Congress Passes Last-Minute Tax Changes

Congress, at almost the last minute, has passed a large number of tax changes, including retirement plan issues that will become effective in 2020, as well as extensions through 2020 of a number of tax provisions that had expired or were about to end. The list of changes is quite large, so we have only included those that are most likely to affect individual tax returns. Here is a run-down on some of the new tax provisions:

Article Highlights:

• Discharge of Qualified Principal Residence Indebtedness
• Mortgage Insurance Premiums
• Above-the-Line Deduction for Qualified Tuition and Related Expenses
• Medical AGI Limits
• Residential Energy (Efficient) Property Credit
• Employer Credit for Paid Family and Medical Leave
• Maximum Age Limit for Traditional IRA Contributions
• Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption
• Increase in Age for Required Minimum Pension Distributions
• Difficulty of Care Payments Qualifying for IRA Contributions
• Expansion of Sec. 529 Plan Uses
• Required Distributions Modified for Inherited IRAs and Retirement Plans
• Increase in Penalty for Failure to File
• Major Change to Kiddie Tax Rules

Congress, at almost the last minute, has passed a large number of tax changes, including retirement plan issues that will become effective in 2020, as well as extensions through 2020 of a number of tax provisions that had expired or were about to end. The list of changes is quite large, so we have only included those that are most likely to affect individual tax returns. Here is a run-down on some of the new tax provisions:

TAX EXTENDERS

The tax changes retroactively revive a number of provisions that had previously expired or were going to at the end of 2019, and extend them through 2020. So, review them carefully to see if any of them provide you with an opportunity to amend your return for a refund.

Discharge of Qualified Principal Residence Indebtedness – When an individual loses his or her principal residence to foreclosure, abandonment, or short sale or has a portion of their loan forgiven under the HAMP mortgage-reduction plan, they will generally end up with cancellation-of-debt (COD) income. COD income is equal to the amount of debt on the home that is forgiven by the lender. To the extent that the mortgage debt becomes COD income, it is taxable income unless the taxpayer can exclude it based on specific provisions in the tax code.

After the housing market crash a few years back, Congress added the qualified principal residence COD exclusion, which allowed taxpayers to exclude up to $2 million ($1 million if married filing separately) of COD income, to the extent it was discharged debt used to acquire the home, termed acquisition debt. Equity debt was not eligible for the exclusion. However, equity debt is deemed to be discharged first, thus limiting the exclusion if both equity and acquisition debt are involved in the transaction.

This COD exclusion was temporarily added in 2007, was extended, and then expired at the end of 2017. Under the current legislation, the exclusion for qualified principal residence indebtedness is retroactively extended through 2020. Thus, if you paid taxes on principal residence COD income in 2018, be sure to call attention to that fact so your return can be amended for a refund.

Mortgage Insurance Premiums – For tax years 2007 through 2017, taxpayers could deduct the cost of premiums for mortgage insurance on a qualified personal residence as an itemized deduction. The premiums were deducted as home mortgage interest on Schedule A. To be deductible:

• The premiums must have been paid in connection with acquisition debt (note: acquisition debt includes refinanced acquisition debt).
• The mortgage insurance contract must have been issued after Dec. 31, 2006.
• It must be for a qualified residence (first and second homes).
• The deductible amount of the premiums phases out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000).

Qualified mortgage insurance means mortgage insurance provided by the:

• Dept. of Veterans Affairs (VA),
• Federal Housing Administration (FHA), or
• Rural Housing Services (RHS), as well as
• Private mortgage insurance.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020.

Above-the-Line Deduction for Qualified Tuition and Related Expenses – An above-the-line deduction for qualified tuition and related expenses for higher education has been available since 2002 and was previously extended through 2017. For purposes of the higher education expense deduction, “qualified tuition and related expenses” has the same definition as for the American Opportunity and Lifetime Learning credits for higher education expenses – that is, with certain exceptions, tuition and fees paid for an eligible student (the taxpayer, the taxpayer’s spouse, or a dependent) at an eligible higher education institution. The deduction – up to $2,000 or $4,000, depending on AGI – is not allowed for joint filers with an AGI of $160,000 or more ($80,000 for other filing statuses), except no deduction is allowed for taxpayers using the married filing separate status. The phase-out amounts are not inflation-adjusted. The same expenses can’t be used for both an education credit and the tuition and fees deduction.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020.

Medical AGI Limits – For 2017 and 2018, individuals could claim an itemized deduction for unreimbursed medical expenses, to the extent that such expenses exceeded 7.5% of their AGI. For post-2018 years, the percent of AGI has been increased to 10%. The provision retroactively extends the lower threshold of 7.5% through 2020.

Residential Energy (Efficient) Property Credit – This non-refundable credit has been available in one form or another since 2006 and through 2017, with credit amounts varying from 10% to 30% and the maximum credit ranging from $500 to $1,500. Most recently, the credit percentage was 10%, with a lifetime credit amount limited to $500. This credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. Generally, it applies to insulation, storm windows and doors, and certain types of energy-efficient roofing materials, energy-efficient central air-conditioning systems, water heaters, heat pumps, hot water systems, circulating fans, etc.

The recent legislation extends this credit through 2020, with a lifetime credit cap of $500.
Caution: The lifetime credit extends to returns going all the way back to 2006.

Employer Credit for Paid Family and Medical Leave – This credit provides an employer with credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The maximum amount of family and medical leave that may be taken into account for any qualifying employee is 12 weeks per taxable year. The credit is variable and only applies if the leave wages are at least 50% of the individual’s normal wages. The credit percentage is 12.5% and increases by 0.5%, up to a maximum of 25%, for each percentage point that the payment rate exceeds 50%.

The credit was originally only for 2018 and 2019 but has been extended through 2020.

RETIREMENT PLAN AND IRA CHANGES

Maximum Age Limit for Traditional IRA Contributions – The legislation repeals the maximum age for making traditional IRA contributions, which, prior to this legislation, prohibited traditional IRA contributions after an individual reached the age of 70½. The provision is effective for contributions made for taxable years beginning after December 31, 2019.

Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption – The legislation allows a penalty free but taxable distribution of up to $5,000 from a qualified plan made within one year of birth or in the case of a finalized adoption of an individual aged 18 or younger or an individual who is physically or mentally incapable of self-support. Distributions can later be repaid to avoid the tax on the distribution.

Increase in Age for RMDs – For decades, individuals were required to begin taking distributions from their traditional IRAs and qualified plans once they reached age 70½. These distributions, commonly referred to as a required minimum distribution or RMD, have never been adjusted to account for increases in life expectancy. The legislation changes the required beginning date for mandatory distributions to age 72, effective for distributions required to be made after December 31, 2019, with respect to individuals who attain the age of 72 after this date.

Special Rule – Difficulty of Care Payments – Many home health-care workers do not have a taxable income because their only compensation comes from “difficulty of care” payments that are exempt from taxation under Code Section 131. Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA. This provision will allow home health-care workers to contribute to a qualified plan or IRA by amending the tax code so that tax-exempt difficulty of care payments are treated as compensation, for purposes of calculating the contribution limits to defined contribution plans and IRAs. This is effective for plan years after December 31, 2015, and IRA contributions after the act’s date of enactment (December 20, 2019).

Sec. 529 Plan Modifications – Sec. 529 plans (also referred to as qualified state tuition plans) were originally created to allow tax-free accumulation saving accounts for a child’s education but generally limited the funds’ use to post-secondary education tuition and certain college fees. Since then, Congress has continued to expand the use of funds to include supplies, books, equipment, and reasonable room and board expenses for attending college. With the passage of the tax reform at the end of 2017, Congress allowed up to $10,000 a year to be used for elementary and secondary school tuition expenses. This new legislation adds the following to the list of qualified expenses:

• Qualified higher education expenses associated with registered apprenticeship programs certified by the Secretary of Labor under Sec. 1 of the National Apprenticeship Act
  
• Payment of education loans, up to a maximum of $10,000 (reduced by the amount of distributions so treated for all prior taxable years), including those for siblings

These changes are effective for distributions made after December 31, 2018.

RMDs for Designated Beneficiaries – The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the account owner’s death. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or a child of the employee (or IRA owner) who has not reached the age of majority must generally be distributed by the end of the tenth calendar year following the year of the employee’s or IRA owner’s death. A special rule for children requires any remaining undistributed funds to be distributed within 10 years after they reach the age of maturity.

This is a major change since beneficiaries previously had options to take certain lifetime payouts. This will require careful planning to minimize the tax on the distributions. The change applies to distributions with respect to employees or IRA owners who die after December 31, 2019.

Penalty for Failure to File – The legislation increased the minimum penalty for failure to file a tax return within 60 days of the return’s due date to $435, up from $330, for returns with a due date (including extensions) after December 31, 2019. Thus, the $435 penalty will apply to 2019 returns and will be inflation adjusted for future years.

Kiddie Tax – The tax reform enacted late in 2017 changed how the income of dependent children is taxed, causing a child’s unearned income to be taxed at fiduciary rates that very quickly reach the maximum tax rate of 37%. That change created an unintentional tax increase for survivors of service members and first responders who died in the line duty. This last-minute change reverts the kiddie tax computation to the pre–tax reform method for years beginning in 2020. It also allows taxpayers to choose whichever method provides the lowest tax for 2018 and 2019. Taxpayers can amend their 2018 return if doing so will provide a better outcome.

The changes are extensive and, in many cases, open the door to amending prior years’ returns. If you have any questions or think any of these changes might benefit you for a prior year, please give this office a call at 336-705-6322, visit our website or visit us on Facebook.

The 1099-MISC Filing Date Is Just Around the Corner – Are You Ready?

If your business engages the services of an individual (independent contractor), other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).

Article Highlights:

• Independent Contractors
• Non-employee Compensation
• 1099 Filing Requirement
• Due Dates
• Penalties
• Form W-9 and 1099 Worksheet

If your business engages the services of an individual (independent contractor), other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).

Note: The IRS has cautioned taxpayers who are treating rental activities as a trade or business for purposes of claiming the 20% passthrough deduction that they are required to issue 1099-MISC forms to their services providers who meet the $600 test for those rental activities.

Because so many fraudulent tax returns are filed right after e-filing opens up in January, the IRS requires 1099-MISCs for NEC to be filed by January 31 and will not release refunds for individual income tax returns that include the earned income tax credit until the NEC amounts can be verified.

Thus, the due date for filing 2019 1099-MISC forms for NEC is January 31, 2020. This is also the same due date for mailing the recipient his or her copy of the 1099-MISC.

It is not uncommon for a business or rental property owner to have a repairperson go out early in the year, pay him or her less than $600, use his or her services again later in the year, and have the total paid for the year be $600 or more. As a result, the business or landlord may have overlooked getting the needed information from the individual to file the 1099s for the year. Therefore, if you own a business or are a landlord, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, then it would be a good idea going forward to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you.

The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.

The penalty for failure to file a required information return due in 2020, such as the 1099-MISC, is $270 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of January 31, 2020, and it is reduced to $110 for returns filed after the 30th day but no later than August 1, 2020. If you are required to file 250 or more information returns, you must file them electronically.

In order to avoid a penalty, copies of the 1099-MISCs you’ve issued for 2019 need to be sent to the IRS by January 31, 2020. The forms must be submitted on magnetic media or on optically scannable forms (OCR forms).

Note: Form 1099-MISC is also used to report other types of payments, including rent and royalties. Payments to independent contractors are reported in box 7 of the 1099-MISC, and the dates mentioned in this article apply when box 7 has been used. When the 1099-MISC is used to report income other than that in box 7, the due date to the form’s recipient is January 31, 2020, while the copy to the government is due by February 28, 2020.

If you have any questions, please call. This firm prepares 1099s for submission to the IRS along with recipient copies and file copies for your records. Use the 1099 worksheet to provide this office with the information needed to prepare your 1099s. Contact us on our website and visit us on Facebook.

Forget Something on Your 2018 Return?

If you forgot to include necessary information on your 2018 return, you are not alone. In addition, you may have received a revised 1099 or K-1 since filing your return. The IRS has struggled to deal with the enormity of the changes in the recent tax reform; despite significant pressure to update its regulations, forms, and publications, the IRS could not finish all of its tax-reform updates in a timely manner. Some IRS publications still have not been updated for 2018, and others even include errors. The new tax regulations have been dribbling out, but the IRS still has not provided sufficient guidance for some issues.

Article Highlights:

• Tax Reform Problems 
• Corrected 1099s and K-1s 
• Overlooked Income and Deductions 
• Marital Issues 
• Mitigating Penalties 
• The Need for Prompt Amendments 

As a result of this uncertainty, you may receive a corrected 1099 or K-1. You may also need to update your return because, like most taxpayers, you did not fully comprehend all of the provisions of the new tax law thus failing to include an item of income, deduction, or credit. You also may have simply overlooked an item of income or missed a significant deduction. These mistakes happen, which is why the IRS and state tax agencies allow for amended tax returns.

A failure to report an item of income will generate an IRS inquiry; this typically happens a year or so after the filing of the original return—which is after the interest and penalties have built up. On the other hand, if you forgot a deduction and are owed a refund, you should not let that go by the wayside.

In some cases, marital problems lead taxpayers to file incorrectly—for instance, by incorrectly claiming children or not allocating income correctly. These and myriad other issues can be corrected by amending the returns. As a warning, please note that, if you are married and filed a joint return, you cannot amend to file separate returns. However, a married couple’s separate returns can be amended into a single joint return.

Regardless of the issue, the solution is to file an amended return as soon as possible. This will minimize the penalties and interest in the case of omitted income and will also prevent you from getting those annoying letters from the IRS. Amended returns can also be used to claim an overlooked credit, to correct your filing status or the number of dependents, to report an omitted investment transaction, to submit a delayed K-1, or to include any other information that should have been on the original return.

If overlooked item results in a tax increase, filing the amended return quickly will mitigate the penalties and interest. Procrastination will lead to further complications when the IRS eventually determines that information is missing, so it is always best to take care of the issue right away.

Generally, to claim a refund on an amended return, you must file the amendment within three years of the date when you filed the original return, or within two years of the date when you paid the tax—whichever is later.

If any of these issues apply to you, please give this office a call so that we can prepare the necessary amended returns https://gallowaytax.com/tax-preparation

Top 10 Startup Business Questions Every Entrepreneur Should Answer

Starting a small business can be one of the most exciting and rewarding events in someone’s life. But it can also be extremely stressful. If you’re thinking about becoming an entrepreneur, you might have more questions swirling around in your mind right now than you can count. Don’t despair. This is completely normal. After all, it shows you’re serious about your business venture and care enough to want to do things the right way. Before moving forward with a new business idea, ensuring you know the answers to the following vital questions is crucial.

Starting a small business can be one of the most exciting and rewarding events in someone’s life. But it can also be extremely stressful. If you’re thinking about becoming an entrepreneur, you might have more questions swirling around in your mind right now than you can count. Don’t despair. This is completely normal. After all, it shows you’re serious about your business venture and care enough to want to do things the right way. Before moving forward with a new business idea, ensuring you know the answers to the following vital questions is crucial.

1. Does your startup idea meet a need?
Before starting a small business, you need to know if your product or service will meet a need those in your target market have. It doesn’t matter how special your potential product or service offerings are to you. If you can’t convince others to care about them, your small business won’t be a success.

2. Is your plan feasible?
Learning things on the fly isn’t smart in the business world. Rather than taking a blind leap of faith, determine if your plan is actually feasible before moving forward. For instance, will you be able to afford to put your plan into action? Will your loved ones commit to the ways this venture might affect them? Starting a small business isn’t for the faint of heart. Do you have the ambition and determination to see your vision through?

3. How much financing do you need?
Not adequately estimating financing needs is a common mistake of entrepreneurs. To avoid this pitfall, strive to perform an accurate cost analysis. Approximate both foreseen and unexpected expenses for the first year. Also, determine how long it will take you to become profitable. When creating a cost analysis, be realistic. Don’t count on things going perfectly. Despite your best efforts, they most certainly won’t.

4. Where will your company be located?
The type of small business you want to start will largely determine where it should be located. For example, you wouldn’t attempt to open a ski lodge in sunny, balmy Florida. Generally, you’ll want to find a location with lots of foot traffic. If you’re a new entrepreneur looking to break into an already crowded market, locating your business near your competitors might be a good idea. According to Biz Brain, you’ll already have a built-in market in the location. But if you’re competing in a saturated market with major brand-name competition, locating your business a short distance away from your competitors may be your best bet.

5. Who will comprise your customer base?
If you’re thinking about starting a small business, you likely already have a vague idea about who will comprise your customer base. However, delving into the profiles of potential clients of your company is a smart idea. During this research, you can study characteristics such as age, gender, buying triggers and general preferences. This should help you fine-tune your marketing efforts and target your products or services to the people who would most benefit from them.

6. When can you expect to be profitable?
The old adage is that you should expect to wait at least a year until your startup becomes profitable. But times are changing. Innovations in technology and communication mean entrepreneurs can start companies with little to no overhead nowadays. This rings especially true for service-oriented companies. Therefore, having an astute business plan is essential. A good business plan will help you predict when you may start turning a profit.

7. What setbacks can you anticipate?
The road to small business success can be a bumpy one, so anticipating setbacks is important. One of the most common ones is failing to meet revenue expectations. This can sometimes be blamed on overestimating the amount of business your company will generate in the early days of its existence. A second setback startups can face is losing vital employees. If you plan to start a sole proprietorship, this isn’t an issue. But if you’re launching a business venture with one or more partners, someone might decide to jump ship. To prevent your company from disintegrating into shambles, develop an exit plan that can be utilized if a partner wants to get out.

8. Do you need solid advisors?
Starting a small business can be overwhelming. This is especially the case if you try to do everything yourself. Surprisingly, the CountingWorks What Small Business Owners Value Most in 2019 survey reveals that 60% of small business owners handle their budgeting themselves. Unfortunately, the U.S. Small Business Administration Office of Advocacy’s 2018 Frequently Asked Questions says only about half of small businesses survive past five years. To boost your chances of long-term success, surround yourself with solid advisors. For instance, experienced financial advisors can help you with accurate budgeting. Legal advisors can assist you with contracts and permits.

9. How will you lure the best talent to your company?
Obviously, offering prospective employees a competitive salary can help you lure the best talent to your company. But when you’re just starting a business, this might not be an option. To compensate for this, providing employees with growth bonuses is a good alternative. Offering employees flexible scheduling options and wellness perks such as an onsite gym, a break room stocked with healthy snacks, and standing desks may also attract promising talent to your company.

10. Should you start more than one company at once?
Do you have multiple ideas for new small businesses? Perhaps you’re eager to get more than one startup running at the same time. While this might be tempting, starting out with one company is best. You can put all your energy into getting it profitable and stable. This will prevent you from spreading yourself and your resources too thin. You can always branch out later if your first business takes off.

Starting a business can be quite an undertaking. Therefore, planning correctly and thoroughly is critical. Before you can enjoy small business success, you’ll need to learn the answers to the above questions.

"Business Made Simple"
We help struggling and overwhelmed startup entrepreneurs who want to get their business up and running and existing businesses position themselves so they can build the business of their dreams, feel they’re getting the most value for the money they pay and receive the highest value. Let us know what we can do for you.

Have questions about becoming a business owner or need assistance with getting started or next assistance with building, contact us as soon as you need us at gte@gallowaytax.com or call us at 336-705-6322.

Combatting Retirement Anxiety and the Fear of Running Out of Money

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.

Be Tax Wise With Your Charitable Contributions

Article Highlights:

• Charitable Itemized Deductions
• Bunching Deductions
• Qualified Charitable Distributions
• Donor-Advised Funds

Donations to charities can be deducted as an itemized deduction on your tax return. This means that to achieve any tax benefit from your charitable donations, you cannot use the standard deduction and instead must itemize your deductions. However, if the total of all your itemized deductions does not exceed the standard deduction amount for the year, then you are better off taking the standard deduction, but in doing so, you will get no tax benefit from your charitable contributions. 

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.

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.