Retirement is the endgame for most people - it's literally why we work so hard our entire lives. But it's also no longer a situation that is as straightforward as it once was, particularly as far as financial planning is concerned.
According to one recent study, nearly one out of every three people have nothing saved for retirement. More than half that have less than $10,000 set aside in a bank account for this specific purpose.
Indeed, a recent survey of CPA financial planners confirms that this situation may be a lot more precarious than most people think.
Your Money, Your Retirement and You
According to the most recent AICPA PFP Trends Survey, running out of money for retirement is the top concern of 41% of CPA financial planners today. If people aren't worried about not having enough money to retire in the first place, they're worried about not having enough to maintain their current lifestyle — a fear that 29% of respondents shared. The third biggest concern — coming in far behind the other two — had to do with the rising cost of healthcare, which 11% of people said that they were worried about.
The same study also revealed that once people retire, the biggest fear of 52% of retirees was a sharp decline in the value of their investments.
The second biggest fear, coming in at 24%, was a serious illness like dementia. To put that into perspective, millions of people are diagnosed with dementia or other cognitive issues every year, and that trend is expected to increase sharply over the next decade. Despite this, people are STILL more worried about their financial situation than they are about anything related to their health and wellbeing.
So at the very least, if you've come down with a severe case of retirement anxiety and are worried about your financial situation during your twilight years, know that you are not alone. Luckily, there are a few key steps you can take today to help ease some of this anxiety moving forward.
The Fight Against Retirement Anxiety
One of the biggest ways to combat retirement anxiety involves knowing what you can cut if needed. Take a look at your current spending patterns and decide which actions are related to "needs" and which are related to "wants." You can't necessarily cut the amount of money you're spending on healthcare, but you CAN get rid of that expensive cable package. Experts agree that running out of money is actually rare for older people who actively track and plan their spending, so keep this in mind moving forward.
Likewise, you should also at least consider delaying your Social Security checks until you reach the age of 70. Depending on when you retire, this might mean that you go almost a decade without receiving these monthly checks (if the current average retirement age is any consideration).
However, making this move means that you'll actually get a lot more money every month - something that may make all the difference if this is something you're truly concerned about.
Finally, the most important thing that you can do involves the acknowledgment that these types of issues are incredibly common - worrying about having enough money to comfortably retire is not something that is exclusive to you. Everyone thinks about these things and they cause everyone to stress every now and again. It's a natural part of getting older. Don't try to avoid it.
But you also can't let retirement anxiety prevent you from taking the action today that will protect your financial situation tomorrow. Partner with a financial advisor to lay out your goals and work to come up with the right plan that meets your needs together. That in and of itself is one of the best ways to prevent these types of fears from becoming a reality in the first place.
Taxation news blog
Friday, May 10, 2019
Thursday, May 9, 2019
Be Tax Wise With Your Charitable Contributions
Article Highlights:
- Charitable Itemized Deductions
- Bunching Deductions
- Qualified Charitable Distributions
- Donor-Advised Funds
As a rule, most taxpayers just wait until tax time to add up their potential deductions and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, here are some strategies that might work for you.
Bunching – Charitable contributions are a nice fit for the tax strategy referred to as “bunching.” When employing the bunching strategy, a taxpayer essentially doubles up on as many deductions as possible in one year, with the goal of being able to itemize deductions and then taking the standard deduction in the following year. Because charitable contributions are entirely payable at your discretion, they fit right into the bunching strategy. For example, if you normally tithe at your church, you could make your normal contributions throughout the current year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution in one year and having no charity deduction for church in the next year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows the year when the contribution was made.
Qualified Charitable Distribution – If you are age 70.5 or older, you can make charitable contributions by transferring funds from your IRA account to a charity, which are referred to as qualified charitable distributions (QCDs). The only hitch here is the funds must be transferred directly from the IRA to the charity, meaning your IRA trustee will have to make the distribution to the charity. No minimum amount needs to be transferred, but the maximum of all such transfers for the year is $100,000 per year, per taxpayer. Also note that distributions to private foundations and donor-advised funds don’t qualify for the QCD.
Thus, this strategy allows you to make a charitable contribution without itemizing deductions; since these distributions are tax-free, you can’t also claim a deduction for them. Even better, QCDs also count toward your minimum required distribution for the year. Because QCDs are nontaxable, your AGI will be lower, and you can benefit from tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers. If you decide to make a QCD, check with your IRA custodian on the IRA’s rules for how to request the QCD, and be sure to give the IRA custodian ample time to complete the process if you are making the request toward the end of the year. Always get a written acknowledgment from the charity, for tax-reporting purposes.
Donor-Advised Funds – Contributing to a donor-advised fund is a way to make a large (and generally deductible) charitable contribution in one year and put funds aside to satisfy the donor’s social obligations to make charitable contributions in future years, without incurring the expenses of setting up a private foundation and satisfying annual filing and other private foundation requirements.
Although generally considered a tax strategy for those with an unusually high income for the year, they are available to everyone, although most such funds set up through brokerages have minimum donation requirements, often $5,000–25,000. Although they may bear the donor's name, donor-advised funds are not separate entities but are mere bookkeeping entries. They are components of a qualified charitable organization. A contribution to a charity's donor-advised fund may be deductible in the year when it is made if it isn't considered earmarked for a particular distributee. The charity must fully own the funds and have ultimate control over their distribution. To document the contribution, the taxpayer must get written acknowledgment from the fund's sponsoring organization that it has exclusive legal control over the contributed assets. Although the donor can advise the charity, which generally will follow the donor’s recommendations, the donor cannot have the power to select distributees or decide the timing or amounts of distributions. The charity must also ensure that all distributions from the fund are arm’s length and do not directly or indirectly benefit the donor.
Example: Don and Shirley donate $25,000 to a donor-advised fund in one year. The $25,000 can be in the form of cash or even appreciated stock. Don and Shirley get a deduction for the full $25,000 as a charitable contribution during the year of the contribution and can suggest the amounts of distributions from the donor-advised fund should be made to various charities over a number of years. Thus, Don and Shirley achieve a large charitable contribution in one year that can be used to fund their charitable obligations over several years and can claim the $25,000 as an itemized deduction on their return for the year when they made the donation. They do not get a charitable contribution deduction when the funds are paid out to the various charities.
Wednesday, May 8, 2019
The Best Ways to Create a Budget You Can Live By
It takes little more than a passing understanding of the United States economy to understand that the next recession might be right around the corner. In fact, people have already begun to talk about how it may be arriving sooner rather than later. Recent economic forecasts predict that the economy will not only slow down across 2019, but it will continue to do so into 2020... pointing to the fact that trouble may be just over the horizon.
If you’re worried about the next great recession and are still haunted by memories of 2007 and 2008, you have every right to be. But you also need to learn from the mistakes of the past. Things got so bad the last time because many, many people were caught off-guard. Based on that, your course of action is clear: You need to start preparing for this possibility, and you need to start doing so today.
This means getting real about a personal or family budget, which, thankfully, is a lot more straightforward than you might have thought.
Your Keys to Building a Better Budget
To build the most accurate and forward-thinking budget that you can, you first need actionable information to work from. That means figuring out your after-tax income, so you know how much money you’re talking about.
If you get a regular paycheck from your employer, for example, sit down and consider not only your taxes but also automatic deductions for things like health and life insurance and your 401(k). Do this for every member of your household and add all those totals together to get a better idea of the total amount of money you’re actually working with.
At the same time, you also need to get an accurate idea of what your monthly expenses look like. For the best results, don’t consider your spending habits just yet this early in the process. Instead, simply list everything that you ‒ and your loved ones ‒ spend money on to maintain the lifestyle you’ve grown accustomed to.
List absolutely everything, including not only the essentials like utilities but also streaming service subscriptions, the amount of money you spend eating out in a month, and more. Don’t hold anything back ‒ it won’t benefit you at all to pretend like you don’t spend $50 a month on coffee runs if you absolutely know that you do. If you need to, go through your credit card statements. A variety of smartphone apps are available that will help you get a granular look at your expenses moving forward.
The Beautiful Simplicity of the 50/30/20 Budgeting Plan
Once you’ve got that bottom line dollar value, the next step involves choosing a budgeting plan that you can stick by. Generally speaking, the 50/30/20 plan is popular, both because of its effectiveness and its simplicity.
As the name suggests, this plan says that you should spend about 50 percent of your after-tax income on pure necessities. This means food, utilities, rent or mortgage payments, and other critical financial obligations like that. You can absolutely spend money on things that you want but don’t need (like that night out on the town or that fancy new 4K TV), but it shouldn’t total more than 30 percent of your after-tax earnings. Then, the remaining 20 percent gets funneled directly into your savings account (or is used toward debt repayment).
Depending on the amount of debt that your household has, you may have to adjust these totals a bit. Not all debt is bad, but too much debt can obviously be crippling. Increase the amount of money you’re using to pay down debt in the short term to help create a steadier foundation from which to build for the long term.
Other Important Considerations
Going back to your expenses, now that you know exactly what you’re spending money on every month, look for opportunities to proactively cut back whenever possible. Do you pay $15 per month for a Netflix account that you don’t really use? It’s better to cancel that and pocket the $15 NOW before it becomes a requirement for you to do so during the next recession.
Finally, and perhaps most importantly, don’t be afraid to enlist the help of a professional if you’re not sure what to do. Diving into your finances can always be stressful from a certain perspective, and with the looming threat of a recession on the horizon, that will only get even worse. Rather than trying to do everything yourself and making mistakes in the process, consider enlisting the help of a professional to fill in some of the gaps that exist in your own knowledge.
Financial professionals have seen it all ‒ they’ve worked with every type of situation ‒ both good and bad and can bring an invaluable wealth of experience to the conversation. In the end, you’ll be left with more than just a budget you can live by. You’ll have one that sees you come out all the better on the other side because of it.
If you’re worried about the next great recession and are still haunted by memories of 2007 and 2008, you have every right to be. But you also need to learn from the mistakes of the past. Things got so bad the last time because many, many people were caught off-guard. Based on that, your course of action is clear: You need to start preparing for this possibility, and you need to start doing so today.
This means getting real about a personal or family budget, which, thankfully, is a lot more straightforward than you might have thought.
Your Keys to Building a Better Budget
To build the most accurate and forward-thinking budget that you can, you first need actionable information to work from. That means figuring out your after-tax income, so you know how much money you’re talking about.
If you get a regular paycheck from your employer, for example, sit down and consider not only your taxes but also automatic deductions for things like health and life insurance and your 401(k). Do this for every member of your household and add all those totals together to get a better idea of the total amount of money you’re actually working with.
At the same time, you also need to get an accurate idea of what your monthly expenses look like. For the best results, don’t consider your spending habits just yet this early in the process. Instead, simply list everything that you ‒ and your loved ones ‒ spend money on to maintain the lifestyle you’ve grown accustomed to.
List absolutely everything, including not only the essentials like utilities but also streaming service subscriptions, the amount of money you spend eating out in a month, and more. Don’t hold anything back ‒ it won’t benefit you at all to pretend like you don’t spend $50 a month on coffee runs if you absolutely know that you do. If you need to, go through your credit card statements. A variety of smartphone apps are available that will help you get a granular look at your expenses moving forward.
The Beautiful Simplicity of the 50/30/20 Budgeting Plan
Once you’ve got that bottom line dollar value, the next step involves choosing a budgeting plan that you can stick by. Generally speaking, the 50/30/20 plan is popular, both because of its effectiveness and its simplicity.
As the name suggests, this plan says that you should spend about 50 percent of your after-tax income on pure necessities. This means food, utilities, rent or mortgage payments, and other critical financial obligations like that. You can absolutely spend money on things that you want but don’t need (like that night out on the town or that fancy new 4K TV), but it shouldn’t total more than 30 percent of your after-tax earnings. Then, the remaining 20 percent gets funneled directly into your savings account (or is used toward debt repayment).
Depending on the amount of debt that your household has, you may have to adjust these totals a bit. Not all debt is bad, but too much debt can obviously be crippling. Increase the amount of money you’re using to pay down debt in the short term to help create a steadier foundation from which to build for the long term.
Other Important Considerations
Going back to your expenses, now that you know exactly what you’re spending money on every month, look for opportunities to proactively cut back whenever possible. Do you pay $15 per month for a Netflix account that you don’t really use? It’s better to cancel that and pocket the $15 NOW before it becomes a requirement for you to do so during the next recession.
Finally, and perhaps most importantly, don’t be afraid to enlist the help of a professional if you’re not sure what to do. Diving into your finances can always be stressful from a certain perspective, and with the looming threat of a recession on the horizon, that will only get even worse. Rather than trying to do everything yourself and making mistakes in the process, consider enlisting the help of a professional to fill in some of the gaps that exist in your own knowledge.
Financial professionals have seen it all ‒ they’ve worked with every type of situation ‒ both good and bad and can bring an invaluable wealth of experience to the conversation. In the end, you’ll be left with more than just a budget you can live by. You’ll have one that sees you come out all the better on the other side because of it.
Tuesday, May 7, 2019
Tax Benefits for Members of the Military
Article Highlights:
Service Member Spouse’s Residence or Domicile – In order to simplify the tax-filing requirements of military couples, the Military Spouses Residency Relief Act of 2009 allowed military spouses to claim the same state of domicile as their service member for tax purposes, provided they had also established domicile there.
Unfortunately, spouses who had not established domicile in the same state as their service member spouse and who had earned income in the state where their spouse was stationed were still forced to file with both states (assuming both states have income tax).
New for Years Beginning in 2018 – Thanks to the Veterans Benefits and Transaction Act of 2018, an individual married to a military member now has more choices. Under the act, a spouse can elect to have the same state of domicile as their service member spouse, even if they didn’t previously have the same domicile. If the non-military spouse doesn’t make that election, they can continue to choose to file in their own domicile state.
Making these choices can significantly impact the amount of state tax the spouse might have to pay. As an example, a spouse of a service member stationed in a high-income-tax state can elect to use the state of residency of the service member whose residence state has no or low state income tax and not be subject to the state taxes where his or her spouse is stationed.
Careful – It is tempting for a service member or their military spouse to declare their state of domicile to be without any state income tax such as Texas, Nevada, Florida, etc. That can get them in hot water if they do so without any connections to the state.
Non-Taxable Allowances – Members of the military benefit from a number of non-taxable allowances including:
Combat Zone Exclusion – A member of the U.S. Armed Forces who serves in a combat zone can exclude certain pay from income. This pay includes active duty pay earned in any month served in a combat zone; imminent danger/hostile fire pay; a reenlistment bonus, if the voluntary extension or reenlistment occurs during a month served in a combat zone; accrued leave pay earned in any month served in a combat zone; awards for suggestions, inventions, or scientific achievements the service member is entitled to because of a submission made in a month served in a combat zone; and student loan repayments attributable to the period of service in a combat zone (provided a full year’s service is performed to earn the repayment). Any part of a month in a combat zone counts as an entire month. Periods when one is hospitalized as the result of wounds, disease, or injury in a combat zone are also excluded, provided the hospitalization begins within 2 years of combat zone activities. The hospitalization need not be in the combat zone. Generally, combat pay is not included in the individual’s pay reported on Form W-2.
Commissioned Officers – Commissioned officers may exclude their pay; however, the amount of their exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received).
Home Mortgage Interest Deduction – Military taxpayers who receive a non-taxable housing allowance and also own a home can deduct the mortgage interest on their home as an itemized deduction, even if they are paid with the nontaxable military housing allowance pay. However, the home mortgage interest is still subject to the general rules for deducting home mortgage interest, meaning that for years 2018 through 2025, only home acquisition debt interest is deductible. Home acquisition debt is debt used to acquire, build, or substantially improve a home. Equity debt interest is no longer deductible for years 2018 through 2025.
Home Property Tax Deduction – Even though they receive a non-taxable housing allowance, a military taxpayer can still deduct their home’s property taxes as an itemized deduction. However, the tax reform limits real property tax and state/local income or sales tax deductions to $10,000 annually for years 2018 through 2025.
Home Sale Gain Exclusion – Most taxpayers can exclude up to $250,000 ($500,000 if filing married joint) of home gain if the home was owned and used as their main home for 2 of the 5 years preceding its sale. However, a military taxpayer may choose to suspend the 5-year test period for ownership and use during any period when the taxpayer (or spouse) serves on qualified official extended duty as a member of the Armed Forces. This means that the 2-year use test may be met even if, because of military service, the taxpayer did not actually live in his or her home for at least the required 2 years during the 5-year period ending on the date of sale.
For this exception to the usual test period, a taxpayer is on qualified official extended duty when at a duty station that is at least 50 miles from his or her main home, or while residing under orders in government housing for more than 90 days or for an indefinite period.
The suspension period cannot last more than 10 years and can be revoked by the taxpayer at any time. The 5-year period cannot be suspended for more than one property at a time.
Example – Sarge bought and moved into a home in 2011 that he lived in as his main home for 2½ years. For the next 6 years, he did not live in the home because he was on qualified official extended duty with the Army. He sold the home for a gain in 2019. To meet the use test, Sarge chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty – he disregards those 6 years. Sarge’s 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period.
Moving Deduction – The tax reform suspended the moving deduction for all moves except for certain members of the Armed Forces, for years 2018 through 2025. Military taxpayers who are still allowed a moving deduction are those who are required to move because of a permanent change of station. However, the deduction is limited to the actual cost less any non-taxable moving allowance provided.
A permanent change of station includes a move from home to one’s first post of duty when appointed, reappointed, reinstated, called to active duty, enlisted or inducted; a move from one permanent post of duty to another permanent post of duty at a different duty station, even if the service member separates from the Armed Forces immediately or shortly after the move; and a move from one’s last post of duty to home or to a nearer point in the U.S. in connection with retirement, discharge, resignation, separation under honorable conditions, transfer, relief from active duty, temporary disability retirement, or transfer to a fleet reserve, if the move occurs generally within 1 year or the termination of active duty.
Death Gratuity Payments –Military death gratuity payments and amounts received under the service members' group life insurance program are not taxable to eligible survivors. In addition, these amounts may be rolled over to a Roth IRA or Coverdell education savings account without regard to the limits that otherwise apply to other taxpayers.
Child Credit – Excluded combat pay is treated as earned income for purposes of determining the refundable portion of the child credit.
Earned Income Tax Credit (EITC) – A taxpayer may elect to treat combat pay that is otherwise excluded from gross income as earned income for purposes of the EITC. Making this election for EITC purposes may or may not be advantageous. If the taxpayer has earned income below the maximum amount of earned income on which the credit is calculated, including the combat pay will increase the credit amount. On the other hand, if the taxpayer’s earned income is already in the phase-out range, electing to include combat pay as earned income will decrease the amount of credit that can be claimed.
IRA Contributions – For 2019, individuals can contribute up the $6,000 ($7,000 if age 50 or over) to their IRA accounts, subject to phase-out limits for certain higher-income individuals. However, any contribution is limited to the individual’s earned income for the year. For service members, their combat pay, even though it is not taxable, is treated as earned income for purposes of an IRA contribution.
Reservist’s Travel Expenses - Armed Forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct travel expenses as an adjustment to gross income. Thus, this deduction can be taken even by taxpayers using the standard deduction. However, the expenses themselves are subject to certain limitations. Transportation, meals (subject to a 50% limit) and lodging qualify, but the deduction is limited to the amount the federal government pays its employees for travel expenses, i.e., the general federal government per diem rate for lodging, meals and incidental expenses applicable to the locale and the standard mileage rate for car expenses plus parking and ferry fees and tolls.
Qualified Reservists Pension Withdrawals - Qualified reservists are permitted penalty-free withdrawal from IRAs, 401(k)s and other arrangements if ordered or called to active duty.
A “qualified reservist distribution” is any distribution to an individual if the individual was, by reason of his being a member of a “reserve component”, ordered or called to active duty for a period in excess of 179 days, or an indefinite period and the distribution is made during the period beginning on the date of the order or call to active duty, and ending at the close of the active duty period.
Retired Military Disability Compensation – Disability compensation, as distinguished from retirement payments, are tax free and made by the Department of Veterans Affairs. Some misinformation has circulated indicating that the disability is included in the retirement benefits paid by the Defense Finance and Accounting Services. That is not true since the disability payments are made by the Department of Veterans Affairs and those amounts are NOT included on a Form 1099-R issued by the Defense Finance and Accounting Services.
- Service Member Residence or Domicile
- Service Member Spouse’s Residence or Domicile
- Non-Taxable Allowances
- Combat Zone Exclusion
- Home Mortgage Interest Deduction
- Home Property Tax Deduction
- Home Sale Gain Exclusion
- Moving Deduction
- Death Gratuity Payments
- Child Credit
- Earned Income Tax Credit
- IRA Contributions
- Reservist’s Travel Expenses
- Qualified Reservist’s Pension Withdrawals
- Retired Military Disability Compensation
- Military members benefit from a variety of special tax benefits. These include certain non-taxable allowances, non-taxable combat pay, and a variety of other special tax provisions. Here is a rundown on the most prominent of the tax benefits.
Service Member Spouse’s Residence or Domicile – In order to simplify the tax-filing requirements of military couples, the Military Spouses Residency Relief Act of 2009 allowed military spouses to claim the same state of domicile as their service member for tax purposes, provided they had also established domicile there.
As an example, say Chris resides in California with his spouse, who is in the military, and Chris has earned income in California but had established domicile with his military spouse in Virginia. Chris would be subject to Virginia income tax laws instead of those of California, and the couple would need file only one state return – in this case, Virginia. They have no obligation to file a California return.
Unfortunately, spouses who had not established domicile in the same state as their service member spouse and who had earned income in the state where their spouse was stationed were still forced to file with both states (assuming both states have income tax).
New for Years Beginning in 2018 – Thanks to the Veterans Benefits and Transaction Act of 2018, an individual married to a military member now has more choices. Under the act, a spouse can elect to have the same state of domicile as their service member spouse, even if they didn’t previously have the same domicile. If the non-military spouse doesn’t make that election, they can continue to choose to file in their own domicile state.
Making these choices can significantly impact the amount of state tax the spouse might have to pay. As an example, a spouse of a service member stationed in a high-income-tax state can elect to use the state of residency of the service member whose residence state has no or low state income tax and not be subject to the state taxes where his or her spouse is stationed.
Careful – It is tempting for a service member or their military spouse to declare their state of domicile to be without any state income tax such as Texas, Nevada, Florida, etc. That can get them in hot water if they do so without any connections to the state.
Non-Taxable Allowances – Members of the military benefit from a number of non-taxable allowances including:
- Living allowances - Basic allowance for housing (BAH), housing and cost-of-living allowances abroad whether paid by the U.S. Government or by a foreign government and overseas housing allowance.
- Family allowances - certain educational expenses for dependents, emergencies, evacuation to a place of safety and separation.
- Death allowances - Burial services, death gratuity payments to eligible survivors, and travel of dependents to burial sites.
- Moving allowances – Including for relocation, move-in housing, moving household and personal items, moving trailers or mobile homes, storage, temporary lodging and temporary lodging expenses, and military base realignment and closure benefits.
- Travel allowances – Including annual round trips for dependent students, leave between consecutive overseas tours, reassignment in a dependent-restricted status, transportation for military taxpayers and dependents during ship overhaul or inactivation, and per diem.
- State benefit payments – Any bonus payment made by a state or political subdivision to any member or former member of the U.S. uniformed services, or to his or her dependent, only because of the member's service in a “combat zone,” is generally treated as a “qualified military benefit” excludable from gross income.
- Other payments – Defense counseling, disability (including payments received for injuries incurred as a direct result of a terrorist or military action), group term life insurance, professional education, ROTC educational and subsistence allowances, survivor and retirement protection plan premiums, uniform allowances, and uniforms furnished to enlisted personnel.
- In-kind military benefits – Including legal assistance benefits, space-available travel on government aircraft, medical/dental care, and commissary/exchange discounts.
Combat Zone Exclusion – A member of the U.S. Armed Forces who serves in a combat zone can exclude certain pay from income. This pay includes active duty pay earned in any month served in a combat zone; imminent danger/hostile fire pay; a reenlistment bonus, if the voluntary extension or reenlistment occurs during a month served in a combat zone; accrued leave pay earned in any month served in a combat zone; awards for suggestions, inventions, or scientific achievements the service member is entitled to because of a submission made in a month served in a combat zone; and student loan repayments attributable to the period of service in a combat zone (provided a full year’s service is performed to earn the repayment). Any part of a month in a combat zone counts as an entire month. Periods when one is hospitalized as the result of wounds, disease, or injury in a combat zone are also excluded, provided the hospitalization begins within 2 years of combat zone activities. The hospitalization need not be in the combat zone. Generally, combat pay is not included in the individual’s pay reported on Form W-2.
Commissioned Officers – Commissioned officers may exclude their pay; however, the amount of their exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received).
Home Mortgage Interest Deduction – Military taxpayers who receive a non-taxable housing allowance and also own a home can deduct the mortgage interest on their home as an itemized deduction, even if they are paid with the nontaxable military housing allowance pay. However, the home mortgage interest is still subject to the general rules for deducting home mortgage interest, meaning that for years 2018 through 2025, only home acquisition debt interest is deductible. Home acquisition debt is debt used to acquire, build, or substantially improve a home. Equity debt interest is no longer deductible for years 2018 through 2025.
Home Property Tax Deduction – Even though they receive a non-taxable housing allowance, a military taxpayer can still deduct their home’s property taxes as an itemized deduction. However, the tax reform limits real property tax and state/local income or sales tax deductions to $10,000 annually for years 2018 through 2025.
Home Sale Gain Exclusion – Most taxpayers can exclude up to $250,000 ($500,000 if filing married joint) of home gain if the home was owned and used as their main home for 2 of the 5 years preceding its sale. However, a military taxpayer may choose to suspend the 5-year test period for ownership and use during any period when the taxpayer (or spouse) serves on qualified official extended duty as a member of the Armed Forces. This means that the 2-year use test may be met even if, because of military service, the taxpayer did not actually live in his or her home for at least the required 2 years during the 5-year period ending on the date of sale.
For this exception to the usual test period, a taxpayer is on qualified official extended duty when at a duty station that is at least 50 miles from his or her main home, or while residing under orders in government housing for more than 90 days or for an indefinite period.
The suspension period cannot last more than 10 years and can be revoked by the taxpayer at any time. The 5-year period cannot be suspended for more than one property at a time.
Example – Sarge bought and moved into a home in 2011 that he lived in as his main home for 2½ years. For the next 6 years, he did not live in the home because he was on qualified official extended duty with the Army. He sold the home for a gain in 2019. To meet the use test, Sarge chooses to suspend the 5-year test period for the 6 years he was on qualifying official extended duty – he disregards those 6 years. Sarge’s 5-year test period consists of the 5 years before he went on qualifying official extended duty. He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period.
Moving Deduction – The tax reform suspended the moving deduction for all moves except for certain members of the Armed Forces, for years 2018 through 2025. Military taxpayers who are still allowed a moving deduction are those who are required to move because of a permanent change of station. However, the deduction is limited to the actual cost less any non-taxable moving allowance provided.
A permanent change of station includes a move from home to one’s first post of duty when appointed, reappointed, reinstated, called to active duty, enlisted or inducted; a move from one permanent post of duty to another permanent post of duty at a different duty station, even if the service member separates from the Armed Forces immediately or shortly after the move; and a move from one’s last post of duty to home or to a nearer point in the U.S. in connection with retirement, discharge, resignation, separation under honorable conditions, transfer, relief from active duty, temporary disability retirement, or transfer to a fleet reserve, if the move occurs generally within 1 year or the termination of active duty.
Death Gratuity Payments –Military death gratuity payments and amounts received under the service members' group life insurance program are not taxable to eligible survivors. In addition, these amounts may be rolled over to a Roth IRA or Coverdell education savings account without regard to the limits that otherwise apply to other taxpayers.
Child Credit – Excluded combat pay is treated as earned income for purposes of determining the refundable portion of the child credit.
Earned Income Tax Credit (EITC) – A taxpayer may elect to treat combat pay that is otherwise excluded from gross income as earned income for purposes of the EITC. Making this election for EITC purposes may or may not be advantageous. If the taxpayer has earned income below the maximum amount of earned income on which the credit is calculated, including the combat pay will increase the credit amount. On the other hand, if the taxpayer’s earned income is already in the phase-out range, electing to include combat pay as earned income will decrease the amount of credit that can be claimed.
IRA Contributions – For 2019, individuals can contribute up the $6,000 ($7,000 if age 50 or over) to their IRA accounts, subject to phase-out limits for certain higher-income individuals. However, any contribution is limited to the individual’s earned income for the year. For service members, their combat pay, even though it is not taxable, is treated as earned income for purposes of an IRA contribution.
Reservist’s Travel Expenses - Armed Forces reservists who travel more than 100 miles away from home and stay overnight in connection with service as a member of a reserve component can deduct travel expenses as an adjustment to gross income. Thus, this deduction can be taken even by taxpayers using the standard deduction. However, the expenses themselves are subject to certain limitations. Transportation, meals (subject to a 50% limit) and lodging qualify, but the deduction is limited to the amount the federal government pays its employees for travel expenses, i.e., the general federal government per diem rate for lodging, meals and incidental expenses applicable to the locale and the standard mileage rate for car expenses plus parking and ferry fees and tolls.
Qualified Reservists Pension Withdrawals - Qualified reservists are permitted penalty-free withdrawal from IRAs, 401(k)s and other arrangements if ordered or called to active duty.
A “qualified reservist distribution” is any distribution to an individual if the individual was, by reason of his being a member of a “reserve component”, ordered or called to active duty for a period in excess of 179 days, or an indefinite period and the distribution is made during the period beginning on the date of the order or call to active duty, and ending at the close of the active duty period.
Retired Military Disability Compensation – Disability compensation, as distinguished from retirement payments, are tax free and made by the Department of Veterans Affairs. Some misinformation has circulated indicating that the disability is included in the retirement benefits paid by the Defense Finance and Accounting Services. That is not true since the disability payments are made by the Department of Veterans Affairs and those amounts are NOT included on a Form 1099-R issued by the Defense Finance and Accounting Services.
Monday, May 6, 2019
Read This before Tossing Old Tax Records!
Article Highlights:
Generally, tax records are retained for two reasons: (1) in case the IRS or a state agency decides to question the information on your tax returns or (2) to keep track of the tax basis of your capital assets, so that you can minimize your tax liability when you dispose of those assets.
With certain exceptions, the statute of limitations for assessing additional taxes is three years from the return’s due date or its filing date, whichever is later. However, the statute in many states is one year longer than that of federal law. In addition, the federal assessment period is extended to six years if more than 25% of a taxpayer’s gross income is omitted from a tax return. In addition, of course, the three-year period doesn’t begin elapsing until a return has been filed. There is no statute of limitations for the filing of false or fraudulent returns to evade tax payments.
If none of the above exceptions applies to you, then for federal purposes, you can probably discard most of your tax records that are more than three years old; you will want to add a year to that time period if you live in a state with a longer statute.
The problem with discarding all of the records for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records with the records that substantiate the basis of their capital assets. The basis records need to be separated and should not be discarded until after the statute has expired for when a given asset was disposed of. Thus, it makes more sense to keep separate records for each asset. The following are examples of records that fall into the basis category:
What about the Tax Returns Themselves? Although the backup documents that you use to prepare your returns can usually be disposed of after the statutory period has expired, you may want to consider indefinitely keeping a copy of the tax returns themselves (the 1040, the attached schedules/statements, and the state return). If you just don’t have room to keep copies of your paper returns, digitizing them is an option.
If you have questions about whether to retain certain records, give this office a call. Before discarding any records, it is a good idea to make sure that they will not be needed down the road.
- Reasons to Keep Records
- Statute of Limitations
- Maintaining Record of Asset Basis
Generally, tax records are retained for two reasons: (1) in case the IRS or a state agency decides to question the information on your tax returns or (2) to keep track of the tax basis of your capital assets, so that you can minimize your tax liability when you dispose of those assets.
With certain exceptions, the statute of limitations for assessing additional taxes is three years from the return’s due date or its filing date, whichever is later. However, the statute in many states is one year longer than that of federal law. In addition, the federal assessment period is extended to six years if more than 25% of a taxpayer’s gross income is omitted from a tax return. In addition, of course, the three-year period doesn’t begin elapsing until a return has been filed. There is no statute of limitations for the filing of false or fraudulent returns to evade tax payments.
If none of the above exceptions applies to you, then for federal purposes, you can probably discard most of your tax records that are more than three years old; you will want to add a year to that time period if you live in a state with a longer statute.
Examples – Sue filed her 2015 tax return before the due date of April 15, 2016. She will be able to safely dispose of most of her 2015 records after April 15, 2019. On the other hand, Don filed his 2015 return on June 2, 2016. He needs to keep his records until at least June 2, 2019. In both cases, the taxpayers should keep their records for a year or two longer if their states have statutes of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday, or holiday, the actual due date is the next business day.
The problem with discarding all of the records for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records with the records that substantiate the basis of their capital assets. The basis records need to be separated and should not be discarded until after the statute has expired for when a given asset was disposed of. Thus, it makes more sense to keep separate records for each asset. The following are examples of records that fall into the basis category:
- Stock-acquisition data – If you own stock in a corporation, keep the purchase records until at least four years after the year when you sell the stock. This data is necessary for proving the amount of profit (or loss) from the sale. If your sales for a given year result in a net loss of more than $3,000, you may need to keep your purchase and sale records for even longer. This is because $3,000 is the maximum capital loss that can be deducted in any one year, so the excess loss must be carried over to the following year(s) until it is used up. If the IRS audits a return that includes a carryover loss, it will ask to see the records from the original purchase, even if it happened more than three years in the past. Thus, don’t dispose of such records until the statute of limitations has passed for the last year when you claimed a carryover loss.
- Stock and mutual fund statements (if you reinvest dividends) – Many taxpayers use the dividends that they receive from stocks or mutual funds to buy more shares of the same stock or fund. These reinvested amounts add to the basis of the property and reduce the gain when They are eventually sold. Keep all such dividend statements for at least four years after the final sale.
- Tangible property purchase and improvement records – Keep records of home, investment, rental-property, or business-property acquisitions; the related capital improvements; and the final settlement statements from the sale for at least four years after the underlying property is sold.
What about the Tax Returns Themselves? Although the backup documents that you use to prepare your returns can usually be disposed of after the statutory period has expired, you may want to consider indefinitely keeping a copy of the tax returns themselves (the 1040, the attached schedules/statements, and the state return). If you just don’t have room to keep copies of your paper returns, digitizing them is an option.
If you have questions about whether to retain certain records, give this office a call. Before discarding any records, it is a good idea to make sure that they will not be needed down the road.
Friday, May 3, 2019
When Can You Withdraw from Your 401k or IRA and Avoid Penalties?
| Withdrawing money early from your 401(k), your IRA or some other type of retirement fund is something that may be necessary for a wide range of reasons. Maybe you're dealing with unexpected medical bills and could use a bit of financial assistance. Perhaps you've gone through some type of life-changing event like a divorce. Regardless — it happens, and it's totally understandable. It is not, however, a decision that should be made lightly. If you want to withdraw funds from your 401(k) or IRA and avoid the often hefty penalties that follow, you'll need to keep a few key things in mind. Avoiding Penalties on Retirement Accounts: What You Need to Know All told, there are actually a number of different ways that you can qualify for a penalty exemption on withdrawals from these types of retirement accounts — provided that you're using that money for very specific purposes. Currently, these include but are not limited to things like:
Generally speaking, the maximum loan term is up to five years. In certain circumstances, however, this can go up to 15 years. Not all employer plans actually allow this, however, so you'll want to talk with your company's human resources department to make sure this is actually an option that is on the table for your particular circumstances. One of the most important things to understand about all of this, however, is the idea that "penalty free" and "tax free" are two totally separate things. Regardless of whether or not you qualify for a penalty exemption, you will still need to pay taxes on the money that you withdraw at ordinary income rates. The only major exception to this is in the case of a Roth IRA, which you can take money out of penalty free AND tax free after five years. You may be able to enjoy the same benefit on a Roth 401(k), but only if your employer plan specifically permits this. Regardless, as you can see, avoiding penalties on these types of funds is not necessarily as difficult as you probably thought it was going to be. Provided you go about things in the right way, you'll have fast access to the funds you need when you need them the most. |
Thursday, May 2, 2019
Disappointed in Your Tax Refund?
If your tax refund is less than you anticipated, you are not alone. In a report issued by the Treasury Department on February 14, the average refund it is paying in 2019 has dropped to $1,949 from $2,135 in the prior year. In addition, the number of returns filed so far has dropped from 13.5 million last year to 11.4 million this year for the same period.
Article Highlights:
With all the hype about how tax reform would reduce taxes, taxpayers were anticipating larger refunds this year but instead are receiving less, on average. This has left the Republican lawmakers who passed the tax reform scrambling to explain why the refunds are lower.
Lower refunds can be especially harmful to taxpayers who count on their refunds to pay their annual property taxes, holiday spending and other debts. Many count on the refunds to pay for summer vacations and other discretionary spending. Some who normally receive refunds may even find themselves owing money this year.
Although most taxpayers will actually pay less in taxes this year, this does not necessarily translate into increased refunds. For most, the tax cut provided more take-home pay during 2018, instead of adding to their refunds at the end of the year. This decrease in withholding spread over 52, 26 or 24 paychecks is far less noticeable than a lump sum added to the refund.
How did this happen? The culprit is generally the amount of tax you had withheld from your paycheck each payday. The tax reform was passed at the very end of 2017, not allowing the IRS sufficient time to adjust the employer withholding tables or the W-4 – Employee’s Withholding Allowance Certificate – for the new law. When they did a couple of months later, the revised withholding tables and W-4 produced lower withholding, leading to the lower refunds.
The IRS was aware of this and issued notices almost weekly cautioning taxpayers that the lower withholding would lead to lower refunds or perhaps even them owing instead of receiving a refund. The General Accounting Office estimates that the number of taxpayers who will owe taxes this year will increase from 18 to 21 percent.
If you are affected and want to avoid the same thing from happening next year, you may want this office to compare your current withholding to your projected tax liability so that you can adjust your withholding to produce the result you desire on your 2019 return.
Article Highlights:
- Average Refund Down
- Tax Filings Down
- Effects of Lower Refunds
- Actual Tax Generally Lower
- How This Happened
With all the hype about how tax reform would reduce taxes, taxpayers were anticipating larger refunds this year but instead are receiving less, on average. This has left the Republican lawmakers who passed the tax reform scrambling to explain why the refunds are lower.
Lower refunds can be especially harmful to taxpayers who count on their refunds to pay their annual property taxes, holiday spending and other debts. Many count on the refunds to pay for summer vacations and other discretionary spending. Some who normally receive refunds may even find themselves owing money this year.
Although most taxpayers will actually pay less in taxes this year, this does not necessarily translate into increased refunds. For most, the tax cut provided more take-home pay during 2018, instead of adding to their refunds at the end of the year. This decrease in withholding spread over 52, 26 or 24 paychecks is far less noticeable than a lump sum added to the refund.
How did this happen? The culprit is generally the amount of tax you had withheld from your paycheck each payday. The tax reform was passed at the very end of 2017, not allowing the IRS sufficient time to adjust the employer withholding tables or the W-4 – Employee’s Withholding Allowance Certificate – for the new law. When they did a couple of months later, the revised withholding tables and W-4 produced lower withholding, leading to the lower refunds.
The IRS was aware of this and issued notices almost weekly cautioning taxpayers that the lower withholding would lead to lower refunds or perhaps even them owing instead of receiving a refund. The General Accounting Office estimates that the number of taxpayers who will owe taxes this year will increase from 18 to 21 percent.
If you are affected and want to avoid the same thing from happening next year, you may want this office to compare your current withholding to your projected tax liability so that you can adjust your withholding to produce the result you desire on your 2019 return.
Wednesday, May 1, 2019
Relief from the Affordable Care Act Penalty for Not Being Insured
Article Highlights:
The elimination of this penalty as of 2019 does not impact the health care subsidy for low-income families, which is known as the premium tax credit and which is available for policies acquired through a government insurance marketplace. This elimination also does not affect the penalties assessed on employers that do not offer affordable insurance to employees and that have 50 or more full-time-equivalent employees.
However, the penalty still applies for individual taxpayers who did not have minimum essential health coverage for 2018 and is the greater of the sum of the family’s flat dollar amounts or 2.5% of the amount by which the household’s income exceeds the income-tax-filing threshold.
For 2018, the flat dollar amounts are $695 per year ($57.92 per month) for each adult and half that amount ($347.50; $28.96 per month) for each child under the age of 18; the maximum family penalty using this method is $2,085 per year ($173.75 per month).
As an example, say that a family of four (2 adults and 2 children) has a household income that exceeds the income-tax-filing threshold by $100,000. This family would have a maximum penalty equal to the greater of the flat dollar amount ($695 + $695 + $347.50 + $347.50 = $2,085) or 2.5% of the income amount (2.5% × $100,000 = $2,500). Thus, the maximum penalty would be $2,500. However, the penalties are applied separately per month, and they do not apply in a given month if certain exceptions are met.
There are a number of exceptions to the penalty, as listed below. For details related to qualifying for any of these exceptions, please give this office a call. Some of the penalty exceptions apply to the entire year, and some only apply to a specific month in the year. If penalty relief applies to a specific month, it also applies to the months just preceding and following that month. The table below lists the various exceptions and the code number the government assigned to that exception.
* ECN standards for “exception certification number,” which must be applied for and provided through the government marketplace.
In addition to the general exceptions included in the table above, hardship exemptions are also available. The most common of these exemptions are:
A person is eligible for a hardship exemption for at least the month before, the month(s) during and the month after the specific event or circumstance that created the hardship.
- Tax Reform
- Penalty for Not Being Insured
- Premium Tax Credit
- Employer Penalty
- Coverage Exemptions
- Hardship Exemptions
The elimination of this penalty as of 2019 does not impact the health care subsidy for low-income families, which is known as the premium tax credit and which is available for policies acquired through a government insurance marketplace. This elimination also does not affect the penalties assessed on employers that do not offer affordable insurance to employees and that have 50 or more full-time-equivalent employees.
However, the penalty still applies for individual taxpayers who did not have minimum essential health coverage for 2018 and is the greater of the sum of the family’s flat dollar amounts or 2.5% of the amount by which the household’s income exceeds the income-tax-filing threshold.
For 2018, the flat dollar amounts are $695 per year ($57.92 per month) for each adult and half that amount ($347.50; $28.96 per month) for each child under the age of 18; the maximum family penalty using this method is $2,085 per year ($173.75 per month).
As an example, say that a family of four (2 adults and 2 children) has a household income that exceeds the income-tax-filing threshold by $100,000. This family would have a maximum penalty equal to the greater of the flat dollar amount ($695 + $695 + $347.50 + $347.50 = $2,085) or 2.5% of the income amount (2.5% × $100,000 = $2,500). Thus, the maximum penalty would be $2,500. However, the penalties are applied separately per month, and they do not apply in a given month if certain exceptions are met.
There are a number of exceptions to the penalty, as listed below. For details related to qualifying for any of these exceptions, please give this office a call. Some of the penalty exceptions apply to the entire year, and some only apply to a specific month in the year. If penalty relief applies to a specific month, it also applies to the months just preceding and following that month. The table below lists the various exceptions and the code number the government assigned to that exception.
COVERAGE EXCEPTIONS
|
CODE NUMBER
|
| Income below the tax-filing threshold. |
No code
|
| Coverage considered unaffordable. |
A
|
| Short coverage gap (less than 3 months). |
B
|
| Certain U.S. citizens or resident aliens living abroad. |
C
|
| Member of a health care ministry. |
D
|
| Member of an Indian tribe. |
E
|
| Incarcerated. |
F
|
| Aggregate self-only coverage unaffordable. |
G
|
| Resident of a state that did not expand Medicaid. |
G
|
| Member of tax household born or adopted during the year. |
H
|
| Member of tax household died during the year. |
H
|
| Member of certain religious sects. |
ECN*
|
| Ineligible for Medicaid based on a state decision not to expand Medicaid. |
ECN*
|
| Coverage considered unaffordable based on projected income. |
ECN*
|
| Certain Medicaid programs that are not minimum essential coverage. |
ECN*
|
| * Certain hardship exemptions. |
G – See list below
|
* ECN standards for “exception certification number,” which must be applied for and provided through the government marketplace.
In addition to the general exceptions included in the table above, hardship exemptions are also available. The most common of these exemptions are:
- Being homeless.
- Evicted or facing eviction because of foreclosure.
- Received a shut-off notice from a utility company.
- Experienced domestic violence.
- Death of a family member.
- Fire, flood or other disaster that caused substantial damage.
- Filed for bankruptcy.
- Medical expenses could not cannot be paid, resulting in substantial debt.
- Increased necessary expenses to care for an ill, disabled or aging family member.
- Claiming a child who was denied Medicaid or CHIP coverage.
- Ineligible for coverage because state didn’t expand Medicaid.
- Financial or domestic circumstances, including an unexpected natural or human-caused event, causing an unexpected increase in essential expenses, which prevented obtaining coverage under a qualified health plan.
- The expense of purchasing a qualified health plan would have caused the taxpayer to experience serious deprivation of food, shelter, clothing or other necessities.
A person is eligible for a hardship exemption for at least the month before, the month(s) during and the month after the specific event or circumstance that created the hardship.
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