Life Insurance Sales Material

Transcription

1 MKTG-OC-1054D Life Insurance Sales Material

2 FOR INDIVIDUALS 3 Thinking Ahead...3 Taxes and Your Investments...7 Strategies for Homeowners...13 Education Tax Incentives...15 Making the Most of Deductions...18 Tips for Retirees...21 FOR BUSINESSES 23 Business Structure Makes a Difference...23 Strategies for Business Assets...26 Deduction and Credit Planning...28 Establishing a Retirement Plan...31 YOUR NEXT MOVE 32 This publication was prepared for Pacific Life by DST, an unrelated third party. The content was not written or produced by Pacific Life. Copyright 2014 by DST 1

3 Why is tax planning important? You may not think about them that often, but income taxes can be a significant expense. Planning can help you minimize your taxes so that you ll have more money to spend, save, or invest. The federal tax law contains various provisions that can work to your tax planning advantage. Some provisions allow you to defer (postpone) the taxation of income or exclude the income altogether. Deductions reduce your taxes by lowering your taxable income. Credits offset your tax liability dollar for dollar. The bottom line: You keep more of your hard-earned money because you pay the IRS less. This 2015 Tax Planning Guide highlights several taxsaving opportunities and strategies that may be helpful in reducing your personal and business taxes. The planning opportunities mentioned in the Guide may or may not be appropriate for your situation, so be sure to obtain professional advice before acting on any of the general information presented. Calculating Taxable Income GROSS INCOME ADJUSTMENTS ADJUSTED GROSS INCOME DEDUCTIONS EXEMPTIONS TAXABLE INCOME Adjustments are also called above-the-line deductions because you take them in computing your adjusted gross income. Deductions consist of either a standard deduction set by the IRS annually or itemized deductions (specified actual expenses). You deduct the larger of the two. FOR THINKING AHEAD Before you engage in a major transaction, you will want to understand its potential tax impact. In some instances, you may be able to take proactive steps that will result in a better tax outcome. Be aware of the tax brackets. For example, a spike in income could push you into a higher tax bracket. Planning may help you avoid an unnecessary tax increase. Perhaps you anticipate that your taxable income will be lower this year. If you have a traditional individual retirement account (IRA), it might be a good time to consider a conversion to a Roth IRA, especially if the income from the conversion would be taxed in a low bracket. Before converting, however, weigh the pros and cons of paying taxes on the conversion now in exchange for the opportunity to receive tax-free income from the Roth account later. Find more about IRA tax strategies on pages The federal tax rate schedules appear on the next page. As you can see, the tax rates range from 10% to 39.6%, and the income brackets vary considerably depending on your filing status. 2 3

4 FILING STATUS RATE (%) SINGLE HEAD OF HOUSEHOLD 2015 Individual Tax Rate Schedules MARRIED FILING JOINTLY (AND SURVIVING SPOUSES) MARRIED FILING SEPARATELY TAXABLE INCOME ($) BRACKETS , ,226 37, ,451 90, , , , , , , Over 413, , ,151 50, , , , , , , , , Over 439, , ,451 74, , , , , , , , , Over 464, , ,226 37, ,451 75, , , , , , , Over 232,425 Avoid an underpayment penalty. Paying your bills on time but no sooner than necessary gives you the use of your money for as long as possible. As you look at your tax situation, have a plan for paying your 2015 income taxes. You can avoid an underpayment penalty by satisfying the estimated tax rules. At minimum, the federal income-tax withholding from your pay and/or your quarterly estimated tax payments should equal the lower of (1) 90% of your 2015 tax or (2) 100% of the tax shown on your 2014 return (110% of your 2014 tax if your adjusted gross income (AGI) was more than $150,000, or $75,000 as a married taxpayer filing separately). A change in marital status is a good reason to review your tax situation. You can adjust your tax withholding by filing a new Form W-4 with your employer. If you pay your taxes in quarterly installments, the amount of your required payment could change. Weigh gift decisions carefully. Now that the federal estate-tax exemption is quite high ($5.43 million in 2015; to be inflation adjusted for future years), strategies to remove property from your estate, such as giving property to your children, may not be as useful from a tax standpoint. If you don t expect an estate-tax liability, planning for appreciated property to be included in your estate could make more tax sense. Why? Your heirs would receive the property with a stepped-up 4 5

5 basis equal to the property s estate value (usually, its fair market value on the date of death). If they later sell it, there would be no capital gains tax on the property s increase in value during your lifetime. Plan for distributions. If you are changing jobs, consider taxes before you decide what to do with any money you have in your employer s retirement plan. The plan administrator generally must withhold 20% of any eligible rollover distribution paid to you for federal income taxes. If you arrange to have your money paid into another employer s plan or an IRA in a direct rollover, no withholding will be required and your rollover will be tax free. You d also avoid the 10% penalty that can apply to early distributions from employersponsored retirement plans and IRAs. When it applies, the penalty is levied in addition to income tax. You can avoid the 10% penalty by waiting until you re age 59½ or older to take distributions from your retirement accounts. If you need your money sooner, see if you can qualify for one of several other exceptions to the 10% penalty. For example, you can take money from your IRA before age 59½ to pay higher education expenses for you, your spouse, or your child or grandchild without penalty. (Regular taxes would still apply.) Note that this particular penalty exception isn t available for distributions from 401(k) and other qualified retirement plans. Watch out for the AMT. Although the alternative minimum tax (AMT) exemptions are now adjusted for inflation annually, the AMT remains a planning concern. Every year, you re required to calculate your taxes under the AMT system. If your AMT liability turns out to be higher than your regular tax liability, you pay the extra AMT amount in addition to your regular tax. Certain items are not deductible for AMT purposes, such as state and local taxes and personal exemptions. And there are other intricacies involved in the AMT calculation. For 2015, the AMT exemptions are $53,600 (unmarried), $83,400 (married filing jointly), and $41,700 (married filing separately), and an exemption phaseout applies. The AMT rates are 26% on the first $185,400 ($92,700 if married filing separately) of AMT income in excess of the exemption amount and 28% on the remainder. Here are some of the items that can increase exposure to the AMT: Deducting a large amount of state and local taxes Exercising incentive stock options Having many dependents Recognizing a large capital gain A tax projection is often the best way to determine your potential AMT exposure. TAXES AND YOUR INVESTMENTS No matter what you are investing for, finding ways to lower taxes on your investment income can help you keep more of your earnings. 6 7

6 Tax Rates on Capital Gains HOLDING PERIOD More than 1 year* 1 year or less YOUR TAX BRACKET CAPITAL GAIN RATE 10% 15% 0% 25% 35% 15% 39.6% 20% 10% 39.6% Same as your ordinary tax rate * Long-term capital gain on the sale of collectibles or depreciable real estate is taxed differently. A maximum rate of 28% applies to collectibles gain and a maximum rate of 25% applies to real estate gain to the extent of prior allowable depreciation. Watch investment sale timing. You ll want to pay attention to holding periods when you are investing outside of a tax-advantaged account. If you hold securities for longer than one year before selling them (long term), any capital gain you realize on the sale will be taxed at a favorable rate. In contrast, capital gains on investments held one year or less (short term) are taxed at your higher ordinary tax rate. Qualified dividend income is taxed at the same favorable rates that apply to long-term capital gains. A key requirement for the lower dividend rates is that you hold the underlying stock for a minimum of 61 days during the 121-day period beginning 60 days before the stock s ex-dividend date. The minimum holding period is longer for certain preferred stock dividends. Selling appreciated investments and dividend-paying stocks before you meet the applicable holding period can cost you tax dollars. Of course, taxes are only one factor you should consider when making decisions about when to sell investments. Benefit from the 0% rate. You ll generally owe no federal income tax on long-term capital gains and qualified dividends if your total taxable income, including the gains and dividends, is less than the top of the 15% tax rate bracket for your filing status. If your income is too high to qualify for this 0% tax rate, perhaps a family member can take advantage of it. Use capital losses. You may use capital losses to offset capital gains and up to $3,000 of ordinary income ($1,500 if married filing separately). Any additional capital losses are carried forward for deduction in later tax years, subject to the same limits. Reduce exposure to the 3.8% surtax. When modified AGI is more than $200,000 ($250,000 on a joint return or $125,000 if married filing separately), investors can be hit with a 3.8% surtax. The surtax applies to the lesser of your net investment income or the amount by which your modified AGI exceeds the applicable threshold. Investment income for surtax purposes includes taxable interest, dividends, annuities, royalties, rents, net capital gain, and income earned from passive trade or business activities. It does not include municipal bond interest or distributions from tax-deferred retirement plans. Various timing strategies may be effective in controlling exposure to the 3.8% surtax, particularly if your modified AGI is close to the threshold that triggers the tax. Other potential planning steps include: Increasing contributions to qualified retirement plans Strategically taking capital losses to offset capital gains Transforming passive business activities into active business activities by increasing participation in the activities Deferring capital gains through the use of installment sales 8 9

7 Maximize retirement plan contributions. Investing through an IRA or an employer-sponsored retirement savings plan, such as a 401(k) plan, offers tax deferral benefits. Any earnings in your account compound tax deferred. This helps your account grow faster than it would if taxes were taken out each year. Consider an installment sale. When you sell appreciated property and will receive at least one payment after the year of sale, using the installment method lets you defer taxes by recognizing your profit over time. EXAMPLE. Don is selling land that he originally purchased several years ago for $100,000. The selling price is $300,000, and there are no outstanding mortgages on the property. His sale will create a $200,000 capital gain. Don allows the buyer to pay the purchase price in equal installments of $60,000 (plus interest) over five years. That way, the tax on his $200,000 gain will be spread out over five years. The installment method is not available for sales of publicly traded securities and certain other sales. Compare bond yields. Interest you receive from most municipal bonds is free of federal income tax, including the 3.8% net investment income surtax. You can compare the yields on a municipal bond and a taxable bond by calculating taxable equivalent yield. Be cautious about investing in private activity municipal bonds if you are likely to be subject to the AMT. Although tax exempt for regular income-tax purposes, the interest on most private activity bonds must be included in income for purposes of calculating the AMT. Some 401(k) plans give participants a choice of making either pretax contributions or after-tax Roth contributions. Pretax contributions lower your current tax bill, but you will pay taxes at ordinary rates on both the contributions and your account earnings upon distribution from the plan. Roth contributions don t save current taxes. But after you ve reached age 59½ and satisfied a five-year waiting period, account distributions including earnings are tax free. Contributions to a traditional IRA are deductible if you don t actively participate in an employer-sponsored retirement plan. If you are a plan participant (or your spouse is), deductions for IRA contributions are subject to AGI-based restrictions. How Much Can You Contribute? 401(k), 403(b), 457 plan IRA (traditional and/or Roth) UNDER AGE 50 AGE 50 OR OLDER (with catch-up) $18,000 $24,000 $5,500 $6,500 Other plan limits may apply. Not all employer plans allow participants age 50 or older to make catch-up contributions, and certain 403(b) and 457 plans have special catch-up provisions. You must have compensation to contribute to an IRA

8 Roth IRA contributions are not deductible, and you can withdraw them tax free at any time. Roth IRA earnings accumulate tax deferred and won t be taxed at the time of withdrawal if you are 59½ or older or disabled and have met a five-tax-year holding period. After the five-year period, you can withdraw Roth IRA earnings to pay up to $10,000 of first-time homebuying expenses for yourself or certain family members. First time is interpreted loosely (basically, no ownership of a principal residence in the previous two years). The $10,000 limit is a lifetime cap. Your ability to make a regular contribution to your Roth IRA depends on your modified AGI. For 2015, the contribution limit phases out as modified AGI rises from $116,000 to $131,000 (unmarried); $183,000 to $193,000 (married filing jointly); or $0 to $10,000 (married filing separately). You can convert a traditional IRA to a Roth IRA no matter how high your income. Because a Roth IRA conversion is a taxable event, choosing a low-bracket year for a conversion or doing smaller conversions over several years can be a good strategy. A conversion contribution does not count toward the annual Roth IRA contribution limit or the AGI limits on Roth contributions. You may roll over money from one traditional IRA to another on a tax-free basis as long as you complete the rollover within 60 days. Starting in 2015, the IRS will allow only one such 60-day rollover per year. STRATEGIES FOR HOMEOWNERS A home is a big investment one that the federal tax code encourages with several valuable home-related tax breaks. Deduct taxes and interest. If you itemize deductions on your tax return, you may deduct the property taxes you pay as well as interest paid on qualifying home mortgage debt of up to $1 million ($500,000 if you are married filing a separate return). The interest deduction is available for mortgages taken to buy, build, or substantially improve your primary residence and one other personal residence. Interest on up to $100,000 of qualifying home equity debt ($50,000 for a married-separate filer) is also tax deductible no matter how you use the loan proceeds. You can convert nondeductible consumer interest (on credit cards, for example) to potentially deductible interest by using a home equity loan or line of credit to pay off the consumer debt. But exercise caution since your home would act as security for the loan

9 The deductions for taxes and home mortgage interest are two of the itemized deductions that are reduced for high earners. (See page 20.) Exclude home sale gain. Do you hope to make a profit when you sell your home? Before you sell, check into the requirements for the home sale gain exclusion. The exclusion is generally available once every two years. If you qualify, you can exclude as much as $250,000 of gain from your income ($500,000 of gain if you re a married taxpayer filing jointly). The full $250,000/ $500,000 exclusion applies if you owned and used the home as your principal residence for at least two years (a total of 24 full months, or 730 days) during the five-year period ending on the sale date. The ownership and use periods don t necessarily have to coincide, and short, temporary absences count as periods of use. So, for example, a three-week vacation abroad would count as time spent in your principal residence. If you are married, only one of you must pass the ownership test, although neither of you may have used the exclusion for a prior home sale during the two-year period before the sale. You both must pass the use test. If you don t qualify for the full $250,000/$500,000 exclusion, you might be able to benefit from a reduced exclusion under certain circumstances. Benefit from tax-free rental income. Here s another great tax break that may interest you if you re a homeowner: You can rent your home for 14 or fewer days during the year and exclude all the rental income for tax purposes. Once you go over 14 rental days, you must report your rental income, but you may deduct your rental expenses, within certain limits. EDUCATION TAX INCENTIVES Paying for higher education is a financial concern many families share. If you are saving for college or have a child who is currently attending college, the tax incentives described in this section may be of particular interest. Use tax-favored plans. Qualified tuition programs, also called 529 plans after the tax code section authorizing them, are tax-exempt plans designed for families who want to set funds aside for higher education costs. There are two types. Prepaid tuition plans basically lock in tuition at today s prices at eligible colleges and universities. State-sponsored 529 college savings plans let you save and invest for future college expenses. Money can be used to pay qualified higher education expenses, including tuition, mandatory fees, room and board, and required books, supplies, and equipment. Plan earnings are free from federal income taxes as long as they are used for eligible expenses. You are not limited to investing in a 529 plan offered by your state. However, certain benefits may be unavailable unless specific requirements, such as state residency, are met. A particular plan may have restrictions on the timing 14 15

10 and use of plan distributions. Before investing in a 529 plan, consider the investment objectives, risks, and expenses associated with municipal fund securities. The issuer s official statement contains more information about municipal fund securities, and you should read it carefully before investing. A Coverdell education savings account (ESA) offers similar tax advantages. However, unlike a 529 plan, you may use an ESA to save for elementary and secondary school tuition and expenses, as well as for college. ESA contributions for a beneficiary are limited to $2,000 a year and are phased out for contributors with AGI between $95,000 and $110,000 ($190,000 and $220,000 for married taxpayers filing jointly). There are no such income restrictions with a 529 plan. Take a tuition tax credit. Once your child is in college, see if you or your student can qualify for a tuition tax credit. The American Opportunity Tax Credit can be as much as $2,500 per eligible student in your family. The credit equals 100% of the first $2,000 of qualifying expenses (generally, undergraduate tuition and fees) and 25% of the next $2,000. The 2015 credit phases out with modified AGI between $80,000 and $90,000 or between $160,000 and $180,000 on a joint return. The Lifetime Learning Credit is for undergraduate or graduate tuition and fees or qualifying job training. The credit is 20% of the first $10,000 of expenses, for a maximum credit of $2,000 per taxpayer return. The 2015 credit phases out with modified AGI between $55,000 and $65,000 or between $110,000 and $130,000 on a joint return. You can t claim the American Opportunity Tax Credit for the same education expenses you pay with money withdrawn tax free from a 529 plan. If you have a 529 plan and otherwise qualify for the credit, consider paying the first $4,000 of your child s college tuition out of pocket for credit purposes and using 529 plan funds for the balance of the tuition. Deduct student loan interest. As much as $2,500 of interest paid on qualified education loans is potentially deductible each year, regardless of whether you itemize or claim the standard deduction. In 2015, the deduction phases out ratably with modified AGI between $65,000 and $80,000 (between $130,000 and $160,000 on a joint return). If you pay student loan interest for your child that you are not legally obligated to pay, it s treated as a gift to your child. In this scenario, your child would be entitled to the deduction, assuming your child is not a dependent and meets the other deduction requirements

11 MAKING THE MOST OF DEDUCTIONS You ve already read about some of the expenses you may be able to deduct. Here are some additional ideas for making the most of the deduction opportunities available to you. Look above the line. Deductions claimed in computing AGI (also called above-the-line deductions) are particularly valuable because many tax breaks are limited or unavailable when AGI is more than a specified threshold. The personal exemption phaseout is an example of an AGI-based limitation. Each personal exemption you re entitled to deduct in full (for yourself, your spouse, and your dependents) will reduce your taxable income by $4,000 in However, once your AGI goes over the threshold shown in the table on page 20, your exemptions start to be phased out. In this situation, increasing above-the-line deductions could help you retain the benefit of your exemptions. Here s a partial list of items that are potentially deductible above the line: Alimony paid Self-employed retirement plan contributions and medical insurance premiums Traditional IRA contributions Health savings account contributions Expenses of a work-related move Student loan interest Various limits apply to these deductions. Bunch expenses. Medical expenses are deductible to the extent they, in aggregate, surpass 10% of AGI. The deduction floor is a little lower, 7.5% of AGI, if the taxpayer or the taxpayer s spouse is age 65 or older. A still lower floor 2% of AGI applies to miscellaneous itemized deductions. The income floors make it all the more important to know what s deductible and track your expenses carefully. Medical expenses can add up quickly when you consider health insurance premium payments (including Medicare Part B premiums), copays, and deductibles. Amounts paid for dental care, eye exams, and eyeglasses and contact lenses needed for medical reasons also count as medical expenses. As for miscellaneous itemized deductions, examples include investment management fees, union and professional dues, and other unreimbursed employee business expenses. When it s possible to do so, bunching medical or miscellaneous expenses in one tax year could help you exceed the applicable deduction floor and gain a deduction for a portion of your expenses. Deduct charitable contributions. Donations to qualified charities are potentially deductible as an itemized deduction. Noncash donations are generally valued at fair market value for deduction purposes, although certain exceptions apply. For large donations of property, an appraisal may be required

12 Volunteers may deduct various expenses associated with their volunteer work, such as travel, if the charity doesn t reimburse them and other requirements are met. The standard mileage rate is 14 per mile (plus parking and tolls) for driving while performing services for a charity. Or you can deduct actual expenses. Donating appreciated securities you ve held longer than a year can be a tax-smart strategy that lets you avoid capital gains tax (and, possibly, the 3.8% surtax) on the stock s appreciation. If you intend to deduct charitable contributions, make sure you keep the records you will need to support your deduction. The charitable deduction is one of the itemized deductions that can be subject to an AGI-based limitation. When the limitation applies, the affected deductions are reduced by 3% of AGI in excess of the amount shown in the accompanying table. The limitation does not apply to medical expenses, investment interest, casualty and theft losses, or gambling losses, and you can t lose more than 80% of the itemized deductions that are affected. Will Your Exemptions or Deductions Be Reduced? FILING STATUS 2015 AGI THRESHOLD Single $258,250 Married filing jointly $309,900 Head of household $284,050 TIPS FOR RETIREES If you are retired or approaching retirement, minimizing taxes on your Social Security retirement benefits and planning withdrawals from your retirement accounts may be important tax planning concerns. Protect Social Security benefits. No taxes are payable on Social Security if your income is below a specified amount. But once you go over the income threshold, a portion of your benefits will be taxable. Income is specially calculated for this purpose it consists of your AGI (with certain modifications) plus half your Social Security benefits plus any tax-exempt bond interest you received during the year. Up to 50% of your Social Security benefits will be taxable if your provisional income is between $25,000 and $34,000 (single/head of household) or $32,000 and $44,000 (married filing jointly). If your provisional income exceeds the top of the range, up to 85% of your benefits will be taxable. Consider paying off debt with invested funds that are earning interest or dividend income if doing so would reduce taxes on your Social Security benefits. You d have less income coming in, but you wouldn t have to make payments on the debt. Another possibility: Shift some income-producing assets you won t need in the short term to growth-oriented stocks that don t pay dividends. Before acting, however, be certain to evaluate these or any other steps in the context of your overall financial planning. Married filing separately $154,950 Personal exemptions are phased out and various itemized deductions are reduced when AGI surpasses the thresholds shown here

13 Plan withdrawals. When you are ready to begin withdrawing money from your retirement savings, think about taxes when deciding which accounts you will withdraw from first. You re probably better off from a tax perspective withdrawing from non-tax-deferred savings and investment accounts before your tax-deferred accounts. Withdrawing from alreadytaxed accounts first will provide an opportunity for your tax-deferred accounts to continue growing tax deferred. After you reach age 70½, you generally must start taking a minimum amount each year (called a required minimum distribution, or RMD) from 401(k) and other retirement plan accounts and traditional IRAs. (An employer s plan may allow you to delay RMDs until retirement if you are still working for the company sponsoring the plan and you are not a 5% owner.) Your first RMD generally will be due by April 1 of the year after the year you reach age 70½. Another RMD will be due by December 31 of that same year and each subsequent year. If you have a Roth IRA, qualified withdrawals will be tax free. But there s no requirement that you take minimum distributions from your Roth IRA during your lifetime. FOR BUSINESS STRUCTURE MAKES A DIFFERENCE The way a business is structured determines how it will be taxed. Even if you have been in business for a while, it s important to make sure that your current structure continues to meet your needs from both a tax and a non-tax perspective. Review corporate tax rates. Unless a Subchapter S election is made, a corporation uses the corporate tax rate schedule below to figure the federal income taxes due on its taxable income. Corporate Tax Rates TAXABLE INCOME RATE 22 Up to $50,000 15% $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10 million 34% Over $10 million $15 million 35% Over $15 million $18,333,333 38% Over $18,333,333 35% A qualified personal service corporation is taxed at a flat 35% rate. 23

14 When corporate income is distributed to shareholders as dividends, the corporation receives no deduction for the payments, and the dividend income is taxed again to the shareholders. The IRS may assess a 20% accumulated earnings penalty on a regular corporation that retains more earnings and profits than are necessary to meet reasonable business requirements. The penalty is designed to encourage corporations to pay taxable dividends to shareholders. As a shareholder working for the company, you generally would take a paycheck, which lets you draw out corporate earnings on a tax-deductible basis. A corporation generally may accumulate up to $250,000 ($150,000 for certain service corporations) without penalty. Corporations should document the reasons for additional accumulations the anticipated purchase of a new facility or equipment, for example in the corporate minutes. Like individual taxpayers, regular corporations may be subject to the alternative minimum tax. The corporate AMT rate is 20%, and an exemption of up to $40,000 is available. However, the $40,000 exemption is phased out for corporations with AMT income between $150,000 and $310,000. Qualifying small corporations are exempt from the AMT. Compare pass-through entities. Making a valid Subchapter S election for a corporation avoids the potential for double taxation at the federal level. An S corporation files income-tax returns but generally does not pay federal income taxes itself. Instead, the shareholders are taxed individually on their respective shares of the corporation s taxable income. EXAMPLE. Frank owns 70% of the stock in an S corporation and Michelle owns the other 30%. For its 2015 tax year, the S corporation has taxable income of $100,000. The corporation pays no federal income tax on the $100,000. Instead, Frank includes $70,000 of the income on his personal return and Michelle includes $30,000 on hers. An S corporation shareholder s distributive share of corporate income is not subject to selfemployment tax. However, to avoid IRS scrutiny, S corporation shareholders working in the business should draw reasonable salaries and the appropriate employment taxes should be paid on those amounts. A limited liability company (LLC) can have one owner, or the company can have co-owners, called members. An LLC s income is taxed to the owners individually. An LLC has more freedom in allocating income and deductions among the owners than an S corporation, which must make such allocations according to ownership percentages. A partnership, by definition, has more than one owner. Partnerships do not pay federal income taxes; business 24 25

15 profits and losses generally are divided among the partners according to the terms of the partnership agreement and taxed to them individually. The business income and expenses of a sole proprietor are reported on Schedule C, an attachment to the individual income-tax return. Net earnings from the business are taxed directly to the owner. To minimize self-employment taxes, sole proprietors should plan to claim as many deductions as possible on Schedule C. For example, professional fees should be claimed on Schedule C to the extent they are business related. STRATEGIES FOR BUSINESS ASSETS Your business may invest large sums in machinery, equipment, furniture and fixtures, real property, and other assets. You can recover some of those costs through depreciation deductions and by taking advantage of certain tax elections. Claim depreciation. Timing your asset purchases carefully may allow you to maximize your company s depreciation deductions. The tax rules generally allow a full half-year s depreciation for a non-real-estate asset no matter when the asset was actually placed in service. However, if more than 40% of the year s total purchases of such assets occur during the last three months of the year, each asset is depreciated as though it had been acquired in the middle of the applicable quarter. This could result in a lower overall depreciation deduction for the year. The depreciation period for commercial buildings and their structural components is 39 years. However, it may be possible to segregate certain building-related costs and depreciate them more quickly than the building itself. Consider the Section 179 election. Your business may be able to make an election to immediately expense up to $25,000 of its qualifying asset purchases instead of depreciating them over time. Note, however, that this Section 179 election is not available for real estate, is limited to the amount of taxable income from active trades or businesses, and is phased out as purchases of qualifying assets rise from $200,000 to $225,000. Deduct small purchases. Like many businesses, you may have accounting procedures calling for lower cost assets to be expensed rather than capitalized. The IRS allows companies to elect the same treatment for de minimis asset purchases costing up to $5,000 per item ($500 if a company does not have an applicable financial statement ). Because items that are expensed under the de minimis election do not count against your annual Section 179 expensing limit, making the election can increase the amount of asset purchases you re able to expense for tax purposes. (Certain requirements apply.) 26 27

16 28 DEDUCTION AND CREDIT PLANNING As part of your business tax planning, try to take advantage of all the tax deductions and credits available to your business. Choose an auto expense method. One way to compute tax deductions for business-related use of a vehicle is to keep track of actual expenses. The other way is to multiply the number of business miles driven by a standard mileage rate (56 per mile for 2014; subject to adjustment for 2015). Using the standard mileage rate simplifies recordkeeping but won t necessarily produce the largest deduction. Track meal and entertainment expenses. Fifty percent of business meal and entertainment expenses are deductible, assuming they are substantiated with appropriate records. The recordkeeping rules are quite detailed, so you ll want to have procedures in place to capture all the required elements for each expense. Using an accountable plan arrangement to reimburse employees for their business-related expenses avoids the need to include the reimbursements in employees taxable wages and can save your company payroll tax dollars. With an accountable plan, employees provide an adequate accounting of their expenses and return any excess reimbursement or expense allowance to the employer within a reasonable period. The reimbursed expenses must have a clear business connection. Identify bad debts. If your business uses the accrual method, monitor your accounts receivable to see if there are any uncollectible amounts that should be written off as bad debts. Consider a home office deduction. Do you work from home? If you meet specific requirements, you may be entitled to claim a deduction for various expenses related to the business use of your home, such as utilities, maintenance, and insurance. There are two options for figuring the deduction: (1) use actual expenses, prorated for the portion of your home devoted to the home office or (2) deduct a standard rate of $5 per square foot for the office space (up to a maximum of 300 square feet). Carry back NOLs. You re in business to generate profits, not losses. But if you have a bad year, you might find that you have a net operating loss (NOL). The tax law allows you to carry back an NOL to offset taxable income for the two preceding tax years and secure a refund of taxes paid for those years. If the NOL is not completely absorbed through the carryback process, you can carry the balance forward for up to 20 years. Instead of carrying an NOL back to previous tax years, a business may elect to carry its NOL forward. This election is worth considering if a company expects to generate a large profit and a high tax bill the next tax year. Deduct start-up expenses. If you are planning to open a new business, keep track of your expenses. The first $5,000 of expenses incurred in launching a new business such as pre-opening advertising, travel 29

17 and survey fees, consulting fees, and wages are potentially deductible in the year the business begins. With this election, any additional expenses would be deductible over a 180-month period. (The $5,000 limit is reduced dollar for dollar once total start-up costs exceed $50,000.) Benefit from timing rules. If your business uses the accrual method of accounting for tax purposes, you have some flexibility with respect to the timing of any year-end bonuses you are going to pay. Employee bonuses for the current tax year generally may be paid within the first 2½ months of the next tax year and still be deducted on the current year s return. (Certain restrictions apply.) Here s another break that could help your cash flow if you have a profit sharing plan: Tax-deductible plan contributions may be made as late as the extended due date of your business tax return (a possible 8½ months after year-end for a calendar-year corporation). Track down credits. Although most of the credits available to businesses have very specific requirements and limits, they re well worth looking into if you think your business might qualify. Among others, there are tax credits for costs related to: Energy-efficient property installed for business use (e.g., solar energy property, small wind turbines, geothermal heat pumps) FICA taxes paid on cash tips (food and beverage establishments) Employer-provided child care Health insurance benefits for employees (small employers only) Retirement plan start-ups (small employers only) ESTABLISHING A RETIREMENT PLAN Consider establishing a tax-favored retirement plan through your business if you don t already have one. The tax benefits can be significant. When all requirements are met, plan contributions for yourself and any eligible employees will be tax deductible (within limits). You and the other plan participants can defer paying income taxes until distributions are received from the plan. Compare plans. To find a retirement plan that suits your needs and objectives, compare features and requirements. With a 401(k) plan, participants defer a portion of their pay to individual plan accounts on a pretax basis. The sponsoring employer may make matching contributions but isn t required to do so. In addition to pretax contributions, a 401(k) plan may offer a Roth contribution option. If you are selfemployed and do not have employees, you might consider establishing a solo 401(k) plan. Flexibility is one of the key advantages of a profit sharing plan. Whether your company will contribute for a given year and how much can be left to its discretion. If desired, a profit sharing plan may incorporate a 401(k) salary deferral feature. A simplified employee pension (SEP) plan is relatively easy to establish and administer. The business funds the plan with tax-deductible contributions to SEP- IRAs set up for the plan participants. The annual employer contribution is discretionary

18 Like SEP plans, SIMPLE plans are relatively easy to set up and maintain. Eligible employees have the opportunity to make payroll contributions to the plan on a pretax basis, and the employer is required to make matching or nonelective contributions for employees. A defined benefit plan provides benefits in the form of a traditional pension, typically based on average pay and length of service. Although not as widely used as in the past, defined benefit plans can be ideal for older owners who desire faster accumulation of benefits. Another avenue you might explore is a hybrid plan, such as a cash balance plan, that has features of both a defined contribution and a defined benefit plan. YOUR We hope the information and strategies presented in this Tax Planning Guide will be helpful to you in your 2015 tax planning. Please contact us if you would like assistance or more information about the range of services we offer. The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any actions, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation. FR /E TP15 10/

19 This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. Pacific Life Insurance Company Newport Beach, California (800) Pacific Life & Annuity Company Newport Beach, California (888) Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Investment and Insurance Products: Not a Deposit Not Insured by any Federal Government Agency Not FDIC Insured Not Bank Guarantee May Lose Value MKTG-OC-1054D /14 TP