Kathleen Hargrove, Author at Whalen & Company, CPAs

Stock market volatility can cut tax on a Roth IRA conversion

Kathleen Hargrove on June 2, 2016

This year’s stock market volatility can be unnerving, but if you have a traditional IRA, this volatility may provide a valuable opportunity: It can allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Traditional IRAs

Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax-deferred.

On the downside, you generally must pay income tax on withdrawals, and, with only a few exceptions, you’ll face a penalty if you withdraw funds before age 59½ — and an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 70½.

Roth IRAs

Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free.

There are also estate planning advantages to a Roth IRA. No RMD rules apply, so you can leave funds growing tax-free for as long as you wish. Then distributions to whoever inherits your Roth IRA will be income-tax-free as well.

The ability to contribute to a Roth IRA, however, is subject to limits based on your MAGI. Fortunately, anyone is eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount you convert.

Saving tax

This is where the “benefit” of stock market volatility comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market stabilizes.

Of course, there are more ins and outs of IRAs that need to be considered before executing a Roth IRA conversion. If your interest is piqued, contact us to discuss whether a conversion is right for you.

How many full-time employees do you have? The number might be different than you expect.

Kathleen Hargrove on May 27, 2016

It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.

The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.

50 is the magic number

Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.

Under the law, an ALE:

Is subject to the employer shared responsibility provisions with their potential penalties, and
Must comply with certain information reporting requirements.

Calculating full-timers

A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.

A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.

Seasonal workers

If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help

Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.

Tax Consequences When Selling Your Home

Kathleen Hargrove on May 23, 2016

home sale taxe As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put a home on the market. After all, in many locales, summer is the best time of year to sell a home! But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

Gains

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

Losses

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Learn more

If you’re considering putting your home on the market, please contact Whalen & Company to learn more about the potential tax consequences of a sale.

Can summer day camp save you taxes?

Kathleen Hargrove on May 19, 2016

child care tax credit Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?

The Power of Tax Credits

Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Rules to Know

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Are You Eligible?

These are only some of the rules that apply to the child and dependent care credit. So please contact Whalen & Company to determine whether you’re eligible.

CLIENT ALERT: Final Overtime Rule Will Affect 4.2 Million Workers

Kathleen Hargrove on May 18, 2016

The United States Department of Labor (DOL) issued the final update to its proposed “Overtime Rule” this week, a revision to the Fair Labor Standards Act.

The salary threshold for white collar exemptions will be increased to $47,476 from the current threshold of $23,660, effective December 1, 2016, affecting 4.2 million U.S. workers. Vice-President Joe Biden is in Columbus, Ohio today to share this announcement.

Key Overtime Rule Changes:

Full-time salaried workers earning less than $47,476 annually will be eligible for overtime pay (previous threshold was $23,660).

The Highly Compensated Employee (HCE) annual compensation threshold will be increased to $134,004 from $100,000 for full-time salaried workers.

Employers have six months to prepare for the change, which will be effective December 1, 2016.

Bonuses, commissions and incentive pay for non-HCE employees may be counted toward 10% of the threshold if paid at least quarterly.

The overtime salary threshold will be updated every three years based on wage growth, to be posted by DOL 150 days before effective date.

Duties test for white collar salaried workers will remain unchanged.

The DOL is proposing the following ways for businesses to comply with these changes:

Pay salaried employees earning less than $47,476 annually time-and-a-half for overtime work.
Raise workers’ salaries above the new $47,476 annual threshold.
Limit hours worked for salaried employees earning less than the threshold to 40 hours per week.

Webinars on the new overtime rule will be conducted by the DOL in May and June. See the scheduled webinars and register here.

According to the DOL, this exemption threshold has not been updated since 2004 and was due to be revised as “President Obama directed the Secretary of Labor to update the FLSA’s overtime pay protections and to simplify the overtime rules for employers and workers alike.”

For more details on this update rule, check out the DOL’s Overview and Summary and Small Business Guide.

We hope this information has been helpful to you. If you have questions about how the proposed overtime rule affects your business, please contact your Whalen & Company representative.

Sources:

Author: Kathleen Hargrove

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