August 17, 2008 by Ray Perez.

If you are thinking of retiring soon, or changing jobs, you may face a major financial decision: what to do about the funds in your retirement plan. This article will discuss partial withdrawals and full withdrawals.

Note: As you will see, the rules on retirement withdrawals are quite complex. They are offered here only for your general understanding. Please call us before taking withdrawals or making other major changes in your retirement plan.

Take a Partial Withdrawal

Partial withdrawals are withdrawals that aren’t the rollovers, annuities or lump sums. Because they are partial, the amount not withdrawn continues its tax shelter, see below.

A partial withdrawal will usually leave open the option for other types of withdrawal (annuity, lump sum, rollover) of the balance left in the plan.

Note: Before retirement, partial withdrawals are fairly common with profit-sharing plans, 401(k)s, and stock bonus plans. After retirement, they are fairly common in all types of plans (though least common with defined-benefit pension plans).

Tax Planning. A partial withdrawal is taxable (and can be subject to the penalty tax on withdrawals before age 59 ½ ) except to the extent it consists of after-tax contributions, such as nondeductible IRA contributions. The withdrawal is generally tax-free in the proportion the after-tax investment bears to the total retirement account.

Example: Your retirement account totals $100,000, which includes an after-tax investment of $10,000. You withdraw $5,000. The withdrawal is tax-free to the extent of $500 ($10,000 / $100,000 x $5,000).

Note: The tax-free portion is computed differently for plan participants who were in the plan on 5/5/86.

Preserving the Tax Shelter. Your funds grow sheltered from tax while they are in the retirement plan. So the longer your financial situation lets you prolong the distribution—or the smaller the amount you must withdraw—the more your assets grow. Some taxpayers choose to defer withdrawals for as long as the law allows to maximize assets and shelter them for the next generation.

The law has specific rules about how fast the money must be taken out of the plan after your death. These rules curtail the ability to prolong a tax shelter which was intended to aid your retirement.

Withdrawal Before You Reach Age 70½

Until the year you reach 70½, you need not take your money out of your retirement account—unless your employer’s plan requires this. In fact, there will usually be a 10% early-withdrawal penalty if you make withdrawals before age 59½. This is on top of the regular income tax you will owe at any age on amounts withdrawn, though there’s no tax on your recovery of after-tax contributions you made.

Once You Reach Age 70½

Once you hit 70½, withdrawals must begin. Technically they can be postponed until April 1 of the year following the year you reach 70½—say April 1, 2008 if you reach 70½ in 2007. But waiting until April 1 means you must withdraw for two years—2007 and 2008—in 2008. To avoid this income bunching and a possible higher marginal tax rate, your tax adviser may suggest withdrawing in the year you reach 70½.

The rules allow you to spread your withdrawals over a period substantially longer than your life expectancy. Under these rules the taxpayer (say, an IRA owner) first determines his or her retirement plan asset values as of the end of the preceding year. Then the owner takes the number for his or her age from an IRS table (the table is unisex). The number corresponds to the future period (at that age) over which the withdrawals may be spread. The owner divides that number into the retirement asset total. The result is the minimum amount to be withdrawn for the year.

Example: Joe reaches age 70 1/2 in October of this year. Retirement plan assets in his IRA totaled $600,000 at the end of last year. The IRS number for age 70 is 27.4. Joe must withdraw $21,898 ($600,000/27.4) this year.

Example: Two years from now Joe is 72 and his IRA was $602,000 at the end of the preceding year (when Joe reached age 71). The IRS number for age 72 is 25.6. Joe must withdraw $23,516 ($602,000/25.6) when he’s 72.

The distribution period in the IRS table in effect assumes distribution over a period based on your life expectancy plus that of a beneficiary 10 years younger than you. Only where your designated beneficiary is a spouse more than 10 years younger than you is his or her actual life expectancy used to figure the withdrawal period during your lifetime.

Caution: You can always take out money faster than required–and pay tax on these withdrawals. However, the tax code is strict about minimum withdrawals. If you fail to take out what’s required, a tax penalty will take 50% of what should have been withdrawn but wasn’t.

Financial Calculator: Required Minimum Distribution
The IRS requires that you withdraw at least a minimum amount - known as a Required Minimum Distribution - from your retirement accounts annually, starting the year you turn age 70-1/2. Determining how much you are required to withdraw is an important issue in retirement planning.

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April 12, 2007 by Ray Perez.

Do you want to avoid the last-minute rush for doing your taxes? Here are some stress reducing ideas that might help.

• Don’t Procrastinate, it can only make it worse - Resist the temptation to put off your taxes until the very last minute. Your hurry to meet the filing deadline may cause you to forget potential sources of tax savings and will probably increase your risk of making an error.
• Don’t Go Crazy if You Can’t Pay - If you can’t pay the taxes you owe withy the return, consider some alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have other options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the credit card companies might charge a convenience fee. Electronic filers with a balance due can file early and authorize the government’s financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
• Request an Extension of Time to File – But Pay on Time If the clock runs out, you can get an automatic six month extension of time to file to October 16. The extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date. Call us for a variety of easy ways to apply for an extension.

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April 12, 2007 by Ray Perez.

Review Your Retirement Plans
How much have you accumulated so far? How much do you need to retire comfortably at the desired date? Professional advice may be helpful in determining how much you should be saving and what the best investment vehicles are.

Inventory Your Non-Financial Assets
Perform an inventory of your non-financial assets (e.g., home, furniture, cars, personal belongings). Compare this inventory to your property insurance coverage. Is your insurance adequate for your assets? You may need a rider to your policy for certain items such as jewelry. If some assets are no longer in use, consider selling them or donating them to charity. You may be entitled to a deduction based upon the fair market value of the assets.

Budget vs. Actuals
Compare March income and expenditures with your budget. Make adjustments as appropriate to your April expenditures. Make sure you have invested your planned savings amount for March.

Review Retirement Contributions
Review planned contributions for IRAs, SIMPLE Plans, SEPs and Keoghs for the preceding tax year. Professional advice should be sought to help you determine the maximum amounts deductible, and whether postponing return filing for the preceding year will help determine the amount and timing of the contribution.

Schedule Estimated Tax Payments
Add the estimated tax payments for the year to your calendar so you don’t overlook them later. You might want to attach the payment vouchers to your calendar with a paperclip.

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March 21, 2007 by Ray Perez.

Have you ever called your mutual funds family and exchangedthe share in your growth fund for shares in a value fund? If so, you know that you pay capital gains taxes. A swap like this actually requires selling those growth fund shares.

Or try bartering your professional service. Offer, say,your medical services for a friend’s legal services to avoid income tax. If you’re audited, the IRS will nail you for not reporting the equivalent of wage income.

But if real estate’s your game, then swapping is a way of life. One of the sweetest tax breaks ever devised is the section 1031 exchange, which allows you to swap investment property on a tax-deferred basis.

Although sometimes known as like-kind exchanges, these transactions don’t have to involve identical types of investment property.

You can swap an apartment building for a shopping center, or a piece of raw land for an office building. You can swap a second home that you rent out for a parking lot.

It’s a tremendous deal, you can’t do that with stocks or bonds or personal property.

Originally, Section 1031 transactions were designed for people who wanted to exchange properties of equal value. Suppose you own land in Oregon and you trade it for a shopping center in Rhode Island. If the values are equal, nobody pays taxes even though both properties may have appreciated since they were originally purchased.

One variation involves properties of unequal value. Let’s say you have a small piece of property, and you want to trade up to a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property’s current market value and your lower original cost.

That’s good for you, but your partner doesn’t make out so well. Presumably, you have to pay cash or assume a mortgage on the bigger property to make up the difference in value. Known as “boot”in the tax trade, your partner must pay tax on that part transaction.
Work Through An Agent

To avoid that, you could work through an intermediary, who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don’t even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. He or she gets the title to the deed and transfers the property to you.

But you need to move fast. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period.

If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you’re back to a taxable sale.
Advance Planning Required

Some accountants and lawyers specialize in Section 1031 exchanges to make sure that you qualify.

Because it’s such a significant tax benefit, there are all kinds of restrictions and pitfalls that you’ve got to be careful of. You’ve got to dot all of you i’s and cross all of your t’s.

A Section 1031 transaction takes advance planning. Find an escrow agent that specializes in the transaction. Contact your accountant to set up the IRS form ahead of time. Some people just sell their property, take cash and put it in their bank account. They figure that all they have to do is find a new property within 45 daysand close within 180 days. But that’s not the case.

As soon as (sellers) have cash in their hands, or the paperwork isn’t done right, they’ve lost their opportunity to use this provision of the code.

Section 1031 doesn’t apply to personal residences. But the IRS lets you sell your principle residence tax-free as long as the gain is under $250,000 for individuals and under $500,000 if you’re married.

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March 21, 2007 by Ray Perez.

The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:

• Introduction
• Marketing
• Financial Management
• Operations
• Concluding Statement

Q: What should be included in the introduction to my business plan?

A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.

Q: What should be included in the marketing section of my business plan?

A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.

Q: What should be included in the financial management section of my business plan?

A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide “what if” statements that address alternative approaches to any problem that may develop.

Q: What should be included in the operations section of my business plan?

A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.

Q: What should be included in the concluding statement of my business plan?

A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also be specific as to how you plan to achieve your goals.

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March 14, 2007 by Ray Perez.

One of the disadvantages of forming a corporation is that you are subject to double taxation and in some states it could be triple taxation. The corporation is considered a separate entity seperate from its stockholders and is taxed on its profits at the Federal level and at the state level again. When these profits are distributed to the shareholders as dividends, they are taxed again (on the personal level.)

You can avoid this double or triple taxation by forming an LLC or by electing to have your corporation treated as an S Corporation (by filing Form 2553 within 75 days of first forming the business or first transacting business and have less than 75 shareholders who all agree to this form of taxation)

S Corporations and LLCs are taxed as if they were partnerships - no tax is due on the entity level. Each partnership engaged in a trade or business must file a return on Form 1065 showing its income, deductions, and other required information. The return shows the names and addresses of each partner and each partner’s distributive share of taxable income and deductions. This is an information return and must be signed by a general partner. If an LLC is treated as a partnership, it must file Form 1065 and one of its members must sign the return. The partnership does not pay any tax on its income but “passes through” its profits or losses to its partners. Partners must include partnership items such as their distributive share of income and deductions on their personal tax returns.

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March 14, 2007 by Ray Perez.

You can contribute up to $2,000 each year to a Coverdell education savings account (Section 530 program) for a child under 18. These contributions are not deductible, but they grow tax-free until withdrawn. Contributions for any year (say 2007) can be made through the (unextended) due date for the return for that year (April 15, 2008).

Only cash can be contributed to a Section 530 account and you cannot contribute to the account after the child reaches his or her 18th birthday.

Anyone can establish and contribute to a Section 530 account, including the child, as long as the contributor’s modified AGI doesn’t exceed $220,000 for a joint return or $110,000 for a single filer. You may establish 530s for as many children as you wish, and the child need not be a dependent — in fact, he or she need not be related to you. But the amount contributed during the year to each account cannot exceed $2,000. This maximum contribution amount for each child is phased out for AGI between $190,000 and $220,000 (joint) and $95,000 and $110,000 (single).

The child must be named (designated as beneficiary) in the Coverdell document, but the beneficiary can be changed to another family member (for example, to a sibling where the first beneficiary gets a scholarship or drops out). And funds can be rolled over tax-free from one child’s account to another’s. Funds must be distributed not later than 30 days after the beneficiary’s 30th birthday (or 20 days after the beneficiary’s death if earlier). For “special needs” beneficiaries the age limits (no contributions after age 18, distribution by age 30) don’t apply.

Withdrawals are taxable to the person who gets the money, with these major exceptions: Only the earnings portion is taxable (the contributions come back tax-free). Also, even that part isn’t taxable income, as long as the amount withdrawn doesn’t exceed a child’s “qualified higher education expenses” for that year. The definition of “qualified higher education expenses” includes room and board and books, as well as tuition. In figuring whether withdrawals exceed qualified expenses, expenses are reduced by certain scholarships and by amounts for which tax credits (see Educational Credits, below) are allowed. If the amount withdrawn for the year exceeds the education expenses for the year, the excess is partly taxable under a complex formula. There’s another formula if the sum of withdrawals from this 530 program and from the qualified tuition (Section 529) program exceed education expenses.

You as the person who sets up the Section 530 account may change the beneficiary (the child who will get the funds) or roll the funds over to the account of a new beneficiary, tax-free, if the new beneficiary is a member of your family. But funds you take back (for example, withdrawal in a year when there are no qualified higher education expenses, because the child is not enrolled in higher education) are taxable to you, to the extent of earnings on your contributions, and you will generally have to pay an additional 10% tax on the taxable amount. However, you won’t owe tax on earnings on amounts contributed that are returned to you by June 1 of the year following contribution.

Investment policy

You may choose and change Section 530 investments freely — in contrast to Section 529 programs and, of course, Series EE bonds.

Elementary and secondary schools

Section 530 programs can be used to build up funds for primary and secondary education. The tax rules are similar to those for higher education: withdrawals taxable to the extent of earnings on contributions, except tax-free up to the child’s qualified elementary and secondary education expenses. These expenses qualify whether the child attends a private, religious or public school. Expenses such as room, board, tuition, transportation and uniforms will qualify only where connected with private or religious schools, but some expenses — books, computers, educational software and internet access — apply as well to children in public school living at home.

The age limits for higher education apply here too: no contribution after child reaches age 18, distribution at age 30 except for special needs beneficiaries. Withdrawals in excess of qualified education expenses are taxable under a special formula.

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March 14, 2007 by Ray Perez.

The tax law allows you to deduct two types of travel expenses related to your business.

1. Firstly you can deduct local transportation expenses incurred for business purposes—the expense of getting from one location to another, but not meals or incidentals.
2. Second, you can deduct away from home travel expenses—including meals and incidentals. Deduction limits can be eased if your employer reimburses your travel expenses.

Local Transportation Costs

You can deduct the cost of local business transportation. This includes airfare, rail fare, and bus fare, as well as the costs of using and maintaining a business automobile. For those whose main place of business is their personal residence, business trips from that residence, and return trips, are deductible transportation and not non-deductible commuting.

You generally cannot deduct lodging and meals unless you stay away overnight. Meals may be partially deductible as an entertainment expense, as discussed below.

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March 13, 2007 by Ray Perez.

This is for you if you are self-employed and involved in multiple businesses, even with partners.

A new tax act has made a change allowing you to contribute to a self-employed retirement plan, on your own behalf, without requiring you to make contributions on behalf of your employees. The new act has repealed the so-called aggregation rules that previously applied to the self-employed retirement plans.

Under the old rules, if a self-employed person owned, or was a part owner of more than one business, and a retirement plan was provided for the employees in one business, law required that a retirement plan be provided for the employees of the other business(es). Beginning in 1997, this law removed this requirement!

If you own two businesses, the law allows you the option of establishing a retirement plan for only one business (with the fewest employees), even if you work by yourself in that business! The only limitation for this new law is that the amount of money you can contribute to a retirement plan is based on the self-employment earnings generated by the business with the retirement plan.

In other words, if the business you own with (no employees) has smaller net earnings than the other business (with employees), the amount you can contribute to a retirement plan will be based on the smaller net earnings.

While the rule change allows you to avoid contributing to a plan for your employees, it also means that you would be limited to making the smallest (rather than the largest) potential contributions to your personal retirement plan.

I want to make sure you are getting the most out of your financial future, so contact us or your accountant to determine your eligibility and to optimize the plan for you.

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March 13, 2007 by Ray Perez.

Well, you can. If you don’t have enough cash to make a deductible contribution to your IRA by April 15th, here is how you can still take the tax deduction. And have until June 12th to make the full 4,000 contribution! To get started, all you need is a previously started IRA.

You begin by having $4,800 distributed to you from your IRA on April 15th. Your bank is required to hold 20% (income tax withholding), so you’ll actually receive $4,000. Once you have the $4,000, immediately deposit it back into your IRA. If you do this before April 15th, this counts as your deductible contribution for the year. The best part of this is that you have 59 days to “make up” the withdrawal-or to be taxed. Simply deposit $4,800 “rollback” into the same IRA account by June 12th to avoid taxes on the original $4,000 distribution made to you.

This is a type of short-term loan from your IRA to make this year’s deductible contribution before the April 15th due date.

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