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Tax Tip of the Week | No. 356 | Charitable IRA Distributions May 25, 2016

Posted by bradstreetblogger in : Charitable Giving, Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | May 25, 2016 | No. 356 | Charitable IRA Distributions


As you probably know, a person must take a Required Minimum Distribution (RMD) from their IRA each year once they reach age 70.5.  For many years, there has been a special tax rule that allowed these individuals to contribute the RMD to a charity tax free. The problem in prior years, however, was that this rule was always one of those last minute changes Congress made to the tax code which never allowed time to do any planning.

Changes Congress made to tax code in late 2015 have made this charitable contribution provision “permanent”.  Now that we have some time to plan, let’s take a look at how this can be a very powerful tax planning tool.

First, what is a “qualifying charitable contribution”? The requirements are relatively simple. The charitable contribution must be:

1.    A distribution from an IRA
2.    A direct contribution from the IRA trustee to the charitable organization-with no intervening possession or ownership by the IRA holder
3.    Made by an IRA holder who has reached age 70.5
4.    Contributed to a 501(c)(3) organization, church or other “non-private foundation” or donor advised fund.

Let’s look at some examples:

Fred has reached age 70.5 and doesn’t really need the RMD to help pay his bills.  Fred also likes to make a donation to his church each year.  Fred has his house paid off and can no longer itemize his deductions.  If Fred does a charitable RMD to his church, he is not paying taxes on a distribution that he could not write off as a charitable contribution.  In all likelihood, Fred will also have less of his Social Security benefits be included in taxable income because he has eliminated that income from his AGI for the taxable Social Security equation.

Mary is 70.5, but can itemize her deductions due to some sizable medical bills.  She also likes to make a contribution to her alma mater each year.  By making a charitable RMD, she can make her AGI lower, therefore allowing more of her medical expenses to be deducted against the 7.5% AGI floor on medical deductions.

Rick and Diane are both 70.5 and would like to make a sizable donation to their favorite charity.  Each has their own IRA account.  They would like to donate $100,000 each this year. (The annual limit is $100,000 for a charitable RMD.)  If Rick and Diane do not use the charitable RMD rule, they would not be able to deduct the full charitable contribution this year due to the 50% AGI charitable limitation.

Also note that in all three of these examples, the taxpayers have kept the RMD off of their federal tax return which means they are not paying Ohio taxes on what otherwise would have been a taxable distribution.

If you are approaching, or have reached 70.5, give us a call to see how this powerful tax planning tool can be used to reduce your taxes.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 355 | What’s Your Tax Bracket? May 18, 2016

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes , add a comment

Tax Tip of the Week | May 18, 2016 | No. 355 | What’s Your Tax Bracket?

Do you know your tax bracket? Understanding what rate was assessed on the last dollar of taxable income on your 2015 federal income tax return can help with 2016 tax planning as well as financial decisions you make throughout the year. For example, say you’re wondering how much tax you’ll save by increasing the pre-tax contribution to your retirement plan during 2016. The additional amount invested times your tax rate provides a quick estimate.

For 2016 planning, your estimated taxable income determines which of the seven federal tax brackets will apply. For instance, 2016 taxable income ranging from $75,301 to $151,900 puts you in the 25% bracket if you’re married and filing a joint federal return. Keep in mind that your tax bill will not be 25% of your total taxable income. One reason: The rate only applies to the income in that bracket.

Since each bracket consists of a range of income, a planning opportunity is to “fill a bracket.” That means you keep your income below the level that will push you into the next bracket. You could accomplish this by prepaying itemized deductions, making a partial conversion of a traditional IRA to a Roth, or taking a comprehensive family-level approach to planning.

Contact us for more information about tax brackets and 2016 planning strategies.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 354 | Financial Perks of Growing Older May 11, 2016

Posted by bradstreetblogger in : General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | May 11, 2016 | No. 354 | Financial Perks of Growing Older

As we get older we must adjust for wrinkles, gray hair, vision and hearing loss and general aches and pains. There are, however, some financial benefits to ageing! Here are a few examples:

1.    Bigger retirement account limits.  When you turn 50, you can begin increasing your 401(K) and/or IRA contributions.  The maximum amount you can contribute to your 401(K) is now $24,000/yr. vs. $18,000/yr. for those under age 50.  An additional $1,000 can be contributed to your Traditional or Roth IRAs for a maximum of $6,000/yr.

2.    No more early withdrawal penalty.  Once you turn age 59.5 there is no more 10% penalty to withdraw from your IRA.  If you leave your job at age 55 or older, you can begin taking distributions from your work-place retirement account without the 10% penalty.

3.    Social Security payments.  You can sign up for early, reduced, benefits as early as age 62.  Depending on the year you were born, you can receive full benefits at age 66 or 67.  If you can hold off until age 70 to sign up for Social Security, your monthly benefits will go up even more.  The best part of Social Security is benefits are adjusted for inflation every year and payments continue for as long as you live.

4.    Reduced taxation.  The amount of your Social Security benefit that is included in your taxable income depends on the amount of your other sources of income.  It could be as low as 0%, 50% or at most 85%.  Ohio doesn’t tax Social Security benefits at all!

5.    Affordable health insurance.  Once you turn 65, you don’t need to worry about having a job that offers a health plan.  You can sign up for Medicare at 65.  For most, the monthly cost of Medicare is $104.90 in 2016 for basic coverage.

6.    Tax deductions for seniors.  If you are over age 65, your standard deduction is $7,850 individual/$15,100 married vs. $6,300 individual/$12,600 married in 2016.

7.    Relaxes filing requirements.  Many people over 65 no longer need to file a tax return. An individual with income up to $11,850 or a couple with income up to $23,100 would not need to file.  Note:  at these income levels, none of the Social Security benefits would be included in taxable income.

8.    Senior Discounts.  If you are willing to admit your age, many retailers and restaurants offer special discounts.  Plus, you get to use your “Golden Buckeye” card.  (The discount I like the best is reduced green fees at most public golf courses!)

Give us a call if you are approaching any of these ages we discussed.  Let us help you update your tax planning as you mature.

Rick Prewitt (the guy who just turned 60) – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 353 | Man Faces Charges for Cursing Out IRS May 4, 2016

Posted by bradstreetblogger in : General, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | May 4, 2016 | No. 353 | Man Faces Charges for Cursing Out IRS

Here is a recent article we thought you would find interesting……..

A taxpayer has been charged with mailing a threatening communication after he responded to a notice from the Internal Revenue Service about overdue taxes by scribbling a profanity on the letter and mailing it back to the IRS.

Enrique Santiago of the Bronx, N.Y., allegedly wrote, “I do not live at this address anymore, so go —- yourself,” on the IRS notice and told the post office to return it to the sender. The IRS had intended the notice for his nephew, named Enrique A. Santiago, but he had moved out of the elder Santiago’s home a month earlier after a “physical altercation” with his uncle, according to the New York Post. Santiago shares a similar name with his nephew, who owes the IRS $3,032.57 in unpaid taxes.

In addition to the curse-filled missive, the elder Santiago also allegedly put white powder in the envelope, causing an IRS office in Long Island to be locked down until authorities determined it was only soap. He was charged with providing false information and mailing a threatening communication.

The IRS is not known for having a sense of humor!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.