This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
Cash flow is the lifeblood of any small business. Some business experts even say that a healthy cash flow is more important than your business's ability to deliver its goods and services! While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, then you're out of business!
What is Cash Flow?
Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers, but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.
Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.
Note: An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.
Cash Flow versus Profit
While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.
Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.
In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.
Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.
Analyzing your Cash Flow
The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.
The first step toward taking control of your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.
Some of the more important components to examine are:
Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.
For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.
Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.
Need assistance? We can help you analyze and manage your cash flow more effectively and make sure your business has adequate funds to cover day-to-day expenses.
According to a 2014 study published by the Federal Reserve Bank of San Francisco, researchers found that over a lifetime, the average U.S. college graduate will earn at least $800,000 more than the average high school graduate--even after taking into consideration the cost of college tuition and the four years of lost wages it entails. So even though tuition and fees are always on the rise, most people still feel that a college education is well worth the investment. That said however, the need to set money aside for their child's education often weighs heavily on parents.
Fortunately, there are two savings plans available to help parents save money that also provide certain tax benefits. Let's take a closer look.
The two most popular college savings programs are the Qualified Tuition Programs (QTPs) or Coverdell Education Savings Accounts (ESAs). Whichever one you choose, try to start when your child is young. The sooner you begin saving, the less money you will have to put away each year.
Example: Suppose you have one child, age six months, and you estimate that you'll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you'll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until your son is six years old, you'll have to save almost double that amount every year for 12 years.
How Much Will College Cost?
It depends on whether your child attends a private or state school. For the 2013-2014 school year the total expenses--tuition, fees, board, personal expenses, and books and supplies--for the average private college were about $40,917 per year and about $18,391 per year for the average public college. However, these amounts are averages: the tuition, fees, and board for some private colleges can cost more than $55,000 per year, whereas the costs for a state school can be kept under $10,000 per year.
According to the College Board, the annual increase in inflation-adjusted average tuition and fees at public four-year colleges and universities has declined in each of the past five years, from 9.5 percent in 2009-10 to 0.9 percent in 2013-14. Despite the decline, college is still expensive and proper planning can lessen the financial squeeze considerably, especially if you start when your child is young.
Saving with Qualified Tuition Programs (QTPs)
Qualified Tuition Programs, also known as 529 plans, are often the best choice for many families. Every state now has a program allowing persons to prepay for future higher education, with tax relief. There are two basic plan types, with many variations among them:
1. The prepaid education arrangement. With this type of plan one is essentially buying future education at today's costs, by buying education credits or certificates. This is the older type of program and tends to limit the student's choice to schools within the state; however, private colleges and universities often offer this type of arrangement.
2. Education Savings Account (ESA). With an ESA, contributions are made to an account to be used for future higher education.
Tip: When approaching state programs, one must distinguish between what the federal tax law allows and what an individual state's program may impose.
You may open a 529 plan in any state, but when buying prepaid tuition credits (less popular than savings accounts), you will want to know what institutions the credits will be applied to.
Unlike certain other tax-favored higher education programs, such as the American Opportunity Credit (formerly the Hope Credit) and Lifetime Learning Credit, federal tax law doesn't limit the benefit to tuition, but can also extend it to room, board, and books (individual state programs could be narrower).
The two key individual parties to the program are the Designated Beneficiary (the student-to-be) and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.
There are no income limits on who may be an account owner. There's only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. Some state programs don't allow the same person to be both beneficiary and account owner.
Tax Rules Relating to Qualified Tuition Programs
Income Tax. Contributions made by an account owner or other contributor are not tax deductible for federal income tax purposes, but earnings on contributions do grow tax-free while in the program.
Distributions from the fund are tax-free to the extent used for qualified higher education expenses. Distributions used otherwise are taxable to the extent of the portion which represents earnings.
A distribution may be tax-free even though the student is claiming an American Opportunity Credit (formerly the Hope Credit) or Lifetime Learning Credit, or tax-free treatment for a Coverdell ESA distribution, provided the programs aren't covering the same specific expenses.
Distribution for a purpose other than qualified education is taxable to the one getting the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution, which is comparable to the 10 percent penalty in Coverdell ESAs.
The account owner may change beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.
Tip: In 2009, the American Recovery and Reinvestment Act (ARRA) added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not considered qualified expenses.
Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them. Thus they qualify for the up-to-$14,000 annual gift tax exclusion in 2014 (same as 2013). One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of gift and the following four years, so that up to $70,000 can be given tax-free in the first year.
However, a rollover from one beneficiary to another in a younger generation is treated as a gift from the first beneficiary, an odd result for an act the "giver" may have had nothing to do with.
Estate Tax. Funds in the account at the designated beneficiary's death are included in the beneficiary's estate, another odd result, since those funds may not be available to pay the tax.
Funds in the account at the account owner's death are not included in the owner's estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $14,000. For example, if the account owner made the election for a gift of $70,000 in 2014, a part of that gift is included in the estate if he or she dies within five years.
Tip: A Qualified Tuition Program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $70,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.
State Tax. State tax rules are all over the map. Some reflect the federal rules, some reflect quite different rules. For specifics of each state's program, see College Savings Plans Network (CSPN). If you need assistance with this, please contact us.
Saving with Coverdell Education Savings Accounts (ESAs)
You can contribute up to $2,000 in 2014 to a Coverdell Education Savings account (a Section 530 program formerly known as an Education IRA) for a child under 18. These contributions are not tax deductible, but grow tax-free until withdrawn. Contributions for any year, for example 2014 can be made through the (unextended) due date for the return for that year (April 15, 2015). There is no adjustment for inflation; therefore the $2,000 contribution limit is expected to remain at $2,000 for 2014 and beyond.
Only cash can be contributed to a Coverdell ESA and you cannot contribute to the account after the child reaches his or her 18th birthday.
The beneficiary will not owe tax on the distributions if they are less than a beneficiary's qualified education expenses at an eligible institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.
Anyone can establish and contribute to a Coverdell ESA, including the child. An account may be established for as many children as you wish; however, the amount contributed during the year to each account cannot exceed $2,000. The child need not be a dependent, and in fact does not even need to be related to you. The maximum contribution amount in 2014 for each child is subject to a phase out limitation with a modified AGI between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.
A 6 percent excise tax (to be paid by the beneficiary) applies to excess contributions. These are amounts in excess of the applicable contribution limit ($2,000 or phase out amount) and contributions for a year that amounts are contributed to a Qualified Tuition Program for the same child. The 6 percent tax continues for each year the excess contribution stays in the Coverdell ESA.
Exceptions. The excise tax does not apply if excess contributions made during 2014 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2015, for a calendar year taxpayer). However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. The excise tax does not apply to any rollover contribution.
The child must be named (designated as beneficiary) in the Coverdell document, but the beneficiary can be changed to another family member--to a sibling for example, when the first beneficiary gets a scholarship or drops out. Funds can also be rolled over tax-free from one child's account to another child's account. Funds must be distributed not later than 30 days after the beneficiary's 30th birthday (or 20 days after the beneficiary's death if earlier). For "special needs" beneficiaries the age limits (no contributions after age 18, distribution by age 30) don't apply.
Withdrawals are taxable to the person who gets the money, with these major exceptions: Only the earnings portion is taxable (the contributions come back tax-free). Also, even that part isn't taxable income, as long as the amount withdrawn doesn't exceed a child's "qualified higher education expenses" for that year.
The definition of "qualified higher education expenses" includes room and board and books, as well as tuition. In figuring whether withdrawals exceed qualified expenses, expenses are reduced by certain scholarships and by amounts for which tax credits are allowed. If the amount withdrawn for the year exceeds the education expenses for the year, the excess is partly taxable under a complex formula. A different formula is used if the sum of withdrawals from a Coverdell ESA and from the Qualified Tuition Program exceeds education expenses.
As the person who sets up the Coverdell ESA, you may change the beneficiary (the child who will get the funds) or roll the funds over to the account of a new beneficiary, tax-free, if the new beneficiary is a member of your family. But funds you take back (for example, withdrawal in a year when there are no qualified higher education expenses, because the child is not enrolled in higher education) are taxable to you, to the extent of earnings on your contributions, and you will generally have to pay an additional 10 percent tax on the taxable amount. However, you won't owe tax on earnings on amounts contributed that are returned to you by June 1 of the year following contribution.
Considering the wide differences among state plans, federal and state tax issues, and the dollar amounts at stake, please call us before getting started with any type of college savings plan.
Selecting your business successor is a fundamental objective of planning an exit strategy and requires a careful assessment of what you want from the sale of your business and who can best give it to you.
There are only four ways to leave your business: transfer ownership to family members, Employee Stock Option Plan (ESOP), sale to a third party, and liquidation. The more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here's what you need to know about each one.
1. Transfer Ownership to your Children
Transferring a business within the family fulfills many people's personal goals of keeping their business and family together, but while most business owners want to transfer their business to their children, few end up doing so for various reasons. As such, it's necessary to develop a contingency plan to convey your business to another type of buyer.
Transferring your business to your children can provide financial well-being for younger family members unable to earn comparable income from outside employment, as well as allow you to stay actively involved in the business with your children until you choose your departure date.
It also affords you the luxury of selling the business for whatever amount of money you need to live on, even if the value of the business does not justify that sum of money.
On the other hand, this option also holds the potential to increase family friction, discord, and feelings of unequal treatment among siblings. Parents often feel the need to treat all of their children equally. In reality, this is difficult to achieve. In most cases, one child will probably run or own the business at the perceived expense of the others.
At the same time, financial security also may be diminished, rather than enhanced, and the very existence of the business is at risk if it's transferred to a family member who can't or won't run it properly. In addition, family dynamics in general, may also significantly diminish your control over the business and its operations.
2. Employee Stock Option Plans (ESOP)
If your children have no interest or are unable to take over your business, there is another option to ensure the continued success of your business: the Employee Stock Ownership Plan (ESOP).
ESOPs are qualified retirement plans subject to the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There's one important difference however; the majority (more than half) of their investment must be derived from their own company stock.
Whether it's due to lack of interest from your children, an economic downturn or a high asking price that no one is willing to pay, what an ESOP does is create a third-party buyer (your employees) where none previously existed. After all, who more than your employees has a vested interest in your company?
ESOPs are set up as a trust (complete with trustees) into which either cash to buy company stock or newly issued stock is placed. Contributions the company makes to the trust are generally tax deductible, subject to certain limitations and because transactions are considered stock sales, the owner who is selling (you) can avoid paying capital gains. Shares are then distributed to employees (typically based on compensation levels) and grow tax free until distribution.
If your company is a stable, well-established one with steady, consistent earnings, then an ESOP might be just the ticket to creating a winning exit plan from your business.
If you have any questions about setting up an ESOP for your business, give us a call today.
3. Sale to a Third Party
In a retirement situation, a sale to a third party too often becomes a bargain sale--and the only alternative to liquidation. But if the business is well prepared for sale this option just might be your best way to cash out. In fact, you may find that this so called "last resort" strategy just happens to land you at the resort of your choice.
Although many owners don't realize it, most or all of your money should come from the business at closing. Therefore, the fundamental advantage of a third party sale is immediate cash or at least a substantial up front portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well.
If you do not receive the bulk of the purchase price in cash, at closing, however, your risk will suddenly become immense. You will place a substantial amount of the money you counted on receiving in the unpredictable hands of fate. The best way to avoid this risk is to get all of the money you are going to need at closing. This way any outstanding balance payable to you is "icing on the cake."
If there is no one to buy your business, you shut it down. In liquidation the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, and keep what's left, if anything, for themselves.
The primary reason liquidation is considered as an exit plan is that a business lacks sufficient income-producing capacity apart from the owner's direct efforts and apart from the value of the assets themselves. For example, if the business can produce only $75,000 per year and the assets themselves are worth $1 million, no one would pay more for the business than the value of the assets.
Service businesses in particular are thought to have little value when the owner leaves the business. Since most service businesses have little "hard value" other than accounts receivable, liquidation produces the smallest return for the owner's lifelong commitment to the business. Smart owners guard against this. They plan ahead to ensure that they do not have to rely on this last ditch method to fund their retirement.
If you need assistance figuring out which exit strategy is best for you and your business, please don't hesitate to contact us. The sooner you start planning, the easier it will be.
Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today's competitive environment.
Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business's assets. Such benefits include:
• Tax-deferred growth on earnings within the plan
• Current tax savings on individual contributions to the plan
• Immediate tax deductions for employer contributions
• Easy to establish and maintain
• Low-cost benefit with a highly-perceived value by your employees
Here's an overview of four retirement plans options that can help you and your employees save:
SIMPLE: Savings Incentive Match Plan
A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE IRA plans, employees can set aside up to $12,000 in 2014 (same as 2013) by payroll deduction. If the employee is 50 or older then they may contribute an additional $2,500. Employers can either match employee contributions dollar for dollar - up to 3 percent of an employee's wage - or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.
SIMPLE IRA plans are easy to set up by filling out a short form. Administrative costs are low and much of the paperwork is done by the financial institution that handles the SIMPLE IRA plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution. Employees are 100 percent vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.
SEP: Simplified Employee Pension Plan
A SEP plan allows employers to set up a type of individual retirement account - known as a SEP-IRA - for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee's annual salary or $52,000 in 2014 ($51,000 in 2013). SEP plans can be started by most employers, including those that are self-employed.
SEP plans have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year - offering you some flexibility when business conditions vary.
401(k) plans have become a widely accepted savings vehicle for small businesses and allows employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $17,500 in 2014 (same as 2013), reduce a participant's pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $5,500 in 2014 (same as 2013). Employers may offer to match a certain percentage of the employee's contribution, increasing participation in the plan.
While more complex, 401(k)plans offer higher contribution limits than SIMPLE IRA plans and IRAs, allowing employees to accumulate greater savings.
Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEP plans.
Contributions may range from 0 to 25 percent of eligible employees' compensation, to a maximum of $52,000 in 2014 ($51,000 in 2013) per employee. The contribution in any one year cannot exceed 25 percent of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25 percent, while others may get as little as 3 percent. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).
Call Us First
Pension rules are complex, and the tax aspects of retirement plans can also be confusing, so call us first. We'll help you find the right plan for you and your employees.
Some natural disasters are more common in the summer. But major events such as hurricanes, tornadoes and fires can strike at any time, so it's a good idea to plan for what to do in case of a disaster. You can help make your recovery easier by keeping your tax and financial records safe. Here are some basic steps you can take now to prepare:
1. Backup Records Electronically. Many people receive bank statements by email. This is a good way to secure your records. You can also scan tax records and insurance policies onto an electronic format. You can use an external hard drive, CD or DVD to store important records. Be sure you back up your files and keep them in a safe place. If a disaster strikes your home, it may also affect a wide area. If that happens you may not be able to retrieve your records.
2. Document Valuables. Take photos or videos of the contents of your home or business. These visual records can help you prove the value of your lost items. They may help with insurance claims or casualty loss deductions on your tax return. You should store them with a friend or relative who lives out of the area. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings.
3. Update Emergency Plans. Review your emergency plans every year. Personal and business situations change over time as do preparedness needs, so update them when your situation changes. Make sure you have a way to get severe weather information and have a plan for what to do if threatening weather approaches. In addition, when employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
4. Get Copies of Tax Returns or Transcripts. Use Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns or need information from your return. You can also file Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return. Don't hesitate to contact us if you need assistance filling this form out.
5. Check on Fiduciary Bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
6. Count on us. If you fall victim to a disaster, we are here to help you with any disaster-related tax issues you might have.
Children who receive investment income are subject to special tax rules that affect how parents must report a child's investment income. Some parents can include their child's investment income on their tax return, while other children may have to file their own tax return. If a child cannot file his or her own tax return for any reason, such as age, the child's parent or guardian is responsible for filing a return on the child's behalf.
Here's what you need to know about tax liability and your child's investment income.
1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.
2. Special rules apply if your child's total investment income in 2014 is more than $2,000 (same as 2013). The parent's tax rate may apply to part of that income instead of the child's tax rate.
3. If your child's total interest and dividend income is less than $10,000 (same as 2013), then you may be able to include the income on your tax return. If you make this choice, the child does not file a return. Instead, you file Form 8814, Parents' Election to Report Child's Interest and Dividends, with your tax return.
4. If your child received investment income of $10,000 or more in 2014 (same as 2013), then he or she will be required to file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,000, with the child's federal tax return for tax year 2014.
Starting in 2013, a child whose tax is figured on Form 8615, Tax for Certain Children Who Have Unearned Income, may be subject to the Net Investment Income Tax. NIIT is a 3.8 percent tax on the lesser of either net investment income or the excess of the child's modified adjusted gross income that is over a threshold amount.
If you have any questions about tax rules for your child's investment income in 2014, don't hesitate to send us an email or give us a call.
If you are looking for a tax deduction, giving to charity can be a "win-win" situation--good for them and good for you. Here are eight things you should know about deducting your gifts to charity:
1. You must donate to a qualified charity if you want to deduct the gift. You can't deduct gifts to individuals, political organizations or candidates.
2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.
3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that's more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services.
4. If you give property instead of cash, the deduction is usually that item's fair market value. Fair market value is generally the price you would get if you sold the property on the open market.
5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.
6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.
7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information.
8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift.
Questions about charitable donations? Don't hesitate to give us a call.
Taking money out early from your retirement plan may trigger an additional tax. Here are seven things that you should know about early withdrawals from retirement plans:
1. An early withdrawal normally means taking money from your plan before you reach age 59 1/2.
2. If you made a withdrawal from a plan last year, you must report the amount you withdrew to the IRS. You may have to pay income tax as well as an additional 10 percent tax on the amount you withdrew.
3. The additional 10 percent tax does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
4. A rollover is a type of nontaxable withdrawal. Generally, a rollover is a distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. You usually have 60 days to complete a rollover to make it tax-free.
5. There are many exceptions to the additional 10 percent tax such as using the money for qualified higher education expenses or unreimbursed medical expenses in excess of 10 percent of adjusted gross income. Some of the exceptions for retirement plans are different from the rules for IRAs.
6. If you make an early withdrawal, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return.
The rules for retirement plans can be complex, but we're here to help. Give us a call today. We'll make sure you file the right tax forms and help you get the tax benefits you're entitled to.
Employees Who Work for Tips - If you received $20 or more in tips during July, report them to your employer. You can use Form 4070.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in July.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July.
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