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Incorporating a Business

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Should I incorporate my business?

Answer: Operating as a sole proprietor is often the simplest and least expensive way to organize your business. Even so, many business owners choose to incorporate their businesses. But taking that step has both advantages and drawbacks.
A chief advantage of incorporation is that the business assets of the corporation can be separated from your personal finances. As a result, your personal assets generally can be shielded from creditors of the business if you incorporate your business.
To maintain this legal separation (known as the corporate veil), you must observe certain formalities. For instance, you must keep corporate assets separate from personal assets, hold periodic shareholder meetings, and file reports required by various government agencies, including a separate tax return. The costs of establishing and maintaining corporate formalities are a disadvantage of incorporation and must be factored into your decision.
Another possible disadvantage of incorporation is double taxation of income. Double taxation means that after the corporation pays tax on its earnings, you must pay tax on corporate earnings distributed to you as dividends by the corporation. In many instances, corporations with 100 or fewer shareholders can avoid double taxation by electing to be treated as S corporations.
Before deciding to incorporate, you should seek legal and tax advice on what type of ownership best suits your business. Other forms of ownership may offer your company the advantages of incorporation (such as limited liability), but also offer more management flexibility or tax advantages. You might also want to consider how big you expect the business to grow, and the sources of financing you expect to tap. An experienced attorney and tax advisor can help you decide which form of ownership is best for your business.

Kids going to day camp? You may be eligible for a tax credit

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Day camp is a qualified expense under the child or dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2013, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. The credit’s value had been scheduled to drop in 2013, but the American Taxpayer Relief Act of 2012 made higher limits permanent.

Be aware, however, that overnight camp costs don’t qualify for the credit.

A wide variety of tax breaks are available to parents. If you’d like to learn more, please contact us.

401(k) Plans

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A 401(k) plan is a type of employer – sponsored retirement plan in which you can elect to defer receipt of some of your wages until retirement. If you make pre-tax contributions, your taxable income is reduced by the amount that you contribute to the plan each year, up to certain limits. The contributed amount and any investment earnings are taxed to you when withdrawn or distributed. If your plan allows after-tax Roth contributions, there’s no immediate tax benefit, but qualified distributions are entirely tax free.

Most 401(k) plans offer an assortment of investment options, ranging from conservative to aggressive.

Key strengths

  • You receive “free” money if your contributions are matched by your employer
  • You decide how much to save (within federal limits) and how to invest your 401(k) money
  • Your regular 401(k) contributions are made with pretax dollars
  • Earnings accrue tax deferred until you start making withdrawals, usually after retirement
  • Your Roth 401(k) contributions (if your plan allows them) are made with after-tax dollars; there’s no upfront tax benefit, but distributions of your contributions are always tax free and, if you satisfy a five-year waiting period, distributions of earnings after age 59½, or upon your disability or death, are also tax free
  • You may qualify for a partial income tax credit
  • Plan loans may be available to you
  • Hardship withdrawals may be available to you, though income tax and perhaps an early withdrawal penalty will apply, and you may be suspended from participating for up to six months
  • Your employer may provide full-service investment management
  • Savings in a 401(k) are exempt from creditor claims in bankruptcy (but not from IRS claims)

Bare in mind…

  • 401(k)s do not promise future benefits; if your plan investments perform badly, you could suffer a financial loss
  • If you withdraw the funds prior to age 59½ (age 55 in certain circumstances) you may have to pay a 10 percent early withdrawal penalty (in addition to ordinary income tax)
  • The IRS limits the amount of money you can contribute to your 401(k)
  • Unless the plan is a SIMPLE 401(k) plan, you may have to work for your employer up to five years to fully own employer matching contributions

The new 0.9% Medicare tax: Watch out for withholding issues

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Under the health care act, starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an additional 0.9% Medicare tax on the excess earnings. Employers are required to withhold the tax beginning in the pay period in which wages exceed $200,000 for the calendar year — without regard to the employee’s filing status or income from other sources. So, it’s possible your employer:

Will withhold the tax even though you aren’t liable for it. You can’t ask your employer to stop withholding the tax, but you can claim a credit on your income tax return.

Won’t withheld the tax even though you are liable for it. You may use Form W-4 to request additional income tax withholding to cover your liability and avoid interest and penalties.

If you have questions about how withholding issues related to the new 0.9% Medicare tax might affect you, please contact us.

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