Monthly Archives: December 2014

Are you ready for next April?

Are you prepared for 2015? Here are two things you can do now to get ready for next year — specifically for April 15, when your 2014 federal income tax return is due.

  • Add up your income and tax payments for 2014. Year-end is close enough now for you to have a good idea of your total annual income and federal tax withholding.

    What you’re looking for: Check for potential underpayments of tax. For example, make sure you’re covered for the 0.9% additional Medicare tax. Your employer is only required to withhold this surtax when your salary exceeds $200,000 — without regard for other income. If you have a second job, or neither you nor your spouse has wages individually in excess of the withholding threshold, you may be underpaid.

    What to do: Increase your federal income tax withholding for December by updating your Form W-4. Alternatively, make an estimated tax payment.

  • Add up your retirement plan contributions for 2014. Contributions to 401(k) plans reduce your taxable income.

    What you’re looking for: Is there an opportunity to make additional contributions? Compare your year-to-date contributions to the 2014 maximum contribution of $17,500 (plus another $5,500 if you’re over age 50). Will your current payroll deduction leave you under the allowable limit at year-end?

    What to do. Ask your employer to increase your contribution from your remaining 2014 paychecks. Another option: Find out whether you can make a lump-sum contribution from a year-end bonus.

Need more tax-saving suggestions to implement before December 31? Give us a call at Heinemann CPAs, your Chattanooga CPA.

What to do with your required minimum distribution

Have you already withdrawn the annual “like-it-or-not, need-it-or-not” distribution from your traditional IRA? If you haven’t, keep in mind you’re required to take minimum withdrawals annually once you reach age 70½, and December 31 is the deadline for avoiding penalties.

What if you don’t need the money for living expenses? You still have to take a required minimum distribution, or RMD, from your account, based on your age and the total prior year-ending balance in all your IRAs.

Once you’ve withdrawn the required amount, deciding what to do with your distribution involves analyzing your entire portfolio, as well as reviewing your tax and estate planning goals.

For example, to limit taxable income, you may choose to invest your RMD in securities that offer growth. Or say your investment allocations have gotten lopsided during the year. You could use your RMD to readjust the mix of assets.

If gifting is part of your estate plan, you may want to make a contribution to a 529 education savings account for a family member. While you generally can’t roll RMDs into other tax-deferred accounts, you are free to use outside assets to set up and fund a 529 plan.

Another suggestion is to convert all or part of the balance remaining in your traditional IRA to a Roth. The conversion is taxable, but no future RMDs are necessary.

Finally, if you have multiple traditional IRAs, consider consolidating them into a single account. You’ll still have to take your RMD each year, but the calculation will be less complicated.

Please give us a call for more information on retirement plan options. We’re here to help.

Set your salary at a reasonable level

Compensation is a subject that never goes out of style. For owners of subchapter S corporations, the focus is typically on the definition of “reasonable” compensation. Since no specific authoritative guidelines exist, the determination comes down to facts and circumstances.

With potential penalties and payroll tax assessments at stake, setting your salary at a reasonable level can keep tax disputes at bay. Here are suggestions for a year-end review of your compensation.

  • Create a written employment contract. You may be the only employee in your business. But the process of writing down your responsibilities can highlight congruencies between the services you provide and the salary you take. Incorporating the advice of outside mentors lends credence to compensation decisions.
  • Investigate market data. Look for salary surveys from businesses in your industry or profession. Comparability data is not always easy to come by, but benchmarking against your competitors provides support for specific salary levels.

    Online databases that list salaries and responsibilities for a variety of jobs are available, and some of these “career communities” offer free resources. Generally, these sources are more persuasive than simply setting your salary using a “rule of thumb” method based on financial statement ratios.

Determining a reasonable salary is a task you’ll want to tackle sooner rather than later. Whatever method you choose, be sure to document your decision-making process.  Call Carl Heinemann, your Chattanooga CPA, for more information.

Review your 529 plan before year-end

November is not generally the time of year that brings school to mind. But adding a review of your 529 education savings account to your year-end planning list could save you tax dollars. Here are three ideas to consider before December 31.

  • Review plan investments. You can change the investments in 529 accounts once a year, generally without federal income tax consequences. Reasons to make a switch include poor investment performance, a change in beneficiary, or the need for more liquidity to protect capital as a beneficiary reaches college age.
  • Coordinate withdrawals. Add up the qualified education costs you paid during the year. Then check your eligibility for education tax breaks such as the American Opportunity Tax Credit. You can claim an education credit in the same year you withdraw 529 plan funds. However, you cannot use the same expenses to claim a credit and take a tax-free distribution from your 529 plan.
  • Make contributions. Contributions to 529 plans are gifts and you can use your annual $14,000 exclusion to shelter them from federal gift tax. You can also make an election to contribute as much as five years worth of gifts — up to $70,000 per account — in a lump sum.

    Contributions made by year-end may be deductible on your state income tax return.

Please call Carl Heinemann, your Chattanooga CPA,  for more 529 plan tips. We’re here to help.

Focus on expenses, not just income

Listen closely. In workplaces across America you’ll hear this refrain: “If only I made more money. Then I’d have plenty to live on.”

Certainly it’s important to earn a sufficient salary to pay the rent, keep the lights on, service the car, and purchase school supplies. But the income side of the ledger tells only half the story. Expenses are the other half.

Retirement planners often tell clients to take a hard look at expenses they expect to incur when full-time employment draws to a close. But even if you’re decades from retirement, it makes sense to scrutinize your routine and not-so-routine expenses, at least on an annual basis. Folks who accumulate wealth over a lifetime generally develop a habit of living within their means. In other words, they’ve whittled down their expenses to a level commensurate with their income. By one means or another, they’ve learned to stick to a budget and save for the future.

Does that mean they never take a vacation? Or buy a newer model car? Or send their kids to college? No. It does mean, however, that they’ve learned to sacrifice in the short term for long-term benefits. They refuse to live paycheck-to-paycheck until the paychecks dry up.

Here are four expenses that can often be trimmed with minimal pain:

  • Cable or satellite television. Watching pay-per-view events can drain your budget in a hurry. So, too, can T.V. packages brimming with premium channels. Take a break from the tube for a week and use the time to read a book or play cards with friends. Your thinking may change. You may find that the cost of premium television begins to outweigh the benefits.
  • Auto fuel. Consolidate trips to the store, the school, and the church. Planning ahead is a relatively painless way to minimize visits to the gas pump.
  • Telephone services. If your wireless bill is beginning to resemble a phone book — with most of the records logged against your kids’ phones — maybe it’s time to shop around for less expensive plan.
  • Vacations. America is a huge country (just ask someone who lives in Europe). It’s also a great place to explore on a budget. Road trips, especially if planned for the off season, can provide a wealth of memories for a reasonable price.

Take steps to increase your earning potential, sure; but don’t forget the other side of the ledger.  Call Heinemann CPAs, Your Chattanooga CPA, for more information.

How to handle customer complaints

No one likes to be criticized. But customers do understand how your products and services affect them. So a wise business owner will pay attention to customer complaints, even when they seem to descend from left field, even when criticisms seem on the surface, at least unreasonable.

It’s important, first of all, to defuse emotions. Like the bomb squad called in to deactivate a deadly device, you want to make sure the situation doesn’t escalate out of control. Once tension has diminished, you can engage in rational conversation with your customer.

Usually some grain of truth can be gleaned from even the most irrational grievance. Sometimes the problem is obvious a defective product or poor customer service from an untrained employee, for example. Other times, you may need to listen long and hard to discover the underlying problem, like a patient doctor who studies symptoms and consults with colleagues before prescribing a remedy.

Following are three tried-and-true suggestions for dealing with customer complaints:

  • Don’t ignore them. Whether or not you agree, it’s important to let customers know that you’ve heard them and will attempt to meet their needs. Employees should be trained to treat customers with respect, make eye contact, and listen without interruption. Such simple acts of courtesy will often lower the level of emotion so that complaints can be constructively addressed. A customer who isn’t acknowledged may leave in a huff and start broadcasting complaints about your business to anyone who will listen.
  • Keep the process positive. If a customer shows signs of frustration or anger, a response in kind may simply add fuel to the fire. Don’t be afraid to apologize. There’s a reason the customer is upset, regardless of whether you’re at fault. Take the time to listen. Acknowledge the importance of the issue and be willing to make things right.
  • Work toward a solution. If a product was defective, replace it — no questions asked, no excuses given. If someone was treated poorly by one of your employees, acknowledge the problem and let the customer know that you take such complaints seriously. Get the details. Complaints often highlight the need for additional training or revised procedures. Track complaints with a log and use them to your advantage.

Over time, dealing constructively with customer complaints can build loyalty and may even generate new business.