Do mutual fund tax planning at midyear

Do mutual fund tax planning at midyear

Are mutual funds part of your portfolio? As you begin your mid-summer investment review in preparation for year-end, think about how your funds can affect your federal income taxes.

Here are two things to consider.

Dividend income. The dividends you receive from mutual funds held in nonretirement accounts are included in the calculation of net investment income. When your 2015 modified adjusted gross income exceeds $250,000 ($200,000 when you're single), a portion of your net investment income will be taxed at a rate of 3.8% over and above your ordinary tax liability.

Planning tip. The tax form the mutual fund company sends you at the beginning of 2016 may classify some dividends as "qualified" – meaning they meet the requirements for a lower tax rate. However, you have to own the mutual fund shares for more than 60 days to get the lower rate on your federal return.

Capital gains. Mutual funds generally distribute short-term and long-term capital gains from in-fund sales to shareholders. Even if you reinvest the distributions in additional shares instead of opting for cash, the gain remains taxable to you.

Short-term distributions, for sales of fund investments held one year or less, are taxable at your ordinary income tax rate. The tax rate for long-term capital gains may be as high as 20%, depending on your adjusted gross income.

You might also have a capital gain or loss when you sell shares of a mutual fund. That's true even if you "exchange" one fund for another and receive no proceeds.

Planning tip. You have options for calculating the cost of mutual fund shares you sell during the year. Remember to include reinvested distributions in your basis.

Please call for more information. We're happy to help you manage your investments with an eye toward tax savings.

Don't take a vacation from tax planning

Don't take a vacation from tax planning

Don't ignore your opportunity to save on taxes just because it's summertime. Here are some summertime tips to keep your tax plans going.

If you are a sole proprietor with children, you might consider putting them on the payroll during the summer months. Wages paid to your children under age 18 are not subject to social security and Medicare taxes. What's more, their earnings are not subject to federal unemployment tax until they turn 21.

If employing your children is not an option, you might still be able to score a deduction by sending them to summer camp. Day camp expenses for kids under 13 can provide a tax credit of up to 35%. Just remember, overnight camps do not qualify, and child-care must be necessary to allow the parents to work.

Summer is also a common time for home selling and moving, so be on the lookout for deductions related to these activities. Carefully file away all home sale or purchase papers for next year's tax filing. If your move is job-related, there is the potential for additional deductions if you meet the 50 miles or more test.

Perhaps your sights are set instead on some leisure travel. Tacking on a few fun days before or after a business trip might be a tax (and cost) efficient way to pay for a vacation – if you follow all the rules. Travel that is primarily for charitable work might also qualify you for a tax deduction.

And finally, no matter what your summer plans are, this is always a good time for a general tax check-up to ensure your withholdings and estimated tax payments are on target. For assistance with any of these issues, contact our office.

Five things every business owner must do

Five things every business owner must do

If you own or manage your own business, you're probably busy monitoring operations and dealing with everyday problems. But there are a few things that you should make time to do every year. These are important for your long-term business and personal success.

1. Review your business insurance coverage.

Don't just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise. Ask about new developments in business insurance. Use your agent's expertise to identify risk areas and suggest suitable coverage.

2. Review your business tax strategy.

A month or so after you've filed your tax return, make an appointment with your tax advisor. Go over your return together and identify opportunities for tax savings. Question everything, starting with whether you're using the right form of business entity. Ask about recent changes in the tax code and how they might benefit your business. Make your advisor a "partner" in your business strategy.

3. Update succession planning for your business.

Review your succession planning annually. You should have a specific plan for each key manager position, including yourself. Be prepared for a short-term absence or a permanent vacancy. Your plan might mean promoting from within or recruiting externally. But an up-to-date plan can be invaluable if you have an unexpected vacancy.

4. Review your business banking relationships.

Annually, you should go over your cash balances and banking relationships with your controller or CFO. Then both of you should meet with your banker. Ask about new products or services that could help your company. Address any service concerns or problems you might have had. Look for ways to reduce idle cash, boost interest earned, and improve cash flows.

5. Review and update your personal estate planning.

If you're a business owner, your company is likely to be a significant part of your estate. A good estate plan is essential if you hope to pass a business on to your heirs. But your company, your personal circumstances, and the tax laws are continually changing. You should meet with your estate planner annually to make sure your plans are current.

Let us and your attorney assist you with the reviews and planning necessary to your business's long-term success. Give our office a call.

Don't let the IRS become your pen pal

Don't let the IRS become your pen pal

Getting a letter or notice from the IRS can be upsetting, confusing, and unnecessary. The IRS sends taxpayers notices to request payment for taxes, to notify them of a change to their account, or to request additional information. Attention to the following details will reduce the likelihood that you will become pen pals with the IRS.

Never send a payment to the IRS without designating what it is for. Otherwise the IRS may apply it in any manner they want. Every payment should include your name, your taxpayer identification number (social security number), the type of tax you are paying, and the period the tax payment is for.

Make sure the name and social security number on your tax return agree with the Social Security Administration's records. If you change your surname, notify the Social Security Administration and request a new social security card.

Don't claim a tax exemption for your child unless you are entitled to do so. Special rules apply to divorced parents. If both parents claim the child as a dependent, both returns will be subject to further IRS review.

Respond promptly to any notice you receive from the IRS, even if you think the notice is incorrect. If the IRS doesn't hear from you within the time specified on their notice, you may lose the right to protest any changes made to your return.

Send a change of address form (Form 8822) to the IRS when your address changes. If you fail to provide the IRS with your current mailing address, you may not receive a refund check or a notice if there are problems or adjustments to your return. And even if the IRS can't find you, penalties and interest will continue to accumulate on any tax due.

Send your income tax return and any other correspondence to the IRS by certified mail, return receipt requested. The receipt provides evidence that you filed on time. That proof will be valuable in the event the IRS or Postal Service loses your paperwork and the IRS threatens to assess late-filing and late-payment penalties.

Should you pay more attention to cash flow in your business?

Should you pay more attention to cash flow in your business?

In assessing their business, most owners focus on growth in sales and profits. Yet these do not guarantee business health and success. Another important gauge is cash flow. Simply put, is there enough cash inflow to cover cash outflow? Cash flow needs change on a daily basis. The more you're aware of cash flow needs, the more control you'll have over your business.

● Calculating cash flow. Cash flow from operations can be calculated by taking net profit, adding back depreciation and amortization (noncash outlays), subtracting increases in accounts receivable and inventories during the period, and adding increases in accounts payable. Calculations can be done on whatever operating cycle time frame is most meaningful to you (monthly, quarterly, etc.). Best results are usually obtained by using monthly cash flow statements and projections based on prior experience.

● Using cash flow. Building a history of cash flow needs by using historical financial records will provide an invaluable tool for projecting the timing of receipts, expenditures, and financing needs. Periods of negative cash flow can seriously hinder expansion plans and may even lead to business failure. Cash flow statements and projections can forewarn you of cash needs and allow you to implement changes.

● Improving cash flow. Proper management of accounts receivable and inventory can strengthen cash flow. Review billing procedures to reduce lag time between shipping and invoicing. Reexamine credit and collection policies. Consider offering discounts for early payment and charging interest on delinquent balances. Review inventory levels. Be alert for stockpiles and excess inventory. Dispose of obsolete inventory by reducing prices or selling for scrap.

Effective cash flow management will permit better utilization of cash, generate additional funds from internal sources, and provide advance notice of financing needs. Knowing your cash flow requirements is imperative for business success.

Business Tax Tip: Calculate your basis

Business Tax Tip:  Calculate your basis

It's important for S corporation shareholders to know their basis in the corporation. Basis is the key to determining whether current-year losses can be deducted by the shareholder or not. Losses in excess of basis are generally "suspended" for use in later years when the business has income. Basis is also important when shareholders plan to take nontaxable distributions. In cases where distributions exceed investment in the company, the distributions can be taxed as capital gain. Check your basis now to give yourself time to increase basis if necessary and avoid a tax surprise at year-end.

Check the "support" test to maintain dependent deductions

Check the "support" test to maintain dependent deductions

Keep your college student qualified as your dependent by meeting the "support" test. Generally, your child cannot provide over one-half of his or her own support during the year. Add up funds your child will have received from work, student loans, and other sources of income. Do you need to increase your level of support during the rest of the year in order to claim the exemption?

IRS announces 2016 HSA limits

IRS announces 2016 HSA limits

The 2016 inflation-adjusted amounts for health savings accounts (HSAs) have been released by the IRS. Individuals will be allowed to contribute up to $3,350, and contributions for family coverage will be limited to $6,750. As before, an individual aged 55 or older may contribute an additional $1,000. For 2016, a "high-deductible health plan" is one with an annual deductible of not less than $1,300 for individual coverage and $2,600 for family coverage.

Watch out for the AMT

Watch out for the AMT

As you review your income tax situation at midyear, consider your exposure to the alternative minimum tax (AMT). The alternative minimum tax involves a separate tax calculation that disallows many of the deductions and credits used to calculate regular income tax. If you have high levels of deductions or exemptions, or if you exercise incentive stock options this year, it's worth checking for possible AMT liability so it doesn't take you by surprise.

IRS issues reminder on child tax credit

IRS Issues reminder on child tax credit

Working parents should be aware that the child and dependent care tax credit is available to offset some of the expenses for child care. Six facts the IRS wants taxpayers to know about the credit:

● Children must be under age 13 to qualify for the credit.

● The credit applies whether the childcare provider is a sitter at home or a daycare facility.

● The credit applies for up to $3,000 of expenses for one child and up to $6,000 for two or more.

● The credit can be up to 35% of qualifying expenses, depending on your income.

● Overnight camps don't qualify; day camps do.

● Keep receipts for expenses, and get the employee ID number of the care giver.

Summertime Tax Tip

Summertime Tax Tip

If you itemize your deductions, you can deduct the mortgage interest and property taxes paid for your vacation home. A boat or RV can qualify as a vacation home if it has sleeping quarters, cooking facilities, and a bathroom. If a retreat also serves as rental property, you can control your tax deductions by changing the number of days you use it for vacation.