Category: Newsletters

While parents have a variety of tax-advantaged ways to save for their children’s educational needs, they haven’t always enjoyed the same tax benefits when saving for the future of their special-needs children. The Achieving a Better Life Experience Act (ABLE) of 2014 provides such an opportunity.

ABLE Accounts

States may offer ABLE accounts, designed to pay for disability-related expenses, to people who become disabled before age 26. Account earnings are tax-deferred, but you make contributions to an ABLE account after tax. Qualified withdrawals — including support services, assistive technology, employment training, transportation, education and housing — are tax-free.

You and other loved ones can each contribute up to $15,000 gift-tax-free, and the recent tax law changes now allow disabled persons to also contribute to their ABLE accounts subject to certain limits. The first $100,000 of ABLE account assets are not considered part of the account beneficiary’s assets, a positive feature for those depending on Medicaid eligibility.

Tax Law Changes

A provision allowing ABLE account beneficiaries to qualify for the Saver’s Credit based on account contributions of up to $2,000 is new in 2018. Also new are limited rollovers to an ABLE account from 529 plans of the disabled beneficiary and loved ones.

A special needs trust, also known as a supplemental trust, is a legal document created by the family or guardians for the benefit of a disabled person who cannot manage their own finances. These trusts are designed to provide assets for the health and welfare of disabled individuals, often without jeopardizing government assistance such as Supplemental Security Income (SSI), Medicaid and other programs.

Understanding The Terms

A grantor establishes a trust and can name a trustee who manages the trust’s assets and makes distributions for the benefit of the beneficiary, or disabled person. Because the trust owns the assets — not the beneficiary — distributions made through the trust are not considered part of the disabled person’s assets and will not put that person’s government aid at risk.

There are a couple of different ways to set up this trust, including one that uses the beneficiary’s assets and pays back Medicaid disbursements after death, so work with an attorney experienced with Medicaid planning and trusts.

Jerry is the owner of an architectural firm. He is 50 years old and wants to work past normal retirement age, but he wants to continue saving for an eventual retirement. Jerry wants to know if he is still required to take required minimum distributions at age 70½ if he is working.

Federal law requires owners of retirement accounts like 401(k)s and IRAs to begin taking required minimum distributions (RMDs) beginning around age 70½. Jerry can delay RMDs from a 401(k) plan if he doesn’t own at least 5% of his company and it offers this option in its retirement plan while he continues to work.

If he owns more of the company and qualifies by income, Jerry might want to consider a Roth IRA, into which he makes after-tax contributions but tax-free withdrawals. Anyone with earned income (and who qualifies by income) is eligible to contribute to a Roth IRA, and it has no RMDs during its lifetime.

If he has a Roth 401(k) plan, Jerry might want to talk to his accounting professional to learn about rolling it over into a Roth IRA, since the latter doesn’t have RMDs.

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

If you’re like many business owners, you may wonder how to leverage your business to maximize your retirement savings efforts. A cash balance plan may be one option, especially for highly paid principals and key executives of small corporations, partnerships and LLCs.

What Is It?

A cash balance plan offers a specific retirement benefit in the form of a lump sum paid for by the employer. The exact benefit is due upon a participant’s retirement. Employees — owners count as employees — have the option to convert their balances to lifetime annuities or take the lump sum. In contrast, traditional defined benefit plans must offer a guaranteed series of payments that last a lifetime.

Either way, a defined benefit plan puts the onus on employers to deliver the eventual retirement benefit, regardless of investment performance, while the performance of a defined contribution plan depends solely on employees, who may or may not receive contributions from their employers. Because investment performance is a factor in a defined contribution plan, the eventual benefit cannot be defined.

Pros And Cons

Cash balance plans aren’t for everyone, but they can be advantageous for those seeking a larger benefit. Tax-deductible contribution limits are higher than for 401(k) plans and they rise with age, so more experienced employees stand to benefit from this feature. Benefits are also guaranteed and protected by the Pension Benefit Guaranty Corporation, subject to limits.

These plans are not inexpensive, and they must be audited annually. Cash balance plans must also fully vest all eligible employees after three years. However, a cash balance plan can help owners build a bigger retirement balance while attracting qualified workers. Talk to an experienced retirement plan specialist to learn more.

When it comes to records, some are more important to keep than others. If you own a business, here is a look at some records you might want to hold on to for a while.

Tax Records

Keep documents that provide a record of your gross receipts, including credit card and bank statements, cash register tapes and invoices, at least seven years after your business is sold. You will also want a record of money that leaves your business, as proven by 1099 forms, checks and credit card receipts for business expenses, receipts for sales and employment taxes and more.

Assets

If you eventually sell your business and want a record of how much you bought your business for (or put into it from scratch), keeping a record of it will be important. Also keep cancelled checks and other proof of purchases you may depreciate on your tax return and deductions taken for casualty losses.

No one likes to lose money, but the good news is that certain investment losses may be tax-deductible, so this is a good time of year to get an idea about how your investments are performing.

Know The Difference

Not all investment losses qualify for a federal tax deduction. First, you realize a capital gain or loss only by selling the investment. A paper loss on an investment that you continue to hold is not considered a loss for tax purposes, just as a paper gain isn’t a taxable event until you realize gains by selling the investment.

When you realize investment losses, offset them with investment gains. For example, let’s say you sell some investment losers for a $5,000 loss in 2018. You know this by subtracting what you sold the investment for from what you paid for it, called the basis. Then you sell a few winning investments that give you $4,000 in taxable gains. Subtract your loss from your gain, and you get a total loss, in this case, of $1,000.

Capital Gains Limit

Not all capital gains and losses are treated the same. Long-term capital gains are on investments you hold for at least a year, while short-term investment results are realized when you sell an investment you owned for a shorter time period.

You also need to be aware of the annual $3,000 capital loss deduction limit. Losses over this amount may be carried forward to the next year’s tax return.

Be Careful

Work with your accounting professional to make sure you can take advantage of tax-loss harvesting, as well as any other tax break the IRS offers. Also, some investments that are temporary losers may become long-term winners, so keep your long-term investing goals in mind before deciding whether to sell any investment.

Tax Harvesting – no one likes to lose money, but certain investment losses may be tax deductible.

How Long Is Enough? – a look at record retention.

A Balanced Approach To Retirement – to leverage your business to maximize your retirement savings efforts.

Client Profile – minimum distributions from your retirement plan.

A Trust For Disabled Individuals – a legal document for the benefit of a disabled person who cannot manage their own finances.

Special Needs, Special Savings – the Achieving a Better Life Experience Act.

Questions And Answers

Short Bits

Fewer Americans Receive Guaranteed Income

Just as more Americans are entering their retirement years, the number of Americans who get guaranteed retirement income is shrinking. According to the IRS, the number of tax returns reporting pension or annuity income fell from 28.4 million in 2015 to 28.05 million in 2016, a 1.2% drop. Although the number of people receiving this income fell, total income from these sources increased 0.4%.

Unemployment Is Down, But Hourly Wages Are Up

As of May, the unemployment rate fell to a low 3.8%, as reported by the Bureau of Labor Statistics. May saw 223,000 new jobs, and average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $26.92. Average hourly earnings since May 2017 increased by 71 cents, or 2.7%.

New Medicare Cards

Starting in April, the Centers for Medicare & Medicaid Services (CMS) began rolling out new Medicare cards with unique numbers, replacing cards that used Social Security numbers as identifiers. This is expected to reduce the chances of identity theft. If you haven’t received your card yet or have questions, contact Medicare at 1-800-MEDICARE (1-800-633-4227).

Credit Freeze Law Begins This Month

Starting September 22, you may obtain a free credit freeze, thanks to a new federal law. You’ll also be able to unfreeze your credit at no charge, and put a freeze on a minor child’s credit. Previously, states allowed credit reporting companies to charge customers for these services. A credit freeze can prevent identity thieves from opening new accounts in your name.

Question:

With job competition keen, I’m considering hiring someone I can train. Are there tax breaks for that?

Answer:

Your business receives a tax deduction for educational assistance and training expenses given to employees. In addition, your business may receive the Work Opportunity Tax Credit if it hires someone who was long-term unemployed, receiving food stamps, is an ex-felon, a disabled veteran or other classifications of potential employees. The Work Opportunity Tax Credit is first figured on Form 5884 after requesting certification with IRS Form 8850, and then becomes a part of the general business credit claimed on Form 3800, General Business Credit. Talk to your tax professional to learn more.

Question:

I am planning to sell my home and will move into a rental property. Will I owe taxes on my profit?

Answer:

The answer depends on how much and for how long. A single person may exclude up to $250,000 of profit ($500,000 for couples filing jointly) on the sale of a primary residence. To qualify, you must have owned and lived in the home for at least two of the preceding five years. You can use this tax exclusion as many times as you want, but not within two years of each other.

When you retire, you might draw income from a variety of sources. Which come first and how will taxes play a part? Here’s a look:

Tax-Free Income

If you contributed to a Roth IRA (or Roth 401(k) plan), your forward thinking will result in a delightful retirement reality – tax-free income. If you expect you’ll tap all of your retirement income sources, this may be your first choice when drawing income. This lets your other tax-deferred income continue to grow. If you have some wealth, you might tap your Roth last with the remainder going to heirs as a future financial legacy.

Tax-Deferred Income

Some experts recommend retirees let their tax-deferred investments continue to grow for as long as possible. Because of minimum distribution rules, this is typically until age 70-1/2 when withdrawals must begin. Beware, however, of leaving so much for later that you trigger a higher tax bracket on eventual distributions.

Taxable Income

If you trade investments outside of a retirement account, own individual municipal bonds or bank CDs, or continue to work, you likely pay taxes annually. You might use all or a portion of taxable income early on, leaving other investments until later. Talk to your tax professional to learn more.