If You Aren’t Ready to Prepare Your Taxes, File an Extension

April 10, 2024

The deadline for most income tax filers falls on April 15th (or the next business day if April 15th falls on a Saturday, Sunday, or legal holiday). Therefore, you must complete returns postmarked by this date to avoid penalties.

However, if you cannot complete your return by April 15th, you can get an extension to give you more time to do so. Here’s what you need to know to file an extension.

ACTION ITEMS:

1. Obtain an automatic 6-month extension (until October 15), no reason needed.

  • File Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
  • Estimate your full tax liability for the filing year using the information available to you
  • Enter your tax liability on line 4 of the form
  • File the form by the regular due date of your return

Tip: While Form 4868 gives you more time to file your return, it does NOT extend the time you have to pay taxes. If you do not pay the full amount of tax due on your return by the regular due date, you will also be subject to penalty and interest charges.

2. Understand the penalties associated with filing or paying late.

Paying late: If you fail to pay at least what you end up owing by the April deadline, even if you file for an extension, the late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by the regular due date. The IRS will charge you for each month or part of a month the tax is unpaid. The maximum penalty is 25%. The IRS may not charge the late payment penalty if you can show “reasonable cause” for not paying on time.

Filing late: You’ll usually get a late filing penalty if you either failed to submit the form for extension and filed after April 15th or filed after October 15th, no matter what. The penalty is usually 5% of the tax due for each month or part of a month your return is late. Generally, the maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $435, or the balance of the tax due on your return, whichever is smaller. You might not owe the penalty if you have a good reason for filing late, so be sure to attach a statement to your return (not to Form 4868) fully explaining the reason.

Here’s more from the IRS on how all this works.

How to Invest in a Taxable Account

January 04, 2024

Investing in your retirement account can be quite different from investing in a taxable account. Here are some options to consider when investing in a taxable account:

Use it for short term goals. One of the advantages of a taxable account is that you don’t need to worry about any tax penalties on withdrawals. For that reason, it probably makes the most sense to use a taxable account for goals other than retirement and education like an emergency fund, a vacation, or a down payment on a car or home. In that case, you don’t want to take risk so cash is king. To maximize the interest you earn, you can search for high-yielding rewards checking accounts, online savings accounts, and CDs on sites like Deposit Accounts and Bankrate.

Keep it simple for retirement. Just like in a 401(k) or IRA, you can simplify your retirement investing as much as possible with a target date fund that’s fully diversified and automatically becomes more conservative as you get closer to the target retirement date. There are a couple of differences in a taxable account though. The bad news is that you’ll be paying taxes on it each year so you want a fund that doesn’t trade as often. The good news is that you’re not limited to the options in an employer’s plan so you can choose target date funds with low turnover (how often the fund trades and hence generates taxes) like ones composed of passive index funds.

Invest more conservatively for early retirement. If you plan to retire early, a taxable account can be used for income until you’re no longer subject to penalties in your other retirement accounts or to generate less taxable income so you can qualify for bigger subsidies if you plan to purchase health insurance through the Affordable Care Act before qualifying for Medicare at age 65. In either case, you’ll want to invest more conservatively than with your other investments since this money will be used first and possibly depleted over a relatively short period of time. Consider a conservative balanced fund or make your own conservative mix using US savings bonds (which are tax-deferred and don’t fluctuate in value like other bonds do) or tax-free municipal bonds instead of taxable bonds if you’re in a high tax bracket.

Make your overall retirement portfolio more tax-efficient. You can also use a taxable account to complement your other retirement accounts by holding those investments that are most tax-efficient, meaning they lose the least percentage of earnings to taxes. Your best bets here are stocks and stock funds since the gains are taxed at a capital gains rate that’s lower than your ordinary income tax rate as long as you hold them for more than a year. In addition, the volatility of stocks can also be your friend since you can use losses to offset other taxes (as long as you don’t repurchase the same or an identical investment 30 days before or after you sell it). When you pass away, there’s also no tax on the stocks’ gain over your lifetime when your heirs sell them.

In particular, consider individual stocks (which give you the most control over taxes) and stock funds with low turnover like index funds and tax-managed funds. Foreign stocks and funds in taxable accounts are also eligible for a foreign tax credit for any taxes paid to foreign governments. That’s not available when they’re in tax-sheltered accounts so you may want to prioritize them in taxable accounts over US stocks.

For retirement, you’ll probably want to max out any tax-advantaged accounts you’re eligible for first. But if you’re fortunate enough to still have extra savings, there are ways to make the best use of a taxable account. Like all financial decisions, it all depends on your individual situation and goals.

5 Estate Planning Steps Literally Everyone Needs To Take

January 04, 2024

You may be thinking that you do not have the need for an estate plan or at least there is no harm in delaying getting started with estate planning.  The truth is that anyone with savings, debt, a spouse, children, a home, or a retirement plan needs to at least have the basics in place.

Hopefully, it’s true that you won’t need it for decades to come, but should something happen and you don’t have a plan, it could make a HUGE difference, sometimes even while you’re still alive.

Here are the 5 critical steps – make a plan to check these off the list today.

Step 1: Create or review your will

If you have a current will, congratulations! You have already taken an important step in the estate planning process. Your will controls the distribution of everything you own that doesn’t have a beneficiary designation and can also name a guardian for any minor children. Things that you pass via will include:

  • Tangible personal property like your home, your car, and all your stuff
  • Individually held financial accounts such as savings, checking, stocks, bonds, and mutual funds held outside retirement accounts which do not have a beneficiary designation.

Don’t have a will? If you die without a will, your state has laws that determine who gets your money called laws of intestacy. These laws vary from state to state but generally give first priority to your spouse and children. If you have neither, then blood relatives including parents, siblings, and others are your default heirs, under a specified order of priority. If no blood relatives can be found, your money goes to the state Treasury.

Protect your children! Should your minor children lose both parents, your will determines who will raise them and manage your money on their behalf until they reach the age of majority. If you die without a will, the state will name a guardian to take the children – and it may not be who you think is the most appropriate person!

In your will, you can designate a guardian for your children, as well as one or more alternates in the event your first choice is not available. You can name the same person, or a different one, to manage any money left to your children as well.

Step 2: Review your assets and update beneficiary designations

Many people think that once they have made a will, all of their assets will pass according to that document. Actually, a large number of your most valuable assets are not subject to probate, meaning they may NOT pass by will. Use this checklist to keep track of specific exceptions to your will.

Do you…

  • Own any bank accounts, mutual funds, or brokerage accounts in joint name with someone else?

-If yes, the joint account owner will automatically own the assets upon your death (in most cases). Also, in most states, you can designate an individual account to be “Payable On Death” (POD) or “Transfer On Death”(TOD) to a named beneficiary for the same result and the account will “skip” your will (and probate).

  • Own real estate with another person?

-If yes, real estate owned as joint ownership with rights of survivorship also does not pass by your will but goes directly to the other joint owner automatically.

  • Have insurance policies, annuity contracts, employer retirement plans and/or IRA’s?

-If yes, keep your beneficiaries updated.  All of these account types require you to name who will receive the account or policy value upon your death.  If you fail to name a beneficiary or all beneficiaries have died before you, the account will be payable to your estate.

  • Have a trust?

-If yes, your trust will determine how the trust property is distributed to beneficiaries, but only if you take the necessary steps to re-title accounts and other assets to the trust.  Failure to change the title to the name of your trust will cause them to pass by other means, regardless of what the trust says.

All of these exceptions pass directly to the person named, and not by your will. It is extremely important to keep your beneficiary designations up to date – it is not uncommon for older life insurance policies and previous employer retirement plans to be paid out to ex-spouses or other unintentional parties. Updating your will does not fix these accounts, since they are not subject to your will.

Step 3: Evaluate your insurance coverage

Whether your income stops due to death or disability, the effect on your family is the same. Where will the money come from to replace your paycheck? Insurance may be your best option. Without it, your family may need to sell assets, move to a less expensive home and/or disrupt college and retirement plans.

  • Life insurance. Use this calculator to get an idea of how much insurance you need to have in place. Once you decide on the right amount for you, be sure to find out what benefits you have through work first. Sometimes, you can get all of the life insurance you need there at the most affordable rates, but if you can’t, look into supplementing with a personal policy.
  • Disability insurance. This is your paycheck insurance – should something happen that keeps you from being able to work, this insurance kicks in to replace some of that until you’re able to work again. Statistically speaking, this is the insurance you’re more likely to use during your working years. First, confirm any coverage you have through work and find out if you can add to it, if necessary — most group plans are broken into Short-Term and Long-Term and often have lower premiums than individual policies. It’s important to know that most policies only provide 60 – 70% replacement income, so should you become disabled, you’ll still have a drop in income. Use this calculator to see if you need to purchase coverage beyond what you have through work.

Step 4: Check your powers of attorney

Remember that your will doesn’t take effect until you actually pass away, but what happens if you have an accident or are otherwise unable to make financial or healthcare decisions for yourself? You can designate someone else to make these decisions for you using the following important documents:

Advanced Directives – There are two types of documents, called advance directives, that can be prepared as part of your estate planning for future medical decisions.

  • Living Wills – If you have strong feelings about what type of medical care you want (or don’t want!) and you are unable to communicate, a living will can do it for you. This is a document that you can use to state under what circumstances you wish to be kept alive by artificial means. If you do not express your views in writing, all available means of treatment to maintain your life are usually provided, even if family members object. Therefore, if there are conditions where you would not want treatment, it is important that you state your wishes while you are able to do so.
  • Medical Power of Attorney – While the title and wording of this document may vary from state to state, most states permit a document that enables you to select someone to make medical decisions on your behalf. This power can only be exercised when you are unable to communicate but is not limited to situations where you are terminally ill.

Durable Power of Attorney – There can be a number of situations where you may need someone else to make financial transactions on your behalf. Whether you’re traveling overseas, in a coma, or sequestered in a jury, a document called a durable power of attorney permits the person named as your agent to sign documents, trade securities, and sell property. You do not have to be unable to act for yourself in order for your agent to act on your behalf.

The agent does have to act in good faith, and may not abuse the power of attorney for his/her own advantage. If you sign a power of attorney that is not specifically durable, the power is revoked upon your disability or inability to communicate. With a durable power of attorney, your agent can make the necessary transactions in order to pay your medical bills or make sure your family has the money they need.

Living Trust – Another method is to place your assets in a living trust. Don’t confuse this with the living will described above. Although they sound similar, they are very different. A trust is simply an arrangement that provides for a third party to manage your assets for a beneficiary, upon your death. A living trust allows you to start a similar arrangement while you are still alive. You can be your own trustee, and simply name a successor trustee to take over upon your death or disability. A living trust is a more expensive estate planning tool than a durable power of attorney, but it can also be customized to your specific needs. It is particularly useful for more complicated situations such as second families or people who own property in multiple states.

Step 5: Monitor your estate plan

Things change. That’s why you should review your estate plan whenever a life event occurs for you and your family. Even if it seems like nothing’s changed, you should review your estate plan every few years at a minimum. A good rule of thumb is that you should update your will any time someone enters or leaves your life (aka birth, marriage, divorce, death)

Documents to review

  • Your will and any trusts
  • Powers of attorney
  • Beneficiary designations on employer-sponsored retirement plans (401(k), 403(b), 457, etc), IRAs, life insurance policies, annuities, HSAs

An estate plan, like a financial plan, is always evolving as your life changes. It can be easy to delay making an estate plan because there are several important decisions you must make, but don’t fall victim to analysis paralysis. You can always change your documents as long as you’re still of sound mind, so choose what works for your life today, and then make updates as things change. Also, be sure to check with legal benefits offered by your employer to help with the estate planning process. 

Be A Tax Savvy Investor

January 04, 2024

Take advantage of long-term capital gains rates

Hold stocks and mutual funds for more than twelve months to have your gains taxed at lower capital gains rates.

Consider tax-advantaged investments

Municipal bonds are issued by state and local government agencies. The interest is tax free at the federal level, but may be subject to the alternative minimum tax. Those issued by the state or municipality where you live are tax free at the state or local level as well.

Sell investments at a loss

If you have stocks or mutual funds in a taxable account that are worth less than you paid for them, and your losses exceed your gains, you can take losses of up to $3,000 against your taxable income. Be sure to evaluate selling costs and the investment’s future potential first.

Watch out for the wash sale

You can sell mutual fund or stock losers and buy them back again if you feel they are good long-term investments (but make sure you wait at least 31 days before you buy them back or the IRS will disallow your loss).

Don’t buy mutual funds at the end of the year

Mutual funds may pay out capital gains accrued throughout the year as a taxable distribution toward the end of the year (even if you just bought the fund, you’ll owe taxes on this payout!). Wait until after the distribution is made if you wish to minimize your tax bill.

Know the limit if you’re selling your home

Qualifying homeowners are exempt from the first $250,000 of capital gains ($500,000 if married filing jointly) when they sell their home.

Understand the different tax rates for dividends versus interest

Qualified dividends paid from stock investments are taxed at the same rate as long-term capital gains. Interest earned on investments such as CDs, savings accounts, and money market funds, however, are taxed at higher ordinary income tax rates.

How To Find The Right Tax Professional For Your Needs

January 04, 2024

There are lots of reasons to consider outsourcing the preparation of your income taxes to a pro, whether you just don’t want to take the time anymore or you have a more complicated situation such as income sourced from multiple states, income from your side gig or just want to make sure you’re taking advantage of any and all tax savings opportunities. It’s important to know that all tax preparers are not the same – there are different credentials and specialties within the world of tax preparation.

The first step in finding a pro is determining what type of preparer you need. Here are the 5 categories to choose from.

The type of preparer you need depends on your situation

Paid tax preparer:

For a routine return (aka you’re married with kids, own a home and have donations and maybe some investment income, but nothing more complicated), a tax preparer from a storefront service like H&R Block or Jackson Hewitt could do the trick. The convenience of extended hours and immediate tax preparation along with the relatively low cost (starting at about $60 on up, depending on the complexity of your return) is what attracts most customers. While most paid tax preparers must pass employer-administered examinations, they may not be as rigorous as those required to gain the designations or certifications other pros hold.

Also keep in mind that anyone can call themselves a tax preparer as long as they have an IRS issued preparer tax identification number (PTIN), but that doesn’t necessarily mean they know what they’re doing. If you’re looking to hire a tax preparer that doesn’t work for a large service, be sure to ask about experience and other credentials. And beware of any preparer asking you to sign a blank tax return or promising you any type of refund guarantee before looking at your information – they’re most likely up to no good and you’re always on the hook for taxes you owe, no matter who prepares your return.

Accountant:

Someone who practices accounting but hasn’t taken or passed the CPA examination may not be a bad choice for a basic return. Seek someone with a personal tax emphasis. Rates can range from $40 to $75 or more per hour.

Enrolled Agent:

EAs are the only taxpayer representatives who receive their right to practice from the United States government. (CPAs and attorneys are licensed by the states.) Agents have either worked for the IRS for five continuous years or have passed a two-day exam, and must complete 72 hours of continuing education every 3 years. Billing may be hourly (usually $100 to $200 per hour) or by the tax return, which can run from $100 (for a basic 1040) on up depending on the complexity. You may choose to work with an EA if you have an unusual tax situation or have past tax issues that you need help cleaning up.

Certified Public Accountant:

A CPA earns the title by passing the Uniform CPA examination, a rigorous 4-part test that ensures those holding the license are knowledgeable in all areas of accounting. CPAs must also complete a certain amount of on-the-job training in auditing and taxes (the amount varies by state) before they can earn their license and then must maintain their license with a certain amount of continuing education each year (varies by state ). Some CPAs specialize in corporate work and may not be the best choice for personal taxes, while others specialize in tax, but not in individual income taxes. A CPA may be the best choice if you have business income, own rental property or have other tax complexities that extend beyond income you earned from working and/or investing.

Tax Attorney:

If your tax situation is very complex or you are in deep trouble with the IRS, you may want to consider a tax attorney. Of course, a tax attorney is the most expensive of the tax pros, with rates typically running from $150 to $600 an hour.

How to find the best one for you

The best place to start your search for a tax pro is with friends and colleagues or even your local chamber of commerce. You can also check with the National Association of Tax Professionals, which has listings with certifications noted. The Better Business Bureau or the pros certifying agency can tell you if the person you’re considering hiring is in good standing, with no disciplinary actions.

Interviewing a preparer before you hand over your W-2 can prevent problems later. Make sure you’re comfortable with their answers to these questions.

  • What’s your education and experience? (at minimum they should have a college degree or several years of experience with references available)
  • Are you licensed or registered? By what agency? For how long? (If they are not licensed or registered, ask to talk with other clients to make sure they know what they’re doing)
  • What’s your specialty (personal taxes, corporate taxes, audit issues)?
  • What continuing education courses have you taken recently?
  • Who from your office would work on my taxes? (many larger offices have interns prepare returns that are then reviewed by more experienced CPAs – if that’s the case, you may be better off going to a smaller office and paying less)
  • In the event I’m audited, could you represent me?
  • What are your rates, and how much do you expect the total cost of the return to be? (beware of anyone wanting to charge by the form – you could be overcharged. The best preparers either charge by the hour or are willing to give you a not-to-exceed estimate)
  • When would the return be finished? (if you’re coming to them after mid-March, don’t be surprised if the answer is after the filing deadline – busy tax preparers often file extensions for clients who procrastinate getting their information in on time, although that doesn’t extend your time to pay any taxes due)

Whatever your needs, there’s a tax pro out there ready to make your life easier. Choose the right one, and you’ll more than likely get your money’s worth.

How To Tackle Tax Season

January 04, 2024

When the tax deadline approaches, it can be stressful, especially if you are unsure if you have to pay the IRS. It’s too easy to procrastinate with that potential IOU looming over your head. However, having a game plan to organize and execute filing your taxes can take the bite out of tax season.

Gathering information

Build a tax file for your incoming tax statements. Getting it all together saves the hassle of stopping in the middle of your tax preparation. Visit your checking, savings, and online brokerage accounts for 1099s. Check your mortgage provider for statements on interest paid. If you have an escrow, this may also include property taxes. If not, check your local jurisdiction online to download a statement.

One way to “de-stress” your tax planning is to know in advance if you and the IRS agree on the facts of the previous year. Nothing is more annoying than preparing your return and then getting that letter from the IRS that they found a discrepancy. It can slow down the process of your tax refund. You can view your official transcript with the IRS online account by visiting Your Online Account | Internal Revenue Service (irs.gov). (The IRS made this easier by removing the biometric data requirement.)

Getting your tax filing done

One recent survey shows that almost half (45%) of its respondents use tax planning software. Others (38%) choose to hire a tax preparer in person or virtually. The remainder prepares it the old-fashioned way. People with simple situations (no businesses, no real estate investment, and little to no investment income) are generally satisfied using tax filing software. However, one thing that can get overlooked is the options available to prepare your taxes for free if you fall below a certain income threshold. In addition, over 94% of individual tax returns are filed electronically.

Choosing a tax preparation method has much to do with your personal preference. For example, if you prefer to have a person prepare your return for you and your situation is relatively simple, a national chain franchise like H&R Block, Jackson Hewitt, or their local equivalent could be your cheapest and quickest solution. Just be aware that there is a wide variation in skills and experience among the people who work in these companies.

If your situation is complex or you have lingering issues with the IRS, you may want to consider an Enrolled Agent or CPA specializing in individual taxes. Enrolled Agents are authorized to represent you in front of the IRS and earn their status either through experience as a former IRS employee or by passing a 3-part comprehensive IRS test on individual and business tax returns. You can search for a local one here. Like Enrolled Agents, CPAs can represent you in front of the IRS and have even more rigorous requirements, but they’re not necessarily more qualified as tax preparers. You will want to interview your prospective CPA to determine how much of their practice they dedicate to helping someone with the same tax concerns as you.

Plan for next year today

To make next year’s filing even less stressful than this year, begin planning before the year is over. Maintain that tax file for important documents as they come in throughout the year, so you do not have to pull it all together this time next year. If your refund is getting dangerously close to you having to pay, update your Form W-4 now to increase your withholding. Also, determine if putting more aside into your 401(k) or HSA could benefit you in the future.

Tackling Your Taxes

January 05, 2023

Let’s face it. Tax time is no fun. It can also be stressful. Perhaps this explains why 33% of Americans typically wait until the last minute to file their annual income taxes. However, tax season doesn’t have to be a dreadful, stressful time. So let’s look at how to make tackling tax time more manageable and (relatively) stress-free.

Stress Less

Financial issues have long been a source of stress for many people, and tax time makes this stress even more pronounced. Not only might you owe some additional money to the government, but there is also a clock ticking and some uncomfortable financial penalties if you are late. Use these tips to help reduce stress and anxiety the next time you have to file your taxes:

  • Break the tax filing job up into smaller tasks so you can complete your filing over time
  • Start early to avoid a stressful time crunch near the tax filing deadline
  • Use tax software to guide you and help keep you on track with helpful email reminders
  • Consider hiring a tax professional to handle your filing while you enjoy a fun, relaxing activity instead

Buy More Time

If the looming tax deadline is just too much to take, you can elect to file later and buy yourself more time. First, however, there are a couple of rules to follow:

Individual tax filers at any income level can request an extension until October 15 to file their federal income taxes. However, an extension to file does not give you an extension to pay. If you owe taxes, the IRS expects you to pay some or all of those taxes when you file. Requesting extra time is easy. You can file for an extension electronically using IRS Free File and following the online instructions. When you file an extension, you can pay taxes owed through the IRS website.

If you have time to file but need time to gather enough cash to pay your tax bill, the IRS also allows qualified taxpayers to pay over time. A setup fee may apply, and you must pay accrued interest and penalties. Still, this option will let you spread your tax payments over several months or even years. Apply online for a payment plan with the IRS to see if you qualify and to request a payment schedule.

Get Ready to Be Ready

Before the next tax season rolls around, there are some steps you can take to help make tax filing easier in the future.

  • Organize your records so you can easily find them. For example, many people scan or take photos of important tax documents as soon as they receive them and file them electronically using Dropbox or similar apps.
  • Run a W-4 withholding estimator to adjust your payroll withholdings and avoid future tax bill surprises at filing time.
  • Once tax season starts again, many accountants or services may be too busy to take on new clients. So, if you hire an accountant or tax preparer, conduct your search and decide well before next January.

Feel More Relaxed and Less Taxed

Although death and taxes are inevitable, according to an old saying, no one says that filing your taxes always has to be stressful and unpleasant. However, with a bit of pre-planning and some thoughtful organization, you can make your tax filing efforts simpler and much less hectic in the future. So take some time to review these tips, select a couple that works for you, and become better prepared to tackle your taxes.

How to Change Your W-4 and Increase Your Take-Home Pay

February 15, 2022

Are you looking for a quick way to increase your savings or find some extra money to pay down debt? If you are like millions of other taxpayers currently overpaying your income taxes to the IRS each year, you still have time make adjustments to how much you are sending Uncle Sam. The average refund was $2,827 in 2020 with over 125 million refunds issued. This is a substantial amount of money to be loaning out to the IRS at zero percent interest. Continue reading “How to Change Your W-4 and Increase Your Take-Home Pay”

The Risks Of Employer Stock

November 15, 2021

One of the biggest risks lurking in people’s investments is having too much in a current or former employer’s company stock. What’s too much?

Rule of thumb

You should generally have no more than 10-15% of your investment portfolio in any single stock. It’s worth noting that an investment adviser can lose their license for recommending more than that.

More than just a stock when it’s your job

So why is this such a bad idea? What if your company stock is doing really well? Well, remember Enron, anyone? While it’s practically impossible for a well-diversified mutual fund to go to zero, that could easily happen with an individual stock. In that case, you could simultaneously be out of a job and a good bulk of your nest egg.

Now, I’m not saying your company is the next Enron. It could be perfectly managed and still run into trouble. That’s because you never know what effect a new technology, law, or competitor can have, regardless of how good a company it is.

Nor does the company have to go bankrupt to hurt your finances. Too much in an underperforming stock can drag down your overall returns, and even a well-performing stock can plummet in value just before you retire. As volatile as the stock market is as a whole, it’s nothing compared to that of an individual stock.

Why do we over-invest in our own companies?

So why do people have so much in company stock? There are two main reasons. Sometimes, it’s inadvertent and happens because you receive company stock or options as compensation. For example, your employer may use them to match your contributions to a sponsored retirement plan. Other times, it’s because people may feel more comfortable investing in the company they work for and know rather than a more diversified mutual fund they may know little about.

A general guideline is to minimize your ownership of employer stock. After all, the expected return is about the same as stocks as a whole (everyone has an argument about why their particular company will do better, just like every parent thinks their child is above average). Still, as mentioned before, the risks are more significant. That being said, there are some situations where it can make sense to have stock in your company:

When it might make sense to keep more than usual in company stock

1) You have no choice. For example, you may have restricted shares that you’re not allowed to sell. In that case, you may want to see if you can use options to hedge the risk. This can be complicated, so consider consulting with a professional investment adviser.

2) You can purchase employer stock at a discount. If you can get a 10% discount on buying your employer’s stock, that’s like getting an instant 10% return on your money. If so, you might want to take advantage of it but sell the shares as soon as possible and ensure they don’t exceed 10-15% of your portfolio.

3) Selling the stock will cause a considerable tax burden. Don’t hold on to a stock just because you don’t want to pay taxes on the sale, but if you have a particularly large position, you may want to gift it away or sell it over time. If you do the latter, you can use the same hedging strategies as above.

4) You have employer stock in a retirement account. This is a similar tax situation because if you sell the shares, you’ll pay ordinary income tax when you eventually withdraw it. However, if you keep the shares and later transfer them out in kind to a brokerage firm, you can pay a lower capital gains tax on the “net unrealized appreciation.” (You can estimate the tax benefit of doing so here.) In that case, you may want to keep some of the shares, but I’d still limit it to no more than 10-15% of your total portfolio.

5) You have a really good reason to think it’s a particularly good investment. For example, you work at a start-up that could be the proverbial next Google. It may be too small of a company for analysts to cover, so it may genuinely be a yet-to-be-discovered opportunity. In that case, go ahead and get some shares. You may strike it rich. But remember that high potential returns come with high risk so ensure you’ll still be financially okay if things don’t pan out as hoped.

The ups and downs of the stock market typically get all the media and attention. But your greatest investment risk may come from just one stock. So don’t put all your eggs in it.

The Real Income Number That Matters When It Comes To Taxes

March 19, 2018

One of the things that is toughest to grasp about taxes for non-tax professionals is the difference between income (a.k.a. gross income), adjusted gross income (a.k.a. AGI), modified adjusted gross income (or MAGI) and taxable income (the amount that actually determines your marginal tax rate).

Gross income is actually (kind of) irrelevant

We all know that our gross income is really only just a number on paper. No one actually takes home the total amount of income they earn (at least no one complying with the tax laws in the U.S.), but understanding how that number translates into the amount of taxes they pay each year is a mystery that most leave to the tax geeks of the world like me and my fellow CPAs.

Unless figuring out the tax code intrigues you, there is no need to become an expert on how it all fits together, but I do think it’s important to have a general understanding of the different terms. Why? Because you’ll be able to make better financial decisions that ideally may lead to tax savings. Here are a few key concepts to better understand:

Adjusted Gross Income or “AGI”

Why it’s important:

Your AGI is the basis for several tax thresholds, including:

  • Determining whether you qualify for certain tax credits
  • Determining whether you can deduct medical expenses, all your itemized deductions and/or miscellaneous itemized expenses (at least for tax years 2017 and prior)

Your AGI is also the starting point for most states in figuring out your state income taxes.

How it’s calculated:

To put it simply, it’s all your income from working, investments, retirement accounts, rental property, etc. minus all the expenses considered “above the line” such as IRA contributions, student loan interest and HSA deposits. Here’s the full list from the 2021 Schedule 1, which is part of the Form 1040:

Modified Adjusted Gross Income (“MAGI”)

Why it’s important:

Your MAGI adds back some of the “above the line” deductions mentioned earlier, and determines things like your eligibility to: contribute to a Roth IRA, take a tuition and fees deduction (which was resurrected for tax years 2018 – 2020), and deduct contributions to a traditional IRA (when you have an employer-sponsored retirement savings plan, like a 401(k), available to you).

Why you should care

Here are just a few examples of reasons you should have a rough idea of what your AGI and MAGI is:

  • You rule out making Roth IRA contributions because your salary exceeds the income limits, not understanding that the limit is based on your MAGI for IRAs. If you make contributions to your 401(k) at work, deposit funds to your HSA or even pay alimony, your MAGI may fall below the limits and allow you to contribute.
  • You sold a stock holding that was gifted to you many years ago from a relative and the gain from the sale pushes you over the MAGI limit resulting in additional net investment income tax. If you’d known before, you could have taken steps to minimize that additional tax.
  • You are retired and decide to make a last-minute withdrawal from your IRA right before the end of the year, not realizing that the withdrawal increases your AGI, subjecting more of your Social Security income to taxation.

Avoiding these situations requires careful tax planning and the assistance of an expert. But these are just examples of why we should all try to be a little more knowledgeable about how the income tax system works so that we will know when to look further into certain financial moves before we make them.

After all, who wants to pay more taxes than they have to?

Disclaimer: The author of this post is not a practicing tax professional; the content of this post is for informational purposes only and should not be construed as tax advice. Taxpayers should always consult a tax professional for tax planning services and/or tax-related questions.

What to Do If You Missed the Tax Deadline

May 04, 2017

April what? I’ve written before about why not to procrastinate filing your taxes, but sometimes life just gets in the way. We recently received a question about what to do if you missed the tax filing deadline. Here are some steps to take:

  1. Don’t panic. Assuming you’re not found guilty of egregious tax fraud, you’re not going to jail. In fact, if you don’t owe anything, you won’t even have a penalty. I once filed late one year and my only punishment was having my refund delayed.
  1. Decide whether to do your taxes yourself or use a professional tax preparer. Here are some things to consider. Keep in mind that if your income is below $64k, you may now qualify to use name-brand tax software for free. (If your income is above $64k, you can still use the IRS’s fillable forms for free, but they don’t offer any real guidance so I wouldn’t recommend this unless your taxes are really simple and/or you really know a lot about tax preparation, in which case you probably wouldn’t be reading this.) The good news is that if you decide to hire a tax preparer, you may have an easier time finding one now that the busy tax season is over.
  1. Get your taxes done ASAP. If you do owe taxes, you’ll want to get the payment made as soon as possible to minimize interest and penalties. (Here are some things you can do if you can’t afford the payment.) If you’re owed a refund, my guess is that you can think of better uses of the money than continuing to loan it to federal government tax-free (although they could really use the money right now). Either way, you’ll be relieved to get it off your mind.
  1. Prepare for next time. Check out these tips to prepare for the next tax season. If you think you’ll need extra time, you can file for an automatic extension until October. However, you’ll still owe interest and penalties for any payments made past the filing deadline. To be on the safe side, you may want to adjust your W-4 to have more money withheld from your paychecks so that you don’t owe next year.

Don’t worry. You’re not the first person in America to miss the filing deadline. That being said, next time the consequences could be worse so try not to make the same mistake again.

 

How to Find a Good Tax Preparer

April 26, 2017

As a CPA who used to actually prepare taxes for other people, many are often surprised to learn that I no longer even prepare my own income taxes. The first year my husband and I were married, I spent the better part of a spring Saturday inputting all of our stuff into online software and resolved after that to outsource that task to a real pro going forward. When I was single and had just a W-2, student loan interest and a deposit to my IRA, my taxes were simple and it took me less than an hour to get them filed. But our taxes are much more extensive these days.

My husband is an independent contractor so he’s considered self-employed. We make several trips to Goodwill each year to drop stuff off, which requires an entry for each and every trip, and I have income from my moonlight gig as a fitness instructor and writing the “Weekly Savings Tip” for Feed the Pig. Not to mention that my husband has a brokerage account where he likes to play the market a little bit (with money we can afford to lose), which some years means a dozen or more entries for capital gains and losses. If time is money, then the money we pay our accountant to prepare and file our taxes is money well spent. If you’re in the same boat or find yourself with a new tax complexity that isn’t as easily handled by the tax software available to “common folk,” here are some best practices for finding the best person to help you:

Decide if you want a tax preparer, an EA or a CPA.

What’s the difference? I bet you didn’t know that pretty much anyone can call themselves a tax preparer, although the IRS has started to regulate that by requiring people who accept payment for preparing taxes to have a PTIN (paid preparer tax identification number).

An EA (enrolled agent) is someone who has passed the IRS’s test for tax preparation and is allowed to represent taxpayers in front of the IRS. Most EAs are going to be pretty well-versed in the more common tax issues like what you can deduct, self-employment income and what credits you might qualify for.

A CPA (certified public accountant) is someone who has a degree, studied accounting, and passed the Uniform CPA exam, which is no joke. Just because someone is a CPA doesn’t mean they do taxes, but if a tax person is a CPA, you can bet that they have a decent depth of knowledge. If they are a CPA/PFS (like me!) then they have also passed an additional test demonstrating deep knowledge of personal finance issues like retirement planning, budgeting and investing.

If your situation is pretty simple, but you just don’t want to spend the time on preparation, then you may be satisfied with a tax preparer through one of the large chains like H&R Block or Jackson Hewitt. Just know that since these companies guarantee accuracy and your lowest taxable income, they’re likely to go a little overboard in requiring you to document things that ultimately may not matter, like casualty losses and medical expenses (which must exceed 10% of your adjusted gross income to count).

If you have a little more complexity like self-employment income, income in multiple states or rental properties, then you may want to look at either an EA or a CPA. The biggest difference here is probably going to be cost, although not always.

How to find an EA or CPA to help with your taxes.

EA: National Association of Enrolled Agents

CPA: Look to your state’s society of CPAs by searching “Illinois (or whatever state you live in) CPA society.” That’s the best way to find a database of those in your area since CPAs are registered through their state rather than nationally.

CPA/PFS: www.findacpa-pfs.com

When performing your search, make sure you limit results to specialties that apply to you. If the database has a category for “individuals,” always check that and then also look for other complexities you may have such as multi-state or small business. Your search is likely to turn up multiple results, so you’ll want to filter out anyone who works for a large firm because they’re less likely to actually work with “everyday” people and instead specialize in very wealthy individuals.

I tend to look for people who work in a small office or even on their own. They’re more likely to want to work with everyday people at an affordable rate. After that, it may come down to convenience. Whose office is easiest for you to get to in order to drop information off, sign documents or stop by mid-year for a tax planning session?

This brings me to another criteria. Do you want someone to just prepare and file your taxes or do you want someone to help you save money on taxes going forward? Our accountant is a straight-up tax preparer, at least for us. If you’re looking for more guidance on saving money going forward, then you’ll want to ask a potential preparer if they do tax planning and you may want to look for the CPA/PFS credential.

The sad fact is that there aren’t a lot of CPAs out there that actually want to do income taxes for regular families who just have jobs, kids, a house and a few charitable donations. The easiest way to find one that does is to just pick up the phone and start asking, “Do you accept individual tax clients and what is your minimum fee?” If the minimum is more than $500, I’d say move on.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How Getting Divorced Affects Your Taxes

April 12, 2017

One of the biggest questions people often ask as they’re going through a divorce is how it will affect their taxes. It’s a question worth considering, especially if the process of getting divorced spans multiple tax years where you’ll still be technically married but living apart. The IRS only cares what your marital status is on December 31st. For example, when I was going through a divorce, we had filed by year-end but the divorce was not finalized until late January. That meant that by the time we had to file our taxes for the prior year, we were no longer married, but in the eyes of the IRS, we were for that tax year.

If you’re separated from your spouse but haven’t filed for divorce yet, you may qualify to file as “head of household” if you and your spouse lived apart the last six months of the year and you paid more than half the cost of keeping up a home for your child who lives with you more than six months. This generally means you’ll pay less taxes than if you were to use “married filing separately.” This article goes more into the details of filing jointly versus filing separately. Just know that if you file jointly and then your estranged spouse bails on the tax bill, you’re fully on the hook. In my case, we filed jointly because we both ended up paying less taxes and I personally wasn’t concerned that my ex was committing tax fraud.

The decision could also depend on the rules of your state and how your expenses were paid. If you live in a community property state (AZ, CA, ID, LA, NV, NM, TX, MI or AK) and decide to file separately, you generally would each claim one-half of your expenses on your return. If you do not live in a community property state then each spouse only takes a deduction for expenses he or she actually paid. In other words, if you are making the mortgage payment without help from your spouse, you’ll want to figure out which status realizes the full value of the interest you paid.

Once your divorce is finalized, you’ll want to start from scratch in making sure you’re having enough withheld from your paycheck. Don’t have too much withheld either though. You can use the IRS Withholding Calculator to help figure out what changes you may need to make.

Finally, make sure you understand how maintenance (often called alimony) and child support work for tax purposes. Basically, you can deduct alimony paid but not child support. Likewise, if you’re receiving alimony, you have to claim it as income but not if you’re receiving child support. Who gets to claim the kids as dependents on their tax return is something that should be worked out in your divorce agreement and if you’re receiving a significant amount of alimony, you may need to file estimated taxes to avoid any under-payment penalty. For help with that, it’s best to consult a tax professional for customized guidance.

 

Quiz: Do You Get the Most Out of Your Benefits?

April 03, 2017

Today is Employee Benefits Day. How will you celebrate? Don’t worry. Celebrating Employee Benefits Day does not require you to make a special trip to the party store or spend a single dollar.

In fact, the best way to celebrate it is to recognize and appreciate the value of your employee benefits and to maximize them for your personal financial situation. Don’t know where to start? Take this quick quiz to test your benefits knowledge.

1) You have decided it’s time to prepare a will. Where might you most likely find links to basic estate planning tools?

a. The public library

b. Your employee assistance program (EAP)

c. Your retirement plan provider

d. The HR department

2) Next year you plan to get laser eye surgery to correct your vision. Where is the best place to save extra money pre-tax to pay for it?

a. A health savings account (HSA)

b. An employee stock purchase plan (ESPP)

c. A flexible spending account  (FSA)

d. A deferred compensation plan

3) Where you can save and invest for retirement so that the income after age 59 ½ will be tax-free?

a. Non-qualified stock options (NSOs)

b. Nowhere – there’s no such thing as tax-free retirement income

c. A cafeteria plan

d. A Roth 401(k)

4) During this year’s open enrollment, you choose a high deductible health plan (HDHP) because of the lower premiums. You have the option to save money pre-tax in an HSA to cover the deductible and a portion of out-of-pocket expenses. You should:

a. Skip the HSA. The point of choosing your health insurance was to save money.

b. Contribute no more than $1,000.

c. Contribute the maximum ($3,400 for an individual and $6,750 for a family in 2017). If you don’t need to use the money, you can roll it forward to future years.

d. Contribute no more than $1,500.

5) Taylor takes the train to work every day, Max drives and parks in the public garage and Jenna rides her bike. Who can use a pre-tax commuter benefits account offered by their employer?

a. Only Taylor. The point of pre-tax commuter benefits is to encourage employees to take public transportation.

b. Taylor and Max can contribute up to $255 per month in 2017, but not Jenna. There are no employer-sponsored bicycle benefits.

c. Everyone but contributions are from the employer only.

d. Taylor and Max can contribute up to $255 per month in 2017. Jenna can’t contribute pre-tax, but she can participate in her employer’s bicycle reimbursement program, for up to $20 per month in eligible expenses.

6) According to our recent financial wellness research, the single most important tool an employer can offer to boost employee retirement preparedness is:

a. A “bank at work” program

b. A retirement calculator

c. Incentive stock options (ISOs)

d. A target date fund

7) Which benefit replaces your income if you have an injury or illness which is not work-related?

a. Disability insurance

b. Long term care insurance

c. Workers compensation

d. Unemployment insurance

8) According to the 2016 Milliman Medical Index, what is the typical total cost for family coverage in an average employer-sponsored group health plan?

a. $25,826 for a preferred provider organization (PPO) plan

b. $6,742 for a health maintenance organization

c. $43,350 for a high deductible health plan (HDHP)

d. $15,003 for preferred provider organization (PPO)

9) Your employer will reimburse you up to $3,000 for an undergraduate course, a graduate course or a professional certification. How will the reimbursement be taxed?

a. Reimbursement for a professional certification will be taxed  but not reimbursement for college/university courses

b. Reimbursement for college/university courses will be taxed  but not reimbursement for professional certification

c. Tuition reimbursements are generally included in the employee’s taxable income

d. Tuition reimbursements of less than $5,250 are generally not included in the employee’s taxable income

10) What type of pre-tax benefit can you use to pay for after-school care expenses for your children?

a. Health savings account

b. None – after school care is not eligible for reimbursement

c. Education savings account

d. Dependent care flexible spending account

See the answers in italics below. How did you do? If you scored a 9 or higher, congratulations! Chances are that you see your employee benefits as an integral part of your overall compensation.

If you scored an 8 or lower, you may be leaving money on the table by not taking full advantage of everything your employer offers. If you have access to financial coaching via your workplace financial wellness program, consider setting up a time to talk to a planner about how you can fully maximize the value of your employee benefits. In addition, check out the blog posts for the rest of this week, which will focus on various aspects of your benefits.

Answers:  1 – b, 2 – c, 3 – d, 4 – c, 5 – d , 6 – b, 7 – a, 8 – a, 9 – d, 10 – d

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

5 Common Myths About Gifts

March 30, 2017

Whether I’m facilitating workshops and webcasts or talking to people individually, one of the areas that I’ve found the most confusion around is a topic that we all (hopefully) have some experience in and that’s gifts. Some of the misconceptions are harmless, while others can result in significant financial losses or missed opportunities. Here are some of the most common myths about gifts I hear:

To be a gift, you have to completely give something away. That’s how we generally think about a gift, but it’s not how the law looks at it. For example, if you add someone’s name to an account or a property deed, that’s considered a gift and subject to everything else in this blog post even though you yourself retain control over that asset. Assigning someone certain rights in a trust can be considered a gift as well.

Gifts are taxable to the recipient. Intuitively, this makes some sense. However, the income tax doesn’t consider gifts taxable income unless it’s a “gift” from your employer that could be considered part of your compensation. Also, the gift tax is actually a tax on the giver, which brings us to…

Being subject to the gift tax means you owe money to the IRS. First of all, let’s define “subject to the gift tax.” Gifts to charities and gifts in the form of payments directly to medical or educational institutions on behalf of someone else are not subject to the gift tax. The same is true for gifts of up to $14,000 per person per year. That means if you and your spouse have 5 kids, you can each give each of them $14,000 for a total of  $140,000 in 2017 without filing a gift tax return.

What if you give more than that? The good news is that you still likely won’t owe the IRS anything. That’s because any taxable gift reduces the total amount you can give tax-free over your life and death, which is currently $5.49 million. If Warren Buffett’s only taxable gift were to give $1,000,000 to you (above the $14,000 exemption), his $5.49 million exemption would be reduced to $4.49 million. Only after he’s given away another $5.49 million in taxable gifts would he have to pay the IRS.

A gift can save money from being spent down to qualify for Medicaid coverage of long term care. There is some truth to this one because giving away assets can indeed reduce the amount you have to spend down before being eligible for Medicaid. However, any gifts made within the last 5 years (formerly 3 years) still have to be spent down so you have to give the assets at least 5 years in advance. One option is to buy a 5 year long term care insurance policy so you can give assets away if you need care and then qualify for Medicaid after the insurance policy (and the 5 year time period) expires.

Giving assets away is more tax-advantageous than passing them on. If you give an asset away and the recipient sells it, they have to pay a capital gains tax on all the gain since you purchased it. However, if they inherit it, they only have to pay taxes on any gain from when they receive it. All the gain during your lifetime goes untaxed. That’s a pretty good reason/excuse to let your heirs inherit an asset rather than giving it to them now.

Hopefully, this will help you give and receive gifts with more confidence. For more complex questions, you might want to consult with a qualified tax professional. If you’d like to practice your new gifting skills but aren’t sure who to give assets to, feel free to send them my way…

 

Should You Follow Senator Elizabeth Warren’s Investment Advice?

March 23, 2017

Last week, I wrote about some of her money management tips as described in an article titled “You, Too, Can Invest Like Elizabeth Warren!” Overall, I found them a bit too simplistic. Now let’s take a look at the investing side:

1. Visualize. Specifically, “take a moment to savor your dream.” It’s hard to argue with this. If visualizing your retirement or other goals helps motivate you to save and invest, go for it. Just remember that the dream probably won’t become reality unless you wake up and take action, which brings us to…

2. Create a retirement fund. Warren suggests contributing 10% of your income to a 401(k) or IRA. This isn’t a bad idea on its face but lacks detail. Why just 10%? The consensus seems to be that the average American household needs to save about 15% of their income for retirement so 10% is probably too low.

Even better, you should run a retirement calculator to get a more personalized number. That’s because the percentage you should be saving depends on your age, your current retirement savings, how aggressively you invest, when you want to retire, how much retirement income you need, and how much you can expect to get from Social Security and other income sources. In other words, you may need to save a lot more or a lot less, depending on your particular goals and situation.

It also matters whether you choose a 401(k) or an IRA. While they can have similar tax benefits, you’ll want to contribute at least enough to your 401(k) to get your employer’s full match. After that, your choice depends on a variety of factors like the investment options in each account and whether you prefer the convenience and simplicity of having everything in your 401(k) or the freedom and flexibility of an IRA. Don’t forget that you can also do both.

3. Invest prudently in the stock market. Warren also recommends investing another 5% (or 10% if you’ve paid off your mortgage) in an indexed mutual fund. Her own non-retirement account portfolio is largely invested in fixed and variable annuities with some money in stock, real estate, and bond funds.

Again, why 5%? The amount you save should depend on how much you’re willing to put away to reach your goals. If your goal is retirement, you’ll probably want to max out your 401(k) and IRA before investing in a taxable account. If your goal is education funding, consider tax-advantaged education accounts like a Coverdell account or 529 plan.

The index fund recommendation makes sense since compared to actively managed funds, they generally have lower costs, outperform over the long run, and generate less in taxes since they don’t trade as much. However, Warren seems to be using deferred annuities instead to shield her personal money from taxes. There are a couple of downsides to this strategy. One is that variable annuities tend to have high fees. Another is that the earnings are withdrawn first and are taxed at ordinary income tax rates.

In addition, her heirs will also have to pay taxes on the earnings they inherit after she passes away. In contrast, long term (over one year) capital gains on stocks and funds are taxed at lower tax rates and won’t be taxed at all when passed on to heirs. Her real estate and bond funds also generate a lot of taxes.

A better strategy for Warren would be to prioritize the bonds and real estate investments in her 401(k) and IRA and use the taxable accounts for the remaining stock funds. This is because stocks are more tax-efficient and their higher volatility would allow her to use losses to offset other taxes. By sticking to index funds, she could save even more in taxes and other costs.

4. Oh, and avoid investing in these: gold, prepaid funerals, and collectibles. I’m not sure I’d call prepaid funerals an investment at all, but collectibles can be a fun way for someone to speculate as long as they’re not counting on them for anything. A small amount in gold is used by many investors as a hedge against rising inflation and other types of instability and can help diversify a portfolio since it typically moves differently than stocks and bonds.

As with her money management advice, you could do a lot worse than funding a retirement account, investing in an index fund, and avoiding speculative investments. But Warren’s investment advice is a bit too oversimplified as well. Instead, find out what retirement and investing strategy makes the most sense for your particular needs or work with an unbiased financial planner who can help you. After all, we don’t all have a senator’s pension to bail us out of any mistakes.

 

What Qualifies as Deductible Mortgage Interest? (The Answer Might Surprise You)

March 22, 2017

When it comes to being able to deduct the interest you pay on a mortgage, most people correctly assume that this applies to a home that you use as your primary residence. (There are some wonky rules around limits on the deductibility of certain types of mortgage interest from home equity loans or loans in excess of $1 million, which are best explained by Figure A on this page.) But many are surprised to learn that they may also be able to deduct interest paid on a second home and are even more surprised when they learn what the IRS considers a “qualified home.” Generally speaking, in order to be considered a home, a property must have sleeping, cooking and toilet facilities.

This means a boat, camper, or even a tricked out old ambulance could qualify as long as it has a bed, a stove and a toilet on board, and as long as any loan you took out to purchase the property is secured by the actual property. In other words, if you used a credit card to buy that fancy yacht, you can’t deduct the interest you pay on your card. But if there is a loan document that you signed that basically collateralizes the boat/home (aka if you don’t pay the loan back, the lender can repossess the property and sell it to satisfy the debt), it’s a mortgage and the interest is technically tax deductible. In most cases, the lender will send you a Form 1098 showing how much interest you paid. That’s one clue that you have an actual mortgage.

Another surprising aspect of the rule is that you don’t have to live there full time. In fact, you don’t even have to use it at all during the year as long as it’s not rented out. Note that if your second home is rented out, you may still qualify to deduct the interest. You just have to use it more than 14 days or more than 10% of the number of days it is rented, whichever is longer. If you don’t meet that qualification, you may still realize a tax benefit from interest paid, but it will be applied against the rental income you generate.

You shouldn’t go out and buy a second home, boat or RV you can’t afford just for the tax deduction, but it is worth knowing, especially if you’re looking into buying a second home for your future retirement or just a place to vacation throughout the years. If you’re thinking of taking out a loan to buy a boat or RV, make sure you shop around to get the best rates. Dealers often offer financing deals, but it’s worth it to double check that your bank or credit union can’t offer you a better deal. You can use this mortgage loan comparison tool to compare up to 3 loans and see which is the best financial deal.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

3 Strategies To Help With Your Tax Fears

March 15, 2017

I’m going to go out on a limb and say that tax time is pretty much everyone’s least favorite time of year. Even for me, a CPA and former tax preparer – I dread the process of digging up all our information and organizing it in order to complete our taxes and I especially dread the verdict of how much we’ll owe. It’s no surprise that nearly 1/3rd of all tax returns were filed in the last two weeks of the 2015 tax deadline. Whether it’s due to fear, procrastination or waiting on that last bit of information, tax time is stressful. My colleague Teig Stanley offers the top 3 fears that we help people address and a strategy to overcome each of them:

Fear #1:  It’s Confusing/Overwhelming

Your strategy: Overcome this barrier by writing a short, step-by-step plan to file. Set a date and time well in advance of the deadline (April 18th this year) when you will start your tax filing and decide if you are going to use a tax preparer or do your taxes yourself.

Then, organize your documents. Use a tax preparation checklist or ask your tax preparer for one and start making an inventory of the documents you’ve saved. If you’re like most, almost all of your documents are in paper form, so make these files for them:

  • Income
  • Charitable contributions
  • Taxes paid
  • Receipts
  • Miscellaneous

Fear #2:  I Might Not Get a Refund

Your strategy: If you’re afraid you’ll owe, the sooner you know the better. Even if you file your taxes in February, that balance isn’t due until April 18th so go ahead and file as early as possible and use the extra time to make a plan to pay what you owe. If it’s more than you can afford, you can contact the IRS to arrange a payment plan or borrow from another source.  Just be sure to compare interest rates to get the lowest possible cost.

If you’ll be receiving a refund – great! Get those tax returns in quickly to receive the money sooner. Asking for direct deposit makes it even faster. If that refund is large, consider filing a new W-4 form with your payroll department to increase your exemptions and take more money home in your paycheck throughout the year.

Fear #3:  What If I Get Audited

Your strategy: Statistically, less than 1% of tax returns for those reporting under $200,000 in income (and more than $0) are chosen for an audit by the IRS each year. If you are concerned about an audit, work with a professional tax preparer who will agree in writing to provide audit support if one is requested.

The bottom line is that while tax time is no fun for anyone, it’s not something you should be fearing. If you haven’t already, get down to it and get it done. If you’re going it alone in preparing your own taxes and need help, contact your tax software provider or search for free tax prep help through local community organizations and national non-profits. You may even qualify for free preparation if you have a moderate to low income.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How to Maximize the Benefits of Incentive Stock Options

March 02, 2017

If your employer is providing you incentive stock options (or ISOs) as part of your compensation, they’re giving you a stake in the success of the company (or at least the stock price). ISOs can be complicated though. To make sure you’re taking full advantage of the opportunity they offer, here are some questions to ask yourself:

Are you subject to AMT (the alternative minimum tax)? When you are granted the options and when they vest, there’s generally no tax (assuming they’re priced at the current fair market value of your employer’s stock). When you exercise the option, there’s also generally no tax (unlike with nonqualified stock options, which are subject to income and employment taxes when exercised).

However, there’s an exception that your gain when the option is exercised is considered income for purposes of calculating the AMT. For this reason, you may want to wait to exercise the option until a year when you’re not subject to the AMT. If you’re not sure when that might be, consult a tax professional for guidance.

How long has it been since you’ve been granted the option and exercised it? In order to qualify to pay a lower capital gains rate on all the gain, you need to wait at least 2 years from when the option was granted and one year since you exercised the option before selling the stock. If you sell the stock before then, you’ll have to pay ordinary income tax on the difference between the value of the stock when you bought it and the fair market value of the stock at that time.

It pays to wait, but not too long. Options (or the employer stock after you exercise the option) are risky because your money is tied up in just one stock. That’s why you may want to exercise your options and sell the stock to diversify the money as soon as you’re eligible to do so at the lower capital gains rate.

How much of your net worth do the options represent? If it’s more than 10-15% and you need to hold on to them for tax purposes, you may want to talk to a financial advisor about what options (no pun intended) you have to hedge against the risk of a falling stock price. Otherwise, you may see a significant decline in your net worth should something happen to the stock price.

Incentive stock options can be a great opportunity to participate in the success of your company. However, there are many pitfalls to avoid. Just make sure you understand all the ramifications before making any decisions and consult with qualified financial or tax professionals as needed.