Accounting Blog

Understanding Mutual Fund Distributions Tax Consequences

Do you invest in mutual funds? Unless you hold your investment
in a tax-deferred account, you’ll want to consider taxes when you
look at a fund’s returns. After all, it’s not what your fund earns
but what you keep that counts.

Distributions of Fund Income

Mutual funds are required to distribute almost all of their
income — including realized capital gains, dividends, and interest
— to their shareholders each year. The tax bite from these
distributions reduces the fund’s total return to the investor.

Capital gains. The tax rate on long-term
capital gains is capped at 15% for most taxpayers, and 20% for
those with higher incomes. However, if a fund sells a security at a
gain before meeting the more-than-one-year holding period for
long-term capital gain treatment, the gain is considered short term
and is taxable to you when distributed at your regular tax rate.
Regular individual tax rates currently range as high as 37%.

Dividends. The tax rates on qualifying
dividends mirror the long-term capital gains rates. These rates
apply to qualifying dividends a mutual fund receives on stocks in
its portfolio and distributes to shareholders. Dividends that don’t
qualify for a favorable rate are taxable to you at your regular tax
rate.

Interest. Distributions of interest a fund
earns on bonds, certificates of deposit, and other interest-bearing
investments are generally taxable to you at your regular tax rate.
However, interest you receive from a municipal bond fund is
generally exempt from federal income taxes (and possibly state
taxes as well).

Note that a 3.8% surtax on net investment income may also apply
to your capital gains, dividends, and interest from mutual fund
investments if your income exceeds a tax law threshold. And you
must pay taxes on taxable fund distributions whether or not you
reinvest the distributions in additional shares of the fund.

Sales of Fund Shares

When you sell shares in a mutual fund, you’ll typically have a
gain or loss to report on your tax return. If the securities in the
fund’s portfolio have gone up in value during the period the fund
has owned them, this appreciation is reflected in the share price.
Similarly, if the value of the fund’s holdings has dropped, the
share price will reflect the loss in value.

Your gain or loss on a sale of fund shares is figured by
comparing the amount you realize on the sale to your cost basis in
the shares you sold. If you sell all the shares you own, figuring
your taxes is easy. You just add up all the investments you’ve
made, including reinvested dividends and other distributions, and
compare that amount to the net sale proceeds to determine whether
you have a gain or loss. However, if you don’t sell all your shares
at once, you must use an IRS-approved method for figuring your cost
basis.

Taxes can have a significant effect on your mutual fund returns.
Be sure to consider them in evaluating your investments.

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Understanding Cost Basis of Your Securities

When you sell securities in a taxable investment account, you have to know your “basis” in the securities to determine whether you have a gain or a loss on the sale — and the amount — for tax purposes. Generally, your basis is the price you paid for the investment, adjusted for the costs associated with that purchase, any share splits, reinvested dividends, or capital gain distributions.

Although the cost basis calculation sounds straightforward enough, there’s more to the story.

Inherited and Gifted Securities

Though basis is usually derived from cost, inheritances are treated differently. Generally, the basis of inherited securities is reset at their date-of-death value. This reset is sometimes referred to as a “step-up in basis.”

With gifted securities, the person receiving the securities generally takes the basis of the person who gave them. However, if gift tax was paid, a basis adjustment may be necessary. And, if the securities’ fair market value on the date of the gift is less than their original cost, you use that lower value to determine any loss on a subsequent sale.

Stock Dividends and Splits

Instead of distributing cash dividends, companies sometimes distribute stock dividends. Stock dividends are generally not taxable. However, a basis adjustment needs to be made. If the new stock you receive is identical to the old stock — for example, you receive two new shares of XYZ common stock for each share of XYZ common stock you own — you simply divide the basis of your old stock by the total number of shares held after the distribution to arrive at your new basis for each share.

Stock splits also result in basis adjustments. For example, if a company has a “two-for-one split” of its stock, the original basis must be divided between the two new shares. Conversely, companies sometimes have “reverse splits,” such as when three shares are exchanged for one, in which case the basis in the original three shares is now the basis of the new share.

Keeping track of share basis through a series of mergers, spinoffs, etc., can be very complicated. Often, taxpayers must research the terms of the relevant transactions by contacting the company directly or logging on to the company’s website.

Selling Less Than Your Entire Holding

If you sell less than your entire holding in a particular stock and can adequately identify the shares you sold (“specific identification”), you may use their basis to determine your gain or loss. Adequate identification involves delivering the stock certificates to your broker or, if your broker holds the stock, telling your broker the particular stock to be sold and getting a written confirmation. If you can’t adequately identify the shares you sell, you may use the FIFO — “first in, first out” — method to determine your basis.

With mutual funds, you are also allowed to elect to use the “average basis” method of accounting for shares sold. With this method, the total cost of all the shares owned is divided by the total number of shares owned.

Tax-Deferred and Tax-Exempt Investments

Cost basis is generally not an issue with securities held in tax-deferred investment accounts, such as traditional individual retirement accounts (IRAs) or employee retirement accounts. With these accounts, you are not taxed on capital gains but will be taxed at ordinary income tax rates on distributions you receive. (Qualified Roth distributions are an exception.) Also note that though interest on municipal bonds may be tax exempt, any gain realized from selling such bonds could be taxable, so it’s important to keep the information you’ll need to determine your basis.

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Should You Sell Your Under Performing Stock and then Buy it Back?

You sold one of your stock investments at a profit, so now you’ll have to report a capital gain on this year’s income tax return. Since another stock you own has been losing ground lately, you’re thinking of selling it to claim a capital loss on your return to offset your gain.

However, because you believe the company will bounce back eventually, you’re reluctant to part with your stock. What would happen if you sold your stock to claim the loss and then bought it back again right away?

Wash-Sale Rules

At first glance, it might appear to be the perfect plan. But it won’t work because of the tax law’s wash-sale rules. These rules prevent you from claiming a capital loss on a securities sale if you buy “substantially identical” securities within 30 days before or after the sale. If you want to claim the loss, you’ll have to wait more than 30 days to repurchase stock in the company.

Gone for Good?

Wondering what happens to wash-sale losses you can’t deduct? They don’t just disappear from your tax calculations. Instead, you’re allowed to add the losses to the cost basis of the shares you reacquire. This increase in cost basis will mean a smaller capital gain (or a larger loss) when you eventually sell your shares.

Potential Trap

Keep track of any share purchases you make through a stock dividend reinvestment plan or by having mutual fund distributions automatically reinvested. Selling shares of the same stock or mutual fund at a loss within 30 days of the automatic purchase (before or after) will trigger the wash-sale rules, and part of your loss will be disallowed.

Is There a Plan B?

Is there any way you can take your tax loss and still maintain your position in the stock? You may be able to double up on the loss securities, then wait 30 days and sell your original securities at a loss. Be sure to consult your tax advisor before taking this, or any, action.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Keeping Up With Your IRA: Tax Season Checklist

If you’re one of the millions of American households who own either a traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2019, for the 2018 tax year.

This checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy.

Which Account: Roth IRA or Traditional IRA?

There are two types of IRAs available: the traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax-free .1

In choosing between a traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.

If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a traditional IRA. If you don’t qualify for the deduction, then it’s almost certainly a better idea to fund a Roth IRA.

Case in point: Your ability to deduct traditional IRA contributions may be limited not only by income but by your participation in an employer-sponsored retirement plan. (See callout box below.) If that’s the case, a Roth IRA is likely to be the better solution.

On the other hand, if you expect your tax bracket to drop significantly after retirement, you may be better off with a traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense. That’s because a prolonged period of tax-free compounded earnings could more than makeup for the lack of a deduction.

Traditional IRA Deductible Contribution Phase-Outs
Your ability to deduct contributions to a traditional IRA is affected by whether you are covered by a workplace retirement plan.

If you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (MAGI) is:

  • Between $101,000 and $121,000 for a married couple filing a joint return for the 2018 tax year.
  • Between $63,000 and $73,000 for a single individual or head of the household for the 2018 tax year.

If you are not covered by a retirement plan at work but your spouse is covered, your 2017 deduction for contributions to a traditional IRA will be reduced if your MAGI is between $189,000 and $199,000.

If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot claim the deduction.

Roth IRA Contribution Phase-Outs
Your ability to contribute to a Roth IRA is affected by your MAGI. Contributions to a Roth IRA will be phased out if your MAGI is:

  • Between $189,000 and $199,000 for a married couple filing a joint return for the 2018 tax year.
  • Between $120,000 and $135,000 for a single individual or head of the household for the 2018 tax year.

If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot make a contribution.

Should You Convert to Roth?

The IRS allows you to convert — or change the designation of — a traditional IRA to a Roth IRA, regardless of your income level. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the traditional IRA. The withdrawal from your traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% additional federal tax normally imposed on early withdrawals.

The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert.

Maximize Contributions

If possible, try to contribute the maximum amount allowed by the IRS: $5,500 per individual, plus an additional $1,000 annually for those age 50 and older for the 2018 tax year. Those limits are per individual, not per IRA.

Of course, not everyone can afford to contribute the maximum to an IRA, especially if they’re also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer’s matching contribution, that additional money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first and then try to maximize IRA contributions.

Review Distribution Strategies

If you’re ready to start making withdrawals from an IRA, you’ll need to choose the distribution strategy to use: a lump-sum distribution or periodic distributions. If you are at least age 70½ and own a traditional IRA, you may need to take required minimum distributions every year, according to IRS rules.

Don’t forget that your distribution strategy may have significant tax-time implications if you own a traditional IRA because taxes will be due at the time of withdrawal. As a result, taking a lump-sum distribution will result in a much heftier tax bill this year than taking a minimum distribution.

The April filing deadline is never that far away, so don’t hesitate to use the remaining time to shore up the IRA strategies you’ll rely on to live comfortably in retirement.

Source/Disclaimer:

1Early withdrawals (before age 59½) from a traditional IRA may be subject to a 10% additional federal tax. Nonqualified withdrawals from a Roth IRA may be subject to ordinary income tax as well as the 10% additional tax.

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Smart Pricing Strategies

It’s a given that businesses need to be profitable to survive. A key element in making a profit is pricing. Here are some suggestions that can help you get your pricing right.

Identify Your Costs

If you don’t know what your product’s or service’s total costs are, you can’t price them accurately. What makes up the total cost? The components may include:

  • Cost of materials or merchandise
  • Labor costs, including salaries plus benefits
  • Overhead costs, such as taxes, rent, insurance, marketing, utilities, and transportation

Determining how much you need to charge just to cover your costs is an essential first step in setting prices. Be sure to reevaluate your costs regularly. If you are experiencing difficulty moving certain products at an acceptable profit, your costs could be too high.

Know Your Customers

Customers generally fall into distinct categories. Some are very price sensitive. Others focus less on price and more on convenience. The implied status or exclusivity of certain goods and services is very important to certain other customers. Once you identify the type of customer you are targeting, it becomes easier to set your prices accordingly.

Know Your Competitors

Knowing what your competitors charge for similar products or services helps you position your business in the marketplace. For example, if you determine your competitors focus on low prices, you can decide if you want to differentiate your business by focusing on superior service.

Leveraging service as a value proposition may justify charging higher prices than your competition. Or there may be other differentiators that allow you to charge higher prices, such as exclusive merchandise or highly knowledgeable employees.

Experiment and Monitor

Look for ways you can sell options, service contracts, and add-ons to a primary product or service, perhaps by offering several “packages” at different prices. Or consider applying discounts based on the quantity ordered.

Continuously monitor your prices and your profitability. Knowing which products or services are making you money allows you to make data-driven decisions about inventory and pricing.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Beware of the Tax Liability that Comes with Being on a Non-Profit Board

If you are a volunteer board member for a nonprofit organization, one specific issue to keep in mind is the IRS’s trust fund recovery penalty. If any entity — nonprofit or for-profit — fails to properly remit Social Security taxes and/or income taxes withheld from employees’ wages, the IRS will directly approach the organization’s “responsible persons” for the tax payments and a potential 100% penalty.

In general, the penalty will not be imposed on any unpaid, volunteer member of the board of a tax-exempt organization if the member: (1) is solely serving in an honorary capacity, (2) does not participate in the day-to-day operations of the organization, (3) does not participate in the financial operations of the organization, and (4) does not have actual knowledge of the failure on which the penalty is based.

However, for an active member who has governing responsibilities, it is still important to ask questions about who is handling these tax payments (a staff member, the executive director, a payroll service, an accountant?) and what checks and balances are in effect to make sure no problems arise. Annual reviews or audits may also be helpful to verify compliance.

To learn more about non-profit compliance issues, give us a call today. We look forward to helping your non-profit grow.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Are You a Non-Profit? Then Politics are Out of Bounds

Nonprofit organizations exempt from tax under Section 501(c)(3) of the federal tax code — schools, religious groups, hospitals, social service providers, and other public charities — should be careful not to violate the law’s prohibition on political campaign activities.

What’s Prohibited?

Participation or intervention in a political campaign on behalf of, or in opposition to, a candidate for public office is absolutely prohibited, whether it’s done directly or indirectly. This restriction applies across the board to campaigns of candidates running for national, state, or local public office.

Examples of prohibited political campaign activities include:

> Endorsing a candidate

> Donating to a candidate’s campaign

> Allowing a candidate to make a campaign speech at an organization-sponsored event

> Allowing a candidate to use an organization’s assets or facilities if other candidates are not given an equivalent opportunity

> Distributing materials that favor or oppose a candidate (whether the statements are prepared by others or by the organization)

> Posting comments about a candidate on the organization’s website or maintaining a link to only one candidate’s profile on the site

Permissible Activities

An organization may educate voters as long as it’s done in a nonpartisan, unbiased way. For example, organizations may prepare and distribute voter education guides or hold public forums. But all candidates seeking the same office should have an equal opportunity to be represented or participate. Neutrality — in content, wording, questioning, issues for discussion, etc. — is key.

Board members and other leaders of an organization may, of course, hold their own political views. But when they express those views, they should make it abundantly clear they are speaking for themselves, not on behalf of the organization. Leaders should avoid making political statements at organization meetings. Similarly, the organization’s resources or publications should not be used to express political views.

A charity may conduct educational activities regarding public policy issues of importance to its mission, including issues that divide candidates in an election for public office. However, messages that could be construed as political campaign intervention should be avoided.

Failure To Comply

Violating the prohibition on political campaign activities can result in revocation of an organization’s tax-exempt status and the imposition of certain excise taxes.

To learn more about non-profit compliance issues, give us a call today. We look forward to helping your non-profit grow.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Pursuing the right path: Which business entity is right for you?

Critical Choices: How the Business Entity You Select Impacts Your Taxes

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under. The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued. When your business exists as a separate entity, the business itself can apply for credit, and these types of businesses can continue to operate when you decide to move on or retire.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your businesses are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Limited Liability Companies (LLC)

It is common to see initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation. With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated than operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows. To learn more about your options for structuring your business, contact us today!

Finding the right route: special topics for LGBT couples

Tax-Saving Tips for LGBT Couples

The issues around marriage equality caused lots of debate, but it was federal tax laws that finally prompted the Supreme Court to take a look. Prior to the 2013 United States v. Windsor decision, same-sex couples who were legally married in states or countries that recognized their union were unable to take advantage of certain federal benefits. For example, individuals in same-sex marriages were ineligible for the insurance benefits of their spouses who worked in government, and they could not receive social security survivor’s benefits or file joint tax returns.

The 2013 United States v. Windsor decision and the 2015 Obergefell v. Hodges decisions changed these practices, and LGBT couples became eligible for federal tax savings that were previously unavailable. The Amazon Best Selling book, The Great Tax Escape, offers a comprehensive look at making the most of these programs to enjoy greater tax savings.

Choosing Your Filing Status

The first tax-related issue to consider after you are married is how you will file your returns. Depending on your income, “married filing separately” could offer larger savings than “married filing jointly”. There is a phenomenon knows as “the marriage penalty”. This references the tax increase that many couples face when filing joint returns versus single returns.

Tax specialists can assist with significantly reducing tax liability through a combination of smart financial planning, examination of the impact of each filing status, and a review of all possible deductions. Filing status is expected to be particularly relevant for the 2018 tax year, as new tax regulations with revised tax brackets may reduce or eliminate the marriage penalty.

Quick Tips to Avoid Tax Filing Pitfalls

Completing your tax returns after you are married is not necessarily more complicated than filing as single, but there are a few differences to keep in mind. Small errors can lead to major frustration if your returns are rejected or you have to file an amended form. These are the most common pitfalls – and how to avoid them:

  • You must either choose “married filing jointly” or “married filing separately”. Other filing statuses are not permitted, including “head of household”. (Note: There is an exception available for married couples who have lived apart for six months or more.)
  • Your spouse cannot be listed as your dependent.
  • If you choose “married filing separately”, only one spouse can claim each dependent child.
  • Married couples must choose the same option with regard to itemizing deductions versus claiming the standard deduction.

Your Certified Tax Coach can provide the guidance you need to complete your returns correctly.

New Options for Reducing Estate Taxes

The underlying issue that prompted United States v. Windsor was the application of federal estate tax regulations. In short, married couples pay far less when a spouse dies than they would if no marriage existed. The individual who brought the suit wanted the same benefits as married couples who are opposite-sex. Today, all married couples can enjoy the tax savings that come with careful estate planning. Your Certified Tax Coach is an excellent resource for putting a tax minimization strategy in place to protect your wealth after one partner passes away.

For more tips on how LGBT couples can increase tax savings, visit our consultation form for your copy of our new release, The Great Tax Escape.

Expertly navigate the labyrinth of the tax code 23 tax saving tips for doctors

Quick Tips for Tax Savings: Physician Edition

Doctors offer critical services to the community through prevention and treatment of health issues. However, getting the necessary education and experience can be challenging – both physically and financially. In an effort to make life a bit easier for physicians, lawmakers have put together a variety of programs to reduce tax liability for doctors. Maximizing these opportunities in combination with other tax-reduction strategies can dramatically increase the rewards of working as a healthcare provider. The Amazon Best Selling book, The Great Tax Escape, includes in-depth information on taking advantage of these tax savings techniques. Learn how to get a free copy of The Great Tax Escape here.

Small Changes Add Up to Big Savings

It may not be possible to implement all available tax savings strategies at once, but making small changes in managing your practice quickly adds up. Over time, continue to add layers of savings by implementing additional strategies. Before long, you will see your tax bill go down, even when your income is going up. These are just a few of the tips you will learn more about in The Great Tax Escape.

The Case for Specialized Financial Professionals

Free and low-cost budgeting and financial planning tools are great for those with basic financial situations. However, your position as a practicing physician is too complex for these platforms. Enlist a team of professionals with specific experience in tax issues that affect health care providers. Not only will they help you save your money more effectively – they will also assist you in planning major purchases to minimize tax expenses. Long-term, you are likely to realize a significant return on this investment.

Common Deductions You Probably Aren’t Maximizing

Though you are already aware of many deductions available to you, it is likely that you are not yet getting the maximum tax savings you are entitled to. For example, continuing education expenses, depreciation of your medical equipment, and student loan interest are frequently underreported on physicians’ tax returns. Your Certified Tax Coach can guide you through the nuances of these deductions, as well as the specific opportunities available to medical professionals.

The Benefits of Better Record-Keeping

Whether you work for yourself or you are employed by a larger healthcare organization, you are always moving at a rapid pace. For many physicians, that means letting the little things slide. While you always meticulously update your patients’ records, you are probably less careful about recording your expenses. Over the course of a year, these small charges add up, and you could be missing out on significant tax savings for want of a few receipts. Make financial record-keeping a priority, and you will notice a difference in your year-end tax bill.

Be Ready for Retirement

Paying off your student loans often takes precedence over saving for retirement – especially when you are just starting out in your career. However, contributing to your retirement accounts now has across-the-board benefits for your current and future financial state. The funds you deposit are given special tax-advantaged status, and when you contribute regularly over a long period of time, you are better able to ride out the ups and downs of the market.

For more information on tax-saving opportunities specifically impacting physicians, visit our consultation form for your copy of The Great Tax Escape.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

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