Age matters in the world of taxes

Are you aware of the numerous age-related provisions in the IRS code? They are probably more plentiful and significant than you thought. Here are a few examples of the age-related tax rules that could affect you and your dependents.

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* At birth up to age 19 and even 24: dependency deduction. Parents can claim a dependency exemption for a child under 19 or for full-time students under the age of 24.

* Under 13: child care credit. This provision gives parents a tax credit for dependent care expenses.

* Under 17: child tax credit. If parental adjusted gross income is below a threshold level, parents can claim a child tax credit of $1,000.

* At 50: retirement contributions. The government allows extra “catch up” contributions to retirement savings. This is a helpful provision to encourage savings.

* Before age 59½: early withdrawal penalty. Withdrawals from IRAs and qualified retirement plans, with some exceptions, are assessed a 10% penalty tax.

* At 65: increased standard deduction. Uncle Sam grants a higher standard deduction, but there’s no additional tax benefit if the taxpayer itemizes deductions.

* At 70½: mandated IRA withdrawals. The IRS requires minimum distributions from a taxpayer’s IRA beginning at this age (doesn’t apply to Roth IRAs). This starts to limit tax-deferral benefits.

Awareness of how the tax code affects you and your family at different ages is important. For tax planning assistance through the various phases of life, give our office a call.

Do you need to get your credit card spending under control?

untitledIf you’re living beyond your means, you could be courting financial disaster. Here are some indicators that you need to get your credit card usage under control.

* Your income’s dwindling but your credit card balances keep growing. Lost your job but can’t seem to reign in those charge cards? Don’t be surprised when the bill collectors come calling.

* You pay only minimum balances. Still paying off last year’s Valentine’s Day dinner? Bad spending habits?

* You practice the credit card shuffle. You take out a cash advance on one credit card to pay off another, then apply for another card when the first comes due. Practiced regularly, shuffling credit cards is a losing game. At some point you need enough income to cover your expenses. Eventually, the house of credit comes tumbling down.

* You’re working overtime to cover expenses. Say you work for an airplane manufacturer that’s building a new line of jets. To increase production, the company asks you to work longer hours. Bigger paychecks become routine and the cash starts flowing. So you take out installment loans to buy a new car or boat or house on the beach. But what happens when the production line slows down and the overtime pay dries up? The car payments, boat payments, and second home payments keep chugging along. And suddenly you’re struggling to make the payments.

* You routinely charge everyday expenses. Do you use credit cards to pay for groceries, gas, and fast food? Unless you’re disciplined and pay off the charges every month, your credit card balances can grow exponentially.

* The utility company calls. When the local water company threatens to discontinue service because you’re behind on the payments, it may be time to seek financial help.

* You’re refused credit. These days, even people with good credit may find it hard to obtain loans. But if your credit score is in the don’t-call-us-we’ll-call-you category, you may have a debt problem.

The best time to seek professional advice is well before your financial boat capsizes. If you’d like help, give us a call.

 

Setting your salary: What’s the right amount for a small business owner?

One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. untitledYou can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation.

While there’s not a one-size-fits-all formula for determining how much to pay yourself as a business owner, here are three factors to consider:

  • Personal expenses. Determine how much you’re willing to draw from personal savings to keep your household afloat as the company grows. For a start-up company, owner compensation may be minimal. Beware, however, of going too long without paying yourself a reasonable salary. Be sure to document that you’re in business to make a profit; otherwise the IRS may view your perpetually unprofitable business as a hobby aimed at avoiding taxes.
  • The market. If you were working for someone else, what would they pay for your skills and knowledge? Start by answering that question; then discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites. In the early stages of your business, you probably won’t draw a salary that’s commensurate with the higher range of salaries, but at least you’ll learn what’s reasonable.
  • Affordability. Review and continually update your firm’s cash flow projections to determine the salary level you can reasonably sustain while keeping the business profitable. As the company grows, that level can be adjusted upward.
  • For assistance with this issue or other business concerns, contact our office.

Some very last-minute tax moves to consider

hurry-upThere’s not much time left to make tax-saving moves for 2014. Some ideas to consider:

  • Make your January mortgage payment before December 31 to squeeze an extra interest deduction into 2014.
  • Make tax-free gifts to use your annual gift tax exclusion for 2014. This year you can give up to $14,000 to as many individuals as you like without tax consequences. These gifts to individuals are not deductible by you; nor are they taxable to the recipients.
  • Sell appreciated stock to offset capital losses taken earlier in the year and vice versa. Any excess loss can offset up to $3,000 of ordinary income in 2014, and losses greater than that can be carried to future years.
  • Use your credit card to pay tax-deductible expenses by December 31 if you’re short of cash. You can deduct the expenses on your 2014 return even though you pay your credit card bill in 2015.
  • If you’re required to take a minimum distribution from your retirement plan, do so by December 31 or you face a 50% penalty. If you just turned 70½ this year, you could wait until April 1, 2015, to take a first distribution.
  • If a wedding or divorce is in your year-end plans, be aware that your marital status as of December 31 determines your tax status for the whole year. Changing the dates of a year-end event may save taxes.
  • To discuss these or other tax-cutting moves you might want to consider, give us a call now before it’s too late to act.