Through the end of this year only, there is a special tax benefit if you convert your traditional IRA to a Roth IRA, which allows you to make tax-free distributions from your retirement account. There is no income limitation, which previously disallowed a Roth conversion if your adjusted gross income was greater than $100,000. Before 2010, if your tax filing status was married filing separately you were not able to convert either, but this restriction has been lifted as well. Additionally, one of the reasons to take advantage of this during 2010 is that you can include any income from the conversion on your 2011 and 2012 tax returns.
But even with these benefits, should you convert your IRA to a Roth and pay additional taxes currently? Possibly, but it depends upon your situation and several major factors. The good news is that you have some time during 2011 to convert or “recharacterize” your Roth back to a traditional IRA if you realize that would be beneficial to you. The deadline to do this is April 15th 2011, but if you file an extension you will have until October 15th 2011.
Do You Have the Money to Pay the Tax? Even though you can spread out the income from the conversion over two years, do you have the money to pay the additional taxes? For example, if you convert $100,000 and you are in the $25% bracket, do you have an additional $12,500 for each of those years? If not, then converting is not right for you. And you never want to use some of the IRA distribution to pay the tax because you will create a tax nightmare for yourself with possible early distribution penalties of 10%.
How Much Time Until Retirement? If you are in your sixties, a conversion will probably not make a lot of sense. The main reason for the conversion is to not pay any taxes in the future from your Roth, which means that you will need several years to recoup the taxes that you have paid up-front. Although, you may want to convert to minimize the tax impact to your heirs. Another benefit is that a Roth IRA does not require minimum distributions once you reach age 70 ½.
Which Tax Bracket Will I Be In? If you think that you will be in a lower tax bracket when you retire, then converting now does not make sense. If you think that you will either be in a higher tax bracket or that tax rates will be higher when you retire, then a Roth makes a lot of sense. Of course, this is a guess, but you need to make an educated guess based upon all of the known factors.
These are just a few of the factors to consider when converting your IRA to a Roth. Conversion strategies, such as filing an extension, the creation of multiple Roth accounts, or conversion of only a partial balance can also be implemented to help make your conversion more tax-efficient and allow the benefit of hindsight.
Thursday, November 18, 2010
Monday, November 15, 2010
Do You Keep Track of Your Business Mileage?
Most business owners, sales people, and some employees should keep track of their business miles for tax purposes. In my experience, most do not keep very good records, and scramble to come up with an amount to prepare their taxes.
The best practice is to keep a vehicle mileage log. It doesn’t have to be fancy, as it can be written in a notebook, but a better option is Microsoft Excel, which helps with the calculations. An example of a good log would show the following:
- Beginning of year odometer reading
- Columns to show the date, where traveled, description, and the business miles driven
- A total at the bottom for business miles
- End of year odometer reading
Instead of keeping track of everywhere you have driven, for business and personally, you can easily figure your overall miles by subtracting your beginning odometer reading from the ending reading. Subtract your total business miles from the difference to obtain the personal amount.
What’s the benefit of all this extra work? Actually there are several. First, if you are ever audited, you will need to prove the business use of your vehicle. Second, it can reduce your taxes! For example, instead of deducting your actual vehicle business expenses, you may be eligible to use the alternative mileage method. By multiplying your business miles by the mileage rate, currently at $.50 a mile, you can deduct this amount if it is greater than your actual expenses.
The best practice is to keep a vehicle mileage log. It doesn’t have to be fancy, as it can be written in a notebook, but a better option is Microsoft Excel, which helps with the calculations. An example of a good log would show the following:
- Beginning of year odometer reading
- Columns to show the date, where traveled, description, and the business miles driven
- A total at the bottom for business miles
- End of year odometer reading
Instead of keeping track of everywhere you have driven, for business and personally, you can easily figure your overall miles by subtracting your beginning odometer reading from the ending reading. Subtract your total business miles from the difference to obtain the personal amount.
What’s the benefit of all this extra work? Actually there are several. First, if you are ever audited, you will need to prove the business use of your vehicle. Second, it can reduce your taxes! For example, instead of deducting your actual vehicle business expenses, you may be eligible to use the alternative mileage method. By multiplying your business miles by the mileage rate, currently at $.50 a mile, you can deduct this amount if it is greater than your actual expenses.
Do You Use QuickBooks? You Should Be Doing This!
QuickBooks is a very popular accounting software program for small businesses, and I use it personally for my practice as well. But, if you are using QuickBooks, there is one key step you should be taking – reconcile your bank and credit card accounts!
Why? When you reconcile your accounts, it helps to make sure that the data you entered is accurate. Everyone makes mistakes when they enter data, even when they upload data. This is okay, as long as you catch your mistakes by reconciling to your bank and credit card statements.
Reconciling your accounts will not only help you to make sure bank accounts are accurate, but it will also help you to make your receivables from customers and payables to vendors more accurate as well.
Fortunately, this is not a difficult task to do. If you have never reconciled before, it may take some work to get the first month’s reconciliation taken care of, but after that, the task become easier. The steps to reconcile are as follows: Click on banking; reconcile; choose the correct account; type in the statement date and the balances.
We offer ongoing QuickBooks consulting to assist clients with their books to insure they are getting the most from QuickBooks. Do you need help?
Why? When you reconcile your accounts, it helps to make sure that the data you entered is accurate. Everyone makes mistakes when they enter data, even when they upload data. This is okay, as long as you catch your mistakes by reconciling to your bank and credit card statements.
Reconciling your accounts will not only help you to make sure bank accounts are accurate, but it will also help you to make your receivables from customers and payables to vendors more accurate as well.
Fortunately, this is not a difficult task to do. If you have never reconciled before, it may take some work to get the first month’s reconciliation taken care of, but after that, the task become easier. The steps to reconcile are as follows: Click on banking; reconcile; choose the correct account; type in the statement date and the balances.
We offer ongoing QuickBooks consulting to assist clients with their books to insure they are getting the most from QuickBooks. Do you need help?
Wednesday, November 3, 2010
Year-End Tax Planning Tips
We still don’t know what is going to happen to the tax rates after December 31st, but most likely they will go up. So how do you plan ahead to try to save taxes both this year and next? Here are a few ways that are generally effective no matter where taxes are headed:
For Business Owners:
Purchases of equipment and vehicles through the end of this year may qualify for bonus depreciation: This allows you to generally expense 50% of the cost of equipment or a vehicle for this year. For example, if you purchase a new vehicle, you may receive an additional $8,000 of additional depreciation expense for this year.
Review you business structure: If you are a single-member LLC or sole-proprietor, does this structure still make sense for next year? What if you are an S-Corp? Each entity has its own advantages and disadvantages, but a thorough analysis to see which entity will save you more taxes and help your business prosper is beneficial.
Retirement plans: Does your business have a retirement plan? Some plans need to be set-up before the end of this year to take advantage of them for 2010. If you have a plan already in place, is it set-up correctly to allow you to maximize your contributions and save taxes?
Estimated taxes & withholdings: Should you increase your estimated tax payments or withholdings to avoid underpayment penalties, and increase your itemized deductions for state tax payments? Now is the time to plan.
For Individuals:
Residential energy credits: You have until the end of this year to purchase eligible energy-efficient equipment, such as a new hot water heater, or even doors and windows, to receive a credit equal to 30% of the cost for a maximum credit of $1,500.
Convert you IRA to a Roth: For this year only, if you convert your IRA to a Roth IRA, you can defer the taxes over two years, 2011 and 2012. By converting to a Roth, distributions are tax-free! This decision should be weighed carefully to see if it makes sense for you.
Contribute to an FSA Plan: If your employer offers a flexible spending account for medical expenses, you can save taxes by participating. You will most likely need to enroll before this year is over.
Remember, a little planning can go a long way!
For Business Owners:
Purchases of equipment and vehicles through the end of this year may qualify for bonus depreciation: This allows you to generally expense 50% of the cost of equipment or a vehicle for this year. For example, if you purchase a new vehicle, you may receive an additional $8,000 of additional depreciation expense for this year.
Review you business structure: If you are a single-member LLC or sole-proprietor, does this structure still make sense for next year? What if you are an S-Corp? Each entity has its own advantages and disadvantages, but a thorough analysis to see which entity will save you more taxes and help your business prosper is beneficial.
Retirement plans: Does your business have a retirement plan? Some plans need to be set-up before the end of this year to take advantage of them for 2010. If you have a plan already in place, is it set-up correctly to allow you to maximize your contributions and save taxes?
Estimated taxes & withholdings: Should you increase your estimated tax payments or withholdings to avoid underpayment penalties, and increase your itemized deductions for state tax payments? Now is the time to plan.
For Individuals:
Residential energy credits: You have until the end of this year to purchase eligible energy-efficient equipment, such as a new hot water heater, or even doors and windows, to receive a credit equal to 30% of the cost for a maximum credit of $1,500.
Convert you IRA to a Roth: For this year only, if you convert your IRA to a Roth IRA, you can defer the taxes over two years, 2011 and 2012. By converting to a Roth, distributions are tax-free! This decision should be weighed carefully to see if it makes sense for you.
Contribute to an FSA Plan: If your employer offers a flexible spending account for medical expenses, you can save taxes by participating. You will most likely need to enroll before this year is over.
Remember, a little planning can go a long way!
Friday, September 17, 2010
How Healthy Are Your Sales?
There are many ways of measuring risk, but did you know that your sales concentration may be placing an unnecessary risk to your business? This also applies to sales professionals as well.
I have seen it over and over again, whereas a small business relies heavily on one or several large customers, and then the customer disappears. Sometimes multiple large customers disappear at the same time. Either they go out of business, cut-back due to a slowdown, have management changes, or other various changes happen that are beyond your control. This will all impact your business as your sales now plummet.
As a good rule of thumb, you don’t want to have more than 10% of your sales from one customer. It creates more risk than necessary because you never know if or when things will change. There is an adage known as Murphy’s Law that states, “Anything that can go wrong, will go wrong.” Additionally, you don’t want to rely heavily on one referral source for new business either. Murphy’s Law applies here as well.
What should you do to minimize your risk? First, never build your business around one or a few customers. This may be the case when a business is relatively new, but over time it is a huge risk. Secondly, assess sales per client to acknowledge who the large customers are. And thirdly, you need to market your business to decrease your risk of serving a few large customers.
A healthy business is constantly looking for ways to reduce risk. This not only decreases your chance of set-backs, but increases your odds of insuring ongoing success.
I have seen it over and over again, whereas a small business relies heavily on one or several large customers, and then the customer disappears. Sometimes multiple large customers disappear at the same time. Either they go out of business, cut-back due to a slowdown, have management changes, or other various changes happen that are beyond your control. This will all impact your business as your sales now plummet.
As a good rule of thumb, you don’t want to have more than 10% of your sales from one customer. It creates more risk than necessary because you never know if or when things will change. There is an adage known as Murphy’s Law that states, “Anything that can go wrong, will go wrong.” Additionally, you don’t want to rely heavily on one referral source for new business either. Murphy’s Law applies here as well.
What should you do to minimize your risk? First, never build your business around one or a few customers. This may be the case when a business is relatively new, but over time it is a huge risk. Secondly, assess sales per client to acknowledge who the large customers are. And thirdly, you need to market your business to decrease your risk of serving a few large customers.
A healthy business is constantly looking for ways to reduce risk. This not only decreases your chance of set-backs, but increases your odds of insuring ongoing success.
Children and Tax Benefits
With the recent birth of our twins, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:
Dependency Exemption: For each qualifying dependent child, you can exempt from your income $3,650.
Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.
Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.
Education Credits: There are three credits available for education expenses. The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000). The Hope Credit provides a credit of up to $1,800 for the first two years of college (100% of the first $1,200 of expenses and 50% of the next $1,200). The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses). There are income limitations for each credit which range from $120,000 for the Lifetime Learning Credit for joint filers to $180,000 for the American Opportunity and Hope Credits for joint filers. The income limitations are half for all other filers.
Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.
These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.
The 1099 Nightmare is Coming
In addition to income tax filings, sales tax filings, and payroll tax filings, businesses need to also file annual 1099’s. Generally, a 1099-MISC is an information report that needs to be prepared by a business when they spend $600 or more on services from a non-employee. For example, if you are a contractor and you pay $600 or more to a subcontractor that does not own a corporation, you will need to issue him a 1099 at the end of the year.
Depending upon how many subcontractors you compensate, if any, you may not have to prepare and issue that many 1099’s during any given year. It may not be much of a burden, except for the new changes due to the Patient Protection and Affordable Care Act . . .
After December 31, 2011 business will have to report all payments totaling $600 or more to any vendor during the year, with almost no exceptions. If you go to the same gas station to fill up your tank, you will need to issue a 1099. Purchase supplies from Staples? Have a telephone and a cell phone bill? Take clients to the same restaurant often? Business owners will also need to obtain the taxpayer identification number of all of their vendors, along with their address to comply with the new regulations.
The main reason for these changes is because the federal government is trying to increase compliance with the tax laws by having businesses report all income that is received. But these reporting requirements are still being clarified by the IRS, and the obvious result of these changes is an increased time and expense burden to small business owners.
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