Monthly Archives: July 2016

Three Mutual Fund Tax Hazards to Watch Out For

Tax and Your Mutual Funds

AMTInvesting in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these three tax hazards:

 

  1. High turnover rates. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates.  Turnover percent’s amount of the portfolio that is new on a year by year basis.  Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
  2. Earnings reinvestments. Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.  However, you may be on your own for investments made prior to 2012.)
  3. Capital gains distributions. Buying equity mutual fund shares late in the year can be costly tax-wise. Such funds often declare a large capital gains distribution at year end, which is a taxable event. If you own the shares on the distribution’s record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year — even if you reinvest the distribution.

If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, watch out for these hazards.

The best advice we can offer is, “Don’t go it alone.” Contact David M. Reape, CPA, at Ciuni & Panichi, Inc. to help you avoid unnecessary tax liabilities. Contact us at 216-831-7171 or dreape@cp-advisors.com.

 

College Funding Options

College Funding Options:  You can plan to meet the costs through a variety of methods.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2How can you cover your child’s future college costs? Saving early (and often) may be the key for most families. Here are some college savings vehicles to consider.

529 plans. Offered by states and some educational institutions, these plans let you save up to $14,000 per year for your child’s college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer you options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.1,2

While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.1

Grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.1

529 plans have been improved for 2016 with two additional features. One, you can now use 529 plan dollars to pay for computer hardware, software, and computer-related technology, as long as such purchases are qualified higher education expenses. Two, you can now reinvest any 529 plan distribution refunded to you by an eligible educational institution, as long as it goes back into the same 529 plan account. You have a 60-day period to do this from when you receive the refund.3

If you have a 529 plan and received such a refund at any time during January 1-December 18, 2015, you have until Tuesday, February 16, 2016 to put that money back into your 529 plan. If you meet that deadline, the distribution will not be seen as a non-qualified one by the IRS (i.e., fully taxable plus a 10% penalty).3

Coverdell ESAs. Single filers with adjusted gross income (AGI) of $95,000 or less and joint filers with AGI of $190,000 or less can pour up to $2,000 annually into these tax-advantaged accounts. While the annual contribution ceiling is much lower than that of a 529 plan, Coverdell ESAs have perks that 529 plans lack. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses. Coverdell ESAs offer a broader variety of investment options compared to many 529 plans, and plan fees are also commonly lower.4

Contributions to Coverdell ESAs aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are tax-free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30 (there is a 30-day grace period), or taxes and penalties will be incurred. Money from a Coverdell ESA may even be rolled over tax-free into a 529 plan (but 529 plan money may not be rolled over into a Coverdell ESA).2,4

UGMA & UTMA accounts. These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child reaches the “age of majority” (usually 18 or 21, as defined by state UGMA or UTMA law), he or she can use the money to pay for college. However, once that age is reached, that child can also use the money to pay for anything else.5

Cash value life insurance. If you have a “cash-rich” permanent life insurance policy, you can take a loan from (or even cash out) the policy to meet college costs. The principal portions of these loans are tax-exempt in most instances. Should you fail to repay the loan balance, the policy’s death benefit will be lower, however.6

Did you know that the value of a life insurance policy is not factored into a student’s financial aid calculation? That stands in contrast to 529 plan funds, which are categorized as a parental asset even if the child owns the plan.6

Imagine your child graduating from college debt-free. With the right kind of college planning, that may happen. Talk to a financial advisor today about these savings methods and others.

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

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. 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 neither a solicitation nor 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.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.
Citations.
1 – irs.gov/uac/529-Plans:-Questions-and-Answers [8/24/15]
2 – time.com/money/3149426/college-savings-esa-529-differences-financial-aid/ [8/21/14]
3 – figuide.com/new-benefits-for-529-plans.html [1/13/16]
4 – time.com/money/4102891/coverdell-529-education-college-savings-account/ [11/9/15]
5 – franklintempleton.com/investor/products/goals/education/ugma-utma-accounts?role=investor [2/3/16]
6 – investopedia.com/articles/personal-finance/102915/life-insurance-vs-529.asp [10/29/15]

Tax-smart Gifting Strategies to Consider Now

More Tax Savings Ideas

tax giftingIf your 2015 tax liability was higher than you’d hoped and you’re ready to transfer some assets to your loved ones, it’s time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall. Consider the following:

  • Gift appreciated or dividend-producing assets to loved ones eligible for the 0 percent rate. The 0 percent rate applies to both long-term gain and qualified dividends that would be taxed at 10 or 15 percent based on the taxpayer’s ordinary-income rate.
  • Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0 percent rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8 percent net investment income tax on dividends from the assets or any gains if you sold the assets.
  • Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.

If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too.

The best advice we can offer is, “Don’t go it alone.” Contact Tony Constantine, CPA at Ciuni & Panichi, Inc. today to explore tax strategies that will position you for a good tax season in 2017 and beyond at 216-831-7171 or tconstantine@cp-advisors.com.

Selling Your Business and Its Customers

How “selling” your customers can help you sell your business

ChuckCiuni-05lowmediumrWhen selling your business knowledge is key to achieving a successful transaction for all parties.  For many business buyers, expanding their customer base is a primary acquisition objective. Whether they acquire a close competitor or a company in a different market sector, most buyers hope that expanded revenues from new customers will justify the cost of their merger and/or acquisition transaction.

If you want to get top dollar for your company, you need to assess — and effectively market — your customer assets to potential buyers. A serious buyer will want to know that your customer base will help it increase penetration in its own market or break into new ones.

Hunger for new faces
In a 2015 KPMG survey, 35 percent of respondents said their primary reason for participating in a merger would be to expand their geographic reach or their customer base. To drill down to a specific sector, the National Association for Printing Leadership (the commercial printing industry’s trade association) surveyed its members in 2014, asking what they planned to achieve through M&A deals. Three-quarters cited “expand our business and client base,” and most (52 percent) said they wanted to participate in mergers “to diversify our client base.”
It’s easy to understand why companies are attracted to the idea of buying new customers. Building a customer base is hard and long work, requiring businesses to make major investments in sales staff to initiate relationships and customer service divisions to maintain them. Acquiring a new, possibly lucrative customer base in a single purchase seems a lot easier.

Know your buyer
Although it’s possible to market your customer base to buyers in general, it’s easier to sell your businesses customers to a particular buyer whose objectives are known. If you have one serious suitor, determine whether it views your business, and customer base, as a strategic acquisition that can provide it with growth opportunities, or whether it’s looking to buy assets as inexpensively as possible. Doing so will help you understand the buyer’s plans for your customer list and the premium it’s willing to pay for it.

To get a better idea of the value a potential buyer might place on your customers, look closely at:

  • The condition of its client list. Has the company steadily grown its client base and revenues, or have these numbers plateaued recently? If the buyer shares your market sector, is your company responsible for luring customers away?
  • The nature of its clients. Does the buyer have a diverse client base in terms of number, geography and type of income? Or is the company overly reliant on a handful of key customers?
  • Its strategic plans. Does the buyer want to sell new products that don’t interest its current customers? If it’s domiciled overseas, is it looking for a foothold in the United States? Has it attempted to expand its customer base in the past and failed?

Making it work
Once you know what a buyer is looking for, you can tailor your presentation to its needs — for example, an international company that wants to make a savvy geographic move. In this case, you could emphasize your long-term relationships with U.S. customers who might otherwise be wary of buying foreign goods.

Also consider how your products and services can help a buyer grow its current customer base. If your buyer wants to rejuvenate customer relationships with products that complement its own, highlight those products and explain how seamlessly they can be incorporated into the company’s current lineup.

Expansion dreams
Business buyers want their acquisitions to provide good value for money. To make your company as appealing as possible, learn about a buyer’s client expansion dreams and make the case that your company can help them come true.

The bests advice we can offer is, “Don’t go it alone.” Contact Ciuni & Panichi, Inc. Chairman Charles Ciuni, CPA, CVA, to get sound business advice at 216-831-7171 or cciuni@cp-advisors.com.

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© 2016

Restricted Stock Units and Your Tax Bill

Awards of RSUs can provide tax deferral opportunity

RSUExecutives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.

RSUs vs. restricted stock
RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.

But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

Tax deferral
Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).

However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.

Complex rules
If RSUs — or other types of stock-based awards — are part of your compensation package, please contact Jim Komos, CPA, CFP, at 216.831.7171 or jkomos@cp-advisors.com. The rules are complex, and careful tax planning is critical.

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© 2016