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Succession Planning

Don’t fail to plan for what will happen to your business when you retire. Perhaps your partner wants to buy you out or you want to leave the business to heirs. If you’re planning to sell your business to outside investors, you’ll need to complete a valuation so everyone can agree on the business’s value. Include your consultation fees if the new owner needs assistance through the transition.

Regardless of how you plan to transition your business to new owners, consider how you’ll receive payment for your ownership. Will it be one lump sum payment or will you receive monthly payments? You need to structure your payout in a way that allows you to enjoy the standard of living you desire in retirement and minimize your taxes.

Your succession plan is not just for retirement. It’s also useful in the event you become ill, injured or worse. And remember that your succession plan isn’t something you create and file away. Situations change that may require a tweak to your plan, so review it annually.

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Taxes in Retirement

Retirement is something almost all of us look forward to. But have you considered how your retirement income will be taxed? Not all retirement income is taxed the same, so it is important that you understand the details.

SOCIAL SECURITY

If your total income is more than $25,000 for an individual or $32,000 for a married couple filing jointly, you must pay federal income taxes on your Social Security benefits. The tax rate is based on your total income from all sources, maxing out at the rate of 85%. Some states also tax social security income.

401(K) AND IRA WITHDRAWALS

Withdrawals from tax-deferred retirement accounts, such as a 401(k), are taxed as ordinary income. The taxability of a traditional IRA depends on how you treated your contributions before you retired. If you took a tax deduction in the years you contributed, your withdrawals are likely taxable.

Qualified withdrawals from a Roth IRA are non-taxable. Since your investment was made with after-tax dollars, you won’t be taxed again when you withdraw it. Although these accounts are long-term assets, they don’t enjoy capital gains treatment.

INVESTMENT INCOME

You’ll pay taxes on dividends, interest and capital gains just as you did before you retired. The length of time you held an asset before selling it will determine your capital gains tax rate. It can be as low as zero if your total income for the year isn’t high.

SELLING YOUR HOME

If you’ve downsized and sold your home, you may be able to avoid paying tax on the gain. If you lived in your home for two of the five years prior to the sale, you may be able to exclude up to $250,000 in gain. The rules are a little more complex if you rented your home out, so consult with your tax professional to determine if you have taxable gains.

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February 2021 ClientLine

Taxes in Retirement – not all retirement income is taxes the same, so it is important that you understand the details.

Succession Planning – don’t fail to plan for what will happen to your business when you retire.

The Cost of New Hires – be sure to understand the total cost of hiring help.

February 2021 Client Profile – will gift tax be owed on amounts given or received.

How Business Losses Affect Your Tax Return – how losses from the pandemic-induced economic slowdown affect your business tax return.

Is Your Hobby a Business or Is Your Business a Hobby?

February 2021 Questions and Answers

February 2021 Short Bits