Diversify investments by focusing on taxes

Transcription

1 Berlin, Ramos & Company, P.A. focusing on taxes Savvy investors often spread their risks by investing in a variety of asset classes such as stocks, bonds, commodities, and real estate. But with a changing tax landscape, investors might consider three more classes: taxable, tax-deferred, and tax-free. In days gone by, taxpayers often worked under the assumption that their tax bracket would be lower after they retire. Therefore, a common strategy was to defer as much taxable income as possible to the golden years. Now, however, with the possibility of higher tax rates in the future, it could be more efficient to pay those taxes today while rates remain lower. Since no one knows for sure what Washington will do, it might be time to hedge your tax risk and allocate your portfolio between accounts with differing tax consequences. Taxable accounts Savings or brokerage accounts result in current taxation on earnings, but they do provide maximum flexibility. You can withdraw as much as you wish whenever you wish, with no IRS penalties or taxes. This quarterly newsletter provides general business, financial, and tax information to our clients. This information should not be acted upon without further details and/or professional assistance. Keeping some of your nest egg in this type of account will provide immediate funds for major purchases or debt reduction. Tax-deferred accounts IRAs or 401(k)s only postpone the payment of taxes; eventually you will have to pay Uncle Sam when you withdraw the funds. But in the meantime, you generally receive a current-year tax deduction when you contribute, and the account can grow tax-free until you take it out at retirement. Tax-free accounts Roth IRAs are funded with after-tax dollars. What you

2 Page 2 of 2 put in, including any investment earnings, can be later withdrawn tax-free. The downside? You generally must wait until after age 59½ (and the account has to be open for five years) to make a tax-free withdrawal. Diversifying your portfolio is only the first step. The next (and trickiest) step is properly investing in each type. For instance, your goal for a taxable account might be to generate growth while keeping taxable earnings to a minimum. This could be done by investing in tax-exempt municipal bonds or low-dividend yielding growth stocks. In a tax-deferred account, investment income is not taxed until withdrawn, so earnings can come from any source without immediate tax implications. However, since you must start withdrawing funds from an IRA or 401(k) at age 70½, you might want to stay away from highly volatile investments as you approach that age. Your account will have less time to rebound from a down market. Tax-free Roth IRAs offer the longest time horizon for investing since you are not required to make a withdrawal at any age. So investments with higher risks or lower liquidity might fit best here. In an era of high uncertainty and low expectations, tax-efficient investing has never been more important. To review the tax implications of your investments, give our office a call today. Page to article menu Berlin, Ramos & Company, P.A.

3 page 2 buying a franchise With a franchise, you don't have to start a company from scratch. Whether the business sells fast food, automotive services, gourmet coffee, or dry cleaning, successful franchises are usually based on a proven business idea and a recognized brand name. The best franchisors can jump start a business by providing staff training, location advice, and detailed operations manuals. And some have ongoing relationships with financial institutions, which can help when you're searching for start-up capital. But buying into a franchise requires careful analysis and a healthy dose of skepticism. Before taking the plunge, watch for these hazards: Unrealistic forecasts. Sometimes predicted revenues do not materialize. That's because early entrants may have cornered the most profitable territories already. So be aware that rosy forecasts based on historical data do not always pan out. Get market research for the area you've staked out (preferably from several sources), and determine the least amount of revenue you'll need to cover costs and remain profitable. Unanticipated costs. In addition to an initial outlay for franchise rights, you'll incur numerous out-of-pocket costs. These might include advertising, inventory and supply expenses, additional fees for training staff, legal expenses, and so on. Generally, you'll also pay a continuing royalty on sales whether or not you make a profit. Failure to factor in these additional costs can sink a business before it gets started. Undependable franchisors. This is one area where research is vital. Contact other franchisees and ask about their experiences with the company. Have they been satisfied with the company's support, including training, the quality of goods delivered, and ongoing relationships? Take a hard look at the company's key management staff. How long have they been in business? What experience and education did they bring to the company? How many of their franchises have failed and why?

4 Page 2 of 2 Unproven business model. If you're considering a franchise that's not exactly a household word, use caution. Of course, jumping in during the initial stages of a fast-growing franchise can be especially lucrative. But there's no substitute for proven marketability. Often a great idea on paper needs to be tweaked (or overhauled) when a company enters the marketplace. Unless you can live with significant risk including the potential loss of your investment steer toward a franchise with a solid track record. If franchises are on your mind, give us a call for help with your analysis. Page to article menu Berlin, Ramos & Company, P.A.

5 page 3 gone, but it's not forgotten With the recent economic downturns experienced by many taxpayers, there is a tax concept that is very important: cancellation of debt. You would think that the cancellation of debt by a credit card company or mortgage company would be a good thing for the taxpayer. And it can be, but it can also be considered taxable income. Here is a quick review of various debt cancellation situations. Consumer debt If you have gone through some type of credit "workout" program on consumer debt, it's likely that some of your debt has been cancelled. If that is the case, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return. The exception is if you file for bankruptcy. With bankruptcy, generally the debt cancelled is not taxable. gone, but it's not forgotten Even if you are not legally bankrupt, you might be technically insolvent (where your liabilities exceed your assets). If this is the case, you can exclude your debt cancellation income by reporting your financial condition and filing IRS Form 982 with your tax return. Primary home If your home is "short" sold or foreclosed and the lender receives less than the total amount of the outstanding loan, you can also expect that amount of debt cancellation to be reported to you and the IRS. But special rules allow you to exclude up to $2 million in cancellation income in many circumstances. You will again need to complete IRS Form 982, but the exclusion from taxable income brought about by the debt cancellation on your primary residence is incredibly liberal. So make sure to take advantage of them should they apply to you. Second home, rental property, investment property, business property The rules for debt cancellation on second homes, rental property, and investment or business

6 Page 2 of 2 property can be extremely complicated. Generally speaking, the new laws that cover debt cancellation don't apply to these properties, and the IRS considers any debt cancellation income taxable. Nevertheless, given your cost of these properties, your financial condition, and the amount of debt cancelled, it's still possible to have this debt cancellation income taxed at a preferred capital gains rate, or even considered not taxable at all. Be aware that many of the special debt cancellation provisions are set to expire at the end of If you're unsure as to how debt cancellation affects you, contact our office to review your situation and determine how much, if any, cancelled debt will be taxable income to you. Page to article menu Berlin, Ramos & Company, P.A.

7 page 4 If you own a home that is available for both personal and rental use, you have what is commonly known as a vacation home. Vacation homes are a hybrid: they are not purely rental properties, nor are they purely personal use properties. Since they are special, they have their own very specialized tax issues. A vacation "home" could be a house, condo, motor home, boat, or similar property. In order to qualify, it must have a sleeping place, toilet, and cooking facilities. If the home is rented for less than 15 days, you are not required to report the income. However, if you rent the home for 15 days or more, and you or family members use the home for personal use for even one day, you have to allocate rental expenses. Vacation Homes: A look at The amount of personal use determines the classification of your home for tax purposes. If you rent your vacation home for more than 14 days, all your rental income is reportable. Whether you treat the income and expenses as a second residence or as rental property depends on the personal use of your vacation home relative to the time the home is rented out. If you limit your personal use to not more than 14 days or 10% of the time the home is rented, all rental expenses are deductible. If you use the property for more than 14 days or 10% of the number of days it's rented, the rules change. Your rental deductions (except for taxes and mortgage interest) are limited to the amount of your rental income. The rules are complex, but a basic understanding of the rules and good recordkeeping will help you get the best tax breaks from your vacation home. Give us a call if you would like more information.

8 page 5 taking social security? If you're approaching retirement and are eligible for social security, you have three broad options for drawing your benefits: start early, wait until your "full" retirement age, or hold out a few years longer to qualify for the monthly maximum. Early withdrawals Starting your withdrawals at the earliest allowable date (age 62) may be a good idea if you (a) plan to stop working or cut back to part-time status, and (b) really need the income. Your health is also a consideration, since an early start will maximize your lifetime benefits if your life expectancy is much below eighty. Selecting early retirement will permanently reduce the amount you receive each month. In addition, until you reach full retirement age, your benefits will be cut by one dollar for every two dollars over $14,640 that you earn (as of 2012). Consequently, if you're in good health, don't need the extra income, and/or plan to keep on working, you're generally better off postponing your benefits until full retirement age or beyond. Full retirement age Full retirement age is 66 for workers born between January 1, 1943, and December 31, For those born later, the age limit gradually increases to 67. Once you've reached full retirement age, your social security benefits are no longer reduced by any amount of earned income. If you've waited to start your benefits, your monthly income will be greater than under early retirement, although less than you'd get by waiting until age seventy. Maximum retirement age If you wait until age 70 to begin drawing social security, your monthly benefits will be maximized for the rest of your life. This option is generally the best choice for people who are in good health and who can afford to wait. The disadvantage is that political factors might cause changes to the

9 Page 2 of 2 program in the interim. Other factors Although the above three ages are the major milestones, the years between are also important, since each year you wait will increase your monthly benefit. If you're now working for a relatively high income, your overall benefits will increase even more because they're recomputed annually based on your highest earning years. Other considerations include your marital status, the relative ages and earnings of each spouse, and expected survivor benefits. The potential variables are too complex to address here, but if you're interested in planning for your own retirement, just call our office to schedule an appointment. Page to article menu Berlin, Ramos & Company, P.A.

10 page 6 Vehicle deductions for 2012 The IRS has published depreciation limits for business vehicles first placed in service this year. Because 50% bonus depreciation is allowed only for new vehicles, these limits are different for new and used vehicles. For new business cars, the first-year limit is $11,160; for used cars, it's $3,160. After year one, the limits are the same for both new and used cars: $5,100 in year two, $3,050 in year three, and $1,875 in all following years. The 2012 first-year depreciation limit for trucks and vans is $11,360 for new vehicles and $3,360 for used vehicles. Limits for both new and used vehicles in year two are $5,300, in year three $3,150, and in each succeeding year $1,875. For details relating to your 2012 business vehicle purchases, contact our office. Tax freedom on April 17 According to the Tax Foundation, April 17, 2012, was not only the day 2011 tax returns were due, it also was Tax Freedom Day for That means Americans worked 107 days, from January 1 to April 17, to earn enough money to pay their federal, state, and local taxes for If the federal government collected enough taxes to meet 2012 federal spending, Tax Freedom Day would have come 27 days later on May 14, And unless Congress acts to prevent tax increases scheduled for 2013, next year's Tax Freedom Day will be eleven days later than in 2012, and the average American household will pay $3,800 more in taxes.

11 page 7 JUNE 15 Second quarter 2012 individual estimated tax is due. 15 Second quarter 2012 estimated tax is due for calendar-year corporations Report on foreign financial assets and accounts must be received by the Treasury Department. JULY retirement and employee benefit plan returns are due for calendar-year plans. SEPTEMBER 17 Third quarter 2012 individual estimated tax is due. 17 Third quarter 2012 estimated tax is due for calendar-year corporations. 17 Deadline for filing 2011 calendar-year tax returns for corporations with extensions of the March 15 deadline. 17 Deadline for filing 2011 partnership returns with extensions of the April 17 deadline. Page to article menu