Month: September 2019

October 1 Deadline to Set up SIMPLE IRA Plans

Of all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage. The catch is that you’ll need to set it up by October 1st. Here’s what you need to know.

What is a SIMPLE IRA Plan?

SIMPLE IRA Plans are intended to encourage small business employers to offer retirement coverage to their employees. Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings. In addition, if living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments.

How does a SIMPLE IRA Plan Work?

A SIMPLE IRA plan is easier to set up and operate than most other plans in that contributions go into an IRA you set up. Requirements for reporting to the IRS and other agencies are minimal as well. Your plan’s custodian, typically an investment institution, has the reporting duties and the process for figuring the deductible contribution is a bit easier than with other plans.

SIMPLE IRA plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $13,000 in 2019, after which it can rise further with the cost of living. Owner-employees age 50 or older can make an additional $3,000 deductible “catch-up” contribution (for a total of $16,000) as an employee in 2019.

2. Employer “matching” contribution
The employer match equals a maximum of three percent of employee’s earnings.

An owner-employee age 50 or over in 2019 with self-employment earnings of $40,000 could contribute and deduct $13,000 as employee plus an additional $3,000 employee catch up contribution, plus a $1,200 (three percent of $40,000) employer match, for a total of $17,200.

Are there any Downsides to SIMPLE IRA Plans?

Because investments are through an IRA you must work through a financial institution acting, which acts as the trustee or custodian. As such, you are not in direct control and will generally have fewer investment options than if you were your own trustee, as is the case with a 401(k).

You also cannot set up the SIMPLE IRA plan after the calendar year ends and still be able to take advantage of the tax benefits on that year’s tax return, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE IRA plan effective for a year, it must be set up by October 1 of that year. A later date is allowed only when the business is started after October 1 and the SIMPLE IRA plan must be set up as soon as it is administratively feasible.

Furthermore, once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE IRA retirement plan.

If you are under 50 with $50,000 of self-employment earnings in 2019, you could contribute $13,000 as employee to your SIMPLE IRA plan plus an additional three percent of $50,000 as an employer contribution, for a total of $14,500. In contrast, a Solo 401(k) plan would allow a $31,500 contribution.

With $100,000 of earnings, the total for a SIMPLE IRA Plan would be $16,000 and $44,000 for a 401(k).

If the SIMPLE IRA plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE IRA plan and the 401(k) combined (in 2019) can’t be more than $19,000 or $25,000 if catch-up contributions are made to the 401(k) by someone age 50 or over. So, someone under age 50 who puts $9,500 in her 401(k) can’t put more than $9,500 in her SIMPLE IRA plan for 2019. The same limit applies if you have a SIMPLE IRA plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started Setting up a SIMPLE IRA Plan

You can set up a SIMPLE IRA plan account on your own; however, most people turn to financial institutions. SIMPLE IRA Plans are offered by the same financial institutions that offer any other IRAs and 401(k) plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement, you will choose an “effective date,” which is the start date for payments out of salary or business earnings. Again, that date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA plan. You need such an agreement even if you pay yourself business profits rather than salary. Printed guidance on operating the SIMPLE IRA plan may also be provided. You will also be establishing a SIMPLE IRA plan account for yourself as participant.

Ready to Explore Retirement Plan Options for your Small Business?

SIMPLE IRA Plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business and work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

If you are a business owner interested in discussing retirement plan options for your small business, don’t hesitate to contact the office today.

• By Leon Clinton
• September 14, 2019

It’s Not Too Late Check Paycheck Withholding

Did you know that the average tax refund was $2,729 for tax year 2018? While some taxpayers may find it advantageous to get a large tax refund, others may wish to have more of their money show up in their paychecks throughout the year. No matter which preference taxpayers choose, they should remember that they can make adjustments throughout the year that will influence the size of their refund when they file their tax return next spring.

Tax Reform Changes

The Tax Cuts and Jobs Act of 2017 made significant changes that affected almost every taxpayer. Most of these changes took effect in 2018 and were noticed on tax returns filed earlier this year. Many taxpayers ended up receiving refunds on their 2018 tax return that were smaller or larger than expected. Others found they owed additional tax when they filed. To avoid tax surprises like this, taxpayers may need to increase or reduce the amount of tax they have taken out of their pay and should check their paycheck withholding as soon as possible — even if they did one last year.

Typical Taxpayer Filing Scenarios

Simple returns. For taxpayers whose tax situation is less complex, the easiest way to check whether their withholding is correct is to use the IRS Withholding Calculator on IRS.gov, which is designed to help employees make changes based on their individual financial situation.

Complex returns. Taxpayers with more complex tax situations such as married couples who both work, higher-income earners, and those who take certain tax credits or itemize might need to revise their Form W-4, Employee’s Withholding Allowance Certificate, completely to ensure they have the right amount of withholding taken out of their pay. If you’ve been putting this off, it’s not too late to adjust your tax withholding. Please call the office and speak with a tax and accounting professional who will evaluate your particular tax situation and help you determine how much tax you should withhold from your paycheck.

Small business owners or sole proprietors. Taxpayers who owe self-employment tax, or individual taxpayers who need to pay the alternative minimum tax, or owe tax on unearned income from dependents, as well as people who have capital gains and dividends should contact the office and speak to a tax and accounting professional as well.

Life changes. Taxpayers should also check their withholding when there are life changes such as marriage or divorce, birth or adoption of a child, retirement, new job or loss of a job, purchase of home, or Chapter 11 bankruptcy.

Certain life changes might affect a taxpayer’s itemized deductions or tax credits. As such, taxpayers should check their withholding if they experience changes to the following:

• Medical expenses
• Taxes
• Interest expense
• Gifts to charity
• Dependent care expenses
• Education credit
• Child tax credit
• Earned income tax credit

Income not subject to withholding. Some taxable income is not subject to withholding. Taxpayers with taxable income not subject to withholding and who also have income from a job may want to adjust the amount of tax their employer withholds from their paycheck. Income that is generally not subject to withholding includes interest and dividends, capital gains, self-employment and gig economy income, and IRA distributions, including certain Roth IRAs.

Help is just a phone call away

If you have any questions about tax withholding, don’t hesitate to call and speak to an accounting professional who can help.

• By Leon Clinton
• September 10, 2019

Homeowner Records: What to Keep and How Long

Keeping full and accurate homeowner records is vital for determining not only your home deductions but also the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means.

You should also keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Here’s some examples:

• Putting an addition on your home
• Replacing an entire roof
• Paving your driveway
• Installing central air conditioning
• Rewiring your home
• Assessments for local improvements
• Amounts spent to restore damaged property

In addition, you should keep track of any decreases to the basis. Here’s some examples:

• Insurance or other reimbursement for casualty losses
• Deductible casualty loss not covered by insurance
• Payment received for easement or right-of-way granted
• Value of subsidy for energy conservation measure excluded from income
• Depreciation deduction if home is used for business or rental purposes

How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. And you must keep these records for as long as they are important for the federal tax law.

Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. (A period of limitations is the limited period of time after which no legal action can be brought.)

For assessment of tax, this is generally three years from the date you filed the return. For filing a claim for credit or refund, this is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

You may need to keep records relating to the basis of property (discussed earlier) longer than the period of limitations.

Technically, basis is needed to determine gain on home sale (loss is not deductible). That need has diminished for most homeowners now that gain up to $250,000 ($500,000 in some sales by married couples) is tax-exempt.

Basis is still important, however, in figuring casualty loss, on conversion of the home to business use, or where there’s a gift of the home (in this case, important to the donee).

Keep those records as long as they are important in figuring the basis of the property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.

If you have any questions as to what items are to be considered in determining basis, please call.

• By Leon Clinton
• September 7, 2019