Before you start tapping into your retirement savings, you may want to read this first:
If you are under age 59½ and plan to withdraw money from a qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax on any previously un-taxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.
The following exceptions may help you avoid the penalty:
- Withdrawals from any retirement plan to pay medical expenses—Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 10% of your adjusted gross income. This is true even if you do not
- IRA withdrawals annuitized over your lifetime—To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59½.
- Employer retirement plan withdrawals—To qualify, you must be separated from service and be age 55 or older in that year (the lower limit is age 50 for qualified public-service employees such as police officers and firefighters) or elect to receive the money in substantially equal periodic payments after your separation from service.
- Withdrawals from any retirement plan as a result of a disability—You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
- IRA withdrawals by unemployed individuals to pay medical insurance premiums—The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 weeks during the year.
- IRA withdrawals to pay higher education expenses—Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
- IRA withdrawals to buy, build, or rebuild a first home—Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.
You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed above may need to be met before qualifying for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call Dagley & Co. for assistance.
Business owners and employees often use the standard mileage rate when taking a deduction for the business use of their vehicle. The standard mileage rate is determined annually by the IRS by using data based on the prior year’s costs. For 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 53.5 cents per mile for business miles driven, down from 54 cents for 2016. Operating expenses include:
- Vehicle registration fees
- Straight line depreciation (or lease payments)
What business owners using the standard mileage rate frequently overlook is that parking and tolls, as well as state and local property taxes paid for the vehicle and attributable to business use, may be deducted in addition to the standard mileage rate.
Regardless of whether the standard mileage rate or actual expense method is used, a self-employed taxpayer may also deduct the business use portion of interest paid on an auto loan on their Schedule C. However, employees may not deduct interest paid on a consumer car loan.
If you have questions related to taking a tax deduction for the business use of your vehicle, please give Dagley & Co. a call.
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Starting your own business or service can be an exciting, yet confusing time. To make it easier, we recommend working with us, as well as a financial planning team, to get off to a good start. We also recommend asking these ten questions to a professional:
#1: What should be in a basic business plan?
A business plan should outline each detail of your company including who will run it, how much you’ll charge, and what you expect to earn. Putting time into creating a thorough business plan is important. Work with your team to ensure your plan is accurate and represents your business well.
#2: Who will you need to pay taxes to?
Your local jurisdiction and state have specific taxation requirements. You’ll likely have to pay taxes on sales, but also costs associated with payroll. Ensure your accountant not only talks to you about who you need to pay, but payment deadlines as well.
#3: What is a projected cash flow for the business?
How much cash does your company need to keep on hand? The key here is to be able to anticipate how much it will cost you to operate your business. Most companies should not expect to have positive cash flow for at least a year, often longer. Your professionals can help you decide what your cash flow projections are.
#4: How much of an investment do you need to put into your company right now?
Your financial team can help you project the cost of setting up your new business. This will include costs related to establishing the physical business and paying for supplies. Your initial investment generally will be the highest amount put into the company by the founder, but it changes significantly from one company to the next.
#5: What is your break-even analysis?
This may be an important question to ask early on. How much do you need to make to break even? You’ll want to talk to your financial team about the timeline for this and what can be done to help ensure you break even as soon as possible.
#6: What liability insurance do you need?
While most tax professionals don’t offer recommendations here, having adequate policies to cover potential loss is important. Work with your team to ensure you have comprehensive protection to minimize risks against your company’s financial health.
#7: What will interest cost you?
Interest on loans is not something to overlook. You’ll want to ensure you have an accurate representation of how much you are paying in interest so you can make adjustments to pay off any borrowed debt sooner, make better decisions about borrowing, or factor in the cost.
#8: How will you manage payroll?
This is a very big component of starting up since it can be troublesome for most startups to actually know how to pay employees and meet all federal and state requirements. Working with a payroll provider is often the easiest option (and most financially secure since paying an employee to do this work tends to be more expensive).
#9: How can you reduce your taxes?
Tax professionals will work with you to determine if there are any routes to reducing taxation on your business including local incentives that may be available. You’ll also want to talk about projects taxes, investments that could reduce taxes, and having all possible deductions in place.
#10: What’s the right profit margin?
Working with a financial team often comes down to this question. How much should you charge to make the best profit possible while still ensuring your company can grow? It’s not a simple question, but having the right team by your side ensures it will be clarified as much as possible.
Make an appointment with Dagley & Co. to get your business off to the right start. We are here for you for any tax, payroll or accounting questions or issues you may have for your new business.
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Employer Offered You Health Insurance but You Got Yours through the Marketplace. You May Be in for an Unpleasant Surprise!
The premium tax credit (PTC) is one of the key provisions of Obamacare. It serves as a subsidy for the cost of health insurance for lower-income individuals and families. Although the credit is determined at the end of the year based upon income, taxpayers are allowed to estimate their income and receive the credit in advance, thereby reducing their premium costs.
Another key provision of Obamacare requires large employers to offer full-time employees affordable healthcare insurance. The term “affordable” means that the employee’s insurance costs less than 9.66% (2016 percentage) of the employee’s household income. In addition, because the government wants to limit its outlay for the PTC, the law denies PTC to employees who are offered affordable healthcare insurance by their employer.
This is where a potential problem arises! Quite often, the cost of insurance subsidized by the advance PTC obtained through the Marketplace is substantially less costly than the “affordable” insurance offered by the employer; as a result, the employee will instead obtain the less expensive insurance through the Marketplace, while not realizing that they are not entitled to the PTC because the employer offered them “affordable” insurance.
Prior to 2015, the government had no way of determining who was offered “affordable” insurance by their employer and therefore was unable to enforce the “no PTC rule.” However, beginning in 2015, employers with 100 or more equivalent full-time employees were required to file the new Form 1095-C, which shows month-by-month when an employee was offered “affordable” healthcare insurance. Generally, the employer is required to furnish a copy of Form 1095-C (or a substitute form) to the employee. Beginning in 2016, even employers with 50 or more equivalent full-time employees are required to file 1095-Cs.
The IRS will begin matching the information on the 1095-Cs that the employers have filed with taxpayers who claimed the PTC for months during which they were also offered “affordable” insurance by their employer. Those taxpayers will be receiving notices from the IRS requiring them to repay the premium tax credit for the months when they were offered affordable care.
If you are concerned that you claimed the PTC and might be subject to repayment, you can look at your copy of Form 1095-C from your employer. Check line 14 and see if there are entries in any of the months. The entries will be codes, which are explained on the reverse of the form.
If you need assistance or additional information related to Form 1095-C and its impact on the PTC, please give Dagley & Co. a call.
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In the wake of the “Affordable Care Act,” one of the largest and most substantially rising expenses are health insurance premiums. Although the cost of health insurance is allowed as part of an individual’s medical deductions when itemizing deductions, only the amount of total medical expenses that exceed 10% of the taxpayer’s adjusted gross income (AGI) is deductible. The 10% limitation is reduced to 7.5% through 2016 where a taxpayer or spouse (if any) is age 65 or over as of the end of the year. Prior to the increased limitation imposed by the “Affordable Care Act,” the limitation was 7.5% for everyone.
The purpose of this article is twofold: first, to remind you what insurance can be included as a medical deduction, and second, to inform you of an alternate means of deducting health insurance for certain self-employed individuals—a means that avoids the AGI limitation and allows for deduction without itemizing.
Let’s start by looking at what is treated as deductible health insurance. It includes the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans: Health Care and Hospitalization Insurance, Long-Term Care Insurance (but limited based upon age), Medicare-B, Medicare-C (aka Medicare Advantage Plans), Medicare-D, Dental Insurance, Vision Insurance, and Premiums Paid through a Government Marketplace net of the Premium Tax Credit.
However, premiums paid on your or your family’s behalf by your employer aren’t deductible because their cost is not included in your wage income. Or, if you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums aren’t deductible either because they are paid with pre-tax dollars.
If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the premiums without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment. If you are a partner who performs services in the capacity of a partner and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments that are deductible by the partnership and are includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article.
No above-the-line deduction is permitted when the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. This rule is applied separately to plans that provide coverage for long-term care services. Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums, as long as he isn’t eligible for employer-subsidized long-term care insurance. In addition, to be treated as subsidized, 50% or more of the premium must be paid by the employer.
This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.
If you have any questions related to deducting health insurance premiums, either as an itemized deduction or an above-the-line deduction for self-employed individuals, please give Dagley & Co. a call.
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Figuring out a health plan for your employees can be tough, and it’s best to examine all of your options instead of taking it lightly. The IRS earlier this year cautioned employers of the consequences of reimbursing employees for the cost of premiums the employees pay to purchase qualified health plans, either through a health insurance marketplace or outside the marketplace, rather than establishing a health insurance plan for its own employees.
Employers may think they can use this strategy to avoid the employer insurance mandate required by the Affordable Care Act that applies to mid- and large-size firms, as well as shift some of the expense of providing employee health care away from the employer. Not so, says the IRS, which refers to this method of avoiding the employer insurance mandate as a “dumping” strategy.
This type of arrangement, termed an “employer payment plan,” is considered a group health plan by the IRS, and as such, is subject to the reform provisions of the Affordable Care Act (ACA) and the penalty that applies for failing to meet those provisions. These reforms include a prohibition on the annual limits for essential health benefits and a requirement to provide certain no-cost-sharing preventive care. Employer payment plans can’t be integrated with individual policies to achieve the market reform requirements, and therefore they fail to satisfy the market reform requirements. As a result, the employer may be subject to a $100/day per employee excise tax penalty amounting to $36,500 per year per employee for failure to meet the ACA provisions.
However, an employer payment plan does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan.
The employer group insurance mandate takes effect in 2015 for larger employers (those with 100 or more full-time employees) and in 2016 for employers with 50 to 99 full-time employees that meet certain conditions. Employers with fewer than 50 full-time employees are not required to provide health insurance coverage for their employees.
One last item: because an employer payment plan is considered a group health plan, the employees participating in such an arrangement who purchase their health coverage through a marketplace cannot claim the premium assistance credit because employees who have an employer plan are not eligible for the credit.
If you have further questions related to this issue, please get in touch with us at Dagley & Co.
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