Delaying retirement affects benefits and taxes

In today’s economic environment, you may decide you have to work beyond the "normal" retirement age. Here's how extending your work life can affect your taxes and retirement benefits.

"Normal" retirement age is not a fixed number. For social security purposes, the "full" retirement age threshold ranges from 65 to 67, depending on your birth date. However, you can elect to start receiving lower payments as early as age 62, or you can maximize your benefits by forgoing them until you're 70. Once you reach age 70, there's no incentive to postpone your benefits further since you'll already have reached your maximum.

* Earnings limit

If you're working, you probably should forgo the early payment option. Benefits received before full retirement age will be reduced by $1 for every $2 earned over an annual limit (currently $15,120). However, you will receive a compensating increase when you do reach full retirement age, and your payments will not be reduced thereafter no matter how much you earn.

* Taxable benefits

Whether or not you draw benefits, you'll continue to pay social security and Medicare taxes on any income you earn from wages or self-employment. Up to 85% of your benefits may become subject to income tax, depending on the amount of your other income.

* Medicare

Medicare eligibility begins the year you reach age 65. The program encompasses four types of coverage: Medicare A (hospital insurance), Medicare B (general medical insurance), Medicare C (Medicare Advantage), and Medicare D (prescription drug coverage).

It's wise to sign up for Medicare A as soon as you're eligible. There's generally no cost, and the program provides supplemental coverage even if you're already insured at work. Medicare B and D are neither free nor mandatory, but the monthly premiums are reasonable, and either may be used as a stand-alone program or in conjunction with a private plan. If you have "creditable coverage" at work (i.e., coverage that's at least as good as Medicare), you can postpone signing up for Medicare B and/or D until you're no longer employed.

Your employer's plan also may offer Medicare C, which provides for private programs administered under contract with the government. These plans typically merge Medicare A and B benefits with other coverage.

Working beyond retirement age can require several complex decisions. Call us for help with planning the outcome that's best for you.

Consider providing low-cost benefits to employees

Fringe benefits are important to your employees. Wage levels often don't differ much between companies, so the fringes you offer can be an important factor in hiring and retaining workers.

Major fringe benefits such as health insurance are expensive. But if you're willing to be creative, you can design other attractive benefits at low or no cost. Often these benefits are tax-free to your employees. The exact benefits will depend on the size of your work force and the nature of your business. But here are some ideas to consider.

* Flexible schedules. If the nature of your business allows, offer flexibility in working hours. Canvass senior employees for suggestions on changes. Consider ideas such as closing earlier on summer Fridays to give employees a longer weekend. Make up the time with slightly longer hours on other days.

* Personal leave days. Offer eight hours of paid leave every two months for employees to take care of personal business.

* Transportation benefits. If you're in a metropolitan are

a, help your employees solve their commuting problems. Work with your local transit authority to offer free bus passes. Consider offering subsidized parking or even van pools in major urban areas.

* Company discounts. Give employees discounts on your own products. Negotiate discounts with other businesses - health club memberships, for example.

* Provide employees with a free monthly health newsletter, with updates and tips on health care issues. Many hospitals and charities publish such newsletters as part of their marketing efforts.

* Arrange lunchtime seminars on topics such as basic financial planning or health issues. It's not difficult to find professionals willing to speak for no fee as part of their business development.

Want to lower your 2013 tax bill? The time for action is running out, so consider these tax-savers now.

* You can choose to deduct sales taxes instead of local and state income taxes. If you're planning big ticket purchases (like a car or a boat), buy before year-end to beef up your deductible amount of sales tax.

* If you're a teacher, don't overlook the deduction for up to $250 for classroom supplies you purchase in 2013.

* Consider prepaying college tuition you'll owe for the first semester of 2014. This year you can deduct up to $4,000 for higher education expenses. Income limits apply.

* Max out your retirement plan contributions. You can set aside $5,500 in an IRA ($6,500 if you're 50 or older), $12,000 in a SIMPLE ($14,500 if you're 50 or older), or $17,500 in a 401(k) plan ($23,000 if you're 50 or older).

* Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of the plan's first three years.

* Need equipment for your business? Buy and place it in service by year-end to qualify for up to $500,000 of first-year expensing or 50% bonus depreciation.

* Review your investments and make your year-end sell decisions, whether to rebalance your portfolio at the lowest tax cost or to offset gains and losses.

* If you're charity-minded, consider giving appreciated stock that you've owned for over a year. You can generally deduct the fair market value and pay no capital gains tax on the appreciation.

* Another charitable possibility for those over 70½: Make a direct donation of up to $100,000 from your IRA to a charity. The donation counts as part of your required minimum distribution but isn't included in your taxable income.

* Install energy-saving improvements (such as insulation, doors, and windows) in your home, and you might qualify for a tax credit of up to $500.

These possibilities for cutting your taxes are just the starting point. Contact us now for a review of your 2013 tax situation and tax-saving suggestions that will work best in your individual circumstances.

Can you have too much of a good thing?

Employees often have too much of their employer's company stock in their 401(k) or other retirement plan. Employees feel they know their company best, overlooking the risks of having too much of an investment in any one company, including their own.

What are some of the risks of loading up on your employer's stock?

* Tremendous bet in a "safe haven." Overweighting investment holdings in any company minimizes diversification, exposing your portfolio to increased risk. The belief that employer shares are less risky is an illusion.

* Double whammy potential. No company is protected from economic downturns. If your employer's performance weakens, you may lose your job, as well as growth in your retirement portfolio from the company's market value.

* Lock-up periods. Some companies prohibit employees from converting the employer retirement match contributions in company stock into other investments until after a number of years. In this case, use your own contributions to diversify your holdings.

* Tendency to forget. As you move closer to retirement, you may forget the riskiness of your employer's stock to your portfolio. At the same time, contributions of company stock may be growing, based on higher benefit matches - just when portfolio reallocation is becoming more important.

Your goal should be to create a well-balanced portfolio that suits your age (investment horizon) and your risk tolerance. Call us for assistance in reviewing your retirement situation.

Obsolete inventory can be costly for your business

Walk through most commercial warehouses and you'll find products that have been collecting dust for months, even years. Tires that no one wants to buy, raw materials that are no longer used, tubes of caulking that are good for nothing but the dumpster - all may be considered obsolete inventory.

What makes inventory obsolete?

For one thing, alternative products may arrive in the marketplace at lower costs to the consumer. You might sell refrigerators that, several years ago, were a great value because they offered a "frost-free" feature. Now, however, similar models with digital enhancements are available - at the same or lower prices. This change in product features will often adversely affect the value of your existing inventory.

Many firms have learned that technological advances are a double-edged sword. (Ask any computer retailer.) Perhaps your company makes custom-designed widgets. If demand for such products dries up, you may need to retool and modify your existing product line. Your need for certain expensive raw materials - stuff that's sitting on your warehouse shelves - may dwindle.

 

Carrying obsolete products in your warehouse or retail store tends to increase operating costs without generating profit. Besides the cost of storing and insuring such items, you may be forced to incur labor expense to move the products to new locations and account for them. In addition, your financial reports may overstate business assets, especially if inventory is a major item on your balance sheet. Even your tax bill may be affected. Failing to recognize the expense of obsolete inventory may overstate net income.

How can you reduce the cost of excess inventory?

Define "obsolescence" for your major product lines; then be proactive. For example, if an item hasn't sold in a certain number of months or is being phased out by suppliers, start moving that item by offering sales discounts.

Be willing to write off products or raw materials that are unlikely to generate profit. Don't wait until escalating storage costs or an auditor's findings shine a spotlight on obsolete inventory.

Establish a regular schedule for reviewing inventory. Many firms count their goods at the end of the year. That's great. But knowing where you stand with inventory should be a year-round process.

For help with this or other business problems, give us a call.

Business or Hobby? What's the tax difference?

For federal tax purposes, the determination of "business" or "hobby" is a matter of deduction. If your new venture is considered a business, you can deduct losses against other income.

However, when the activity is classified as a hobby, the "hobby loss" rules limit the amount you can write off. Expenses you incur might be deductible only if you itemize - or they might even be nondeductible.

The distinction affects the amount of tax you owe. So how can you prove you're trying to run a money-making business despite several years of losses?

One test you're probably familiar with is the general rule of earning a profit in three of the past five years. If your business has more income than deductions in three of five consecutive taxable years, the IRS generally accepts that you have a profit motive. (The time frame is two years in seven for certain horse-related activities.)

Unable to meet that test? Additional factors play a role as well. For instance, the Tax Court agreed that a volleyball consulting service with multiple loss years qualified as a business, in part because of a businesslike manner of operation. Among other items, the Court mentioned the maintenance of a separate bank account and accurate records as support for a profit motive.

Positive indicators of your profit-making intentions also include your expertise in the activity, the time and effort you put into your new business, and your success in other ventures.

If you'd like a complete list of the IRS "business vs. hobby" criteria, please contact us. We'll be happy to review the guidelines with you.

Avoid penalties for underpayment

Check the total taxes you've already paid in for 2013 through withholding and/or quarterly estimated payments. If you've underpaid, consider adjusting your withholding for the final months of 2013 or increasing your remaining quarterly estimate. If you employ household workers, be sure your calculations include the payroll taxes you'll owe for them.

It's year-end tax planning time

Take some time to review your tax situation for 2013 while there are still a few months to make tax-cutting adjustments. Higher-income taxpayers face tax increases this year, which means that an investment in a year-end tax review could make a significant difference in your final tax bill.

IRS issues "state of celebration" rule for same-sex marriages

The IRS recently issued a ruling that will treat same-sex married couples the same as opposite-sex couples for federal tax purposes as long as the marriage occurred in a jurisdiction that recognizes same-sex marriages as legal. This ruling, known as the "state of celebration" rule means same-sex couples can live anywhere they like, and they'll be considered married for tax purposes as long as the marriage itself occurred where it was legal.

Employer health insurance requirement postponed

The health care reform law passed in 2010 included a provision that would require employers of 50 or more full-time employees to provide affordable health insurance to their workers or face steep penalties. That provision was scheduled to take effect January 1, 2014.

The Treasury Department has announced that the effective date of this provision will be postponed for one year. The mandatory employer and insurer reporting requirements and any penalties connected with them will be delayed in order to allow more time for companies to adapt to meet the requirements.

Business Alert: No penalty if you missed October 1 deadline

October 1 was the original deadline for employers to provide their workers with a notice about the state health insurance exchanges created by the Affordable Care Act. Failure to comply could have resulted in fines of up to $100 per day.

The U.S. Department of Labor recently announced that, while companies are required to provide the notice, there will be no fine or penalty under the law for failure to do so.