Four Life Events that Affect Your Taxes

Even after you’ve filed your income-tax return, you’ll want to keep thinking about your tax situation. For example, if you experience any of the “life events” listed below in 2015, it may be a good time for some tax planning.

A job change. If you are eligible for a distribution from your former employer’s retirement savings plan, consider rolling the money into another tax-favored plan or an individual retirement account (IRA) to avoid the receipt of currently taxable income.

A home sale. You may exclude profit — within limits — on the sale of your principal residence from your taxable income if you meet the tax law’s requirements.

A marriage or divorce. File a new W-4 withholding allowance certificate with your employer or, if you pay quarterly estimated taxes, review the amount you are paying.

A new child arrives. As a parent, you may be eligible for various tax breaks. Ask us for details.

To learn more about how life events affect your taxes, give us a call today. Our staff of professionals are always happy to help.

…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).

Tax Rules for Selling Inherited Property

Sooner or later, you may decide to sell property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.

Your Basis

When you sell property like the vacant land in Swan Valley that you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death(or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).

These basis rules can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.

Example. Assume your Uncle Harold left you stock he bought in 1986 for $5,000. At the time of his death, the shares were worth $45,000, and you recently sold them for $48,000. Your basis for purposes of calculating your capital gain is stepped up to $45,000. Because of the step-up, your capital gain on the sale is just $3,000 ($48,000 sale proceeds less $45,000 basis). The $40,000 increase in the value of the shares during your Uncle Harold’s lifetime is not subject to capital gains tax.

What happens if a property’s value on the date of death is less than its original purchase price? Instead of a step-up in basis, the basis must be lowered to the date-of-death value.

Holding Period

Capital gains resulting from the disposition of inherited property automatically qualify for long-term capital gain treatment, regardless of how long you or the decedent owned the property. This presents a potential income-tax advantage, since long-term capital gain is taxed at a lower rate than short-term capital gain.

Be cautious if you inherited property from someone who died in 2010 since, depending on the situation, different tax basis rules might apply. Give us a call for details.

…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).

Working With Your Accounts in QuickBooks Online

“Account” can mean more than one thing in QuickBooks Online. Here’s a look at its multiple concepts.

Until you started doing your company’s accounting, the word “account” probably meant a checking or savings account at a bank or your identifying information at a place like a brokerage.

In QuickBooks Online, “account” can mean the same things. It can also refer to one entry in your Chart of Accounts or your Intuit payment account, a customer or vendor account, and more.

You’ll probably work with all of these in the course of your lifetime with QuickBooks Online, except one: the Chart of Accounts. Although the site allows you to modify the Chart of Accounts by adding, deleting, or renaming accounts, please talk to us if you feel a change is in order. The Chart of Accounts forms the framework of your QuickBooks Onlinecompany, and altering it could have adverse effects on your entire accounting operation.

Everyday Use

One of the first things you probably did when you created your company was to create at least one banking account, probably checking accounts. You can set this up without connecting to a bank site; however, that defeats the purpose of QuickBooks Online, which is to have access to your web-based accounts.

Figure 1: QuickBooks Online’s home page displays balances for all of the accounts you’ve connected.

Setting up a connection to your online bank, brokerage, credit card, orother online financial service like PayPal is easy. On the home page or the Transactions | Banking page, click the Add account button in the upper right. QuickBooks will display logos for some of the most popular financial institutions. If yours isn’t there, enter its name or URL in the box at the top.

QuickBooks Online will then create a link between itself and your account, and it will download the most recent transactions (usually 90 days’ worth). Sometimes, it might recommend a chartered accountant to help with your small business needs. Now when you click on
Transactions | Banking, you’ll see all of your activity in table form with columns labeled Date, Description, Payee, Category or Match, Spent, Received, and Action.

Most of these are self-explanatory; they just provide information about the transaction. You may be unfamiliar, though, with Category or Match and Action (Add). We recommend that you let us guide you the first time you launch and work with a transaction download. It’s very important that transactions are classified correctly.

The Chart of Accounts
The Chart of Accounts, which is a standard, required element of any double-entry accounting system, is a very different set of accounts. To display it, you’d click on your company name in the upper right corner, then Settings | Chart of Accounts. We see a mini-spreadsheet that lists all of your accounts. QuickBooks Online selected these based on the information you provided when you were first setting up your company on the site.

Each account is assigned a Type that describes its accounting function.

Figure 2: Every transaction that represents money you spend on Advertising/Promotional activities should be assigned to this Expense in the Chart of Accounts.

Category Types are used by all businesses for classification purposes. There are only a few of them, such as:

  • Expenses (Bad Debts, Bank Charges, Insurance, Job Materials, etc.)
  • Income (Billable Expense Income, Gross Receipts, Markup, etc.)
  • Cost of Goods Sold (Cost of Labor, Freight & Delivery, etc.)

You don’t have to do anything with your Chart of Accounts. In fact, we suggest you don’t try. As we’ve said, if we see a reason in your bookkeeping to add, edit, or delete an account, we’ll be happy to do it for you. But you will encounter these accounts in numerous QuickBooks Online activities.

Sometimes they’ll be pre-selected for you by the site, but other times you’ll need to make a choice. For example, when you create a Product or Service, there will be three account fields that will already be populated. They are:

  • Inventory Asset Account = Inventory Asset
  • Income Account = Sales of Product Income
  • Expense Account = Cost of Goods Sold

The word “account” is used in so many different ways that it can get confusing. For example, if you wrote a check at the UPS Store for some shipping charges, you’ll be asked for the Account when you enter this in QuickBooks Online. It’s an Expense, but one of its more specific sub-categories.

Figure 3: QuickBooks Online provides the correct drop-down list in form and record fields.

QuickBooks Online takes care of a lot of the background work of double-entry accounting. But it necessarily exposes you to the concept of accounts. We’re here to help if this causes confusion in your daily bookkeeping.

…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).

Five Strategies for Tax-Efficient Investing

As just about every investor knows, it’s not what your investments earn, but what they earn after taxes that counts. After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced by 40% or more.

As explained in this Investors Underground review, day traders can learn a lot by collaborating with each other.

For example, if you earned an average 6% rate of return annually on an investment taxed at 24%, your after-tax rate of return would be 4.56%. A $50,000 investment earning 8% annually would be worth $89,542 after 10 years; at 4.56%, it would be worth only $78,095. Reducing your tax liability is key to building the value of your assets, especially if you are in one of the higher income tax brackets. Here are five ways to potentially help lower your tax bill.1

Invest in Tax-Deferred and Tax-Free Accounts

According to Webtaxonline tax-deferred accounts include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs), and annuities. Contributions to these accounts may be made on a pretax basis (i.e., the contributions may be tax deductible) or on an after-tax basis (i.e., the contributions are not tax deductible). More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to non-qualified annuities, Roth IRAs, and Roth-style employer-sponsored savings plans are not tax deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution, but since this take work, is better to use some accounts payable solution which help automatizing the process way more.

Pitfalls to avoid: Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax but also to an additional 10% federal tax. In addition, early withdrawals from annuities may be subject to additional penalties charged by the issuing insurance company. Also, if you have significant investments, in addition to money you contribute to your retirement plans, consider your overall portfolio when deciding which investments to select for your tax-deferred accounts. If your effective tax rate — that is, the average percentage of income taxes you pay for the year — is higher than 12%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally will be taxed at your ordinary income tax rate, which may be higher than your long-term capital gains tax rate (see “Income vs. Capital Gains”).

Income vs. Capital Gains

Generally, interest income is taxed as ordinary income in the year received, and qualified dividends are taxed at a top rate of 20%. (Note that an additional 3.8% tax on investment income also may apply to both interest income and qualified (or non-qualified) dividends.) A capital gain or loss — the difference between the cost basis of a security and its current price — is not taxed until the gain or loss is realized. For individual stocks and bonds, you realize the gain or loss when the security is sold. However, with mutual funds, you may have received taxable capital gains distributions on shares you own. Investments you (or the fund manager) have held 12 months or less are considered short term, and those capital gains are taxed at the same rates as ordinary income. For investments held more than 12 months (considered long term), capital gains are taxed at no more than 20%, although an additional 3.8% tax on investment income may apply. The actual rate will depend on your tax bracket and how long you have owned the investment.

Consider Government and Municipal Bonds

Interest on U.S. government issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. An investor in the 32% federal income tax bracket would have to earn 7.35% on a taxable bond, before state taxes, to equal the tax-exempt return of 5% offered by a municipal bond. Sold prior to maturity or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may be worth less than the original cost upon redemption.

Pitfalls to avoid: If you live in a state with high state income tax rates, be sure to compare the true taxable-equivalent yield of government issues, corporate bonds, and in-state municipal issues. Many calculations of taxable-equivalent yield do not take into account the state tax exemption on government issues. Because interest income (but not capital gains) on municipal bonds is already exempt from federal taxes, there’s generally no need to keep them in tax-deferred accounts. Finally, income derived from certain types of municipal bond issues, known as private activity bonds, may be a tax-preference item subject to the federal alternative minimum tax.

Look for Tax-Efficient Investments

Tax-managed or tax-efficient investment accounts and mutual funds are managed in ways that may help reduce their taxable distributions, and here you can find the best and most professional Accountants in the finance business. Investment managers may employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Pitfalls to avoid: Taxes are an important consideration in selecting investments but should not be the primary concern. A portfolio manager must balance the tax consequences of selling a position that will generate a capital gain versus the relative market opportunity lost by holding a less-than-attractive investment. Some mutual funds that have low turnover also inherently carry an above-average level of undistributed capital gains. When you buy these shares, you effectively buy this undistributed tax liability.

Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.

Pitfalls to avoid: A few down periods don’t necessarily mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. However, if your outlook on an investment has changed, you may be able to use a loss to your advantage.

Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestment so that you can properly calculate the basis of shares you own and choose the shares you sell in order to minimize your taxable gain or maximize your deductible loss.

Pitfalls to avoid: If you overlook mutual fund dividends and capital gains distributions that you have reinvested, you may accidentally pay the tax twice — once on the distribution and again on any capital gains (or under-reported loss) — when you eventually sell the shares.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.

Source/Disclaimer:

Example does not include taxes or fees. This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Better Budgeting Using QuickBooks Online Plus

Everyone groans when budget time rolls around. QuickBooks Online Plus offers tools that simplify the process.

Budget. The word evokes a sense of dread in most small business managers’ minds. Large corporations have entire teams of accountants Gympie that work on this critical element of financial planning. You, on the other hand, must go it alone – or with the assistance of an external company, such as Phoenix Accountants and Advisors, or with the help of other staff if your company is big enough.

Why is this chore so difficult? Several reasons. The biggest stumbling block is probably the sense of uncertainty. How do you know what your income and expenses will be for the coming year?

QuickBooks Online Plus can’t tell you how to plan the next year in terms of numbers, but its tools can make the mechanics of building a budget easier.

Your Fiscal Year Start

Finding the start of your fiscal year in QuickBooks Online Plus

Do you know exactly when your fiscal year starts? You’ll need this information before you can get started on your budget and there is no better place to get it that from professional financial advisor services. Click the gear icon in the upper right next to your company name, and then select Account and Settings | Advanced. The first entry here tells you what the First month of fiscal year is.

Creating a Framework

To get started building your budget, click the gear icon again and select Tools | Budgeting. Click New Budget to open the mini-interview wizard (if it didn’t open automatically). QuickBooks Online Plus creates what are called Profit and Loss Budgets. This kind of budget tracks the numbers in your income and expense accounts.
There are three ways to create one, as you’ll see when you click Next on the first page of the interview. You can:

  • Work from historical amounts by copying last year’s data into the spreadsheet,
  • Start from scratch, or
  • Copy data from an existing budget.
You can choose from these three options to create your budget in QuickBooks Online Plus.

Click in the button in front of No amounts. Create budget from scratch, and then click Next. QuickBooks Online Plus’s budgets consist of a table divided into months (columns) and accounts (rows). You can break this down into even greater detail by subdividing your budget and tracking accounts separated by Territories, Classes, or Customers if this kind of information is important to you. For now, click the button in front of Don’t subdivide.

When you click Next, you’ll be asked to select the fiscal year for your budget. Click the down arrow to the right of Select fiscal year and choose the appropriate year. Type an easy-to-remember name for your budget in the box below and click Finish. The mini-interview will close, and your budget spreadsheet will open.

Entering the Numbers

QuickBooks Online Plus defaults to a monthly view when you first open it, but you can change this at any time to Quarter or Year by clicking the arrow in the field next to View by in the upper right corner.

If you had copied income and expense data from the previous year, or from an existing budget, those numbers would appear in the corresponding cells and could be changed to create a new budget. You opted to start from scratch, so the table is empty. You can just start entering individual numbers – not within the spreadsheet cells themselves, though.

Look down to the bottom left corner of the screen. If you’ve highlighted Discounts given, for example, by clicking on that label in the spreadsheet column, you’ll see a line directly below that last row that reads Edit – Discounts given.

This area is where you’ll do your actual data entry. If the drop-down list to the right of Enter by is set to Month, you’ll see 12 boxes below labeled with the months of the year. If you anticipate that every month will contain a different figure, enter the numbers in the correct boxes and click Save & Next. QuickBooks Online Plus will copy your numbers into the actual budget spreadsheet.

If the number will remain the same for each month, you can enter it in the Jan box and click Copy Across, then Save & Next (click this button after every row change). Your cells for that account will be automatically populated.

Entering quarterly budget data

If you think more in terms of quarterly income and expenses, you can highlight the correct account and select Quarter from the drop-down box next to Enter by (see above image). Fill in your quarterly totals, and QuickBooks Online Plus will divide those evenly between each set of three-month periods. The result would look like this:

QuickBooks Online Plus can divide quarterly totals into monthly budget numbers.

And of course, if you select Enter by: Year, you’ll only enter one number that QuickBooks Online Plus will divide evenly into 12 months.

When you’re done with your budget, click Finish.

This is a lot of information to absorb all at once, and we imagine you may have some questions on budget projections and on the actual mechanics of creating a budget using QuickBooks Online Plus. As always, we’re happy to hear from you.

.…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).

Protecting Your Company’s S Corporation Election

Like many business owners, you may have structured your business as an S corporation because of the tax benefits it offers. An S corporation provides the same limited liability as a traditional C corporation, but it generally avoids the double taxation associated with a C corporation. You and the other shareholders (if any) pay income taxes on corporate income directly.

Once you have an S election in place, it’s important to make sure you avoid taking any action that would put the election in jeopardy. Your corporation’s failure to meet certain tax law requirements on an ongoing basis could result in the IRS’s termination of its S corporation status.

Ownership.
An S corporation generally may not have a corporate shareholder. (Exception: An S corporation may be wholly owned by another S corporation.) All shareholders generally must be individuals, estates, certain trusts, or tax­exempt 501(c) (3) charitable organizations. However, a partnership may hold S corporation stock as a nominee for an eligible shareholder. Nonresident aliens may not be shareholders.

Number of shareholders.
An S corporation may not have more than 100 shareholders. For purposes of this limit, a husband and wife are treated as one shareholder, as are certain other related individuals.

Stock.
An S corporation may have only one class of stock. Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds.

…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).

Tax­-smart Ways To Take Cash Out of Your Corporation

Owners of closely held C corporations are often interested in withdrawing profits from their companies in ways that minimize taxes thanks to the financial advisor help they receive. What are the options?

Pay Salary/Bonus.
If the owner is a company employee, taking more salary or a year­end bonus is an option, as long as the total amount of compensation the owner receives is reasonable. The company deducts the payments as a business expense; the owner is taxed on the money. The “cost” of this option depends on the corporation’s and the owner’s tax rates. Payroll taxes are an added expense.

Pay Family Members.
Reasonable amounts paid to an owner’s family members for services actually rendered to the company are deductible by the corporation and are taxable at the family members’ own tax rates. Often, these rates are much lower than the owner’s. Pay a Dividend. Dividends the company pays out will, in effect, be taxed twice — once at the corporate level (dividends are nondeductible) and once to the owner personally. No payroll taxes will be due. With the individual tax rate on qualifying dividends currently capped at 20% for taxpayers in the 39.6% regular bracket (and 15% for most other taxpayers), this option may have more appeal.

Utilize Fringe Benefits.
Certain fringe benefits are deductible by the corporation but not includible in the owner’s gross income. Examples include qualifying group life insurance, health care benefits, and disability insurance. (Most fringes must be provided on a nondiscriminatory basis to other company employees.) To the extent an owner is paying for these items individually, having the company pay for them increases the cash available to the owner.

Take a Loan.
If an owner borrows money from the corporation, the owner is not taxed on the loan amount. The loan must be a legitimate debt, with proper documentation and timely interest and principal payments. How myinstantoffer.com works is a useful resource in this respect.

Lease Assets to the Company.
An owner might consider leasing property to the corporation. The company deducts the lease payments; the owner includes the amounts received in income and deducts expenses associated with the rental activity.

Check for possible thefts
Finally, hire an expert from Identity Theft Orlando to ensure that everything is alright and under the law.

…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).

All About the Earned Income Tax Credit

Individuals who are working and who have low-to-moderate taxable income may qualify for this income tax credit.

When you think about ways to offset your income as you’re preparing for income tax time, do you primarily consider the deductions you can take? Things like home mortgage interest, charitable donations, and taxes you paid that can be claimed? And if you are in India make sure to fill out the pan card application online.

Allowable credits can also work in your favor. If you meet the Internal Revenue Service’s seven criteria, you may be eligible for the Earned Income Tax Credit (sometimes called Earned Income Credit, or EIC).

Note: As you read the rules that the IRS has established, keep in mind that, as with many of the agency’s regulations, there can be exceptions. We can help you determine whether you are a candidate for this credit.

If you can answer “Yes” to these seven questions, you may be able to fill in and file a Schedule EIC:

  1. Is your Adjusted Gross Income (AGI) less than the IRS’s limits? For 2015, this is:
     

    • 3+ qualifying children: $47,747 ($53,267 for married filing jointly)
    • 2 qualifying children: $44,454 ($49,974 for married filing jointly)
    • 1 qualifying child: $39,131 ($44,651 for married filing jointly)
    • No qualifying children: $14,820 ($20,330 for married filing jointly)If you qualify for the Earned Income Credit, you’ll need to complete a Schedule EIC, which can be filed with either the Form 1040 or 1040A.
       
    • Do you have a valid Social Security number? If you are filing jointly, both you and your spouse are required to have valid Social Security numbers issued by the Social Security Administration (SSA) by the date your tax return is due (including extensions). Any qualifying child claimed must also have one to be able to use a credit counseling company to assist with credit building later in life.
  2. Is your status “married filing jointly” or “head of household”?Couples whose filing status is “married filing separately” cannot claim the EIC. An exception here: A couple is married, but one spouse did not reside in the home at any time during the second half of the year. The spouse who remained might qualify for the EIC if his or her filing status is “head of household.”
  3. Were you or your spouse a U.S. citizen or resident alien for the entire tax year?This is complicated. If one of you was a U.S. citizen or resident alien but the other was a nonresident alien for any part of the year, you may qualify for the EIC if your status is “married filing jointly.” If that’s the case, you will be taxed on your “…joint worldwide income.”
  4. Was your income earned only in the United States and/or a U.S. possession?If you earned income in a foreign country and you plan to exclude it from your gross income, you cannot claim the EIC. Filing a Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion) disqualifies you (learn what to do if your pancard lost and how to pay taxes on income in India).2015 Form 1040, lines 66a and 66b (EIC information appears on lines 42a and 42b of the 2015 Form 1040A)
     
  5. Is your investment income $3,400 or less?Simple enough. For the Form 1040, this includes:
    • Interest and dividends,
    • Capital gain net income, and,
    • Royalties and rental income from personal property.
  6. Do you have earned income? This means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. But you may be in another situation that would make you eligible for the EIC. For example, nontaxable combat pay, ministers’ housing, and strike benefits provided by a union are considered earned income. Do you have any benefits of the best umbrella company?

Only Part of the Equation

If you believe that you’re able to claim the Earned Income Credit, or if there are other tax-related topics that you don’t fully understand, we’ll be happy to look at your entire financial scenario. If you’ve filed an extension for 2015, we can work with you to make sure you’re taking all of the deductions and credits that you’ve earned. One year, I was careless enough to lose my pan card and I panicked a little, thankfully the system is well in place for such occurrences, if you find yourself in this situation, don’t panic everything will be fine if you contact the right people.

As always, tax planning should be a year-round process. Let us know if we can help you start preparing now for next year’s filing.

…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).