How To Plan for Retirement Financially

For many Americans, retirement feels like a far-off and distant dream. The most common age to retire in the US is 62 years old, which is also the minimum age to collect Social Security.

However, as demographics change in the US, Social Security will become less and less of a dependable, viable source of full income for future generations of retirees. It is of paramount importance that young people begin to plan and save for retirement sooner, rather than later.

There are several ways to predict and budget for the money you will need in retirement. Here’s how to estimate how much you need to save to live comfortably in your later years.

How much money do you need to live on after you retire?

The first step is establishing what your general living costs are and trying to adjust how much you will need to live on in retirement. The overall goal is to get a clear picture of how much you need, and then finding the sources of retirement income to match that result.

It’s hard to predict the future, but as a rule of thumb, most experts suggest that you will need 80% of the income you earn while working. That does not consider variables like healthcare, which can be a substantial cost in your later years. Some other factors to consider are:
• Monthly housing costs (mortgage, rent, or assisted living)
• Transportation expenses
• Food, clothing, and personal care
• Taxes and insurance
• Other travel and entertainment
• Family care (helping your children or grandchildren)

According to the Employee Benefit Research Institute, almost 50% of families end up spending more during retirement in comparison with their working salaries. Nearly one-third of families surveyed actually spend 120% more than they did while working. In retirement, many families have the time to enjoy traveling, buy a second home, or spend money on entertainment they otherwise wouldn’t while working.

Taxes and Retirement

Taxes will also play a role in how you budget for retirement. There are tax implications when you withdraw from retirement investment accounts like the 401(k) or a traditional IRA. Taking money out of your 401(k) means the money will be taxed as ordinary income based on your tax bracket.

Retirement taxes don’t end at the 401(k) investment. There are also Social Security benefits taxes. If your income is above $25,000 for singles and $32,000 for married couples filing jointly, federal taxes apply to Social Security benefits. The tax rates depend on your tax bracket and your state’s tax rules – 13 states tax Social Security, each with their own rules. The best way to estimate your future tax rates is to research what taxes your state imposes, plus your current federal income tax rates to get a rough estimate of what you can expect to pay. It’s also worthwhile to consider switching to a Roth IRA account if you’re at least five years from retirement.

The Impact of Healthcare Costs

Bottom line: healthcare in the US is expensive. Many adults underestimate how much money they will need to save for healthcare in retirement. In 2018, Fidelity Investments estimated that a healthy, 65-year-old couple would need $280,000 to cover their healthcare costs in retirement. This figure included “premiums, cost-sharing provisions and out-of-pocket costs associated with Medicare parts A, B, and D,” but not “other health expenses such as over-the-counter medications, most dental services, and long-term care” or any employer-sponsored retiree health coverage.

Often, seniors assume that Medicare is free and will be enough to cover their healthcare costs. However, Medicare premiums can be quite high. Social Security considers some individuals to be a “higher-income beneficiary,” meaning they pay higher rates for Medicare Part B, the health-insurance portion of Medicare. In 2017, higher-income beneficiaries were individuals who made $85,000 or married couples filing jointly who made $170,000.

Estimating Your Sources of Income

As soon as you have a figure of what you need to live comfortably in retirement – including day-to-day living expenses, your predicted tax bracket, and some extra funds for healthcare costs – it’s time to find the best investment sources for your retirement fund. This means understanding what you can expect from pensions and Social Security, as well as your own personal saving goals. Here are some of the vehicles for saving for retirement you may consider.

If you work in the private sector, it’s rare to have a pension; government organizations may offer a pension plan, as well as a handful of large companies. If you do have a pension, the way that it works is the employer contributes money into your pension plan for as long as you work for them. When you retire, that money is then paid back to you in the form of a monthly check. The amount you will receive depends on a formula that considers the number of years you worked for the company, your age, and your salary. Pension benefits are taxable.

Most companies don’t offer pensions, but they do offer 401(k) plans. A 401(k) is a way to avoid paying income tax in the current year on the amount of money you put into your retirement account. The employer makes contributions to the 401(k) as well – either by matching the amount you contribute, putting in a set percentage, or using a profit-sharing formula that bases their contribution on the company’s success.

A “salary deferral contribution” is the amount you add to your 401(k) each year to save for retirement. This contribution is tax-deferred, meaning as you earn investment income, you don’t pay tax on the annual investment gains. As mentioned previously, you will pay income tax on the amount you withdraw during retirement. If you withdraw from your 401(k) too early, you’ll pay a 10% penalty tax on top of your income tax.

Like the 401(k) is the IRA, or individual retirement account. There are two main types of IRAs: Roth IRAs and traditional IRAs. These accounts hold retirement savings with some tax benefits that depend on the type of account you open, with contribution limits, early withdrawal penalties, and other implications that you must research ahead of time.

Finally, Social Security benefits are guaranteed income the government raises from your taxes. The amount you receive will depend on the amount of Social Security taxes you paid, with wages adjusted for inflation (this is your Average Indexed Monthly Earnings, AIME). There’s a tool that helps estimate your Social Security benefits on the organization’s website. Remember, this estimated Social Security benefit is primarily based on your salary; adjust your expectations depending on how far you are from retirement.

If you’re worried about saving enough for your retirement, talk to the experts at CPA Services to get recommendations on the best investment plan for you and your family.

What You Need to Know About the 529 College Savings Plan

There are many misconceptions about the 529 college savings plan. This tax-advantaged savings plan is a great option for saving for college expenses; yet more than 70% of Americans are unfamiliar with the advantages it presents.

College costs – as well as student loans – are on the rise. The average in-state college tuition, room and board bills at $20,770, while private college costs are nearly $188,000. It can take years to pay off student debt or college loans. Parents (or grandparents) who own a 529 plan are making a smart investment in their student’s future.

To clarify some of the confusion around the 529 plan, read our guide on who should own the 529 plan, the tax benefits and types of plans available, as well as how to set one up.

The 529 Plan: Background

The 529 plan is an education savings plan that is sponsored by a state or a state agency. It’s named after Section 529 of the Internal Revenue Code (IRC) which authorizes tax-free status for “qualified tuition programs.” The section was added after Michigan established the first prepaid tuition plan, the Michigan Education Trust, in 1986.

A family member can add to the 529 plan and accumulate funds on a tax-deferred basis. Additionally, the 529 plan is not taxed federally when used for higher education expenses. Savings under the plan can be used toward tuition, books, and other education-related expenses. “Qualified tuition programs” means accredited two and four year colleges and universities, U.S. vocational/technical schools, and select eligible foreign institutions. It can be applied to tuition expenses at eligible public, private, and religious primary and secondary educational institutions (K-12).

Though the plans are offered on a state by state basis, you can invest in any state 529 plan. The state plan in which you invest does not dictate the state in which you decide to get an education. For example, you may live in Connecticut, invest in the California 529 plan, and matriculate as a student at a university in Illinois. There are more than 6,000 colleges and universities and more than 400 overseas institutions eligible under the 529 regulations.

Tax Benefits and Types of 529 Plans

There are some key tax benefits to setting up a 529 college savings plan.

First and foremost, the earnings in a 529 plan are federal tax-free. They will not be taxed when the money is taken out to pay for college. Starting last year, tax-free withdrawals were extended to include up to $10,000 in tuition expenses for K-12 education.

In addition to federal tax benefits, more than 30 states also offer some form of tax relief. You may be eligible to receive a full or partial tax deduction or credit for 529 plan contributions. It’s common for most states to allow plan contributors to claim state tax benefits each year you contribute to your 529 plan; experts recommend that you continue to pay deposits into your fund until you’ve completed all your tuition payments.

Another benefit to opening a 529 college savings plan is that the donor is always in control of the account. Whereas other vehicles like the UGMA/UTMA let the child take control of the assets at age 18, the 529 plan retains control with the account donor. And, unlike Roth IRAs, 529 plans are open to everyone: there are no income limits, age limits or annual contribution limits to be able to start a 529 plan for you and your family. There are lifetime contribution limits which vary by plan, and those range from $235,000 – $520,000.

529 plans are flexible and low-maintenance; it’s straightforward to set up the plan, link your bank account, and allow for automatic investments to transfer or take a payroll deduction. There’s no requirement to report contributions to a 529 plan on your federal tax return, and you can change your investment options twice per calendar year.  You may make a withdrawal from a 529 account at any time for any reason, but keep in mind that if you use the money for something other than qualified education-related expenses, you will be taxed accordingly.

There are two main categories of 529 plans: prepaid tuition or college savings plans.

  • College Savings Plan: this version works similarly to a Roth IRA in that you invest after-tax contributions in a mutual fund or a similar vehicle. Each state’s 529 plan offers a variety of options you can choose from. Then, the account balance will go up or down depending on the investment performance.
  • Prepaid Tuition Plan: in this version, a contributor pre-pays all or a portion of the costs for an in-state public college education. This can also be converted towards costs at a private or out-of-state college. Some colleges and universities offer prepaid tuition plans, but not college savings plans.

Which is better: a prepaid tuition plan or a college savings plan?

Think of a college savings plan as a 401k, and a prepaid tuition plan like a pension. Prepaid plans are protected from bear markets and are not tied to how one investment changes relative to another. As a result, when a savings plan loses money, a prepaid plan continues to increase in value assuming that tuition increases.

However, there are drawbacks to the prepaid plan. For most families, the greater return potential and flexibility of a 529 savings plans are a better option. Prepaid plans limit your school choice to options within the state or network. While you may withdraw funds for out-of-state institutions, you will incur a penalty for doing so. In addition, like a pension, a prepaid plan is only as good as the institution backing it. Make sure the plan is backed with full faith by the state sponsor or schools that are required to honor the account holders.

Ultimately, the type of plan you choose depends on your financial circumstances and personal budget considerations. Our experts can help you determine what plan, and which state, offers the best 529 plan for you and your family.

What if my student doesn’t attend college?

Planning for your 529 plan takes years of preparation. A lot can change – including the beneficiary’s desire to attend college. Luckily, the funds in a 529 plan can be used in a few different ways should your child or grandchild choose not to pursue higher education.

First, the beneficiary of a 529 plan can be changed at any point. A beneficiary can be “any qualified family member of your current beneficiary” – including a niece or nephew, another child, or even a daughter- or son-in-law. Or, you can name yourself the beneficiary of the plan.

Depending on your state’s restrictions, the owner of a 529 plan may be able to leave the funds invested indefinitely – and continue to let the money grow. Check with your plan provider to see if there are any age-based rules or regulations about leaving the money untouched. Otherwise, many families keep it invested in case something changes down the road or a new beneficiary (like a grandchild, for example) decides to put the money to use.

You may withdraw 529 money if you are definite that no one will be applying the 529 plan toward their higher education. However, you’ll owe federal and state taxes on the funds, in addition to the 10% penalty on your account’s earnings. If you withdraw the funds as a result of the beneficiary’s death, disability, or because they have earned scholarships and don’t need the money, FINRA may waive that 10% penalty.

Remember: “college” as defined in the 529 plan doesn’t necessarily mean a traditional four-year school. It can be applied to financial aid programs administered by the US Department of Education: from vocational to technical schools and specialty education programs.

Who should own the 529 plan: parents or grandparents?

Before you open your 529 plan, you should be prepared to take full advantage of the tax-free status of your education fund. Many grandparents open a 529 plan for their grandchildren to allow more time for the fund to grow tax-free.

However, there’s a catch to listing grandparents as the owner on your 529 plan. The Free Application for Federal Student Aid (FAFSA) determines how much financial aid a student is eligible to receive by looking at income and assets. This helps them estimate how much parents and a student can contribute to their own education expenses. A 529 plan owned by grandparents does not get reported on a FAFSA application, but when funds are withdrawn and used to pay for college-related expenses, it’s considered income to the student. The student income, unfortunately, does get reported on FAFSA, meaning that the 529 plan can impact a student’s financial aid eligibility IF it’s owned by the grandparents.

A parent-owned 529 plan, however, only reduces eligibility for need-based financial aid by a maximum of 5.64% of the net worth of the assets. FAFSA is aiming to provide financial assistance to those families that are most in need; so, while a grandparent-owned 529 plan may reduce the assistance for the student, it may also help avoid student loans. It’s up to your family to decide whether a parent-owned 529 plan is the better option to FAFSA assistance.

One final caveat: a recent change in the timing of federal aid calculations means that FAFSA estimations are now based on income from two years ago. So, if you are seeking federal aid for 2019, your 2017 tax return will be used to make aid calculations. With a little planning ahead, you can make withdrawals from the 529 plan which won’t impact your income reporting towards FAFSA.

Setting up a 529 Plan

Getting started with your own 529 college savings plan is relatively straightforward. Here is what the process looks like.

  1. Select your plan. Some of the things you will need to consider are the type of plan (savings, prepaid, or a combination of both); whether to contribute to an in-state or out-of state plan; and the different costs and investment options. Websites like or are useful for comparing your various options.
  2. Gather your documentation. Most states require personal information (your address, birth date, and social security number) as well as the beneficiary information (including his/her birthday and social security number).
  3. Open the account. Most states let you do this online, but there are some that require you to mail in your application.
  4. Choose your investments. This is where most people get confused, and it can be helpful to talk to a CPA or accountant about your various options. Many people choose to invest in an age-based portfolio that corresponds to the age of their beneficiary. Remember, you can make two changes per year to your 529 plan investments.
  5. Submit your application and make a deposit. When you submit your application, you will be asked to either to fund the account immediately by providing your bank information, or you will mail a check along with your application materials.

Each state takes several days or weeks to process your account application. They may come back to you for more information.

If you have questions about the 529 plan, who should own the plan, and what is the best plan for your family, get in touch with the experts at CPA Services. We can help establish the best 529 account for your future student.

Get Your Tax Refund Quicker

Income tax-filing season started on January 28 and the tentative government shutdown and reopen has tax returns on everyone’s mind, especially when the IRS is one of the agencies that is unfunded while our government is closed. Despite the uncertainty of a future shutdown, the IRS will still pay tax refunds, according to the White House.

Many American families rely on getting money back in their annual tax refund. The average refund was more than $2,890, according to the IRS. And, by some estimates, more than 70% of Americans expect to get money back.

Following these tips will help you to get your tax refund quicker.

Get your tax return filed ASAP

The faster you get your taxes filed, the sooner you’ll see your return. Filing as soon as the window opens lowers the risk of refund theft. Tax refund theft has been on the rise in recent years. A fraudster steals personal information and then uses it to file a fake tax return, taking the refund amount for themselves. Then, when the real taxpayer goes to file their return, they’ll get an error message saying they’ve already filed. It could take months for the IRS to verify your identify, sort out the fraud, and get you your actual tax refund. It’s better to file early and avoid the risk altogether.

File your taxes electronically

Paper tax returns are time consuming for the IRS to process. An employee at the agency has to manually input and process your records. The IRS estimates that it takes roughly two weeks to process an e-filed return – versus six weeks to process a paper tax return.

There are a number of options to file your claim electronically. Those with an annual income of $66,000 and below can use the IRS’ FreeFile service, which is already up and running. For anyone who makes more than $66,000, you can still use the IRS’ Free File Fillable Forms service. This service lets you input your data onto tax forms to e-file directly. There are also numerous tax software options and tax professionals who can e-file for you.

Use direct deposit

Sign up for direct deposit when you file. Weather or other post office delays may affect the chances of getting your return via paper check quickly. Direct deposit allows you to receive your money straight into your bank account. There’s also an option to spread your tax refund across up to three accounts. You can do this by filing IRS Form 888.

Triple check your return to make sure there are no errors

Human error is one of the most common reasons for a tax return to be delayed. According to the IRS, small mistakes like writing the incorrect social security number can stall the delivery of your refund. Some of the most common errors, according to the agency, are:

1. miscalculating tax owed based on taxable income and marital status;
2. entering data on the wrong lines of the form;
3. basic math mistakes.

If you’re not sure how much you owe or what you can claim, get help from a tax professional. The best way to get your tax refund faster is to make sure it’s submitted perfectly the first time around.

Don’t forget to sign your return before sending it in!

Keep an eye on your refund.

Though keeping track of your refund won’t make it arrive any faster, it can help you plan ahead. You can watch the progress of your tax return with the IRS’s refund tracker for federal tax refund. There are also state tax return trackers that you can use depending on where you live. It takes about 24 hours to start tracking after the IRS accepts your tax return when you e-file. If you send in a paper form, you’ll have to wait for nearly a month for tracking to update.

The uncertainty surrounding governmental operations may continue to impact the IRS during tax season. By planning ahead, filing your taxes digitally, and keeping apprised of your return, you can get your tax refund quicker.

Work with CPA Services’ team of qualified experts who can help you prepare your return correctly the first time around, saving you hours of frustration and decrease the time it takes you to get your tax refund. Take advantage of their knowledge and years of experience to make sure you’re taking all the deductions available to you and your family.

Copyright 2019 CPA Services

New Updates for 2019 Taxes – Part 2

In part 1, we covered changes to taxable income brackets and tax rates for individuals and married filing jointly. In part 2, we will cover deductions and other updates.

Changes to Standard Deduction Amounts

A standard deduction is the dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. At the beginning of 2018, the new tax plan brought higher standard deductions with the intention of helping families keep more of what they earn. Higher standard deductions often benefit middle-income families who see their income subject to lower tax rates.

This coming tax year, new standard deduction amounts will increase to: $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly and surviving spouses.

There are also a few specific standard deduction changes you need to know for 2019:

  • Additional standard deduction amount for the aged or the blind: $1,300 (increases to $1,650 for unmarried taxpayers).
  • The standard deduction for an individual claimed as a dependent by another taxpayer cannot exceed $1,100 OR the sum of $350+ the individual’s earned income, whichever is greater.
  • There will be no personal exemption amount for 2019 per the Tax Cuts and Jobs Act.
  • Alternative minimum tax (AMT) exemption amounts will be adjusted for inflation. The AMT exemption is a mandatory alternative to the standard income tax for taxpayers who make more than the exemption.

Updates to the Kiddie Tax

The Kiddie Tax is a tax law that was created in 1986 to regulate investment and unearned income tax for kids under the age of 17. Despite its cute name, this regulation is designed to close a loophole where parents would give their children large gifts of stock and avoid paying taxes on said “gift.” When Congress passed the Tax Cuts and Jobs Act in 2017, the Kiddie Tax changed dramatically. Now, if a child’s income exceeds a certain threshold set forth in the Kiddie Tax, a taxations structure applies. This structure dictates a tax rate on the amount of income earned separate from the tax rate of the child’s parents.

In 2019, the key change to the Kiddie Tax is that unearned income – income from sources other than a paycheck or salary – will be taxed according to the brackets which apply to estates and trusts. Dividends and interest get the same tax rates as can be found in the table below. For earned income, the rules have not changed. Please note that the Kiddie Tax applies to individuals under age 19 as well as college students under the age of 24.

Changes to Child Tax Credits

Parents will be relieved to know that the Child Tax Credit expanding in 2019. This credit gives parents a deduction of $2,000 per qualifying child (an individual who has not turned 17 during the taxable year). This credit is refundable up to $1,400. The TCJA also includes a temporary revision for a $500 nonrefundable credit for qualifying dependents other than qualifying children. To learn more about the specifics of the expanded CTC, read more here.

Schedule A Itemized Deductions

Itemized deductions are certain expenses that you may incur throughout the taxable year and you can claim against your tax return. If you qualify, you may be able to deduct some of these items from your adjusted gross income.

  1. Medical and dental expenses deduction: starting in 2019, you may only deduct medical and/or dental expenses which exceed 10% of your adjusted gross income. This is an increase from 7.5% in 2018.
  2. State tax deduction: there is a new limit of a combined total of $10,000 which you may deduct for state and local sales, income, and property taxes (or $5,000 for married taxpayers filing separately).
  3. Home mortgage interest deduction: you may only deduct interest on a mortgage used to buy, build, or improve your home up to $750,000 ($375,000 for married taxpayers filing separately).
  4. Charitable donation deduction: in 2018, the percent limit for charitable cash donations increased to 60%. The IRS is keeping the limit at 60% for 2019.
  5. Casualty and theft loss deduction: unfortunately, this deduction will be repealed for personal casualty and theft loss, except if your loss can be recorded in a federal disaster area.
  6. Job expenses, miscellaneous deductions: these had been subject to 2% floor but have been repealed for 2019. Prior to TCJA, employees could deduct business expenses that weren’t reimbursable by their employer as 2% miscellaneous itemized deductions if:
    • they were incurred or paid in the tax year,
    • if it allowed the taxpayer to carry on in their trade, and
    • if the expenses were ordinary and necessary.

The job expenses and miscellaneous deductions which will no longer be allowed starting in 2019 include:

  • Tax prep fees, unless you are able to allocate them under Schedule C, E, F
  • Unreimbursed employee expenses, including: sales, travel, and entertainment expenses for outside salespeople, and entertainment industry expenses, including agent, attorney and publicist fees
  • Home office for employees, union dues, out-of-pocket expenses, and uniforms- including police and fire, construction workers
  • Continuing education expenses
  • Investment advisor fees or asset management fees, and
  • Attorney fees, among others

Tax Credit and Deduction 2019 Adjustments

There have been some popular changes that passed under the tax reform law that impact your taxes in 2019. Here are a few of the deductions and credits you may be able to take advantage of (in addition to the Child Tax Credit).

  1. Earned Income Tax Credit (EITC): maximum EITC amount is $6,557 for married taxpayers filing jointly with three or more qualifying children.
  2. Adoption Credit: allowable credit for the adoption of a child with special needs is $14,080. The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $13,810.
  3. Student Loan Interest Deduction: maximum deduction for interest paid on student loans is $2,500 (no change from 2018).
  4. Lifetime Learning Credit: joint filers seeking to receive a Lifetime Learning Credit must have an adjusted gross income amount of $116,000, up from $114,000 for 2018.
  5. Medical Savings Accounts: if you have self-only coverage in an MSA, and meet certain annual deductible limits, you may be able to take a tax deduction on your return. Click through to see if you qualify for a medical savings account deduction.
  6. Foreign Earned Income Exclusion: in 2019, the exclusion increases to $105,900, up from $103,900.

Last but not least, the shared individual responsibility payment has been eliminated for 2018. This provision was part of the Affordable Care Act and required taxpayers and dependents to have qualifying health care coverage (or an exemption) – or, make an individual shared responsibility payment on your federal income tax return.

Remember: these changes apply to your tax return due in 2020, not in April 2019. If you’re need a qualified tax preparer to prepare your 2018 tax returns, or would like more information on 2019 updates, get in touch with our experts to see how we can help.

Copyright 2019 CPA Services

New Updates for 2019 Taxes – Part 1

As 2018 winds down, it’s time to look ahead to the new year and the changes coming to your 2019 federal tax rates. The IRS recently announced changes to more than 60 tax provisions, including tax rate schedules, cost-of-living adjustments, and more. Many of the changes announced for 2019 align with the Tax Cuts and Jobs Act passed in 2017. These new policy regulations take effect starting January 1, 2019 – meaning they’ll impact the tax return you prepare for April 2020. Nevertheless, plan ahead and avoid surprises when tracking your finances.

Here are the key changes the IRS is making to your taxes in 2019.

New 2019 Taxable Income Brackets and Tax Rates

Just as in 2018, there are seven tax rates the IRS has bracketed out for 2019. These tax rates are set at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The taxable income ranges have changed slightly from 2018. Here’s how these rates break out by filing status:


In comparison to 2018, the income brackets have shifted upward slightly. For example, in 2018, incomes of 0 – $19,050 were taxed at 10%; now, the IRS includes incomes up to $19,400.

Don’t forget: this is a progressive income tax, meaning when calculating your potential tax savings, don’t use a flat rate. Many people fall into the trap of estimating their tax using their top rate and then comparing that amount to the tax calculated using the proposed rates.

Here’s an example. Pretend you’re an individual payer in the 22% taxable income bracket for 2019. That doesn’t mean you pay 22% tax on all income. If you’re single, you pay 10% on the first $9,700. Then you pay 12% on the next $29,775, etc. You only pay 22% on the income over $78,950. That’s what makes it progressive income tax.

Remember: these changes apply to your tax return due in 2020, not in April 2019. If you need a qualified tax preparer to prepare your 2018 tax returns or would like more information on 2019 updates, get in touch with our experts to see how we can help.

Continue to part 2 >>

Copyright 2019 CPA Services

Tax Law Update: What’s New in Tax Reform

What’s New in Tax Reform?

In our previous look at how the new tax plan will affect your income taxes in 2018, we examined the Senate and House plans. The tax reform bill has undergone reconciliation and has now passed. Here’s what you can look forward to in the new package, broken down for single and joint filers. Continue reading

How Will the New Tax Plan Affect You?

Not long ago, we wrote an overview of tax reforms, and legislation is now underway in Congress to implement some of these streamlined tax proposals. In just six months, plans have already shifted. The passage of a new tax reform law would usher in even more sweeping changes for corporate and personal finances.

Earlier this month, the House of Representatives voted to pass a version of the Tax Cuts and Jobs Act. Later the same day, the Senate Finance Committee unveiled and passed its own version. Although the final product has yet to be written by the reconciliation committee, now is the time to prepare for tax reform. During times of great economic change, the stability a skilled accountant offers can help you with smart tax planning, allowing you to control more of your own wealth and adjust to financial shifts.

Here’s what each bill looks like in its current state, the portions of it that are likely to be included in the final version, and how it could affect your financial goals. Continue reading

5 Accounting Mistakes You May Be Making

Some of the earliest writing archaeologists have discovered relates to accounting. Clearly, the concept of tracking goods and services exchanged has been with us for some time. That doesn’t stop businesses from repeating mistakes that could cost them – mistakes you could be making too. The good news is that seeing these pitfalls helps you avoid them, so here’s what you need to know about accounting for your organization whether you’re looking for a CPA firm to handle all your needs or just take care of routine bookkeeping.

 Relying on the Wrong Credentials

Accounting is a more varied field than some business owners realize, and not every accountant is qualified to take on every task. A bookkeeper or tax preparer may not be an accountant at all, yet for business owners seeking financial services, the distinction isn’t always clear. A CPA goes through years of education, rigorous testing, and ongoing coursework to maintain the title. They also have experience with handling an organization’s most sensitive data, including personnel files and financial information.

Accountants certified in multiple states are important assets for businesses that have additional branches. Your New York accountant who’s also a CPA in Florida, for example, can manage your financial records seamlessly. There may also be times you need specific accounting services such as forensic accounting or audits, and a CPA firm with a broader range of experience can provide them.

 Not Knowing What You Need

You may want someone who can handle daily and routine tasks such as preparing accounts payable, accounts receivable, and payroll. You might need a full-service accountant who also creates budgets and builds financial statements. You could be preparing for a sale or acquisition, a process that requires sharp accounting skills. For many businesses, not knowing what they want from their accountant becomes a stumbling block.

No matter what degree of service you need now, keep future growth in mind. Make a list of what you need now and what you may need soon. Consider the size and frequency of your financial transactions when deciding how much you need from your accountant too.

Working with a CPA Firm That Doesn’t Fit You

Accounting is about more than crunching numbers. You also need to feel comfortable with your CPA. The accountants you hire must understand your business thoroughly and be able to communicate their information to you in clear, concise terms. Look for a firm that stays in close contact with you and is readily accessible when you reach out to it. Your finances deserve individual attention, so pay attention if you feel you’re being overlooked or treated as part of a crowd.

Establishing a personal rapport also matters.

Your CPA will see every detail of your company’s finances, and financial records are often closely tied to other sensitive information. A trustworthy accountant is a must for any business.

 Lacking Financial Analysis

All the knowledge in your accountant’s head doesn’t do your firm much good if it isn’t available to you. Your CPA service should provide you with regular reviews of your organization’s financial health. A dashboard or daily report that lets you take the pulse of your company’s finances every day is essential to making informed business decisions. Look for a firm that gives you quality analytics, with figures broken down into comprehensive categories so you can watch growth as it happens and spot problems before they affect your bottom line.

Going It Alone

For start-ups and small businesses, handing the books to someone who took a few accounting courses in college is common practice, but it can backfire. Accountants have more than their education to support their skill; they also have experience. An in-house bookkeeper may handle corporate taxes once a quarter, but an accountant at a third-party firm deals with tax preparation every day. Accounting is important enough to entrust to professionals.

How Should LLCs Handle Corporate Tax on Retained Earnings?

Reinvesting in your business is essential to helping it grow, but shareholders also expect a return on their investment in the organization. How businesses distribute profits among shareholders and assume tax responsibilities on retained earnings will depend on a number of factors, including the amount of retained earnings and your organization’s expenses. Because these factors can change over time, it’s best to work with a New York accountant who has experience with state and federal tax law.

LLCs as Pass-Through Entities

LLC Corporate TaxesAn LLC, or limited liability company, is a hybrid entity that has characteristics of a corporation and a partnership. According to the IRS, it can be treated as either kind of business for tax purposes, depending on whether you opt to file a Form 8832 and affirm your organization’s status as a corporation. Otherwise, an LLC is a pass-through entity, which means that profits and tax liability “passes through” the business to be distributed among owners and shareholders.

Sometimes it’s preferable to allow tax liability to pass through to individual returns; at other times, you may want to file corporate taxes. Where this distinction matters most is with retained earnings.

Retained Earnings and Taxation

Retained earnings are what you have left for reinvestment in the company after subtracting dividends from the LLC’s total net income. This retained surplus that isn’t distributed to partners and shareholders is subject to taxation. If your organization’s retained earnings reach a $250,000 threshold, any amount beyond this becomes subject to a supplemental corporation tax at 39.6 percent. For example, if your LLC ends the fiscal year with $400,000 in retained earnings, $150,000 of that amount is taxed at the supplemental corporate rate for a tax liability of $59,400.

Under normal circumstances, then, it is often best to limit retained earnings and let revenue pass through unless you are able to justify a significant reinvestment of profits. The IRS makes exceptions on supplemental tax liability when businesses demonstrate how they plan to use these retained earnings.

Justification of Retained Earnings

A business that plans to expand, upgrade equipment, or invest in restocking inventory can offer a business justification for using retained earnings and may be able to waive additional taxes. You will need to document how you plan to allocate retained earnings. Your CPA can offer guidance on how to gather and prepare the necessary proof, which might include meeting minutes, quotes for services, and other evidence that your LLC is preparing for growth.

Form 8832 and Corporate Taxes

Another way to manage retained earnings is to file a Form 8832 and affirm your choice to have corporate taxes assessed on your LLC. For companies that intend to invest retained earnings into the organization over a few years, this may be a fiscally sound choice, but because you must wait five years before returning to a pass-through taxation structure, you will want to go over all your options with your accountant.


When Should You Outsource?

Whether they own a small business, a mid-sized regional organization, or a multi-national corporation, business owners have a host of options when it comes to accounting services. For some companies, handling routine accounting in-house and relying on an outside accounting firm for attestation and assurance makes sense. For others, turning over all accounting duties, including payroll and tax preparation, to a CPA is the best option. Continue reading