Monthly Archives: December 2015

January Tax Tips

Congress passes “extenders” legislation reviving expired tax breaks for 2015

2015Many valuable tax breaks expired December 31, 2014. For them to be available for 2015, Congress had to pass legislation extending them — which it now has done, with the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law by the President on December 18. The PATH Act not only revives expired breaks for 2015 but also makes many breaks permanent, generally extends the rest through either 2016 or 2019, and enhances some breaks.

Here is a sampling of extended breaks that may benefit you or your business:

  • The deduction for state and local sales taxes in lieu of state and local income taxes (extended permanently),
  • tax-free IRA distributions to charities (extended permanently),
  • bonus depreciation (extended through 2019, but with reduced benefits for 2018 and 2019),
  • enhanced Section 179 expensing (extended permanently and further enhanced beginning in 2016),
  • accelerated depreciation for qualified leasehold-improvement, restaurant and retail improvement property (extended permanently),
  • the research tax credit (extended permanently and enhanced beginning in 2016),
  • the Work Opportunity credit (extended through 2019 and enhanced beginning in 2016), and
  • various energy-related tax incentives (extended through 2016).

Please contact us for more information on these and other breaks under the PATH Act. Keep in mind that, for you to take maximum advantage of certain extended breaks on your 2015 tax return, quick action may be required.

Protect your deduction: Verify that a charity is eligible to receive tax-deductible contributions before you donate

charityDonations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. But before you donate, it’s critical to make sure the charity you’re considering is indeed a qualified charity — that it’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Also, with the 2016 presidential election heating up, it’s important to remember that political donations aren’t tax-deductible.

Of course, additional rules affect your charitable deductions, so please contact us if you have questions about whether a donation you’re planning will be fully deductible. We can also provide ideas for maximizing the tax benefits of your charitable giving.

Contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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The Pros & Cons of Roth IRA Conversions

December Tax Tips

 

© 2015

The Pros & Cons of Roth IRA Conversions

What are the potential benefits? What are the drawbacks?

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2If you own a traditional IRA, perhaps you have thought about converting it to a Roth IRA. Going Roth makes sense for some traditional IRA owners, but not all.

Why go Roth? There is an assumption behind every Roth IRA conversion – a belief that income tax rates will be higher in future years than they are today. If you think that will happen, then you may be compelled to go Roth. After all, once you are age 59½ and have owned a Roth IRA for five years (i.e., once five full years have passed since the conversion), withdrawals from the IRA are tax-free.(1)

Additionally, you never have to make mandatory withdrawals from a Roth IRA, and you can contribute to a Roth IRA as long as you live, unless you lack earned income or make too much money to do so.(2,3)

For 2016, the contribution limits are $132,000 for single filers and $194,000 for joint filers and qualifying widow(er)s, with phase-outs respectively kicking in at $117,000 and $184,000. (These numbers represent modified adjusted gross income.)(4)

While you may make too much to contribute to a Roth IRA, anyone may convert a traditional IRA to a Roth. Imagine never having to draw down your IRA each year. Imagine having a reservoir of tax-free income for retirement (provided you follow IRS rules). Imagine the possibility of those assets passing tax-free to your heirs. Sounds great, right? It certainly does – but the question is, can you handle the taxes that would result from a Roth conversion?

Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.

A Roth IRA conversion is a taxable event. When you convert a traditional IRA (which is funded with pre-tax dollars) into a Roth IRA (which is funded with after-tax dollars), all the pretax contributions and earnings for the former traditional IRA become taxable. When you add the taxable income from the conversion into your total for a given year, you could find yourself in a higher tax bracket.(2)

If you are nearing retirement age, going Roth may not be worth it. If you convert a sizable traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion. Model scenarios considering “what ifs” should be mapped out.

In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.

However, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.

If you aren’t sure which argument to believe, it may be reassuring to know that you can go Roth without converting your whole IRA.

You could do a partial conversion. Is your traditional IRA sizable? You could make multiple partial Roth conversions through the years. This could be a good idea if you are in one of the lower tax brackets and like to itemize deductions.(2)

You could even undo the conversion. It is possible to “re-characterize” (that is, reverse) Roth IRA conversions. If a newly minted Roth IRA loses value due to poor market performance, you may want to do it. The IRS gives you until October 15 of the year following the initial conversion to “reconvert’’ the Roth back into a traditional IRA and avoid the related tax liability.(5)

You could “have it both ways”. As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.

If you do go Roth, your heirs might receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. (You may have heard of the “stretch IRA” strategy, which can theoretically keep IRA assets growing for generations.) If the rules are followed, Roth IRA heirs can end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, distributions of inherited assets from a traditional IRA are routinely taxed.(2)

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – bankrate.com/finance/retirement/roth-ira-conversion-subject-to-5-year-rule.aspx [10/30/14]
2 – kiplinger.com/article/investing/T046-C000-S002-reap-the-rewards-of-a-roth-ira.html [12/15]
3 – irs.gov/Retirement-Plans/Roth-IRAs [10/23/15]
4 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2016 [10/23/15]
5 – thestreet.com/story/13321349/1/roth-recharacterization-how-to-maneuver-your-ira-before-oct-15.html [10/13/15]

 

Protect your business with good internal controls

The cost of fraud is too high to ignore

By:  Mike Klein, Partner

MikeKlein9848The 2013 Global Fraud Report survey reports 70 percent of companies suffered from at least one type of fraud, up from 61 percent in the previous poll. Businesses reported physical assets or stock theft increased four percent, internal financial fraud or theft up four percent, and vendor, supplier and procurement fraud up seven percent in just one year. This is a trend business leaders cannot ignore.

Your best defense against fraud is to implement effective internal controls. Your CPA is your best resource to test your internal controls and suggest strategies to protect your business. However, keep in mind an audit doesn’t specifically focus on fraud defense and detection, but rather determines whether your financial reporting meets Generally Accepted Accounting Principles (GAAP) standards. Testing your internal controls is not a requirement in most audits of non-publically traded businesses.

To gain further insights into how your controls are operating, consider having your CPA firm perform agreed-upon procedures to test the operating effectiveness of your controls. Your CPA firm can also help you perform a gap analysis to identify areas of weakness that make your organization susceptible to fraud.

If you suspect you are a victim of fraud, consider engaging a forensic accountant. He or she can conduct an actual investigation to determine if fraud has occurred and help you quantify the amount.

Following are practices you should have in place right now to protect against fraud:

Draft and implement an ethics policy. When employees know such a policy exists, and management is following it, they’ll also know attempted fraud will be much riskier. Equally important to a strong ethical position is a clear delineation of internal control responsibilities.

Spread risk-intensive tasks among several employees. Authorization duties (check signing or releasing a wire transfer), custody (access to the blank check stock or the ability to establish a wire transfer), and recordkeeping (recording transactions in the accounting system) should be separated so one individual cannot complete a transaction from start to finish. For many businesses, proper segregation of duties can be difficult to achieve.  In these instances, company owners should consider having the unopened bank statements delivered to them directly. The owners should then review the bank statements and the check images on-line for any transactions appearing unusual, and follow up to understand them.

For example: controls over your vendor list and payments. Implementing controls such as requiring vendors to sign a code of conduct annually, ensuring the vendor set-up process incorporates segregation of duties and implementing check validation of select vendor payments can help deter and detect fraudulent activities.  Business owners should also review the vendor list at least annually and question any vendors on the list that seem unusual.  Each review of the vendor list may help to uncover potential instances of vendor-related fraud, highlight opportunities for strengthening controls around vendor-related files, and mitigate future exposures.

Secure your facility. Lock up valuable assets. Invest in video monitoring systems, time clocks for tracking the work of hourly employees, and alarm systems and use them. Implement IT security policies such as passwords and server and software authentication to prevent fraudsters from stealing or vandalizing critical information (or money and products).

Know what you have and what you don’t. Scrupulously maintain your financial statements and regularly review them for suspicious budget-to-actual variances. Create invoices unique to your company and sufficiently informative so they are difficult to fabricate. And use pre-numbered, consecutive documents as a quick indicator if things are out of order.

If you suspect fraud, address it. Contact an accounting firm specializing in fraud services to investigate. But don’t inform your employees. The element of surprise can be helpful. When employees don’t know when the process is scheduled to begin, they can’t preemptively fix mistakes or, in worst cases, cover their tracks after committing fraud.

For an internal control assessment to help protect your business from fraud contact Mike Klein, CPA, MBA, Ciuni & Panichi, Inc., 216-765-6943 mklein@cp-advisors.com or for more information click here.

December Tax Tips

Avoid a 50% penalty:  Take retirement plan RMDs by December 31

RMDAfter you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs).

If you don’t comply — which usually requires taking the RMD by December 31 — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

So, should you withdraw more than the RMD? Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.

Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact the tax experts at Ciuni & Panichi, Inc.  – Jim Komos at jkomos@cp-advisors.com or 216.831.7171.

Don’t miss your opportunity to make 2015 annual exclusion gifts

tax giftRecently, the IRS released the 2016 annually adjusted amount for the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption: $5.45 million (up from $5.43 million in 2015). But even with the rising exemptions, annual exclusion gifts offer a valuable tax-saving opportunity.

The 2015 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. (The exclusion remains the same for 2016.)

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.

But you need to use your 2015 exclusion by December 31. The exclusion doesn’t carry over from year to year. For example, if you and your spouse don’t make annual exclusion gifts to your grandson this year, you can’t add $28,000 to your 2016 exclusions to make a $56,000 tax-free gift to him next year.

Questions about making annual exclusion gifts or other ways to transfer assets to the next generation while saving taxes? Contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171.
© 2015

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November Tax Tips

Social Security: The End of File and Suspend