One of the most overlooked points, when retirees are calculating their living expenses, is the percentage of tax they will be paying on those retirement dollars. How you go about using your savings accounts can make a big difference in how much tax you will be responsible for.
It is generally believed that you should tap taxable accounts first, then tax-deferred accounts, and finally your Roth. For most retirees this makes sense. This changes if you have a lot of money in your traditional IRA or 401(k). When you turn 70 1/2 you will have to take required minimum distributions (RMDs) from those accounts. If the accounts grow too large - the minimum distribution could be large enough to put you into a higher tax bracket. This is avoided by making withdrawals from tax-differed accounts earlier.
Retirement assets are taxed in the following ways:
Tax-deferred accounts. Years of paying into these accounts and enjoying the tax benefits upfront of doing so leaves you with a painful distribution from these accounts. Withdrawals from traditional IRAs and your 401(k) will be taxed as ordinary income. At the top tax bracket.
Taxable accounts. Profits from sale of investments (stocks, bonds, mutual funds, and real estate) are taxed at capital-gains rates, which vary depending on the length of time you have own the investments. If you have held assets longer than a year, the long-term capital-gains rates are favorable. If you are in the 10% or 15% tax bracket, you will pay 0% on those gains. Most other tax payers pay 15% on long-term gains. Short-term capital gains are taxed at your ordinary income tax rate.
Roth IRAs. This is a fun account to withdraw from because as long as the Roth account has been open for 5+ years and you're 59 1/2 or older, all withdrawals are tax-free. You also do not have to take RMDs from your Roth account when you turn 70 1/2.
Social Security. Yes, you can be taxed on your Social Security benefits. Whether or not you’re taxed depends on your provisional income. Your provisional income is your adjusted gross income plus any tax-free interest plus 50% of your benefits. As of 2016 if your provisional income is between $25k and $34k if your single or between $32k and $44k if you are married, up to 50% of your benefits is taxable. If it exceeds $34k if you're single or $44k if you're married, up to 85% of your benefits is taxable.
Pensions. Assuming you made no after-tax contributions to the plan, payments from private and government pensions are usually taxable at your ordinary income rate.
Annuities. If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free. Everything else is taxable. You should be told by the insurance company that sold you the annuity what is taxable. If you bough the annuity with pretax funds - different rules apply. If that happens, 100% of your payment will be taxed as ordinary income.
Financial circumstances are as varying as life circumstances be sure to connect with your Sorge tax team for information and guidance specific to your situation.
References: Kiplinger's Personal Finance. Yahoo Finance. Business Insider.
Starting a business can start organically, with a structured business plan, or a combination. No matter what way you start a business you will have to choose a business entity in order to be recognized by the federal government. The business entity determines which income tax form you have to file. The federal government levies four basic types of business taxes:
Self Employment Tax
Taxes for Employers
To learn more about these taxes visit the Internal Revenue Service's (IRS's) Guide to Business Taxes.
To access the forms you will need to file - click on your business entity.
Most states levy a business or corporate income tax. State taxe requirements depends on the legal structure of your business. For Wisconsin:
Check with your Sorge Team Member to make sure you are defining your business in the best way for both your current business situation and structure and for your desired tax planning goals.
1. Maximize Investment Tax Benefits. If you have investments, now is the time to recognize loss on stock transactions and how they could offset gains. Also if you have any capitol loss carryover from prior tax years now is the time to recognize how it will come into play this year.
2. Open a 529 Plan. Whether you have kids or grandkids - setting up a 520 plan for contributions can help reduce your tax liability. Contributions must be made by the last day of the year.
3. Gifting. You can give up to $14,000 per year to anyone you’d like without tax consequences. This can be particularly important to understand around the holiday season.
4. Charitable Giving. Supporting your favorite charities has its advantages tax wise. Be sure to calculate those dollars and have them ready for your tax advisor!
5. Health Insurance. Open enrollment for Medicare starts mid-October and ends in early December. Be sure to discuss this with your advisors to be eligible for the tax benefits related.
6. Accelerate deductions. Making purchases before the year end will make them eligible for your 2016 tax deductions. Be sure to talk with your advisor about whether deducting things this year or next would be best for your business. Also, for example, if you have medical bills outstanding and you are going to exceed the minimum needed for a medical deduction this year - timely payment of those bills outstanding would result in a bigger 2016 deduction.
7. Delay Income. If you predict you may be in a lower tax bracket next year waiting to send out late in the year work invoices can help equal out the income between the two years.
There is never a bad time for tax planning!
Day camps are common during the summer months. Many parents enroll their children in a day camp or pay for day care so they can work or look for work. If this applies to you, your costs may qualify for a federal tax credit. Here are 10 things to know about the Child and Dependent Care Credit:
Keep in mind this credit is not just a summer tax benefit. You may be able to claim it at any time during the year for qualifying care. IRS Publication 503, Child and Dependent Care Expenses, provides complete details on all the rules. Get it anytime on IRS.gov. https://www.irs.gov/uac/keep-in-mind-the-child-and-dependent-care-credit-this-summer
The standard deduction will vary year to year depending on your filing status. The fixed number, determined by the tax year, reflects the dollar amount that reduces the income you’re taxed on.
In 2015, the standard deductions were:
Single/Married Filing Separately — $6,300
Married filing jointly or qualifying widow(er) — $12,600
Head of household — $9,250
Most (around two - thirds) of tax returns will claim the standard deduction. The benefits of using the standard deduction for your taxes include:
- allows a deduction even without expenses that qualify for claiming itemized deductions
- no need to itemize deductions
- avoids the need to keep records + receipts for IRS audit purposes
Similarly to the standard deduction, itemized deductions reduce your taxable income. However, itemized deductions require more information.
You might see itemizing your deductions as beneficial if:
- your itemized deductions > the standard deduction you’d receive
- you had large medical/dental expenses
- paid mortgage interest and real estate taxes on your home
- had large business expenses or unreimbursed expenses as an employee
- had theft, natural casualty losses in your immediate family
- donated sizable dollars to charities
- had unreimbursed miscellaneous expenses
If you calculate your itemized deductions and it is less than your standard deduction you might want to consider taking the standard deduction. However, in some cases there is a benefit to itemize deductions even if your itemized deductions are less than the standard deduction. For example - you might choose to do this if you would end up paying less tax by itemizing on a state return in order to get a larger tax benefit than if you would file the standard deduction on your federal tax return.
At Sorge CPA we can help go through your tax return line by line to make sure that your are filing the appropriate deduction method for your unique case.
It is that time of year, again! Garage Sales are saturating Craigslist, neighborhoods, and our thoughts as we all try to determine if all of that pricing, organizing, and purging of our STUFF is worth it. Here are some important tips to consider as you are gearing up or scaling down the thought of opening up your garage to patrons.
1. Understand your Itemized Deductions. The IRS provides a great description of charitable donations as well as other itemized deductions you can look into. We will be posting a more detailed description between standard and itemized deductions on a future blog post next week!
2. Standard Deduction. What is the standard deduction for your filing status? Do you exceed the standard?
For 2016 the Standards are:
|Married Filing Jointly||$12,600|
|Married Filing Separately||$6,300|
|Head of Household||$9,250|
One of the main advantages to having your business taxed as an S-Corporation is that you can potentially reduce self-employment tax.
For example you will end up paying self employment tax on 100% of what you make in a sole-proprietorship. Where as if you have an S-Corp you have the opportunity to pay yourself as the business owner and pay self-employment tax only on the income you allot for yourself.
In general it is safe to start your business as a sole-proprietorship. However, when your business reaches a point when you would like more control over your tax liability be sure to connect with your accountant to discuss options with your business titling.
It is helpful to understand the many factors that go into the selection process for IRS Audits. In general everyone can be audited - however some people are at greater risk.
Tax Return Selection Process for Purposes of IRS Agent Audit:
· Not necessarily available to the public
· Some tax returns are selected randomly
· Most audit cases: returns have line items that are “out of the norm”
Sorge CPA has several teams who put extra care into your tax return. Your personal team is devoted to eliminating mistakes and also being aware of current updated tax law involved with every new tax return.
· Answers the Question: How much money you will make this year
· Most familiar to people
· Explains: income - expenses = bottom line
· Answers the Question: Where did the money go?
· More in depth understanding of expenses
· Explains: dollars going into things like debt, inventory, or supporting the clients lifestyle.
There are many worthy accounting software programs available. We recommend Quickbooks for small to medium sized businesses. At Sorge CPA we will host your quickbooks file for you remotely this proves to be an advantage in the following ways:
1. Quickbook files are accessible anywhere through a secure icon.
2. Quickbook files are backed up off site continuously.
3. Paperless! There is no need of paper delivery of your documents.
4. Your team at Sorge CPA can efficiently complete your work in real time.
5. Payroll services can be added.
6. No ongoing fees for the routine hosting of your files.
Our accounting firm's main focus is to have strong communication with our clients. We accomplish this in two main ways:
1. Using Large Firm Resources + Cultivating Small Firm Attention
2. Taking Advantage of Technology
Sorge QuickBooks Online (SQBO) allows our firm to unite technology with our main objective of staying connected with you.
· Allows us to host clients QuickBooks file on our server.
· Allows for simultaneously access for both client and us.
· Client can access their file from anywhere in the world.
· We can access clients file for advisory and tax planning purposes.
SQBO becomes extremely valuable when their are questions or for an opportunity to educate a client for best practices.
It shows each category of the assets owned, such as:
· accounts receivable
It also shows each category of liabilities involved, such as:
· accounts payable
· payroll tax liabilities
· loans payable
The Balance Sheet can helps answer the questions:
· Where did the profit go?
· Did cash increase?
· Did loans decrease?
· Did the owner draw funds out of the business?
· Was cash used for fixed assets?
The balance sheet allows us to understand basic things about a business. Comparing balance sheet year-to-year shows the financial structure and stability of the business.
By analyzing an income statement, we can find answers to questions like:
· Is the % of Gross Profit compared to % Gross Income higher or lower than last year? Why?
· How do unique core differentiators impact the gross profit margin?
The analysis of each line item in the income statement compared to the prior year is important.
Ratios,help to compare each income and expense item to the total business income.
The relationship between the expense items and the revenue items is critical in helping businesses become more profitable.
For example: If we are able to increase revenue without increasing certain expenses the business will become more profitable.
Income statements are used to show the gross income, expenses, and net income. Depending the nature of the business the cost of sales (a subtotal of gross profit after direct expenses of sales) may be applicable. Through a careful analysis, they can help reveal ways to imporve your business.
Every business needs to be analyzed carefully in order to both grow and maintain growth successfully. Here at Sorge CPA we offer to help you plan in a way that allows you to expect greater profit margins and overall business health. The profit planning process should be done after tax season to allow for a clear understanding of what is happening within the business. Here is our process.
Review the income statement and balance sheet. This helps to determine the gross profit margin and overhead costs.
Calculate sales needed to reach net income goals. Using the historical information allows us to create appropriate sales goals for you.
State the sales goal. This can be in annual or monthly terms depending on the type of business and the seasonal sales that may occur.
Analyze the gross profit margin for potential improvement. Based on historical income and cost relationships we analyze the gross profit margin in terms of improvement. Profit margin improvement is possible when unique core differentiators are identified and communicated to your customers in a way that they will understand the value of your product or service.
Consider line by line potential improvements. This is done by going through your balance sheet and income statement to see what changes could be made to improve profitability.
We consider profit improvement strategies and the investment required in order to implement these strategies. Is there a better way of completing a task(s) within your business? We can go over potential investments for your business and how they could help you profit more in the future.
Tasks are then assigned with deadlines. Ideally, profit planning sessions will occur multiple times a year in order to assess your business.
We want your profit margins to continue to grow year-round.Planning for this allows it to be an expectation rather than a variable.