February 2015 DiSabatino CPA Newsletter

news header

In this issue:

There is still time for Retirement Funding
Maximizing Your Refund Power
So You Think You are Hip
The Benefits of a Sole Proprietor

The Month of February:

Receive all 1099s and W-2s
Set up Tax Appointment
Rebalance Investment Portfolios
February 14th: Valentines Day
February 16th: Presidents Day

As your mailbox fills up with information required to organize your 2014 tax records, there is still time to reduce 2014's tax obligation with a contribution to an IRA. Included this month are articles that outline tax benefits of operating your businesses as a sole proprietor, some great ideas for using a tax refund, and a fun general interest article that tests your knowledge of new teen terms.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

There is still time for Retirement Funding

Remember you have until you file your tax return to make a contribution to a Traditional IRA or Roth IRA for the 2014 tax year. The annual contribution limit is $5,500 or $6,500 (if you are age 50 or over).

Prior to making the contribution, if you (or your spouse) are an active participant in an employer's qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain thresholds. There are also MAGI (income) limits to qualify to make Roth IRA contributions. The limits are outlined here for your reference.

There is Still Time for Retirement Funding

2014 IRA Income (MAGI) Limits

Filing
Status

Traditional IRA
allowed contribution range

Roth IRA
allowed contribution range

Full
contribution

Phase-out
complete

Full
contribution

Phase-out
complete

SINGLE

$60,000

$70,000

$114,000

$129,000

MARRIED

$96,000

both participating

$116,000

both participating

$181,000

$191,000

$181,000

spouse participating

$191,000

spouse participating

Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separately and either spouse participates in an employer's qualified plan, the income phase-out to contribute is $0 - $10,000.

How does the phase-out work?

If the phase-out rules apply to you and your income is below the "full contribution" amount noted above, you can contribute up to the maximum annual contribution. But what if your income falls between these ranges?

	First, subtract your income from the higher (phase-out complete) amount to get your contribution income potential.
	Next calculate the phase out range.
	Then, divide your contribution income potential by the phase-out range.
	Take the result times your maximum annual contribution amount.

Example: Roth IRA contribution limit for a single person, age 40 with MAGI of $119,000; $10,000 contribution income potential (129,000-119,000); divided by phase-out range of $15,000 ($129,000 - 114,000); 10,000/15,000= .666 x $5,500 = $3,666 2014 ROTH IRA contribution limit. Rounding rules apply.

A final thought

If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.

Maximizing Your Refund Power

One of the highlights of the year for many Americans is the receipt of a refund check from the IRS. Before you run out and book a big vacation with this new found wealth, here are some ideas to consider for your refund.
	Pay down credit card debt. Lenders are continually increasing fees and interest rates, making credit card debt more expensive than ever. If you have large credit card debts consider using the bulk of any refund toward paying down the balance.

	Add to your emergency fund. It is recommended that you have enough money in savings to pay your bills in an emergency. How much is enough? That differs from person to person, but many recommend saving six months to nine months worth of expenses. Consider placing some of your refund into this emergency account.
	Any other debt? Look to paying down your auto loans, home mortgage, student loans and other debt. Pay those loans with the highest interest first. Remember, it is nice to head into your retirement years without having to worry about debt payments.
	Save for retirement. Consider placing some of your refund into your retirement savings accounts. This way your refund will continue to grow and will pay you back when you retire.
	Buy something you need. If you have been saving for a new car, a new house, or a new appliance put some of your refund towards this planned purchase.
	Don't forget to spend some on you. While spending all of your refund on a trip or a big-ticket item is not usually a great idea, give yourself permission to spend part of your refund on something fun. But consider limiting the amount to a set percentage of your refund check. That way you will feel better about spending the rest of it wisely and not feel like you are depriving yourself.

So You Think You are Hip

As the age gap widens between you and the next generation, so too does your language. You may have been "groovy", "cool", and "boss", but can you converse correctly with teen's new idioms? Here is a fun test to see how knowledgeable you are with language used by the younger crowd. Simply match the word with the accepted "current" use.

What does it mean?
a.	something on point (on topic)
b.	doing something amazing
c.	you're desperate
d.	showing off
e.	shopping (to go shopping)
f.	being excited about something or agreeing
g.	replacement for the word "very" or a lot
h.	rude or obnoxious
i.	cool / awesome
j.	something is incredibly overwhelming
k.	average, uninteresting
l.	wild, crazy

So how did you do?

answers: 1h, 2d, 3k, 4b, 5f, 6j, 7a, 8l, 9e, 10g, 11c, 12i

	10 to 12 correct? Yaas! You are mad good at this, let's go pop some tags.
	6 - 9 correct? Who are you kidding, just bring a teen along to translate for you.
	Less than 6. Hey man, stop trying so hard. Just stay cool and keep your groove on.

Sources: The urban dictionary, noslang, and metrokids.com.

The Benefits of a Sole Proprietor

In the eyes of the IRS, if you are a sole proprietor you have an audit target on you. This is because the audit rates on those who have a schedule C (sole proprietor) in their 1040 tax return are much higher than those who don't. In addition, sole proprietors generally have more personal legal liability as there is no legal entity between you and those who wish to sue your business. So does that mean there are no advantages to forming a small unincorporated business? Absolutely not. Here are some benefits of running your company as a sole proprietor.
	You can hire your kids. One of the key benefits of being a sole proprietor is you can hire your kids and not have to pay Social Security and Medicare taxes for their work. While there are exceptions, this can save your small business over 7.65% on their wages.

	Your kids benefit too. If the pay to your kids is less than $6,200, this income is not taxed to them at the federal level. Remember, their work must reflect actual activity and reasonable pay. Why not hire your kids to do copying, act as a receptionist, provide office clean up, advertising and other reasonable activities for your business?
	Fewer tax forms and filings. Sole proprietors can add their business activity as a schedule with their 1040 tax return. Sub chapter S corporations, C corporations, and partnerships must file separate tax returns, which make compliance a lot more complicated. It is also harder to close these entities should things not go as planned.
	More control of revenue and expense. As a sole proprietor, you often have more control over the taxable income of your small business. You can determine the timing of your business expenses to help manage your annual taxable income. The same is often true with booking your income.
	Hire your spouse. There are benefits of hiring a spouse and then providing them with a Healthcare Reimbursement Arrangement. This tax beneficial health reimbursement account of up to $5,000 can save you plenty by paying for out-of-pocket health care expenses with pre-tax dollars.

Please give us a call to discuss this or any of our other topics with you, so we can address your specific requirements.

DiSabatino CPA
Michael DiSabatino
651 Via Alondra Suite 715
Camarillo, CA 93012
Phone: 805-389-7300
ww.sharpcpa.com

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. All rights reserved.