Tax Saving Strategies: A Helpful Checklist

How are mutual fund distributions taxed? You must generally report as income any mutual fund distribution, whether or not it is reinvested. The tax law generally treats mutual fund shareholders as if they directly owned a proportionate share of the fund's portfolio of securities. The fund itself is not taxed on its income if certain tests are met and substantially all of its income is distributed to its shareholders. Thus, all dividends and interest from securities in the portfolio, as well as any capital gains from the sales of securities, are taxed to the shareholders. There are two types of taxable distributions: ordinary dividends and capital gain distributions. Ordinary dividends are the most common type of distribution from a corporation and are paid out of the earnings and profits of the corporation. For mutual funds, this is the interest and dividends earned by securities held in the fund's portfolio that represent the net earnings of the fund. Ordinary dividends are periodically paid out to shareholders and are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains and are included with your capital gain distributions as long-term capital gain, regardless of how long you have owned your fund shares. Like the return on any other investment, mutual fund dividend payments decline or rise from year to year, depending on the income earned by the fund in accordance with its investment policy. You should receive a Form 1099-DIV, Dividends and Distributions, from each payer for distributions of $10.00 or more; however, even if you do not receive a Form 1099-DIV or Schedule K-1 (dividends received through a partnership, an estate, a trust, or a subchapter S corporation), you must still report all taxable dividends. Ordinary dividends are taxed at ordinary tax rates for whatever tax bracket you fall under. Qualified dividends are taxed at a 15 percent rate. Capital gain distributions are the net gains, if any, from the sale of securities in the fund's portfolio. When gains from the fund's sales of securities exceed losses, they are distributed to shareholders. As with ordinary dividends, capital gain distributions vary in amount from year to year and are reported on Form 1099-DIV, Dividends and Distributions. Capital gain distributions are always reported as long-term capital gains for tax purposes. Are reinvested dividends from a mutual fund taxable? Most mutual funds offer you the option of having dividend and capital gain distributions automatically reinvested in the fund a--good way to buy new shares and expand your holdings. Most shareholders take advantage of this service, but you should be aware that you do not avoid paying tax by doing this. Reinvested ordinary dividends are taxed as ordinary income, just as if you had received them in cash and reinvested capital gain distributions are taxed as long-term capital gain. If you reinvest, add the amount reinvested to the "cost basis" of your account. "Cost basis" is the amount you paid for your shares. The cost basis of your new shares purchased through automatic reinvesting is easily seen from your fund account statements. This information is important later on when you sell shares. Make sure that you don't pay any unnecessary capital gain taxes on the sale of mutual fund shares because you forgot about reinvested amounts. When you reinvest dividends and capital gain distributions to buy more shares, you should add the cost of those shares (that is, the amount invested) to the cost basis of the shares in that account because you have already paid tax on those shares. You bought 500 shares in Fund PQR in 1990 for $10,000. Over the years you reinvested dividends and capital gain distributions in the amount of $10,000, for which you received 100 additional shares. This year, you sold all 600 of those shares for $40,000. If you forget to include the price paid for your 100 shares purchased through reinvestment (even though the fund sent you a statement recording the shares you received in each transaction), you will unwittingly report on this year's tax return a capital gain of $30,000 ($40,000 - $ 10,000) on your redemption of 600 shares, rather than the correct capital gain of $20,000 ($40,000 [$10,000 + $10,000]). Failure to include reinvested dividends and capital gain distributions in your cost basis is a costly mistake. Am I subject to tax if I switch from one fund to another in the same mutual fund family? The "exchange privilege," or the ability to exchange shares of one fund for shares of another, is a popular feature of many mutual fund "families." Families are fund organizations offering a variety of funds. For tax purposes, exchanges are treated as if you had sold your shares in one fund and used the cash to purchase shares in another fund. This means you must report any capital gain from the exchange on your return. The same tax rules used for calculating gains and losses when you redeem shares apply when you exchange them. Gains on these redemptions and exchanges are taxable whether the fund invests in taxable or tax-exempt securities. Am I subject to tax on return-of-capital distributions? Sometimes mutual funds make distributions to shareholders that are not attributable to the fund's earnings. These are called nontaxable distributions, also known as returns of capital. Note that nontaxable distributions are not the same as the tax-exempt dividends. Because a return of capital is a return of part of your investment, it is not taxable. Your mutual fund will show any return of capital on Form 1099-DIV in the box for nontaxable distributions. If you receive a return of capital distribution, your basis in the shares is reduced by the amount of the return. Two years ago you purchased 100 shares of Fund ABC at $10 a share. Last year, you received a $1-per-share return of capital distribution, which reduced your basis in those shares by $1, to give you an adjusted basis of $9 per share. This year, you sell your 100 shares for $15 a share. Assuming no other transactions during this period, you would have a capital gain this year of $6 a share ($15 - $9) for a total reported capital gain of $600. Non-taxable distributions cannot reduce your basis below zero. If you receive returns of capital that, taken together, exceed your original basis, you must report the excess as a long-term capital gain. Should I invest in tax-exempt funds to cut my income taxes? If you're in the higher tax brackets and are seeing your investment profits taxed away, you might want to consider tax-exempt mutual funds as an alternative. The distributions of municipal bond funds that are attributable to interest from state and municipal bonds are exempt from federal income tax, although they may be subject to state tax. The same is true of distributions from tax-exempt money market funds. These funds also invest in municipal bonds, but only in those that are short-term or close to maturity, the aim being to reduce the fluctuation in NAV that occurs in long-term funds. Many taxpayers can ease their tax bite by investing in municipal bond funds. The catch with municipal bond funds is that they offer lower yields than comparable taxable bonds. For example, if a U.S. Treasury bond yields 4.8 percent, then a quality municipal bonds of the same maturity might yield 4 percent. The tax advantage makes it worthwhile to invest in the lower-yielding tax-exempt fund, and the tax advantage to a particular investor hinges on that investor's tax bracket. To figure out how much you'd have to earn on a taxable investment to equal the yield on a tax-exempt investment, use this formula: The tax-exempt yield divided by (1 minus your tax bracket) = equivalent yield of a taxable investment. You are in the 24 percent bracket, and the yield of a tax-exempt investment is 4 percent. Applying the formula, we get 0.04 divided by (1.00 minus 0.24) = 0.0526. Therefore, 5.26 percent is the yield you would have to receive from a taxable investment to match the tax-exempt yield of 4 percent. For some taxpayers, portions of income earned by tax-exempt funds may be subject to the federal alternative minimum tax. Although income from tax-exempt funds is federally tax-exempt, you must still report on your tax return the amount of tax-exempt income you received during the year. This is an information-reporting requirement only and does not convert tax-exempt earnings into taxable income. Your tax-exempt mutual fund will send you a statement summarizing its distributions for the past year and explaining how to handle tax-exempt dividends on a state-by-state basis. Capital gain distributions paid by municipal bond funds (unlike distributions of interest) are not free from federal tax. Most states also tax these capital gain distributions. How do states generally tax mutual fund distributions? Generally, states treat mutual fund distributions as taxable income, just as the federal government does. However, states may not provide favored tax rates for dividends or long-term capital gains. Further, if your mutual fund invests in U.S. government obligations, states generally exempt dividends attributable to federal obligation interest from state taxation. Mutual funds that invest in state obligations are another special situation. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities. What are the tax benefits and drawbacks of investing in a foreign mutual fund? Dividends from funds investing in foreign stocks may qualify for the 15/5/0 percent rate on dividends. If your fund invests in foreign stocks or bonds, part of the income it distributes may have been subject to foreign tax withholding. If so, you may be entitled to a tax deduction or credit for your pro-rata share of taxes paid. Your fund will provide you with the necessary information. A tax credit provides a dollar-for-dollar offset against your tax bill while a deduction reduces the amount of income on which you must pay tax, so it is generally advantageous to claim the foreign tax credit. If you decide to take the credit, you may need to attach a special form to your Form 1040, depending on the amount of credit involved.

What's the best way to borrow to make consumer purchases? For tax years 2018 through 2025, interest on home equity loans is only deductible when the loan is used to buy, build or substantially improve the taxpayer's home that secures the loan. Prior to 2018, many homeowners took out home equity loans. Unlike other consumer-related interest expenses (e.g., car loans and credit cards), interest on a home equity loan was deductible on your tax return. What special deductions can I get if I'm self-employed? You may be able to take an immediate Section 179 expense deduction of up to $1,160,000 for 2023 ($1,080,000 in 2022), for equipment purchased for use in your business, instead of writing it off over many years. There is a phaseout limit of $2,890,000 in 2023 ($2,700,000 in 2022). Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums. You may also be able to establish a Keogh, SEP, or SIMPLE IRA plan and deduct your contributions (investments). Can I ever save tax by filing a separate return instead of jointly with my spouse? You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria: One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses. The spouses' incomes are about equal. Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately. Why should I participate in my employer's cafeteria plan or FSA? Medical and dental expenses are deductible to the extent they exceed 7.5 percent of your adjusted gross income or AGI. If your employer offers a Flexible Spending Account (FSA), Health Savings Account, or cafeteria plan, these plans permit you to redirect a portion of your salary to pay these expenses with pretax dollars. What's the best way to give to charity? If you're planning to make a charitable gift, giving appreciated long-term capital assets generally makes more sense instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair-market value of the property. I have a large capital gain this year. What should I do? If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it before year-end. Capital gains losses are deductible up to the amount of your capital gains plus $3,000 ($1,500 for married filing separately). If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). What other tax-favored investments should I consider? For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death. Interest on state or local bonds ("municipals") is generally exempt from federal income tax and tax by the issuing state or locality. Therefore, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher-paying commercial bonds after a reduction in taxes. For high-income taxpayers who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. What tax-deferred investments are possible if I'm self-employed? Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several plans are available: an individual or self-employment 401(k) plan, a SEP (Simplified Employee Pension), and the SIMPLE IRA plan. How can I make tax-deferred investments? Through tax-deferred retirement accounts, you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are known as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer-matching contribution. What can I do to defer income? If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you're self-employed, defer sending invoices or bills to clients or customers until after the new year begins. You can also defer some of the tax, subject to estimated tax requirements. You can achieve the same effect of short-term income deferral by accelerating deductions, for example, paying a state-estimated tax installment in December instead of the following January due date. Why should I defer income to a later year? Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate.  Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

A basic knowledge of mutual fund taxation and careful record-keeping can help you cut the tax bite on your mutual fund investments. You must generally report as income any mutual fund distributions, whether or not they are reinvested. The tax law generally treats mutual fund shareholders as if they directly owned a proportionate share of the fund's portfolio of securities. Thus, all dividends and interest from securities in the portfolio, as well as any capital gains from the sales of securities, are taxed to the shareholders. The fund itself is not taxed on its income if certain tests are met and substantially all of its income is distributed to its shareholders. Taxable Distributions There are two types of taxable distributions: (1) ordinary dividends and (2) capital gain distributions: 1. Ordinary Dividends. Distributions of ordinary dividends, which come from the interest and dividends earned by securities in the fund's portfolio, represent the net earnings of the fund. They are paid out periodically to shareholders. Like the return on any other investment, mutual fund dividend payments decline or rise from year to year, depending on the income earned by the fund in accordance with its investment policy. These dividend payments are considered ordinary income and must be reported on your tax return. 2. Qualified dividends . Qualified dividends are ordinary dividends that are subject to the same tax rates that apply to net long-term capital gains. Dividends from mutual funds qualify where a mutual fund is receiving qualified dividends and distributing the required proportions thereof. Dividends from foreign corporations are qualified where their stock or ADRs are traded on U.S. exchanges or with IRS approval where the dividends are covered by U.S. tax treaties. 3. Capital gain distributions . When gains from the fund's sales of securities exceed losses, they are distributed to shareholders. As with ordinary dividends, these capital gain distributions vary in amount from year to year. They are treated as long-term capital gain, regardless of how long you have owned your fund shares. A mutual fund owner may also have capital gains from selling mutual fund shares. Capital gains rates The beneficial long-term capital gains rates on sales of mutual fund shares apply only to profits on shares held more than a year before sale. Profit on shares held a year or less before the sale is ordinary income, but capital gain distributions are long-term regardless of the length of time held before the distribution. In 2023, tax rates on capital gains and dividends remain the same as 2022 rates (0%, 15%, and a top rate of 20%); however, threshold amounts are different in that they don't correspond to new tax bracket structure as they did in the past. The maximum zero percent rate amounts are $44,625 for individuals and $89,250 for married filing jointly. For an individual taxpayer whose income is at or above $492,300 ($553,850 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $44,625 and below $492,300 for single filers). In 2023, say your taxable income, apart from long-term capital gains and qualified dividends, is $87,000. Even though you're in a middle-income tax bracket (22 percent on a joint return in 2023) you'll get the benefit of a lower capital gains tax rate, in this case, 15 percent for long-term gains and qualified dividends. For tax years 2013-2017 dividend income that fell in the highest tax bracket (39.6%) was taxed at 20 percent. For the middle tax brackets (25-35%) the dividend tax rate was 15 percent, and for the two lower ordinary income tax brackets of 10% and 15%, the dividend tax rate was zero. At tax time, your mutual fund will send you a Form 1099-DIV, which tells you what earnings to report on your income tax return, and how much of it is qualified dividends. Because tax rates on qualified dividends are the same as for capital gains distributions and long-term gains on sales, Congress wants these items combined in your tax reporting, that is, qualified dividends added to long-term capital gains. Also, capital losses are netted against capital gains before applying favorable capital gains rates. Losses will not be netted against dividends. Undistributed capital gains. Mutual funds sometimes retain a part of their capital gain and pay tax on them. You must report your share of such gains and can claim a credit for the tax paid. The mutual fund will report these amounts to you on Form 2439. You increase your shares' "cost basis" (more about this in Tip No. 5, below) by 65 percent of the gain, representing the gain reduced by the credit. Medicare Tax Starting with tax year 2013, an additional Medicare tax of 3.8 percent is applied to net investment income for individuals with modified adjusted gross income above $200,000 (single filers) and $250,000 (joint filers). These amounts are not indexed for inflation. Now that you have a better understanding of how mutual funds are taxed, here are 13 tips for minimizing the tax on your mutual fund activities: Keep Track of Reinvested Dividends Most funds offer you the option of having dividend and capital gain distributions automatically reinvested in the fund - a good way to buy new shares and expand your holdings. While most shareholders take advantage of this service, it is not a way to avoid being taxed. Reinvested ordinary dividends are still taxed (at long-term capital gains rates if qualified), just as if you had received them in cash. Similarly, reinvested capital gain distributions are taxed as long-term capital gain. If you reinvest, add the amount reinvested to the "cost basis" of your account, i.e., the amount you paid for your shares. The cost basis of your new shares purchased through automatic reinvesting is easily seen from your fund account statements. This information is important later on when you sell shares (more about that in Tip No. 5 ). Be Aware That Exchanges of Shares Are Taxable Events The "exchange privilege," or the ability to exchange shares of one fund for shares of another, is a popular feature of many mutual fund "families," i.e., fund organizations that offer a variety of funds. For tax purposes, exchanges are treated as if you had sold your shares in one fund and used the cash to purchase shares in another fund. In other words, you must report any capital gain from the exchange on your return. The same tax rules used for calculating gains and losses when you redeem shares apply when you exchange them. Gains on these redemptions and exchanges are taxable whether the fund invests in taxable or tax-exempt securities. Be Wary of Buying Shares Just Before Ex-Dividend Date Tax law requires that mutual funds distribute at least 98 percent of their ordinary and capital gain income annually. Thus, many funds make disproportionately large distributions in December. The date on which a fund's shareholders become entitled to future payment of a distribution is referred to as the ex-dividend date. On that date, the fund's net asset value (NAV) is reduced on a per-share basis by the exact amount of the distribution. Buying mutual fund shares just before this date can trigger an unexpected tax. You buy 1,000 shares of Fund XYZ at $10 a share. A few days later, the fund goes ex-dividend, entitling you to a $1 per share distribution. Because $1 of your $10 NAV is being distributed to you, the value of your 1,000 shares is reduced to $9,000. As with any fund distribution, you may receive the $1,000 in cash or reinvest it and receive additional shares. In either case, you must pay tax on the distribution. If you reinvest the $1,000, the distribution has the appearance of a wash in your account since the value of your fund investment remains $10,000. The $1,000 reinvestment results in the acquisition of 111.1 new shares with a $9 NAV and increases the cost basis of your total investment to $11,000. If you were to redeem your shares for $10,000 (their current value), you would realize a $1,000 capital loss. In spite of these tax consequences, in some instances it may be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date. To find out a fund's ex-dividend date call the fund directly. If you regularly check the mutual fund quotes in your daily newspaper and notice a decline in NAV from the previous day, the explanation may be that the fund has just gone ex-dividend. Newspapers generally use a footnote to indicate when a fund goes ex-dividend. Do Not Overlook the Advantages of Tax-Exempt Funds If you are in the higher tax brackets and are seeing your investment profits taxed away, then there is a good alternative to consider: tax-exempt mutual funds. Distributions from such funds that are attributable to interest from state and municipal bonds are exempt from federal income tax (although they may be subject to state tax). The same is true of distributions from tax-exempt money market funds. These funds also invest in municipal bonds, but only in those that are short-term or close to maturity, the aim being to reduce the fluctuation in NAV that occurs in long-term funds. Many taxpayers can ease their tax bite by investing in municipal bond funds. The catch with municipal bond funds is that they offer lower yields than comparable taxable bonds. For example, if a U.S. Treasury bond yields 2.8 percent, then a quality municipal bond of the same maturity might yield 2.45 percent. If an investor is in a higher tax bracket, the tax advantage makes it worthwhile to invest in the lower-yielding tax-exempt fund. Whether the tax advantage actually benefits a particular investor depends on that investor's tax bracket. To figure out how much you would have to earn on a taxable investment to equal the yield on a tax-exempt investment, use this formula: Tax-exempt yield divided by (1 minus your tax bracket) = equivalent yield of a taxable investment. You are planning for the 32% bracket. The yield of a tax-exempt investment is 2.8 percent. Applying the formula, we get .028 divided by .68 (1 minus .32) = .041. Therefore, 4.1 percent is the yield you would need from a taxable investment to match the tax-exempt yield of 2.8 percent. In limited cases based on the types of bonds involved, part of the income earned by tax-exempt funds may be subject to the federal alternative minimum tax. Although income from tax-exempt funds is federally tax-exempt, you must still report on your tax return the amount of tax-exempt income you received during the year. This is an information-reporting requirement only and does not convert tax-exempt earnings into taxable income. Your tax-exempt mutual fund will send you a statement summarizing its distributions for the past year and explaining how to handle tax-exempt dividends on a state-by-state basis. Capital gain distributions paid by municipal bond funds (unlike distributions of interest) are not free from federal tax. Most states also tax these capital gain distributions. Keep Records of Your Mutual Fund Transactions It is very important to keep the statements from each mutual fund you own, especially the year-end statement. By law, mutual funds must send you a record of every transaction in your account, including reinvestments and exchanges of shares. The statement shows the date, amount, and number of full and fractional shares bought or sold. These transactions are also contained in the year-end statement. In addition, you will receive a year-end Form 1099-B, which reports the sale of fund shares, for any non-IRA mutual fund account in which you sold shares during the year. Why is record keeping so important? When you sell mutual fund shares, you will realize a capital gain or loss in the year the shares are sold. You must pay tax on any capital gain arising from the sale, just as you would from the sale of individual securities. (Losses may be used to offset other gains in the current year and deducted up to an additional $3,000 of ordinary income. Remaining loss may be carried for comparable treatment in later years.) The amount of the gain or loss is determined by the difference between the cost basis of the shares (generally the original purchase price) and the sale price. Thus, in order to figure the gain or loss on a sale of shares, it is essential to know the cost basis. If you have kept your statements, you will be able to figure this out. In 2012, you purchased 100 shares of Fund JKL at $10 a share for a total purchase price of $1,000. Your cost basis for each share is $10 (what you paid for the shares). Any fees or commissions paid at the time of purchase are included in the basis, so since you paid an up-front commission of two percent, or $20, on the purchase, your cost basis for each share is $10.20 ($1,020 divided by 100). Let's say you sell your Fund JKL shares this year for $1,500. Assume there are no adjustments to your $ 1,020 basis, such as basis attributable to shares purchased through reinvestment (for an example of the effect of reinvestment on the cost basis, see Tip #6.). On this year's income tax return, you report a capital gain of $480 ($1,500 minus $1,020). Since they are taken into account in your cost basis, commissions or brokerage fees are not deductible separately as investment expenses on your tax return. One of the advantages of mutual fund investing is that the fund provides you with all of the records that you need to compute gains and losses--a real plus at tax time. Some funds even provide cost basis information or compute gains and losses for shares sold. That is why it is important to save the statements. However, you are not required to use the fund's gain or loss computations in your tax reporting. Re-investing Dividends & Capital Gain Distributions when Calculating Make sure that you do not pay any unnecessary capital gain taxes on the sale of mutual fund shares because you forgot about reinvested amounts. When you reinvest dividends and capital gain distributions to buy more shares, you should add the cost of those shares (that is, the amount invested) to the cost basis of the shares in that account because you have already paid tax on those shares. Failure to include reinvested dividends and capital gain distributions in your cost basis is a costly mistake. You bought 500 shares in Fund PQR 15 years ago for $10,000. Over the years, you reinvested dividends and capital gain distributions in the amount of $8,000, for which you received 100 additional shares. This year, you sell all 600 of those shares for $40,000. If you forget to include the price paid for the 100 shares purchased through reinvestment (even though the fund sent you a statement recording the shares you received in each transaction), you will unwittingly report on your tax return a capital gain of $30,000 ($40,000 - $ 10,000) on your redemption of 600 shares, rather than the correct capital gain of 22,000 ($40,000 - [$10,000 + $8,000]). Adjust Cost Basis for Non-Taxable Distributions Sometimes mutual funds make distributions to shareholders that are not attributable to the fund's earnings. These are nontaxable distributions, also known as returns of capital. Because a return of capital is a return of part of your investment, it is not taxable. Your mutual fund will show any return of capital on Form 1099-DIV in the box for nontaxable distributions. Nontaxable distributions are not the same as the tax-exempt dividends described in Tip No. 4 . If you receive a return-of-capital distribution, your basis in the shares is reduced by the amount of the return. Fifteen years ago, you purchased 1,000 shares of Fund ABC at $10 a share. The following year you received a $1-per-share return-of-capital distribution, which reduced your basis in those shares by $1, to give you an adjusted basis of $9 per share. This year you sell your 1,000 shares for $15 a share. Assuming no other transactions during this period, you would have a capital gain this year of $6 a share ($15 - $9) for a total reported capital gain of $6,000. Nontaxable distributions cannot reduce your basis below zero. If you receive returns of capital that, taken together, exceed your original basis, you must report the excess as a long-term capital gain. Your overall basis will not change if non-taxable distributions are reinvested. However, your per-share basis will be reduced. Use the Best Method of Identifying Sold Shares Calculating the capital gain or loss on shares you sell is somewhat more complicated if, as is usually the case, you are selling only some of your shares. You then must use some accounting method to identify which shares were sold to determine your capital gain or loss. The IRS recognizes several methods of identifying the shares sold: First-in, first-out (FIFO), Average cost (single category and double category), and Specific identification. Reports from your funds may include a computation of gain or loss on your sale of mutual fund shares. Typically, these will use the average cost method, single category rule. This is done as a convenience. You are allowed to adopt one of the other methods. First-In, First-Out (FIFO) Under this method, the first shares bought are considered the first shares sold. Unless you specify that you are using one of the other methods, the IRS will assume you are using FIFO. Average Cost This approach allows you to calculate an average cost for each share by adding up the total cost of all the shares you own in a particular mutual fund and dividing by the number of shares. If you elect to take an average cost approach, you must then choose whether to use a single-category method or a double-category method. With the single category method, you simply group all shares together, add up the cost, and divide by the number of shares. Under this method, you are deemed to have sold first the shares you have held the longest. The double category method enables you to separate short-term and long-term shares. Shares held for one year or less are considered short-term; shares held for more than one year are considered long-term. You average the cost of shares in each category separately. In this way, you may specify whether you are redeeming long-term or short-term shares. Keep in mind that once you elect to use either average cost method, you must continue to use it for all transactions in that fund unless you receive IRS approval to change your method. Specific Identification Under this method, you specify the individual shares that are sold. If you have kept track of the purchase prices and dates of all your fund shares, including shares purchased with reinvested distributions, you will be able to identify, for example, those shares with the highest purchase prices and indicate that they are the shares you are selling. This strategy gives you the smallest capital gain and could save you a significant amount on your taxes. To take advantage of this method, you must, at the time of the sale or exchange, indicate to your broker or to the mutual fund itself the particular shares you are selling. The IRS also insists that you receive written confirmation of your instructions. To see the advantages and disadvantages of these methods of identifying sold shares, see How The Various Identification Methods Compare (below). Money market funds present a very simple case when you redeem shares. Because most money market funds maintain a stable net asset value of $1 per share, you have no capital gain or loss when you sell shares. Thus, you only pay tax on any earnings distributed. Avoid Backup Withholding One way the IRS makes sure it receives taxes owed by taxpayers is through backup withholding. In the mutual fund context, this means that a mutual fund company is required to deduct and withhold a specified percentage (see below) of your dividend and redemption proceeds if one of the following situations has occurred: You have not supplied your taxpayer identification number (Social Security number) to the fund company; You supplied a TIN that the IRS finds to be wrong; The IRS finds you have underreported your interest and dividend payments; or You failed to tell the fund company you are not subject to backup withholding. The backup withholding percentage is 24 percent for tax years 2018-2025 (28 percent in prior years). Don't Forget State Taxation Many states treat mutual fund distributions the same way the federal government does. There are, however, some differences. For example,: If your mutual fund invests in U.S. government obligations, states generally exempt from state taxation dividends attributable to federal obligation interest. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities. Most states don't grant reduced rates for capital gains or dividends. Don't Overlook Possible Tax Credits for Foreign Income If your fund invests in foreign stocks or bonds, part of the income it distributes may have been subject to foreign tax withholding. If so, you may be entitled to a tax deduction or credit for your pro-rata share of taxes paid. Your fund will provide you with the necessary information. Because a tax credit provides a dollar-for-dollar offset against your tax bill, while a deduction reduces the amount of income on which you must pay tax, it is generally advantageous to claim the foreign tax credit. If the foreign tax doesn't exceed $300 ($600 on a joint return), then you may not need to file IRS form 1116 to claim the credit. Be Careful About Trying the "Wash Sale" Rule If you sell fund shares at a loss (so you can take a capital loss on your return) and then repurchase shares in the same fund shortly thereafter, beware of the wash sale rule. This rule bars a loss deduction when a taxpayer buys "substantially identical" shares within 30 days before or after the date of sale. Be sure to wait more than thirty (30) days before reinvesting. Choose Tax-Efficient Funds Many investors who hold mutual funds directly may hold others through tax-sheltered accounts such as 401(k)s, IRAs, and Keoghs. Your aggressive high-turnover funds and high-income funds should be in tax-sheltered accounts. These generate more current income and gains, currently taxable if held directly but tax-deferred in tax-sheltered accounts. Buy-to-hold funds and low activity funds such as index funds should be owned directly (as opposed to a tax-sheltered account). With relatively small currently distributable income, such investments can continue to grow with only a modest reduction for current taxes. For some investors, the simpler approach may be to hold mutual funds personally and more highly taxed income (such as bond interest) in the tax-sheltered account. As you can see, there are many tax pitfalls that await the unwary mutual fund investor. Professional guidance should be considered to minimize the tax impact. How The Various Identification Methods Compare. To illustrate the advantages and disadvantages of the various methods of identifying the shares that you sell, assume that you bought 100 shares of Fund PQR in January 2005 at $20 a share, 100 shares in January 2006 at $30 a share, and 100 shares in November 2010 at $46 a share. You sell 50 shares in June of this year for $50 a share. Here are your alternative ways to determine cost basis. First-In, First-Out (FIFO) . The FIFO method identifies the 50 shares sold as among the first 100 shares purchased. Your cost basis per share is $20. This rate gives you a capital gain of $1,500 ($2,500 - (50 x $20)). Advantages/Disadvantages. In this example, this method produces the highest amount of capital gain on which you are taxed. FIFO provides the lowest capital gain amount when the fund's net asset value has declined, and the first shares purchased were the most expensive. It can also sometimes save tax when shares bought later weren't held long enough to qualify for long-term capital gains treatment. Average Cost/Single Category. Average cost/single category allows you to calculate the average price paid for all shares in the fund. Here, your cost basis per share is $32 (your 300 shares cost $9,600: $9,600 divided by 300 = $32), giving you a capital gain of $900 ($2,500 - (50 x $32)). Advantages/Disadvantages. : Compared to FIFO, this method can reduce the amount of your capital gain if the fund's net asset value has increased over time. You could generate a lower long-term capital gain by using specific identification, but average cost/single category is useful if you did not designate shares at the time of sale or you simply do not want to do the record-keeping required to use the specific identification method. Average Cost/Double Category. Under this method, you average the cost of the short-term shares (those held for one year or less) and the cost of the long-term shares (those held for more than one year) separately. Thus, in the long-term category, you have 200 shares at $5,000 for an average cost of $25 per share ($5,000 x 200), and in the short-term category, you have 100 shares at $4,600 for an average cost of $46 per share ($4,600 divided by 100). Comparing the two categories, your taxable gain using the long-term shares would be $1,250 ($2,500 - (50 x $25)), to be taxed at up to 20 percent, while your taxable gain using the short-term shares would be $200 ($2,500 - (50 x $46)), to be taxed at up to 37 percent (top rate for 2023). Advantages/Disadvantages. In this example, using the average cost of short-term shares produces a better result. However, because of the current spread between the top marginal income tax rates and the maximum rate on long-term capital gains, it could make sense in some instances to choose the long-term shares. Furthermore, as with specific identification, you must plan ahead to use this method by specifying to the broker or mutual fund company at the time of sale that you are selling short-term or long-term shares, and you must receive confirmation of your specification in writing. If you have elected to use average cost-double category but do not specify for a particular redemption whether you are redeeming short-term or long-term shares, the IRS will deem you to have redeemed the long-term shares first. Specific identification. With this method, you designate which shares you are selling. To reduce your capital gains tax bill the most, you would select the shares with the highest purchase price. In this case, you would identify the 50 shares sold as among those purchased in 1999. Your cost basis, therefore, is $46 per share, giving you a capital gain of $200 ($2,500 - (50 x $46)). Advantages/Disadvantages: This method can produce favorable results in lowering the capital gain, but IRS regulations require you to think ahead by providing instructions before the sale and then receiving confirmation of your specification in writing. The IRS will not let you designate shares after the fact. Government and Non-Profit Agencies US Securities and Exchange Commission (SEC) Securities and Exchange Commission 100 F Street, NE Washington, D.C. 20549 (202) 942-8088 The SEC has public reference rooms at its headquarters in Washington, D.C., and at its Northeast and Midwest Regional offices. Copies of the text of documents filed in these reference rooms may be obtained by visiting or writing the Public Reference Room (at a standard per page reproduction rate) or through private contractors (who charge for research and/or reproduction). Other sources of information filed with the SEC include public or law libraries, securities firms, financial service bureaus, computerized on-line services, and the companies themselves. Most companies whose stock is traded over the counter or on a stock exchange must file "full disclosure" reports on a regular basis with the SEC. The annual report (Form 10-K) is the most comprehensive of these. It contains a narrative description and statistical information on the company's business, operations, properties, parents, and subsidiaries; its management, including their compensation and ownership of company securities: and significant legal proceedings that involve the company. Form 10-K also contains the audited financial statements of the company (including a balance sheet, an income statement, and a statement of cash flow) and provides management's discussion of business operations and prospects for the future. Quarterly financial information on Form 8-K may be required as well. Anyone may search the SEC's Company Filings database for information regarding including quarterly and annual reports, registration statements for IPOs and other offerings, insider trading reports, and proxy materials. American Association of Individual Investors (Offers an a n nual guide to low-load mutual funds): 625 North Michigan Avenue Chicago, IL 60611 Tel: 312-280-0170 or 800-428-2244 Investment Company Institute (Publishes an annual directory of mutual funds): 1401 H Street NW, Suite 1200 Washington, DC 20005 Tel: 202-326-5800 Investment Management Education Alliance (Offers a free Portfolio tool, complete with data from Morningstar, Inc.): 2345 Grand Boulevard Kansas City, MO 64108 Tel: 816-454-9427

This Financial Guide provides tax saving strategies for deferring income and maximizing deductions and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed. Before getting into the specifics, however, we would like to stress the importance of proper documentation. Many taxpayers forgo worthwhile tax deductions because they have neglected to keep receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, and charitable gifts and travel. But don't do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income. The checklist items listed below are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, we'd be happy to discuss it with you. Avoid or Defer Income Recognition Deferring taxable income makes sense for two reasons. Most individuals are in a higher tax bracket in their working years than they are during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer. You can achieve the same effect of deferring income by accelerating deductions, for example, by paying a state estimated tax installment in December instead of at the following January due date. Max Out Your 401(k) or Similar Employer Plan Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets. Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution. If You Have Your Own Business, Set Up and Contribute to a Retirement Plan If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan. Contribute to an IRA If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA -even where the spouse has little or no earned income. All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax-free. To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure that you get the most tax-deferred earnings possible from your money. Defer Bonuses or Other Earned Income If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you're self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements. This may even save taxes if you are in a lower tax bracket in the following year. Be advised, however, that the amount subject to social security or self-employment tax increases each year. Accelerate Capital Losses and Defer Capital Gains If you have investments on which you have an accumulated loss, it may be advantageous to sell them prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss. Watch Trading Activity in Your Portfolio When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don't withdraw them, so you may prefer a fund with low turnover, assuming satisfactory investment management. Turnover isn't a tax consideration in tax-sheltered funds such as IRAs or 401(k)s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death. Use the Gift-Tax Exclusion to Shift Income You can give away $17,000 ($34,000 if joined by a spouse) per donee in 2023, per year without paying federal gift tax. You can give $17,000 to as many donees as you like. While the gift on these transfers is not taxable, any income earned on these gifts will be taxed at the donee's tax rate, which in many cases is lower. Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax. Invest in Treasury Securities For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. Also, investing in Treasury bills that mature in the next tax year results in a deferral of the tax until the next year. Consider Tax-Exempt Municipal Bonds Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher-paying commercial bonds after reduction for taxes. Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in the computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible. Give Appreciated Assets to Charity If you're planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property. Many taxpayers also give depreciated assets to charity. The deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits. Keep Track of Mileage Driven for Business, Medical or Charitable Purposes If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2023, it's 65.5 cents per mile for business, 22 cents for medical and moving purposes (members of the armed forces only for tax years 2018-2025), and 14 cents for service for charitable organizations. To substantiate the deduction, you need to keep detailed daily records of the mileage driven for these purposes. Take Advantage of Your Employer's Benefit Plans to Get an Effective Deduction for Items Such as Medical Expenses Medical and dental expenses are generally only deductible to the extent they exceed 7.5 percent of your adjusted gross income (AGI). For most individuals, particularly those with high incomes, this eliminates the possibility of a deduction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pretax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans. Check Out Separate Filing Status Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria: One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses. The spouses' incomes are about equal. Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes. If Self-Employed, Take Advantage of Special Deductions You may be able to expense up to $1,160,000 in 2023 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan, or a Health Savings Account, as mentioned above. If Self-Employed, Hire Your Child in the Business If your child is under age 18, he or she is not subject to employment taxes from your unincorporated business (income taxes still apply). This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she is under the age of 8 years old. Take Out a Home-Equity Loan Due to tax reform legislation passed in 2017, the following information applies only to tax years prior to 2018. For tax years 2018-2025, interest on home equity loans is not deductible when used for the purposes listed below. Most consumer-related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other nondeductible obligations. Bunch Your Itemized Deductions  Certain itemized deductions, such as medical or employment-related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.

What kind of records do I need to keep in my business? Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that helps you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income, and expenses. That information helps you pinpoint both the strong and weak phases of your business operations. Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS. To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied up in inventory. They should reveal which of your product lines, departments, or services are making a profit, as well as your gross and net profit. The Basic Recordkeeping System A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records. An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns. What do I need to know about automating part or all of my business? You must have a clear understanding of your firm's long- and short-range goals, the advantages and disadvantages of all of the alternatives to a computer and, specifically, what you want to accomplish with a computer. Compare the best manual (non-computerized) system you can develop with the computer system you hope to get. It may be possible to improve your existing manual system enough to accomplish your goals. In any event, one cannot automate a business without first creating and improving manual systems. Business Applications Performed by Computers A computer's multiple capabilities can solve many business problems from keeping transaction records and preparing statements and reports to maintaining customer and lead lists, creating brochures, and paying your staff. A complete computer system can organize and store many similarly structured pieces of information, perform complicated mathematical computations quickly and accurately, print information quickly and accurately, facilitate communications among individuals, departments, and branches, and link the office to many sources of data available through larger networks. Computers can also streamline such manual business operations as accounts receivable, advertising, inventory, payroll, and planning. With all of these operations, the computer increases efficiency, reduces errors, and cuts costs. Computer Business Applications Computers also can perform more complicated operations, such as financial modeling programs that prepare and analyze financial statements and spreadsheets and accounting programs that compile statistics, plot trends, and markets, and do market analysis, modeling, graphs, and forms. Various word processing programs produce typewritten documents and provide text-editing functions while desktop publishing programs enable you to create good quality print materials on your computer. Critical path analysis programs divide large projects into smaller, more easily managed segments or steps. How can I ensure that I'm choosing the right computer system? To computerize your business you need to choose the best programs for your business, select the right equipment, and then implement the various applications associated with the software. In addition, application software is composed of programs that make the computer perform particular functions, such as payroll check writing, accounts receivable, posting or inventory reporting and are normally purchased separately from the computer hardware. QuickBooks is a good example of this type of software. To determine your requirements, prepare a list of all functions in your business. in which speed and accuracy are needed for handling volumes of information. These are called applications. For each of these applications make a list of all reports that are currently produced. You should also include any pre-printed forms such as checks, billing statements or vouchers. If such forms don't exist, develop a good idea of what you want - a hand-drawn version will help. For each report list the frequency with which it is to be generated, who will generate it and the number of copies needed. In addition to printed matter, make a list of information that you want to display on the computer video screen (CRT). For all files you are keeping manually or expect to computerize list, identify how you retrieve a particular entry. Do you use account numbers or are they organized alphabetically by name? What other methods would you like to use to retrieve a particular entry? Zip code? Product purchased? Indeed, the more detailed you are, the better your chance of finding programs compatible with your business. How can I successfully implement a new computer system?  When implementing computer applications for your business, problems are inevitable, but proper planning can help you avoid some and mitigate the effects of others. First, explain to each affected employee how the computer will change his or her position. Set target dates for key phases of the implementation, especially the last date for format changes. Be sure the location for your new computer meets the system's requirements for temperature, humidity, and electrical power. Prepare a prioritized list of applications to be converted from manual to computer systems, and then train, or have the vendors train, everyone who will be using the system. After installation, each application on the conversion list should be entered and run parallel with the preexisting, corresponding manual system until you have verified that the new system works. System Security If you will have confidential information in your system, you will want safeguards to keep unauthorized users from stealing, modifying or destroying the data. You can simply lock up the equipment, or you can install user identification and password software. Data Safety The best and cheapest insurance against lost data is to back up information on each diskette regularly. Copies should be kept in a safe place away from the business site. Also, it is useful to have and test a disaster recovery plan and to identify all data, programs, and documents needed for essential tasks during recovery from a disaster. Finally, be sure to employ more than one person who can operate the system, and ensure that all systems are continually monitored.

According to the US Small Business Administration, small businesses employ half of all private-sector employees in the United States. However, a majority of small businesses do not offer their workers retirement savings benefits. If you're like many other small business owners in the United States, you may be considering the various retirement plan options available for your company. Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today's competitive environment. Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business's assets. Such benefits include: Tax-deferred growth on earnings within the plan Current tax savings on individual contributions to the plan Immediate tax deductions for employer contributions Easy to establish and maintain Low-cost benefit with a highly-perceived value by your employees Types of Plans Most private sector retirement plans are either defined benefit plans or defined contribution plans. Defined benefit plans are designed to provide a desired retirement benefit for each participant. This type of plan can allow for a rapid accumulation of assets over a short period of time. The required contribution is actuarially determined each year, based on factors such as age, years of employment, the desired retirement benefit, and the value of plan assets. Contributions are generally required each year and can vary widely. A defined contribution plan, on the other hand, does not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees' individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans, and employee stock ownership plans. Small businesses may choose to offer a defined benefit plan or any of these defined contribution plans. Many financial institutions and pension practitioners make available both defined benefit and defined contribution "prototype" plans that have been pre-approved by the IRS. When such a plan meets the requirements of the tax code it is said to be qualified and will receive four significant tax benefits. The income generated by the plan assets is not subject to income tax because the income is earned and managed within the framework of a tax-exempt trust. An employer is entitled to a current tax deduction for contributions to the plan. The plan participants (the employees or their beneficiaries) do not have to pay income tax on the amounts contributed on their behalf until the year the funds are distributed to them by the employer. Under the right circumstances, beneficiaries of qualified plan distributors are afforded special tax treatment. It is necessary to note that all retirement plans have important tax, business, and other implications for employers and employees. Therefore, you should discuss any retirement savings plan that you consider implementing with your accountant or financial advisor. Here's a brief look at some plans that can help you and your employees save. SIMPLE: Savings Incentive Match Plan A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE IRA plans, employees can set aside up to $15,500 in 2023 ($14,000 in 2022) by payroll deduction. If the employee is 50 or older then they may contribute an additional $3,500. Employers can either match employee contributions dollar for dollar - up to 3 percent of an employee's wage - or make a fixed contribution of two percent of pay for all eligible employees instead of a matching contribution. SIMPLE IRA plans are easy to set up by filling out a short form. Administrative costs are low and much of the paperwork is done by the financial institution that handles the SIMPLE IRA plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent or to send contributions for all employees to one financial institution. Employees are 100 percent vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs. SEP: Simplified Employee Pension Plan A SEP plan allows employers to set up a type of individual retirement account - known as a SEP IRA - for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee's annual salary or $66,000 in 2023 (up from $61,000 in 2022). SEP plans can be started by most employers, including those who are self-employed. SEP plans have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP IRA each year - offering you some flexibility when business conditions vary. 401(k) Plans 401(k) plans have become a widely accepted savings vehicle for small businesses and allow employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $22,500 in 2023 ($20,500 in 2022), reduce a participant's pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $7,500 in 2023. Employers may offer to match a certain percentage of the employee's contribution, increasing participation in the plan. While more complex, 401(k)plans offer higher contribution limits than SIMPLE IRA plans and IRAs, allowing employees to accumulate greater savings. Profit-Sharing Plans Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEP plans. Contributions may range from 0 to 25 percent of eligible employees' compensation, to a maximum of $66,000 in 2023 (up from $61,000 in 2022) per employee. The contribution in any one year cannot exceed 25 percent of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25 percent while others may get as little as three percent. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions). Your Goals for a Retirement Plan Business owners set up retirement plans for different reasons. Why are you considering one? Do you want to:  Take advantage of the tax breaks, to save more money than you'd otherwise be able to. Provide competitive benefits in addition to - or in lieu of - high pay to employees? Primarily save for your own retirement? You might say "All of the above." Small employers who want to set up retirement plans generally fall into one of two groups. The first group includes those who want to set up a retirement plan primarily because they want to create a tax-advantage savings vehicle for themselves and thus want to allocate the greatest possible part of the contribution to the owners. The second group includes those who just want a low-cost, simple retirement plan for employees. If there were one plan that was most efficient in doing all these things, there wouldn't be so many choices. That's why it's so important to know what your goal is. Each type of plan has different advantages and disadvantages, and you can't really pick the best ones unless you know what your real purpose is in offering a plan. Once you have an idea of what your motives are, you're in a better position to weigh the alternatives and make the right pension choice. If you do decide that you want to offer a retirement plan, then you are definitely going to need some professional advice and guidance. Pension rules are complex and the tax aspects of retirement plans can also be confusing. Make sure you confer with your accountant before deciding which plan is right for you and your employees.

How would you like to legally deduct every dime you spend on vacation this year? This financial guide offers strategies that help you do just that. Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did - and was able to legally deduct every dime that he spent on his "vacation." Here's how he did it. 1. Make all your business appointments before you leave for your trip. Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible. Wrong. You must have at least one business appointment before you leave in order to establish the "prior set business purpose" required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit. Let's say Tim is a manufacturer of green office products looking to expand his business and distribute more product. One possible way to establish business contacts - if he doesn't already have them - is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination. Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business. It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary. 2. Make Sure your Trip is All "Business Travel." In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100 percent deductible as long as your trip is business-related you are traveling away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home. Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS. Remember: You don't need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status. 3. Make sure that you deduct all of your on-the-road-expenses for each day you're away. For every day you are on business travel, you can deduct 100 percent of lodging, tips, car rentals, and 50 percent of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50 percent of this amount, or $25. The IRS doesn't require receipts for travel expense under $75 per expense - except for lodging. For 2021 and 2022 only, business-related meals purchased from a restaurant (for eat-in or take-out) are deductible at 100 percent. Let's look at an example: If Tim pays $6 for drinks on the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75. He would, however, need to document these items in a diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and business reason for the expense. If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging. Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home. 4. Sandwich weekends between business days. If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend. Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend. 5. Make the majority of your trip days business days.  The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities, otherwise, you cannot make any transportation deductions. Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday met with distributors on Monday and flew home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days? All of them. Thursday is a business day since it includes traveling - even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day. Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible. With proper planning, you can deduct most of your vacations if you combine them with business. Bon Voyage!

Under the IRS rules, a taxpayer is allowed to deduct expenses related to business use of a home, but only if the space is used "exclusively" on a "regular basis." To qualify for a home office deduction you must meet one of the following requirements: Exclusive and regular use as your principal place of business A place for meeting with clients or customers in the ordinary course of business A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities A separate structure not attached to your dwelling unit that is used regularly and exclusively for your trade or profession also qualifies as a home office under the IRS definition. The exclusive-use test is satisfied if a specific portion of the taxpayer's home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes. Incidental business use does not qualify. In determining the principal place of business, the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business. Employees Tax reform legislation passed in 2017 repealed certain itemized deductions on Schedule A, Itemized Deductions for tax years 2018 through 2025, including employee business expense deductions related to home office use. For tax years prior to 2018, employees could claim home office expenses as deductions provided they met additional rules such as business use must also be for the convenience of the employer (not just the employee). To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer and use the rented portion to perform services as an employee for the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction. To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer and use the rented portion to perform services as an employee for the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction. Expenses Home office expenses are classified into three categories: Direct Business Expenses relate to expenses incurred for the business part of your home such as additional phone lines, long-distance calls, and optional phone services. Basic local telephone service charges (that is, monthly access charges) for the first phone line in the residence generally do not qualify for the deduction. Indirect Business Expenses are expenditures that are related to running your home such as mortgage or rent, insurance, real estate taxes, utilities, and repairs. Unrelated Expenses such as painting a room that is not used for business or lawn care are not deductible. Deduction Limit You can deduct all your business expenses related to the use of your home if your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation). But, if your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Nondeductible expenses such as insurance, utilities, and depreciation that are allocable to the business are limited to the gross income from the business use of your home minus the sum of the following:  The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). These expenses are discussed in detail under Deducting Expenses, later. The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. If your deductions are greater than the current year's limit, you can carry over the excess to the next year. They are subject to the deduction limit for that year, whether or not you live in the same home during that year. Sale of Residence If you use property partly as a home and partly for business, tax rules generally permit a $500,000 (married filing jointly) or $250,000 (single or married filing separately) exclusion on the gain from the sale of a primary residence provided certain ownership and use tests are met during the 5-year period ending on the date of the sale: You owned the home for at least 2 years (ownership test), and You lived in the home as your main home for at least 2 years (use test). If the part of your property used for business is within your home, such as a room used as a home office for a business there is no need to allocate gain on the sale of the property between the business part of the property and the part used as a home. However, if you used part of your property as a home and a separate part of it, such as an outbuilding, for business other rules apply such as whether the use test was met (or not met) for the business part and whether or not there was business use in the year of the sale. If you need more information about whether you qualify for the exclusion, please don't hesitate to call us. Simplified Home Office Deduction If you're one of the more than 3.4 million taxpayers who claimed deductions for business use of a home (commonly referred to as the home office deduction), don't forget about the new simplified option available for taxpayers starting with 2013 tax returns. Taxpayers claiming the optional deduction will complete a significantly simplified form. The new optional deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet. Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees are still fully deductible. Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. Tax Deductions The "home office" tax deduction is valuable because it converts a portion of otherwise nondeductible expenses such as a mortgage, rent, utilities, and homeowners insurance into a deduction. Remember however, that an individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the "principal place of business" as defined above. The IRS applies a 2-part test to determine if the home office is the principal place of business. Do you spend more business-related time in your home office than anywhere else? Are the most significant revenue-generating activities performed in your home office? If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction cannot be taken. A home office also increases your business miles because travel from your home office to a business destination--whether it's meeting clients, picking up supplies, or visiting a job site--counts as business miles. And, you can depreciate furniture and equipment (purchased new for your business or converted to business use), as well as expense new equipment used in your business under the Section 179 expense election. Taxpayers taking a deduction for business use of their home must complete Form 8829. If you have a home office or are considering one, please call us. We'll be happy to help you take advantage of these deductions.