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 Should You Invest In Your Roth IRA?

April 20, 2017

If you’re like many people I’ve talked to recently, you may have decided to contribute to a Roth IRA before the deadline on Tue. However, it’s not enough to open an account and fund it. After all, a Roth IRA is simply a tax-sheltered account, not an investment. You still have to decide how to invest the money. Here are some options to consider:

Use it as an emergency fund. If you don’t have enough emergency savings somewhere else, you can use a Roth IRA as part or all of your emergency fund since you can withdraw your contributions tax and penalty-free at any time and for any purpose. (Earnings are subject to taxes and a 10% early withdrawal penalty before 5 years and age 59 ½ but the contributions all come out first.) In this case, you’ll want to keep it someplace safe and accessible like a savings account or money market fund. Once you accumulate enough emergency savings elsewhere, you can invest it more aggressively for retirement.

Save for a short term goal. A Roth IRA can also be used penalty-free for a first-time home purchase (up to $10k) or education expenses. If you intend to use your Roth IRA for either goal in the next few years, you’ll probably want to keep it in savings.

Choose investments that complement your other retirement accounts. For example, you may want to use your Roth IRA for investments that may not be available in your employer’s plan like real estate, gold, commodities, emerging markets, international bonds, and microcap stocks. They can help diversify a more traditional mix of bonds and large and small cap US and international stocks.

Choose a more conservative mix for early retirement. If you’re planning to retire before becoming eligible for Medicare at age 65 and are planning to purchase health insurance through the Affordable Care Act (assuming it hasn’t been repealed and replaced), a tax-free Roth IRA can help reduce your insurance costs because the insurance subsidies are based on your taxable income. Since a large percentage of the account may be coming out over a relatively short period of time, you may want to invest it more conservatively than your other retirement investments.

Choose more aggressive investments for long term tax-free growth. If you’re not planning to withdraw your Roth IRA early, you may want to take the opposite approach and use it for the most aggressive parts of your portfolio. That’s because the account is growing tax-free and may be the last to be touched. (It helps that Roth IRAs aren’t subject to required minimum distributions.) Some examples of more aggressive investments would be emerging market and small and micro cap stocks.

Keep it simple. If this all sounds confusing and you want to just keep your investing as simple as possible, you can look at each account separately. For example, you might choose a target date retirement fund for your Roth IRA since it’s a fully diversified one stop shop that automatically becomes more conservative as you get closer to the retirement date. All you need to do is pick the one with the date closest to when you think you’ll retire and set it and forget it. If you want something more customized, you can also use a robo-advisor or design your own portfolio based on your particular risk tolerance.

Like all financial decisions, your choice begins with your goal. Are you trying to save for emergencies? Do you plan to use the account early or late in your retirement? Or do you just want to keep things as simple as possible?

 

 

 

What You Need to Know About Keeping or Tossing Tax Records

April 19, 2017

The basic reason you need to keep any tax documentation is so that if the IRS comes calling with questions about what’s on your return, you can prove the numbers. The most acceptable rule of thumb is that for anything you used to put numbers on your tax return, you should keep it at least three years or seven if you’re toeing any lines with what you put on your return. This includes receipts, cancelled checks, tax forms and even bank statements.

But the fact is that any official tax form you receive, such as a W-2, 1099 or 1095-B, was also provided to the IRS. That’s why if you forget to include, say, that withdrawal of your old job’s 401(k) on your return, the IRS WILL send you a letter reminding you (and requesting a little extra for penalties and interest). So do you really need to keep your copy? The answer is a bit of a “yes but…” and you obviously want to keep anything that wasn’t on an official tax form like receipts for donations or property tax statements.

The biggest “but” is that in terms of what the IRS accepts, there is no need to keep a paper copy of anything that you can easily obtain digitally. Since my accountant prefers to receive documents online anyway, I scan everything to a removable jump drive and just keep that in a safe place for three years. Besides being able to substantiate what you put on your tax return, here’s why you need to keep…

W-2s – These are mostly in case you want to do something like buy a house, refinance your mortgage or some other activity that requires you to prove your income.

Bank account statements – In case you are doing any type of mortgage application, the bank will want at least the past 60 days of any checking or savings accounts you hold.

Brokerage account statements – If your only transactions for the year were dividends and interest received, then you can get rid of the statements and just keep the 1099 that you received showing the income for the standard three years. However, if you purchased investments (including dividend reinvestment of a mutual fund), you’ll want to keep the statements as long as you hold the underlying investment plus three years. This is so that when you do sell, you’ll be able to properly calculate any gains or losses based on what you paid for the shares. The “plus three years” is because once you sell and claim the gain or loss, it becomes a tax document.

Receipts for home improvements – That new roof you had to put on your home may have been your least favorite purchase of the year, but if you’re lucky enough to eventually sell your house for a gain greater than the exemption amount ($250,000 for single, $500,000 for married), you’ll be able to reduce the gain by the cost of any improvements you made to the home throughout the years. One simple way to keep track would be to keep a running list, either in Excel, in Google Sheets or even by hand. Then scan and store the receipts with the other tax documents for the year of the expense.

Home sale/purchase documents – Besides providing evidence of any basis you used to calculate a gain (or lack thereof) on the sale of your home, you’ll want to keep these documents in case you need them on future mortgage applications. When my husband and I purchased our home, the title agency uncovered something that indicated he still owned the home in Michigan that he’d sold years before. He had to show them the sale document in order to avoid compromising our purchase.

IRA-related forms – If you ever made a non-deductible contribution to a traditional/pre-tax IRA or converted a traditional/pre-tax IRA to a Roth IRA, you’ll need the documents proving that so when you begin your distributions, you can avoid paying taxes twice on any of your savings. It’s best to create a separate file just for these forms and when they come in the mail each year, either scan them or place them into their designated place.

While you really should keep all tax documents for at least three years, make it seven if the interim years include red flag items like self-employment income, a home office deduction or large non-cash donations. The IRS really has a seven year statute of limitations to audit returns if they have any reason to believe abuse of the tax code. (That statute of limitations disappears if they uncover massive tax fraud so just don’t go there, okay?) The above list is meant to share exceptions or alternate reasons to save certain documents. Again, it’s okay to store your documents digitally, just make sure you’re shredding the originals to help avoid identity theft.


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.

 

Which Retirement Plan Benefits Are You Missing Out On?

April 06, 2017

This week, we’re recognizing Employee Benefits Day on April 3rd by writing about ways to appreciate and “benefit from your benefits.” One of the most common benefits that is often underappreciated and underutilized is your employer’s retirement plan. In particular, here are some features that you may not be taking full advantage of if you’re fortunate enough to have them in your plan:

Employer’s match. According to our research, 92% of employees are contributing to their plan but almost a quarter aren’t contributing enough to get the full match from their employer. At the very least, make sure you’re contributing enough to not leaving any of this free money on the table.

Contribution rate escalator. If you can’t afford to save enough to hit your goal, try slowly increasing your contributions by one percentage point each year. This tends to be less than cost of living adjustments so people generally don’t even notice the difference in their paychecks, but after just a few years, they may be saving more than they ever thought they could. A contribution rate escalator can do this for you automatically.

Roth contributions. Unlike pre-tax contributions, you get no tax benefit now, but Roth contributions can grow to be tax-free after 5 years and age 59 ½. This is especially useful if you’re worried about paying higher tax rates in retirement or if you’re planning to retire early since tax-free Roth distributions won’t count against you in calculating the subsidies you would be eligible for if you purchase health insurance through the Affordable Care Act (assuming the subsides are still in place) before becoming eligible for Medicare at age 65. Roth contributions are also more valuable if you max out your contributions since $18k tax-free is more valuable than $18k that’s taxable. (Yes, you could technically invest the tax savings from making pre-tax contributions, but then you’d still have to pay a tax on those earnings too.)

After-tax contributions. If you max out your normal pre-tax and/or Roth contributions, you may be able to make additional after-tax contributions. These aren’t as advantageous since the money goes in after-tax and the earnings are taxed at distribution, but you can convert them into a Roth account to grow tax-free, either while you’re still at your job if the plan allows it or by rolling it into a Roth IRA after you leave. You can also generally withdraw after-tax money while still working at your job (subject to taxes and a 10% penalty on earnings before age 59 1/2).

Asset allocation funds. To simplify your investing, retirement plans will often provide you with fully-diversified asset allocation funds that can be a one-stop shop. Some, called target date funds, even automatically become more conservative as you get closer to the target date so you can simply “set it and forget it.”

Online retirement and investing advice. Some plans provide access to a free online retirement planning and investment tool that can tell you whether you’re on track for retirement and make specific investment recommendations based on your particular risk tolerance and time frame, typically using the lowest cost funds in your plan.

Brokerage window. If you’re looking for an investment not otherwise available in your plan, see if you have a brokerage option that will give you access to thousands of other funds and in some cases, even individual stocks.

Employer stock. While you don’t want to put too much in any one stock (no more than 10-15% of your overall), especially your employer’s, there can be a tax benefit for doing so when you eventually cash out the account. If you transfer the employer stock directly to a brokerage firm in-kind, you can pay a lower capital gains tax on the growth instead of the higher ordinary income tax rate that you would normally owe on distributions.

Retirement plan loans. If you need a loan, borrowing from your retirement plan doesn’t require a credit check and the interest goes back into your own account. However, you miss out on any earnings that money would have received and if you leave your employer, you may owe taxes plus possibly a 10% penalty (if you’re under age 59 ½) on any outstanding balance after 60 days. (Some plans do allow you to continue making loan payments though.) Also, be aware that retirement plan loans are paid back from your paycheck so there’s no possibility of default and you can’t discharge them through bankruptcy.

Financial wellness. Some plans offer free, unbiased financial wellness coaching to help you plan, save and invest for your retirement. This is an important benefit since it can help you take advantage of all the others.

Which of those benefits are you not taking advantage of? See which ones are offered by your plan and start utilizing them. Your future self will thank you.

 

 

 

Employee Benefits New Moms Need to Know

April 04, 2017

I joined the Army in 1993 and spent the next 11 years in the military. I have been called every name you can imagine in my military career. I have also accomplished things I never thought possible such as scaling a 3 story building, training in hand-to-hand combat and shooting a rocket launcher (my G.I. Joe moment). Later, I became an instructor helping people navigate through simulated grenade attacks. I did this with no tears, just a determination to finish anything I started.

With all I have experienced, you would think that there is nothing that could bring me to tears. I thought so too until I had to drop my newborn daughter off at her daycare for the first time. I cried so hard the day care director had to give me a hug. What made this easier was the wealth of benefits I took advantage of through my employer. If you are about to have a baby or recently had a baby, consider researching the following benefits:

Affinity Groups For Mothers. For all of you that are parents, you learned that there were things you did not even think to ask because you just did not know they might be a problem. I was lucky. My employer offered affinity groups for mothers and even classes for expectant mothers. I learned invaluable lessons such as when and how to tell your employer you are expecting and how to develop a transition maternity plan and a post-maternity plan for when you return.

Employee Assistance Programs. Personally, I think employee assistance programs (EAPs) are one of the most underused employer benefits. My EAP provided information on what to expect after my daughter was born and guidance on deciding what type of childcare works best for my needs. The right childcare is different for everyone. For some, a daycare center eliminates the uncertainty of finding last minute daycare if your nanny or in-home provider is sick or on vacation. For others, a nanny eliminates the uncertainty of your kid getting sick because of another child.

My EAP offered a daycare referral service that saved me hours of research. I filled out a form with the details of the type of daycare I wanted and they sent me a list of the daycare centers that met my criteria. This made the process so much easier.

Daycare Discount Programs. Some employers have partnerships with daycare centers. This could translate into substantial savings. Other employers  offer “emergency daycare” programs where you get a discount if you need daycare for a day.

My employer partnered with a daycare center that discounted one day services to $25 – much cheaper than the normal drop in cost for that particular daycare. Some even offer daycare discounts for children who may be too sick for daycare (temperature over 100.5 in some cases) but not sick enough to be bedridden or go into a hospital. Contact your employer to get a list of possible daycare discounts. The list can literally save you hundreds of dollars per month.

Dependent Care Tax Breaks. For those of you that have children under the age of 13, consider using a dependent care FSA to pay for daycare expenses pre-tax. If you are going to pay for daycare anyway, you might as well do it in a way that can help you save money on taxes. You can even use the dependent care FSA for summer camp. A good rule of thumb is the dependent care FSA may be the most beneficial for taxpayers in the 15% or higher tax bracket. If you are in the 15% or below tax bracket then paying the costs with after-tax money and taking the dependent care tax credit may be more beneficial.

Being a new mom can be tough, but you don’t have to be alone. Talk to co-workers who recently had children and contact your HR benefits department and your EAP to explore every benefit you have available to you. This will help make the transition to motherhood a lot easier.

 

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.

 

Would You Be a Winner or a Loser Under the Proposed Health Care Law?

March 09, 2017

Regardless of what you think of the newly proposed Republican health care plan to replace the Affordable Care Act, one thing is for certain. As with all new laws, there will be both winners and losers. Here will be some of the individual winners and losers if the bill’s provisions become law:

WINNERS:

High Income Taxpayers: The bill would eliminate the Medicare payroll tax and the net investment income tax on individuals with MAGI over $200k a year and married couples with MAGI over $250k a year.

Tanning Salon Patrons: The bill would also eliminate the 10% excise tax on indoor tanning salons. This should make indoor tanning both cheaper and more available since the tanning industry claimed that nearly half of the nation’s tanning salons closed after the excise tax took effect. (However, it’s debatable whether they’re really “winners” given the health risks of indoor tanning.)

The Voluntarily Uninsured: Those who choose not to purchase health insurance would no longer be subject to a tax penalty. In fact, the law would be retroactive to 2016 so if you were subject to a penalty last year, you could file an amended return and get your money back.

Higher Income People Who Purchase Insurance Through the Exchanges: The ACA income-based premium subsidies would be replaced with new tax credits based on age for those who purchase insurance through the exchanges. The higher income you are, the likelier you are to benefit more from the tax credit. You can calculate the current subsidies here and see a comparison with the proposed tax credits here.

Younger People Purchasing Insurance Through the Exchanges: The law would allow insurance companies to discriminate more on age, which could mean lower premiums for younger people.

People Who Want to Contribute More to HSAs: The HSA contribution limits would nearly double to $6,500 for individuals and $13,000 for families and spouses over age 50 would be able to make additional catch-up contributions. You would also be able to use the HSA for certain medical expenses before the HSA was opened.

LOSERS:

Some Medicaid Beneficiaries: The law would cut funding to the states for Medicaid expansion.

Lottery Winners: Lottery winners would not be able to enroll in Medicaid.

Patrons of Planned Parenthood and Other Abortion Providers: Organizations that provide abortions would be de-funded.

The Involuntarily Uninsured: You would be subject to higher premiums if you neglect to purchase health insurance and later decide to enroll.

Lower Income People Who Purchase Insurance Through the Exchanges: The income-based premiums subsidies would be replaced by age-based tax credits that will be lower for most low income people. You can calculate the current subsidies here and a comparison with the proposed tax credits here.

Older People Purchasing Insurance Through the Exchanges: The law would allow insurance companies to discriminate more on age, which could mean higher premiums for older people.

Of course, no one knows what the final bill will look like after negotiations and whether it will even be passed into law. In fact, it doesn’t look too popular right now. Still, it could be useful to be aware of how the proposed provisions could affect you if any of them do become law. (Incidentally, I would currently be a “winner” under the bill since the only impact I can see on me is being able to contribute more to my beloved HSA.)

 

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.

 

 

What Are Miscellaneous Itemized Deductions and Are They Worth Tracking?

March 01, 2017

Editor’s note: Please note that all miscellaneous deductions were eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

Whenever I’m asked for “little known” tax tips, I can’t help but be a little annoyed. Part of the reason they are little known is because they apply to so few people, at least when it comes to deductions that fall under the “miscellaneous itemized deductions” umbrella. Things like tax preparation fees, unreimbursed business expenses and the home office deduction for employed workers – these are all deductions that I personally have in my life and yet I see no tax benefit because the only way they are actually deductible is if they exceed 2% of my adjusted gross income. In other words, a married couple who makes a combined $100,000 would only be able to deduct miscellaneous items that exceed $2,000, which is 2% of their income. That’s a lot of unreimbursed expenses.

However, I still track mine just in case. I probably won’t have a deduction in a normal year, but should something big come up or we have a year of unexpectedly low income, I want to be able to take whatever deductions are available. Here are the common deductions that may be worth tracking, even if you don’t get to write them off, as well as some expenses that people think are deductible but aren’t:

Common deductions worth tracking

Unreimbursed business expenses. Anything you pay out of your own pocket that applies directly to your job but you can’t put on your work expense report falls in this category. For example, when I travel for work, we have daily meal allowances. They’re reasonable, but sometimes I like to treat myself to a nicer dinner than the guidelines allow. I keep track of the amount I spend over the per diem limit as an unreimbursed expense.

Another example is a professional organization I belong to here in Chicago. My membership doesn’t fit my company’s expense guidelines, but it’s still work-related. I wouldn’t be a member of this group if I didn’t have my job. Other examples would be if your employer doesn’t reimburse at the full IRS-allowable mileage rate or if you subscribe to any magazines for your field. The full IRS list is here.

Tax preparation fees. Even if you do your own taxes, chances are you have to pay for the software or at least filing fees. Make a note of this expense in your tax files just in case you have other miscellaneous deductions that you can add on for a deduction.

Appraisal fees. If you made a gift to a charity that required an appraisal or if you had a casualty loss that required you to get an appraisal for insurance purposes, those are deductible in this category.

Any of these expenses. Many of the expenses that qualify may be one-time things that you didn’t know you could deduct, like repayments of Social Security benefits. It’s worth reviewing the list each year to see if you paid any of these things, in case they push you over the limit.

What’s not considered a miscellaneous deduction

Funeral expenses. If you prepaid your funeral expenses or purchased your burial lot ahead of time, those are not tax deductions, contrary to popular belief. However, once you’re gone, if you have a taxable estate, those expenses may be applicable there (something worth noting for executors of estates.)

Commissions paid to a broker. Fees for investment advice are deductible, leading many to believe that they can also deduct commissions. Instead, commissions become part of the cost basis of the investment purchased, so you’ll realize the tax benefit when the commission reduces the amount of your capital gain when the investment is sold.

Lost or misplaced cash or property. Losing something is not the same as someone stealing it or having it ruined due to a fire, flood or other event, which would make it a casualty loss (reported on Form 4684.) But just leaving your phone somewhere and not having it returned to you or dropping your wallet on the street is not deductible. There are no tax benefits for being careless…

Any of these expenses. Claiming a deduction for any of these items on your tax return could result in a tax levy from the IRS or sometimes even a full audit. While it seems like you should be able to write some of these things off, the bad news is that you can’t. C’est la vie.

I keep a file for receipts that would apply should I end up in a tax year where the total of these expenses might exceed 2% of my AGI. As I prepare to file taxes at the end of the year, I just do a quick review of the expenses that qualify to make sure I’m not forgetting anything, then recycle those receipts if they don’t add up to enough. So what do you think? Are these expenses worth tracking to you?

 

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.

 

 

Can You Deduct Your Student Loan Interest?

February 22, 2017

Don’t you just hate making student loan payments? Besides the fact that your student loans (hopefully) enabled you to earn a degree that allows you to command a higher income than you would without it, at least there is a small tax benefit to those loans for those who qualify. Here’s the skinny on what you need to know to maximize your deduction:

There are income limits. If you’re single and your AGI exceeds $80,000 or you’re married and your combined AGI is over $160,000, you can’t take any deduction at all. There are also phase-outs, which means you can still take some of the deduction but not all of it. Those limits start at $65k for single and $130k for married people. If you use tax software or a tax professional to prepare your taxes, the amount will be figured for you.

You can only deduct the first $2,500 paid in interest each year. Probably the biggest mistake I’ve seen here is when people think they can deduct payments. It’s actually only the interest you can deduct, so even if you’ve made well in excess of $2,500 in actual payments, you may not have a $2,500 deduction.

Your loan provider will tell you how much interest you paid. You don’t have to do the math to figure out what portion of your payments were for interest and which went toward the principal. Just look for Form 1098-E from each of your lenders. If you’re signed up for electronic delivery of statements, then you’ll probably have to log in to find your form. Look for a link to “Tax Documents” if your lender doesn’t make it obvious on their home page.

You can deduct interest from multiple loans, but they have to be qualified. If you have multiple loan accounts or lenders, you can add up all those Form 1098-E amounts for your total deduction. But the loan has to be considered a qualified student loan. If you refinanced by taking out a home equity  or 401(k) loan or even just borrowed from a family member to lower your rate, you can’t deduct that interest.

If you claim student loan interest on your tax form and the IRS doesn’t receive a corresponding 1098-E from a lender, you can count on getting a letter asking you to prove the interest was paid on a qualified student loan. If you’re not sure if your loan is considered qualified or not, ask them for your Form 1098-E. If they are unable to provide one, it’s not qualified.

I know that paying student loans is no fun. Hopefully, this small tax benefit will offer a little silver lining though. (In addition, reflect on what your finances would be like if you hadn’t earned that degree.)

 

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 Deduct Your Home Office On Your Tax Return

February 15, 2017

Updated in 2018 for the Tax Cuts and Jobs Act of 2017

If you have any self-employment income AND you have a home office that serves as a primary place you do “office work,” then the home office deduction is most likely available to you provided you meet the IRS qualifications. In order to qualify as a home office for tax purposes, your space must meet two requirements:

  1. Regular and exclusive use: The space you are claiming as your home office must only be used for that so if you work at your kitchen table, that wouldn’t qualify. I sectioned off a corner of our family room for my office. That qualifies because no one else uses that specific space for anything but my work.
  2. Principal place of business: You have to show that your home is your primary place of business, although there are some situations where you may still qualify even if you have a separate place where you also do business. Check the IRS regulations to see if you qualify.

If you’ve determined that you indeed do have a home office for tax purposes, then it’s important to understand how to calculate what you can deduct. There are two methods for calculating your deduction, and you can use a different method from year to year.

The Actual Expense Method

This is best for taxpayers who have a large amount of space and keep meticulous records of expenses. (The home office deduction is reputed to be a red flag for audit, although the IRS does not corroborate this.) The actual expense method is pretty self-explanatory. You deduct the actual amount of the expenses related to your home office.

Home office expenses

Figuring the percentage

To determine the percentage of your home that qualifies for business use, you need to measure the space compared to the total size of your home. The IRS offers these two examples:

Example 1

  • Your office is 240 square feet (12 feet x 20 feet).
  • Your home is 1,200 square feet.
  • Your office would be 20% (240/1,200), so that is also your business percentage.

Example 2

  • You use one entire room in your home for business.
  • Your home has 10 rooms, all equal in size.
  • Your office would be 10% (1/10), so that is also your business percentage.

The Safe Harbor Method

This is best for people whose office space is 300 square feet or less and don’t want to hassle with tracking records. Here’s how the safe harbor method works:

You calculate your deduction by multiplying the square footage of your home office (but not to exceed 300 square feet) by $5. That’s it! In other words, the maximum amount you could claim each year would be $1,500.

A few final things to consider

  • Your home office deduction cannot exceed your gross business income for the year, but if you use the actual expense method, you can carry over any amounts that you are unable to deduct to future years where you also use the actual expense method.
  • IRS Publication 587 has more information, including several easy-to-use worksheets that can help you figure your deduction.

 

This post is not meant to replace the advice of a paid tax professional who can give you specific guidance on your own unique situation. Please consult your CPA or tax preparer if you are not certain whether you qualify to take this deduction.

 

 

Credit Or Debit — How To Pay Your Dependent Care Costs

February 01, 2017

Paper or plastic? Credit or debit? Common questions you hear at the grocery store, but do you consider what is the best way, credit or debit, when it comes to paying for dependent care?

Dependent care tax credit or pre-tax dependent care?

I don’t mean actually charging the cost to a credit card – what I am referring to is whether to take the Child and Dependent Care tax credit at the end of the year on your tax return, or to have the funds withheld (debited) pre-tax from your payroll using the Dependent Care Flexible Spending Account.

Your tax bracket will determine

The best answer to this is based on what your marginal federal tax bracket is.

For employees in either the 10% or 12% federal tax bracket, it may make more sense to take the credit at the end of the year and steer away from the payroll deduction. You may actually qualify for up to a 35% tax credit of up to $3,000 per child (maximum of 2, or $6,000).  Here are some examples at various income limits:

AGI up to $15,000 = 35% credit

AGI $23,000 to $25,000 = 30% credit

AGI $33,000 to $35,000  = 25% credit

AGI over $43,000 = 20% credit

For employees in the 22% or higher federal tax bracket, it probably makes more sense for you to take advantage of the payroll deduction option. If you’re in the 12%, it will depend on where your income falls on the scale. As income increases, the federal tax credit phases down to only a 20% tax credit so your savings from avoiding paying tax altogether on the funds is higher than the credit you would have been eligible for.

Not just federal tax savings

This tax savings not only includes your federal and most state income taxes, but also the 7.65% FICA tax for Social Security and Medicare. Plus, you can contribute as much as $5,000 to the Dependent Care Flexible Spending Account (DCFSA), even if you only have 1 child. Some employers even match funds going into the DCFSA, so check with your HR Dept to see if this applies.

Should You Be Making Catch-Up Contributions?

February 01, 2017

Turning age 50 is definitely a milestone – one that some people celebrate and some mourn while others remain ambivalent. No matter how you may feel about it, there’s at least one minor thing to celebrate from a financial planning perspective: 50 is the age when the annual contribution limits to retirement savings accounts is increased for savers via what’s called “catch-up contributions.” Here’s how they work.

Each type of retirement savings account has an annual limit that savers can contribute to each year. Catch-up contributions are intended to allow people who perhaps got a late start to “catch up” by giving them the ability to save above and beyond those annual limits:

catch up contributions 2017

So someone with a workplace retirement plan and a Roth IRA over the age of 50 could conceivably tuck $30,500 away after age 50 versus the lower $23,500 that younger workers are limited to. Even if you’re right on track with your retirement goal, the catch-up contributions can help to lower your taxable income and accelerate that financial independence day.

A strategy for 401(k) and 403(b) savers

For workers who are contributing to 401(k) or 403(b) accounts via payroll deductions at work, the catch-up contribution is typically a separate election that must be made in dollar amounts versus the regular contributions where you must elect a percentage of income. For workers whose pay varies due to hourly wages or commissions, it can be challenging to budget for these contributions or ensure that a certain amount is going in each pay period. The good news is that you don’t have to be maxing out your regular contributions in order to elect catch-up contributions.

So if you’re looking to bump your contributions up by a certain dollar amount and don’t feel like doing the math to figure out what percentage that is, you can just enter it as a catch-up amount. A small consolation for hitting that half-century mark? I think so.

Of course, I would always recommend trying to get the maximum amount into your retirement account each year, but that’s not always realistic for lower income workers or people with competing priorities like family needs or high interest debt. If you’re over 50 and thinking about making catch-up contributions, run a retirement estimate to see how they can help you get to your retirement goal sooner. Then start catching up today!

 

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Are Your Job Relocation Expenses Tax Deductible?

January 27, 2017

Editor’s note: The moving expense deduction was eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

Many of our client companies have a national presence and it isn’t unusual for employees to have to relocate halfway across the country for a new role. Since moving is expensive (even my local move last year when I bought a little townhouse a few miles away), accounting for those expenses becomes not just a “to do” item that is time consuming and frustrating – but possibly also rewarding! You can potentially get reimbursed for moving expenses, get paid a relocation expense and/or get to deduct some of your moving expenses on your tax return.  There are a lot of “moving parts” in this situation.

With all of these potential situations in play, what do you need to know? The first thing you should know is if your move is local, like mine was, and isn’t required for work (mine wasn’t) then there is no benefit to you financially. That’s just the cost of making a transition.

Does your move have deduction potential?

If your move is for business purposes, and this would include a new job, your current job or even your first job (note to recent or upcoming grads…..this means YOU!) – your move has to pass two “tests” in order to be tax deductible:

Test #1 = the distance test. The job must be 50 miles further away than your current home. If you live 15 miles away from work now, the new role would have to be 65 miles away (and on a reasonable route, not a zigzag route through the scenic back roads).

Test #2 = the time test. Once you’ve moved, you have to spend at least 39 weeks working in the first 12 months. If you’re self employed, that bumps up to 78 weeks in the first 24 months.

If you don’t receive money from your employer

If you don’t get reimbursed, keep your receipts and track your mileage. You can use the IRS Form 3903 to track your expenses. You don’t need the Schedule A since it’s not subject to a percentage of income test and it isn’t impacted by income phase-outs.

It’s a pretty straightforward process. Things you can deduct are: the cost of moving, 30 days of storage expenses, insurance for the move, the cost of disconnecting/connecting utilities, lodging expenses during the move, the cost of transporting pets, and the cost of shipping your car (or mileage if you drive). Things you can NOT deduct are:  the cost of meals and house hunting. (Boo!)

If you do receive money from your employer

Where it gets a bit tricky is if you get post-move reimbursements or a relocation allowance paid prior to your move. If you get reimbursed and it is a non-taxable reimbursement (like an expense check), you can’t double dip and then deduct the expenses. If you get reimbursed and it IS taxable (you can see if it’s on your W-2 form, box 12, Code P), you then are allowed to deduct the expenses. If you get a relocation allowance in December 2016 and incur expenses in January or February 2017, you can deduct the moving expenses as if you moved in 2016 – so you’d fill out the 3903 for the 2016 tax year, which means you’ll probably be bumping up against the April tax filing deadline.

Having just completed a move recently, I can tell you that moving is no fun. But looking for a new place can be a blast and it’s pretty cool once you’ve settled in to the new place. Remember, if you’re moving for work, it can also be something that can help you around tax filing season.