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Income Tax Breaks for your Home October 28, 2020

Posted by bradstreetblogger in : Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Rules, Tax Tip , add a comment

It is a good time to chat about some tax breaks associated with a personal residence since the real estate market remains hot for a variety of reasons.  According to companies like SoFi, some people are motivated by the historic low mortgage rates either to buy a home or to refi an existing mortgage.  Others, having spent a lot of time working from home because of the pandemic, wish to enlarge and/or remodel their home.  Some people are also buying a second home.  Interestingly, mortgage interest paid for boats and motor homes may be deductible provided they have a toilet, and cooking and sleeping arrangements.  Of course, this interest must still meet the other deduction requirements.  As a side note, mortgage interest may not be deducted on more than two homes.

Mortgage interest is deducted as an itemized deduction.  Itemized deductions also include medical expenses, state and local taxes and charitable contributions – each subject to their own limitations.  It does not make sense to use your itemized deductions if your standard deduction is larger.  If you are unable to itemize or go “long form”, your mortgage interest may not be of any value on your tax return.  As for most tax deductions, limitations do exist on the size of the home loan and the use of the loan proceeds as to what may be deducted for the mortgage interest.

Business owners may deduct expenses associated with the regular and exclusive business use of their home.  Such expenses are deducted typically more favorably as a business deduction than as an itemized deduction.  These expenses may include improvements made to your home.

The deduction for working from home as an employee was unfortunately eliminated in 2017.  But you may have a win-win situation if your company reimburses you for your home expenses.  The reimbursement is not taxable income to you but is deductible to the company. 

Various ideas written above were taken from the August 8, 2020 WSJ article written by Laura Saunders titled “Home Is Where The Tax Breaks Are.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

5 New Rules for Charitable Giving October 14, 2020

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

New tax laws and strategies can help you maximize tax breaks for yourself and benefits for the charity.

THERE ARE SO MANY reasons to make charitable gifts this year – whether it’s to support nonprofits that help people and communities with challenges from the coronavirus pandemic, or to provide assistance after disasters such as the Beirut explosion or an active hurricane season.

Even though a lot of people are struggling financially right now, many people whose finances have stabilized want to do whatever they can to help out. And they’re not waiting until the end of the year to make their gifts. “A lot of things are driving people to be generous, and our numbers prove it,” says Kim Laughton, president of Schwab Charitable, which runs Schwab’s donor-advised funds. From January through June 2020, its donors recommended over $1.7 billion in 330,000 grants, almost a 50% increase in the dollars granted and the number of grants compared to the same period in 2019. “There’s great need out there, and people are stepping up.”

“Philanthropy and giving is on everyone’s mind,” says Dien Yuen, who holds the Blunt-Nickel Professorship in Philanthropy at the American College of Financial Services. Some nonprofits need help now just to stay afloat. “The donors who are quite active are making gifts now and not waiting until later in the year, because the nonprofit might not be there later on.”

New tax laws and strategies can help you maximize tax breaks for yourself and the benefits for the charity. Here’s what you need to know:

New $300 Charitable Deduction for Non-Itemizers

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, created several incentives for people to help charities right away, including a charitable deduction of up to $300 in 2020, even if you don’t itemize. Otherwise, you generally need to itemize to take the charitable deduction, which fewer people do since the standard deduction doubled a few years ago – now at $12,400 for single filers and $24,800 for married couples filing jointly in 2020.

“As a result of the Tax Cuts and Jobs Act of 2017, most taxpayers utilize the significantly higher standard deduction instead of itemizing deductions for mortgage interest, state taxes paid and charitable contributions,” says Mark Alaimo, a certified public accountant and certified financial planner in Lawrence, Massachusetts. “This special CARES Act provision now gives a tax incentive to all taxpayers to give at least $300 to charity during 2020.” To qualify, the gift must be made in cash and go directly to the charity, rather than to a donor-advised fund or private foundation.

“I think that the additional $300 provision in the CARES Act is really great, especially for the younger generation who may be just starting to work and may not be paying substantial mortgage interest,” says Kelsey Clair, tax strategist for Baird’s Private Wealth Management Group. “It allows them to give even in a small way and reap the tax benefit for it.”

The CARES Act also helps people who are in a financial position to make very large gifts. In 2020, you can deduct cash gifts of up to 100% of your adjusted gross income, rather than the usual 60% limit. To qualify for this higher limit, the gifts must go directly to the charities, rather than to a donor-advised fund or private foundation. This can help wealthy people reduce their taxable income significantly in 2020, and it may also help retirees who have money to give but bump up against the income limits for the deduction. “I see it in the older generation who have a lot of cash but don’t have a lot of income coming in and are trying to help out the community in any way they can,” says Clair.

Bunching Contributions and Donor-Advised Funds

Bunching contributions is a strategy that became popular after the standard deduction was increased. Instead of making smaller charitable contributions spread over several years, you can make larger contributions in one year so you can itemize your deductions (and claim the charitable deduction) that year, then take the standard deduction in the other years. “Rather than making a steady stream of charitable contributions from year to year, it may be beneficial instead to use a bunching strategy – give more and itemize in one year, and claim the standard deduction in other years,” says Clair.

Even though this can help you tax-wise, you might not want to give all of the money to the charities at one time and then neglect them over the next few years. But bunching can work well if you have a donor-advised fund. These funds are offered by brokerage firms, banks and community foundations, and you can take the charitable deduction in the year you give the money to the donor-advised fund, but then you have an unlimited amount of time to decide which charities to support. You can usually open a donor-advised fund with an initial contribution of $5,000 to $10,000 (it’s $5,000 at Schwab and Fidelity, $10,000 at T. Rowe Price, and $25,000 at Vanguard). You can make grants to charities of $50 or $100 up to thousands of dollars or more, and you can invest the money in a handful of mutual funds or investing pools until you make the grants. “It can be a great way to go ahead and make the contribution, without having to decide where that money goes right away,” says Clair.

Another benefit of the donor-advised fund is simplicity – you get one receipt for your tax records when you make the contribution and don’t have to wait for a variety of paperwork from each of the charities. “Donor-advised funds really help with the administrative side of things,” says Elliot Dole, a certified financial planner with Buckingham Strategic Wealth in St. Louis. “Itemizing charitable gifts is a hot button audit area. But with a donor-advised fund, it’s clear that you met the requirements.”

A Double Tax Break From Giving Appreciated Stock

Many people just write a check to the charity, but you may get a bigger tax benefit if you give appreciated stock. If you owned the stock for more than a year, you can deduct the value of the stock on the date you give it to the charity if you itemize. And even if you don’t itemize, you can avoid having to pay long-term capital gains taxes on your profits, which could have cost up to 20% if you sold the stock first. (Giving appreciated stock doesn’t qualify for the special $300 charitable deduction for non-itemizers for 2020; that only applies to cash.)

Most charities can accept appreciated stock, but the process can be easier if you have a donor-advised fund. “Given how volatile the stock market can be, many advisors recommend utilizing donor-advised funds due to the ease and speed that one can make a contribution,” says Alaimo. “This makes it easier to opportunistically gift highly appreciated securities, while regulating which charity receives how much of the donation, and when they receive it.”

It’s even easier if your brokerage account and donor-advised fund are with the same company. “When you log into your Schwab accounts, it shows your investment accounts, your bank accounts and your charitable account,” says Laughton. You can sort your investments by most highly appreciated or highly concentrated and see if you’re overweighted in one area. “We encourage people to rebalance their portfolios regularly, and when they see they’re overconcentrated, instead of selling those shares, they can just move them over to their charitable account,” says Laughton.

With so much stock market volatility this year, you may want to donate the stock when it reaches a target price, rather than giving at a certain time of year.

The donor-advised fund can also accept a variety of contributions – whether you write a check or you give appreciated stock, privately held stock, real estate, limited partnerships or even a horse farm. “It always makes sense for people who have highly appreciated non-cash assets to at least explore whether they could make good charitable gifts,” says Laughton. “Donor-advised funds can make that simple and easy.”

If you have investments that have lost value, however, it’s better to sell them first – and take a Charitable loss – and then give the cash to charity. “I’ve seen multiple times where people made mistakes of donating stocks that were in a loss,” says Clair. “It’s better to sell that and claim the loss on your return and donate the cash.” When you sell the losing stock, you can use the loss to offset your capital gains and can use up to $3,000 in losses to reduce your ordinary income, which you couldn’t do if you gave the stock directly to the charity.

Make a Tax-Free Transfer From Your IRA

People who are age 70½ and older can give up to $100,000 per year tax-free from their IRA to charity, a procedure called a qualified charitable distribution or QCD. The gift counts as their required minimum distribution but isn’t included in their adjusted gross income. (Even though the SECURE Act, another recent tax law, increased the age to start taking RMDs from 70½ to 72, you can still make a qualified charitable distribution any time after you turn age 70½.)

This is usually a great strategy for people who have to take RMDs and would like to give money to charity – they can help the charity and not have to pay taxes on the money they have to withdraw from their IRA. But because of the CARES Act, people are not required to take RMDs in 2020. However, you may still be able to benefit from making a QCD this year. “Some people who have been doing the QCD have been supporting a couple of charities every year, and they’re not going to stop, especially during this time of need,” says Yuen. The tax-free transfer takes money out of your IRA, which can help reduce future RMDs. “It’s great planning,” she says.

To keep the money out of your AGI, it must be transferred directly from your IRA to the charity – you can’t withdraw it first. Ask your IRA administrator about the procedure, and let the charity know the money is coming. You have to give this money directly to a charity; it can’t go to a donor-advised fund.

Make an Extra Effort to Research Charities This Year

Scam artists have been out in full force to take advantage of the coronavirus pandemic. It’s even more important now to check out charities before you give money, especially if they contact you first. You can look up charities at sites such as Charity Navigator and the Better Business Bureau’s Wise Giving Alliance. Local community foundations are also a great resource for aid focused on your community – see the Community Foundation Locator for links. If you have a donor-advised fund, you may have access to additional research tools, such as GuideStar.

Schwab Charitable can help its donors vet the charities and also provides lists of selected charities that focus on timely issues, such as COVID-19 relief and social justice. “We’re trying to develop short lists to help people narrow the charities down to ones we know are valid and doing good work,” says Laughton.

Credit given to US News & World Report published Aug 21, 2020 by Kimberly Lankford.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Where’s My Refund? July 29, 2020

Posted by bradstreetblogger in : 2019 Taxes, tax changes, Tax Rules, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

                     

Due to the COVID-19 pandemic, IRS live phone assistance is extremely limited. People are encouraged to first check the Where’s My Refund? tool on the IRS website and the IRS2Go app. Taxpayers can also review the IRS Services Guide (PDF) which links to additional IRS online services.

The IRS issues 9 out of 10 refunds in less than 21 days, and the fastest way to get a refund is to use IRS e-file and direct deposit. Taxpayers should also know they can have their refunds divided into up to three separate accounts.

Please note: Ordering a tax transcript will not speed delivery of tax refunds nor does the posting of a tax transcript to a taxpayer’s account determine the timing of a refund delivery. Calls to request transcripts for this purpose are unnecessary. Transcripts are available online and by mail at Get Transcript.

A few necessary items

To use the “Where’s My Refund” tool, taxpayers will need to enter their Social Security number, tax filing status (single, married, head of household) and exact amount of the tax refund claimed on the return.

Taxpayers who file electronically can check “Where’s My Refund” within 24 hours after they receive their e-file acceptance notification. The tool can tell taxpayers when their tax return has been received, when the refund is approved and the date the refund is to be issued.

Some refunds may take longer

While the IRS continues to process electronic and paper tax returns, issue refunds, and accept payments, there are delays in processing paper tax returns due to limited staffing. If a taxpayer filed a paper tax return, the return will be processed in the order in which it was received. Do not file a second tax return or call the IRS.

Many different factors can affect the timing of a refund. In some cases, a tax return may require additional review. It is also important to consider the time it takes for a financial institution to post the refund to an account or for a refund check to be delivered by mail.

Taxpayers who owe

The IRS encourages taxpayers who owe to do a Paycheck Checkup every year to ensure enough tax is withheld from their pay to avoid an unexpected tax bill.

This week’s article – From IRS.gov – Click Here

– Tammy

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

– until next week.

Working Remotely? Watch Out for Unintended Tax Consequences! July 1, 2020

Posted by bradstreetblogger in : COVID, COVID-19, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

  Typically, you are taxed by the location of your physical presence (this is changing now to some degree to better deal with the complexities of the internet).  For example, Ohio cities tax you first where you work and then next where you live.  That is to say that you won’t owe any city tax for your residence city if your workplace is located in a city whose tax rate is equal to or higher than the city where you live.  This is true only if your resident city allows a full tax credit for the city taxes paid where you work and its tax rate is equal to or less than your work city.  Not too long ago, almost all cities allowed a full credit for the tax paid to the city where you are employed.  But this full tax offset is becoming more of a rarity the last few years as city budgets continue to become more and more strained. These deficit situations for state and local governments won’t become any better with the current pandemic placing even greater demands on city finances.  

    For all intents and purposes, your state income tax model differs little from that of the cities.  It is not unlikely to find yourself double taxed by cities AND states.

    Now having attempted to make a long story short and leaving out the numerous tax exceptions for the general tax rules for cities and states as mentioned above; and, all the while assuming you have a good handle on how your state and local taxes should currently be filed, let’s throw you a curve ball.  Let’s presume you are now working from home.  And, your home is in a different city or even a different state than where you work.  What if you are working half the week at home and the rest of the week at work?  All of a sudden, a tax nightmare has developed.  

    I wish I had the silver bullet to answer my own questions.  Perhaps, the cities and states will pass legislation to overcome these added complexities resulting from the pandemic.  But I doubt it.  In the meantime, we better become accustomed to even more tax correspondence from cities and states.  None of them are going to roll-over in their efforts to collect all the monies that they can.  It is always a mystery to me why they would spend megabucks and create huge amounts of ill will in the community all in an effort to collect a nominal amount of taxes.  But some things never change.

This week’s Author – Mark Bradstreet

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

– until next week.

Energy Tax Credit: Which Home Improvements Qualify? February 19, 2020

Posted by bradstreetblogger in : 2019 Taxes, Taxes, Taxes, Uncategorized , add a comment

Updated for Tax Year 2019

Taxpayers who upgrade their homes to make use of renewable energy may be eligible for a tax credit to offset some of the costs. Through the 2019 tax year, the federal government offers the Non-business Energy Property Credit. The renewable energy tax credits are good through 2019 and then are reduced each year through the end of 2021. Claim the credits by filing Form 5695 with your tax return.

Residential Renewable Energy Tax Credit

Equipment that qualifies for the Residential Renewable Energy Tax Credit includes solar, wind, geothermal and fuel-cell technology:

Renewable energy tax credit details

According to the U.S. Department of Energy, you can claim the Residential Energy Efficiency Property Credit for solar, wind, and geothermal equipment in both your principal residence and a second home. But fuel-cell equipment qualifies only if installed in your principal residence.

Non-business Energy Property Tax Credit
(Extended through December 31, 2019)

Equipment and materials can qualify for the Non-business Energy Property Credit only if they meet the standards set by the Department of Energy. The manufacturer can tell you whether a particular item meets those standards.

For this credit, the IRS distinguishes between two kinds of upgrades.

The first is “qualified energy efficiency improvements,” and it includes:

The second category is “residential energy property costs.” It includes:

Details of the Non-business Energy Property Credit
(Extended through December 31, 2019)

You can claim a tax credit for 10% of the cost of qualified energy efficiency improvements and 100% of residential energy property costs. This credit is worth a maximum of $500 for all years combined, from 2006 to its expiration.  Of that combined $500 limit;

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.

Tax Tip of the Week | Can S Corporations Save Taxes? Apparently, Some Politicians Think So. August 21, 2019

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

In an effort to save federal income taxes, many people and not just some politicians route their business income through S corporations.  Their profits which may be retained by the S corporation and/or distributed to the shareholder(s) are typically the result of keeping the shareholder’s reasonable wages at a level that assures a corporate profit.  Keeping these reasonable wages below the FICA ceiling ($132,900 for 2019) may save taxes of 15.3% from FICA and Medicare, combined.  If, these wages exceed the FICA ceiling then the potential tax savings drop to only the Medicare tax of 2.9% plus another .9% if individual’s wages are over $200,000 ($250,000 married filing jointly).

The point to be made here is that at the right income levels, significant tax savings may exist with the proper use of an S corporation.  However, these savings come along with the possibility of additional IRS scrutiny.  And, since you may be paying less social security taxes, your future social security benefits may be dinged ever so slightly; but these tax savings are now in your own pocket.

The below WSJ article authored by Richard Rubin covers a portion of this age-old tax saving strategy along with some interesting commentary.

               -Mark Bradstreet

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% net investment income tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Biden’s would have owed if paid directly or if the Obama proposal had become law.

“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Biden’s are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.

The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.

Some tax experts have pointed to pieces of President Trump’s financial disclosures and leaked tax returns to suggest that he has used a similar tax-avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.

“There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.

Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.

“We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.

The U.S. imposes a 3.8% tax on high-income households—defined as individuals making above $200,000 and married couples making above $250,000. Wage earners have part of the tax taken out of their paychecks and pay part of it on their returns. Self-employed business owners have to pay it, too. People with investment earnings pay a 3.8% tax as well.

But people with profits from their active involvement in businesses can declare those earnings to be neither compensation nor investment income. The Obama administration proposed closing that gap by requiring all such income to be subject to a 3.8% tax, and it was the largest item on a list of “loophole closers” in a plan Mr. Obama released during his last year in office. The administration estimated that proposal, which didn’t advance in Congress, would have raised $272 billion from 2017 through 2026.

Under current law, S-corporation owners can legally avoid paying the 3.8% tax on their profits as long as they pay themselves “reasonable compensation” that is subject to regular payroll taxes. S corporations are a commonly used form for closely held businesses in which the profits flow through to the owners’ individual tax returns and are taxed there instead of at the business level.

The difficulty is in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The Bidens’ S corporations—CelticCapri Corp. and Giacoppa Corp.—reported more than $13 million in combined profits in 2017 and 2018 that weren’t subject to the self-employment tax, while those companies paid them less than $800,000 in salary.

If the entire amount were considered compensation, the Bidens could owe about $500,000. An IRS inquiry might reach a conclusion somewhat short of that.

“The salaries earned by the Bidens are reasonable and were determined in good faith, considering the nature of the entities and the services they performed,” the Biden campaign statement said.

For businesses that generate money from capital investments or from a large workforce, less of the profits stem from the owner’s work, and thus reasonable compensation can be lower. For businesses whose profits are largely attributable to the owner’s work, the case for reasonable compensation that is far below profits is harder to make.

To the extent that the Bidens’ profits came directly from the couple’s consulting and public speaking, “to treat those as other than compensation is pretty aggressive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a research group run by a former Obama administration official.

Mr. Nitti said he uses a “call in sick” rule for his clients trying to navigate the reasonable-compensation question: If the owner called in sick, how much money could the company still make?

“The reasonable comp standard is a nebulous one,” Mr. Nitti said. “This is pretty cut and dried. If you’re speaking or writing a book, it’s all attributable to your efforts.”

The IRS puts more energy into cases where the business owners pay so little reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday along with the candidate’s tax returns, the Biden campaign noted that the couple employs others through its S corporation and calls the companies a “common method for taxpayers who have outside sources of income to consolidate their earnings and expenses.”

Credit given to: Richard Rubin. This article was written July 10, 2019. You can write to Richard Rubin at richard.rubin@wsj.com—Ken Thomas contributed to this article.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Are You Considering Early Retirement? Maybe You Should Reconsider… July 10, 2019

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

Effects of Early Retirement

While many people look forward to retirement, after years of hard work and dedication, most people do not think about the potential physical, emotional and cognitive issues arising from the cessation of their life filled with the routine of working every day. Research suggests that early retirement may even kill you. You may think: How can that be? How can working longer be better for your health?

Early retirement offers many positive benefits. People have more time to pursue other passions and interests that they may have been longing to try. This gives them time to step away from stressful work and the high demand of work. 

Early retirees do not consider their potential unhealthy behaviors. These include being uninvolved with others, being too sedentary, over eating, and consuming too much alcohol. These factors arise because the retirees no longer have the purpose to fulfill work duties. Life as they have known it is suddenly gone.  This can lead to depression, lack of engagement, or even death. According to Richard W. Johnson, work and the work environment creates intellectual stimulation, while retirement can accelerate cognitive decline. He explains that it is important to keep the brain stimulated. 

Another risk to retirement is the possibility of becoming socially isolated. Many people do not realize the impact that a work environment can have on a person. Colleagues are there to engage and support each other, which adds significant social fulfillment to one’s life. Research suggests that avoiding social isolation by working even part time or volunteering may give retirees a longer life. Social isolation can reduce life satisfaction and affect your physical and mental health. Johnson discovered that only one-third of Americans age 55 and older will actually participate in community groups or unpaid activities. Being involved in activities or even having a part time job can provide stimulation and social interaction similar to that experienced by those who are engaged in full-employment.

Retiring early also has a significant financial impact. Some believe that this is the biggest danger to retirement. Being financially secure is something that people worry about each day while in paid employment. How much time do people think about it when they are in actual retirement? At age 62, you are eligible to receive Social Security, however, it will only cover about 40% of your paycheck. Johnson suggests that workers who remain in their careers can save some of their additional earnings for retirement and will accumulate more Social Security in the long run. 

When you turn 62…

At age 62 everyone thinks about the possibility of retiring. It is like a light bulb that goes off to indicate that you should consider taking the long break you have earned. A study by Maria Fitzpatrick at Cornell University and Timothy Moore at the University of Melbourne shows that there is a correlation between an increase in mortality rates and retirement. It states the risk factors include smoking and lack of physical activity, which are downfalls to early retirement. Many people believe they should retire by a certain age or they feel the pressure to retire early, which is a psychological effect. Johnson explains that as a society we should be encouraging older workers to stay on the job. This can boost long term health, longevity and the emotional and physical strength of the brain. Older workers are protected from age discrimination by Federal law. By allowing older workers to work longer the companies can not only benefit from the skilled workers but will enable the workers to live a longer healthier life. 

Credit given to:  Johnson, R. W. (2019, April 22). The Case Against Early Retirement. 

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Brianna Anello

–until next week.

Tax Law: An Art or a Science? May 29, 2019

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

Is preparing tax returns an art or a science? My answer may depend upon the day you ask me. But, more often than not, I would say that tax preparation is a blend of an art AND a science.

Too often when people are presented with a tax problem of sorts – what do they do? Well, of course, they pull out their smartphone and GOOGLE their question. In all honesty I am guilty of this quick fix as well. Naturally, we are all looking for the answer that we wish to hear. That being anything that will save us taxes. Most GOOGLE responses, especially the ones near the top of the search page are click bait. They have the answers you want to see. You are doing yourself a disservice if you stop with that “fast and loose” answer. You have to look for the “odd” stuff, the twists and turns that accompany the exceptions to every tax rule. Some of these may help you while others will cost you money. Even once you have found the exceptions then one must continue to look for how your question fits in with or conflicts with other sections of the Internal Revenue Code. And, what about that tax law change or court case that was handed down yesterday. What about that new tax law on the horizon? Did you notice that the website where you fell in love with the answer is six (6) years old?

The “art” part comes from trying to hit a moving target. A target that is not always visible but at the end of the day you have to take the shot. Or, at least spin it in a fashion so that you have not crossed the often-fuzzy line and stayed in the gray.

                                        –    Mark Bradstreet

An Internal Revenue Service official once introduced me to the rule of PUNG. When writing about taxes, he said, make frequent use of the words “probably, usually, normally and generally.”

That’s generally good advice—not only for tax columnists struggling to explain tricky tax laws but also for tens of millions of taxpayers racing to file their returns on time. “The law is chock-full of exceptions and counterintuitive twists that are easy to overlook and can often have an important impact on your tax bill”, says Claudia Hill, owner of TaxMam Inc., a tax services firm in Cupertino, Calif.

With the tax-filing deadline fast approaching for most of us, here are a few reminders from tax pros on how the fine print can sometimes be your friend.

Filing deadline: For most taxpayers, the filing deadline is April 15. But it’s April 17 for taxpayers who live in Maine or Massachusetts because of the Patriots’ Day holiday there on April 15 and the Emancipation Day holiday in the District of Columbia on April 16. It can be even later for other taxpayers, such as those in places designated as federal disaster areas.

If you need more time to file, as millions of people do each year, don’t panic: The IRS gives automatic six-month extensions until Oct. 15. But its website notes that an “extension of time to file your return doesn’t grant you any extension of time to pay your taxes.” The IRS estimates it will receive more than 14.6 million extension requests; a spokesman says.

Casualty losses: Fires, floods, mudslides, tornadoes, hurricanes and many other natural disasters made 2018 a year many of us are eager to forget, and this year already is shaping up as another grim reminder of Mother Nature’s awesome power.

At first glance, the wide-ranging tax law enacted in late 2017 might seem like yet another disaster for the many people who suffered major casualty losses. That law generally eliminated personal casualty and theft-loss deductions for most taxpayers, starting last year. But there is an important exception, says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block Inc. in Kansas City, Mo. Victims still are eligible to deduct net personal casualty losses “to the extent they’re attributable to a federally declared disaster,” the IRS says.

Warning: There are important loss limitations and other tricky calculations to consider. For details, see IRS Publication 547.

Here is a holdover from the old law that may surprise some people because it sounds counterintuitive: Victims in federal disaster areas can choose to claim their losses for the year in which the disaster actually struck or for the prior year. For example, taxpayers with net personal casualty losses this year could claim their losses on their return for 2018—or they could wait until next year and claim it on their return for 2019, says Ms. Jackie Perlman of H&R Block. Taxpayers who suffered losses in 2018 could claim those losses on their return for that year—or on their return for 2017 (typically by filing an amended return).

14-day rule: As a general rule, the net rental income you get from renting out your home is subject to tax. But “there’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days,” the IRS says on its website. “In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.”

Those 14 days don’t have to be consecutive, says Ms. Claudia Hill, who is also an enrolled agent (enrolled agents are tax specialists authorized to represent taxpayers at all levels of the IRS). But if you rent your home for 15 days or more, include all of that rental income in your income, says Ms. Jackie Perlman.

Refund claims: Don’t assume that you have forever to file your federal income-tax return as long as you are entitled to a refund. About 1.2 million taxpayers could lose almost $1.4 billion in unclaimed refunds because they still haven’t filed a 2015 Form 1040 return, the IRS warned in a recent press release.

“In cases where a federal income tax return was not filed, the law provides most taxpayers with a three-year window of opportunity to claim a tax refund,” the IRS says. If they miss that deadline, “the money becomes the property of the U.S. Treasury. For 2015 tax returns, the window closes April 15, 2019, for most taxpayers.”

Here are other reasons to pay attention: The IRS reminded taxpayers seeking a 2015 tax refund “that their checks may be held if they have not filed tax returns for 2016 and 2017. In addition, the refund will be applied to any amounts still owed to the IRS or a state tax agency and may be used to offset unpaid child support or past due federal debts, such as student loans.”

Credit for excess Social Security tax: Most people probably assume it’s a waste of time to check and see how much their employers withheld from their paychecks for Social Security. But consider doing it anyway, especially if you’re a high-income taxpayer who worked for two or more employers last year. The maximum amount that should have been withheld for 2018 was $7,960.80 (6.2% of $128,400, which was the maximum amount of wages subject to the tax.) If more than that was withheld, claim a credit for the excess amount. However, if any single employer withheld too much, ask the employer to adjust the tax for you, the IRS says. “If the employer doesn’t adjust the overcollection you can file a claim for refund using Form 843.”

Interesting exception: Interest income you receive on U.S. Treasury bills, notes and bonds is taxable at the federal level. But don’t forget that such interest is tax-free at the state and local level. That can be especially important for taxpayers in New York City, California or other high-tax areas.

Additional standard deduction: Thanks to the 2017 law, tax professionals predict many more people will claim the standard deduction for 2018, rather than itemizing. That law included a sharp increase in the basic standard deduction and generally limited state and local tax deductions to $10,000 per household. The basic standard deduction for 2018 is $24,000 for married couples filing jointly, or $12,000 for most singles and those who are married but filing separately.

But there is an extra amount for older taxpayers, those who qualify as blind, or both. For example, if you’re married filing jointly and you and your spouse each are 65 or older, the total standard deduction for 2018 would be $26,600. See IRS Publication 17 for more details.

IRA deadline: It might seem logical to assume there is nothing you can do now to affect your return for 2018. But for some people, it isn’t too late: The IRS says contributions to a traditional IRA can be made for a year “at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2018 must be made by April 15, 2019 (April 17, 2019, if you live in Maine or Massachusetts).”

Educator Expenses: Teachers and other educators who pay for educational supplies and other expenses out of their own pockets should be aware that those costs may be deductible up to $250 a year. This special deduction applies to teachers from kindergarten through grade 12, instructors, counselors, principals or aides in school for at least 900 hours during a school year. Qualified expenses include “ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom,” the IRS says. But you can’t deduct expenses for home schooling or for “nonathletic supplies for courses in health or physical education.”

If you and your spouse file jointly and both are eligible, “the maximum deduction is $500,” the IRS says. “However, neither spouse can deduct more than $250 of his or her qualified expenses.” This deduction goes on Schedule 1 of Form 1040, line 23.

Credit given to: Tom Herman. This article was written for the WSJ on Monday, March 25, 2019. Mr. Herman is a writer in New York City. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | New Tax Laws Benefit Retirees May 22, 2019

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

The tax year of 2018 was the first full year for some tax savings that may benefit retired taxpayers more than some other groups. Some of these possible benefits follow:

1.    Higher standard deduction – for those retirees that have paid off their home mortgage may now have difficulty in itemizing their deductions. But, no matter – the new higher standard deduction which has practically doubled from 2017 to 2018 is more likely worth more in tax savings than being able to itemize as before.  
2.    Taxpayers aged 70 ½ and older may transfer up to $100,000 to charities from their IRAs even if unable to itemize. These contributions may count toward their RMD – BUT, the withdrawal doesn’t count as taxable income. An added benefit is that making donations in this fashion holds down your adjusted gross income which can help save on taxes on Medicare premiums, investment income and social security benefits. 
3.    Higher gift tax exemptions are available. The annual gift exclusion for 2019 is $15,000. So, any annual gifts made less than $15,000 do not require a gift tax return. Above that amount, a gift tax return is required, but typically, no gift tax is paid, unless working with a high net worth individual that is making lifetime gifts exceeding $11.4 million. A sunset provision exists where in 2026 – gift and estate tax provisions revert back from the $11.4 million to the pre-2018 levels of $5.49 million per person.  

The article that follows, Tax Overhaul Gives Retirees Some Relief further discusses the above in greater depth and includes some additional benefits. It was authored by Anne Tergensen and published by the WSJ on April 12, 2019.  
                                        –    Mark Bradstreet

Taxpayers are now filing their first returns based on the tax law Congress enacted in 2017. For retirees, the largest overhaul of the U.S. tax code in three decades has created new opportunities to cut taxes, along with some potential headaches.

Here are important changes retirees should be aware of and steps they can take to reduce their future tax bills.

1.    Higher standard deduction:

Many retirees, especially those who have paid off mortgages, take the standard deduction. For them, one positive change is the near-doubling of this deduction, or the amount taxpayers can subtract from their adjusted gross income if they don’t itemize deductible expenses including state taxes and charitable donations.

For individuals, the standard deduction is $12,000 for 2018 and $12,200 for 2019, up from $6,350 in 2017. For married couples, it is $24,000, rising to $24,400 for 2019, up from $12,700 in 2017. People 65 and older can also take an additional standard deduction of $1,600 (rising to $1,650 in 2019) or $2,600 for married couples. The expanded standard deduction expires at the end of 2025.

2.    A tax break for charitable contributions:

Retirees who take the standard deduction can still claim a tax benefit for donating to charity.

Taxpayers age 70½ or older can transfer up to $100,000 a year from their individual retirement accounts to charities. These donations can count toward the minimum required distributions the Internal Revenue Service requires those taxpayers to take from these accounts. But the donor doesn’t have to report the IRA withdrawal as taxable income. This can help the taxpayer keep his or her reported adjusted gross income below thresholds at which higher Medicare premiums and higher taxes on investment income and Social Security benefits kick in. People over 70½ who itemize their deductions can also benefit from such charitable transfers, said Ed Slott, an IRA specialist in Rockville Centre, N.Y.

3.    More options for 529 donors:

The new law allows taxpayers to withdraw up to $10,000 a year from a tax-advantaged 529 college savings account to pay a child’s private-school tuition bills from kindergarten to 12th grade.

For parents and grandparents who write tuition checks, saving in a 529 has advantages. The accounts, which are offered by states, allow savers to make after-tax contributions that qualify for state income tax breaks in many states and grow free of federal and state taxes. Withdrawals are also tax-free if used to pay eligible education expenses.

As in prior years, donors who want to give a child more than the $15,000 permitted under the gift-tax exemption can contribute up to five times that amount, or $75,000, to a 529. (They would then have to refrain from contributing for that child for the next four years.)

About a dozen states don’t allow tax-free withdrawals from 529s for private K-12 school tuition, so check with your plan first, said Mark Kantrowitz, publisher of Savingforcollege.com.

4.    Higher gift-tax exemption:

The tax overhaul includes a sweet deal for ultrawealthy families. For the next seven years, the gift-tax exemption for individuals is an inflation-adjusted $11.4 million, up from $11.18 million in 2018 and $5.49 million in 2017. For couples, it is $22.8 million, up from $22.36 million in 2018 and $10.98 million in 2017.

Congress also raised the estate-tax exemption to $11.4 million per person today from $5.49 million in 2017. As a result, taxpayers can give away a total of $11.4 million tax-free, either while alive or at death, without paying a 40% gift or estate tax.

Because in 2026 gift- and estate-tax exemptions are set to revert to pre-2018 levels of $5.49 million per person adjusted for inflation, individuals with assets above about $6 million—and couples with more than $12 million—should consider making gifts, said Paul McCawley, an estate planning attorney at Greenberg Traurig LLP.

The sooner you give assets away, the more appreciation your heirs can pocket free of gift or estate tax, Mr. McCawley said.

The Treasury Department and the IRS recently issued proposed regulations that would grandfather gifts made at the higher exemption amount between 2018 and 2025 after the exemption reverts to pre-2018 levels.

5.    Less generous medical-expense deduction:

For 2018, taxpayers can deduct eligible medical expenses that exceed 7.5% of adjusted gross income. That means for someone with a $100,000 income and $50,000 of medical or nursing-home bills, $7,500 is not deductible.

In 2019, the threshold for the medical deduction is slated to rise to 10% of adjusted gross income. That would leave the person above unable to deduct $10,000 of medical bills. One way to reduce the pain is to take advantage of the tax break available to people 70½ or older who make charitable transfers from IRAs, said Mr. Slott. Because the donor doesn’t have to report charitable IRA transfers as taxable income, a $5,000 gift would reduce a $100,000 income to $95,000. That, in turn, would mean $9,500 of medical expenses are ineligible for the deduction in 2019, rather than $10,000.

6.    Goodbye to Roth re-characterizations:

The legislation ended the ability of savers to “undo” Roth IRA conversions, which had been used to nullify certain IRA-related tax bills.

With a traditional IRA, savers typically get a tax deduction for contributions and owe ordinary income tax on withdrawals. With a Roth IRA, there is no upfront tax deduction, but withdrawals in retirement are usually tax-free. Tax-free withdrawals are attractive since they don’t push the saver into a higher tax bracket or trigger higher Medicare premiums.

Savers can convert all or part of a traditional IRA to a Roth IRA, but they owe income tax on the taxable amount they convert in the year they convert. Until the overhaul, savers could undo a Roth conversion—and cancel the tax bill—within a specific time frame. But under the new tax law, Roth conversions can no longer be undone.

That doesn’t mean converting is no longer worthwhile, Mr. Slott said. But people should be careful to convert only an amount they know they can afford to pay taxes on.

Credit Given to:  Anne Tergesen. You can write to Anne Tergesen at anne.tergesen@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Nanny Taxes May 1, 2019

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

With the last day of school fast approaching, it is time to consider child care during the summer months.

Instead of sending children to day care or summer day camp, many parents consider hiring a nanny or frequent baby sitter to watch their children. As if balancing work and childrearing is not challenging enough, if parents get outside help to care for their children at home, they will also need to understand the tax implications. Unless they are tax experts, they probably have a few questions about how to do things correctly.

If parents have a nanny or frequent babysitter watching their children at home, that person is considered a household employee if she is in charge of what work is done and how it is done (which is usually the case). It does not matter whether the person works full time or part time, or that the person was hired through an agency or from a list provided by an agency or association. It also does not matter whether the person is paid for the job on an hourly, daily or weekly basis.

On the flipside, someone providing childcare services in his or her own home is not a household employee of the parents. Likewise if an agency provides the worker and the agency is in charge of what work is done and how it is done, the worker is not a household employee of the parents.

As a household employee, a nanny or frequent baby sitter is going to cost parents more than the rate they pay for watching their children. In addition to paying the employee’s wages, they may be required to pay household employment taxes, popularly referred to as the “nanny tax.”

The nanny tax involves two separate employment taxes. Whether the parents are responsible for either depends on the amount they pay.

First is FICA, which consists of Social Security and Medicare taxes. FICA is a 15.3 percent tax on cash wages that is generally split equally between the employer and employee. Parents and their household employee each pay 7.65 percent—which is 6.2 percent Social Security tax plus 1.45 percent Medicare tax.

In 2015, the IRS required anyone with a household employee to withhold and pay FICA for any employee with annual cash wages of $1,900 or more.

Second is FUTA (federal unemployment tax). The FUTA tax is 6.0% of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. Your credit for 2019 is limited unless you pay all the required contributions for 2019 to your state unemployment fund by April 15, 2020. The credit you can take for any contributions for 2019 that you pay after April 15, 2020, is limited to 90% of the credit that would have been allowable if the contributions were paid on or before that day.

Note:  Don’t withhold the FUTA tax from your employee’s wages. You must pay it from your own funds.

The rules and reporting of “nanny wages” and “nanny taxes” get pretty complicated real quick.

The important thing to remember is that if you pay someone more than $1,900 this summer, you need to give us a call.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

–until next week.