Articles

Red Flags for Tax Auditors

No one wants to see an Internal Revenue Service (IRS) auditor show up at his or her door. The IRS can’t audit every American’s tax return, so it relies on guidelines to select the ones most deserving of its attention.

Here are six flags that may make your tax return prime for an IRS audit.¹

The Chance of an Audit Rises with Income

According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to nearly 4% for those with incomes between $500,000 and $1 million, and is over 8% for those making between $1 million and $5 million.²

Deviations from the Mean

The IRS has a scoring system it calls the Discriminant Information Function that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The IRS does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return is within the range of others with similar income.

When a Business is Really a Hobby

Taxpayers who repeatedly report business losses increase their audit risk. In order for the IRS not to consider your business as a hobby, it needs to have earned a profit in three of the last five years.

Non-Reporting of Income

The IRS receives income information from employers and financial institutions. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.

Discrepancies Between Exes

When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments may be deducted on one return, while alimony income goes unreported on the contra party’s return. Another common tripwire is when both former spouses claim the same dependents.

Claiming Rental Losses

Passive loss rules prevent deductions of losses on rental real estate, except in the event when an individual is actively participating in the property’s management (deduction is limited and phased out), or with real estate professionals who devote greater than 50% of their working hours to this activity. This is a deduction to which the IRS pays keen attention.

 

  1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  2. IRS, 2016
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

Choosing a Retirement Plan that Fits Your Business

One survey found that 79% of small business owners expect at least some of their retirement income to come from tax-advantaged retirement savings accounts.¹ If you have yet to develop a retirement plan for your business, or if you’re not sure the plan you’ve chosen is the right one, here are some things to consider.

How much can my business afford to contribute?

The cost of contributions may be managed by the plan type.

A simplified employee pension plan (SEP) is funded by employer contributions only. SEP contributions are made to separate IRAs for eligible employees.²

Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs blend employee and employer contributions.³ Employers either match employee contributions up to 100% of the first 3% of compensation, or contribute 2% of each eligible employee’s compensation.

A 401(k) is primarily funded by the employee; the employer can choose to make additional contributions, including matching contributions.⁴

A defined benefit plan is entirely funded by employer contributions.⁵

What plan accommodates high employee turnover?

The cost of covering short-tenured employees may be reduced by eligibility requirements and vesting.

With the SEP-IRA, only employees who are at least 21 years old and have been employed in three of the last five years must be covered.

The SIMPLE IRA must cover employees who have earned at least $5,000 in any prior two years and are reasonably expected to earn $5,000 in the current year.

The 401(k) and defined benefit plan must cover all employees who are at least 21 years of age and who worked at least 1,000 hours in a previous year.

Vesting is immediate on all contributions to the SEP-IRA, SIMPLE IRA and 401(k) employee deferrals, while a vesting schedule may apply to 401(k) employer contributions and defined benefits.

Do I want to maximize contributions for myself (and my spouse)?

The SEP-IRA and 401(k) offer higher contribution maximums than the SIMPLE IRA. For those business owners who are starting late, a defined benefit plan may offer even higher levels of allowable contributions.

My priority is to keep administration easy and inexpensive.

The SEP-IRA and SIMPLE IRA are straightforward to establish and maintain. The 401(k) can be more onerous, but complicated testing may be eliminated by using a Safe Harbor 401(k). Generally, the defined benefit plan is the most complicated and expensive to establish and maintain of all plan choices.

 

 

  1. Gallup, March 16, 2017
  2. Like a traditional IRA, withdrawals from a SEP-IRA are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions (RMDs).
  3. Like a traditional IRA, withdrawals from SIMPLE IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions (RMDs).
  4. Distributions from 401(k) plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, you must begin taking required minimum distributions no later than April 1 of the year after you reach age 70½.
  5. Distributions from defined benefit plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

What the New Tax Bill Means for You

The enactment of the Tax Cuts and Jobs Act represents “the most sweeping overhaul of the U.S. tax code in more than 30 years.”1

For millions of Americans and businesses it means an altered financial and investment landscape with new opportunities and challenges in the years ahead. Keep in mind, however, that the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.

Business Takes Center Stage

Businesses may begin benefiting from a number of changes, including

  • Reduction in the top tax bracket from 35 percent to 21 percent;
  • Full and immediate expensing of capital investments (phased out after five years);
  • Implementation of a territorial tax system that taxes only income earned within the U.S.;
  • Special one-time tax on repatriation of foreign earnings;
  • Repeal of corporate Alternative Minimum Tax; and
  • A 20 percent deduction of qualified business income from certain pass-through entities. Service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers.

Business owners should consider meeting with a tax professional to understand the impact of these changes on employee benefits, business investment, and corporate structure. Keep in mind the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.

Shifting Landscape

The changes in tax law may affect companies differently, which could shift where future investment opportunities may be found.

For instance, the lower tax rate may be more meaningful to higher-taxed industries, which can include certain retail, healthcare and telecom firms. Real estate investment trust companies also may benefit from the new pass-through deductions and exclusion from the new limit on interest deductibility of 30 percent of net income.

Conversely, with the changes made to individual taxation (see below), there may be a negative impact on home builders and realtors, while highly leveraged businesses potentially may burdened by the new cap on interest deductibility.

Overall, the tax cut is projected to increase corporate profits, with many Wall Street analysts lifting their 2018 earnings forecasts anywhere from seven to 10 percent.2 This may not only justify current stock valuations, but may influence prices going forward.

Past performance does not guarantee future results. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Changes for Individuals

The Tax Policy Center projects that taxes will fall for all income groups and result in an increase of 2.2 percent in after-tax income. The Tax Policy Center also cautions, however, that some individuals and households may see a higher tax bill.3

Highlighted below are some of the major changes:

  • Reduction in most marginal income tax brackets;
  • Near doubling of the standard deduction;
  • Elimination of personal exemption;
  • A $10,000 cap on the state and local tax deduction;
  • An increase in the child tax credit and the expansion of eligible families;
  • Mortgage interest deductibility limited to mortgages up to $750,000 (reduced from $1 million);
  • Medical expenses deductibility will kick in at 7.5 percent of income, down from 10 percent;
  • 529 plans may now be used to fund elementary and secondary education; 4
  • Alternative Minimum Tax is curtailed;
  • 401(k) borrowers will have more time to repay plan loans when leaving an employer; 5,6and
  • Elimination of the ability to “undo” a Roth conversion. 7

These tax changes may have wide ranging impact on the financial choices you make. For example, you may want to consider the best use for your additional after-tax income. Keep in mind the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties.

Estate Taxes

The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. As such, individuals benefiting from this change may want to re-evaluate the strategies they have in place to address the tax and liquidity issues that may no longer exist.

Tax Cuts and Jobs Act

The nature and shape of the nation’s tax system inevitably influences the everyday decisions made by individuals and businesses alike. After the implementation of one of the most comprehensive reforms in over a generation, it is essential to review certain financial and investment strategies.

 

 

  1. The Wall Street Journal, December 20, 2017
  2. Reuters.com, December 19, 2017
  3. Tax Policy Center of the Urban Institute & Brookings Institution, 2017
  4. The tax implications of 529 College Savings Plans can vary significantly from state to state, and some plans may provide advantages and benefits exclusively for their residents. Please consult legal or tax professionals for specific information regarding your individual situation. Withdrawals from tax-advantaged education savings programs that are not used for education are subject to ordinary income taxes and may be subject to penalties.
  5. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
  6. A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% tax penalty if the account owner is under 59½. Under the Tax Cuts and Jobs Act, if the account owner switches jobs or gets laid off, the 401(k) loan is eligible for a rollover within 60 days, essentially providing the person more time to repay the loan or manage the tax consequences of non-repayment.
  7. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. The Tax Cuts and Jobs Act repeals the rules permitting the recharacterization of Roth conversions, effective starting in 2018
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

Thinking of Retiring Abroad?

According to a 2017 report from International Living Magazine, Mexico tops the list of places to retire abroad. Panama ranks second, followed by Ecuador, Costa Rica, and Colombia.¹

Many retirees consider moving out of the country in search of greater affordability, adventure, and a change in lifestyle. However exciting retiring abroad may sound, it deserves considerable planning.

Things to consider

  1. Where do you want to retire?

    There are many starting points for this search, but primary considerations may include cost of living, stability of the country, access to healthcare, the type of experience you desire, and the climate.

    Engage your spouse in the conversation since both of you need to be happy and excited in order for a move to work long term.

  2. Visit prospective candidates

    Test drive the country you are considering. No amount of research from your living room can replace being on the ground experiencing the people and actual living conditions.

  3. Check visa and residency requirements

    Each country has different requirements for permanent residency. Some have programs designed to welcome retirees. In any case, you’ll need to know what is required of you before putting down roots.

  4. Make an appointment with a tax advisor

    While visiting prospective countries, spend time with a local tax advisor to understand the country’s taxation of U.S. retirees. You don’t want any surprises.²

  5. Nirvana doesn’t exist

    As you go through this process, appreciate that each country will have its pluses and minuses. You will need to balance them based on your personal priorities. Also, try to remember that most countries will not offer a U.S.-style living.

  6. Consider health insurance

    Since Medicare generally does not cover health care expenses incurred overseas, as is the case for private U.S.-based health insurance, you should research health insurance that will cover you in the country of your choice.

  7. Consider renting first

    Moving into an unknown area makes intelligent real estate decisions difficult. Consider renting to learn the area, understand the neighborhood, and learn whether it offers the range of activities you want.

  8. Beware of scams

    A retiree working on a dream is fertile territory for people looking to separate you from your money. Work with only reputable businesses that you’ve identified from research and referrals.

  1. International Living, January 1, 2017
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.