July 2017 Letter

Happy Fourth of July! While you're doing your best to avoid the summer heat, take a look at these tips for your tax and personal financial planning. This issue includes articles on retirement planning and on keeping your automatic bill payments under control. For the business-minded, there is a list of things to avoid when buying or selling a business, and five common mistakes made by those using the home office deduction.

As always, feel free to forward this newsletter to anyone who may benefit.

Zombie Billing: Automatic Payments Have a Life of Their Own

The turn it on and forget it nature of automatic payments can create "zombie billing" cycles that go on without being reviewed or challenged, even after the product or service you pay for is no longer of value.
Here are some ideas to keep this from happening to you. Create a list. Make a list of the companies you authorize to use automatic bill payment. Include the account number each company uses, as well as payment amounts and frequency. When there's a change in a card or bank account, you can consult the list to find the companies you need to notify.
Watch for fees. Make sure the bill-payment system you're using is low-cost or no-cost. Some companies will charge you a fee for automatic payments. If your biller wants to charge you, pay them with a traditional check. Consider consolidating all your automatic payments within one bill-paying service. Your bank may even offer online bill payment with no fee. Review underlying bills. Automated billing usually means you're not getting paper copies of your bill. If you're not receiving a physical copy, changes to your service may go unnoticed. If possible, opt to continue receiving email or paper billing statements. Review statements monthly to verify that your payment has not changed and there are no additional fees or errors. Drop underused services. Periodically review all automatic payments. Drop products and services that are no longer of value.
Automatic billing is meant to simplify your life, but if you allow it to turn into zombie billing, it will have the opposite effect. Take care to review your accounts and statements to protect yourself and keep your finances under your control.

Five Home Office Deduction Mistakes

If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.
It is a tricky area of the tax code that's full of pitfalls for the unwary. Here are some of the top mistakes people make. Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
Not exclusive or regular. Your home office must be used exclusively and regularly for your business. • Exclusively: If you use a spare bedroom as a business office, it can't double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate your deduction. • Regularly: Your office should be the primary place you conduct your regular business activities. That doesn't mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as record keeping, billing, making appointments, ordering equipment, or storing supplies. Mixing use with other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn't provide you with a local office. Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer and do it in your home office. That could invalidate your use of the home office deduction. The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. The depreciation recapture rules create a possible tax liability for many unsuspecting home office users. Not Getting Help. There are special rules that apply to your use of the home office deduction if: • You are an employee of someone else. • You are running a daycare or assisted living facility out of your home. • You have a business renting out your primary residence or a vacation home. The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

Simplified Home Office Deduction There's a simple "safe harbor" home office deduction. You take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 deduction under the simplified option. However, your savings could be much greater than $1,500, so it's often worth getting help to calculate your full deduction using the standard rules.

How Much Do You Need to Retire?

Most Americans simply don't save enough for retirement. Nearly half of working-age households don't have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and above) nearly two-thirds have less than one year's worth of their annual salary in retirement savings.
The goal: a comfortable retirement So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment returns. Mutual fund broker Fidelity estimates you need enough savings to replace roughly 85 percent of your annual pre-retirement income. Many experts estimate you will have to save between eight and 12 times your pre-retirement annual income to reach this goal. But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, their savings estimate lowers to eight times your annual income.
This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority of workers (51 percent) surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan to continue working during retirement. Some ideas to consider now There are actions you can take now to put you in a better position during your golden years: Contribute as much as possible every year to your employer-provided retirement plans. With a 401(k) pre-tax retirement plan, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older. Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older. If available, contribute as much as possible to a Health Savings Account, which can be used to offset medical expenses with pre-tax dollars. Individuals can contribute up to $3,400 a year, or $4,400 for ages 55 or older.

Common Mistakes When Buying or Selling a Business

It is said with every major purchase there's some kind of remorse either on the part of the buyer or the seller. This can be especially true when buying or selling a business. No matter which side of the negotiating table you sit on, there are some critical areas that could leave you with feelings of regret. Avoid these mistakes and you'll feel better about your deals after they're done.

SELLER MISTAKES BUYER MISTAKES • Not researching the value of similar businesses within the industry • Overestimating the value of the company and losing a well-qualified buyer • Insisting on cash-only terms Selling price • Overpaying based on emotion • Stretching personal resources too thin • Maintaining sloppy financial records that potential buyers cannot trust Accounting records • Relying on company financials not prepared by a third-party accounting professional • Not requesting payroll returns and other tax filings in the financial review • Agreeing to seller-financing without proper vetting of the buyer's creditworthiness Financing • Settling for a high-interest loan, or one with too short a maturity • Selling the assets of the business when it would have been more tax-efficient to sell the corporate shares instead Assets • Purchasing less than all of the assets used in the business, overlooking items such as licenses, patents or important contractual arrangements • Making a stock-purchase transaction without understanding the benefits of an asset purchase • Neglecting to check the background of the buyer and assessing their ability to run a business • Failing to verify the buyer's liquid assets Due diligence • Not asking why the business is for sale • Conducting too little research into the competition or overall industry trends • Not searching for the existence of company loans and other liabilities • Signing a non-compete agreement that is too restrictive in scope or timeframe Non-compete • Failing to require a non-compete clause from the seller, especially in a service-industry business • Leaving too much of the sale price dependent on the ongoing success of the company Transition • Having unclear expectations for seller participation in the business after the sale • Not positioning the business to sell well in advance of the first offer • Requesting professional help too late in the sales process Expert help • Not assembling a team of legal, tax, and insurance experts before agreeing to terms Buying or selling a business is likely one of the most important transactions an entrepreneur faces. It is always best to seek professional help.

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

June 2017 Letter

There's an old Wall Street saying, "Sell in May and go away," advising investors to avoid the historically volatile summer markets. If you are considering selling stock this summer, you may consider donating instead as a way to lower your tax burden. Details on tax-efficient donating are inside, as well some comforting information about the declining frequency of IRS audits. Summer also tends to ignite our home buying instincts, so check out the article with tips for buying a home in this seller's market. Finally, if you're a business owner consider the list of reasons to incorporate.

As always, should you know of someone who may benefit from this information please feel free to forward this newsletter.

Donate Stock to Lower Your Tax Burden

With U.S. equity valuations near historically high levels, now may be an opportune time to take advantage of the tax benefits of donating long-term appreciated stock to a qualified charity. Directly donating a winning stock you've held for at least one year provides greater tax benefits than writing a check to your favorite cause.
Higher deduction. Your charitable gift deduction will be equal to the market value of the stock on the date of your donation, rather than what you originally paid for it. No capital gains tax. You avoid paying capital gains tax on the unrealized gains of the stock, because it is transferred directly to the charity rather than sold. That also means the charity gets a bigger gift. Greg Givesalot bought 50 I.M.Great shares two years ago at $100.00 a share, and its shares have appreciated since then to $150.00 a share, giving him a long-term capital gain of $2,500 if he were to sell today. Instead, Greg avoids the capital gains tax by donating the shares to the Red Cross, and he deducts the full market value of $7,500 as an itemized deduction on his tax return.
Some tips to keep in mind: To maximize your charitable donations, donate only long-term appreciated stock (stock you've held for one year or longer). That way you can deduct the full market value of the stock, rather than its cost basis (what you originally paid for it). If it's a losing stock, it's usually better to sell it first instead of donating directly. That's because selling a losing stock will allow you to take a capital loss deduction on your return. Certain limits apply.

Keep Your Audit Fears in Check

Getting audited by the IRS is no fun. Fortunately, your chances of being audited are probably lower than you think. A look at the latest IRS statistics for 2016 reveals some interesting, and reassuring, facts about the risk of an IRS audit.
Audits are becoming less common. The number of individual tax returns the IRS audited fell to a 12-year low last year, to just above 1 million. Audits have been declining especially steeply over the last five years, which the IRS commissioner said was due in part to declining budgets and a smaller IRS workforce. Audits target the rich. It's a fact: IRS audits happen most often to the super-rich. The statistical chance of being audited increases dramatically for people at higher income levels.
For example, filers that made near the average U.S. income only had a 0.4 percent chance to be audited. That frequency doubled once annual incomes reached $200,000, and doubled again at incomes greater than $500,000. By the time a person reports $10 million in income, they have a one-in-five chance to be audited, according to IRS statistics. Bad math gets you audited. High income isn't the only thing that gets you audited, however. Often when people do their returns themselves, they make calculation errors. The IRS sent out more than 1.6 million examination letters last year correcting math errors, with the most frequent errors occurring in people's calculation of their amount of tax due, as well as the number of exemptions and deductions they claim. Getting professional help can save you a lot of hassle. Missing information creates a problem. Keep in mind that missing or incomplete data on your return also triggers an audit, since the IRS usually gets a copy of the same tax forms (W-2s/1099s) you get every year. Standing out gets you audited. The IRS takes a close look at business expenses, charitable donations and high-value itemized deductions. They have statistical data on what amounts are typical for various professions and income levels. If your return stands out from what is "normal," it may be flagged for review by the agency's computer system. More audits are done by mail. If you do face an audit, it's most likely that it will be done by mail. Only about one in four IRS audits are field audits conducted in person by an IRS agent. The most common issues, such as math errors or missing data, are done through mail correspondence. Most audits end up costing you. You can fight the tax law, but the tax law usually wins. Most people audited by the IRS end up owing additional tax. Only 11 percent of correspondence audits and 8 percent of field audits concluded with a "no change" finding in favor of the taxpayer.

Home Buying in a Seller's Market

It's a tough time to buy a house. Nationwide U.S. house prices rose to their highest levels ever in November and have stayed elevated, according to the Case-Shiller Index tracking single-family home sales. Residential inventories also reached their lowest levels on record during the first three months of 2017, the real estate data site Trulia reported. With high prices and low supply, homebuyers have to tackle the buying process differently than they would in a flat or down market. If you can, it may be worthwhile to wait to buy a house until the market cycle changes. However, that's not always an option.
Preparation is key In a seller's market you'll be competing with other motivated buyers for the house you want, so there's a benefit to acting quickly. If you take these steps to prepare, you can be fast and competitive without being frantic. Have your finances in order. Repair any issues to your credit rating; save as much as you can for down payment; and apply for a preapproval from your mortgage lender. If you can come to the negotiating table with a large down payment (20 percent or more is ideal) and your financing secured, you will be able to close your purchase more quickly.
Research. Investigate the kind of houses you are interested in and the price range you can afford. Know your target neighborhoods before you start looking. When you search, start below your minimum range, with the expectation that you may have to make a better offer if there are competing bids. Get a good agent. In a tight market, having a reputable real estate agent with a good track record can give you an edge. Spend some time finding an agent who knows your target neighborhood and who can lend their expertise in closing a deal in a competitive marketplace. Now may not be a good time to work with someone new to real estate. Land your dream home Your finances are ready; you've researched what you want; and you secured the help you need. Here are the next steps to landing your dream home in a tight market. Be nimble, be flexible. Now you should be primed to quickly investigate new listings within hours of their first posting, if possible. If you're interested in a house but an inspection finds a few flaws, you may have to be flexible about accepting a house with a few quirks or in need of some repairs. Make a strong offer. A seller's market isn't a time to lowball your first offer on a house you want. If you've prepared and set your expectations below your minimum price range, you should be able to make a strong offer to make sure you are among the most attractive bidders. You shouldn't wildly overpay, but making a strategic offer above the listing price may sweeten the deal enough to close quickly. Earnest money. You may consider offering an "earnest money" deposit to show you are serious. Just understand that you may forfeit your deposit if you later change your mind. Few strings. Try to make your offer as simple as possible. The more contingencies, the more room for someone else to sneak in and snap up your target home. Flexible move in dates may help the seller navigate their purchase. Having to sell your home before buying theirs may create a snag versus another offer.

There are many resources available to you to navigate the home-buying waters. Spend some time finding the resources that work best for you and your situation.

Five Reasons to Incorporate Your Business

Most new businesses start with no thought about legal structure. In the eyes of the IRS, the default structure is a "sole proprietor," in which your business profits are taxed on your personal tax return. This can serve you well to start, but there are several reasons you may want to consider incorporating as your business grows.
To protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game. To provide a personal liability firewall.The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
To issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation. To gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages. To enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise, and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors and other businesses often prefer to do business with incorporated companies.

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