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Tax Strategies for a Bonus or Windfall March 31, 2021

Posted by bradstreetblogger in : Business consulting, General, Retirement, tax changes, Tax Rules, Tax Tip , add a comment

Nice recap below which discusses some tax saving or tax deferral options available in the event of a bonus or windfall.                                                                                                       – Mark Bradstreet

Here are 5 Tax Strategies for a Bonus or Windfall.

Yes, it’s inevitable: That cash bonus for a job well done can result in you paying a bigger chunk of money to the Internal Revenue Service (IRS). To start, the IRS considers bonuses to be supplemental wages, which means your employer is required to immediately withhold 22% of your windfall. You could get some of that back at tax time. But then again, a bonus might bump you into a higher tax bracket, which starts at 10% for low-income taxpayers and tops out at 37%.

Heed another precaution, says Rosalind Sutch, a Philadelphia certified public accountant (CPA) at the tax consulting firm Drucker & Scaccetti: “If you work in two or more states during the year, you might need to pay taxes on your bonus to each state.”

Take heart: Your tax advisor can map out a few strategies to let you keep as much of that extra cash as the IRS allows.

KEY TAKEAWAYS

1. Set It Aside For Later

Remember, Uncle Sam truly wants you to have a great retirement. He’s encouraging us all to build up our nest eggs by using contributions to qualified retirement savings accounts, such as 401(k)s and traditional IRAs, to reduce taxable income. With that in mind, a bonus or windfall can represent a great way to jumpstart your retirement savings, especially if you’re allowed to use your bonus to make a special contribution. That, of course, will depend on your plan’s rules.

401(k)s

It might make very good sense to use the extra cash to maximize your 401(k) contribution. This move may even reap an additional reward if your employer kicks in a matching sum—provided you qualify under plan guidelines. The amount you can contribute to your 401(k) or similar workplace retirement plan is $19,500 in 2021. The 401(k) catch-up contribution limit—if you’re 50 or older—will be $6,500 in 2021.

IRAs

For 2021, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. The deduction you can take on IRA contributions, however, is subject to limits based on your income, filing status, and whether your employer has a retirement plan in place.

Roth IRA

Another strategy, says Sutch, is to make a contribution to a non-deductible IRA, then convert the account to a Roth IRA as quickly as possible—at very least before the end of the year. You will need to pay taxes on any gains made because of an increase in the value of the converted IRA, but distributions you take later will be tax-free. That’s an important consideration that can save you money if the assets of the Roth IRA increase, tax rates increase, or you end up in a higher bracket on the eve of your retirement.

The caveat is that you’ll need to walk through the paperwork carefully with your accountant to avoid tripping up and generating taxable income, especially if you already have an IRA. Also, you’ll need to fit the Roth income limitations.

2. Defer Compensation

When it comes to getting back some of that 22% withheld bonus, you have a number of options. For one, you might look into a deferred compensation plan at work, which will allow you to spread out both the money you pocket and the tax liability. If you are paid in shares of stock, you’ll want to mull over the best time to cash out of a security that has increased in value—in order to offset or limit capital gains. Long-term capital gains rates are 0%, 15%, and 20%, depending on your income level.

3. Pay Your Taxes

Yes, the heading here sounds like a no-brainer. But let’s be a bit more specific: One beneficial way to use your bonus is to “catch up” on estimated tax payments or your withholding-tax obligations and thereby sidestep an IRS penalty for coming up short.

And that’s not all you can do. Under certain circumstances, you might be able to pay next year’s real-estate taxes in advance. It all depends on when your real estate taxes were assessed. Under IRS rules, you can deduct the prepayment of property taxes for the next tax year if the assessment was received and paid in the current tax year. Any prepayment of property taxes that have yet to be assessed cannot be deducted. Taxpayers are advised to check with their accountant before trying this tack.

4. Give It Away

If you itemize your deductions on Schedule A, you can shield some of your bonus by making a charitable donation to charity. For most cash contributions, up to 60% of adjusted gross income can be deducted. The IRS maintains an online resource to help taxpayers determine the deductibility of their contributions to tax-exempt organizations.

If you are unable to decide on a charity, you might consider donor-advised funds (DAFs), a tool for high-net-worth individuals. When you contribute to a DAF, the money goes into an account with your name. You are permitted to take the full charitable deduction in the year in which it was made, even though the funds might not be dispersed to charity until later. However, as with donations to charity groups, taxpayers should be certain donations to the DAF are deductible.

5. Pay Up Your Expenses

Another way to shelter a bonus or windfall is to pay upcoming deductible business or personal expenses before Dec. 31. You might consider upgrading your computer equipment or footing utility bills for your home office before year-end.

Using a credit card may make sense, provided you can pay off the additional balance in January.

Another idea: If you’re signed on for a health savings account at work, consider using part of your bonus or windfall to pay up to the contribution limit. Just be sure it’s money you can carry over to next year, or that you know you will spend in time.

The Bottom Line

As soon as you know of a bonus or windfall, book a meeting with your tax advisor to start safeguarding as much as you can.  

“Like a lot of tax issues, things can get very complicated,” says Sutch. “You don’t want to get whipsawed on some of the more intricate rules, so it’s a good time to lean on a competent tax adviser’s advice.”

The only windfall that won’t put you in that situation: the (maximum) $15,000 that someone can give you tax-free each year. Neither you nor the giver owes taxes on a gift that falls within the legal limit. Such gifts can add up: For example, if all four of your grandparents gave you the maximum, you could collect $60,000 per year, gift-tax free.

Credit Given to:  JAMES ANDERSON  Published in Investopedia on Feb 1, 2021.

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.

IRS Announces Higher Estate and Gift Tax Limits for 2021 March 24, 2021

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

Many of our clients have the best of intentions of completing their estate planning. Not that I am perfect. Many of us have been fine-tuning our estate plan for decades. Granted this process is never really done. It is a work in process. But if you have a plan in place only in your head, your family may be surprised by the estate tax owed. Some rather painless steps may be taken with the help of an estate planning attorney to avoid these unpleasant surprises.


– Mark Bradstreet               

How much money should go to the tax collector when you die?

The Internal Revenue Service announced today the official estate and gift tax limits for 2021: The estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. That means an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could shield $23.4 million. 

(Speculative portion who may be our next President was omitted since this was written shortly before Election Day)

The IRS announced the new inflation-adjusted numbers in Rev. Proc. 2020-45. Forbes contributor Kelly Phillips Erb has all the details on 2021 tax brackets, standard deduction amounts and more. We have all the details on the 2021 retirement account limits, including the higher $58,000 overall 401(k) limit, too.

If you’re rich and you’re worried about the estate and gift tax exemption amounts going down, the time to start a gifting plan is now. The IRS finalized rules last year saying that it wouldn’t claw back lifetime gifts if/when the exemption is lowered.

The annual gift exclusion amount for 2021 stays the same at $15,000, according to the IRS announcement. What that means is that you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A husband and wife can each make $15,000 gifts, doubling the impact.

Separately, you can make unlimited direct payments for medical and tuition expenses.

When you’re doing advanced estate planning—making gifts in excess of $15,000 annual exclusion gifts—you’re using your lifetime gift/estate tax exemption. With the new 2021 numbers, a couple who has used up every dollar of their exemption before the increase has another $240,000 of exemption value to pass on tax-free. For folks who are worried that that’s a lot to give, there are newfangled spousal lifetime asset trusts (aka a SLATs). They’re also IRS-tested advanced estate-freeze strategies like grantor-retained annuity trusts (GRATs) and installment sales to grantor trusts, where you give away the upside of assets transferred to the trust tax-free. For planning tips, see Trusts In The Age Of Trump.

Keep in mind the $23.4 million number per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption—a move called “portability”—you must elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

And note, if you live in one of the 17 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate.

Here’s a look at the federal estate tax/gift tax exemption over the years, according to the Tax Policy Center:

2021: $11.7 million/$11.7 million
2018: $11.18 million/$11.18 million
2011: $5 million/$5 million
2009: $3.5 million/$1 million
2008: $2 million/$1 million
2003: $1 million/$1 million

Credit Given to: Ashlea Ebeling – a Senior Contributor for Forbes published on 10/26/20.

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.

IRA and 401(k) Contribution Limits for 2021 January 27, 2021

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

Please find below the 2021 contribution ceilings for IRAs and 401(k) plans.  These ceilings and limitations for contributions to retirement plans are not to be taken lightly.  Penalties (excise taxes) for overfunding some retirement plans are absolutely shocking.  And, the penalties are incurred annually until the excess funds are removed. 
                                                                                                                                                                                               -Mark Bradstreet

Bad News on IRA and 401(k) Contribution Limits for 2021

Retirement savers will be disappointed with the contribution limits for next year, but at least more people will qualify for retirement tax breaks in 2021.

There’s good news and bad news from the IRS for Americans saving for retirement with IRAs, 401(k)s, and other retirement accounts in 2021.

Let’s start with the bad news: Contribution limits won’t go up next year.

And now the good news: The maximum income levels allowed to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver’s Credit all increase for 2021.

Retirement Plan Contribution Limits for 2021

For 2021, employees who are saving for retirement through 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan can contribute up to $19,500 to those plans during the year. That’s the same contribution limit in place for 2020.

Income Ranges for 2021

Increased income ranges for the traditional IRA deduction, Roth IRA contributions, and the Saver’s Credit means more Americans will qualify for these tax breaks.

If you’re contributing to a traditional IRA, the deduction allowed for your contribution is gradually phased-out if your income is above a certain amount. For 2021, the phase-out ranges are:

For people saving for retirement with a Roth IRA, the actual amount that you can contribute to the account is based on your income. To be eligible to contribute the maximum for 2021, your modified adjusted gross income must be less than $125,000 if single or $198,000 if married and filing jointly (up from $124,000 and $196,000, respectively, for 2020). Contributions begin to be phased out above those amounts, and you won’t be able to put any money into a Roth IRA in 2021 once your income reaches $140,000 if single or $208,000 if married and filing jointly ($139,000 and $206,000 for 2020). The phase-out range for a married person filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000 for 2021.T

Finally, the 2021 income limit for the Saver’s Credit for low- and moderate-income workers is $66,000 for married couples filing jointly ($65,000 in 2020), $49,500 for head-of-household filers ($48,750 in 2020), and $33,000 for singles and married people filing separately ($32,500 in 2020).

Credit given to: Rocky Mengle. Published on November 5, 2020.

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.

Special Holiday Edition December 23, 2020

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

Enjoy the Holidays!

We are going to take a break from our tax and business tips this week.  Instead, the family of Bradstreet & Company would like to wish you and your family the most joyous holiday season and best wishes for 2021.

We hope you enjoy the Tax Tip of The Week.  As always, your topic suggestions and questions are always appreciated.

Is the Tax Tip of the Week real?

While your kids are questioning if Santa is real, we continue to receive some interesting feedback that some of you don’t realize this is really Bradstreet CPAs reaching out each week (… some suspect this is a “packaged” communication to which we add our logo.) Well, rest assured it’s us and we love to hear from you.
Enjoy the week and, “Yes Virgina, there is a Santa Claus”.

Wishing you all great things,

The Staff at Bradstreet & Company

Who Will Pay Your Estate Taxes? October 7, 2020

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

To a large degree, paying federal estate taxes is voluntary since many estate planning tools are available to eliminate or at least reduce this tax.  Having said that, once your estate reaches over a certain size and you are not married (if you are married you may have an unlimited marital estate deduction for assets transferred to a spouse) – the available estate tax reducing tools may not be adequate to reduce the federal estate tax to zero. Regardless, your lifetime federal estate exclusion for 2020 is $11,580,000. If your taxable estate is less than the lifetime exclusion amount – no federal estate tax is normally due. For most people the current lifetime exclusion of $11,580,000 seems more than enough. But, as recent as 1997, the lifetime exclusion was only $600,000. Who knows how this might change with the possibility of a new incoming administration. The current top federal estate tax rate is 40%. At that rate, if you expect to have a taxable estate, spending some money now for estate planning may reap some huge benefits for your heirs. 

Too often people tend to focus only on their federal estate tax planning and overlook the possibility of a State death or inheritance tax. Currently, about 1/3 of the states have some sort of death or inheritance tax. The State of Ohio ended its death/inheritance tax for any deaths occurring after January 1, 2013.

Side note: Gifts are one of many effective tools for reducing one’s taxable estate.  In 2020, a gift of up to $15,000 may be made to an individual without having to report the gift or reduce your lifetime exclusion.

                                                                                                  -Mark Bradstreet

If you have a taxable estate, consider yourself fortunate. I often tell clients, “paying estate taxes is a good problem to have.” It is better than the alternative – dying with few or no assets. But sometimes little thought is given to who will pay these estate taxes.

An estate tax is a one-time tax that is due nine months from the date of a person’s death. It is not an income tax, although it is easily confused with yearly income taxes that estates, trusts and individuals have to pay. Republicans call it the “death tax.” Democrats and the Internal Revenue Code refer to it as the estate tax. Whatever you call it, it is the same thing – a tax on a person’s assets valued as of the date of death. 

Many estates are exempt from the estate tax. If the value of your assets (and prior taxable gifts) do not reach the filing threshold, an estate tax return may not be due. The federal amount you are allowed to leave in 2020 without paying an estate tax is $11,580, 000. That amount is scheduled to increase for inflation every year until 2026 when it drops to $5,000,000 adjusted for inflation. It also may drop sooner depending on what happens with the November elections. 

Keep in mind that depending on where you live, your state may also have a state estate tax. For example, the exemption amount in Massachusetts is only $1 million. 

If you have a will, it should specify how your estate taxes will be paid. In general, it is your executor’s responsibility to pay your estate taxes. Typically, the will directs your executor to use your probate assets to pay the estate taxes that are due. However, if some of your assets pass outside your will, i.e. by beneficiary designations or joint ownership, there may not be enough assets in your probate estate to pay your estate taxes. This scenario means that the beneficiaries of your will could end up paying a disproportionately greater share of the taxes due. 

To avoid this, you need to pay close attention to the beneficiaries named in your will and the beneficiaries of your non-probate assets such as life insurance policies, IRA’s and 401K’s. If the beneficiaries are not the same, you may stick some people with paying for the estate tax while others receive their assets free and clear of any tax.

Take the example of a woman who died leaving a large “payable on death” account and life insurance policy to her live-in boyfriend. These non-probate assets were paid directly to the boyfriend. They were still included in her taxable estate and taxed for estate tax purposes, but the boyfriend did not have to contribute to the estate taxes. He received the assets free of estate taxes. 

The estate taxes were paid out of the probate estate. The only probate asset was a heavily mortgaged house that was left to nieces and nephews. Because the will stipulated that all estate taxes must be paid from the probate assets, the nieces and nephews were on the hook for the entire estate tax which essentially ate up any monies they were to receive.  

Be sure to discuss payment of estate taxes with your attorney. You do not want to leave some of your beneficiaries to pay the bill while others walk away scot-free.

Credit Given to:  Christine Fletcher published on June 12, 2020 in Forbes.

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.

Your Age-by-Age Checklist to Prepare for Retirement Conversations June 24, 2020

Posted by bradstreetblogger in : General, Retirement, Tax Tip, Taxes , add a comment

June 24, 2020

The question isn’t at what age I want to retire, it’s at what income.                      -George Foreman

Never have times been so interesting. Never has change occurred so fast.  We all know that time moves faster as we grow older.  However, it may not make sense to bend over backwards in an effort to fund your retirement at a young age.  But neither may it be ignored completely either.  
                           -Mark Bradstreet

What should you and your loved ones be doing to prepare for a retirement when and how you want? While the answer partially depends on whether your own personal finish line is just around the corner or decades away, there’s one thing that everyone should be doing, no matter your age: talking.

It’s important to have conversations about retirement planning early and often, but not everyone knows what to talk about or how to get started. These age-based guidelines can serve as discussion points with your loved ones to make sure you’re on track for the retirement you want.

Preparing for retirement in your 30’s

• Don’t let student loans prevent you from saving for retirement. It’s usually a mistake to think that student loan debt should be fully paid off before putting aside money for retirement. Your retirement savings need time to grow so you can achieve your goals, and investing early will pay off in the long run — even if you can’t save as much as you’d like.  The right balance will likely include payments toward both goals, with the exact amounts depending on factors like interest rates and expected returns. 

• Make sure you’re maxing out your company’s 401(k) matching contributions. Employers often match up to a certain amount of your contributions; it’s essentially free money that you could be taking advantage of! 

• Don’t leave your job without taking vesting into consideration. Many companies tie their retirement contributions to a requirement that you stay with the company for a minimum amount of time, known as the vesting period. If you leave before the allotted period of time, be aware of the financial repercussions. 

• Revisit your 401(k) contributions each time you get a raise or promotion. If you’ve set up automatic contributions, it’s important that you don’t fall into the trap of sticking to those levels indefinitely.

• Understand the power of compounding returns. The earlier you begin investing, the more time your money will have to grow. Don’t delay. 

Preparing for your retirement in your 40’s

• Prioritize paying down your high-interest debt. Whether you have credit card debt, a car loan or a home mortgage, paying interest can eat away at your ability to save money for retirement. Prioritize your highest interest debt first and work your way down until you’re debt free. 

• Don’t fall behind. Your 40’s can be a stressful time financially. Many people in today’s “sandwich generation” are squeezed by the needs of children getting ready for college and elderly parents with dwindling reserves. Try to at least keep pace with your previous level of retirement savings. 

• Start running the numbers. Making some quick calculations can help show you where different savings scenarios are likely to lead you. If you’re not sure where to start, try Lincoln Financial’s retirement calculators.

• Talk to a financial advisor to make sure you’re on the right track. “Meeting with a financial advisor can help alleviate some of the stress surrounding retirement by helping savers create a plan,” said Jamie Ohl, Executive Vice President, President, Retirement Plan Services, Lincoln Financial Group. “People who have a plan are more confident and better prepared for retirement.”

Preparing for retirement in your 50’s

• Don’t let your spending get out of control. People often find that their disposable income increases in their 50’s as they become empty nesters and their salaries peak. Instead of letting your spending increase in tandem, increase the amount of money you put into your retirement accounts and practice frugality — getting accustomed to a more luxurious lifestyle can make it more difficult to retire.

• Ask your employer about catch-up contributions. Most companies allow workers who are age 50 and above to contribute an extra $6,000 annually to their 401(k) on top of the regular contribution limits. 

• Don’t count on an “average” lifespan. “People are living longer than ever before, and they may not factor that into their retirement planning,” said Will Fuller, Executive Vice President, President, Annuities, Lincoln Financial Distributors and Lincoln Financial Network. “That makes outliving your savings a real concern for the millions of households in America that do not have any kind of income protection in place.”

• Consider purchasing an annuity to protect against uncertainty. Annuities provide you with a guaranteed income for life, safeguarding you against longevity risk and stock market risk. 

• Get your financial advisor to align with your expected retirement age. You may have an ideal retirement age in mind, but your financial advisor is best situated to help you determine whether it’s realistic and what you need to do to get there. 

Tips like these will make sure that you’re heading in the right direction, but there’s no substitute for talking through your own personal circumstances with human financial advisors every step of the way. You’re never too young or too old to get help from a professional — and if you’ve already followed the steps above, it will be easy for them to take you across the finish line.

Today’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.