You already know the tax benefits of making retirement plan contributions — your contributions offer the double benefit of tax deferral on asset growth inside the plan and a lower adjusted gross income in the current year that can increase other tax breaks. But are you taking full advantage of these benefits? For 2016, you can contribute up to $18,000 to your 401(k), plus another $6,000 if you’re age 50 or over. The maximum contribution to an IRA for 2016 is $5,500, plus an additional $1,000 when you’re age 50 or older. If you haven’t adjusted your annual contributions in a while, you may be missing an opportunity to boost your retirement savings.
Here are four times to consider increasing your contributions.
- When the kids leave home. According to the U.S. Department of Agriculture, the average annual cost of raising children is approximately $16,000. Once your children leave home, review your budget to determine whether you can direct additional savings to your retirement accounts. Perform the same review any time your expenses decrease, such as when you pay off a credit card balance or vehicle loan.
- Pay raises. When your income increases, direct all or part of the additional money to your retirement plan. This strategy can be especially valuable when your employer matches contributions.
- When your employer’s percentage increases. If your employer makes a contribution to your account that matches all or part of the amount you contribute, taking full advantage of those “matching” dollars is a smart move. When the match goes up, increase your contributions.
- When AMT or other taxes may play a role. Because retirement plan contributions reduce your adjusted gross income, increasing the amount you put in your accounts can help limit your exposure to taxes such as the alternative minimum tax and the net investment income tax.
Contact us Carl Heinemann, your Chattanooga CPA, more retirement savings suggestions.
Are you a first-time freelancer? Have you taken on temporary project- or contract-based work? Congratulations on becoming self-employed! If you didn’t know this type of work is considered self-employment, you have lots of company. The Small Business Committee of the U.S. House of Representatives recently held hearings that indicated many new entrepreneurs are unaware of some or all tax filing responsibilities. Here are issues to know about.
- Recordkeeping. Tracking your income and the hours you spend working in your business makes filing your tax return easier. You can also use good records to help prove that your business is not a hobby. That’s important because expenses from hobbies are limited, unlike the costs of running a business. Other uses for your records include support for valuable credits and deductions, and the ability to reconcile the income you make against what is reported to the IRS. You should also note that all the income you earn is taxable, whether or not you receive a form such as a 1099.
- Estimated tax rules. When you’re self-employed, you’re responsible for paying federal and state withholding as well as self-employment tax. In general, you have to prepay these taxes on a quarterly basis when you expect to owe $1,000 or more with your return. There are exceptions, but the best way to know if you qualify is to calculate your expected income. Failing to make estimated tax payments can lead to penalties.
From whatever source you earn income, keeping up with filing requirements can save you money. Contact Carl Heinemann, your Chattanooga CPA, for help.
Does your company have a lost and found department? Does property you store there include uncashed checks, unapplied customer deposits, and credit balances in accounts receivable? You might not think of intangible property as “lost.” Yet the owner of these assets has a right to receive them, and you may have a reporting requirement with a state government. Under unclaimed property statutes, you’re generally required to identify unclaimed property, attempt to find the owner, file a report, and send the property to the state. Failing to do so could mean penalties and interest.
How do you identify unclaimed property? To determine whether intangible property is unclaimed, states typically designate a “dormancy” period. That’s the amount of time in which you have not had any owner-generated activity with the property holder. The dormancy period can vary, depending on state law and the type of property. As an example, unclaimed paychecks may have a dormancy period of a year, while the dormancy period of security deposits may be five years or longer.
Once you’ve identified the property, you’re required to perform “due diligence,” which means you need to attempt to contact the owner. Typically, this means you send a written notice to the last known address.
If you haven’t heard back from the owner by the end of the dormancy period, you’ll need to file a written or electronic report with the state. Which state? The answer depends on the information you have. For instance, if you know the last address of the property owner, you’d report the unclaimed property to that state. Depending on the type of business you operate, you may have reporting requirements in multiple states, and these reports are generally due annually.
Finally, you have to send the unclaimed property to the state. For intangible property, “sending” the property means you write a check or make a bank or wire transfer for the total amount you reported.
If you don’t already have a policy in place to identify unclaimed property that your business may be holding, take time to establish one. Then review your accounting records to make sure you haven’t inadvertently neglected to comply with unclaimed property laws. As always, if you have questions, please contact Carl Heinemann, your Chattanooga CPA, for assistance.
Does your chart of accounts reflect your current business operations? If you haven’t revised your chart of accounts since you initially set it up, you may be missing out on an easy way to simplify your business’s financial life. That’s because your chart of accounts is more than a basic bookkeeping tool. Your chart can also help you keep track of items that affect your tax return.
For example, your business income may have multiple sources, including the sale of goods and services to customers, rents, royalties, interest, dividends, gains from the sale of business and investment assets, and “miscellaneous” receipts. These different types of income are treated differently under federal income tax rules and appear in different places on your return. Arranging your income accounts for tax-specific categories can streamline tax preparation time and reduce misstatements.
Expense accounts can benefit from organization too. For instance, you’ll want to separate allowable deductions, such as ordinary and necessary business costs, from expenditures that produce benefits in future taxable years, such as equipment. That keeps your depreciation schedule current, highlights assets you’ve purchased and disposed of, and ensures proper reporting on federal, state, and local returns.
In addition, some income tax deductions are based on specific business income and the related costs. The domestic production activities deduction is an example. Calculating this tax benefit requires separating income and expenses attributable to certain qualifying activities such as real property construction. Setting up your chart of accounts to capture the necessary information is a year-end time saver.
Nondeductible expenses are another category that can benefit from tax-specific accounts. Those include dividends paid to shareholders, expenses associated with tax-exempt income, certain entertainment costs, and penalties and fines.
Organizing your chart of accounts to accurately track business events that affect your taxes can be cost-effective. Contact Carl Heinemann, your Chattanooga CPA, for tips on the best way to get the most benefit.
You’ve ascended the stage, received the long-coveted diploma, flipped the tassel, and hurled the cap into the air. Now comes the hard part — finding suitable employment, paying off student loans, and making ends meet. And saving for retirement, an eventuality that may seem like a distant galaxy, too far off to contemplate and irrelevant to the needs of the moment. But decisions made in these early years will influence, and may determine, your financial future.
Here are suggestions to help you get started in the right direction.
- Live within your means. It’s tempting to want the lifestyle your parents enjoy, without the sacrifices. If you can’t afford a new car, consider getting used but reliable transportation. Housing, food, and car expenses should consume less than 65% of your net (after tax) income. Track your expenses for a few months and decide what you can live without. You needn’t become a hermit or resign yourself to dressing in rags, but developing disciplined habits early will pay off in financial freedom later.
- Use debt wisely, if at all. One study found that Americans under age 35 spend nearly 20 cents of every dollar earned to pay existing debts. Resist the temptation to travel further down that road. You can pay off small debts first to build momentum, then tackle high-interest loans and credit cards, or you can reverse the order if that makes more sense to you. Regardless of the method you choose, make a plan and stick with it.
- Get insurance now. Don’t wait to get car, medical, and homeowner’s or renter’s insurance. Consider high deductible policies with low premiums, then establish an emergency fund to cover deductibles and other unforeseen expenses.
- Save regularly. If, at age 22, you contribute $10,000 to a 401(k) or similar retirement plan that annually earns 6%, the Rule of 72 says your money will roughly double in 12 years. (The Rule of 72 is an easy method of calculating how long before an investment will double. In this case, you divide 72 by 6.) That means by age 34, your balance will equal $20,000, even if you never make another contribution. How to get started? Contribute at least 10% of your salary toward retirement and take full advantage of your employer’s matching funds.
Contact Carl Heinemann, your Chattanooga CPA, for more financial tips.
Producing quality goods and providing great customer service depends on employees who take pride in their work and show up every day. But life happens. Sometimes employees get sick or struggle through personal crises. When such events occur, some workers choose to stay home for legitimate reasons but are eager to return to work. Others may exploit sick day policies. If you allow irresponsible employees to coast, you may find production deadlines slipping, customer service deteriorating, and employee morale taking a nosedive.
As a manager, your job is a balancing act. Dealing with employees who are consistently tardy or absent is not an easy assignment — but it’s doable. Here are three suggestions to get started.
- Make your policy clear. When new employees come on board, inform them about your company’s policy regarding tardiness and absenteeism. Put the policy in writing, make it available to all staff, and state your requirements unambiguously. For example, you could clearly define tardiness using plain language, such as, “Employees who arrive over 30 minutes late will be considered tardy.” Also spell out your company’s definition of “excessive” absences: “Six or more unplanned absences in a six-month period will be considered excessive.”
- Provide support. Consider establishing an Employee Assistance Program (EAP) to help staff through personal and work-related issues, some of which may affect attendance. An EAP conveys a caring attitude on your company’s part and may pay off in greater employee loyalty. An EAP program need not break the budget. Providing company-funded access to trained professionals on an as-needed hourly basis may meet the needs of your firm.
- Hold employees accountable. Employees who show up on time, day in and day out, may become resentful if coworkers are allowed to arrive late without consequences. Make note of excessive absenteeism and tardiness in performance evaluations, and spell out the consequences. On the other side, reward staff who go the extra mile. If absenteeism is a problem, consider tying bonuses and merit increases to attendance goals. Administer your policies consistently and build in flexibility.
If you need assistance creating employee guidelines, contact Carl Heinemann, your Chattanooga CPA.