Saturday, March 29, 2014

Four tax-efficient strategies in retirement / How to plan your income withdrawal strategy with taxes in mind.

Fidelity writes: Having enough money to savor your retirement years is a critical component of a successful retirement. That’s why it’s important to consider the impact that taxes may have on your savings in retirement. Although you won’t incur payroll taxes anymore, you will likely continue to owe income tax on some of the withdrawals you take.
On the positive side, you may be in a lower tax bracket in retirement because you won’t be receiving a full-time salary anymore. However, you still may have significant levels of taxable income from withdrawals from your investment and retirement savings accounts, pension payments, Social Security benefits, and possibly a part-time job.
One important element of tax-sensitive investing is developing a withdrawal strategy, which aims to minimize the effect of taxes while helping to provide you with the income you need. Being tax aware is especially important these days, as tax reform continues to receive attention in Congress.
"Most investors are familiar with the idea of maximizing their assets by minimizing taxes during their earning and wealth-building years," says Ken Hevert, vice president of retirement products at Fidelity. “Limiting taxes on those savings in retirement is equally important.”
Here are several different tax-efficient withdrawal strategies to consider.

Strategy #1: Consider the basic retirement withdrawal sequence.

The simplest withdrawal strategy is to take assets from your retirement and savings accounts in the following order:
  • Minimum required distributions (MRDs) from retirement accounts1
  • Taxable accounts
  • Tax-deferred retirement accounts, such as a traditional IRA, 401(k), 403(b), or 457
  • Tax-exempt retirement accounts, such as a Roth IRA or Roth 401(k)
This approach offers several advantages. First, it ensures that you take any MRDs, which are required for traditional and Roth 401(k) plans and traditional IRAs if you’re older than 70½.2 (Roth IRAs don’t have MRDs while the original owner is alive.) If you don’t take the full MRD, you’ll pay a penalty worth half the amount you failed to withdraw.
After you’ve taken your MRD (or if you’re not yet 70½), you can take retirement income from taxable accounts until you’ve exhausted them. You’ll likely have to sell investments, in which case you’ll pay capital gains tax on any appreciation.
If you’ve held the investment for longer than a year, you’ll be taxed at long-term capital gains ratesOpens in a new window., which currently range from 0% to 20%, depending on your tax bracket. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Long-term capital gains rates are significantly lower than ordinary income tax rates, which in 2014 ranged from 10.0% to 39.6%, for withdrawals from traditional retirement accounts. What’s more, using your taxable assets for retirement withdrawals leaves your money in tax-advantaged accounts, where it has the potential to grow tax deferred. “Compounding earnings on a tax-deferred basis is a powerful way to help grow assets over time,” says Hevert.
If you’ve used up your assets in taxable accounts, turn to your traditional, tax-deferred accounts. You’ll pay ordinary income tax on withdrawals, but this allows you to continue to leave any Roth accounts untouched, which may have significant benefits. Qualified withdrawals from Roth accounts won’t be taxed, making them a useful vehicle later in retirement. For example, if you have a significant medical bill, you can withdraw money from the Roth account to pay for it without triggering a tax liability.3 Moreover, Roth accounts can be effective estate-planning vehicles, because any heirs who inherit them generally won’t owe federal income taxes on their distributions. But this could change, because Congress is considering reforming retirement provisions.
The basic withdrawal strategy does have a potential disadvantage, however. Your tax burden may increase when you start taking money from tax-deferred retirement accounts. If that tax bump is a source of concern, consider the following strategy.

Strategy #2: Avoid having withdrawals bump you into a higher tax bracket.

If you want to be a little more active in your withdrawal strategy, you may consider taking simultaneous withdrawals from taxable, tax-deferred, and possibly Roth accounts. The objective here is to monitor the effect of the withdrawals on your tax rate so you won't move into a higher tax bracket.
If you decide to manage your taxable income with a target marginal tax rate—or the rate on the last dollar of income earned—in mind, consider following these steps:
Step 1: Identify your expected gross income, living expenses, and income gap (the difference between gross income and expenses) for the coming tax year, before considering any withdrawals from your investment accounts. Then determine your expected level of deductions and exemptions, and subtract them from your gross income, arriving at an estimate of your taxable income before withdrawals from investment accounts.
Step 2: Choose a marginal tax rate you’d like to target in the coming tax year. A reasonable place to start is the marginal rate associated with the taxable income estimate you identified in Step 1. For example, if you expect $48,000 in taxable income before tapping your investment accounts, you could target a marginal rate of 15%, because $48,000 of taxable income is subject to a marginal rate of 15% for joint filers in 2014.
Step 3: Identify and withdraw the amount of additional taxable income (above the level determined in Step 1) you can recognize without affecting your target marginal tax rate and withdraw it from a tax-deferred account.
Step 4: Draw any additional amount needed to fund your income gap (as well as the amount needed to cover the tax liability itself) from a taxable or Roth account. If using a taxable account, try to avoid liquidating securities at a gain, because this can generate additional tax liability; if using a Roth account, make sure that you’ve met the requirements for qualified distributions, or you may face both additional taxes and penalties.
“This strategy may help you generate the cash flow you need to help meet expenses, while potentially minimizing your tax rate," says Matthew Kenigsberg, vice president in Fidelity’s Strategic Advisers. “If performed consistently over time, it may help you preserve more of your retirement assets for the future.”
Finally, be sure to keep abreast of your state’s tax laws. Some states offer favorable tax treatment for certain sources of retirement income, such as some 401(k) plans and pensions (several states have no state income tax and many have favorable treatment for retirement income).
As a way to help minimize the taxes you’ll pay, consider the following hypothetical scenario.4 It illustrates the way a retired married couple whose annual expenses total $100,000 might seek to manage their taxes. Our hypothetical couple expects $42,000 in gross income (all taxable) before tapping their retirement accounts, so their income gap is $58,000. They anticipate $20,000 in deductions and exemptions, so their expected taxable income before withdrawals is $22,000. If they withdraw $51,800 from their traditional IRAs, it would bring their taxable income to $73,800—the top of the 15% bracket for 2014. They could then withdraw the remaining $6,200 that they need to cover their income gap from a Roth IRA, which does not generate taxable income (assuming the withdrawal is qualified). The chart below shows their cash flow and taxable income:


Other options for our hypothetical couple

The hypothetical couple in this scenario leaves the bulk of Roth IRA assets alone, leaving them in place to potentially generate tax-free growth. In certain situations, however, it may be advantageous to tap Roth assets instead of tax-deferred or taxable accounts. These include situations when:
  • Distributions from a tax-deferred account would cause your taxable income to exceed your target marginal tax rate
  • Withdrawing from a taxable account would require selling assets, resulting in short-term capital gains, which are taxed at ordinary income tax rates
  • You are also trying to minimize taxes on Social Security benefits, as in Strategy #3 (see below), and withdrawals from a tax-deferred account would have an impact on the taxability of those benefits
Your circumstances may be considerably different from those described in the scenario. Nevertheless, you may be able to apply the principles involved in them to your own situation. A tax professional can help you explore the implications of different withdrawal strategies, help minimize the amount of taxes you pay on hard-earned savings, and, of course, help you maximize your ability to live the retirement you envision.

Strategy #3: Limit taxation on Social Security benefits.

This strategy again involves actively managing your distribution strategy. The government considers up to 85% of your Social Security benefits to be taxable, depending on a formulaOpens in a new window. that takes into account most other income sources, plus one-half of your benefits. The objective of this approach is to manage your income so that a smaller percentage of your Social Security benefits will be taxable.
Follow the same approach as outlined in Strategy #2, with two exceptions. You’ll target the income thresholds that determine whether your Social Security benefits are taxable, rather than income levels associated with a particular tax bracket. And in Step 4, you’ll withdraw additional funds from either a Roth IRA or an HSA (health savings account); qualified distributions from these accounts are excluded from the formula used to determine whether your Social Security benefits are taxable, but realized capital gains from taxable accounts are not.

Strategy #4: Exploit lower capital gains rates.

You also may have the opportunity to eliminate taxes on the capital gains you realize from taxable accounts. In 2014, taxpayers in the 10% and 15% income brackets can realize long-term capital gains (or receive qualified dividends) without being taxed. (In 2014, the 15% bracket tops out at taxable income of $73,800 for married couples filing jointly.) The result: If your taxable income falls into one of the two lowest tax brackets, selling stocks held longer than a year could be a highly tax-efficient way to generate cash flow. This strategy is potentially most feasible if you have a relatively high proportion of retirement assets in taxable accounts and a lower amount of recurring annual income, such as Social Security, a pension, or annuity income.

Tax implications for high-income individuals

It is becoming increasingly important for high-income individuals to manage taxable income with a target tax rate in mind. Joint filers earning more than $250,000 per year and single filers earning more than $200,000 in modified adjusted gross income (MAGI) per year now face a 3.8% Medicare surtax on net investment income (capital gains, interest, dividends, etc.) to fund health care reform.
In both cases, taxpayers may be able to significantly reduce their tax burden by carefully managing their annual income so it remains below these levels. For example, if a couple is below the $250,000 level in a given year but expects to exceed it the following year, they may want to consider accelerating the recognition of taxable income into the current year up to the $250,000 limit. In addition, tax-exempt municipal income is not subject to the 3.8% surtax, so investors who are over the limits may wish to consider replacing taxable bonds and bond funds in their taxable accounts with municipal proxies in order to reduce their exposure to the surtax. Of course, taxes aren’t the only consideration—be sure to look at the risks as well before making a decision.  You can visit Fidelity here.
Posted on 9:29 AM | Categories:

Most ETFs Are Tax Smart, Is Yours?

Zack's.com for NASDAQ writes: ETFs are revolutionizing the way we invest and the reasons for their popularity are not difficult to understand. They combine the flexibility, ease and liquidity of stock trading with the benefits of traditional index fund investing. Further, they are generally less expensive, more transparent as well as more tax-efficient than mutual funds. 

Mutual funds are infamous for causing tax headaches to unsuspecting investors. ETFs on the other hand are tax smart due to the way they are structured. However, there are some ETF structures that are not very tax efficient and investors need to be aware of the issues associated with them. 

ETF Structure Creates Tax Efficiency 

Since most ETFs track well-known market indexes, they usually experience lower turnover compared with actively managed funds and thus create lower tax liabilities. 

But more importantly, ETFs are generally more tax efficient compared with similar passively managed mutual funds, due to the way they are  structured . 

In other words, if an investor holds an ETF and a similar mutual fund in a taxable account, the ETF will most likely result in less tax liability for the investor. 

The creation of an ETF begins with the sponsor, also known as the manager filing a plan with the SEC, and on approval of the plan executing an agreement with an authorized participant (AP), also known as a market maker or specialist. AP in turn assembles the appropriate basket of constituent stocks and sends them to a specially designated custodian bank for placing them in a trust. 

 

The custodian forwards the ETF shares (which represent legal claims on tiny slivers of the basket of shares held in the trust) on to the authorized participant. This is a so-called  in-kind  trade of equivalent items and thus there are  no tax implications . 

On the other hand, when an investor purchases shares of a mutual fund, the mutual fund has to create new shares by actually buying  the shares of the constituent stocks. 

Similarly when an investor redeems his/her investment, the mutual fund has to  sell  the constituent shares. 

 

The sale of stocks by the mutual fund (shareholder redemption or portfolio turnover) may create capital gains for the shareholders. So, the mutual fund investors may have to pay capital gains taxes even if they have unrealized losses on their investments. 

According to WSJ, 26% of equity mutual funds paid out capital gains in 2011, compared with just 2% of equity ETFs. 

ETFs are however  not  tax free. Dividends from ETFs are taxed like dividends from mutual funds or stocks. Capital gains at the time of sale also receive similar treatment. 

But overall ETFs-in particularly stock ETFs--are much more tax-efficient than mutual funds and by creating lower tax liabilities, ETFs result in higher long-term returns for investors. 

However not all ETFs are tax-efficient. Below we have highlighted some specific situations that can cause some headaches for investors. 

Commodity ETFs 

Commodity ETFs that hold commodity futures (futures backed) are structured as "limited partnerships" and are required to report an investor's allocated share of a fund's income, gains, losses and deductions on a Schedule K-1 instead of 1099. These are somewhat difficult to handle. 

Further gains or losses realized by ETFs are taxable events even without any distributions being paid to shareholder. These funds are subject to the so called "60/40" rule--60% of the gain is subject to the long-term gains rate and 40% to the short-term rate.  

Precious Metals ETFs 

Commodity ETFs that hold the precious metals (physically backed) like GLD and SLV are treated same as holding the bullion itself. These ETFs are structured as "grantor trust" for income tax purposes. Owners (shareholders) of the trust are treated as if they owned a corresponding share of the assets of the trust. 

IRS treats precious metals as "collectible" for long-term capital gains and as such gains are taxed at the rate of long-term capital gains on collectibles if held for more than one year. 

MLP ETFs 

MLPs come with complicated tax issues and many investors avoid investing in them only due to daunting tax requirements. Thankfully for the investors, some of the tax complexities can be avoided by owning them in ETP form. The payouts by the ETPs are reported as ordinary income on Form 1099, and therefore the K-1 forms are not required. 

Funds that have more than 25% of their assets invested in MLPs are treated as C corporations for tax purposes. Further, assets are required to be marked to market and a deferred tax liability for the unrealized gains needs to be recorded. 

As a result, MLP ETFs have significant tracking errors. The most popular MLP ETF AMLP has a gross expense ratio of 4.85% thanks mainly to deferred tax liabilities. 

Some ETFs avoid these adverse issues by limiting their exposure to MLPs below 25%. ETNs also typically eliminate some of these complex tax consequences, as they do actually not hold any securities. But they come with credit risk of the issuer. 

Bottom Line 

ETFs are generally "Extremely Tax Favorable" due to the way they are structured, but some ETFs are structured differently and have some tax issues that invetors should be aware of before they decide to invest.  

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Posted on 9:28 AM | Categories:

5 sweet tax breaks for students

Chris Crouch for Schools.com writes: For most families, tax season is *almost* as fun as a root canal, but for those paying tuition bills, the possibility of owing more money to the government is likely to be nauseating. These tax breaks might save you a serious chunk of change when April 15th rolls around. Here are five potential tax breaks for students.

The American Opportunity Tax Credit


The mother of student tax incentives, this credit is available to students in their first four years of higher education, and it could knock up to $2,500 off of their tax obligation. To receive the full credit, independent students and guardians of dependent students must have adjusted gross incomes of $80,000 or below ($160,000 or below for joint filers) and will receive a dollar-for-dollar reduction for the first $2,000 spent on tuition, fees and course materials, followed by a 25 percent reduction on the next $2,000, according to the IRS.
"Getting a $2,500 tax credit is equivalent to getting a $2,500 grant," says Sandy Baum, a senior fellow at the Urban Institute and research professor of education policy at George Washington University. "... It's important to understand that [the credit] really does diminish the amount that it costs you to go to college in exactly the same way it would if it were a grant."

A double bonus, Baum adds, is that American Opportunity credit is partially refundable, meaning that students don't need to pay taxes in order to get a portion of the credit. Families with incomes low enough to skip filing a tax return may be eligible for up to $1,000 in free cash. A guide to whether you need to file a tax return is available on the IRS website.

Lifetime Learning Tax Credit


The American Opportunity credit can only be claimed for up to four years per student, but there's no limit on how long families can claim the Lifetime Learning Credit. The catch is that you'll have to spend more to get the full benefit. Unlike the American Opportunity credit, which provides a dollar-for-dollar tax match for the first $2,000 families spend, the Lifetime Learning incentive only provides a credit equivalent of 20 cents for every educational dollar families spend up to $10,000. That's a maximum tax credit of $2,000 annually for $10,000 spent on tuition fees and supplies. The income restrictions are also a bit different. The Lifetime Learning tax credit is available in full for single filers earning $53,000 or less ($107,000 for joint filers). Partial credit is available for single filers with incomes below $63,000 ($127,000 for married couples).

"[Tax credits] are a financial benefit, but you don't get it at the time your tuition bill is due," explains Karen McCarthy, a policy analyst for the National Association of State Financial Aid Administrators. "You pay during the year and then the following year when you're filing your taxes, that's when you claim the tax credit. …The timing is a little bit out of sync."
The Lifetime Learning credit is nonrefundable, meaning that it's only available to those earning enough to file an income tax return.

Tuition and Fees Deduction

Deductions aren't generally as sweet as tax credits, but they can still help. Only available to families who don't claim either of the above credits, the full deduction of up to $4,000 is offered to individuals earning $65,000 or less ($130,000 or below for married filers). A partial deduction is available for single filers earning $80,000 or below ($160,000 for married couples).

Joseph Cunningham, an assistant professor of accounting at Albright College, is quick to point out that a deduction isn't the same as a credit.
"Tax deductions are a reduction of taxable income. For example, if a taxpayer was entitled to deduct $4,000 of these expenses, then their taxable income would be $4,000 less," he says. "A tax credit is a reduction of the taxes owed."

Before claiming a tuition and fees deduction, Cunningham recommends researching whether you qualify for a tax credit and then carefully comparing your options.

Student Loan Interest Deduction

If you're paying a student loan, you can also deduct up to $2,500 of your interest, even if you qualify for other education tax incentives.

"Most student loans made through commercial lenders are eligible for deductions, but there are limitations," Cunningham says. "If a [relative] made a loan to a student then the interest from that loan would not qualify."

Student loan interest deductions are only available for single filers earning below $75,000 ($155,000 for joint filers) and may include any funds paid as origination fees, interest on refinanced student loans and credit card interest if the debt was taken on solely for qualified education expenses. A list of those expenses is available on the IRS website.

529 Incentives

The federal government offers tax-free growth on funds in a 529 prepaid or college savings plan, but many states also offer their own incentives, though these differ quite a bit from state to state, says Karen McCarthy.

Alabama, for example, offers a deduction of up to $10,000 for joint filers, while Illinois offers a walloping $20,000 deduction for married couples annually. If you have a 529 plan and are unsure of whether your state offers a tax incentive, a simple call before tax time could help pad your wallet.
Posted on 9:28 AM | Categories:

Webinar—Financial Reporting and Analytics for Project-based Businesses April 10 @ 2pm EST

Intacct Corporation, the leading cloud based accounting software with customized solutions for all industries, has announced a webcast on Thursday April 10, 2014 at 2 PM ET/11 AM PT. This webcast will teach project based businesses the benefits of real-time financial visibility and analytics through Intacct's cloud software.

Through value-added partners like Trustantial, Intacct offers solutions customized to companies in different industries. Specifically for project based businesses, benefits include the following: 
  • Complete Visibility: Gain immediate insight and reporting of project data, true project profitability, and performance.
  • Up to the Minute Reporting: Monitor project metrics and KPIs through real-time dashboards, accessible anywhere, anytime.
  • Ease of Use, Increased Security: Eliminate manual, Excel-based reporting processes that cannot scale with your business.
  • Monitoring and Benchmarking: Gain insight into successful projects and apply that knowledge to future engagements to increase overall financial performance.

Many companies have already recognized value as a result of choosing Intacct. For instance, a satisfied client of Trustantial's Intacct offering had this to say: "With Intacct we are getting a powerful cloud accounting platform that gives us better controls, more accurate data and greater visibility into financial performance. We looked at the total cost of ownership and found that Intacct will be much less expensive than our previous system or any of the other new solutions we evaluated. Intacct will also allow us to scale our business without significantly expanding headcount in the finance department, providing an outstanding return on our investment."

To learn more and register for this free webcast, click herehttp://online.intacct.com/20140410WebinarReportingPST_website.html?referral=trustantial.

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About Trustantial
Trustantial is a leading provider of a range of accounting-related services, from accounting software implementation and integration, to tax, bookkeeping, payroll and related services. Trustantial is a reseller of the leading AICPA-preferred cloud accounting software for small and mid-size businesses and organizations. The team at Trustantial prides itself on developing long-term relationships with clients based on providing efficient, expert solutions to businesses and individuals. We're big enough to support complex implementations, yet small enough to offer personal and responsive service.


About Intacct
Intacct's sole focus is on building amazing professional-strength financial management and accounting applications that fit into your company's existing business infrastructure and integrate well with the key applications you use to run your business--giving you the freedom to choose and deploy the best applications for each of your departments.


Posted on 9:28 AM | Categories:

#MYOB2014 Roadshow highlights – cloud accounting for every business See full article: http://myob.com.au/blog/myob2014-roadshow-highlights-cloud-accounting-for-every-business/#ixzz2xMTapFOC

Tim Reed for MYOB writes: We’ve just capped off MYOB 2014 Roadshow — our largest roadshow series yet covering 46 locations across New Zealand and Australia. This year’s roadshow has been a major success with over 7,000 registrations recorded.MYOB_Roadshow_BLOG


The momentum for cloud accounting adoption is building and for this reason we brought together our MYOB Certified Consultants, Bookkeepers and Accountant partners for the first time. We were also joined by our Cloud and API partners which showed the full breadth of opportunities for extending MYOB products.
It was great fun see so many old friends and make new ones as I engaged with our partners and helped set them up for what is going to be a massive year. I always love the opportunity to talk to partners.
What excited me was speaking to so many people who have started to move their clients to our live solutions and are seeing great results.  The other really nice feedback to hear was how well our partners believe we’ve listened to them and understand their businesses.
It was also great having some of our partners join us on the road to talk about their experiences with MYOB and the cloud.

“We’re becoming cyborgs”

We had futurist Tim Longhurst as our keynote speaker. Tim’s main point was how we’re all becoming a little more cyborg – part human part machine – which resonated with me and reinforced our investment in on-the-go applications this year.
Each year we set to inform our partners of the big shifts at MYOB through our roadshow. This year was without doubt the most exciting yet. Here are a few highlights:
* Cloud accounting is no longer the future – it’s a reality.
Over 50% of MYOB’s new clients are now selecting cloud solutions and we expect that to increase rapidly this year.  On top of that more than a quarter of our subscriber base have now moved to a cloud solution.
* MYOB has a cloud solution for every business.
 No two businesses are the same and with MYOB BankLink, MYOB Essentials, and MYOB AccountRight, we offer a solution for all needs.
* Accounting on-the-go.
MYOB’s mobile applications PayDirectWindows 8 Companion, and AO + AE OnTheGo are going to make business life easier for hundreds of thousands of small business owners and accountants
* Better value.
MYOB offers better value than any other supplier on the market.
2014 is shaping to be a huge year for us and our partners. Thank you to everyone who made MYOB our roadshow a success – every client who gave up their time to attend; our partners that shared their experiences; our API and Cloud Partners who showed how far reaching the MYOB family is; and my team who have been clocking up the air miles over the last month.
For those that weren’t able to join us in the main centres, here’s a little taste of what MYOB 2014 was all about. See you again next year



What more information on MYOB products? Sign up for one of our MYOB Online Showcases for Australia and New Zealand
Posted on 9:28 AM | Categories: