Category: Newsletters

Before hurricanes, tornadoes and floods make summer news, take some time to create or review a disaster plan for your business.

DISASTER SEASON

Depending on where you’re located, chances are bad weather will disrupt your business. Coastal communities will want to keep an eye out for windstorms, as they should every hurricane and tornado season.

According to a forecast issued in early April by Colorado State University’s Department of Atmospheric Science, we can expect to see 13 named storms in the Atlantic basin in 2019. They predict five hurricanes and two major hurricanes. Tornadoes are typically less common in summer, but often develop around hurricanes.

Because heavy rain almost always accompanies damaging winds, floods are another possible peril. You will need to establish an emergency plan, that includes a strategy for evacuation, for your business and, most of all, your employees.

PROTECT YOURSELF

Once you take the steps necessary to protect life, you can plan ahead to protect your property and your business. Having an offsite computer data backup at a physical location or in the cloud is important, as is having a plan to move and protect important papers.

You will want to work with an insurance professional to ensure you have protection that covers financial loss. This includes not only property and casualty coverage, but also flood and business interruption insurance. The latter is crucial because you can experience lost sales after a disaster, even if your company has escaped most of the damage.

Laura is nearing her planned retirement at age 66 and she is considering cashing in her entire 401(k) plan in one lump sum. What are the pros and cons of taking this money all at once?

If Laura needs the money for medical or other emergencies, a lump sum may make sense. Otherwise, she will lose potential tax-deferral benefits unless she puts the funds back into another tax-deferred account within a short time period.

Another potential disadvantage is how a lump sum distribution can create a larger tax bill. The larger the lump sum, the greater the chance she will move into higher state and federal income tax brackets. Also, Laura will pay more for Medicare Part B if her income for the year exceeds a certain level. In 2019, taxpayers pay $135.50 for Part B insurance if they file tax returns jointly and their income is $170,000 or less. The threshold for taxpayers filing individually is $85,000, so a large lump sum can easily put her income above these thresholds.

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

If you are an income investor, you’ll want to understand what yield curve, inversion and laddering are all about. Here’s why:

WHY THEY MATTER

When business print publications and websites breathlessly reported that the yield curve had inverted earlier this year, many casual investors wondered what this was all about. Inversion happens when short-term U.S. Treasury securities pay more than 30-year Treasury bonds do. Typically, bonds with longer maturities yield higher returns than shorter-term bonds and notes, rewarding investors for their patience.

Think of a normal yield curve’s shape as looking like the left half of a lowercase letter “n.” The lower end on the left signifies short-term, lower-yielding bonds, and it works its way up and to the right for longer-term securities. This is often a sign of a healthy economy. When the curve inverts, it looks like the left half of a letter “u.”

An inverted yield curve often signifies a troubled economy ahead. In unsettled times, investors from around the world, including governments, flock to buy 30-year Treasury bonds because they are backed by the full faith of the U.S. government. Higher demand drives down yields, bringing them to the same level as or below those of two-year Treasury securities, whose yields may rise because of an uncertain short-term economy.

LADDERING

Income investors who worry about interest risk and those seeking to provide a predictable source of income from fixed-income securities often use laddering in an attempt to minimize risk and ensure consistent liquidity.

A fixed-income ladder can include individual bonds, bond mutual funds, bank CDs and even fixed annuities. A typical laddered portfolio’s maturities will be spread out, thus ensuring steady income over time. Talk to your financial professional to learn more.

The IRS and Treasury Department issued proposed regulations that would ensure no clawback of large gifts if the federal estate tax exemption reverts back to 2017 levels. This would occur if Congress doesn’t make the current inflation-adjusted level permanent before its scheduled reversion in 2026.

Fears Calmed

The basic exclusion amount, which the new tax law doubled in 2017, was among the many provisions not made permanent, so taxpayers were concerned that their heirs would be on the hook for the difference if the tax provision reverted back to 2017 levels.

Exclusion Doubled

The new tax law increased the threshold for individuals from $5 million to $10 million for tax years 2018 through 2025, indexed to inflation. The inflation-adjusted threshold is $11.4 million in 2019. If you have concerns about estate taxes, see a tax pro.

The dog days of summer are a great time to review your finances and make the adjustments needed to ensure a tax-efficient year. Here are some strategies you might consider to minimize taxes:

RETIREMENT CONTRIBUTIONS

The IRS classifies many retirement plans as “qualified,” meaning there are certain tax advantages to investing in them. Contributions made to a 401(k), SIMPLE or Simplified Employee Pension (SEP) plan are taken from your check pre-tax, meaning they are tax-deferred. If, for example, you’re in the 32% combined income bracket, you pay $320 of income tax for every $1,000 earned and not contributed to the plan. Same goes for a traditional IRA if you qualify by income. And potential growth is also tax-deferred in all of these retirement plans.

HEALTH SAVINGS ACCOUNT

If you have a Health Savings Account and you don’t max contributions, you’re missing a good deal. HSA contributions, potential growth and withdrawals made for qualified medical expenses are tax-free. You can continue to take distributions from this triple-tax-free savings vehicle in retirement, too.

RETIREMENT DISTRIBUTIONS

If you are retired and drawing income from multiple sources, you’ll want to do so in the most tax-efficient way. As long as you keep in mind that distributions from qualified plans must begin by age 70 1/2, it often makes sense to first withdraw money from taxable investments and accounts in order to let money in qualified plans continue to potentially build tax-free. Incidentally, a Roth IRA doesn’t require minimum distributions, so you can let that grow as long as you want.

OTHER TAX IMPACTS

You can’t deduct 529 plan contributions on your federal return, but many states let you deduct them on state returns. On either level, earnings grow tax-deferred and withdrawals made to pay qualified education expenses are tax-free. If you’re considering buying a first home, mortgage interest and real estate taxes are deductible up to certain limits.

Time For A Tax Tune-Up – review your finances and make the adjustments needed to ensure a tax-efficient year.

Insights And Tips

Terms Income Investors Should Know – What are yield curve, inversion and laddering all about?

Client Profile – What are the pros and cons to taking a lump sum from your 401(k) when you retire?

Disaster Plans For Small Businesses – Take some time to create or review a disaster plan for your business.

How To Set Up An Internship Program – Setting up an internship program may help both you business and interns who seek valuable job experience.

Questions And Answers

Short Bits

MORE CONFIDENT.

The Conference Board Consumer Confidence Index® jumped to 131.4 in February, up from 121.7 in January. Both numbers, indicating that consumers expect the economy to keep expanding, are relatively high. In other Conference Board surveys, the organization found that consumers’ assessment of current business and labor market conditions and their short-term outlook for income, business and labor market conditions also improved.

MORE EDUCATED.

Americans are getting more education. According to the U.S. Census Bureau’s Current Population Survey, the number of people at least age 25 with a Master’s as their highest degree doubled to 21 million from 2000 to 2018. The number of doctoral degree holders also more than doubled to 4.5 million during the same period. In 2018, 13.1% of aults held advanced degrees.

MORE MOBILE.

The U.S. may be near full employment, but employee tenure remains tenuous. The Employee Benefit Research Institute’s analysis of U.S. Census Bureau data from the Current Population Survey (CPS) found that the median tenure of all wage and salary workers aged 25 or older stayed at about five years. Men’s tenure, however, slipped, while women increased their median tenure, according to the EBRI analysis.

MORE VULNERABLE.

The Consumer Financial Protection Bureau released a report showing a dramatic increase in financial crimes against the elderly. According to the Bureau, reported incidents of elder financial exploitation exploded to more than 180,000 cases from 2013 to 2017, totaling $6 billion. The Bureau notes that many more incidents are likely not reported. Adults from age 70 to 79 had the highest average monetary loss – $45,300.

Question:

My income last year was too high to take the full qualified business deduction. What can I do to come closer to getting the full deduction next year?

Answer:

The qualified business deduction (QBI), also known as a Section 199(a) deduction, is available to owners of businesses whose tax structures are pass-through entities. This deduction was subject to limits for couples filing taxes jointly with taxable income over $315,000 and for all others with taxable income over $157,500 in 2018.

If your business income fluctuates and you’re close to the threshold, you might push sales into next year to lower this year’s income. You might also open a SEP-IRA, SIMPLE plan or 401(k) plan, where contributions are made pre-tax, lowering your taxable income.

Question:

With all of the new tax rules, can I still deduct the interest I pay on student loans?

Answer:

It depends on the amount of your interest payments and your income. Beginning in 2019, you can deduct up to 2,500 in qualified student loan interest if you meet income requirements. Take the full deduction if you are single or head of a household and have a modified adjusted gross income (MAGI) under $70,000, or if you are married and filing taxes jointly with a combined MAGI of less than $140,000. You can take a partial deduction up to $85,000 and $170,000, respectively.

A financial audit isn’t the only type of helpful review. Individuals can conduct their own insurance review, taking a comprehensive look at the financial protection they need in various areas of their lives.

WHEN YOU’RE YOUNG

Your insurance needs begin at an early age when you get a driver’s license. Nearly every state requires car insurance. Those that don’t often require financial restitution for those harmed by the driver at fault. That will come either from the driver or the driver’s insurance company. Considering the potentially high costs involved, it’s easy to see how auto liability insurance is typically the choice.

Then, as you build a career and a family, other insurance considerations come into focus. Life insurance is a given, although a long-term disability that prevents you from working (and earning a living) is many times more likely than death at younger ages. Disability insurance offers income protection in that event.

LATER YEARS

As you age your insurance needs may change, such as for financial protection in the event you need long term care. Your life insurance needs may lessen as you grow older, or they may be different. You may, for example, use life insurance to equalize your estate or leave a financial legacy. If you have questions, talk to an insurance professional.

Publicly traded companies are used to undergoing financial audits — it’s a requirement for most of them – but privately held companies can generally keep their finances private. However, lenders and some insurance companies may require you to have an audit performed. And, in any event, an audit can help owners pinpoint problem areas and identify solutions that can improve their company’s prospects.

A COMPLETE ANALYSIS

One advantage of conducting a private company audit is the depth of findings such an exercise can identify. While a financial audit won’t identify or offer an opinion on every internal control process, it may uncover vulnerabilities to embezzlement or significant errors in financial reporting.

FUTURE PROSPECTS

If expansion plans require a cash infusion or complex insurance arrangements are on the horizon, your company will likely need to show an audited financial statement. The statement should follow standards specified in the Financial Reporting Framework for Small- and Medium- Sized Entities, issued by the American Institute of CPAs (AICPA).

This framework provides a detailed approach to providing the information stakeholders may require, and can help you run your company better. Talk to an accounting professional to learn more.