Your social security benefits may be taxable

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Did you sign up for social security benefits last year? If so, you may have questions about how those payments are taxed on your federal income tax return.

The good news is the formula is the same as prior years. That’s also the bad news, because the thresholds for determining taxability are not indexed for inflation, and did not change either. Those thresholds, or “base amounts,” remain at $32,000 when you’re married and file a joint return, and $25,000 when you’re single.

How much of your social security benefit is taxable? To determine the answer, calculate your “provisional income.” That’s your adjusted gross income plus tax-exempt interest, certain other exclusions, and one-half of the social security benefits you received.

When you’re married filing jointly, your benefits are 50% taxable if your provisional income is between $32,000 and $44,000. If your provisional income is more than $44,000, up to 85% of your benefits may be taxable. For singles, the 50% taxability range is $25,000 to $34,000.

In some cases, diversifying the types of other retirement income you receive can reduce the tax burden on your social security benefits. Contact us if you want more information or planning assistance.

Marriages end, and so do business ventures

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If your business is owned by two or more persons, a buy-sell agreement is one of the most important legal documents your business can have. This document provides for the “buyout” of an owner’s interest when that owner leaves. These are the areas that a buy-sell agreement should typically address.

* Describe the events that will trigger the agreement, such as a divorce, disability, death, or notice that an owner simply wants to leave.

* Set a value for each owner’s interest, or provide a formula to value each interest at a later date. Your agreement might require an independent business appraisal.

* Without a method to set the value, there could be some serious problems. Let’s say you and your partner reach a point where you can no longer work together. You believe the company is worth $2 million. Your partner refuses to sell, but he makes you a $100,000, take-it or leave-it offer for your 50% interest. You could face a drawn-out legal battle to settle things.

* Outline a funding plan. Different purchase and financing plans can be used to cover different situations. For example, cross-purchase agreements allow the remaining owners to buy an exiting owner’s share. A redemption agreement allows the company to buy back an exiting owner’s share. Financing options might include owner financing (an installment contract) or life insurance, in the case of an owner’s death.

* Prevent unwanted transfers. Generally owners don’t want a business associate they didn’t choose. Yet this could happen if one owner divorces, dies, or sells his shares to an outsider.

A buy-sell agreement is designed to provide fair compensation to an exiting owner, while making it possible for the remaining partners to continue in business. We can work with you and your attorney to develop a buy-sell agreement or to review your existing agreement. Call us.

April 1 is the deadline for retirement distributions

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You may be approaching an important deadline if you have retirement accounts and you turned 70½ last year. Generally, you must begin withdrawing money from tax-favored retirement plans in the year you turn 70½. However, you may postpone your first withdrawal until April 1 of the year after you turn 70½. That means you have until April 1, 2015, to complete your required 2014 distribution.

The minimum distribution rules don’t apply to your Roth IRA accounts. And if you are still working at age 70½, you are generally not required to withdraw funds from a qualified employer-sponsored plan until April 1 of the calendar year following your actual retirement.

If you postponed your first distribution, you must take two distributions this year – one for 2014 and one for 2015. Your 2014 distribution must be completed by April 1, while your 2015 distribution must be completed by December 31, 2015. After that, you must take a distribution by December 31 each year until your retirement funds are depleted.

Generally, the amount of the RMD for any year is based on your age. You take the balance in all your traditional IRAs as of the last day of the previous year, and divide by a factor representing your life expectancy. The IRS has published a standard life expectancy table to use in the calculation. Special rules might apply if your spouse is more than ten years younger than you are.

Make sure you notify the holder of your retirement account in time to complete your distribution. Follow up to ensure that the transaction will be completed on time. You may withdraw more than the required amount, but if you fail to take at least the minimum distribution on time, you are subject to a 50% penalty tax.

Don’t overlook this important distribution deadline. Call our office if you would like assistance in planning your retirement withdrawals.

March 2015 – Quick Updates

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March 16 is the deadline for calendar-year corporations to file 2014 income tax returns.

March 16 is the deadline for calendar-year corporations to elect S corporation status for 2015.

March 31 is the deadline for electronic filing of 2014 information returns with the IRS.

March 31 is the deadline for employers to electronically file 2014 W-2s with the Social Security Administration.

The IRS will waive some penalties related to advance payments of the premium tax credit for health insurance purchased under the ACA.

The IRS says taxpayers held $5.3 trillion in IRAs in 2012 – $4.6 trillion in traditional IRAs and $403 billion in Roth IRAs.

According to the IRS, 3.7 million taxpayers contributed to traditional IRAs in 2012; 5.5 million contributed to Roth IRAs.

The Treasury estimates that 2% to 4% of taxpayers will be subject to tax penalties under the Affordable Care Act.

Among the ten basic taxpayer rights listed by the IRS is the right to clear explanations of the tax laws and of IRS procedures.

The FTC reports that tax-related identity theft was the most common form of identity theft reported in 2014.

If you turned 70 ½ last year and didn’t take your first required distribution from your IRA, you must take it by April 2, 2015.

If you own foreign investments, you may have to file Form 8938 as part of your individual tax return this year.

Before choosing direct deposit for your tax refund, verify that your bank accepts such deposits, and verify account and routing numbers.