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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 Tip of the Week | Retirees July 3, 2019

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

Everywhere you turn whether it is your doctor’s office or the WSJ or wherever, we see thought-provoking, often mind-numbing articles on the pros and the cons of retiring. Well, the article that follows is one from the WSJ written by Cheryl Winokur Munk. She delves into some of the more commonly made errors made by retirees. We have noticed many of these errors made by our friends and neighbors but of course we would never commit any of them ourselves.

                               -Mark Bradstreet

There are almost as many paths to retirement as there are retirees. But when it comes to financial mistakes that can derail their retirement, familiar patterns often emerge. Many retirees tend to invest too conservatively, spend too much too soon, pay too much in taxes or fall for too-good-to-be-true investments.

Retirees could ensure their nest egg lasts longer by avoiding these common mistakes:

Mistake No. 1: Investing too conservatively

A number of retirees try to eliminate risk by stashing their savings in cash, certificates of deposit or municipal bonds of very short duration. Though taking a more conservative approach in retirement can be prudent, playing it too safe can severely limit retirees’ earning potential, increasing the chances they’ll run out of money.

“It’s important to build a portfolio that incorporates an appropriate mix of fixed income and equities based on their other assets—including Social Security and rental income—their spending requirements and their life expectancy,” says David Savir, chief executive of Element Pointe Advisors, a registered investment adviser in Miami. The average American man will live to age 76, and the average American woman to age 81, according to the Centers for Disease Control and Prevention.

Mr. Savir recommends retirees build a portfolio to match their spending habits and estimated life expectancy—taking into account the national averages as well as their own health and family history—and test it using forward-looking simulations. Those simulations should take into account bear-market scenarios and the chance that returns may be lower—and volatility higher—than historical norms. “This will help a client determine whether they need to spend less, invest slightly more aggressively, or both,” he says.

Mistake No. 2: Spending mishaps

Some retirees shell out significant sums of money early in their retirement, often to pay off debt or enjoy leisure activities they couldn’t do while working. The problem with spending so much in the beginning is that it can be detrimental to a retiree’s long-term financial security, says Tim Sullivan, chief executive of Strategic Wealth Advisors Group, a registered investment adviser in Shelby Township, Mich.

While eliminating debt can be a good thing, large cash outlays can harm retirees’ long-term financial security. It may make even less sense when a retiree’s investments are earning far more than the rate of interest on the debt, Mr. Sullivan says. And while it’s understandable to want to buy a second house, take a pricey European vacation or remodel a home, retirees need to map out the potential lasting effects such hefty spending can have on their finances, Mr. Sullivan says.

He tells of a client in his late 50s who enjoyed a $25,000 African safari so much that upon his return he immediately booked another $20,000 trip. These purchases put such a dent in his nest egg that he risked running out of money six years earlier than expected and had to follow a strict budget to try to minimize the damage, Mr. Sullivan says.

Of course, retirees have to find the right balance, because being too strict with their spending early in retirement can lead to significant regrets later on. Beyond that, there’s a risk for some retirees that by being so frugal they’ll leave so much behind when they die that they will be over the federal or state estate-tax exemption limit, says Alison Hutchinson, senior vice president of private wealth management at Brown Brothers Harriman. They could also end up leaving more to their heirs than they are comfortable with, she says.

Mistake No. 3: Underestimating expenses

Advisers say it’s typical for retirees to underestimate their expenses in retirement, particularly health-care and other periodic, rather than regular, expenses. These incremental expenses—if not built into the budget—can derail a retiree’s financial security, advisers say.

Leslie Thompson, managing principal at Spectrum Management Group, a registered investment adviser in Indianapolis, recommends that people approaching retirement keep track of their expenses for at least a year, ideally two or three, before they leave the workforce, so they have a baseline to work with. They should then make the necessary tweaks to account for expenses they will no longer have and new expenses they may incur during retirement. “A well-thought-out plan should be based upon actual spending needs and future desires, with contingencies for nonrecurring items such as car purchases, major home repairs and remodels, and rising health-care costs,” she says.

Financial support for adult children and grandchildren is another expense that many retirees will want to build into their budget. Many retirees are happy to assist on an as-needed basis, but, to their detriment, they don’t consider the aggregate annual cost, says Alicia Waltenberger, director of wealth planning strategies at TIAA. “A lot of times when they see that collective number, it is eye-opening,” she says.

Mistake No. 4: Creating unnecessary tax expenses

When retirees have both tax-sheltered and taxable accounts, they commonly withdraw exclusively from their taxable account at first. The danger is that growth within the tax-sheltered account could bump the retiree to a higher tax bracket once required minimum distributions kick in, says Paul Lightfoot, president of Optima Asset Management, a registered investment adviser in Dallas. This could also affect the retiree’s Medicare premiums, he says.

Mr. Lightfoot recommends retirees perform yearly assessments using different tax scenarios to determine how best to optimize their accounts. One option may be to take some withdrawals from their tax-deferred account before they turn 70½, provided this doesn’t push them to a higher tax bracket. They might also consider converting some of their taxable-account savings to a Roth IRA because of anticipated tax rates in the future. While there are taxable consequences in the year of conversion, there may be longer-term tax benefits in a conversion, he says.

Mistake No. 5: Falling for investment pitches that are too good to be true

Many retirees are easily swayed by the prospect of finding high-returning investments that have little to no risk, but chasing yield can easily derail the savings they’ve worked hard to build, advisers say. Some advisers are particularly skeptical of products like indexed annuities for retirees, because many people don’t understand the products and think they are getting something they are not.

Dennis Stearns, founder of Stearns Financial Group, a registered investment adviser in Greensboro, N.C., also cautions retirees to pay attention to the fees they pay for investment management. Generally, clients with $500,000 to $5 million in assets should pay in the range of 0.5% to 1% in adviser fees, and keep other custodial fees and ETF and mutual-fund fees low, he says. If they’re paying more for investment management, it might be advisable to rethink the relationship. “The fees can really eat into your retirement savings,” he says.

Credit Given to: Cheryl Winokur Munk. Ms. Winokur Munk is a writer in West Orange, N.J. She can be reached at reports@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 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 | Hmmm…When Should I Get Married? May 15, 2019

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

As long as I can remember, the IRS has penalized couples for being married with higher income taxes (as opposed to being single). However, the latest tax laws have significantly reduced; and, even in many cases, eliminated the so-called “marriage penalty.” Now, for many couples, the “marriage penalty” does not exist until their combined taxable income hits the top marginal income tax bracket of 37%. If these high-income couples are considering a wedding late in the year – they may wish to consider waiting to marry early the next year instead.  

On the other hand, the “marriage penalty” does still exist when considering some of the tax deductions. For example, only one $10,000 state and local tax ceiling on itemized deductions is available for a married couple. If single, each would have the same $10,000 available for their state and local tax deductions. Other scenarios might include when one spouse has significant unreimbursed medical expenses or circumstances surrounding the 20% Qualified Business Income Deduction. 

The tax filing status of married filing separately is still an option but not as beneficial as it once was. But, regardless, the numbers still need run to optimize the best filing status.  

An article written by Ms. Winokur Munk published in the WSJ on Monday, March 18, 2019 follows. It delves further into the tax ramifications of being married.

– Mark Bradstreet

Among many things, the Tax Cuts and Jobs Act of 2017 affected the so-called marriage penalty, which occurs when a couple’s total tax bill rises as a result of getting married and filing their taxes jointly.

Under the old tax code, the marriage penalty hit medium- to high-income earners particularly hard. That had to do with differences in the income-tax brackets for married couples vs. individuals. Now, however, those brackets have been adjusted to eliminate those discrepancies—except for taxpayers who are subject to the top 37% marginal rate.

The 37% marginal tax rate kicks in at taxable income above $500,000 for single individuals, or over $600,000 for married couples filing jointly—so two people with income well below $500,000 each can be pushed into the highest bracket if they’re married and filing together.

Meanwhile, a marriage penalty remains in place for some other federal taxes, and a new one has been created by new limitations on deductions.

What impact will the tax-law changes have on married couples, and what do couples planning to tie the knot need to know about how their planned nuptials could affect their taxes?

The Wall Street Journal invited three experts to discuss these issues: Mitchell Drossman, national director of wealth-planning strategies at U.S. Trust; Mela Garber, a tax principal at accounting firm Anchin, Block & Anchin; and Robert Westley, a vice president and wealth adviser at Northern Trust and member of the American Institute of Certified Public Accountants’ Personal Financial Specialist Credential Committee.

Here are edited excerpts of the discussion.

Savings and penalties

WSJ: Can you provide an example or two of how the marriage penalty might affect couples under the new law?

MS. GARBER: Under the old law, two single taxpayers who earned $95,000 and $125,000 would have had a combined tax bill of $41,965 after the standard deduction and personal exemptions, whereas filing jointly as a married couple they would have had to pay $42,661—a marriage penalty of $696. Under the new rules, however, the couple would pay a total of $35,619 in taxes, $7 less than the single filers.

MR. DROSSMAN: Even for taxpayers who are high wage earners, the marriage penalty generally isn’t as significant as it once was. If two single people are each earning $350,000, their individual tax liability would be $94,000 each—$188,000 in total. However, by getting married and filing a joint return, their tax liability becomes $189,500. Under those circumstances, the marriage penalty is $1,500, whereas under the previous tax laws the marriage penalty would have been in the neighborhood of $24,000—a significant difference.

WSJ: So, the new tax law reduces the marriage penalty in those cases. Where does it increase the marriage penalty?

MR. WESTLEY: A marriage penalty can also occur on the deduction side. For example, the new tax act limits the deduction for state and local taxes to $10,000. That means two single taxpayers can each deduct their own state and local taxes up to $10,000. However, as a married couple, they are limited to the same $10,000 deduction cap, since it’s not doubled for married couples filing joint tax returns. Filing separately does not avoid the disparate treatment, since married taxpayers filing separately are limited to a $5,000 deduction.

MS. GARBER: The $10,000 state income- and property-tax deduction cap will hit especially hard for taxpayers who live in states that have high income and property taxes, such as New York, New Jersey, Connecticut and California.

MR. DROSSMAN: In addition, under the new law couples still have to contend with the Medicare surtax and the surtax on net investment income. Both surtaxes apply to individuals with earnings above $200,000 or married couples with income over $250,000.

Easing the pain

WSJ: What can couples do to mitigate the effects of a marriage penalty?

MR. WESTLEY: For high-wage-earning couples, it might make sense for one person to scale back on work so as not to reach the income threshold where the penalty kicks in. Given added hassles and expenses that can come with working, it’s a conversation that’s at least worth having.

MR. DROSSMAN: Even with the new tax rules, high-earning couples thinking about a late-year wedding may be better off deferring it until the following year if they can save some taxes.

WSJ: Are there publicly available tools to help couples decide whether it pays to file as individuals or jointly?

MR. WESTLEY: Yes, the Tax Policy Center has a great calculator that can help taxpayers understand how their tax liability will change as a result of getting married. Another excellent resource for taxpayers is the Marginal Tax Rate Calculator from the AICPA’s 360 Degrees of Financial Literacy website. This calculator allows you to estimate your income-tax liability and choose between different filing statuses to see how the results differ. Still, there are many possible tax situations and nuances, so I think most taxpayers would benefit from working closely with a trusted professional.

Marriage prep

WSJ: What tax-related advice do you have for couples getting married?

MR. WESTLEY: I think many couples assume that filing separately when they are married is the same as filing as a single taxpayer. But once you’re married, you no longer have the option to file as a single taxpayer. While you can file separately as a married couple, in most cases filing separately is likely to raise their overall household tax bill.

There can be, however, a few situations where it may make economic sense to file separately. If, for example, one spouse has significant unreimbursed medical expenses and both spouses are income earners, filing separately will lower their adjusted gross income and allow the spouse with high unreimbursed medical expenses to achieve a greater deduction amount.

However, couples need to remember that when filing separately both spouses must either itemize or use the standard deduction. Therefore, if only one spouse has enough itemized deductions to exceed the current standard deduction, filing separately may not save tax for the household in the aggregate.

The creation of the 20% qualified business income deduction under the new act is a new area that may induce some couples to file separately. When one spouse qualifies for the 20% QBI deduction but the other spouse’s income pushes the couple over the phaseout threshold, filing separately may be advantageous.

Again, there are many quirks with the married-filing-separately tax status, so it’s imperative to go through the actual calculations with a qualified professional. Married-filing-separately is generally unfavorable, since it limits or disqualifies the use of many tax breaks that couples filing jointly can otherwise take.

MS. GARBER: It may benefit a couple getting married to do tax planning and prepare a projected tax return. This exercise may save them money when the time comes to file their first joint tax return. For example, if they are charitable and intend to give donations, given that the standard deduction increased substantially under the new tax law, they may want to consider bunching and combining two or more years’ worth of donations into one year to get the benefit of their deduction. Otherwise, the risk is that neither year’s contributions will be eligible for the deduction.

The projected return should also show whether the couple’s investments are aligned with their income-tax bracket. For instance, if two individuals have investments in taxable bonds, which worked well when they were filing as singles, it may no longer be beneficial to hold these types of bonds. Perhaps they should switch to municipal bonds, because combining their income together will push them up into higher tax brackets. Preparation of their projected tax return will show which investments will generate higher net-of-tax returns.

Credit Given to:  Cheryl Winokur Munk.  Ms. Winokur Munk is a writer in West Orange, N.J. Email her at reports@wsj.com. Appeared in the March 18, 2019, print edition as ‘Does It Pay (Taxwise) To Get Married?’

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 | Was Your Tax Refund What You Wanted? May 8, 2019

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

Many taxpayers were surprised this year by the amount of their tax refund or their tax balance due. Most refunds were less than the prior year and those who typically owe money, owed more. There were also those people who normally received a refund who were now dismayed to discover a balance due. Even tax preparers were surprised to the extent of these tax refund reductions or additional amounts due. Yes, multiple warnings were issued by the “Chicken Littles” during the year. Well, these “Chicken Littles” turned out to be correct. The new 2018 withholding tables not only gave you an early refund from the new tax law BUT some “extra.” This “extra” is what reduced your withholdings which lead to the nasty tax return surprises. Adding insult to injury, your 2019 refunds (or balances due) may be even worse since the new 2018 withholding tables were not for a full year. They may have started as late as February 15, 2018 (and I am sure some employers began later than that.) So, if you want your bottom line on your tax return to look like times of old – better increase your withholding now.

The below WSJ article published April 13-14, 2019 by Laura Saunders further explains this situation along with some possible remedies.  

                                                          –    Mark Bradstreet

Congratulations American taxpayers, you made it through the first filing season after the largest tax overhaul in a generation. Now do yourself a favor and check your withholding.

For weeks, news articles, message boards, and family dinners have been filled with unhappy taxpayers lamenting tax-refund shortfalls or surprise bills. For many, that’s because they didn’t watch their withholding.

Among them is Alaric DeArment, a 36-year-old biotechnology journalist in New York City.

He got a tax cut from the overhaul, as did two-thirds of American households. For 2018, his federal bill is $2,400 lower than in 2017. But his tax cut didn’t feel like one, he says, because he didn’t know that last year the Treasury Department lowered paycheck withholding for millions of workers in order to speed up delivery of the tax cuts.

So, his customary tax refund of between $1,000 and $3,000 became a surprise tax bill of $785 this year. As a result, Mr. DeArment can’t use a refund to help pay for a trip to Eastern Europe or a new laptop, as he planned. Instead, he’s paying his tax due in installments.

“It’s horrible, a bummer,” he says. He says he’ll change his withholding soon.

So far, about 1.2 million fewer filers are getting refunds compared with last year, according to the latest data from the Internal Revenue Service. Total refunds are down by about $5.8 billion, or 2.6%. The average refund is $2,833, down $31 from this time last year.

This data doesn’t measure the number of filers who have gotten unwelcome surprises this year, such as a lower refund or higher payment due, because of the withholding changes.

Tax preparers say there are many. Don Rosenberg, an enrolled agent in Yorktown Heights, N.Y., says that despite the overall tax cuts, 75% of his clients are unhappy with their tax results this year, many of them because of withholding changes.

“Anybody who says refund size doesn’t matter should sit in my office for a week,” he says.

The emotional response to tax refunds or bills has a logic of its own. People often use tax refunds to help with big purchases, although it means they’ve made an interest-free loan to Uncle Sam by letting the government have more of their money during the year.

The bottom line: If you’re upset by this year’s refund or tax bill, consider changing your withholding to prevent a rerun next year.

Tax specialists at H&R Block, which prepares 20 million returns a year, warn that many filers with smaller refunds this year are set for even lower ones for 2019, because Treasury’s withholding changes will be in effect for the full year. The average refund for this group will be $200 lower next year without adjustments to withholding, based on analysis of their clients.

In addition, the IRS approved broad waivers of penalties on 2018 underpayments. These likely won’t be extended for 2019, and most filers need to pay 90% of what they owe during the year to avoid penalties. Here’s more information about changing your withholding.

Know the options. You can consult a tax preparer, but there are ways to do it yourself. The simplest is to take the additional total amount you want withheld, based on this year’s outcome, and divide it by remaining paychecks. Then put that on the IRS’s Form W-4 and give it to your employer.

You can also recalculate your withholding using the W-4 form, but this can be confusing. The IRS hasn’t finished a redesign following the overhaul, and a proposal released last year proved controversial because it asked workers to share private information with employers. An update is due soon.

You can also use an IRS calculator to figure what you’ll owe for 2019. It allows inputs for more than one earner, investment income and more. Users need their most recent tax return plus recent pay stubs and perhaps other information.

Make good use of paycheck withholding. Do you have nonwage income, as from outside gigs or investments? To avoid penalties, you may need to pay quarterly taxes on this income. If so, it often makes sense to increase paycheck withholding instead, as it’s not subject to the same timing requirements as quarterly payments. 

For example, taxes on nonwage earnings from the first quarter are due April 15 in order to avoid penalties. But if the same taxes are paid through increased withholding in November, there are often no penalties.

Pay attention to pensions. Withholding was lowered for pension payments as well as for paychecks. If you want to raise it, use Form W-4P.

Beware of bonuses. The tax overhaul cut the withholding on bonuses from 25% to 22%, so that can contribute to lower refunds or higher tax bills. Employers will withhold more if requested.

Credit given to Laura Saunders. Write to Laura Saunders at laura.saunders@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.

Tax Tip of the Week | Trusts – The Very Basics April 3, 2019

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

While a trust may be considered an “entity”, it is actually a fiduciary relationship whereby a trustee holds legal title to property and has a duty to manage that property for the benefit of others (known as beneficiaries).

A trust is formed by a trust agreement. There are many types and purposes of trusts, so the trust agreement has to be written specifically to accommodate the goals of the one setting up the trust who is known as the grantor. Once the trust has been set up, the grantor, also referred to as the settlor, or trustor, can then transfer property to the trust to be managed by the trustee.

A trust can be revocable, or irrevocable. A revocable trust, sometimes referred to as a living trust, is generally set up by a grantor who is also the trustee and beneficiary, and who retains the power to revoke or amend the trust. These trusts are legal entities, but are disregarded for federal tax purposes. In fact, they usually use the social security number of the grantor, and all income is reported on the grantor’s tax return. As such, a revocable trust does not file its own return.

On the other hand, an irrevocable trust does usually need to file a tax return, and, depending on the trust agreement, any tax due will be paid by the trust, or by the beneficiaries, or in some cases, by both the trust and the beneficiaries. It is usually better tax-wise if the beneficiaries pay the tax due to the short tax brackets applicable to trusts (and estates). The highest tax rate for a trust is the same as an individual’s, 37% for 2018. However, the highest tax bracket for an individual for 2018 begins at a taxable income of $500,000, while the highest bracket for a trust begins at $12,500. Trusts can also be taxable at the state level. For Ohio, trust rules are governed by the Ohio Trust Code which was enacted January 1, 2007.

There are several reasons for setting up trusts. One is to avoid probate. Revocable living trusts are generally used for this purpose. A trust can help your estate retain privacy whereas the probate process creates a public record. In addition, probate fees can be significant.

Another reason for a trust is to help preserve estate exemptions. A-B trusts, also known as bypass or marital trusts, can be used for this purpose. Other types of trusts used for marital purposes include the QTIP Trust and the Power of Appointment Trust.

Irrevocable Life Insurance Trusts (ILIT’s) are used to prevent the taxability of life insurance within an estate. Dynasty Trusts are used to preserve assets for children and grandchildren or other beneficiaries. Incentive trusts can be used to encourage the behavior of beneficiaries, such as getting a college degree, or to address specific problems such as drug abuse. Special needs trusts can be set up for a physically or mentally disabled child. Spendthrift trusts can provide protection from creditors. Spendthrift clauses can be used in other types of trusts as well. Some additional types of trusts include the charitable remainder, charitable lead, Medicaid trusts, grantor retained annuity trusts, and numerous others.

The taxability of these trusts rests with the trust agreement. Before the trust agreement can be drafted, various questions must be answered. Some of the more important ones are:

•    How much control do I want?
•    Who will be the trustee and can the trustee be trusted?
•    Can I fire the trustee and name a new one?
•    Do I want to be able to revoke, or amend the trust?
•    Can I change the beneficiaries?
•    Do I want the income to be distributed?

As you can see, trusts and their taxation are very complicated. If you are considering setting up a trust, please seek the help of an attorney and a tax professional.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Norman S Hicks, CPA

–until next week.

Tax Tip of the Week | 5 Ways to Fail a Sales Tax Audit March 20, 2019

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

IRS audits are horrible! Sales tax audits are worse. In some areas, a sales tax auditor has more legal authority than an IRS agent. Yes, that is scary! Some businesses think that it is not a big deal failing to collect sales tax from a “favorite” customer since the customer would be liable anyway in an audit. It is not that easy – the sales tax agent collects this shortfall from whoever they are auditing. You might be paying the sales tax for your “favorite” customer. Good luck trying to get those dollars back from them.

The article below is advertising from an Avalara blog. I do not know anything about Avalara other than this tongue in cheek article which makes a lot of sense at least from my experience over the years.
                                                      By Mark Bradstreet

 FROM THE AVALARA BLOG JANUARY 23, 2019

 “All businesses relish a good sales tax audit. After all, what’s not to like? And did you know it’s possible to spend more time, money, and resources than absolutely necessary during an audit? It’s true. Simply follow the five tips below and you’ll dramatically increase your chances of having to pay those coveted audit penalties. 

[From the Avalara blog.]

1. Give the auditor a hard time

Spare no inconvenience. Send the auditor on coffee runs. Set the auditor up in your most cramped and unappealing space then make the auditor sort through the messiest records. First impressions matter when it comes to audits, so make yours a terrible one. The harder the experience for the auditor, the more likely that auditor will help you spend more money, resources, and time.

2. Assume you don’t need to collect tax

This is a high-risk move. If you have nexus in a state, you’re required to collect and remit sales tax; and while nexus used to refer primarily to some sort of physical presence, that’s no longer the case.

On June 21, 2018, the Supreme Court of the United States ruled physical presence is not a requisite for sales tax collection. Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, or economic nexus. That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.

If you want to ensure you run afoul of auditors, just keep on not collecting in states where you make significant sales: Tax authorities are looking for you; they’ll likely find you.

3. Put your exemption certificates in a box in the warehouse

This gives you two advantages. First, it forces the auditor to dig through a potentially rat-infested box for the records needed, thus wasting more time. Second, it increases your chances of losing certificates to flood, fire, or vermin.

If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge — plus bonus penalties and interest.

4. Keep incorrect records

You want to fail a sales tax audit? Make sure your records don’t match your bank accounts. If you have more or less money in your account than shows up on your sales tax records, you’re begging for an audit penalty.

If incorrect records are too blatant for your taste, strive for incomplete records. Don’t stress about recording every cent of sales tax charged to your customers. Scribble sales tax records down on a sheet of paper so you’ll never know where to find them when you need them. The auditor will linger as long as there’s a clear discrepancy between how much you collect and how much you record.

5. Pay less than you owe

This one’s about your overall method. You can drastically increase your risk of penalties during an audit by manually managing sales tax. Paying less sales tax than what your business owes will substantiate incorrect record-keeping, shoddy certificate storage, and (purposeful) ignorance about nexus. Plus, think of all of the other opportunities for error that await when you manually manage the following:

•    State and local jurisdiction rate changes
•    Filing methods and schedules for each taxing jurisdiction
•    Changing product taxability rules

But seriously

We know you don’t actually want to waste time, money, and resources. So, hopefully these tips give you some ideas of what not to do.

The right technology can turn sales tax management from painful and risky to easy and more accurate. Avalara’s suite of solutions can reduce your risk by automating calculations, certificate management, timely filing, and easy-to-access reports.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 C. Bradstreet, CPA

-until next week

Five Things to Know About Proposed Tweaks to the Retirement Systems March 13, 2019

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

The following article, by Anne Tergesen (WSJ), discusses possible revisions to the USA retirement system. These “proposed tweaks” may never happen or if they do, the changes will most likely be different than what follows. When I first began in taxes, an elderly tax practitioner told me to stop worrying about the future tax law changes and to make my decisions based upon the current law. For more often than not, I thought that was good advice. But that is not to say, we should bury our heads in the sand and not consider the provisions that Congress is working on.

-Mark Bradstreet

“In addition to giving annuities a greater role in 401(k) plans as part of its proposals to tweak the U.S. retirement system, Congress is considering provisions that could serve to expand workers’ access to retirement-savings plans and make it easier for savers to tap their accounts in case of emergencies. Here are five changes Americans could see in their 401(k) plans and individual retirement accounts.

(1)     A New Item on 401(k) Disclosures
Currently, 401(k) plans are required to send participants quarterly and annual account statements with their balance. Under the proposed legislation, plan sponsors would have to show an estimate of the monthly income a participant’s balance could generate with an annuity, a detail akin to the payoff disclosures required on credit-card statements. The goal is to help workers better understand how prepared they are to maintain their income in retirement.

(2) A Repeal of the Age Limit on IRA Contributions
If you are 70 ½ or older, you can’t currently make deductible contributions to a traditional IRA. Congress is considering removing the age cap and allowing people above 70 ½ or older to deposit up to $6,500 a year in either a traditional IRA or a Roth IRA. With a traditional IRA, account holder’s generally get to subtract their contributions from their income but they must pay ordinary income taxes on the money when they withdraw it – something they are required to do starting at age 70 ½ (the bill would do nothing to change that). With a Roth IRA, there is no upfront tax deduction but the money increases tax-free.

(3) More Types of Savings Accounts
Among the proposals under consideration is a new type of universal savings account that would offer more-flexible withdrawal rules than existing retirement accounts, according to Rep. Kenny Marchant (R, Texas) Employers could also be allowed to automatically enroll workers into emergency savings accounts. (Employees would be free to opt out.)

(4)  More Ways for Graduate Students to Fund IRAs
The bill would allow students to contribute taxable stipend or fellowship payments to an IRA, something that’s not currently possible.

(5)  Pooled 401(k) Plans
For years policy makers have tried to make retirement-savings plans more attractive and affordable to small businesses, many of which have no plan at all. About one-half of private-sector employees, many of whom work for small companies, lack access to a workplace retirement plan. Under one measure before Congress, small employers would be able to more easily band together to spread out the administrative costs of 401(k) plans. The proposal would eliminate a requirement that employers have a connection, such as being members of the same industry trade group, in order to join a so-called multiple-employer plan. Congress is also considering expanding a tax credit available to small companies to offset the costs of starting a new retirement plan. The annual credit amount would increase from $500 to as much as $5,000 for three years.”

Credit given to Anne Tergesen, WSJ
Saturday/Sunday July 21-22, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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.