Over at UK Business Forums we read: Accounting in the cloud?
Monday, February 16, 2015
Turn Your Taxable Portfolio Into A Tax-Free Retirement Account
Carol Schmidlin for FedSmith.com writes: Long-time federal workers have a unique opportunity for tax-free retirement income…but immediate action is vital. Under President Obama’s proposed budget, aftertax rollovers to Roth IRAs will end next year. Throughout 2015, Civil Service Retirement System (CSRS) and CSRS Offset employees can still lock in the benefits.
THE REWARDS OF ROTH IRAs
Savvy investors understand the advantages of Roth IRAs. Contributions aren’t tax-deductible, but all withdrawals can be tax-free. So you don’t have to share your investment earnings with the IRS.
However, contributions to Roth IRAs are limited to modest amounts. Besides making contributions, you can convert a traditional IRA of any size to a Roth IRA—but that could mean paying a huge tax bill.
Some federal employees can overcome those obstacles. If you are in the CSRS, you can contribute to the little-known Voluntary Contribution Program.
Depending on your lifetime earnings (as explained below), you may be able to move hundreds of thousands of dollars into a Roth IRA without owing tax. That $100,000 or $200,000 or $300,000 now sitting in your taxable account can be relocated into a tax-free Roth IRA, without generating a penny of income tax! This opportunity will vanish after this year, under the Obama proposal.
DELVING INTO THE DETAILS
Roth IRAs offer major tax benefits. After you’ve had the account for at least five years and you’ve reached age 59-1/2, all withdrawals are tax-free.
Suppose a hypothetical John Smith contributes a total of $100,000 to a Roth IRA. Over the years, that account might grow to $200,000. In retirement, John can withdraw as much as he wants, year after year, without owing any income tax.
In fact, Roth IRA withdrawals don’t impact your taxable income at all. Thus, these withdrawals won’t increase the tax John might owe on his Social Security benefits; they won’t result in reduced tax deductions for medical expenses or other tax return items.
But that’s not all. Suppose John discovers that he doesn’t need to tap his Roth IRA in retirement. In that case, he can leave the account alone, letting it grow to perhaps $250,000 or $300,000 or more, untaxed. While owners of traditional IRAs must take certain distributions each year, after age 70-1/2, Roth IRA owners never have required withdrawals.
Thus, John can leave his Roth IRA alone, if he wishes, to pass intact to his surviving spouse or his children or grandchildren. Then John’s beneficiaries can take tax-free withdrawals from the inherited Roth IRA—what a marvelous legacy that can be.
LEARNING THE LIMITS
If you think there must be a catch to Roth IRAs, you’re right. In fact, there are several. For instance, Roth IRAs are funded only with aftertax dollars. You never get a deduction for putting money into a Roth IRA.
To contribute to a Roth IRA, you must have earned income or be married to a worker. Even then, annual contributions now are capped at $5,500 ($6,500 if you’re 50 or older).
Income limits apply, too. In 2015, you can’t contribute to a Roth IRA with income over $131,000, or $193,000 for married couples filing jointly. Thus, if John and his wife Mary have combined income of $200,000 this year, they can’t contribute to a Roth IRA.
Besides annual contributions, you also can fund a Roth IRA by converting a traditional IRA. However, such conversions are taxable.
Suppose that John now has $250,000 in a traditional IRA. His contributions were tax-deductible and investment earnings inside that account have been tax-deferred.
If John converts that traditional IRA to a Roth IRA, he’ll report $250,000 of taxable income on this year’s tax return. Once all the various taxes and surtaxes and stealth taxes are calculated, John could owe well over $100,000 in tax on that conversion!
THE VCP OPPORTUNITY
Let’s take this example one step further. Assume that John has worked for the federal government for decades, is still working there, and he is under CSRS.
In this situation, John is eligible for the VCP. That is, he can make a contribution to this supplementary retirement fund, administered by the federal Office of Personnel Management (OPM).
Under the VCP, contributions can be as large as 10% of your total lifetime basic earnings in federal service. If you have taken any money from the CSRS, that amount plus interest must be re-deposited in full before you can make any VCP contributions.
Continuing our example, suppose that John has earned a total of $1,500,000 over his career as a federal employee; John has not taken any CSRS withdrawals. If so, John can contribute any amount up to $150,000 (10% of $1,500,000) to the VCP.
Say that John looks over his taxable brokerage and bank and mutual fund accounts. Each year, he’s been paying tax on interest and dividends and capital gains.
So John moves $150,000 from these taxable accounts to the VCP. Immediately after the transfer is confirmed, John moves that $150,000 to a Roth IRA. He’ll have converted that amount from taxable accounts to a tax-free account without triggering any income tax. Then John can invest his Roth IRA in stocks, bonds, bank accounts or other acceptable vehicles.
Going forward, John can take as much or as little as he’d like from his Roth IRA, tax-free. That’s true even if income tax rates move higher, in the future.
Once John has reached age 59 1⁄2 and five years have passed since he has established a Roth IRA, all withdrawals–including earnings—will be tax-free. Nevertheless, you don’t have to wait that long, if you need cash flow before reaching those milestones.
In our example, John funded his Roth IRA with $150,000 of aftertax money. Consequently, John can withdraw any amount up to that $150,000 at any time, without owing income tax. (In some instances, an early withdrawal penalty may apply.) The longer you wait to take Roth IRA distributions often will provide the best result, because the delay can increase the amount of tax-free earnings inside the account.
PREPARING THE PAPERWORK
VCP contributions must be made while you are still working within the CSRS. After you retire, this opportunity disappears.
Indeed, current CSRS employees have every incentive to make VCP contributions now, even if you are a few years from your planned retirement. If you wait until after year-end 2015, you may have waited too long, if the President’s proposal is approved and aftertax Roth IRA rollovers are disallowed.
To proceed, you must first liquidate any holdings in your investment accounts that you want to use for VCP contributions. You make VCP contributions with cash, not with securities transfers.
To execute a voluntary contribution, start by completing form SF 2804 and returning it to your agency’s personnel office. Once the people in that office confirm you do not owe any deposits or re-deposits on your federal retirement benefits, they will forward this form to OPM. (As mentioned, you are not eligible for the VCP if you owe any retirement deposits.) Do not send any money with your application.
OPM employees are currently focusing on processing pensions for retiring government employees. Establishing VCP accounts may not be a high priority at OPM, so be prepared for possible delays in setting up your account.
Eventually, you will receive notification from OPM that your application has been accepted and your account has been set up. You will receive a VCP account number to use in all relevant correspondence with OPM.
Once you have an account number, you can make your VCP contributions. They must be made by check, in a multiple of $25, with your VCP account number on all checks.
After you have received confirmation of your VCP contributions, you’ll be ready to convert that amount to a Roth IRA. To do so, complete form RI 38-124 and send it directly to OPM (the address is on the form). By doing this immediately, you’ll avoid accumulating any taxable interest within the VCP.
To make sure this process goes smoothly, you should work with a professional who is very familiar with both federal benefits and tax planning for retirement. Such a pro will be able to ascertain the amount you can contribute and help you handle all the financial transactions.
Your professional advisor probably will encourage you to start this process now, before the law changes. Give yourself ample time because the process can take a while.
If you’re eligible for a VCP contribution and a subsequent Roth IRA contribution, don’t miss out on what might be your last chance for this great tax-saving opportunity!
With So Much Commoditization In The CRM Landscape, How Do You Choose The Right CRM?
Kate Leggett for Forrester Research & Customer Think writes: I have been working on evaluating a range of vendors for the CRM Wave which will be published in March. What I am seeing is that core CRM capabilities are very, very commoditized. Just about every vendor can check the box on core SFA and marketing automation features. There’s a bit more difference if you look at customer service capabilities over social, digital and self service channels but all evaluated vendors handle core case management adequately. So what does this mean to the buyer who is looking for a CRM?
- Choose a solution that is right-sized for your business. Some CRM vendors target the complex, global enterprise. These solutions are typically heavyweight and replete with features that are often customized to meet specific business requirements. Other CRM vendors target small to midsize organizations with a breath, but not necessarily a depth ofcapabilties. For smaller organizations too many features are often an overkill for organizations with lightweight needs, so make sure you understand the target user of theCRMs under evaluation.
- Find a vertical edition. CRM vendors are increasingly offering vertical editions of their solution. Some vendors have lightweight industry-specific templates, while others offer very deep, out-of-the box processes flows and data models for your industry, which include standard connectors to back-end systems. You can find just about any type of verticalizedCRM, from the industry stalwarts for financial services, telecom, life sciences, utilities to solutions that target nonprofits, higher education, real estate brokers, construction, government services, and even restaurants, yoga studios and vetererinarians.
- Dig deep into user experiences. Our research finds that 58% of employees interface directly or indirectly with customers. Many organizations don’t have the luxury of deeply configuring or customizing CRM user experiences. Make sure the user experiences that come “out-of’the-box” from your CRM vendor are consumer-grade; that they work on the devices and platforms that your team use; and that they don’t impede your productivity in any way. Good usability goes a long way to help combat the “hate factor” plaguing many CRM deployments.
- Assess overall costs. Don’t only look at license costs. Understand the total cost of ownership including implementation, integration, configuration, customization costs, as well as ongoing maintenance costs. Make sure you do an apples-to-apples comparison between vendor proposals.
So, how do you go about choosing the right CRM? Don’t focus solely on an RFP process. They are time consuming, and vendors often heavily influence their outcome. Spend your time validating that the CRM can support your business processes in their entirety with little customization. Kick the wheels of a short list of CRMs by doing proof of concepts in a sandbox environment, and don’t forget to check vendor references.
7 tax rules that apply to noncash charitable donations
Bill Bischoff for MarketWatch.com writes: If you want to claim itemized deductions for noncash charitable donations on your 2014 Form 1040, gird your loins.
Thanks to unscrupulous taxpayers who once made a habit of claiming bogus and inflated charitable write-offs, the federal government has tightened the screws over the years, and justifiably so. Unfortunately, however, innocent folks — like you — get squeezed as a result. Here’s a quick summary of the seven rules that apply to the most-common types of noncash charitable donations.
Rule 1: For a donation of a noncash item worth less than $250, you need a receipt from the charity — like the familiar slip you get for noncash donations to Goodwill or the Salvation Army. You need to have the receipt in hand by the time you file your return. Keep it with your tax records for the year, but don’t file it with your return.
Rule 2: To deduct a donated noncash item worth $250 to $5,000, you need a contemporaneous written acknowledgement from the charity (more detailed than a receipt) that meets IRS guidelines.
Specifically, a qualified acknowledgement generally must include the following items of information: (1) a description (but not the value) of the noncash item, (2) whether the charity provided you with any goods or services in exchange for the donation (other than intangible religious benefits), and (3) a description and good-faith estimate of the value of any goods or services provided by the charity in exchange for your donation.
An acknowledgement meets the contemporaneous requirement if you obtain it on or before the earlier of: (1) the date when you file your Form 1040 for the year you made the donation or (2) the due date (including any extension) for filing that return. If you don’t have a qualified acknowledgement in hand by the applicable magic date, your charitable deduction goes bye-bye. The good news is that legitimate charities know about the rule, and you should have no problem collecting a suitable acknowledgment. Keep it with your tax records, but don’t file it with your return.
Rule 3: To deduct a donated noncash item worth $501 to $5,000, you need the aforementioned contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, its fair market value, how much it cost, and so forth. You’ll need this information to fill out IRS Form 8283 (see Rule 4 below). Keep the written evidence (which may simply be notes that you’ve prepared yourself) with your tax records, but don’t file it with your return.
Rule 4: If your total noncash donations for the year exceed $500, you must fill out Form 8283 (Noncash Charitable Contributions) and include it with your return.
Rule 5: For donated clothing and household items (furniture, furnishings, linens, electronics, appliances, and the like), the general rule says you can only claim deductions for stuff that is in “good condition or better.” However, you can deduct the fair market value of an item that’s not in good condition or better if you attach a written qualified appraisal that values the item at more than $500. For example, this rule might apply to a piece of antique furniture that’s fairly valuable despite being in only “fair” condition.
Rule 6: For a noncash item worth over $5,000, you generally need what is listed in Rules 2 and 3 plus a written qualified appraisal. Specific appraisal requirements apply to certain types of donated property and to donations valued above certain amounts. However, no appraisal is required for donations of publicly traded securities.
Rule 7: Special restrictions apply to donations of vehicles, planes, and boats. The most important thing to know is that your charitable write-off will usually be limited to the amount of sales proceeds when the charity sells the vehicle, plane or boat (as opposed to any estimated fair market value for said vehicle, plane, or boat). In other words, the general rule is the IRS doesn’t care what anybody thinks a vehicle, plane, or boat is worth. The Feds only care what it actually sells for.
For more information
What you see here is only a quick and dirty summary of the rules that apply to the most common types of noncash charitable donations. For additional information, see the Form 8283 instructions and IRS Publication 526 (Charitable Contributions). Both are available at the IRS website.
Taxes: Deductible-wrangling can be all math, no payoff
Denver Post writes: Is this item deductible? Should I take the standard deduction or itemize? Will taking out a home mortgage or donating a battered car to charity really improve my tax situation?
If you're new to the itemized deduction form, also known as Schedule A — maybe you bought a house last year, or sent a child to college, or had big medical expenses — you may have to tackle a lot of unfamiliar concepts as you face your 2014 taxes.
Experienced Schedule-A wranglers, however, will find little to get excited about.
"There's really nothing dramatically new this year" in terms of deductions, says David Block, an enrolled agent at TaxMaster Financial Services Corp. in New York.
Congress renewed some deductions that were slated to expire late in the year, including deductions for mortgage-insurance premiums and the ability to donate a rollover IRA to charity.
Unfortunately, the only way to find out whether itemizing will benefit you is to actually do the math. That's a disappointing truth for the taxpayer who loses a Saturday adding up doctor bills and charitable contribution receipts, only to discover that his or her Schedule A total is smaller than the standard deduction.
And you may find yourself in this situation. Standard-deduction amounts have been rising in recent years. For 2014, the standard deduction for single and married-filing-separately status is $6,200. Married-filing-jointly status carries a $12,400 standard deduction, and head of household gets you $9,100.
One of the biggest changes for 2014: For the first time, the federal government will recognize legal same-sex marriages for tax purposes. Couples that are "legally married in jurisdictions that recognize their marriages" will be treated as married "for all federal tax purposes where marriage is a factor," including filing status and taking the standard deduction, according to the IRS.
Deductions with thresholds
Along with the big threshold of standard-deduction-or-itemize, many categories of deductions come with a threshold.
For example: Medical expenses are deductible if they exceed 10 percent of your Adjusted Gross Income, or AGI, or 7.5 percent if you're 65 or older. So, if your AGI is $50,000, you can't deduct the first $5,000 in documented medical expenses. Having $4,950 in medical expenses does you no good whatsoever, no matter how scrupulously you document them.
And miscellaneous deductions for such categories as investment-related expenses and appraisal fees must surpass 2 percent of your AGI.
Where it gets sticky: This category includes "job-related expenses," loosely defined as the things you need to do your job that your company won't pay for: uniforms, union dues, classroom supplies that teachers buy out of their own pockets.
Trouble is, that section of the Internal Revenue Code "is as clear as mud," Block says. It reads: "all the ordinary and necessary expenses paid and incurred in carrying on a trade or business."
"It's extremely vague and amorphous," Block says.
Taxpayers can get into trouble by deducting items that the IRS believes their employers should have paid for (or, perhaps, did pay for). Home-office expenses for an employee, unreimbursed mileage and tools can raise a red audit flag.
"They will ask, 'Why did you pay for this instead of your employer?' " Block says. Documentation helps here.
Deductions vs. credits
Deductions differ from credits in one important way. Deductions reduce your adjusted gross income, thus lowering your tax liability. But credits reduce the amount of tax you owe, dollar for dollar.
That's a distinction that could be worth thousands of dollars. For example, tuition and school fees have long been deductible on Schedule A. But two tax credits that originated during the Obama administration — the American Opportunity Tax Credit, now extended through the end of 2017, and the Lifetime Learning Credit — are a better deal for most people.
The American Opportunity Tax Credit, which can be claimed on tuition and fees, also can be claimed on other related expenses — books, supplies and equipment — even if they're not paid directly to the school (books bought at an off-campus bookstore, for example). Room and board, insurance, medical expenses and transportation aren't included. You can claim up to $2,500; and there's an income cap of $80,000 single/$160,000 joint modified AGI. You can now claim the credit for four years, rather than the two under the previous Hope Credit. If the credit is more than the tax you owe, you may get a refund of up to 40 percent of the overage.
The Lifetime Learning Credit applies to courses that were for acquiring or improving job skills, not just degree programs. The modified AGI to qualify is a bit lower, and course materials aren't deductible.
You'll need to choose between deducting and taking the credit. But the most expensive item in a student's bookbag — the laptop — can be included in the total you claim for the AOTC, if it's required for course work.
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