Roth IRAs: A smart tax idea for children

Persuading your working children to make retirement contributions may not be easy, but investments in Roth IRAs may be the wisest possible use of their earnings. The nature of Roth IRAs, coupled with the effects of long-term compounding, can create exceptional returns on such early investments.

Although contributions to Roth IRAs are not deductible, earnings within the accounts (such as interest or dividends) are not taxed and qualified withdrawals are completely tax-free. Tax-free compounding can result in sizable accumulation in a Roth. For example, if a 15-year-old contributes $2,500 for each of four years, and the account earns 5% annually, the fund will be worth about $85,000 when the child reaches age sixty.

It’s generally best to leave IRA funds untouched until retirement, but if necessary, your child’s contributions to a Roth IRA (excluding the earnings) can be withdrawn at any time without triggering taxes or penalties. This flexibility provides an advantage over a traditional IRA, where most withdrawals before the owner reaches age 59½ will be taxed and penalized.

The owner’s ability to deduct contributions is the one advantage a traditional IRA offers over a Roth IRA. However, this feature is relatively insignificant for most young earners. The first $6,300 of a child’s 2015 income will be entirely sheltered by the standard deduction, and any earnings above $6,300 are likely to be taxed at very low rates.

This year, most working people can contribute up to the lesser of their earned income or $5,500 to a Roth IRA. Although Roth eligibility is phased out for individuals with income above certain ceilings (e.g., $116,000 to $131,000 for a single person in 2015), a working child’s revenue rarely will approach such thresholds.

If you’d like to learn more about the benefits of setting up Roth IRAs for your children, contact us for assistance.

Create a road map to retirement

Preparing for your retirement is a journey. And like most journeys, success or failure often hinges on decisions made early in the trip. Consider some of these pointers as you develop your personal road map to retirement.

A solid retirement plan begins with an honest assessment of what your golden years will look like. Will they involve exotic travel, special purchases, or carefree living? Or do you plan to live modestly, perhaps working part time? A possible hint might be to consider how you are living right now. Many people assume that their living costs will decline later in life, but they often stay about the same or even increase.

Once you know how you want to live, it’s time to take stock of your assets. Are your investments where they should be, or do you have some catching up to do? Keep in mind that those 50 years and older can contribute an extra amount each year into their 401(k) or IRA to help get up to speed. And no matter what career stage you are in, be sure to take full advantage of the matching provision in your employer’s plan.

Like any excursion, your path to retirement will need an occasional tweaking to stay on course. As your working years draw to a close, consider shifting your asset allocation from higher risk securities to those with less price volatility and steadier cash flows. And along the way, take steps to keep your household budget in check. Think hard before incurring additional debt that might stymie your retirement plans. Analyze your spending to see what you really need to live on.

Finally, assemble a team of professionals to help chart your path. You might need to coordinate life and health insurance, estate plans, and tax issues to achieve your retirement goals. If you need assistance, give our office a call.

Depreciating Equipment for Tax Purposes: What’s Required?

Depreciation is a very complex element of the tax code. It’s best you don’t try to tackle it on your own.

From time to time, you may buy a piece of equipment for your business.  This can be anything from a small computer to a large machine that makes little washers to use in the products you sell to your customers.  You don’t plan to retire this equipment after using it for a year.  Rather, it will be used over a period of years, so you’ll want to depreciate it for tax purposes.

TaxPlan1014image_zps36676295What do you need in order to depreciate a piece of equipment?  First, you must own it.  If you rent a piece of equipment, you cannot take a depreciation deduction for it.  (However, there is a deduction available for rental payments that is recorded on your Schedule C, on another line.)

Second, you have to use it in your business.  You can’t claim depreciation on the family computer that you only use in your business part of the time.  You can take some depreciation, but the amount you can record in depreciation will be reduced by the percentage you use the computer for personal tasks.

Third, the equipment must have a determinable useful life, which must be longer than one year.  In other words, you have to know how long you should be able to use the equipment.  The IRS establishes guidelines that determine the expected life of  specific pieces of equipment.  If you don’t anticipate using it for longer than a year, you should deduct it as another type of expense for the current year.

Finally, you will also need to know the depreciable basis of the property. This is a fancy term for a complicated concept. It’s calculated by taking the amount you paid for the equipment and any parts added to it (to make it run better or last longer), less any casualty losses and any depreciation you had recorded in a prior year.

There will be times when you can’t take depreciation on a piece of equipment or a building you’ve purchased. For example, if you bought some equipment and started using it in your business, but then decided it wasn’t what you needed and got rid of it, you can’t take depreciation on it.  Or if you made the purchase to upgrade another piece of equipment, or added an addition to your home for a home office, you cannot deduct depreciation for it.  You could, however, take depreciation on the value of the upgraded piece of equipment or building.

There are other issues involved in calculating depreciation. This is a very complex area of the IRS tax code, and we don’t expect you to understand it fully. So if you’re planning a major purchase of equipment or other property, let us help you determine the best way to claim it for tax purposes.

For more information, please visit www.bmcgiverncpa.com.

Understand the pros and cons of DRIPs

Appropriately enough, investors may notice a slow trickle in earnings from “dividend reinvestment plans” (DRIPs). But these investments may end up providing a steady stream of income over the long run.

The concept is relatively simple. More than 1,000 companies and closed-end mutual funds around the country offer DRIPs to their shareholders. These programs enable shareholders to purchase stock directly from the company by automatically reinvesting dividends in additional shares. Many DRIPs also allow you to voluntarily make cash payments directly into the plan to buy even more shares.

Here are some of the main attractions of DRIPs.

  • Most DRIPs don’t charge any fee, or only a nominal fee, for purchasing shares.
  • Participants may be able to purchase stock at a discounted price. The discount usually ranges from 3% to 5% and could be as high as 10%.
  • The DRIP may allow you to send optional cash payments (OCPs), often for as little as $10, directly to the company to buy additional shares. OCPs are often used to purchase fractional shares, thereby enabling investors to acquire blue chip stocks they might not otherwise be able to afford.
  • It’s easy to join in. Once you’ve chosen a particular stock, check to see if it has a DRIP. The company will furnish the specifics, including a prospectus and the appropriate application forms.

But that’s not to say that investing in DRIPs is without drawbacks. There is a growing trend within the industry to charge a small fee for acquiring shares. Minimum amounts for purchases may be required. Also, the dividends that are reinvested are treated as taxable income, even though you don’t currently receive any cash.

Consider all of the implications of investments in DRIPs before including DRIPs in your portfolio.

Your 401(k) and a job change

If you change jobs this year, don’t forget about your 401(k) in your old employer’s retirement plan. You may be tempted to cash out the balance in the account, but remember that distributions from such accounts are generally taxable. Instead, ask your plan administrator to make a direct rollover to your IRA or another qualified plan. If you’re under age 59½, this decision also avoids the additional 10% penalty on early distributions. An added benefit: Your retirement money can continue to grow tax-deferred.

Accelerate Receivables Using QuickBooks Online

Keeping a positive cash flow is always a struggle for many businesses. Here’s how you can get customers to pay faster.

In a perfect world, customers would receive their invoices from you and remit them immediately.

You may have a diligent few who operate that way, but probably most everyone you do business with delays payment to improve their own cash flow.

There are steps you can take to speed up your incoming revenue. QuickBooks Online incorporates numerous ways to accomplish this.

Institute a prepayment policy. This is best implemented if you provide services and/or perform large jobs. You could, for example, require that all sales that fall above a specified dollar amount will require a deposit up front. Then consider lowering this threshold for newer customers and raising it for those who have been with you for a while and always pay on time.

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Figure 1: One way to apply deposits on future work or services is to record them as you’re preparing an invoice. To avoid bookkeeping errors, contact us before you begin accepting prepayments.

Recording deposits in QuickBooks Online is tricky. There are a number of ways to do it, but some will result in bookkeeping inaccuracies. If you’re going to begin collecting prepayments, please let us go over your options and the steps required.

Pull out the stops when it comes to supported payment methods. If you’re still only accepting cash and checks, this is clearly affecting your cash flow in a negative way. Intuit offers services that allow you to:

  • Send invoices online
  • Accept credit and debit cards
  • Scan checks for quick deposit, and
  • Make sales even when you’re not in the office.

We can go over the options with you. There will be some additional fees to add to your processing costs, but these methods provide the easiest, fastest path to healthier accounts receivable.

Invoice immediately. This should be a no-brainer, but it’s easy to get caught up in day-to-day operations and neglect money that’s waiting to be collected. Set up a check-and-balance procedure that becomes a regular part of your end-of-day work. Using QuickBooks Online reports can help. If you don’t know which reports to generate, we can identify them for you.

At the very least, check the Activities | Needs Attention list in the right vertical pane, and look at your income-tracking overview screen (click on the Customers tab in the left vertical pane).

Use QuickBooks Online’s invoice automation tools. Here, too, you may want us to walk you through the process of setting this up. Automation is great when it’s defined properly; but you could end up affecting your cash flow in a negative way if this isn’t done correctly.

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Figure 2: Invoice automation can help ensure that no sales fall through the cracks, but correct setup is critical to understanding these tools. Let us help.

Perhaps you’ve tried these methods and still find yourself with under-the-wire or overdue electronic payments and paper checks. We can help you explore some additional ideas after looking over your company file and learning about your workflow.

Intuit’s Ongoing QBO Upgrade

If you’ve been reading this column for a while, you’ve probably noticed that the screen shots displayed here look different from yours. Intuit has been rolling out this new interface for quite some time now, but it may not have reached you yet. The company began by converting interfaces for “less complex” businesses, like users of the current QBO lineup and those that don’t employ integrated products such as QuickBooks Payroll and QuickBooks Payments.

When it’s your turn for the upgrade, you’ll see an invitation when you sign in to your company file. You’ll have 28 days to make the switch. You may be able to ask for earlier consideration via your To Do list, which could result in a more timely upgrade. This new version is free of charge to you.

The new QBO looks and works differently, especially the home page. So when you get access to it, we can help you get up to speed quickly.

For more information visit www.bmcgiverncpa.com.