Monthly Archives: September 2014

Do an estate planning review

Is estate planning no longer necessary? With a federal unified estate and gift tax exemption of $5,340,000 for 2014 and the ability to share unused portions of the exemption between spouses, you may think so.

Yet that initial reaction might not be correct. For example, state laws can differ from federal. If your state has a lower estate tax exemption and a lack of portability, your estate can be subject to tax. Having a plan can reduce the impact.

Here are estate planning moves you can make to avoid unintended consequences.

  • Create or update your will. Not having a will can mean what you own is distributed according to state law. A written will outlining your wishes lets you be sure assets go where you choose. Once you have a will in place, update it as your life changes.
  • Review beneficiary designations. Fill out beneficiary forms for bank accounts, life insurance policies, and retirement plans. You designate who inherits the account and the balance is transferred directly.

    For some assets, such as individual retirement accounts, a properly completed beneficiary designation affects the way the account is distributed and can save tax dollars.

Other planning moves include deciding the best way to title assets such as real property, and gifting assets during your lifetime.

Please call Heinemann CPAs in Chattanooga and your attorney to schedule an estate planning review. We’re here to help.

529 plan withdrawals have tax rules

After years of putting money in your 529 college saving plan, you’re ready to start taking withdrawals to pay tuition bills. Do you know the rules for keeping the withdrawals tax-free?

Here’s an overview of three types of 529 plan distributions.

  • Qualified withdrawals. When you take money from the account to pay for college education expenses such as tuition, fees, books, supplies, and equipment, the withdrawals are generally tax- and penalty-free, no matter the age of the account beneficiary.

    Caution: Part of the distribution may be taxable when the account beneficiary receives tax-free assistance such as a scholarship. In addition, you must coordinate 529 withdrawals with Hope and lifetime learning credits, as well as distributions from Coverdell education savings accounts. These rules prevent the use of the same expenses to obtain multiple tax benefits.

  • Nonqualified withdrawals. The earnings portion of withdrawals that are used for anything other than qualified education expenses are taxable. You’ll also have to pay a 10% penalty on the earnings, unless an exception applies.
  • Rollovers. You can deposit, or rollover, withdrawals into the 529 plan of a family member, or into another account of which you are the beneficiary. When the rollover is completed within 60 days after you take the initial distribution, it’s not taxable.

If you have questions or need help calculating 529 plan withdrawals, please call our Heinemann CPAs, your Chattanooga CPA..

Generation-skipping involves a transfer tax

In addition to estate and gift taxes, a third tax applies to assets you transfer to someone two or more generations below you, such as your grandchildren. This “generation-skipping transfer (GST) tax” applies to trusts and individuals, and has features similar to the estate tax rules — and some important differences.

For example, under both sets of rules you can make lifetime and testamentary tax-free transfers up to a specified “exemption.” While the amount is the same for both taxes ($5,340,000 for 2014), the exemptions are unrelated.

Another similarity: You and your spouse can each claim a GST exemption. That means with planning you can make gifts to your grandchildren or other “skip” beneficiaries of up to $10,680,000.

However, the estate tax rule of sharing unused exemptions between spouses (known as portability) does not apply to the GST exemption.

If you make generation-skipping transfers for which regular gift tax is not due — such as gifts with a total combined value of less than $14,000 during a year — you won’t pay GST tax either. That’s also true for tuition sent directly to a qualified school and medical expenses paid to healthcare providers.

Finally, while the federal estate tax rate varies depending on the amount of your taxable assets, generation-skipping transfers are taxed at a flat 40%.

Please call Heinemann Associates, your Chattanooga CPA, if your estate plan includes bequests and gifts to your grandchildren. We can make sure you’re not surprised by an unexpected tax burden.

The IRS provides disaster relief

In the aftermath of a disaster, implementation of established plans can help you get back to your daily routine. Still, no matter how prepared you are, some things — such as tax deadlines — can be overlooked during the recovery period. What happens if you discover you’ve forgotten to file a return or make a deposit?

Here are examples of tax relief available when you or your business are affected by a federally declared disaster.

  • Postponed deadlines. Deadlines for personal and business returns, as well as tax deposits, can be postponed for up to a year. The length of the postponement for each disaster area is determined by the IRS, so you’ll want to verify how much additional time you have.
  • Penalty abatement. Penalties for failing to file certain returns or make required deposits are waived during the postponement period. The waiver is generally automatic and may also apply to interest.
  • Prioritized processing. You have the option of amending last year’s return to claim losses from a current year disaster. Amended returns flagged with applicable “disaster designations” are typically expedited so you get a refund quickly.

Were prior year returns lost in the disaster? Requests for replacements are expedited and the usual fees are waived.

Please call Heinemann Associates, your Chattanooga CPA, and remember you don’t have to navigate disaster-related tax matters on your own. We’re here to help.

Review health savings account basics

Introduced by Congress in 2003 as part of the Medicare Prescription Drug and Modernization Act, Health Savings Accounts (HSAs) provide many families with a viable answer to the ever-rising cost of healthcare. In fact, HSAs are often a win-win alternative for both businesses and employees. For employers, the cost of medical insurance premiums may be substantially reduced when workers sign up for high-deductible plans. For employees, funds contributed to an HSA accumulate tax-free to cover medical needs, rolling over from year to year until the money is needed.

HSAs work in tandem with high deductible health plans (HDHPs). To be eligible to contribute to an HSA in 2014, you’ll need to sign up for a plan that has a deductible of at least $2,500 (for families) or $1,250 (for individuals). You can then contribute up to the IRS annual maximum of $6,550 for a family or $3,300 for an individual. If you’re age 55 or older, you can kick in another $1,000 per year.

From a tax perspective, an HSA is hard to beat. For starters, you get a tax break: contributions reduce your taxable income and tax-free withdrawals are allowed if the money is used for qualified medical expenses. Unlike Flexible Spending Accounts (FSAs), you don’t have to “use or lose” the money every year. Funds in an HSA are allowed to grow until they’re needed. For many people, that type of savings account makes a lot of sense because healthcare needs and related expenses tend to increase over time.

Which medical expenses are “qualified” for favorable tax treatment? Your annual insurance deductible, co-payments for prescription drugs and medical care, vision and dental costs — all are eligible under HSA rules. You can also reimburse yourself tomorrow for medical costs incurred today (just make sure to keep those receipts in case of audit). Some plans even allow you to invest HSA balances in mutual funds when the account reaches a certain threshold.

Nevertheless, an HSA may not be the best choice for everyone. If you or a family member suffers from a chronic health condition, switching insurance companies may present unacceptable risks. Be aware as well that if you’re under age 65, withdrawing HSA funds to cover non-eligible expenses may result in stiff tax penalties, much like early withdrawals from tax-deferred retirement accounts.

Contact Heinemann Associates, your Chattanooga CPA, for more details.

Do a business valuation when you’re ready to sell your company

Well before you’re ready to sell your Chattanooga company, you’ll want to determine its fair market value as a starting point for negotiations. Of course, obtaining a reasonably precise value for your business is often a complicated and time-consuming task. Accurate appraisals must weigh a variety of factors and incorporate numerous assumptions. The more precise the underlying numbers and suppositions, the more likely the appraiser’s determination of fair market value will reflect what a willing buyer would actually pay. Following are two questions an appraisal should address.

  • How does your business compare? If you’re operating a service business, your valuation will differ — often substantially — from a company involved in light manufacturing or retail. Buyers will expect a reasonable return on their investment, a return that is often represented as some form of earnings multiplier. For example, your Chattanooga business may be valued at three times projected earnings. Once determined, that number can be compared to businesses of similar size in your market. Of course, accurate valuations must compare apples with apples. “Earnings” must be defined. Should “earnings” include or exclude the owner’s pay, interest expense, depreciation, or taxes? A careful appraisal will also scrutinize the balance sheet. The basis for valuing tangible and intangible assets (including non-compete agreements) and liabilities (such as mortgages, installment loans, and accounts payable) should be clearly laid out — before the business is put on the block.
  • Will present trends continue? The future is always murky, but a careful analysis will be based on conservative projections, assumptions, and common sense. If, for example, the business is expected to retain skilled management and employees, buyers may be willing to pay a premium. If, on the other hand, the company is overly dependent on a few products or customers, potential buyers may be scared off. Or they may require concessions to mitigate perceived risk. Again, a careful appraisal will consider many such factors and value the business accordingly.

Remember: an appraisal is merely a starting point for negotiations. The more accurate the appraisal, the more likely the business will be priced correctly and potential buyers will be attracted. Unfortunately, determining the fair market value of a business may be fraught with missteps and faulty assumptions. For that reason, hiring a trained and objective professional in Chattanooga is often a worthwhile investment.