Author: production

Retirees often have the bulk of their portfolios in bonds, which tend to offer stable income. But you shouldn’t assume they’ll always perform well, thanks to the possibility of interest-rate increases.

As you may recall, the U.S. Federal Reserve Board (Fed) reacted to the 2008/2009 financial crisis by keeping interest rates near all-time lows to stimulate consumer spending (which is key to any economic recovery.) But interest rates can’t stay low forever, and the Fed has indicated that they’re poised to increase rates, perhaps as soon as 2015.

That may be a problem for bond investors. Generally, bond prices move in the opposite direction to interest rates. Higher interest rates drive bond prices down, and vice versa.

Why? Say, you buy a newly issued $10,000 bond when interest rates are at 8 percent, so your bond yields 8 percent, or $800, annually. But after your purchase, the prevailing interest rate increases to 9 percent.

Now a newly purchased $10,000 bond yields $900 annually. If you wanted to sell your bond, nobody would pay you $10,000 to get $800 interest when the going rate is $900. You’d most likely have to reduce your price.

While the threat isn’t immediate, it’s not too early to consider how to try to protect your bond portfolio from this possibility. For example, you might consider moving your bond investments to mutual funds that invest in floating-rate loans or Treasury Inflation Protected Securities (TIPS).

Your advisor can help you determine if any of these investments are appropriate for you.

In today’s challenging economy, many people who aren’t yet of retirement age may want to withdraw money from their Individual Retirement Accounts (IRAs.) It’s generally a good idea to keep your IRA assets untouched until you can withdraw them penalty-free at age 59½, but if you need to make an exception, you’ll want to do so while avoiding tax implications, if possible.

The bad news? Typically, an early withdrawal from a traditional IRA is considered income, and taxed at your regular income-tax rate. Additionally, you may get hit with a 10 percent penalty. Depending on your tax bracket, that could add up to more than one-third of your money.

While it’s virtually impossible to avoid paying income tax on the withdrawal, you might be able to avoid the penalty by taking advantage of these exceptions:

• You can withdraw the money penalty-free to cover medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) for any tax year.
• You can also withdraw the money to cover health insurance premiums, but this is only penalty-free if they’re used to pay the premiums for you, your spouse, or your dependents when you are unemployed.
• And you can withdraw the money penalty-free to cover higher education expenses for you, your spouse, child, stepchild, or adopted child.
• Additionally, withdrawals taken as substantially equal periodic payments (SEPPs), which are annuity-like IRA withdrawals you take at least annually, are penalty-free. But, SEPPs are available only under certain circumstances.

Many of these techniques are complicated. For example, in regard to SEPPs, you must continue taking the exact amount of the SEPP for at least five years, or until you reach age 59½, whichever is later. As a result, you should contact your advisor for professional advice before using any of these strategies. He or she can tell you what will work best given your individual financial situation.

If you want to stay in the fixed-income market but are afraid that interest rates might rise, you might want to consider a short-term bond fund. You’re still invested in an income fund, but the shorter maturities of the bonds in the fund’s can potentially protect against losses when interest rates rise.

Rates rise – value declines

Why do bond funds lose value when interest rates rise? Suppose a fund holds a $20,000 bond that pays 4 percent interest per year. Then the U.S. Federal Reserve Board (Fed) raises interest rates, and bonds start paying 5 percent interest per year.

When this happens, the market price of the 4 percent bond in the fund will decline, because no one wants to pay $10,000 for a bond with a 4 percent yield when a bond with the same value purchased now is yielding 5 percent.

Protect against rising rates

This is always the case: When interest rates rise, the market prices of existing bonds fall. (The opposite is true when interest rates fall: Bond prices rise.) But, you can help protect your bond fund against a rise in interest rates by switching to a fund that has a portfolio of bonds with shorter maturities – a short-term bond fund. With such a fund, you won’t be locked into a bond that doesn’t mature for years. The fund will contain faster-maturing bonds, which can be replaced as they mature.

Rate sensitivity measured by duration

Your advisor can help you determine how sensitive your current bond fund is to interest rates, but one way to do so yourself is to look at the fund’s average duration. Duration measures the sensitivity of a fixed-income investment’s price to a change in interest rates.

It is expressed as a number of years. In general, the longer the duration, the more a bond’s price will fluctuate when interest rates rise or fall.

Most Americans consider 65 the traditional age to take Social Security benefits, but there are other options. You can take them early, at age 62, or late, up to age 70.

If you start collecting Social Security benefits in the first year of eligibility – at 62 – you’ll receive a smaller monthly payment, but you could, theoretically, receive benefits for a longer period of time and maximize your total gain.

On the other hand, you could wait until age 70 to start collecting Social Security benefits, at which time you could qualify for the maximum possible payment.

There are pros and cons to taking Social Security early, late, or on time, but here we’ll discuss the argument for waiting. The main reason to delay taking benefits until you reach age 70 is that you’ll receive an additional 8 percent of income per year for every year past your full retirement age; this depends on the year in which you were born, but it is currently 66 or 67.

As well, your annual cost-of-living increase will be based on this higher amount, which is a significant return in today’s market environment.

Of course, in this case, you’ll need another source of income until you’re 70, which means you’ll either have to keep working or live off other investments. There also may be some concern that Social Security won’t be around if you wait the additional five years.

This option isn’t for everyone, but if you can plan ahead, it might be a compelling alternative.

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If you want to buy an investment property, but don’t have the cash in a non-retirement account, consider this: An individual retirement account (IRA) can legally own real estate, as well as other alternative investments, such as gold and oil.

Large financial institutions that act as custodians for most IRAs typically limit investments to stocks, bonds, cash, mutual funds, and other such traditional investments. But smaller custodians offer what are called self-directed IRAs, which allow assets to be invested in alternative investments such as real estate.

Although the Internal Revenue Service (IRS) allows self-directed IRAs, you have to be sure to follow the rules, and the big one is no “self-dealing” is allowed. In other words, you can’t use an IRA to buy property that benefits you or certain family members, even indirectly. So, you can’t live in the property; even renting it to yourself is a prohibited transaction.

There are also tax implications if there is debt associated with an investment in a self-directed IRA, such as a mortgage – which will certainly be the case unless you buy the property in full. Because there is financing involved, some of investment income may be taxable.

Additionally, when it comes time to take required minimum distributions from the IRA, you may have a hard time determining the value of the assets and therefore the amount of the distributions. Tax penalties will be levied if you take the wrong distribution.

At the end of the day, there are a number of risks and rewards associated with self-directed IRAs.

However, before pursuing one, it’s a good idea to talk to your advisor; he or she will ensure that you know what you are getting into when investing in a self-directed IRA and offer guidance on the best way to go about it.

The information contained in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations. We cannot give tax advice.

If you qualify for a home-office deduction, there’s good news. Starting this year, there’s a simpler way to claim it.

As you may know, taxpayers who use a home office exclusively and regularly for work are able to take a deduction for the space. And more than a million taxpayers claimed deductions for business use of a home for the 2012 tax year, according to the Internal Revenue Service (IRS). However doing so wasn’t easy.

Taxpayers who wanted to claim the deduction had to complete a lengthy form. Expenses such as utilities and property insurance had to be allocated between personal use and business use. Many people avoided taking the deduction because the form was so complex.

A new option: Now, taxpayers can claim $5 per square foot of space that meets the definition of a qualified home office up to a maximum of 300 square feet, or $1,500. As an example, if your office is 10 feet by 10 feet – 100 square feet – your total home-office deduction would be $500. (Taxpayers can continue to take home-related itemized deductions, such as mortgage interest, on Schedule A.)

This new option saves time, but that doesn’t mean you’ll want to use it. If your home-office deductions are greater than the $1,500 limit, you’ll want to use the old method.

Also, note that this new option does not change the eligibility rules for taking the deduction. For a complete list of home-office deduction qualifications, see IRS Publication 587, or discuss it with your advisor.

The information contained in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations. We cannot give tax advice.

Most of us who are middle-aged or older have competing demands on our financial resources: our children, our aging parents, and ourselves. How do we handle it all?

Pay yourself first: Start with yourself. Using your retirement funds to cover current expenses can threaten your financial security. So make a commitment to pay yourself first. Employer-sponsored 401(k) plans, Individual Retirement Accounts (IRAs), and variable annuities allow your investment earnings to grow, tax-deferred, until they’re withdrawn; this could mean your assets may grow faster than if you made the same contributions to a taxable account.

Education costs: If you have children, plan for their future. Estimate how much money they’re going to need for college, then consider whether they’ll qualify for financial aid, scholarships, grants, loans, and student work-study programs.

Subtract the amount he or she can get from other sources from the total amount required, then work with your financial advisor to develop an investment plan that will make up the difference.

Long-term care costs: Consider your parents’ finances. Do they have the resources to support themselves in a long-term situation? Do you, if they need your financial help? Contrary to popular belief, Medicare only covers about three months in a nursing home after a hospitalization, and Medicaid won’t cover nursing home costs until your parents have exhausted virtually all of their hard-earned personal resources. Careful planning can help you prepare, but it starts with finding out if your parents are prepared for such expenses. Your financial advisor can help.

f you are looking to add to your retirement nest egg, you may want to know more about the contribution limits for 2014. The Internal Revenue Service (IRS) sets different contribution limits for different types of retirement accounts, and keeping up with them can be difficult, as they tend to change each year. But the good news is: If you’re 50 or older, you can make additional catch-up contributions.

Below are listed the 2014 retirement plan contribution limits. You can make contributions for 2014 until the tax filing deadline of April 15, 2015.

If you are looking to add to your retirement nest egg, you may want to know more about the contribution limits for 2014. The Internal Revenue Service (IRS) sets different contribution limits for different types of retirement accounts, and keeping up with them can be difficult, as they tend to change each year. But the good news is: If you’re 50 or older, you can make additional catch-up contributions.

Below are listed the 2014 retirement plan contribution limits. You can make contributions for 2014 until the tax filing deadline of April 15, 2015.

Traditional IRAs and Roth IRAs:
Contribution limit: $5,500
Age 50 catch-up contribution limit:
$6,500

Deferred-contribution plans, such as 401(k), 403(b), and 457 plans: Contribution limit: $17,500
Age 50 catch-up contribution limit: $23,000

Simple IRAs: Contribution limit: $12,000
Age 50 catch-up contribution limit: $14,500

Note that these are just the contribution limits; there are also income limits. For example, you can only contribute to a Roth IRA in 2014 if your adjusted gross income (AGI) is less than $129,000 if you’re single, or $191,000 if you’re married and filing jointly. The amount you are able to contribute declines gradually once your AGI exceeds $114,000 for singles, and $181,000 for couples.

Savers’ Tax Credit: Don’t forget about the Retirement Savings’ Contribution Credit (The Savers’ Credit), which is an often-overlooked tax break that provides an additional incentive to those who wish to contribute to a retirement savings account. This is in addition to any tax break you already get for contributing to a retirement plan, and essentially it allows you to also receive a credit worth 10-50 percent of up to $2,000 in your contributions to a retirement plan. It’s well worth remembering, as it can reduce your tax bill by up to $1,000.

This article is not intended to provide tax or legal advice and should not be relied upon as such. Any specific tax or legal questions should be discussed with your tax or legal advisor.

As many small business owners know, ignoring the small stuff is sometimes dangerous; small problems can become big ones and ultimately hold you back from accomplishing your goals.

One such issue is employee fringe benefits. But you can ensure this won’t become an impediment to long-range success by creating an effective system.

Advances and reimbursements

In addition to wages, your employees likely receive other types of payments. Accounting for each of these events depends upon the processes involved and the rules apply, even if you are the only employee.

Some payments are considered taxable fringe benefits, and these are treated the same as wages; income tax withholding and payroll taxes apply, and the amounts are included on payroll reports.

Corporations must receive substantiation for expense reimbursements to avoid having to report the payments as taxable fringe benefits. Even sole proprietors and partnerships must document expenses paid as reimbursement to business owners. Without supporting evidence, cash outlays are treated as owner or partner withdrawals of taxable profit rather than deductible business expenses.

Reimbursement made under the rules for an accountable plan is not considered income for the recipient. Corporations establish accountable plans by reimbursing only reasonable expenses that have a business connection, maintaining adequate records and assuring that employees return any advances in excess of incurred business expenses.

The same standards apply to proprietors and partners claiming tax-deductible expenses for amounts their businesses pay to them as reimbursements. Small businesses can escape serious aggravation by avoiding cash advances and only reimbursing costs that are supported by receipts.

Several exceptions exist. Ensure you discuss with your accounting professional the types of reimbursement your business provides.

Employee gifts

Most employee gifts are considered taxable compensation. However, those employee gifts that meet the de minimis exception are not taxed. These extremely small gifts are excluded from treatment as taxable employee fringe benefits. The primary factor in identifying a de minimis gift is that accounting for it is unreasonable or administratively impractical based upon its value and frequency.

Exceptions for de minimis gifts only apply to non-cash items. Gifts of cash to employees are always considered taxable compensation. This includes cash equivalents such as gift cards.

Awards and discounts

Employee achievement awards dodge treatment as taxable gifts if they comprise tangible property given for length of service, productivity or safety. The average awarded amount per employee cannot exceed $400, and no employee can receive more than $1,600 in a year.

Awards for other purposes are also exempt when no single employee receives more than $400 annually. To qualify for this exemption, the awards must be governed by a written plan that doesn’t discriminate in favor of highly compensated employees.

Employee discounts are not a taxable fringe benefit as long as items are sold to employees for at least the company’s gross cost. Non-taxable discounts may also extend to spouses and dependent children of employees.

Create an effective system of accounting for employee fringe benefits, and you’ll avoid being derailed on the road to success.

Small businesses that are tempted to act like solopreneurs while hiring independent contractors to do the work of employees should beware; the Internal Revenue Service (IRS) is on the case.

With the popularity of contract workers, the IRS has become more diligent in seeking out misclassified workers. They’ve discovered that many businesses have them…and that’s bad news for those businesses. If the IRS finds contract workers performing as employees, the employer will be billed for unpaid payroll taxes and incur severe penalties, after which the state will demand past due unemployment insurance contributions.

Employers don’t usually withhold taxes from independent contractors. So contract workers present the IRS with a problem at tax time; it’s a hassle to collect taxes from them. It’s easier to collect withheld taxes from a single employer than from multiple independent contractors. This is why the IRS is adamant about accurate worker classification. Here are three key features that define independent contractors:

• Contractors themselves decide the time and the way they work.
• When you hire an independent contractor, you specify the end result, not the way it will be achieved.
• If you provide a fixed location and tools for the job, and dictate hours, it’s nearly impossible to claim a worker is an independent contractor.

The benefits of outsourcing makes hiring contractors worthwhile; however, be diligent about classifying contractors, or the IRS may come calling.