KNOW YOUR OPTIONS FOR BUSINESS INTEREST TRANSFERS

Business owners should always know their options when it comes to their company and its relation to their estate plans. Let’s take a look at some commonly chosen vehicles for transferring ownership interests in a business.

The great GRAT

With a grantor retained annuity trust (GRAT), you transfer business interests or other assets to an irrevocable trust. The trust then pays you a fixed annuity for a specified number of years, and at the end of the trust term the trust assets are transferred to your children or other beneficiaries free of any additional gift tax, even if the property has appreciated while held in trust.

GRATs offer several important advantages. Gift tax is based on the actuarial value of your beneficiaries’ future interest in the trust assets at the time the trust is funded. Depending on the size of the annuity payments and the length of the term, this value can be very low and can even be “zeroed out.” Also, you remain in control of the business during the trust term. And the annuity payments provide a source of income to fund your retirement or other needs.

Keep in mind that for a GRAT to succeed you must survive the trust term, and your business must generate enough income to cover the annuity payments. Also, be aware that legislation has been proposed that would limit the benefits of a GRAT.

The intriguing IDGT

An intentionally defective grantor trust (IDGT) is an irrevocable trust designed so that contributions to the trust are considered completed gifts for gift and estate tax purposes even though the trust is considered a “grantor trust” for income tax purposes. (That’s the “defect.”) But the trust is very effective because the trust assets won’t be included in your estate. Selling your business to an IDGT, rather than giving it to your beneficiaries outright, allows you to retain control over the business during the trust term while still enjoying significant tax benefits.

Maintaining grantor trust status is important for two reasons: First, you pay income taxes on the trust’s earnings. Because those earnings stay in the trust rather than being used to pay taxes, you’re essentially making additional tax-free gifts to your beneficiaries. Second, because a grantor trust is considered your “alter ego” for income tax purposes, distributions you receive from the trust generally will be tax-free.

The need for a plan

For business owners, strategic planning and estate planning should go hand in hand. To achieve your goals, develop an integrated approach that addresses ownership and management succession issues together with estate planning issues. For help gathering the right information and making the best choice for you, please contact us.

Sidebar: 4 more options for transferring ownership interests

In addition to GRATs and IDGTs (see main article), there are several other options for transferring family business interests to the younger generation, including:

1. Outright gifts.If you’re willing to relinquish control, you can transfer substantial interests tax-free using the $5.45 million exemption.
2. Installment sales to family members.These offer significant gift and estate tax savings, provided you’re ready to part with the business.
3. Self-canceling installment notes. These require the buyer to pay a significant premium. But, if the seller dies before the note is paid off, the remaining payments are canceled without triggering additional gift or estate taxes.
4. Family limited partnerships.These arrangements enable you to transfer large interests in the business to family members at discounted gift tax values, while retaining management control. The IRS does scrutinize them closely, however.

ARE YOU SURE YOU WANT TO TAKE THAT 401(K) LOAN?

With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.

Pros and cons

Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:

• They’re easy to get (no income or credit score requirements),
• There’s minimal paperwork,
• Interest rates are low, and
• You pay interest back into your 401(k) rather than to a bank.

Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.

You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.

Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.

Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.

Hardship withdrawals

If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.

Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.

Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.

The right move

Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.

HOW TO ASSESS THE IMPACT OF A CHILD’S INVESTMENT INCOME

When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.

Potential danger

For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.

Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.

But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)

Simplified approach

In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.

Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.

Many lessons

Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.

HEADS UP! ITEMIZED DEDUCTIONS MAY BE AHEAD

Year end may seem far away. But now’s a good time to start looking ahead to what itemized deductions you may be able to claim for the 2016 tax year.

Following is a list of selected deduction and exclusion items to consider. Don’t use the list as a tax planning worksheet. Rather, think of it as an exercise to help with your tax planning efforts and a good conversation starter for the next time we visit. Bear in mind that various limitations may apply to the items listed.

Deductible unreimbursed employee expenses

• Business travel expenses.
• Business education expenses.
• Professional organization or chamber of commerce dues.
• License fees.
• Impairment-related work expenses.
• Depreciation on home computers your employer requires you to use in work.

Deductible money management costs

• Tax preparation fees.
• Depreciation on home computers used to produce investment income.
• Investment interest expenses.
• Dividend reinvestment plan service charges.
• Loss of deposits due to financial institution insolvency.

Deductible personal expenditures

• Income, real estate and personal property taxes (state, foreign and local).
• Medical and dental expenses.
• Qualifying charitable contributions.
• Personal casualty and theft losses.

Income excludable from taxable income

• Health and most life insurance proceeds.
• Military allowances and veterans benefits.
• Some scholarship and grant proceeds.
• Some Social Security benefits.
• Workers’ compensation proceeds.

Copyright © 2016

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2016.

JUGGLING FAMILY WEALTH MANAGEMENT IS NO TRICK

Preserving and managing family wealth requires addressing a number of major issues. These include saving for your children’s education and funding your own retirement. Juggling these competing demands is no trick. Rather, it requires a carefully devised and maintained family wealth management plan.

Start with the basics

First, a good estate plan can help ensure that, in the event of your death, your children will be taken care of and, if your estate is large, that they won’t lose a substantial portion of their inheritances to estate taxes. It can also guarantee that your assets will be passed along to your heirs according to your wishes.

Second, life insurance is essential. The right coverage can provide the liquidity needed to repay debts, support your children and others who depend on you financially, and pay estate taxes.

Prepare for the challenge

Most families face two long-term wealth management challenges: funding retirement and paying for college education. While both issues can be daunting, don’t sacrifice saving for your own retirement to finance your child’s education. Scholarships, grants, loans and work-study may help pay for college — but only you can fund your retirement.

Uncle Sam has provided several education incentives that are worth checking out, including tax credits and deductions for qualifying expenses and tax-advantaged savings opportunities such as 529 plans and Education Savings Accounts (ESAs). Because of income limits and phaseouts, many higher-income families won’t benefit from some of these tax breaks. But, your children (or your parents, in the case of contributing to an ESA) may be able to take advantage of them.

Give assets wisely

Giving money, investments or other assets to your children or other family members can save future income tax and be a sound estate planning strategy as well. You can currently give up to $14,000 per year per individual ($28,000 if married) without incurring gift tax or using your lifetime gift tax exemption. Depending on the number of children and grandchildren you have, and how many years you continue this gifting program, it can really add up.

By gifting assets that produce income or that you expect to appreciate, you not only remove assets from your taxable estate, but also shift income and future appreciation to people who may be in lower tax brackets.

Also consider using trusts to facilitate your gifting plan. The benefit of trusts is that they can ensure funds are used in the manner you intended and can protect the assets from your loved ones’ creditors.

Overcome the complexities

Creating a comprehensive plan for family wealth management and following through with it may not be simple — but you owe it to yourself and your family. We can help you overcome the complexities and manage your tax burden.

Sidebar: Charitable giving’s place in family wealth management

Do charitable gifts have a place in family wealth management? Absolutely. Properly made gifts can avoid gift and estate taxes, while possibly qualifying for an income tax deduction. Consider a charitable trust that allows you to give income-producing assets to charity, but keep the income for life — or for the charity to receive the earnings and the assets to later pass to your heirs. These are just two examples; there are more ways to use trusts to accomplish your charitable goals.

DISCLOSURE OF FOREIGN ACCOUNTS: 4 FACTS ABOUT FATCA

If you hold assets such as bank and other financial accounts or securities from companies outside the United States, you may need to report them to the IRS. The Foreign Account Tax Compliance Act (FATCA) requires certain U.S. taxpayers who have interests in “specified foreign financial assets” (SFFAs) to provide information via Form 8938, “Statement of Specified Foreign Financial Assets.” Here are four important facts about FATCA:

1. SFFAs are indeed specific.Among the assets the IRS considers SFFAs are foreign financial accounts and instruments, as well as foreign stocks and securities. But some types of foreign assets don’t need to be reported. These include financial accounts maintained by U.S. payers, such as the U.S. branches of foreign financial institutions or the foreign branches of U.S. financial institutions.
2. The penalties for failing to report are steep.They start with a $10,000 failure-to-file penalty. An additional penalty of up to $50,000 can be imposed if you continue to not report after being notified by the IRS. The statute of limitations is lengthy, extending to six years if you don’t include gross income from a foreign asset of more than $5,000 on your tax return.
3. Not everyone with foreign financial assets needs to report.If you aren’t required to file a U.S. income tax return for the year, you don’t need to file Form 8938. Even if you are required to file a return, Form 8938 isn’t required unless:

• You’re a single filer or file separately from your spouse and held SFFAs of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year, or
• You’re married and file jointly and held SFFAs of more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.

The thresholds are higher for U.S. taxpayers living outside the United States. Other details, exceptions and restrictions may apply.

4. It’s complicated. If you hold financial assets outside the United States, it’s worth reviewing them to determine whether you’re subject to the FATCA reporting requirements. But don’t expect this to be a simple task; the law is complex. We can help you account for all of your foreign assets and determine whether you need to file Form 8938.

DON’T FORGET DEPRECIATION BREAKS FOR YOUR COMPANY’S REAL PROPERTY

As a business owner, you’ve probably heard plenty about depreciation-related tax breaks. But, often, such discussions focus only on the tax benefits of buying assets such as heavy equipment, office furniture and computers. Don’t forget that the Internal Revenue Code also allows depreciation breaks for a company’s real property.

Section 179

Section 179, for example, allows businesses to elect to immediately deduct (or “expense”) the cost of certain assets acquired and placed in service during the tax year, instead of recovering the costs more slowly through depreciation deductions. However, the election can only offset net income; it can’t reduce it below $0 to create a net operating loss.

Among the assets eligible for this break is qualified real property, which includes qualified leasehold-improvement, restaurant and retail-improvement property. Thanks to the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), the relatively high annual dollar limits of the election have been made permanent (indexed for inflation beginning this year).

Specifically, for 2016, you can expense up to $500,000 in qualified real property, subject to a phaseout that kicks in at $2,010,000 in purchases. Before 2016, only $250,000 of the $500,000 limit could be applied to qualified real property.

Bonus depreciation

Another important tax break in this area is bonus depreciation, which allows businesses to recover the costs of certain depreciable property more quickly by claiming first-year bonus depreciation. The PATH Act extended it, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019.

Qualified leasehold-improvement property is generally eligible for bonus depreciation. (Before 2016, such property had to be leased to be eligible for bonus depreciation.) But, before claiming bonus depreciation, see whether you qualify for Sec. 179 expensing. It could provide a greater tax benefit than bonus depreciation. But bonus depreciation could benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement.

Accelerated depreciation

The PATH Act also permanently extended the 15-year straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), qualified restaurant property and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period.

This is especially welcome news for restaurants and retailers, which typically remodel every five to seven years. If eligible, they may first apply Sec. 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Sec. 179 limit.

Real property

It’s only natural to look at the many individual objects used by your business and wonder whether and how you can depreciate them. But don’t forget about the very ground beneath your feet, as well as the walls and structures around you. Real property is depreciable, too.

NEED A DO-OVER? AMEND YOUR TAX RETURN

Like many taxpayers, you probably feel a sense of relief after filing your tax return. But that feeling can change if, soon after, you realize you’ve overlooked a key detail or received additional information that should have been considered. In such instances, you may want (or need) to amend your return.

Typically, an amended return — Form 1040X, to be exact — must be filed within three years from the date you filed the original tax return or within two years of the date the applicable tax was paid (whichever is later). Your choice of timing should depend on whether you expect a refund or a bill.

If claiming an additional refund, you should typically wait until you’ve received your original refund. Then cash or deposit the first refund check while waiting for the second. If you owe additional dollars, file the amended return and pay the tax immediately to minimize interest and penalties.

Bear in mind that, as of this writing, the IRS doesn’t offer amended returns via e-file. You can, however, track your amended return electronically. The IRS now offers an automated status-tracking tool called “Where’s My Amended Return?” at https://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1.

If you think an amended return is needed or warranted, please give us a call. We will be glad to help.

What You Should Know About Capital Gains And Losses

When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses:

• Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
• Net investment income tax (NIIT). You must include all capital gains in your income, and you may be subject to the NIIT. The NIIT applies to certain net investment income of individuals who have income above statutory threshold amounts — $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. The rate of this tax is 3.8%.
• Deductible losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
• Long- and short-term. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
• Net capital gain. . If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
• Tax rate. The capital gains tax rate, which applies to long-term capital gains, usually depends on your taxable income. For 2015, the capital gains rate is zero to the extent your taxable income (including long-term capital gains) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). The maximum capital gains rate of 20% applies if your taxable income (including long-term capital gains) is $464,850 or more for married joint-filing couples ($413,200 for singles); otherwise a 15% rate applies. However, a 25% or 28% tax rate can also apply to certain types of long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates.
• Limit on losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
• Carryover losses. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

Providing Tax-Free Fringe Benefits To Employees

One way you can find and keep valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially tax-free ones. From an employee’s perspective, one of the most important fringe benefits you can provide is medical coverage. Disability, life, and long-term care insurance benefits are also significant to many employees. Fortunately, these types of benefits can generally be provided on a tax-free basis to your employees. Let’s look at these and other common fringe benefits.

• Medical coverage. If you maintain a health care plan for your employees, coverage under that plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan; otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions.

Caution: Employers must meet a number of new requirements when providing health insurance coverage to employees. For instance, benefits must be provided through a group health plan (either fully insured or self-insured). Reimbursing an employee for individual policy premium payments can subject the employer to substantial penalties.

• Disability insurance. Your disability insurance premium payments aren’t included in your employee’s income, nor are your contributions to a trust providing disability benefits. The employees’ premium payments (or any other contribution to the plan) generally are not deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for their disability benefits; such contributions are excludable from their income.
• Long-term care insurance. Plans providing coverage under qualified long-term care insurance contracts are treated as health plans. Accordingly, your premium payments under such plans aren’t taxable to your employees. However, long-term care insurance can’t be provided through a cafeteria plan.
• Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 is taxable to the extent it exceeds the employee’s contributions toward coverage.
• Retirement plans. Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including (1) current deduction by you, the employer, for contributions to the plan; (2) deferral of the employee’s tax until benefits are paid; (3) deferral of taxes on plan earnings; and (4) in the case of 401(k) plans and SIMPLE plans, the employee’s ability to make pretax contributions.
• Dependent care assistance. You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance during the year. The dependent care services must be necessary for the employee’s gainful employment.
• Adoption assistance. Generally, in 2015, employees can exclude from income qualified adoption expenses of up to $13,400 for each eligible child paid or reimbursed by you under an adoption assistance program.
• Educational assistance. You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

Benefits provided to self-employed individuals. Generally, different and less favorable tax rules apply to certain fringe benefits provided to self-employed individuals, including sole proprietors (including farmers), partners, members of limited liability companies (LLCs) electing to be treated as partnerships, and more-than-2% S corporation shareholders. However, except in the case of a more-than-2% S corporation shareholder, if the owner’s spouse is a bona fide employee of the business, but not an owner, the business may be able to provide tax-free benefits to the spouse just like any other employee.

Education Planning: It’s Best To Start Early

The increasing costs of higher education have made education planning an important aspect of personal financial planning. However, because the actual expenditure will not be incurred for many years, it is often given a low current priority. Also, some parents are counting on scholarships to cover the cost of their children’s education. Unfortunately, this tendency to postpone the issue may eliminate several education planning strategies that must be implemented early to be effective.

Escalating costs. Although the increase in the cost of attending college has slowed down to its lowest escalation rate in years, the College Board reports that 2014—2015 tuition and fees continue to rise at a rate faster than the consumer price index (www.collegeboard.com). All told, the cost of a college education is staggering, and this is unlikely to change.

According to the College Board report, for one year of full-time study, private four-year colleges rose 3.7% (to an average cost of $31,231) from 2013—2014 for tuition and fees alone. Average total charges with room and board are $42,419. Public four-year colleges are up 2.9% (to an average of $9,139) from last year for in-state tuition and fees — room and board adds on another $9,804. Public four-year colleges are up 3.3% (to an average of $22,958) from last year for out-of-state tuition and fees. Average total charges with room and board are $32,762. Even tuition and fees at public two-year schools are up 3.3% (to an average of $3,347).

The report indicates that the subsidies provided to full-time undergraduates at public universities through the combination of grant aid and federal tax benefits averaged $6,110 in 2014—2015 —far below the actual cost of attending.

Six methods to pay for college. In general, the six basic methods of paying for a child’s higher education include a child working his or her way through school; obtaining financial aid (scholarships and federal loans); paying college expenses out of the parents’ current income or assets; using education funds accumulated over time; obtaining private loans; and grandparents (or others) paying college costs.

The first method (child pays) can work, and many successful persons have obtained a good education while working to pay their way. But this often limits the student’s choice of schools and can adversely affect grades. Planning to rely on financial aid (the second method) is risky, and the family may not qualify for enough. The third method (parents paying out of current income or assets) works for some, but many parents will not know if their current income and/or assets will be sufficient until it is too late. In addition, this method is not as tax-efficient as some strategies used to accumulate separate education funds (the fourth method). However, these strategies are not without risks. Poor investment choices could prove costly. The fifth method (private loans) can result in a serious debt burden. Obviously, the sixth method is ideal, but it is not available to many.

How grandparents can help. . Grandparents, as well as other taxpayers, have a unique opportunity for gifting to Section 529 college savings plans by contributing up to $70,000 at one time, which currently represents five years of gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for 2015.) A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2015) to a beneficiary’s 529 plan account(s) with no adverse federal gift tax consequences. As an added feature, money in a 529 plan owned by a grandparent is not assessed by the federal financial aid formula when qualifying for student aid.

Conclusion. The key to effective education planning is to start planning and saving early to create future options. In addition, the use of tax-sheltered investment and savings vehicles like a 529 plan can help ensure adequate funds are available when a child enters college.

Seniors Age 70 1/2 Take Your Required Retirement Distributions Before Year End 

The tax laws generally require individuals with retirement accounts to take annual withdrawals based on the size of their account and their age beginning with the year they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.

If you turned age 70 1/2 in 2015, you can delay your 2015 required distribution to 2016. Think twice before doing so, though, as this will result in two distributions in 2016 — the amount required for 2015 plus the amount required for 2016, which might throw you into a higher tax bracket or trigger the 3.8% net investment income tax. On the other hand, it could be beneficial to take both distributions in 2016 if you expect to be in a substantially lower bracket in 2016.

Earn 5% Or More On Liquid Assets

Yes, that is too good to be true, but we got your attention. As you are painfully aware, it is extremely difficult to earn much, if any, interest on savings, money market funds, or CDs these days. So, what are we to do? Well, one way to improve the earnings on those idle funds is to pay down debt. Paying off a home loan having an interest rate of 5% with your excess liquid assets is just like earning 5% on those funds. The same goes for car loans and other installment debt. But, the best return will more likely come from paying off credit card debt! We are not suggesting you reduce liquid assets to an unsafe level, but examine the possibility of paying off some of your present debt load with your liquid funds. Paying down $100,000 on a 5% home loan is like making more than $400 per month on those funds.

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2015.