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High Earners Take Note – Roth IRA Strategies

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Have you been locked out of contributing to a Roth individual retirement account (IRA) by the tax law’s income limits? There may be a way you can get around those limits and invest in a Roth IRA.

Why Consider a Roth IRA?

Unlike a traditional IRA, a Roth IRA offers the potential for tax-free earnings. You’re not taxed on investment earnings while they remain in the account, and qualified Roth distributions are not included in taxable income. If you want, you can leave your Roth IRA intact for your beneficiaries since you won’t have to take required minimum distributions (RMDs) after age 70½.

The Problem

Their potential for tax-free growth makes Roth IRAs a powerful planning tool. However, high earners face contribution restrictions. No Roth IRA contribution is allowed if modified adjusted gross income (AGI) is more than $135,000 (unmarried filers) or $199,000 (married joint filers).

A Potential Solution

Even if you aren’t allowed to contribute to a Roth IRA directly, you still may convert a traditional IRA to a Roth IRA. No income limits apply to conversions. This opens up a planning possibility: Make nondeductible contributions to a traditional IRA and later convert it to a Roth IRA. Repeating this process over several years would allow you to build up the amount in your Roth IRA. You’d be taxed on the account earnings you convert, but the taxable amount may be small if you haven’t held the traditional IRA for long.

Caution: This strategy could backfire if you already have a large traditional IRA (from a plan rollover or regular contributions). Under complex rules, much more of each conversion amount would be subject to tax. See us for details.

Connect with our team today for all the latest and most current tax rules and regulations.

How Hiring Your Children can Save You Money at Tax Time

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If you are self-employed, hiring your children to work for you can provide spending money for them and tax savings for you. But make sure you follow the guidelines.

Pay Reasonable Wages

You can deduct “reasonable wages” paid to your children for legitimate work performed for your business. As long as your children are under age 18 and your business is unincorporated, you generally won’t have to pay Social Security or Medicare taxes on their pay.

Keep Good Records

Ask your child to fill out a time sheet or punch a time clock, and pay with a check rather than cash. Keep in mind that wages that are inconsistent with the job or the age of the child won’t pass muster with the IRS.

Report Their Earnings

Complete and file a Form W-2 at the end of the year showing how much you paid your child. Income that exceeds the standard deduction will be taxable.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

Tax Tips for Investors

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As an investor, you may be able to reduce your income-tax liability through year-end tax planning. Here are a few ideas to consider for your next year’s taxes.

Take Advantage of Capital Losses

Do you have capital losses from selling stock shares held in taxable accounts? Maybe you can use the losses to generate a tax benefit. Capital losses can be used to offset capital gains, eliminating tax on the gains. For these purposes, you have to separate long-term gains and losses (on assets held for more than one year) from short-term gains and losses (on assets held one year or less) and net them in a certain order.

Similarly, you may have a carryover loss from a prior tax year that you’ve been “saving up” and hoping to use at some point to offset a capital gain. Well, maybe the time has come. Consider selling carefully selected profitable securities to utilize your carryover loss. Again, how this will play out when the tax law’s netting rules are applied depends on whether the loss is short term or long term and the nature of your current gain.

What if you haven’t sold securities that are showing a paper loss but are thinking of doing so? You can put realized capital losses to work for you by using them to offset any capital gains from this year’s sales. If you have a capital loss with no offsetting gain, you can take up to $3,000 of the loss against your ordinary income. Any loss exceeding this amount can be carried over to subsequent tax years.

Be Careful with Mutual Fund Sales or Purchases

If you’ve been thinking about cashing in appreciated mutual fund holdings that you’ve held for longer than a year, consider completing your transaction prior to the fund’s ex-dividend date (typically in November or December). This will help qualify your entire gain as capital gain, as opposed to having a portion of it potentially identified as a distribution of ordinary income. Conversely, you may want to complete any mutual fund share purchases after the ex-dividend date. You will thus avoid having an immediate tax liability attributable to the dividend payment.

Donate Appreciated Stock to Charity

If you are charitably inclined, donating appreciated securities accomplishes two things: You will create an immediate income-tax deduction equal to the full value of the stock, and you will avoid realization of a capital gain on the sale of your position. Note that deductions for charitable contributions are subject to certain tax law limits.

To learn more about tax rules and regulations for investments, give us a call today. Our knowledgeable and trained staff is here to help.

Get your Business Costs Under Control

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Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort, business costs are often very ripe for a quick trimming. Here are some possibilities.

Supplies and Other Purchases

Usually in any business, relatively few items represent a very large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by making sure you always bid out significant purchases or by more actively seeking less expensive alternatives.

For many companies, inventory carrying costs are a very significant expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and Other Services

The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage.

Look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you are not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash Management

To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts.

On the receiving side, deposit all receipts daily. And always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed Expenses

One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives.

To learn more ways to control your business costs give us a call today. Our trained staff of professionals are always available to answer any questions you may have.

 

Do a Financial Review Mid-Year

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Before you get involved with other things this summer, schedule a mid-year checkup. No, we’re not talking about the height/weight/blood pressure kind of checkup, we’re talking about the income statement/balance sheet/cash flow kind of checkup — a review of your business’s financial operating fundamentals.

If you review your vital financial information only when year-end rolls around, you may not know there’s a problem until it’s too late. The more often you take your company’s “pulse,” the sooner you’ll be able to notice — and react to — changes in your business situation.

Check Your Vital Signs

What should you be looking at? Start with the operating fundamentals. For example, what’s the status of accounts payable? When’s the last time you ran an aging report for accounts receivable? How quickly is your inventory turning? What is your profit margin?

These numbers are critical to running your business. You can’t make accurate decisions if your figures are old. And, by keeping track of key financial ratios, you can more readily spot trends that should be addressed sooner rather than later.

Monitor Your Budget

Next, check your spending. If overspending is a problem, creating a comprehensive budget that establishes realistic guidelines is an effective remedy. Make sure you have a budgeted amount for every line item expense on your operating statement. Then track and compare actual spending to budgeted amounts on a regular basis.

Reduce Your Debt

Avoid the temptation to take out all your profits in good years. Instead, consider reinvesting some of those earnings in the business. Using retained earnings instead of debt to capitalize your business saves money — and provides a safety net that will be there to help you through periods of lackluster sales or unexpected expenses. A healthy debt-to-equity ratio will also look great when it’s time to borrow money or sell your business.

See a Specialist

Helping owners build and maintain healthy businesses is our specialty. Let’s schedule that mid-year review of your company’s finances soon.

To learn more about financial reviews, give us a call today. We are always available to answer any questions you may have.