Posts Tagged ‘Planning’
Favorable tax treatment is one of the main reasons for buying an annuity. But what exactly are the tax benefits? And are there any drawbacks? It’s important to know the answers to these questions before deciding whether to purchase an annuity.
Of course, any information pertaining to taxes is complex, full of exceptions, and subject to change. This discussion deals with the general rules for taxation of annuities–you should consult a tax advisor for more specific information before you take any action.
Taxation of premiums
Annuities are typically funded with after-tax dollars. So, the money you pay into an annuity (in the form of premiums) is nondeductible. By placing funds in an annuity, you will not realize any current income tax savings, unlike putting money into a traditional IRA, 401(k) plan, or other employer-sponsored retirement plan.
Tax-deferred growth
Unlike most investments, an increase in the value of an annuity from interest is not currently taxable.
Generally, annuity funds are allowed to grow tax deferred until they’re distributed, at which time the owner will pay ordinary income tax on all gains.
Taxation of premature withdrawals
Withdrawals taken before age 59½ may be subject to a 10 percent IRS penalty tax unless an exception applies. When you make a withdrawal from an annuity, the IRS assumes that earnings are withdrawn first. The 10 percent penalty applies to the earnings portion of a withdrawal. So, early withdrawals are costly from a tax standpoint.
For example, if your annuity has grown by ,000 since you purchased it, a 0 withdrawal would be considered 100 percent interest and would be subject to the 10 percent penalty–in this case, .
In addition, because the entire withdrawal represents earnings, it would be subject to ordinary income tax. If you are in the 25 percent tax bracket, your income tax liability on the withdrawal would be 5. Adding this to the early withdrawal penalty, 5 of your 0 withdrawal would end up in the IRS’s pocket.
Taxation of scheduled distributions
If you choose an annuitization option, you will begin receiving regular distributions from your annuity over a predetermined period of time. Each distribution consists of two components: principal (a return of the money you paid into the annuity) and earnings. The percentages of principal and earnings of each distribution will depend on the annuitization option chosen. Again, the earnings portion of each distribution will be treated as ordinary income. Also, depending on the annuitization option chosen, the 10 percent penalty rule may not apply.
For most people who purchase an annuity, the main benefit they’re seeking is favorable tax treatment. But it’s important to know all of the tax related answer before making investment into annuities – the pluses and the minuses. • Taxes on premiums paid The money that you use to fund an annuity is generally after-tax money, and therefore the premiums themselves are not deductible. So if you’re looking to lower your income taxes, putting money into an annuity will not give you the same reduction that contributing to an IRA or retirement plan offered through your employer unless you buy annuity inside your IRA or retirement plans. • Taxes on account growth For the most part, annuities grow on a tax deferred basis, meaning that any increase in the value of the account is not taxable until you take a withdrawal. At that time, the money is treated like ordinary income.
• Taxes on early withdrawals When you take money out of an annuity before you’ve turned 59 ½ years old, you may have to pay 10% of the withdrawal amount as a penalty to the IRS. Looking at what you’ve paid into an account, and what the account has earned over the years, for tax purposes the IRS treats the withdrawal as if you’d taken money from the earnings first, and then from the premiums you’ve paid in. From the standpoint of taxation, early withdrawals can cost you a lot! • Taxes on scheduled withdrawals Once you’ve reached the maturity period of your annuity, and begun to take regular distributions, each distribution will be made up of two parts. The first part is the principal – the money you put into the annuity account. The second part is the earnings – money the account has made over the years. As in the case of early withdrawals, the earnings part will be treated as ordinary income, and taxed accordingly. • Taxes on of lump-sum distributions Another way of taking money from your annuity is by means of a lump sum – a complete withdrawal of all funds in the account. Such a withdrawal can have major tax consequences for the investor. If the withdrawal takes place early in the contract, in addition to taxes on earnings, you may have to pay a surrender charge to the company that issued the annuity. And the lump sum withdrawal could even put you into a higher tax bracket than you would normally be, making your tax situation even worse. Taxation is a very complex subject, with lots of rules, and lots of exceptions, and always changing. BeamaLife and its specialists are not authorized to offer tax or legal advice but our experience annuity & retirement specialists can provide you detailed information on these different retirement savings options and annuities. Please call (866) 972-3262 to speak with a retirement specialist or complete your personalized fixed annuity proposal with the best annuity interest rate.
Corporate tax planning is an important step for all businesses each and every year. Plans you put in place each year can mean the difference in what your finances are left with at your physical year end.
The main reason behind corporate tax planning is to minimize your taxes. The nice thing about talking with a tax man or attorney, is that they can help you find ways to minimize your taxes and bring something of value to yourself in some cases. For instance, if you were to start of a retirement plan, the dollars put in that fund would be pre-tax dollars. A program like this can be set up even if you are a sole proprietor.
When doing your corporate tax planning remember to take regular deductions, just as you might take as a family. You can deduct for office expenses, travel, and other things related to your business.
If you work alone, then remember to include in your planning the self employment tax you will have to pay. Planning your taxes must take into consideration the expenses against projected growth.
If this is your companies first year you can write off start-up cost, but that only works for the first year. However, any equipment you purchase in years to come and be used as a deduction and depreciated over many years for tax benefits. If you need equipment, buy it, but never buy it just because it will give you a deduction. Making the right decisions is easier with proper planning.
Travel expense used to weight down some companies, however now that more and more companies are doing their training and meetings with online seminars, this is not the case. If you can save money using equipment you already have to train employees and not travel, then save money at train from your office.
There are a couple of accounting methods available for businesses. For companies that have year end inventory, then you will need to use the accrual method. Again when doing your corporate tax planning, get help from your accountant or tax attorney.
More Taxes Articles
Planning a budget for a renovation project is essentially the process of cost estimating for construction projects. Before a budget can be determined, the renovator needs to have an accurate vision of the finished project in order to arrive at a realistic budget.
The process needs to begin with a brainstorming session. Exactly what does the renovation entail? Does a construction manager need to oversee the entire project or can the renovator perform the tasks of a construction manager? What types of contractors will be needed for the project? Who needs to do what first, second, third and so forth? What types of materials will be used? What permits or licenses are needed for the project? Does the project need a certified architect? Are there additional fees associated with inspectors?
After the brainstorming session, the renovator begins the planning stage by developing a list of all the tasks that need to be performed, the materials needed for those tasks, and who will perform each task.
A cost estimate associated with each task should be included. The cost estimate should include materials, labor, and additional fees for inspectors and permits if needed.
Material costs are determined by the types of materials the renovator wants to use as well as what is required by building codes. For example, how much is each sheet of plywood and how many sheets are needed? Will drywall be needed? If so, how many sheets of drywall and at what cost? Other considerations that determine the material costs may include the type of material the renovator prefers such as granite counter tops versus marble counter tops. When estimating material costs, the renovator needs to know exactly what type of material is going to be used, how much of that material is needed and how much the material costs for the amount needed.
Labor costs can be determined through a bid process.
Once the renovator is sure of the project details, the bidding process can begin. Each potential contractor should be given the exact specifications of the project. Contractors may include materials costs and give the renovator an estimated time frame for the project. The renovator needs to carefully review each bid. If material costs are included, how different are they from the renovator’s material estimates? Is one bidder really low and if so, why? Choosing the lowest bidder is not always the most prudent way to go. Renovators need to check references for each contractor as well as the Better Business Bureau and the Contractor Licensing Board. Finally, the renovator needs to ensure that each contractor provides contractor’s liability insurance.
One of the things my Las Vegas clients ask me often is, “How can you help me more with my tax planning?”, and I think the best answer to that is “I need to talk to you”. Whoever your Las Vegas CPA is, if you let them know what you’re doing before March of the next year, they can often do a lot of things with entity structure, or just planning the deal to make it more tax efficient. Communication is the key with Las Vegas tax planning, but if you only talk to your CPA once a year, in March, you’re missing the boat, and he or she isn’t able to help you as much as they could.
For example: I had a client come to me once that was doing a land deal; they owned some land and they were going to build a building on it. And by talking with us, and letting us understand their particular tax situation, we were able to structure another entity, take the advantages between a partnership and a corporation, and capture most of that gain as long-term capital gain, instead of all as ordinary income. But it’s one of those things that we couldn’t have done if they had started construction and talked to us after the fact.
Make sure that your CPA understands your business and tax situation as early as possible. Give them any information that they might be able to use during the tax planning process, and make sure your Las Vegas accountant really gets to know your and your business.
Quite often, while doing tax preparation in Las Vegas, I get asked the question by small business owners, “How can I reduce my taxes?”. Almost always, the most important thing that they forget is that they don’t keep their receipts so that they can deduct all the expenses that they pay. It’s important, for tax preparation, that the Las Vegas business owner keeps track, even if you just take an envelope and put the receipts that you paid for (whether cash, or by credit card) in that envelope every single day, and at the end of the year, or at the end of the month you just add those up and put those on the expense sheet – that’s a huge way you can save, and quite often, small business owners will just throw away the receipts (or they can’t find them when it comes time to do their tax return)