Category: Newsletters

Many businesses, from farms and ski resorts to surf shops and landscapers, depend on seasonal employees to keep them successful. Seasonal businesses come with added risks because they don’t have the entire year to make up for a bad month or two.

MAKE A PLAN

If you own a seasonal business, you can limit some risks by taking precautions. A few tips that can keep you humming through the slow times:

BRANCH OUT

If, for example, your business is dependent on good weather, consider adding another facet to your business that isn’t weather-dependent.

FOSTER RELATIONSHIPS

It’s not easy having to hire an entire workforce each year. And many seasonal businesses hire teens and young adults, who may not be as dependable as you want. Why not try semi-retired people who look to work only when your business operates?

TARGET-MARKET

Learn where your customers come from and whether they get their information via your website or social media, and then target your marketing efforts at them through these platforms.

KNOW YOUR NUMBERS

When your business revenue isn’t spread out, you need to pay extra attention to your income and expenses. That’s where a tax professional can help. You’ll also want to make sure your business is adequately insured.

Rafael wants to offer employees his company’s public stock as one of the investments in his firm’s employer-sponsored 401(k) plan. He heard there are limits to how much company stock employees can buy, but I told him there weren’t. Who’s right?

You are right. There are no limits to how much participants can invest in their company stock through a 401(k) plan, but his firm still must prove that it is a prudent selection. For that, he may want to bring in a fiduciary that can provide an educated opinion on the stock’s appropriateness.

One alternative Rafael might consider to potentially avoid liability is to carve out the company stock from the 401(k) plan and offer it through an employee stock purchase plan (ESPP), a free-standing program separate from the 401(k). Employers can offer their company stock separately in an ESPP at a discount (subject to limits), then employees who sell the stock are responsible for paying taxes on the discount and any gain. The ESPP doesn’t have the same tax benefits as a 401(k) plan.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.

Like all good things, investing requires moderation. For example, owning too many shares of your company’s publicly traded stock in your 401(k) plan can hurt your retirement income prospects. Enron employees learned this painful truth in the early 2000s when the company’s stock, in which many of them were heavily invested, became worthless.

CAUTION AHEAD

Since then, companies have increasingly avoided offering their own stock to 401(k) plan participants. While employers can’t aggressively tout their own stocks, they can include them as an investment option or use them to match employee contributions. This can add up over time.

Owning too much stock in any single company is a lesson in how not to diversify. So it makes sense to monitor your 401(k) portfolio to make sure your holdings in company stock are appropriate for your time horizon, risk appetite and financial goals. Regularly rebalancing your portfolio to ensure diversification will help limit your risk.

DIVERSIFICATION MATTERS

Dividing your assets appropriately among the three major asset classes — stocks, bonds and cash investments — is the foundation for any investment strategy. Typically, younger 401(k) participants have the time to potentially outlast market volatility, so they can invest more aggressively. The closer you get to retirement, the more conservative your investment strategy should be.

Even within asset classes, you will diversify further with a mix of investments — or mutual funds that do the same. You can, for example, own domestic and international securities, fixed income investments that mature in anywhere from months to 30 years, and companies by capitalization (small-cap, mid-cap, large-cap). With so many choices, don’t let company stock dominate your holdings.

If you don’t want to experience an IRS audit of your tax returns, you can reduce your chances by doing the following:

Report Your Income Accurately –

If you earn income from which taxes aren’t withheld and don’t report it, the IRS can match your numbers to 1099 forms business owners must submit.

Don’t Stretch the Truth –

Keep receipts for every dime of your charitable and other deductions.

Don’t Deduct a Home Office –

If you work from home and use your home office for anything other than work, you can’t deduct it.

Be Honest –

There’s making an honest mistake, and then there is purposely being dishonest. Understandably, the latter is a more serious offense.

Be Thorough –

If you mail in the returns from your tax preparer, don’t forget to sign and date all necessary pages. If you have any questions, don’t hesitate to ask your tax professional.

If you haven’t filed your 2018 tax return yet, double-check it to make sure you’ve taken every tax break you can. New tax rules are in effect, so you may find deductions you overlooked.

CONTRIBUTE TO AN IRA

You can open and contribute up to $5,500 (plus $1,000 if at least age 50) for tax year 2018 up to your tax filing deadline, potentially making this the biggest last-minute tax break you can find. Anyone with earned income can open an IRA, but you’ll need to meet income qualifications to gain the deduction. Regardless of income, your potential investment gains are tax-deferred. Income limits are especially generous for joint filers when one isn’t covered by a retirement plan at work.

DEPENDENTS

If you provide support to a person who is not your child, you could claim a $500 credit per qualifying dependent. If you support children age 17 and younger and your modified adjusted gross income is less than $400,000 (if married filing jointly) or $200,000 (for other tax filers), you qualify for up to a $2,000 tax credit. You deduct tax credits from the taxes you owe, while deductions reduce your taxable income.

INVESTMENT LOSSES

Last year’s lackluster stock market could offer a consolation prize. If you itemize and your net investment income was negative, you can deduct up to $3,000 of net capital losses if married filing jointly or $1,500 if married filing separately when you meet generous new income limits.

AND THERE’S MORE

You can deduct medical expenses exceeding 7.5% of your adjusted gross income for 2018. This becomes less generous in 2019, when the percentage rises to 10%. Student loan interest, tuition and fees could also be deductible if you meet requirements. For these tax breaks and more, be sure to consult with your tax professional.

Last-Minute Tax Breaks – new tax rules are in effect, so you may find deductions you overlooked.

Insights And Tips

Too Much Of A Good Thing – like all good things, investing requires moderation.

Client Profile – are there limits to how much company stock an employee can purchase in their 401(k)?

Reducing Seasonal Business Risk – seasonal businesses come with added risks.

Your Business My Owe Sales Tax – a handful of court decisions have sided with states that want to levy sales taxes on online purchases.

Questions And Answers

Short Bits

CONSUMER EXPECTATIONS MIXED.

The Federal Reserve Bank of New York’s Center for Microeconomic Data conducts a monthly survey of consumer expectations for the future. It found that in November 2018, for the eighth straight month, consumers expected an overall 3% inflation rate a year later. However, consumer expectations for home prices decreased 0.2% to 3.1%, and earnings’ growth expectations fell for the second straight month to 2.0%, from 2.5% in October.

PRODUCTIVITY RISES.

The Bureau of Labor Statistics reports that non-farm labor productivity rose 1.3% from the third quarter of 2017 through the same period in 2018. This reflects a combination of hours and real productivity growth. The increase includes a 2.3% increase in hours worked and a 3.7% increase in output.

JOB MARKET TIGHTENS.

In September of 2018 there were more job openings than unemployed people. There were 7 million job openings at the close of September 2018, while there were only about 6.1 million unemployed people. During the first eleven months of 2018 the number of unemployed persons per job opening ranged from 0.9 to 1.1. This is a dramatic drop from July 2009, when there were 6.6 unemployed persons per job opening.

WE LIKE OURS.

Healthcare is increasingly expensive and viewed by many Americans less positively on a national level. However, most people like their own healthcare and insurance coverage. These are the findings of a November 2018 Gallup Poll of 1,037 adult Americans. Eight of 10 survey respondents rated their healthcare quality as excellent or good, and 69% gave their coverage the same grades. Just 55% viewed healthcare in general positively, and only one in three thought positively about coverage nationally.

QUESTION:

I have a life insurance policy that names my son as beneficiary. Do I also need to include this policy in my will?

ANSWER:

It wouldn’t hurt anything, but no you don’t. That’s because life insurance beneficiary designations take priority over terms of a will, even if they differ. In fact, the same holds true for the beneficiary designations of retirement plans and annuities. This is a good time to remind you that you should keep all your beneficiary and contingent beneficiary designations up to date. If you’re interested in your beneficiaries getting the most from the benefit without triggering estate taxes or you want to avoid the public glare of probate, you might consider putting the life insurance policy in a trust.

QUESTION:

My wife and I had investment losses in 2018 and would like to deduct them on my tax return. How much am I allowed to deduct for last year and going forward?

ANSWER:

When your capital losses exceed capital gains, you can deduct the difference as a loss, up to $3,000 per year, or $1,500 if married and filing separate returns. You may also carry over excess losses to the next tax year. Remember that long-term capital gains or losses are those on investments owned for more than one year.

If you own a business, you’ll need to explore the variety of employer-provided retirement plans before choosing one. Some allow participants to make contributions that are deductible from taxable income, timely during this tax season. Here’s a summary of some of them:

SIMPLIFIED EMPLOYEE PENSION (SEP)

Ideal for solo entrepreneurs and very small companies, a SEP-IRA features large contribution limits and flexible rules. Employers can contribute to a SEP and credit deductions against their 2018 taxable income up to the filing deadline, plus extensions.

401(K) AND MORE

Employers with 401(k), 403(b) and most 457 plans will see contribution limits increase. Growing companies looking for a tax-advantaged way to provide a retirement plan for their employees might consider these plans, but only for 2019 and beyond. You can’t make past-year contributions to these plans.

REALLY SIMPLE

SIMPLE IRAs are potentially less complicated to understand and less costly to set up. Employers make either matching (up to 3% of compensation) or nonelective contributions (2%), with employee salary deferral limits lower than most plans. Any employee who earned at least $5,000 during any two calendar years and is reasonably expected to earn $5,000 in the current calendar year must be eligible. Companies can fund the plan up to their tax filing deadlines, but employees can’t make past-year contributions.

If you aren’t saving enough for the future, the simplest way to increase your retirement plan balance is to increase contributions by 1%. If you’re considering deferring 3% of a $50,000 salary, you would contribute $1,500 annually. Over 20 years at 6% compounded daily, your 3% contribution, which is $125 monthly, would have grown from zero to $57,994.74.

THE 1% DIFFERENCE

Now increase your savings from 3% to 4% of $50,000, about $167 per month. A $42 dollar monthly increase will grow your balance to $77,481 — an almost $20,000 increase. Add another 1% or increase your timeframe and you’ll see similarly significant results.

For example, 4% over 30 years using the same criteria would grow your account to $168,628.

Try it yourself by clicking on the compound interest calculator at www.investor.gov or, better yet, talk to a financial professional to learn more.