth of capital and income.

Good debt can also have secondary advantages, such as the potential for tax deductibility of interest on student loans and home mortgages.

Bad debt, on the other hand, generally strains your cash flow without providing an offsetting advantage.

2. Does the cost exceed the benefit? As a general rule, good debt provides a return that’s greater than the total amount you’ll end up paying. Caution: Remember that your total outlay will be the stated price plus finance charges.

For example, suppose you need to buy a car. A moderately priced vehicle financed with a short-term loan can still have value when the payments end. That falls within the definition of good debt. But with today’s longer terms of five to eight years, your loan might outlast the car. High interest rates and the longer payback period on “stretch” loans can bump your total outlay into bad debt territory.

Credit card debt poses the same peril. Charges you intend to pay back in full at the end of the month may not be a problem. But a restaurant meal, a vacation, or a Christmas splurge can get very expensive once you include the interest charged when you carry a balance on your credit card.

Good debt or bad? Recognizing the difference can lead to better money management – something you need if you want to improve your financial situation.

David Bradsher, CPA