Indiana Unemployment Taxes

In 2008, at the peek of the recession, many states had to take loans from the federal government to meet demands of unemployment funds.  Indiana took the largest of these loans.  The result was a penatly in the form of a reduced credit for state unemployment taxes paid on the federal unemployment tax form.  Business have been paying an extra 1.8% in federal unemployement taxes on each of their employees first $7,000 of wages since.

In October, Governer Pence announced that Indiana now had the funds to payoff the remainder of this loan.  The result is the removal of the 1.8% credit reduction, starting in 2015.  For an employer with $35,000 in taxable wages (5 employees making over $7,000) the tax saving for 2015 will be $630.

Indiana had to take the loan because the state unemployment fund was wofully underfunded.  In order to correct this Indiana increased the taxable wage base by $2,500 (from $7,000 to $9,500) and increased all business tax rates.  Business in industries seeing the largest amount of unemployement claims (construction, specialty contractors, etc.) saw the biggest increase.  The highest rate before the loan was 6.2%.  After the loan rates are as high as 9.484%.  Now that the loan is paid off, business taxpayers with positive experience accounts should see a signifant decrease in there experience rate for 2016.  I have already dealt with two contractors whose rates decreased 2%.  That is a $190 savings per full time employee. For Indiana business this is welcome news for the new year!

The ROTH Advantage

When asked about contributing to an IRA, usually the decision factors center around the current year tax advantage.  However, the ROTH IRA can have a major advantage long term.  The only question is how long is long term?

The ROTH IRA’s main advantage over a traditional IRA is that is grows tax free.  Dollars that you have already paid tax on are used to fund the IRA.  You then pay no tax on the draws when you take them later in retirement.  This makes all the investment income over the life of the IRA tax free.  So, if you make a contribution for 2015 of $1,000, based on a modest average rate of return of 5%, in ten years you will have gained $550, or 55% on your initial investment, tax free.  At a higher rate of return of 7.5%, in ten years you will have made over $900, almost doubling your investment, tax free.  Obviously, the younger you can contribute the better.  If you hold the investment for 30 years you would more than quaruple your investment at a 5% return and you would have eight times your investment at a 7.5% return.

The ability to contribute to a deductible IRA is phased out in the 25% tax bracket.  If you are currently in the 25% tax bracket, you should being shooting to be in the 15% tax bracket at retirement.  In this case, contributing to a traditional IRA would save you 10% on taxes.  On a $1,000 investment, that would be worth $100.  The ROTH would surpass this advantage in two years at a 5% rate of return.

I always try to explain how the ROTH IRA can be a huge advantage to my clients, but often the more real time benefit of the tax deductible traditional IRA is what people are looking for.  This is especially true if they are keeping AGI low for early social security or ACA insurance purposes.  However, another thing to consider is what pools of money you will be pulling from when you retire.  As a tax planner, I love when I have clients that come to me with options.  Having a taxable account to draw from and a non taxable account to draw from is the type of options I can help you utilize to keep you tax burden low no matter the cash requirements you have for a given year in retirement.

Small Business Benefit of Section 179

The recently enacted Consolidated Appropriations Act has increased the section 179 deductions to $500,000 for 2015 and future years.  This is the most talked about provision of this legistlation, but what is the real tax benefit?  There are two benefits to using the section 179 deduction:  Eliminating inflation’s effect on your deduction, and the decrease of tax based on your bracket in the current year versus coming years.

Based on information at Statista, inflation for 2015 will end up 0.1%.  This is the lowest inflation rate since 2009, when purchasing power actually deflated.  The average inflation for the past three years has been 1.72%.  Based on that rate of inflation for the next five years, what is the benefit of taking a deduction for a $100,000 purchase today?  $2,237.87.  Yeah, not much. But it is better than not taking it, so there is that.

Most small business are taxed at the individual level (as opposed to the corporate level) so we will use that for this analysis.  Most indivudual tax brackets jump up about 3%.  The exception is the 15% bracket.  The next bracket up from there is the 25% bracket.  This is the bracket a significant amount of Americans deal with.  The top of the 15% brackets for 2016 will be about $75,000 for married individuals.  So, if you are having a banner year, and find youself in the 25% bracket, when you are commonly in the 15% bracket, you could save yourself 10% on any assets you purchase before the year end.  Pretty nice deal, but the key is having a banner year.  You need to have been in a bracket you haven’t been in, and more importantly won’t be in.  If you are always in the 25% bracket, then this will only speed up your deduction, as there would be no tax benefit.

I love helping clients make decision regarding the use of section 179.  It means they are doing well financially, and are going to pass that along to other businesess in the economy by making a large purchase.  Despite this, I would never reconmend making a purchase just for the sake of section 179.  If you are in need something, and you have the business to support it financially, then section 179 can be a great planning tool.