Super-Funding College Saving Plans

We all know that college is expensive. It can cost upwards of $41,000 a year for private four-year college and $18,500 for a state college. Because of the high cost of college many wealthy clients are taking advantage of 529 college saving plans and the special rule that allows contributors to front-load five years of savings in one year.

The 529 college saving plan are a great way to save for college. The plan allows a parent, grandparent, etc. to establish a college fund for each child. This fund can be used to pay for college, but does not have a timetable on which the money has to be spent or withdrawn. It is a great way to save for college and can be included in estate planning.

There is currently a special rule that governs how contributions can be made. This rule allows contributors to front-load five years of savings in one year. So for clients, that means they can set aside 14,000 at the end of one year (in December) and then in January they can contribute another $70,000 for each would-be scholar. This is a grand total of $84,000 per child.

This strategy allows wealthy clients to take substantial amounts of money out of there estate without facing penalties from the IRS. If the money or part of the money is not used then the account can be transferred to another child, or the funds can be withdrawn. If the funds are withdrawn then there is a 10% penalty and taxes on the earnings.

There is one drawback. If the account is owned by the college student or their parents this counts as an asset and reduces the need-based aid by a maximum of 5.64% of the asset’s value. If the plan is in the name of the grandparents it will not affect the federal financial aid application, but the withdrawals made on the account do count against the aid needs and have a large consequence.

While this plan is good, very few can afford to do contribute that much at a time, but contributions can be made in December and then again in the spring with tax refunds. It just matters that you do something then wait until it is too late.

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A Guide to Rollovers as Business Startups

Since the economic downturn, more than 10,000 new businesses were started with rollovers as business startups (ROBS). They have been able to use their retirement funds without triggering early distribution penalties, to establish their new business venture. How is this possible? Are there any cautions to look out for? The following outline the basic process of ROBS, and warns about some of the pitfalls associated with using the process to establish a new business.

This complicated process is under extreme scrutiny from the IRS. The following are the five basic steps to ROBS transactions:

  • The first step is for the entrepreneur to establish a new corporation, usually a C corporation.
  • Once the new corporations is established, the corporation adopts a prototype 401(k) that permits the plan participants to direct their investments into a selection of investments options, including employer stock. This plan usually allow the employee to roll over from an existing account or execute a direct transfer from an existing retirement account in to the plan and use it to buy the employer’s capital stock. There are no employees at this time, and the corporation does not have any assets, business operations, or even capital received to create shareholder equity.
  • When the entrepreneur becomes the corporation’s only employee, they elect to participate in the newly formed 401(k). They then direct the rollover or transfer of funds from the original retirement account to the new 401(K) account.
  • Once the funds have been transfer or rolled over, the entrepreneur direct to purchase newly issued corporate stock. This stock usually represents the amount of assets the entrepreneur wishes to invest in the new business.
  • The final step is to direct the corporation uses the funds from the sale of the stock to purchase a franchise, existing business, or begin a new business venture.

There are several pitfalls to watch out for when attempting this transaction. The IRS take each ROBS on a case-by-case basis to ensure that the arrangements are not being abused.

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Budget Talks May Alter the Retirement Landscape

Many people contribute to some form of retirement saving account. Whether it is an IRA or defined contribution plan like a 401(k), Americans have contributed $8.82 trillion to some form of retirement account. With so much money stashed away, and not taxed, it not surprising that the government wants to get their cut, but the proposals will reshape the fundamentals of retirement finances and taxes in the US in general.

President Obama along with congress will begin debating the proposals October 1, and only time will tell how this will effect retirement saving in the future. Below are just three of the six proposals that could have the most impact on the retirement landscape. They are:

  • Inherited IRAs: With the current system, people, other than spouses, that inherit IRAs can spread out the withdrawals over their lifetime to minimize the impact on taxes paid. The proposal is for other people who are not spouses that inherit to empty the account by end of the fifth year after the original owner’s death. This means that more money will be required to be withdrawn from the account each year and the taxes paid will be considerably higher. There will be certain exemptions for beneficiaries, including those with disabilities.
  • Savings Cap: If this proposal passes, there will be a limit to the amount that can be contribute to retirement accounts. To do this all account would be considered as a whole, and when the total survivors annuity produces a joint payout of $205,000 a year then the person will no longer be able to contribute to their retirement accounts. While this probably will not affect most people now, as interest rates rise, annuities paying $205,000 a year would cost less and the cap would be lower.
  • Mandatory IRAs: This edict would apply to any business that has ten or more employees and have been in business for two or more years. It would require employers to develop and establish automatic enrollment in IRA for their workers. The contributions would be made through payroll deductions and the employees would be allowed to choose how much is contributed with 3% being the default amount. Employers would be granted tax credits to help design and establish plans, but this is just another thing business owners will have to worry about.
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Post DOMA Wealth Management Tips

There have been many changes now that the Supreme Court overturned the Defense of Marriage Act (DOMA). Some of the changes include how same-sex couples are able to manage their wealth in regards to their partner. Couples will need to think about changing or review many aspects to their financial wealth. The following are point to consider reviewing to get a fresh look at how the law changed same-sex couples’ financial plans.

  • Revisit your Financial Plan. Having your marriage recognized by the government is a big deal. There are many points to you financial plan that will need to be reviewed.
  • Update Estate Plans. The biggest benefit of having your marriage recognized by the federal government is there is no penalty of estate tax. Since the estate will be given over to a spouse, there is not estate tax to take 40% of the estate from them. It also give spouses a change to establish trusts, wills, general power of attorney and healthcare powers.
  • Beneficiary Designations for Retirement Accounts. Now that the same rules apply, same-sex couples can revisit beneficiary designations. The survivorship rules apply to IRAs and other qualified retirement plans.
  • Investment Portfolios. Are there any adjustments to investment that need to be made so you are truly investing together? Think about updating account titles or reorganizing the portfolio in a manner that would be more beneficial to both partners.
  • Tax Planning. The ability to file jointly is now a massive win. While you may choose not to change anything, it is worth a look. It may be in your best interest to file jointly and save you hundreds in taxes not paid. You may even want to look at amending the past three year’s taxes to see if filing jointly would be a benefit.
  • Health Insurance Benefits. An overhaul to the family health insurance plan is in order. If you are not already provided with spousal health insurance, it may be cheap to switch.
  • Taxable Estate and Social Security. If your spouse had died in the last three year, amend the estate tax return and have the taxes refunded. There is three years to be able to do this, so act soon. Also married couples are eligible for 50% of spousal Social Security benefits of the spouse’s full retirement age. If it is bigger switch to spousal benefits.
  • Consider the Whole Family. Since estate planning extends to children for most mixed gender couple, it should also extend to children for same-sex couples. Make sure the estate plan also defines the word spouse.
  • PreNuptials. It is important to protect you assets before entering into a marriage. Since the laws apply to everyone, any laws dissolving a marriage also applies.
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Timing Benefits: When to Tap into Social Security

Everyone knows that there is a magic age when a person can begin a new adventure, retirement is just such time. However, when is the right time to tap into social security? Retirement can be drawn as early as 62, but the Social Security Administration has also created an incentive program for workers that choose to wait until age 70 to retire.

Social security is an annuity that is paid out based on the age that you retire. If a person retires at age 62 then their payment will be 25% less than if they retired at age 66. If a person chooses to retire at age 70 they will earn an additional 8% per year which translates into almost $17,000 annually. The standard advice would be to wait to retire as long as possible. With other investment payouts, it is possible to delay social security payout until the time it is needed to supplement funds. By waiting until age 70 and taking advantage of the higher benefits, a person is provided with a kind of longevity insurance thanks to the government.

Now what about couples, well you are not forgotten. Couples can contemplate several options. The first being the “claim and switch” This is designed for a family that claims two incomes where both individuals are 66 years old. The spouse with the lower earnings (the wife) can retire and file for their benefits as long as the other spouse (the husband) has reached his full retirement age. The husband can then file for benefits based on the lower-earning spouse’s benefits and forgo his own benefits until age 70, when he can then retire and collect the maximum benefits. The wife can either switch to the benefit based on that of the husband or choose to keep her own; whichever is more advantageous to the couple.

Another choice would be for the couple to use the file and suspend. This works well for a couple where only one income is claimed. For example the husband works and the wife stays at home. The husband, at his full retirement age, can file and then suspend payments until the age of 70, and then the wife can file for spousal benefits. She could do this to delay taking out her own social security until the age of 70, where she could then switch if the benefit is higher.

There are many options in the vast and confusing world of social security benefits, but it is important to work with someone who can help navigate and analyze the individual situations.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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Looking Out for Property Tax

With any state, the majority of revenue comes from both personal and real property tax. Combined with the erosion of local tax base, many home and business owners may face higher assessed values then in past years. Some tax assessors may be too aggressive with their assessments so they can maintain the tax revenue, but it is important to keep on top of your assessed property value to make sure that you are not paying too much in property tax.

The object of property assessment is to provide fair and equitable value for each property. Most properties are assessed using fair market value. Fair market value is “the price in a competitive market a purchaser, willing but not obligated to buy, would pay an owner, willing but not obligated to sell, taking into consideration all the legal uses to which the property can be adapted and might reasonably be applied.” The property assessment is either full market value or a percentage of the market value. States then take the assessed amount and multiply it by the millage to get the amount owed in real estate taxes. This process can take place yearly, or over a mandated time, usually 3-6 years.

Determining the assessment of residential home tends to be more straightforward then the process of industrial or commercials properties. Houses are compared to other homes in comparable neighborhoods that have recently sold to determine the assessed value. Commercial and industrial properties have more variables to consider before an appropriate assessment is generated. Since there are so many variables, the chance of an assessment error is there, giving the business owner a chance for an appeal of the assessment.

Timely tracking of personal property assessment is essential to guarantee deadlines are not missed. Many only offer a brief deadline for appeal, usually 15-45 days from the assessment date. Once the business owner determines if there is a tax assessment that warrants an appeal, the appeal is filed. There are three levels to the appeals depending on the severity of the assessment. Each needs proper detailed documentation. If you think that there is a problem with your assessment then it would be beneficial to consult with a CPA firm for assistance.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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The Saver’s Credit for Retirement

For many low- and moderate-income workers it can be hard to save for what seems like an elusive retirement. Many feel like they might work long after retirement age because saving just seems impossible. The IRS has a special tax credit that can help offset the cost of setting up a retirement saving plan.

This tax credit, known as the retirement saving contributions credit or the saver’s credit, helps offset part of the first $2,000 dollars that workers voluntarily contribute to an IRA or 401(k) plan. This credit is only for eligible workers that set up a new retirement account or add to an existing account before April 15, 2013. To find out what your filing status is for this tax credit see Form 8880 for instructions.

So what qualifies you for this tax credit and who can claim this credit? Several groups of workers that can qualify for the credit, including:

  • Married couples that file jointly with incomes up to $57,500 in 2012 or $59,000 in 2013
  • Heads of households with incomes up to $43,125 in 2012 or $44,250 in 2013
  • Married individuals filing separately and singles with incomes up to $28,750 in 2012 or $29,500 in 2013

Other rules that apply to the credit are:

  • You must be an eligible taxpayer 18 years old and older.
  • You cannot be claimed as a dependent on anyone else’s tax return.
  • You cannot not be a student, which is someone enrolled full-time during any part of 5 calendar months during the year.

Like any other tax credit this can increase a taxpayer’s refund or reduce the amount of taxes owed. Even though the maximum tax credit is $1000 for individuals and $2000 for married couples, the IRS wants to caution taxpayers. This tax credit is usually much lower because of other deductions and credit and for some taxpayers it may even be nothing. This should not discourage workers from trying to get the credit. Even a little can help a lot.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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Tips for picking a CPA

Mike Crowley | Crowley Halloran CPA

Michael W. Crowley, CPA - Principal

One of the most critical decisions anyone can make is picking a good-quality, reliable accountant. There are several things to keep in mind when a business owner chooses an accounting firm. Many accountants are excellent, but are they going to meet your business needs?

There are a few basic tips to keep in mind, as a business owner, when choosing a CPA firm:

Certification: The CPA should meet all the states requirements and passed the required exam. It is important that an accountant has met all the requirements and even continues their education to stay certified. It is the best way to know that they are current in all the new procedures and tax laws.

Experience: Make sure the accountant or CPA firm is experienced in the business field that your business specializes in. It is important that they know what the unique business needs are and how to handle any problems that may arise. They should have worked with that business industry before or something very similar.

Size: While the larger, more popular CPA firms may be ok, do not over look the smaller firms. The larger firms can probably take care of all the business needs and more, but the smaller firms will offer a more personalized approach. Many of the larger firms will contract out the smaller firms to work on small accounts anyway, so why not start with the local, smaller firm and go from there. Just make sure they meet the requirements that your business needs.

Get a Referral: One of the most important factors to finding a good, reliable CPA is to get a referral. Ask your friends, family, co-workers and other business owners to see who they would recommend. The best reference usually comes from word of mouth.

Once all the references have been compiled, do some research on the CPA firm and then ask to meet them and conduct an interview. Ask questions and find the right fit for you. Remember your CPA is to be one of your most trusted advisors, so make sure they are the right fit for you and your business.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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