Monthly Archives: June 2015

Buy or Lease?

When thinking of buying vs. leasing we usually think of cars, but did you know that you can lease just about anything? Personal computers, apartments and houses, business equipment, and even employees can all be leased. Which is the best way?

First, there is no best way because each decision should be made on an individual basis. I know that we want to know an exact answer, but there really is none. Let’s look at buying vs. leasing a car for a business owner.

If you lease a car for your business you are generally able to deduct your lease payments as expenses. When financing or buying the same car you will generally be able to deduct your interest payments and a portion of the purchase price as depreciation, which may be an amount that is lower than your loan payments.

It sounds like leasing may be a better deal, right? In many cases it is for tax purposes, but in recent years there has been bonus depreciation, which would allow for a large deduction during the first year that your car is in service. But are taxes the only factor to consider?

Other factors to consider are how long you intend to keep your car, how many miles you drive, how well the car maintains its value, or just personal preference (meaning that you may want to drive a newer car every two to three years). The decision should be thought out carefully, and similar questions should be asked when purchasing or leasing other items, such as computers, equipment, or furniture.

FSA Plan = Money Saved

What exactly is an FSA plan and how can it save you money? FSA stands for flexible spending account, which is a special account that is used to pay for medical expenses on a pretax basis. In other words, the money put towards the plan is not subject to income taxes and social security/medicare taxes.

An FSA plan must be set-up by your employer for the benefit of its employees. For this reason, sole proprietors, partners, and S-corporation owners are not eligible to participate. Each year you need to decide how much money you want to put towards the FSA plan, which will then be deducted equally from each paycheck. For example, if you decide to put aside $1,200 and you get paid twice each month, then $50 will be deducted from your paycheck. For a person in the highest tax bracket the tax savings would be over $500 each year! The maximum amount that can currently be contributed is $2,550.

There are of course some drawbacks to an FSA plan from both an employee and employer perspective. First, if you don’t use the full amount that you elected to set aside by the end of the year, then you will forfeit the money to your employer. The best way around this is to set aside the absolute minimum that you project you will need for medical expenses. Additionally, even if you come up a little short, the tax savings may still be much greater than the shortfall.

The drawback to the employer is the extra cost of for administration of the plan, although it is offset partially by the social security/medicare tax savings. Another point is that if an employee leaves during the beginning of the year and has already spent their maximum, you cannot ask the employee to repay you back. This is why you want to set the threshold to a reasonable level so you lower your risk.

We all seem to be paying more and more for healthcare, but the FSA plan is one way to help lower our costs by lowering our taxes. Regardless of what the current administration elects to implement regarding healthcare, an FSA plan should still remain a viable way to help us out.

Traditional IRA vs. Roth IRA

Traditional IRA:

An individual retirement account that allows individuals to contribute pretax money to investments. The investments grow tax-deferred until the amounts are withdrawn at retirement, generally age 59 1/2. The maximum amount you can contribute for 2015 is the lesser of your taxable compensation or $5,500 ($6,500 if you are 50 or older). There are phase-outs for tax deductible contributions if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.

Roth IRA:

An individual retirement account that allows individuals to contribute after-tax money to investments. The investments grow tax free and there are no taxes when withdrawn at retirement, generally age 59 ½. The maximum amount you can contribute for 2015 is the lesser of your taxable compensation or $5,500 ($6,500 if you are 50 or older). The eligibility to contribute starts to phase-out once your modified adjusted gross income reaches $183,000 if your filing status is married filing jointly and $116,000 if single or head of household.

Estate Planning Basics

No one wants to think of the inevitable, but there are some basic points regarding estate planning we should all know. There are complex trusts and gifting strategies that can be incorporated, but let’s talk about first things first. Do you have a will? How do you own your assets? Are your beneficiaries updated in your insurance policies or retirement plans?

A will is your last will and testament, which spells out your wishes when you become deceased. With a properly set-up will, your assets will transfer to the beneficiaries you desire. Without a will your assets will be distributed according to state law, and your spouse or children may not receive all of your assets.  Additionally, if you have children you will need to appoint a guardian to take care of them. It is important to see a qualified attorney to handle this for you. Do not attempt this yourself. We can refer you to an attorney that best fits your needs.

The way you own assets also affects the way assets are distributed upon death, such as your house. The two ways are tenants in common and joint tenancy. As tenants in common, your share of the house is passed to your heirs designated in your will. With joint tenancy, your share is passed to the surviving joint tenant, regardless of what your will states. It is important to make sure your assets are owned in the way that best suits your needs.

Life insurance is separate from your will. You will need to designate a beneficiary when purchasing a policy, and the same applies to your retirement accounts. Upon death the proceeds will be automatically transferred to your beneficiaries. This is why it is critical to update your beneficiaries periodically. Can you imagine if you are divorced and never changed your life insurance beneficiary who is now your ex-spouse? The answer is obvious – your ex-spouse will be very happy!

Many people tend to think that estate planning is only for the wealthy or they don’t need an estate plan. It can be a costly mistake to feel this way, especially since simple wills are not very expensive, and it doesn’t cost money to change your beneficiaries of your life insurance or retirement plans.