Tax Planning

No Succession Plan Often Means Businesses Live and Die with Owners

To make it past the first generation, family owned businesses need a lot of communication and planning for succession.

To make it past the first generation, family owned businesses need a lot of communication and planning for succession.

Business_meetingThe challenge is clear: less than a third of all family owned businesses will survive to the second generation. By the third generation, prospects for survival are even worse—only one in 10 will make it. With approximately 80-90% of American businesses being owned by families, the potential for business longevity is not great.  However, it can be addressed.

KRCU’srecent article, “Business Succession Planning is Very Important,”reminds us that business succession planning is a process in which business owners research and consider a strategy to move forward in the event of death, illness, or simply transition.

Business succession planning implements several estate planning strategies. There is no “one size fits all” plan. A business owner should carefully consider his or her options. Without a plan in place, there’s a good chance for failure.

There are several factors to be examined. There are questions like estate taxes, liquidity, ownership percentages, family disagreements and the management capabilities of those relevant individuals.

The uncertainty of a transition can impact the business internally among staff and externally with customers. As a result, it’s vitally important to create a business succession plan and communicate that plan to your team and family.

There are many succession planning vehicles and succession planning concerns. Seek the advice of an expert on these matters and do it sooner rather than later. Work with an experienced estate planning attorney, who can walk you through the issues that must be addressed.

Many experts think that business succession planning is at least as important (and maybe more important) than individual estate planning.

Improving the chances that a family owned business will continue past the first generation, takes as much work as building it did in the first place. A seamless transition to the next generation is a worthwhile task, benefiting customers, employees and the community, as well as family members.

Reference: KRCU(June 17, 2018)“Business Succession Planning is Very Important”

Wait, Social Security Benefits are Taxed?

How much of your Social Security benefits are taxable depends on several factors.

How much of your Social Security benefits are taxable depends on several factors. You’ll need the bigger picture of your retirement income to know how much of a hit you can expect.

TaxDepending on the amount of other income and Social Security benefits, those benefits are included with other taxable income. It could be 85%, 50%, or zero. There are steps you can take to reduce your tax exposure.  However, it takes planning and knowing the formulas.

Investopedia’sarticle, “How to Avoid the Social Security Tax Trap,”explains what’s includable in Social Security income and what’s taxed.

To know if your Social Security benefits will be partially taxed or fully tax-free, you need to use these formulas. Add up your gross income with certain adjustments. This is the amount from line 21 of Form 1040. Then add back any excluded income from interest on U.S. savings bonds used for higher education purposes, employer-provided adoption benefits, foreign earned income or foreign housing and income earned by residents of American Samoa or Puerto Rico.

To see if 50% of your Social Security benefits are taxed, review the amount listed on Form SSA-1099, Social Security Benefit Statement, which is sent to you by the Social Security Administration by the end of January following the year in which benefits were paid. For income tax purposes, the benefits are the gross amountlisted in Box 3, not the net amount you actually received after premiums for Medicare were withheld.

All tax-exempt interest is interest from municipal bonds listed on line 8a of Form 1040.

Look at the results compared to a “base amount” fixed for your filing status. If you’re below this amount, then none of your benefits are taxed:

  • $32,000 if married filing jointly; or
  • $25,000 if single, head of household, qualifying widow(er) and married filing separately, where spouses lived apart for the entire year.

If the income mix you figured earlier is equal to or above this base amount, then see if 50% or 85% of benefits is includible. For married persons filing jointly, 50% is includible for income between $32,000 and $44,000, and 85% is includible, if income is more than $44,000.

For singles, head of household, qualifying widow(er) and married filing separately, where spouses lived apart for the entire year, 50% is includible of income, if between $25,000 and $34,000, and 85% of benefits is includible, if income is above $34,000. For a married person filing separately who did not live apart from their spouse for the full year, 85% of benefits are includible.

There are also some special situations. The usual computation isn’t used if you:

  • Made deductible IRA contributions and you or your spouse were covered by a qualified retirement plan through your job or self-employment. (Instead, use the worksheet in IRS Publication 590-A);
  • Repaid any Social Security benefits during the year (see in IRS Publication 915); or
  • Received benefits this year for an earlier year (You can make a lump-sum election that will reduce the taxable amount for this year. Use worksheets in IRS Publication 915).

Since 85% of benefits are includible, once you exceed the $44,000/$34,000 income threshold, it may be wise to defer income to a particular year. Say that you know your income is going to be above this threshold and you’re planning on converting a traditional IRA to a Roth IRA. You could make the conversion in this year and pay the taxes on it. This won’t result in any additional inclusion of Social Security benefits. As a result, in the future, you won’t have to take required minimum distributions (RMDs) because you have a Roth IRA, not a traditional one. This will keep your income lower in future years than it would have been without the conversion.

Remember that your federal income tax isn’t the only tax to worry about. Thirteen states tax Social Security benefits. However, 37 states don’t (either because they have no state income tax or fully exempt Social Security benefits).

Among the 13 states, seven of them (Connecticut, Kansas, Missouri, Nebraska, New Mexico, Rhode Island, and Utah) have high-income thresholds for taxing benefits. So, even if you’re a resident, your benefits may not actually be taxed.

 However, if you live in Minnesota, North Dakota, Vermont, or West Virginia—and your benefits are taxable for federal income tax purposes—they’re automatically taxable for stateincome tax purposes. This is because these states use the federal determination. Remember this, if you’re thinking of relocating in retirement.

You’ll want to gather up all your retirement income information and estate planning documents to see what can be done to reduce Social Security tax exposure. Your estate planning attorney should be able to help guide you through the process.

Reference: Investopedia(March 13, 2018) “How to Avoid the Social Security Tax Trap”

How to Balance Working with Social Security Benefits

Yes, you can work while collecting Social Security, but you have to be very careful.

Yes, you can work while collecting Social Security, but you have to be very careful. Earn too much and you’ll be working for nothing!

Bigstock-Senior-couple-standing-togethe-12052331If your retirement plan includes working, even if only part time, make sure to know your income limits. At a certain point, your earnings will either cause Social Security to be reduced, or you might end up paying more in taxes.

Investopedia’srecent article, “How Working Affects Your Social Security Benefits,”says that when you’re retired, if you claim at your full retirement age (FRA), you are entitled to receive 100% of your benefits from Social Security (that age varies based on your year of birth). Those individuals turning 62 in 2018, will be able to fully retire at 66 and four months and begin collecting Social Security.

However, claiming benefits early means you get lessin Social Security income each month, than if you had waited until your FRA. Therefore, if you can wait until full age, or even later, it may be wise. For every month you claim beforethe full retirement age, the monthly benefit you receive will go down by a fixed percentage. You could claim an income that is about a third less,than if you would have waited. Claiming early and earning too much, means the amount you receive later may be reduced even more. This year, people who earn more than $16,920 will have a dollar held back for every two earned above the limit.

In 2018, your earnings can go to $17,040, and you won’t have your benefits impacted. Hitting your FRA and claiming in 2018 means you can earn $45,630 without a reduction in benefits. The reduction won’t be spread out over the year. Monthly benefit payments will be stopped, until the amount reduced is covered and then you’ll begin receiving your monthly checks again.

Because there’s no pro-rating, you won’t get income from Social Security until the amount is covered. The rest of the checks will then begin coming each month until the end of the year, with any extra money withheld paid back to you the following year. It is not forfeited, but added into your benefit calculation to up your benefit when you hit FRA.

The income limit on working only applies, if you’re youngerthan full retirement age.  People who’ve already reached FRA can earn as much as they want, and it won’t reduce the benefits they get. The limit only applies to work earnings, not the money you gain from investments, annuities, pensions, etc. For those who are self-employed, Social Security will base their income on their net earnings.

The IRS calculates how much of your benefits will be taxed, based primarily on your adjusted gross income. To see if you will be taxed on your benefit, add half of your expected income to your other income and tax-exempt interest. If that’s more than $25,000 for you alone or over $32,000 for a married couple, some of your benefits will be taxable. If it’s more than $34,000 for you or $44,000 for a married couple in 2018, you may fall into the 85% social security tax bracket.

Some people dread the very idea of retiring, since they enjoy their work or want to continue their income stream to maintain a lifestyle. Just remember that if you claim benefits early or continue to work after reaching your FRA, there may be an impact on your benefits. Speak with an estate planning attorney to figure out the balance of benefits and work that makes sense for you.

Reference: Investopedia(December 27, 2017) “How Working Affects Your Social Security Benefits”

Do I Have to Pay Taxes on an Inherited Annuity?

If it seems like everything is subject to an inheritance tax, well, that is often true.

Yes, there are taxes due on inherited annuities. The amount depends upon your relationship to the deceased and the value of the annuity.

TaxIf it seems like everything is subject to an inheritance tax, well, that is often true. In a recent article from nj.com, “Who pays inheritance tax on an annuity?” a beneficiary asks what happens when a Class D beneficiary inherits a qualified annuity.

In this case, which occurred in New Jersey, transfers for less than $500, life insurance proceeds, and certain state and federal pension payments are exempt. However, everything else is subject to the inheritance tax. This includes items controlled by beneficiary designations, instead of a will, like an IRA, 401(k) or annuity.

If it’s an annuity at issue, the date of death valuation must be listed on the New Jersey Inheritance Tax form (IT-R), which is for assets left to Class D beneficiaries. The personal representative (or executor or administrator) of the estate has a fiduciary duty to file the inheritance tax return (Form IT-R). The tax return, along with payment for any taxes owed, is due eight months from the date of death in that state.

The person responsible for paying the tax, depends on the deceased's will. For example, the will could state that all estate or inheritance taxes are paid out of the deceased's residuary estate, which is the part of a deceased's estate that remains after all debts have been paid and specific bequests have been distributed.

If the estate has sufficient funds to pay the tax, the beneficiaries won't owe anything.  However, the will could state that all estate/inheritance taxes are paid proportionately by the recipient, even for assets not controlled by the will. That’s the default in New Jersey, when the will doesn’t say how death taxes get apportioned or the deceased died intestate (without a will).

There can be an issue when the beneficiary refuses to pay his or her share. In that case, the executor is still obligated to pay the tax with other estate funds, if any, which will negatively affect the inheritance of other beneficiaries under the will.

In that case, the executor can sue to recover the funds from non-paying beneficiary. If the executor can't pay the tax because there aren’t enough funds in the estate, the state of New Jersey will bring a delinquency claim directly against the non-paying beneficiary.

The best course of action is simply for the beneficiary to pay their share. An executor with an uncooperative beneficiary, should speak with an estate planning attorney to explore their options and protect the estate and the executor.

Reference: nj.com (May 14, 2018)“Who pays inheritance tax on an annuity?”

Should I Use My Savings for a Down Payment on a New Home?

One way to boost your chances of getting a mortgage and winning a bidding war

It’s not an easy time to be a home buyer, since bank requirements for mortgages are stringent and in some markets, the inventory is low. One way to boost your chances of getting a mortgage and winning a bidding war: a bigger than usual down payment.

MP900442456Tapping your retirement account for a larger down payment on a home purchase has certain advantages, according to a recent article in Forbes, “Should You Use Your Retirement Savings to Buy a Home?Among the advantages are some tax breaks from the IRS, if you qualify as a first-time home buyer.

Get this: you don’t actually have to be buying a home for the first timein your life to be considered a “first-time” home buyer. The IRS defines a first-time home buyer as any home buyer who has had no present interest in a main home during the two-year period ending on the date of acquisition of the new home. Therefore, provided that you haven’t lived in a home you owned for the last two years, you are considered a first-time home buyer, even if you previously owned a home. If you’re married, your spouse also has to satisfy this requirement.

If you withdraw money from a traditional IRA before age 59½, there's typically a 10% penalty for early withdrawal. However, the IRS has an exception that lets you to withdraw up to $10,000 over a lifetime, without a penalty for first-time home purchases.  You should also note that while the distributions are not subject to penalty, they are still subject to income taxes. If you’ve owned a Roth IRA for at least five years, any distributions used for a first-time home purchase (subject to the $10,000 lifetime limit) are treated as qualified distributions. This means the amount distributed will be exempt from penalties and income taxes. If you haven’t owned a Roth IRA for at least five years, your distribution may still avoid penalties but some or all of it may be taxed.

Any money you put into Roth IRAs comes out first. It isn’t subject to taxes or penalties, because you’ve already paid taxes on the money before you deposited it. Therefore, the first-time home purchase exception is really only applicable, after you’ve withdrawn all of your contributions. As a result, many people withdraw all of their initial contributions plus$10,000 of growth with no tax consequences.

This same exception does not apply to your retirement account through work. The only way to withdraw money from your employer-sponsored retirement plan (e.g., your 401(k)) for a home purchase, while you are working and under age 59½, is through a hardship withdrawal. Buying a home is one of the reasons allowed for a hardship withdrawal, but you’ll have the early withdrawal penalty if you’re under age 59½, and any pre-tax withdrawals or growth in your Roth 401(k) will also be taxed.

Another option is to use the 401(k) loan provision to access those funds to buy a home without the tax. Many companies also let you have longer than the standard five-year pay-back period to repay a residential 401(k) loan. However, you may have to show that you actually closed on a home. The interest you pay goes back into your own account, but will be double taxed when you withdraw it.

This could be a risky move, especially if you are going to use the equity in your home as an income stream during retirement. If you can’t make payments on the loan, you could lose both your home and your retirement money. Speak with your estate planning attorney to work through the details, before taking this step. You don’t want to jeopardize your retirement or your home ownership. There may be better alternatives.

Reference: Forbes(May 20, 2018) “Should You Use Your Retirement Savings to Buy a Home?

Making Financial Planning Part of Your Wedding Planning?

Once you’ve worked through the financial and legal part of planning your new life together, many issues that plague marriages will be resolved.

No, it’s not as romantic as planning a honeymoon along a sandy beach. But once you’ve worked through the financial and legal part of planning your new life together, many issues that plague marriages will be resolved. That’s romantic!

26201363701_de6af9d0ed_oThe leading cause of stress in relationships in general and marriages in particular are finances, as reported in an article from My Primetime News, “Hearing Wedding Bells? Be Sure Finances are Included in Your Planning,”by Gerald Rome, Colorado Securities Commissioner. As many as a third of people, say that money is the primary source of discord in their partnership. Therefore, why not eliminate the problem by addressing it?

Rome notes that summer is wedding season. Whether you’re taking the plunge later in life—maybe for the second time or advising a young couple about to make the ultimate commitment—much of the thought process is the same. There’s perhaps no topic less uncomfortable, but more important, than finances.

Before you or a loved one say, “I do,” be sure to consider the following:

Transparency.Many divorces stem from a lack of honesty about finances. Before you walk down the aisle, be sure you know everything about your betrothed’s financial past, spending habits, investing philosophy, and goals for the future. That means sharing information on major debts from education, business, and home loans, as well as credit scores and bankruptcy history. If you’re entering a second marriage, be truthful about any alimony being paid to or received from a former spouse.

For those marrying later in life, think about how or whether to merge accumulated assets and how to compromise on handling financial affairs, after what may have been many years of individual decision-making.

Financial Roles.For co-mingled finances, it’s important to be certain that you’re clear on who will handle what. Many financial issues that arise later in life, are due to one spouse not knowing what’s going on and being deluged with a mountain of new information and decision-making, in the event of a spouse’s sudden illness or death.

Prenuptial Agreement.Detailing what will happen to assets if the marriage fails, isn’t about a lack of trust—it’s about being prepared.

Estate Planning.Organize your property to ensure that no matter what happens, your family’s financial needs will be met. This includes drafting powers of attorney, creating or revising your wills, purchasing life insurance policies, revisiting retirement accounts and investment funds, establishing trusts and naming beneficiaries and considering any tax implications.

By dealing with the business side of marriage from the start, you may learn a lot more about your intended than you would if you had avoided the conversation. Once you know what each other’s financial status is, good or bad, you can figure out how to fix it—or enjoy it! By working with an experienced estate planning attorney and getting your estate plan prepared, you’ll be ready to relax and enjoy each other, without any nagging worries about financial or legal mysteries.

Reference: My Primetime News (May 2, 2018) “Hearing Wedding Bells? Be Sure Finances are Included in Your Planning”

Did the New Tax Law Change Roth IRA Contribution Limits for 2018?

Unlike contributions to a traditional IRA—which may be tax-deductible—a Roth IRA has no up-front tax break.

If you are 50 or older, you can put $6,500 into your Roth IRA: that includes a “catch up” contribution of $1,000. Typical Roth IRA contributions are still limited to $5,500 a year. There are income limits,  which you’ll need to be careful about.

MP900404926One good thing about the new tax law: it raised income limits to qualify for the maximum contribution to a Roth IRA.  However, the maximum contribution to a Roth IRA in 2018 is the same as 2017.

Kiplinger’s recent article on this topic asks “How Much Can You Contribute to a Roth IRA for 2018?”In its answer, the article explains that the maximum amount you can contribute to a Roth IRA for 2018 is $5,500, if you're younger than 50. Those age 50 and older can add an extra $1,000 per year in "catch-up" contributions. That is $6,500, which is the maximum contribution amount and the same as 2017.

The actual amount you can contribute to a Roth IRA is based on your income. To be eligible to contribute the maximum for 2018, your modified adjusted gross income (AGI) must be less than $120,000 if you’re single or $189,000 if you’re married and filing jointly. The contributions start to phase out above those amounts. You can't put any money into a Roth IRA once your income reaches $135,000 if single or $199,000, if married and filing jointly. Roth IRA income limits have increased slightly from 2017.

Unlike contributions to a traditional IRA—which may be tax-deductible—a Roth IRA has no up-front tax break. Money goes into the Roth after it’s been taxed. However, when you begin withdrawing funds in retirement, your contributions and all the earnings will be tax-free.

Roth’s are also more flexible than traditional, deductible IRAs. You can withdraw contributions to a Roth account anytime, tax- and penalty-free.  However, if you want to withdraw earnings tax-free, you need to be at least age 59½ and must have owned the Roth for at least five years.

Roth’s aren’t subject to required minimum distributions (RMDs) after age 70½, and you can deposit money at any age, provided you have earned income from a job or self-employment. Traditional IRAs prohibit new contributions once you reach 70½, even if you’re working.

There’s no minimum age limit to open a Roth IRA, and you can contribute to another individual's Roth account as a gift. However, the recipients must have earned income, and you can only contribute an amount up to that person's annual earnings or $5,500, whichever isless.

The popular Roth IRA accounts are used by many to leave money to heirs. Beneficiaries do have to take distributions over time, but they don’t have to pay taxes on the distributions. That’s an attractive benefit!

Reference: Kiplinger(April 22, 2018) “How Much Can You Contribute to a Roth IRA for 2018?”

Under New Tax Law, Roth IRAs are More Attractive

Here are the two biggest tax advantages from Roth IRAs

The new Tax Cuts and Jobs Act have made the Roth more attractive as retirement savings vehicles.

MP900398747Here are the two biggest tax advantages from Roth IRAs: withdrawals are tax free, and you don’t have to worry about required minimum distributions. According to MarketWatch’s article, “How the new tax law creates a ‘perfect storm’ for Roth IRA conversions,”today’s federal income tax rates might be the lowest you’ll see for the rest of your life.

Tax-Free Withdrawals. Unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free and most often state-income-tax-free. A qualified withdrawal is one taken after you, as the Roth account owner, have met both of the following requirements: (i) you’ve had at least one Roth IRA open for more than five years; and (ii) you’ve reached age 59½ or become disabled or dead. To satisfy the five-year requirement, the clock starts on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution or a conversion contribution.

RMD Exemption. Unlike a traditional IRA, you don’t have to start taking annual required minimum distributions (RMDs) from Roth accounts after reaching age 70½. Instead, you can leave your Roth account(s) untouched for as long as you live if you want. This makes your Roth IRA a great asset to leave to your family, if you don’t need the Roth money to help finance your retirement.

Annual Roth contributions make the most sense for those who think they’ll pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings, because qualified Roth withdrawals are federal-income-tax-free (and typically not taxed at the state level).  However, the downside is you don’t get a deduction for making Roth contributions.

Therefore, if you anticipate paying lower taxes in retirement, you might want to make deductible traditional IRA contributions (if your income allows). That’s because the current deductions may be worth more to you, than tax-free withdrawals down the road.

 What is the other best-case scenario for annual Roth contributions? It is when you’ve maxed out on deductible retirement plan contributions. Annual contributions are limited, and earned income is required. The maximum you can contribute to a Roth for any tax year is the lesser of: (1) your earned income for the year; or (2) the annual contribution limit for the year. Earned income is wage and salary income (including bonuses), self-employment income, and alimony received that is included in your gross income (believe it or not). If you’re married, you can add your spouse’s earned income to the total. Remember, after reaching age 70½, you can still make annual Roth IRA contributions, provided there are no problems with the earned income limitation or the income-based phase-out rule. However, you can’t make any more contributions to traditional IRAs after you reach age 70½.

Roth conversions. Converting a traditional IRA to a Roth IRA, is the fastest way to get a large amount of money into a Roth IRA. This conversion is considered a taxable distribution, since you have received a payout from the traditional IRA. Once that money is deposited into a new Roth IRA, it will trigger a tax bill. However, with federal income taxes so low, now is the time to do this, since you’ll be avoiding the possibility of higher rates on the post-conversion income that will be in the Roth account. You should also remember that if you’ve had at least one Roth account open for more than five years, withdrawals are federal income tax free.

Reference: MarketWatch(March 27, 2018) “How the new tax law creates a ‘perfect storm’ for Roth IRA conversions”

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