Where to Find Investment Income

Yields on bank accounts and money market funds continue to be negligible. That’s discouraging for people who anticipate cash flow from their savings. In some cases, such income is vital for paying ongoing expenses. Even if that’s not the case, the unearned cash flow would be a nice way to pad your portfolio. Of course, be sure to understand any investment carefully before you commit.

For taxable accounts

Generally, you should consider holding investments with tax advantages in a regular account. Some possibilities:

Municipal bonds. The interest is exempt from federal income tax, and local issues may be totally tax free. Some municipal bond funds have low expenses and strong track records. However, if you prefer more control over your holdings, you might construct a bond ladder—individual bonds with staggered maturities.

Example: Heath Jensen buys $50,000 of municipal bonds maturing in 2016, $50,000 of munis maturing in 2017, and so on, out to 2022. As the bonds mature each year, Heath will use the redemption proceeds to buy $50,000 of bonds one year further out, adding a rung to his ladder as a replacement.

Ultimately, Heath will wind up with bonds bought at a 7-year maturity, often a good combination of yield and reasonable waiting time till maturity. If yields should rise, as many people expect, Heath will be reinvesting the proceeds at those higher yields.

Dividend paying stocks. For the most part, people pay only 15% in tax on stock dividends. Those with modest incomes (taxable income up to $74,900 this year on a joint return, for example) owe 0% tax. The good news is that stock dividends can grow over time, if the company’s business is successful.

Of course, stock prices can fall sharply. If that happens, a 2% or 3% dividend won’t be much of a consolation. Still, steady investing in companies that are profitable enough to pay dividends has been a successful strategy, over the long term.

Equity REITs. Some real estate investment trusts (REITs) buy mortgages, whereas others own investment properties. Either way, REITs must distribute most of their profits in order to avoid corporate income tax. Thus, some REITs pay relatively high distributions to their investors.

What’s more, some distributions from REITs that own properties (known as equity REITs) are untaxed returns of capital. You might get 6% from an equity REIT but owe tax only on 4%. In this hypothetical scenario, the 2% that avoids current tax is subtracted from your basis in the REIT. A lower basis, in turn, can increase tax on a future sale. Even so, tax deferral and a possible shift to a lower tax rate on a future sale can amplify the benefits of holding equity REITs. (Again, REIT prices can drop, so there is risk to investors.)

For tax-deferred accounts

In your IRA, 401(k), or other tax-deferred retirement accounts, consider income producing assets that have no protection from current taxation. You can defer the tax on the investment income, perhaps until you’re retired, in a low tax bracket. Some possibilities:

Ginnie Mae funds. These funds hold mortgages that are supported by the Government National Mortgage Association (GNMA). The interest paid by homeowners is passed through to investors in the fund. Unlike other mortgage-backed securities, Ginnie Mae interest and principal repayment is guaranteed by the federal government.

Yields on Ginnie Mae funds are usually a bit higher than Treasury bond yields. Among other reasons, Ginnie Mae payouts are not exempt from state and local income tax, which is the case with Treasury bond interest. You can buy individual Ginnie Mae securities, but they can be complex because homeowners are repaying principal along with their monthly interest, so investing through a fund can offer simplicity.

High-yield bond funds. If you’re looking for yields, why not put some money into a fund with a name that promises steep payouts? Typically, these funds hold corporate bonds that are low-rated or unrated, often known as junk bonds. Because their credit quality is suspect, issuers must promise substantial yields to bond buyers.

It’s unlikely you would want to hold nothing but junk bonds in your retirement fund. Still, a partial allocation might deliver some significant income, if you can stand the volatility of this asset class. A financial adviser may be able to help you find a high-yield fund with relatively low yields and a solid performance history.

Floating-rate funds. These funds acquire loans made by banks and other lenders, often to companies with relatively low credit ratings. Not only do investors receive attractive yields, they also may get some protection against rising interest rates. That’s because the loans held by floating-rate funds typically have interest rates that reset periodically. Rising interest rates devalue most bonds and bond funds; with floating-rate funds, rising rates translate into higher yields for investors.

Floating-rate funds can be volatile—they lost heavily in the financial crisis of 2008. As is the case whenever you depart from familiar investments in search of higher yields, you should be sure you fully understand what you’re buying and what risks you might be facing.

Pros and Cons of Roth IRAs

Annual contributions to IRAs, including Roth IRAs, are now capped at $5,500 ($6,500 if you’re 50 or older). Roth IRA contributions aren’t tax deductible, they’re available only to workers and their spouses, and they’re off-limits to high-income taxpayers.

Nevertheless, there is a way to get large amounts into a Roth IRA, regardless of your income or your work status. You can convert a tax deferred account such as a traditional IRA or a 401(k) to a Roth IRA. Such a conversion, though, probably will trigger income tax much earlier than necessary.

Example 1: Jill Kent, age 60, has $400,000 in her traditional IRA, all of which came from deductible contributions. A complete Roth IRA conversion would add $400,000 to her income for the year. That would put her in the top 39.6% tax bracket and expose her to other tax obligations, such as the 3.8% Medicare surtax. Counting state income tax, Jill might owe close to $200,000 in tax on this conversion, for 2015. If she didn’t convert her traditional IRA, Jill could avoid taking any taxable distributions for more than 10 years; going forward, she would be required to withdraw relatively modest amounts each year.

Roth rewards

The biggest drawback of a Roth IRA conversion is the upfront tax obligation. In addition, Roth IRAs are subject to recordkeeping requirements and federal rules, which can change.

Despite these drawbacks, Roth IRAs are increasingly popular. The big attraction is the lure of tax-free cash flow. Once your Roth IRA has been in place for five years and you reach age 59½, all distributions are tax-free.

Qualified Roth IRA distributions will be untaxed, no matter how much income you report or how high tax rates might be in the future. Thus, having some money in a Roth IRA offers a hedge against rising income tax rates, which many observers predict.

Staying power

Another advantage of Roth IRAs is that owners have no required minimum distributions (RMDs). With traditional IRAs, 401(k)s, and so on, you generally must take out certain amounts each year after age 70½, or face a 50% penalty on any shortfall.

Example 2: With a $400,000 traditional IRA at age 60, Jill Kent could have a much larger account by age 70½. She might have to take taxable withdrawals of at least $15,000, $20,000, or more each year, regardless of whether she needs all the money.

If she converts her entire traditional IRA to a Roth IRA before that age, Jill will have no RMDs. She eventually can withdraw as much or as little as she wants, tax-free, and leave the balance to her beneficiaries. Those beneficiaries—who might be in their own high tax brackets when they inherit the account—can take untaxed distributions, although they will be on an RMD schedule.

By converting her traditional IRA to a Roth IRA in 2015, Jill will be reducing or eliminating her RMD obligation while creating a long-term, tax-free investment account.

Perfect hindsight

Two other features of Roth IRAs make them especially attractive. One, partial conversions are allowed. Jill might convert, say, $40,000 of her Roth IRA in 2015. If she does this every year, Jill could move most or all of her traditional IRA to a tax-free, RMD-free Roth IRA in 10 years.

The second appealing feature of a Roth IRA conversion is the ability to recharacterize (reverse) the conversion back to a traditional IRA by October 15 of the following year. This can be done in full or in part, so you effectively have the ability to specify the amount of tax you’ll have to pay.

Example 3: Jill converts her entire $400,000 IRA to a Roth IRA in 2015. In 2016, when Jill prepares her 2015 tax return, her CPA calculates her tax bill at various conversion amounts. Jill discovers that the total tax rate on an $80,000 (20% of $400,000) Roth IRA conversion would be 35% in this hypothetical scenario. She decides to make the conversion, resulting in a tax bill of $28,000. She recharacterizes the other 80% of her Roth IRA back to a traditional IRA, planning to repeat the process at the end of 2016.

Our office can help you determine the amount to recharacterize, if you wish to execute a Roth IRA conversion in 2015 and perhaps a recharacterization in 2016, to hold down the tax you’ll owe.

Trusted advice

Roth IRA Contributions 

  • The amount you can contribute to a Roth IRA each year is determined by your modified adjusted gross income (MAGI).
  • For this purpose, the MAGI calculation starts with your AGI, found at the bottom of page 1 of your tax return. Subtract any income you report as a result of a Roth IRA conversion or a rollover from a qualified retirement plan to a Roth IRA.
  • To get MAGI, start with AGI and then add any deductions or exclusions you report for a regular contribution to a traditional IRA, student loan interest, qualified tuition and related expenses, foreign earned income, foreign housing, interest income from series EE bonds, employer-paid adoption expenses, and domestic production activities.
  • In 2015, you can contribute the maximum $5,500 ($6,500 at age 50 or older) if your MAGI is under $116,000 as a single taxpayer, or under $183,000 on a joint tax return.
  • You can make a partial contribution with MAGI between $116,000 and $131,000 (single) or between $183,000 and $193,000 (joint). With MAGI beyond those amounts, no contributions can be made.

Home Mortgage Deduction Doubled for Unmarried Co-owners

Home mortgage interest deduction doubled for unmarried co-owners.The Ninth Circuit Court of Appeals, reversing a Tax Court decision, concluded that the tax law’s limits on the amount of debt eligible for the home mortgage interest deduction ($1 million of mortgage “acquisition” debt and $100,000 of home equity debt) are applied on a per-individual basis, and not a per-residence basis as the IRS has long maintained.Thus, for the unmarried co-owners in the case, their collective limit for the home mortgage interest deduction doubled from a maximum of $1.1 million to a maximum of $2.2 million acquisition and home equity debt.

New accounting safe haven.The IRS has provided a new safe harbor that allows accrual method recipients of services to treat economic performance as occurring ratably for contracts where services are provided on a regular basis.Thus, under the safe harbor, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the contract.The IRS also provided procedures for obtaining the IRS’s automatic consent to change to this accounting method, which is effective for tax years ending on or after July 30, 2015.Absent an exception or safe harbor such as this, a liability is generally incurred and taken into account by a taxpayer under an accrual accounting method only in the tax year in which: (1) all the events have occurred that establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy (these first two items are collectively referred to as the all events test); and (3) economic performance has occurred.

HLB International Appoints Three Members in Costa Rica

HLB International, one of the leading global accountancy networks with presence in 130 countries, has recently signed three members in Costa Rica:

Esquivel & Alvarez -eyacpa-

Established in 1997 and based in Heredia, Esquivel & Alvarez -eyacpa- provides nationwide audit, accounting and tax services with special expertise in the following industries and services: agriculture and agro-industry (coffee, grapefruits), NGOs, trade, hospitality and tourism, manufacturing, franchises, international logistics, IFRS implementation, business advisory, transfer pricing advisory, business restructuring, internal control and international taxation.  More information on


D.T. Baltodano Coghi y Zayas

Established in 2007 and based in San José, D.T. Baltodano Coghi y Zayas provides audit and accounting, tax and corporate finance services with special expertise in the services, trade, hospitality, manufacturing, agriculture and insurance sectors, and to the following clients: foundations, trusts, cooperatives and associations, private companies and public entities More information on


J.C. & Asociados

Established in 1992 with offices in San José and San Carlos, J.C. & Asociados provides audit, accounting, tax and advisory services based on risk, due diligence, international funds administration and outsourcing to a wide range of clients and industry sectors nationwide.  More information on

These three additions will contribute to reinforcing HLB International’s presence in Central America, where the network is already established in Guatemala, Honduras, Nicaragua, El Salvador and Panama.

Tax Relief for Victims of Severe Storms and Flooding in South Carolina

Victims of the severe storms and flooding that took place beginning on October 1, 2015 in parts of South Carolina may qualify for tax relief from the Internal Revenue Service.

Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in South Carolina will receive tax relief.

The President has declared Berkeley, Charleston, Clarendon, Dorchester, Georgetown, Horry, Lexington, Orangeburg, Richland, Sumter and Williamsburg counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Oct. 1, and on or before February 16, 2016 have been postponed to February 16, 2016. This includes the Oct. 15 deadline for those who received an extension to file their 2014 return.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Oct. 1, as long as the deposits were made by Oct. 16, 2015.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area that was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Feb. 16, 2016 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Oct. 1 and on or before Feb. 16, 2016.

The IRS also gives affected taxpayers until Feb. 16, 2016 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Oct. 1 and on or before Feb. 16, 2016.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Oct. 1, and on or before Oct. 16 provided the taxpayer made these deposits by Oct. 16, 2015.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “South Carolina, Severe Storms and Flooding” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation “Severe Storms and Flooding in South Carolina” in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website,, or order them by calling 800-829-3676. The IRS toll-free number for general tax questions is 800-829-1040.

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