Can You Avoid Early Withdrawal Penalties from your Retirement Account?

How can you avoid Early Withdrawal Penalties?

If you’re saving for retirement in a qualified plan sponsored by your employer, such as a 401(k), or in a traditional individual retirement account (IRA), you need to remember that the IRS generally imposes a 10% penalty on any withdrawals you make before you turn age 59½.* This penalty is in addition to any income taxes due on the withdrawal. However, there are several exceptions that may apply.**


Both qualified retirement plans and IRAs allow penalty-free distributions in cases of disability or death. “Disability” generally means that the individual is unable to engage in any “substantial gainful activity.”


Withdrawals from an IRA or a qualified retirement plan to pay deductible medical expenses that exceed 10% of adjusted gross income may avoid early withdrawal penalties. The withdrawal must occur in the same year the expenses are paid.


You can make penalty-free withdrawals from an IRA to pay health insurance premiums if you have received unemployment compensation for at least 12 weeks (or could have except for being self-employed).


You can withdraw up to a maximum of $10,000 penalty free from your IRA to buy, build, or rebuild a principal residence for an eligible first-time homebuyer. (The buyer can be yourself, your spouse, or any child or grandchild of you or your spouse, provided the buyer and his/her spouse have not owned another principal residence for at least two years.) This is a lifetime limit.


You may make penalty-free withdrawals from your IRA to pay qualified higher education expenses for you, your spouse, or any children or grandchildren of you or your spouse.


Withdrawals from an IRA or qualified retirement plan that are part of a series of substantially equal periodic payments over your lifetime or the lifetimes of you and the designated beneficiary may be penalty free. (Requirements apply.)

* A 10% penalty may also apply to taxable distributions taken from a Roth IRA prior to the owner turning 59½, but a different set of rules applies.

** The list presented is not all-inclusive

tuition tax credits

Tuition Tax Credits

Education Tuition Tax Credits

College expenses are on the rise. The College Board reports that the average cost of a college education, including room and board, has risen faster than the inflation rate in recent years, topping $20,000 for public four-year institutions and $45,000 for private colleges for the 2016-2017 academic year.*

For many Americans, this burden may be alleviated through the use of education tax credits. There are two types — the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both require that qualified education expenses be incurred by you, your spouse, or a dependent, and credits may not be combined for any one student for a single tax year.


The AOTC provides a dollar-for-dollar tax reduction of up to $2,500 of the cost of tuition, books, and other required course material for up to four tax years. Specifically, the tuition tax credits is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 (for each qualifying student). Should the credit exceed the amount of tax you owe, you may be eligible for a refund of 40% of the credit or $1,000, whichever is less.

You may generally claim the full AOTC if your modified adjusted gross income (MAGI) for the tax year is under $80,000 ($160,000 if married filing jointly). However, the credit starts to phase out once MAGI exceeds those levels and is no longer available once MAGI reaches $90,000 ($180,000 if married filing jointly).


The LLC is a tuition tax credit of up to $2,000 per tax return for tuition and fees, calculated as 20% of the first $10,000 of expenses. In contrast to rules under the AOTC, qualified expenses for the LLC do not include academic supplies, and no portion of the credit is refundable. However, the LLC is available for an unlimited number of years, and it does not require the student to be enrolled in a degree program.

You may receive the full credit if your MAGI is less than $56,000 ($112,000 if filing jointly). The amount of the LLC phases out when MAGI falls between $56,000 and $66,000 ($112,000 and $132,000 if married filing jointly) and is not available when MAGI exceeds these upper limits.

* The College Board, Tuition and Fees and Room and Board Over Time (Public school costs are based on in-state rates.)

We can help you take advantage of the tax credits you are allowed with our tax preparation service. 

CDFA Certified Divorce Financial Analyst

Why Use a CDFA in your Divorce?

A Certified Divorce Financial Analyst (CDFA) Can Help

The process of a divorce can last a year or more. A Certified Divorce Financial Analyst (CDFA) can explain all the financial aspects of your decisions and help you to make smart choices throughout the process.

A CDFA works with you and your attorney to forecast the long-term impact of the divorce settlement. This includes tax liabilities, long term and deferred savings, retirement and college savings plans.

What is the real cost of your divorce?

A CDFA can assist you on planning a budget and help you adjust to the cost of your new living arrangements. Life insurance, health insurance and cost of living increases need to be considered when agreeing on a financial settlement.

There are a lot of misconceptions around the divorce process. A CDFA can help cut through the financial lingo and bring greater understanding to your situation. A CDFA can also help you build a realistic, stable financial budget for both the long and short term

A CDFA will help you take stock of your current financial situation, including:

  • The current balance in all bank accounts
  • The value of any brokerage accounts
  • The value of investments, including any IRAs
  • Your residence(s)
  • Your autos
  • Your valuable antiques, jewelry, luxury items, collections, and furnishings
  • Examine copies of the past two or three years’ tax returns
  • Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse
  • Examine papers relating to insurance-life, health, auto, and homeowner’s-and pension or other retirement benefits
  • List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

This will help you to make smart decisions regarding how debts incurred during the marriage are to be paid off and obtain preliminary information for the eventual division of property. Assessing the above is critical in planning a secure financial future.

Contact our office – we have the areas only Certified Divorce Financial Analyst who is also a CPA.  A true asset to your post-divorce financial planning process.

Best Practices for Running a Family Business

How hard can it be to run a family business? It should be easy since presumably all the key people are on the same page and they all share the same goals. Unfortunately, that’s not always the case. Running a family business is anything but easy when what’s good for the business is different from what’s good for the family.

There are two controlling forces in a family business — the family and the business. Successful family businesses find an effective way of separating the two so that family problems don’t spill over into the business and vice versa. Keeping the lines of communication open on all levels and holding regular business meetings to address and resolve business issues will help establish the necessary boundaries.

Professionalism is another best practice for family businesses. Standardizing operations and procedures and establishing policies can help your family business be successful. If you have nonfamily employees, pay particular attention to personnel issues (such as hiring and promoting on merit and paying market-based salaries). Allowing “special” benefits for family members can be a real morale killer. Providing equal benefits and establishing a family code of conduct will show you’re committed to leveling the playing field.

One big reason family businesses sink is poor financial management. All businesses can benefit from establishing proper accounting procedures. Having accurate data allows you to generate monthly statements and keep tabs on your current financial situation. You can also spot trends as they develop and be proactive instead of reactive.

The odds of a family-run business making it to the next generation are generally low. You can boost the likelihood of beating the odds if you make succession planning a top priority. Just don’t wait until the last minute.

spending plan

Create a Spending Plan & Get a Handle on Your Finances

Create a Spending Plan

Does it seem as if your paycheck is here one minute and gone the next? If your money disappears before you know it, you might need a way to keep better track of your spending. A budget — or spending plan — can help you take control of your finances to make sure that you’re spending wisely.


The first step is to find out where your money is going. And the only way to do that is to keep track of everything you spend, including cash purchases. Ideally, you’ll be able to gather spending data for three months (although one month may be more realistic). There are software programs and mobile apps that can help simplify the process.

Add up how much you’re spending in specific categories during a one-month period, and use those figures to project your future expenses. To improve accuracy, add up any and all irregular expenses (insurance premiums, taxes, etc.), divide the total by 12, and include that amount as a monthly expense. Obviously, spending projections should not exceed your income.


Household expenses generally fall into two main categories. Non-negotiable expenses are the expenses you must pay, such as your mortgage or rent, utilities, phone service, and insurance. Groceries and any personal or student loans also fall into this category.

Negotiable or discretionary expenses are for things you want but don’t necessarily need, such as premium cable service, dinners out, and pricey vacations. If your cash flow is negative, reducing discretionary expenses will help you get from red to black.


Your budget should include “savings” as an expense category. Direct the money into an emergency fund, a retirement savings account, a college savings account (if applicable), etc. Your budget should also reflect your priorities. You don’t necessarily have to give up expensive splurges, as long as you can fit them into your spending plan.

It will probably take some tweaking to finalize a workable spending plan, but it is well worth the time and effort.


Business Borrowing

Like most business owners, you probably have high hopes for your company’s future. You want to expand, to add employees, and, perhaps, to open up other locations. You know that to turn these hopes into reality, you’ll need financing. But you also know that obtaining a small business loan is never a slam dunk.

How you approach the process of securing business financing can determine whether you get the money you need. Here are some ideas that may help make a difference.

Not all banks lend to small businesses. And not all of those that do lend to small businesses lend to all small businesses. The ideal match for you is a banker who’s familiar with your industry and can discuss potential risks and make informed decisions.

If you walk in off the street and ask for a loan, you may not be successful. If possible, build a relationship with a potential lender. If your plans call for borrowing a substantial amount in a few years, you can establish your creditworthiness ahead of time by setting up a line of credit or taking out a small loan.

Regardless of whether you have a relationship with a prospective lender, you’ll need to submit a business plan along with your loan application. Be prepared to answer questions about the assumptions you’ve used to create your plan. You might want to take things one step further by projecting how your plan might play out in three different scenarios: best case, most likely, and worst case.

Another proactive planning move is to line up some secondary repayment sources (business or personal collateral, for example) ahead of time. It shows the lender that you acknowledge the risk your loan represents and that you already have a backup plan.

Potential lenders will want to verify your background and confirm that you have the necessary experience. They will also require extensive financial information, including both your personal and business credit histories. Be prepared to provide personal and business financial statements as well as cash flow projections for a year (or more, depending on what the lender requires).

spending plan

Smart Business Strategies for a Seasonal Business

Spring may still be weeks away, but if your business is seasonal — and your season is summer — it’s time to start getting things organized. The more you can do before opening day, the easier it will be to stay cool when business and the weather heat up.

Operating a seasonal business means having to squeeze a year’s worth of business into a few months and then make your earnings last the entire year. You have to resist the temptation to overspend when cash is plentiful. So, before you start scrubbing walls or unpacking boxes, make sure your business finances are in order.

Go over last year’s budget carefully to see what changes may be necessary. Run some financial projections. Then check your progress frequently during the season to make sure you’re on track.

Give some thought as to how you plan to market your business. If you’re adding new product lines or services for the coming season, there may be new markets you can tap. Think about tweaking your website to give it a fresher look. If your client base is mobile friendly but your website isn’t, it may be time to upgrade.

If you’re hoping to rehire some of last season’s newer workers, the sooner you get in touch with them, the better. Once you know how many vacancies you have to fill, you can even start advertising and interviewing.

This is a great time to take care of any needed repairs and to put on that fresh coat of paint. You also have time to search for deals and compare prices, which could result in substantial savings. Shop for items you regularly keep in stock and any equipment you need to buy or replace.

Before you know it, summer will be here.

The Home-Sale Gain Tax Exclusion

Who doesn’t love a tax break? The reality is that for many taxpayers, there aren’t too many tax breaks they can take. However, if you’re thinking the time is right to put your house on the market and it has appreciated in value, you may be eligible for one of the most valuable tax breaks of all — the home-sale gain tax exclusion.

Here’s how it works: If you make a profit when you sell your principal residence, all or part of your gain may be tax free. Eligible individual filers may exclude up to $250,000 of gain from their income; married couples filing jointly may exclude up to $500,000 of gain.

In general, this tax break is available only once every two years. To qualify, you generally must have owned and used the home as your principal residence for at least two years (a total of 24 full months or 730 days) during the five-year period ending on the date of the sale. The ownership and use periods don’t necessarily have to coincide.

Only one spouse must pass the ownership test, although neither spouse may have excluded gain from a previous home sale during the two-year period ending on the sale date. As for the use test, both spouses must pass it.

If you have to sell your home because of a change in employment, you move for health reasons, or there are other qualifying “unforeseen circumstances,” you might qualify for a reduced exclusion. The amount of the reduced exclusion is based on the portion of the two-year use and ownership periods you satisfy.


The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.   Content courtesy of Client Line Newsletter

Will You Fall into the Alternative Minimum Tax (AMT) TRAP?

Originally introduced in the 1980s, the alternative minimum tax (AMT) system is designed to prevent higher income taxpayers from avoiding federal income taxes through the use of alternative minimum taxvarious exclusions, deductions, and credits. However, taxpayers who have a large number of personal exemptions, take large itemized deductions for state and local taxes, or have a spike in capital gains, among other things, may find themselves subject to the AMT.

Determining whether you will be subject to the AMT requires a thorough review of your tax situation, but here are the general rules.


Generally, the AMT calculation starts with your regular taxable income and requires you to make revisions for certain “tax preferences” and “adjustments” to arrive at alternative minimum taxable income (AMTI). Some of the more common adjustment and preference items relate to interest on certain tax-exempt bonds, personal and dependency exemptions, the exercise of incentive stock options, and itemized deductions for certain types of home equity loan interest, state and local income taxes, and medical expenses.


Once AMTI has been calculated, an AMT exemption amount is subtracted from it to determine the final taxable figure. For 2016, the AMT exemption amounts are $83,800 (married filing jointly), $53,900 (single), and $41,900 (married filing separately). A 26% tax rate is applied to the first $186,300 of the resulting income, while a 28% tax rate is applied to any amounts above $186,300. For married persons who file separately, the rate changes at $93,150 in 2016.

Taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For example, individuals in 2016 will have their exemption reduced by 25% of the amount by which their AMTI exceeds $119,700, which means that their exemption equals zero at AMTI of $335,300 or more.


Taxpayers who expect a potential AMT problem may be able to use certain strategies to reduce their taxes. For example, if a tax projection indicates that you may be subject to AMT this year but not next year, it may be helpful to delay prepaying certain expenses, such as state and local income taxes.

Key Financial Ratios That Measure Your BUSINESS’S FINANCIAL HEALTH

key financial ratiosIt’s human nature to measure and compare. Whether it’s counting steps in the fitness world or tracking single-season passing yards in the sports world, measuring our progress against ourselves and others helps us keep track of how we’re doing.

As an owner of a small business, you can do something similar with financial ratios. Financial ratios help you measure how well your business is performing, and just as importantly, can let others, such as lenders and outside investors, evaluate your business’s financial health.

Looking at trends in your ratios over time and comparing them to industry averages can be instructive. There are different categories of financial ratios, all derived using data from a company’s financial statements.


These ratios measure whether your business is earning an adequate return on sales, total assets, and invested capital. For example, profit margin (the ratio of net income to sales) measures your company’s return on the sales dollar and is a key profitability ratio.


Also known as “turnover ratios,” asset utilization ratios measure how efficiently your business is using its assets. For example, the receivables turnover ratio indicates how fast you collect cash from credit customers. The higher the ratio, the faster your collections. Similarly, the inventory turnover ratio measures how fast a company sells its inventory.


Liquidity ratios illustrate whether your business has sufficient assets to pay outstanding short-term obligations as they come due. The current ratio (current assets to current liabilities) is a commonly used liquidity ratio.


A key ratio in this category, debt to total assets helps you to determine whether the debt your business carries is manageable. Since an inability to pay off debts may result in a business’s failure, this particular ratio is a critical indicator of the long-term financial sustainability of a business.