Adjust your 2014 investment strategy with an eye on taxes

As you investigate opportunities for managing your investment portfolio in 2014, remember to pause and plan for the effect of tax laws. Here are some important rules to consider.

Capital gain tax rates. For 2014, the tax rate you'll pay on gains from sales of assets depends on your taxable income and how long you've owned the investment. Gains on assets owned a year or less are taxed at the same rate as your ordinary income.

The rate for qualified dividends and sales of most assets you own longer than a year can vary.

* The rate is 0% when you're married filing a joint return and your income is $73,800 or less ($36,900 when you're single).

* When your income is between $73,800 and $457,600 ($36,900 and $406,750 for single filers), the maximum rate is 15%.

* A 20% rate applies when your taxable income is more than $457,600 ($406,750 when your filing status is single).

* The 3.8% Medicare surtax applies to your income from capital gains, interest, and dividends when your adjusted gross income exceeds $250,000 ($200,000 when you're filing single).

Analyze your options. Planning strategies for tax-efficient investing should complement your overall financial goals. For example, purchasing stocks and other securities that offer long-term growth potential instead of current income from dividends can help reduce the amount of income subject to the net investment Medicare surtax. Yet, if you need cash flow from your investments, you might choose an alternative tax-saving strategy, such as adding tax-free municipal bonds to your portfolio. A mix of the two could be preferable if you're subject to the alternative minimum tax.

 

The same analysis applies to investment accounts. Say you own bonds or other investments that generate taxable interest income. Holding these assets in a taxable account means you'll pay federal income tax based on your ordinary tax rate. Including them in tax-advantaged accounts such as IRAs might be a better idea because you could delay the tax bill until you begin making withdrawals.

Please give us a call to discuss the tax consequences of your investment decisions. We can help you create the best plan for 2014.

Should you incorporate your business?

One of the first decisions you face as a new business owner is whether or not to incorporate the business. The biggest advantage of incorporating is limitation of your liability. Your responsibility for debts and other liabilities incurred by a corporation is generally limited to the assets of the business. Your personal assets are not usually at risk, although there can be exceptions to this general rule. The trade-off is that there is a cost to incorporate and, in some cases, tax consequences.

Should you incorporate? You might not need to incorporate. Depending on the size and type of your business, liability may not be an issue or can be covered by insurance. If so, you could join millions of other business owners and operate as an unincorporated sole proprietor.

If you do decide to incorporate, you'll face a choice of corporate forms. All offer limitation of your liability, but there are differences in tax and other issues.

C corporation. The traditional form of corporation is the C corporation. C corporations have the most flexibility in structuring ownership and benefits, and most large companies operate in this form. The biggest drawback is double taxation. First the corporation pays tax on its profits; then the profits are taxed again as they're paid to individual shareholders as dividends.

S corporation and LLCs. Two other forms of corporation avoid this double taxation: S corporations and limited liability companies (LLCs). Both of these are called "pass-through" entities because there's no taxation at the corporate level. Instead, profits or losses are passed through to the shareholders and reported on their individual tax returns.

S corporations have some ownership limitations. There can only be one class of stock and there can't be more than 100 shareholders, none of whom can be foreigners. State registered LLCs have become a popular choice for many businesses. They offer more flexible ownership than S corporations and certain tax advantages.

Whether you're already in business or just starting out, choosing the right form of business is important. Even established businesses change from one form to another during their lifetime. Some companies use more than one type of corporation - for example, an LLC to hold the business's real estate and an S corporation for other operations.

A vital business document: the buy/sell agreement

Every business should give serious consideration to how the company would deal with the death, disability, or departure of one of the owners.

Like a will, a buy/sell agreement (also known as a business continuity contract) spells out how assets and other business interests will be distributed should an owner quit, become disabled, or die.

Without such an agreement, complications arising from ownership succession may capsize an otherwise thriving company. The remaining owners might be forced to share management and profits with unskilled or contentious outsiders. They may be embroiled in legal disputes over business assets and liabilities. A firm's internal squabbles may spill over to customer service, resulting in lost sales. If the firm's ownership seems doubtful or its future uncertain, creditors might accelerate collection efforts, bringing unwanted pressure on company resources.

The possible death of an owner isn't the only reason to prepare a buy/sell agreement. Sometimes an owner voluntarily decides to leave a company. He or she may want to pursue another business opportunity, a change of climate, a different professional relationship, or a well-earned retirement. By providing a mechanism for assessing a firm's value and ensuring that all parties are treated equitably, a carefully crafted buy/sell agreement will facilitate that kind of transition as well.

At a minimum, a buy/sell agreement should cover the following:

* Triggering events. What happens if an owner dies, becomes disabled, or leaves the company? What happens if he or she files for divorce or is caught skimming profits? The buy/sell agreement should spell out the company's response to such events, including how assets will be transferred, stock ownership controlled, and voting rights secured by the remaining owners.

* Valuation. The agreement should lay out how the business will be valued should a triggering event occur. For example, it might include a specific price for an owner's interest or specify a formula for determining the company's value. It might even name a specific firm to conduct the valuation. If the triggering event is the death of an owner, the buy/sell agreement might also guarantee a specific lump sum to be paid to the deceased owner's estate.

* Buyout method. If one owner leaves the firm, becomes disabled, or dies, the buy/sell agreement should contain provisions specifying how remaining owners will buy out the interest of that partner. (In many cases, owners use life or disability insurance proceeds to fund a buyout.)

To ensure that the buy/sell agreement remains relevant and up to date, owners should review it periodically and revise it as needed. If you need help preparing or reviewing a buy/sell agreement for your company, contact us and your attorney.

IRS suggests using tax refund for bonds

If you're receiving a tax refund this year, the IRS reminds you that you can use it to buy U.S. savings bonds directly from the IRS. Here are the details.

* You may purchase up to $5,000 in U.S. Series I savings bonds.

* The total amount of bonds you purchase must be a multiple of $50. Any refund over the specified bond purchase amount can be deposited in your bank savings account, or you can request a check by mail.

* Bonds will be issued in your name. If you're married and file a joint return, the bonds will be issued in the names of both spouses.

* The bonds will be sent to you by mail.

* You select this option when filing your 2013 return by using Form 8888, "Direct Deposit of Refund to More Than One Account."

* Form 8888 gives instructions on selecting this option and specifying the amount of refund you want to use to buy savings bonds.

For additional information about Series I savings bonds, go to www.treasurydirect.gov.

More changes made to Affordable Care Act deadlines

On February 10, 2014, the Treasury Department issued rules that will allow mid-sized businesses to delay for one year the requirement to provide health insurance for their workers. The rules also offered some relief for larger companies.

Businesses with 50 to 99 employees will now have until January 1, 2016, to provide minimum, affordable health insurance to their employees, or face penalties. Previously, the deadline for meeting this requirement was January 1, 2015.

 

In order to qualify for this extension, employers must certify that they have not laid off employees in order to come under the 100 employee threshold.

Larger employers - those with 100 or more full-time employees - will be allowed to phase in the required health insurance coverage. These companies won't owe a penalty under the insurance mandate so long as they offer coverage to at least 70% of their full-time employees by January 1, 2015, and at least 95% by 2016.

Study reveals retirement concerns

A recent study conducted by Harris Interactive of 1,000 middle class individuals aged 25 to 75 revealed some interesting statistics about retirement attitudes.

Among the survey's findings:

* 37% of respondents say they don't expect to retire; instead they expect to work until they are too sick or die.

* 59% said retirement is not their top priority; their priority is paying day-to-day bills.

* 34% felt they would have to continue working until age 80 or beyond because they won't have saved enough to retire.

* 31% in the 40 to 59 age category say they have a retirement plan; 69% say they have no plan.

* Those who say they have a written plan say they have saved a median of $63,000 for retirement, which represents 32% of their retirement savings goal of $200,000. Those without a written plan say they have saved $20,000 or 10% of their goal.

* A third of those surveyed said that social security would be their primary source of income in retirement.

* 40% said a large unexpected health care expense was their greatest retirement fear; 37% said lower or no social security benefits was their biggest fear.

IRS publishes business vehicle deduction limits for 2014

The IRS has published depreciation limits for business vehicles first placed in service this year.

 

50% bonus depreciation is no longer allowed for business equipment purchases, including vehicles. Here's a quick review of the adjustments for 2014.

For business cars first placed in service this year, the first-year depreciation limit is $3,160. After year one, the limits are $5,100 in year two, $3,050 in year three, and $1,875 in all following years.

The 2014 first-year depreciation limit for light trucks and vans is $3,460. Limits for year two are $5,500, in year three $3,350, and in each succeeding year $1,975.

For details relating to your 2014 business vehicle purchases, contact our office.

Deadline approaching for tax-exempt groups

If you are involved with a tax-exempt (nonprofit) organization, be aware of this approaching deadline: An annual report must be filed with the IRS on the 15th day of the fifth month after the organization's year-end. For calendar-year organizations, the deadline for 2013 reporting is May 15, 2014. Organizations with gross annual receipts below $50,000 can file an E-postcard rather than a longer ve

rsion of Form 990.

IRS issues "repair regulations"

The IRS has issued regulations intended to clarify for businesses which costs related to fixed assets must be capitalized and which can be expensed currently. Included in the regulations are several safe harbors that make the capitalize-or-expense decision easier for small businesses. If your company owns or leases fixed assets, contact us for assistance in applying the rules to your business.

What to do if you can't meet the filing deadline

If you can't file your 2013 tax return by the April 15 deadline, file for an extension to get until October 15, 2014, to file. You can request the extension on paper, by phone, or online. You don't need to explain why you need more time, but be aware that an extension doesn't give you more time to pay taxes you owe. To avoid penalty and interest charges, taxes must be paid by April 15.

Making gifts may require a tax filing

Here's another filing deadline that might apply to you: April 15 is the due date for filing 2013 gift tax returns. If you made gifts last year in excess of the $14,000 annual limit to any one individual, you may need to report the transaction to the IRS. If you and your spouse agree to "gift-splitting," you could give up to $28,000 to any one individual with no gift tax liability. However, gift-splitting requires that each of you file a gift tax return.