February 2015 Letter

As your mailbox fills up with information required to organize your 2014 tax records, there is still time to reduce 2014's tax obligation with a contribution to an IRA. Included this month are articles that outline tax benefits of operating your businesses as a sole proprietor, some great ideas for using a tax refund, and a fun general interest article that tests your knowledge of new teen terms.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

There is still time for Retirement Funding

Remember you have until you file your tax return to make a contribution to a Traditional IRA or Roth IRA for the 2014 tax year. The annual contribution limit is $5,500 or $6,500 (if you are age 50 or over). Prior to making the contribution, if you (or your spouse) are an active participant in an employer's qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain thresholds. There are also MAGI (income) limits to qualify to make Roth IRA contributions. The limits are outlined here for your reference.

2014 IRA Income (MAGI) Limits
Filing Status	Traditional IRA allowed contribution range		Roth IRA allowed contribution range
	Full contribution	Phase-out complete	Full contribution	Phase-out complete
SINGLE	$60,000	$70,000	$114,000	$129,000
MARRIED	$96,000 both participating	$116,000 both participating	$181,000	$191,000
	$181,000 spouse participating	$191,000 spouse participating
Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separately and either spouse participates in an employer's qualified plan, the income phase-out to contribute is $0 - $10,000.

How does the phase-out work?

If the phase-out rules apply to you and your income is below the "full contribution" amount noted above, you can contribute up to the maximum annual contribution. But what if your income falls between these ranges?

	First, subtract your income from the higher (phase-out complete) amount to get your contribution income potential.
	Next calculate the phase out range.
	Then, divide your contribution income potential by the phase-out range.
	Take the result times your maximum annual contribution amount.

Example: Roth IRA contribution limit for a single person, age 40 with MAGI of $119,000; $10,000 contribution income potential (129,000-119,000); divided by phase-out range of $15,000 ($129,000 - 114,000); 10,000/15,000= .666 x $5,500 = $3,666 2014 ROTH IRA contribution limit. Rounding rules apply.

A final thought

If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.

Maximizing Your Refund Power

One of the highlights of the year for many Americans is the receipt of a refund check from the IRS. Before you run out and book a big vacation with this new found wealth, here are some ideas to consider for your refund. Pay down credit card debt.Lenders are continually increasing fees and interest rates, making credit card debt more expensive than ever. If you have large credit card debts consider using the bulk of any refund toward paying down the balance.

	Add to your emergency fund. It is recommended that you have enough money in savings to pay your bills in an emergency. How much is enough? That differs from person to person, but many recommend saving six months to nine months worth of expenses. Consider placing some of your refund into this emergency account.
	Any other debt? Look to paying down your auto loans, home mortgage, student loans and other debt. Pay those loans with the highest interest first. Remember, it is nice to head into your retirement years without having to worry about debt payments.
	Save for retirement. Consider placing some of your refund into your retirement savings accounts. This way your refund will continue to grow and will pay you back when you retire.
	Buy something you need. If you have been saving for a new car, a new house, or a new appliance put some of your refund towards this planned purchase.
	Don't forget to spend some on you. While spending all of your refund on a trip or a big-ticket item is not usually a great idea, give yourself permission to spend part of your refund on something fun. But consider limiting the amount to a set percentage of your refund check. That way you will feel better about spending the rest of it wisely and not feel like you are depriving yourself.

So You Think You are Hip

As the age gap widens between you and the next generation, so too does your language. You may have been "groovy", "cool", and "boss", but can you converse correctly with teen's new idioms? Here is a fun test to see how knowledgeable you are with language used by the younger crowd. Simply match the word with the accepted "current" use.

What does it mean? a. something on point (on topic) b. doing something amazing c. you're desperate d. showing off e. shopping (to go shopping) f. being excited about something or agreeing g. replacement for the word "very" or a lot h. rude or obnoxious i. cool / awesome j. something is incredibly overwhelming k. average, uninteresting l. wild, crazy

So how did you do?

answers: 1h, 2d, 3k, 4b, 5f, 6j, 7a, 8l, 9e, 10g, 11c, 12i

	10 to 12 correct? Yaas! You are mad good at this, let's go pop some tags.
	6 - 9 correct? Who are you kidding, just bring a teen along to translate for you.
	Less than 6. Hey man, stop trying so hard. Just stay cool and keep your groove on.

Sources: The urban dictionary, noslang, and metrokids.com.

The Benefits of a Sole Proprietor

In the eyes of the IRS, if you are a sole proprietor you have an audit target on you. This is because the audit rates on those who have a schedule C (sole proprietor) in their 1040 tax return are much higher than those who don't. In addition, sole proprietors generally have more personal legal liability as there is no legal entity between you and those who wish to sue your business. So does that mean there are no advantages to forming a small unincorporated business? Absolutely not. Here are some benefits of running your company as a sole proprietor.
	You can hire your kids. One of the key benefits of being a sole proprietor is you can hire your kids and not have to pay Social Security and Medicare taxes for their work. While there are exceptions, this can save your small business over 7.65% on their wages.

	Your kids benefit too. If the pay to your kids is less than $6,200, this income is not taxed to them at the federal level. Remember, their work must reflect actual activity and reasonable pay. Why not hire your kids to do copying, act as a receptionist, provide office clean up, advertising and other reasonable activities for your business?
	Fewer tax forms and filings. Sole proprietors can add their business activity as a schedule with their 1040 tax return. Sub chapter S corporations, C corporations, and partnerships must file separate tax returns, which make compliance a lot more complicated. It is also harder to close these entities should things not go as planned.
	More control of revenue and expense. As a sole proprietor, you often have more control over the taxable income of your small business. You can determine the timing of your business expenses to help manage your annual taxable income. The same is often true with booking your income.
	Hire your spouse. If handled correctly, a spouse hired as an employee can work to your advantage as a sole proprietor. As long as the spouse is truly an employee of the business, the sole proprietor can benefit as a member of their employee's (spouse's) family benefits. This can include potential medical expense reimbursements.

As always, should you have any questions or concerns regarding your situation please feel free to call.

January 2015 Letter

With the flip of a switch, a number of tax provisions that expired at the end of 2013 are now back on for 2014 tax returns. Outlined this month is a list of the more common laws that have been extended for 2014, but are off once again in 2015. Also included are the mileage rates for use in 2015, a general interest article describing the increasingly popular peer-to-peer lending phenomena, and a quick recap of things to consider as you start gathering your 2014 tax records.

Should you wish to review your situation please feel free to call. Also feel free to forward this newsletter to someone who may benefit from this information.

Extender Bill Passes

A visible expression of confusion in tax policy out of Washington D.C. is the treatment of a short list of tax laws that have been extended only to expire once again. In late December, Congress finally acted to extend many of these tax provisions for 2014. Here is a list of the commonly used tax provisions that will be available to you when you file your 2014 tax return.

	Teacher $250 deduction for qualified classroom expenses. Impacts: All qualified educators including those who do not itemize their deductions.
	Deduction for state and local general sales taxes (in place of state income tax deduction) Impacts: All taxpayers in states without income taxes who itemize deductions and taxpayers who have high sales tax obligations versus state income tax obligations.
	Deductibility of home mortgage insurance premiums. Impacts: All qualified home owners who carry mortgage insurance.
	Tuition and fees deduction Impacts: All students who can benefit from this additional program to help reduce the cost of their education.
	50% additional first year depreciation deduction and higher Section 179 expense limits. The new Section 179 annual expense limit is now $500,000 (up from $25,000 prior to the extension.) Impacts: All businesses who have acquired and placed qualified assets into service during 2014.
	Tax-free contributions from qualified retirement plans for charitable contributions. Impacts: All qualified taxpayers 70½ years old (or older) who made charitable contributions directly from their traditional IRAs.

There are many other provisions in this tax law. Clarifications on the signed bill will become known over the next few months. Please remember these extended tax laws are not in place for the 2015 tax year.

Peer-to-peer Lending Goes Public

Recently the largest peer-to-peer lending company, Lending Club, moved to become listed as a public company. So what is this alternative banking model and what should you know about it?

What is it?

Peer-to-peer lending is an example of using the power of the internet to bring lenders and borrowers together. If you wish to receive a loan you go to a peer-to-peer web site, fill out an application, get approved, and then post your request for a loan. If you have money to lend, you go to the same web site. You become approved as a lender, transfer money into your account, and then select approved loans to fund. The peer-to-peer company receives part of each transaction for bringing lenders and borrowers together.

How is it used?

How is this popular banking model used?

By borrowers: Much of the current activity for borrowers is to consolidate credit card debt with lower interest rates. Others use the service for purchasing a car, financing a home improvement, funding college and financing big events (like a wedding). The approval process versus traditional lending is often quicker and less painful.

By lenders: Individual lenders use it as a way to receive better returns versus their traditional bank savings accounts. Institutional lenders use it as a quick way to improve returns on their loan portfolios without a lot of paperwork.

Things to consider

Is peer-to-peer lending or borrowing right for you? Here are some things to consider.

For borrowers:

	Review the service providers. There are a number of peer-to-peer lenders out there. Research them and choose a company that has a great track record. Compare this option with your other borrowing options before proceeding.
	Read the fine print. As is true with any lending document, understand the terms of your loan. What happens if you cannot make a payment? What are the penalties? What happens if the note is in collection status? Are there barriers to obtaining future financing from other sources?

For lenders:

	Understand the model. Prior to investing understand each company's business model. How do they make their money? Read the fine print. Is this option right for you?
	Unsecured lending is risky. Most of these loans are unsecured. If the borrower does not pay, you lose your investment.
	Institutions have an inside track. Most of the funding for large peer-to-peer companies is from very large banks and investment companies. Are they getting to fund the best deals? What is left for you?
	Information to make a good lending decision. The information made available to you to decide whether to make a loan is controlled by the peer-to-peer company. Each peer-to-peer company has different levels of information available for you to make your lending decision.
	Diversify. If lending money is an option you wish to consider, make sure you diversify and talk to experts to ensure you understand the risk. Even within a single peer-to-peer company you will want to reduce your exposure to any one investment going bad.
	The environment could change. If we experience a redo of the 2008 recession, a number of these peer-to-peer loans are going to default. Can you handle this risk?

Currently peer-to-peer lending is a hot and upcoming trend. Most of us will start to see more information on this lending model in the news and via advertising. It is helpful to begin to understand this new banking model and what it means to you.

2015 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2015. The business mileage rate increases by 1.5 cents while Medical and Moving mileage rates are lowered by one cent. Charitable mileage rates are unchanged.

Standard Mileage Rates Mileage Rate/Mile     Business Travel 57.5¢ Medical/Moving 23.0¢ Charitable Work 14.0¢

Here are 2014 rates for your reference as well.

Standard Mileage Rates Mileage Rate/Mile     Business Travel 56.0¢ Medical/Moving 24.0¢ Charitable Work 14.0¢

Remember to properly document your mileage to receive full credit for your miles driven.

Getting Organized for 2014 Tax Filing

Now that the tax laws for 2014 have been put to bed, it is time to start gathering your tax records for 2014 and taking steps to get your tax house in order for 2015. Here are some ideas to help you.

Look for your tax forms. W-2s, 1099s, 1098s and the new 1095-A's will start hitting your mailbox. Look for them and get them organized. Create a checklist of the forms to make sure none is missing. If you used the new Affordable Care insurance exchange to purchase your health insurance you will also be receiving a new 1095-A form that recaps this activity.

It is all in a name. If you were recently married or had a name change, file your taxes using the correct name. File the name change with the Social Security Administration as soon as possible, but be aware of the timing with a potential name conflict with the IRS. Any name mis-match could cause a rejection from the IRS and create an audit trigger.

Collect your receipts and sort them. Using last year's tax return, begin to gather and sort your necessary tax records. Sort your tax records to match the items on your tax return. Here is a list of the more common tax records in no particular order:

	Informational tax forms (W-2, 1099, 1098, 1095-A, plus others) that disclose wages, interest income, dividends, and capital gain/loss activity
	Other forms that disclose possible income (jury duty, unemployment, IRA distributions and similar items)
	Business K-1 forms
	Social Security records
	Mortgage interest statements
	Tuition paid statements
	Property tax statements
	Mileage log(s) for business, moving, medical, and charitable driving
	Medical, dental and vision expenses
	Business expenses
	Records of any asset purchases and sales
	Health insurance records (including Medicare and Medicaid)
	Charitable receipts and documentation
	Bank and investment statements
	Credit card statements
	Records of any out of state purchases that may require use tax
	Records of any estimated tax payments
	Home sales records
	Educational expenses (including student loan interest expense)
	Casualty and theft loss documentation
	Moving expenses
	Contribution records

If you are not sure whether something is important for tax purposes, retain the documentation. It is better to save unnecessary documentation than to later wish you had the document to support your deduction.

Clean up your auto log. You should have the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.

Review and update your withholdings. Make a quick review of your W-2 and decide if now is the time to have your employer update your withholding amounts. A second check might be in order after you file your taxes.

Coordinate your deductions. If you and someone else may share a dependent, confirm you are both on the same page as to who will claim the dependent. This is true for single taxpayers, divorced taxpayers, taxpayers with elderly parents/grandparents, and parents with older children.

Review your other information. Do not just focus on tax related items. Review other parts of your financial life for possible organization and updates. This includes insurance, investments, legal documents, safety plans, identity theft protection, credit scores, retirement planning, retirement account contributions and your home's annual budget.

As always, should you have any questions or concerns regarding your situation please feel free to call.