ClientConnection. August 2014 IN THIS ISSUE. 1 Mid-year Tax Letter

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1 ClientConnection A publication of Donnelly-Boland and Associates August Mid-year Tax Letter IN THIS ISSUE 2 Help During Transitional Times 3 Investment Planning: Bonds 4 Accounting À la Carte 5 Dealing with Troublesome Employees 6 Medicare Surtaxes 7 Social Security Seminars 8 Summertime Tax Planning 10 The Business File / Marriage Accounting À la Carte Learn more about the various accounting services we provide. Page 4 ACCOUNTING FINANCIAL SERVICES GOVERNMENT AND NON-PROFIT CONSULTING HUMAN RESOURCES TAXES Dear Clients and Friends, We have become so accustomed to an ever-changing tax code that it may seem strange to take up a midyear tax review under rules that have not changed significantly for Those in Washington seem to have put tax simplification and revision on hold for the time being. There is still talk and perhaps some behind the scenes work on tax reform, but most admit nothing is likely to happen until 2015 or beyond. There have been a few recent tax events that will affect individuals and businesses. The IRS issued repair regulations, clarifying for the business community when costs related to fixed assets must be capitalized and when they can be currently expensed. A Tax Court case put a once-a-year limit on the number of nontaxable IRA rollovers individuals can do. And the IRS has been focusing its attention on tax-related identity theft and refund scams. This Letter is being sent to you to encourage you to do a 2014 review of your own tax situation. Midyear planning is important because you still have time to adjust strategies that will make a difference to your 2014 tax bill. To make your 2014 tax-cutting efforts most effective, call Donnelly-Boland and Associates now and let s get together for your midyear tax planning review.

2 Help During Transitional Times By Fay K. Boland, CPA President and CEO All organizations go through changes. Turnover in staff can often leave a void between departing employees and their replacements. Due to their constant need, some of the most disruptive changes occur when a financial department or a human resources (HR) department loses key staff. Donnelly-Boland and Associates (Donnelly-Boland) offers transition management services to assist clients who have experienced the loss of a chief financial officer, controller, HR manager, HR professional or other key personnel. If, for example, an organization s CFO or controller has left temporarily, or the company needs additional help with an important finance related project, then our executives can work with you to develop a transition management plan to keep those critical gears in motion. This will ensure that the organization receives the skilled financial leadership it needs to operate successfully. Alternatively, losing your HR manager while you are fighting an unemployment claim or worse an EEOC claim can be equally challenging. Organizational change does not need to be overwhelming. Our professionals can manage the transition and assist in finding the right replacement. More than a standard service firm, Donnelly-Boland is uniquely qualified to help you manage a transition of key personnel, whether that need is in your fiscal department or your human resources department. We also have assisted in various emergency situations both, in the accounting department and the human resources department. We are very interested in finding solutions that work for you, the client, and we are able to help develop solid strategies for managing day-to-day accounting or human resources tasks and operations. We can provide immediate and seamless support in maintaining our accounting system, your human resources system, and all other operational aspects of your accounting and/or human resources departments. Many of the clients we serve have a one person HR shop which, in times of organizational change, can be devastating. Donnelly-Boland has the experience to maintain your human resources department in those critical times. Donnelly-Boland will make sure your needs are met in the most efficient and cost effective manner. Most Common Transition Management Situations: - Pending retirement - Maternity leave - Sick leave - Short and long term disability - Permanent loss of key personnel -Organizational crisis The accounting professionals at Donnelly- Boland and Associates include 6 CPAs and 17 QuickBooks ProAdvisors who are well-equipped to serve clients with both simple and complex accounting and tax requirements ranging from: General ledger and financial reporting Accounts payable processing Billing services Payroll and benefit administration Account reconciliation services System assessments Audit preparation services Year-end reporting to funding sources Budget preparation and review Donnelly-Boland s human resources personnel belong to Pittsburgh Human Resources Association (PHRA) and our human resources Executive is part of the PHRA Emerging Trends committee. We can assist you in all areas of human resources which during a transitional phase can be invaluable in keeping your company safe in this critical arena. In all cases, we work with you to define a project or transition time frame, prepare an estimated cost for the project and get your approval before starting any project. We are here to serve our clients in their most disruptive times to ensure that these departments run smoothly, effectively and efficiently. Page 2 Client Connection

3 The Appeal of Tax Free Investments* By Kevin P. Boland, CPA Executive Vice President ext In planning your investment strategy to achieve an acceptable return, it is important to understand all of your costs including income taxes. In order to minimize taxes, investors should position their investments in the right portfolio tax inefficient holdings should be held in tax deferred accounts. Tax efficient investments should be held in taxable accounts. The phasing in of recent legislative changes has increased the significance of tax costs to net investment returns. While employers and employees focus on the provisions of the Patient Protection and Affordable Care Act dealing with insurance coverage and employer responsibilities, the Act also has implications for investors. The Act introduces a 3.8% surtax on net investment income. For Pennsylvania taxpayers this increases the combined top marginal rate to 46.47% in the top tax bracket. However, the application threshold for the tax means that it could also apply to single tax payers and heads of household in the next three brackets raising the top marginal rate for the 28%, 33% and 36% brackets to 34.87%, 39.87% and 42.87%. For married taxpayers filing jointly only the next two brackets (33% and 36%) are affected. This increases the appeal of tax free and tax deferred investments to taxpayers in these brackets. Income from investments in municipal bond funds* is exempt from Federal taxes. Income from investments in Pennsylvania municipal bond funds is exempt from Pennsylvania taxes as well. You may want to consider municipal bond funds for your taxable portfolio. At current tax rates, a 4% yield on a municipal bond fund is the equivalent of a taxable yield of 7.07% for taxpayers in the top bracket. If the investment is a Pennsylvania municipal bond fund, the tax equivalent yield increases to 7.47%. For a single taxpayer in the 28% bracket, that same 4% yield on a Pennsylvania municipal bond fund is the equivalent of a taxable yield of 6.1%. At 5.8% it s still worthwhile to consider out-ofstate municipal bond funds as well. Those who are more aggressive might consider a high yield municipal bond fund. Those looking to limit market risk might consider a floating rate municipal bond fund. There are also a plethora of single state bond funds for those looking to take advantage of the home state tax exemption. If you would like to discuss how investments in municipal bond funds can be worked into your financial plan, please don t hesitate to call us. Kevin Boland, Advisory Representative. *Securities offered through H.D. Vest Investment Services sm, Member SIPC. Advisory Services offered through H.D. Vest Advisory Services SM Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Donnelly-Boland and Associates is not a registered broker/dealer or independent investment advisory firm. Page 3

4 Accounting À la carte By Ian Episcopo Accounting Assistant ext In an ideal world, your business or nonprofit organization would have complete support of an accounting firm to fulfill all of your accounting needs. However, due to budgetary constraints, that is not always feasible. Allow Donnelly-Boland and Associates to step in to assess your current functions and we can find the scalable solution that s right for you! The Various Components Many people think accounting is just bookkeeping, but in reality it is so much more. There are many processes that fit together to make up the full accounting function of an organization. Some of the major components include general ledger and financial reporting, accounts payable and receivable processing, payroll, and benefit administration. Organizations have various needs, and it is our job to help you identify which needs are most critical. Unique Situations Although Donnelly-Boland and Associates can perform all facets of typical accounting functions, some of our clients pick and choose specific services they need. Regardless if you need help with project work, short-term resolutions, or permanent solutions, Donnelly-Boland can provide the help to meet your unique situation. "...find the scalable solution that's right for you!" Working Within Your Budget Many organizations, especially nonprofits, have strict budgets. Work needs to be completed correctly, in a timely manner, and under budget. Since 1992, Donnelly-Boland and Associates has worked with organizations with such restrictions. We can assess your organization's accounting functions, and help stretch your limited funds. Needs Assessment Each organization is different and has distinct needs. We have different levels of accountants on staff to perform all functions from basic tasks to the most extraordinary challenges. Donnelly- Boland can give your organization the personal attention it needs to become more successful. Woman-Owned Business As a Woman-Owned Business, Donnelly-Boland and Associates can help! Donnelly-Boland meets a number of diversity requirements of government contracts Many state standards, federal goals, and privately owned, corporate programs set aside project funding specifically for women owned businesses Donnelly-Boland is flexible enough to work as a primary contractor or a subcontractor to meet your organization s needs Page 4 Client Connection

5 Dealing with Troublesome Employees All new employees seem wonderful on their date of hire. However, most organizations have the misfortune of dealing with difficult employees. Whether it is someone who does not respect authority, someone who is frequently late for work, or someone who simply will not work with others in the department, employee situations can cause problems that affect the entire organization. Rather than allowing one employee to disrupt an entire department, call Donnelly-Boland and Associates to come in and help to provide a solution that is right for you. Many of the troublesome workers are extremely good at what they do, and you don t want to lose their skills. Terminating an employee is an option, but it is not the only option. Listed below are a number of ways to deal with employee conflict in the workplace. Supervisor-Employee Intervention One of the most common practices to deal with a difficult employee is to intervene. There are many times when employees are unaware of who they are offending or what rules they are breaking. If an employee strolls in to work 15 minutes late each day because he thinks it is a relaxed culture, then he may not be aware of the issue he is causing. Confronting problems head on and communicating effectively with the employee can often fix the situation before they become a much larger issue. Documentation is Key One of the most important aspects of dealing with troublesome employees is proper documentation. It is critical to have specific examples with detailed information of events. In the event that the employee has an attitude change after a meeting with the supervisor, the documentation may never be needed. However, it is always best to be prepared. In cases where things do not go well, the documentation may be what helps keep the company from a costly lawsuit. The key to good documentation is to By Richard C. Healy Senior Consultant rhealy@donnelly-boland.com record relevant and specific information including date and time of occurrence, person(s) involved, location of the situation and details about the issue. It is also vital to have signed documentation. The person who prepares the documentation as well as the person(s) involved should sign the documentation. A copy of the documentation should then be placed in the employee s personnel file. A Clear Handbook When you are having a discussion with an employee, you want to be able to point to specific policies that the employee has violated. In order to do this, you need a well-written handbook to show that what they did was in fact against company policy. Being able to sit down with an employee and explain the issue often contains the matter. How We Can Help In each of these stages, Donnelly-Boland and Associates can help. Our Human Resources department has excellent staff capable of handbook creation and revision, we have extensive experience at auditing employee personnel files, and we have high level staff who can help consult with organizations regarding employee situations. Don t let employee conflict harm your organization. Please call upon one of our experienced HR professionals when these or any other needs arise. Page 5

6 Take steps to deal with the Medicare surtaxes We re now in our second year of the new Medicare surtaxes. Since January 1, 2013, employees and self-employed people have owed an additional 0.9% surtax on earned income above $200,000 for singles or $250,000 for joint filers. Investment income that exceeds certain thresholds has been subjected to a 3.8% Medicare surtax. Both new taxes are in addition to the traditional Medicare taxes, which have remained unchanged. The 3.8% investment surtax applies to the lesser of (a) net investment income (NII), or (b) the excess of modified adjusted gross income (MAGI) above $200,000 for singles, $250,000 for spouses filing jointly, or $125,000 for spouses filing separately. Net investment income includes interest, dividends, capital gains, rents, royalties, nonqualified annuities, and income from passive activities. It excludes earned income, social security benefits, tax-exempt interest, and distributions from qualified retirement plans. Modified adjusted gross income is adjusted gross income increased by certain deductions and exclusions. Planning can help minimize these surtaxes Earned income To help minimize the surtax on earned income, try to defer excess discretionary earnings (such as commissions or bonuses) to a lower-income year. If you re self-employed, consider maximizing payments of deductible expenses in highincome years while deferring late-year customer billings to the following year. You might also think about increasing your withholding or quarterly estimate payments to cover any additional liability. Investment income The surtax on net investment income is trickier but provides more planning opportunities. To reduce this surtax: Consider liquidating depreciating stocks to offset capital gains. Shift some investments to tax-deferred annuities, municipal bonds, or other vehicles that don t generate taxable income. Maximize deductible contributions to traditional IRAs, 401(k) plans, or similar sheltered investments. Their earnings are excluded from NII, and the contributions reduce your MAGI. Donate appreciated stocks to charities rather than selling them. Try to make otherwise taxable investments through a Roth IRA. The earnings won t be part of NII, and subsequent tax-free withdrawals won t count toward the thresholds. If these surtaxes affect you, develop a tax plan now to take them into account and keep them to a minimum. Page 6 Client Connection

7 MAXIMIZING YOUR SOCIAL SECURITY Donnelly-Boland and Associates partnered with the Waynesburg Area Chamber of Commerce and the Brentwood Baldwin Whitehall Chamber of Commerce to sponsor two Social Security Seminars. The first seminar took place in Waynesburg on May 21st and the second took place in Brentwood on June 18th. Both events featured Elaine Cole, a Social Security Administration Public Affairs Specialist. Elaine provided valuable information on the rules and regulations about Social Security benefits. Donnelly-Boland and Associates plans to hold two additional events in the fall of The focus of the presentations will be a follow-up to Elaine's general seminar, and will highlight specific ways to maximize your social security benefits. Elaine Cole at the May 21st DBU Seminar in Waynesburg Keep an eye out for invitations to our fall seminars! Sponsored by Donnelly-Boland and Associates, the Waynesburg Area Chamber of Commerce, and the Brentwood Baldwin Whitehall Chamber of Commerce.

8 Manage your 2014 tax bill with summertime tax planning Summertime: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill. 1. Bump up pre-tax retirement plan contributions. Elective contributions the ones you ask your employer to withhold from your paycheck reduce current-year taxable income. Compare the amount you re presently depositing in your account to the maximum allowed, and make adjustments now to spread the impact over the rest of the year. The maximum 401(k) contribution for 2014 is $17,500. If you re 50 or older this year, add an additional $5, Open an education savings account. There s no federal tax deduction for contributions to a 529 education plan. However, if you are currently setting aside money to pay for your child s college expenses in a taxable account, you could realize tax savings by opening a 529 plan instead. Earnings on plan assets grow taxdeferred and can be tax-free when withdrawals are used for qualified education expenses. 3. Reset basis with capital loss carryforwards. Would you benefit from selling an appreciated stock and using your loss carryforward to shelter the income? Planning point: Reacquiring the stock immediately after selling at a gain doesn t incur the wash sale rules. At the same time, you get an increased basis to offset future gains. 4. Hold off on retirement plan withdrawals. In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible. For example, you could sell long-term stocks with a high basis first. The current tax saving is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts. 5. Plan for required minimum distributions. What do you intend to do with the funds you re required to take from retirement accounts once you reach age 70½? Tax-efficient investing strategies can reduce the tax on the income you earn on the distributed amount. Another suggestion: Using the funds for charitable donations can offset some of the tax from the distribution. 6. Shift Income. Broaden your tax-planning focus to include family members. For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings. 7. Gifting offers similar benefits. You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.) For 2014, you can give $14,000 to anyone without incurring gift tax. Continued on page 9 Page 8 Client Connection

9 8. Track passive activity losses. Make sure you re on track to meet the active or material participation rules for your real estate rentals and other passive activities. The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook. 9. Know the alimony rules. If you are already paying alimony or finalizing a divorce that will result in alimony, be sure you re following the rules so you can claim a deduction. Among other requirements, payments must be made to a former spouse in cash under a divorce or separation decree, and must cease upon the recipient s death. 10. Preserve deductions. You ve heard it before: Recordkeeping is essential. Examples of tax breaks that may be disallowed if you cannot provide proof include charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses. If you neglected to start tracking these expenses at the beginning of the year, get going now. 11. Check dependent status. Keep your college student qualified as your dependent by monitoring the support test. The rule: Generally, your child cannot provide over one-half of his or her own support during the year. Remember, too, that other relatives may qualify as your dependents, including parents in nursing homes. 12. Update payments. Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business. Overpaying your 2014 tax reduces your available cash flow, but underpaying can lead to penalties and interest. 13. Review health insurance subsidies. Review your eligibility for the advance premium tax credit, a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange. If you elected to have the credit applied to your premium and your 2014 income is higher than you expect, you may have to pay back all or part of the credit. Summertime is perfect for tax planning. There s enough of the year behind you to establish a track record and enough ahead to make changes that matter. Please call to schedule an appointment for a comprehensive midyear review. We can help you identify the right tax-saving opportunities for your individual circumstances. Page 9

10 The Business File Do a midyear review of your business tax situation. Here are three areas to start with. What to do: Review asset and expense accounts to determine if current practices are in compliance with the new rules. Need a good reason to get started? Because the regulations can also affect prior years, you may be able to benefit from amending previously filed tax returns. Calculate your basis As an S corporation shareholder, knowing your basis is key to determining whether you can deduct current-year losses. The reason: Losses in excess of basis are generally suspended for use in later years when your business has income. Basis is also important if you plan to take nontaxable distributions. In cases when distributions exceed your investment in the company, the distributions can be taxed as capital gain. What to do: Perform a check-up to give yourself time to reestablish basis and avoid surprises at year-end. Update expensing policies The new repair regulations became effective January 1. These regulations control how you will classify the cost of assets, supplies, and repairs and maintenance some of which you will be able to expense immediately if you have the required policies in place. MARRIAGE: Tax penalty or bonus? Summertime is the traditional season for weddings. If you re planning a wedding this summer, you should take a look at how marriage could affect your tax bill. Depending on your individual situation, marriage could create tax penalties or tax benefits. TAX PENALTY. Take the so-called marriage penalty, the term applied to the amount of additional taxes some couples pay after they marry. If you and your spouse earn similar amounts of income, you may pay more tax as a married couple than each of you would as single individuals because your joint income pushes you into a higher tax bracket. Other provisions that can create a marriage penalty include phase-outs of personal exemptions and itemized deductions. Re-examine your business structure Whenever tax rates for corporations move in a different direction from those of individuals, an evaluation of your business entity makes sense. That s because when your business is an S corporation or a partnership, the business does not generally pay federal income tax. Instead, the income flows through to you and is taxed at your rate. Regular C corporations, on the other hand, pay tax on business income at corporate tax rates, which are presently lower than individual rates. What to do: Analyze the benefits of potential current income tax savings against your future goals. For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision. We urge you to be proactive with your business tax planning this summer. We have the tools and the knowledge to help you find answers to fit your situation. The new Medicare taxes can create a penalty because the threshold for applying them is $200,000 for singles and $250,000 for couples filing jointly. Also, if one of you has a retirement plan at work and the other contributes to an IRA, you may not be able to deduct the full amount of your IRA contributions after you re married. TAX BONUS. The tax code can also create marriage bonuses situations when tax liability can decrease after you marry. For example, if only one spouse has income, the wider brackets for marrieds at certain tax rates will give the couple a lower tax bill than paying as a single on the same amount of income. Other marriage bonuses: A wage-earning spouse can make an additional IRA contribution for a nonworking spouse, and married homeowners get double the $250,000 gain exclusion when they sell a home. Marriage can have significant tax implications. For more details, give us a call. Page 10 Client Connection

11 About Us Donnelly-Boland and Associates, a certified woman-owned business enterprise, is a CPA and consulting firm that provides an array of professional services including accounting, financial planning*, government and nonprofit consulting, human resources, and tax services. We have extensive experience in providing these services to governments, nonprofits, individuals and service businesses. Donnelly-Boland and Associates was incorporated in 1992 and is headquartered locally with offices in Baldwin, Brentwood, and Waynesburg as well as an office in Orlando, FL. We assist a variety of organizations, large and small, on both an interim or more permanent basis. The Value of Proven Results We serve every client with a depth of resources and the highest level of expertise, yet offer the personal attention and accessibility that builds strength and trust. We ve proven it s possible to offer comprehensive accounting, financial planning*, government and nonprofit consulting, human resources, and tax services by top-notch professionals without sacrificing value. Let Donnelly-Boland and Associates be the breath of fresh air you need to find temporary or long term solutions, project assistance, or a different perspective. Our owners and many of our employees are not just accountants, they are business owners and entrepreneurs themselves and have confronted many of the same challenges you face every day. Feel assured that your financial information is accurate, precise and always available in a timely fashion. Now you ll have the time you need to focus on the growth and success of your business or organization. Offices Baldwin 2801 Custer Avenue, Suite G Pittsburgh, PA Phone (412) Fax (412) Brentwood 3730 Brownsville Road Pittsburgh, PA Phone (412) Fax (412) Orlando Hartford Run Orlando, FL Phone (412) Fax (412) Waynesburg 69 S. Washington Street Waynesburg, PA Phone (724) Fax (412) Fay Boland and Kevin Boland, Advisory Representatives, *Securities offered through H.D. Vest Investment Services SM Member SIPC, Advisory services offered through H.D. Vest Advisory Services SM 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, Donnelly-Boland and Associates is not a registered broker/dealer or independent investment advisory firm. Page 11

12 The Hough Building, Suite G 2801 Custer Avenue Pittsburgh, PA Your August Client Connection