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Tax Tip of the Week | A Need to Know on Capital Gains Taxes September 4, 2019

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

Generally, capital assets that are held in excess of one year and sold at a profit may be taxed at three (3) possible tax rates: (1) 0%, (2) 15% or (3) 20%. For most people, the rate used depends upon their filing status and the amount of their taxable income. Gains from the sale of capital assets not held for a year are taxed as ordinary income. If capital assets are sold at a loss – generally, only $3,000 ($1,500 married filing separate) may be deducted annually unless other capital gains are available as an offset.

Everyone thinks that Congress designed the zero-percent capital gain rate just for them. That thinking is only natural since so many reporters and so many politicians have over-hyped the catchy expression of “zero-percent rate.” The truth is VERY few taxpayers will ever be in position to take advantage of the zero-percent long-term capital gain rate. To do so, for most single and married couples filing jointly, their taxable income not including the capital gains must be less than $39,375 or $78,750, respectively. Remember your taxable income might include any Form W-2s, interest and dividend income, business and rental income etc. But, it also includes the capital gain itself. So, not a very big window exists for the possibility of qualifying for using the zero-percent rate. If your income other than capital gains, less your deductions exceeds these taxable income ceilings then the window not only shuts but disappears as though it never existed. This capital gain tax calculation is not made the same as the calculation of income taxes which are calculated using the incremental tax brackets. And, depending upon the amount of your regular taxable income not including the capital gains above and beyond the amounts of $39,375/$78,750 – you will then use either the 15% OR the 20% tax bracket for the capital gains rate. Don’t forget the “net investment income tax” of 3.8% which could be an additional tax along with your particular state income tax. Ohio taxes capital gains as ordinary income. Also, technically outside the tax world – various income levels may also affect the amount of your Alternative Minimum Tax (AMT), Medicare insurance premiums and the amount of student loan repayments (if applicable).

More information and explanations follow in the article below by Tom Herman as published by the Wall Street Journal on Monday, June 17, 2019.

                            -Norm Hicks and Mark Bradstreet

By tax-law standards, the rules on capital-gains taxes may appear fairly straightforward, especially for taxpayers who qualify for a zero-percent rate.

But many other taxpayers, especially upper-income investors, “often find the tax law around capital gains is far more complicated than they had expected,” says Jordan Barry, a law professor and co-director of graduate tax programs at the University of San Diego Law School.

Here is an update on the brackets for this year and answers to questions readers may have on how to avoid turning capital gains into capital pains.

Who qualifies for the zero-percent rate?

For 2019, the zero rate applies to most singles with taxable income of up to $39,375, or married couples filing jointly with taxable income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15% rate, which applies to most singles up to $434,550 and joint filers up to $488,850. Then comes a top rate of 20%.

But don’t overlook a 3.8% surtax on “net investment income” for joint filers with modified adjusted gross income of more than $250,000 and most singles above $200,000. That can affect people in both the 15% and 20% brackets. For those in the 20% bracket, that effectively raises their top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for high net-worth individuals,” says Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

There are several other twists, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Among them: a maximum of 28% on gains on art and collectibles. There are also special rates for certain depreciable real estate and investors with certain types of small-business stock. See IRS Publication 550 for details. There also are special rules when you sell your primary residence.

State and local taxes can be important, too, especially in high-tax areas such as New York City and California. This has become a much bigger issue in many places, thanks to the 2017 tax overhaul that included a limit on state and local tax deductions. As a result, many more filers are claiming the standard deduction and thus can’t deduct state and local taxes. But some states, including Florida, Texas, Nevada, Alaska and Washington, don’t have a state income tax. Check with your state revenue department to avoid nasty surprises.

How long do I typically have to hold stocks or bonds to qualify for favorable long-term capital-gains tax treatment?

More than one year, says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. Gains on securities held one year or less typically are considered short-term and taxed at the same rates as ordinary income, she says. The rules are “much more complex” for investors using options, futures and other sophisticated strategies, says Bob Gordon, president of Twenty-First Securities in New York City. IRS Publication 550 has details, but investors may need to consult a tax pro.

The holding-period rules can be important for philanthropists who itemize their deductions. Donating highly appreciated shares of stock and certain other investments held more than a year can be smart. Donors typically can deduct the market value and can avoid capital-gains taxes on the gain. But don’t donate stock that has declined in value since you purchased it. “Instead, sell it, create a capital loss you can use, and donate the proceeds” to charity, Mr. Gordon says. You can use capital losses to soak up capital gains. Investors whose losses exceed gains may deduct up to $3,000 of net losses ($1,500 for married taxpayers filing separately) from their wages and other ordinary income. Carry over additional losses into future years.

If you sell losers, pay attention to the “wash sale” rules, says Roger Young, senior financial planner at T. Rowe Price . A wash sale typically occurs when you sell stock or securities at a loss and buy the same investment, or something substantially identical, within 30 days before or after the sale. If so, you typically can’t deduct your loss for that year. (However, add the disallowed loss to the cost basis of the new stock.) Mr. Young also says some investors may benefit from “tax gain harvesting,” or selling securities for a long-term gain in a year when they don’t face capital-gains taxes.

While taxes are important, make sure investment decisions are based on solid investment factors, not just on taxes, says Yolanda Plaza-Charres, investment-solutions director at SEI Private Wealth Management. And don’t wait until December to start focusing on taxes.

“We believe in year-round tax management,” she says.

What if I sell my home for more than I paid for it?

Typically, joint filers can exclude from taxation as much as $500,000 of the gain ($250,000 for most singles). To qualify for the full exclusion, you typically must have owned your home—and lived in it as your primary residence—for at least two of the five years before the sale. But if you don’t pass those tests, you may qualify for a partial exclusion under certain circumstances, such as if you sold for health reasons, a job change or certain “unforeseen circumstances,” such as the death of your spouse. See IRS Publication 523 for details. When calculating your cost, don’t forget to include improvements, such as a new room or kitchen modernization.

Credit given to Tom Herman. This article appeared in the June 17, 2019, print edition as ‘A Need to Know on Capital-Gains Taxes.’ 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 & Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Ohio Small Business Deduction – TAKE IT! August 28, 2019

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

We work with many attorneys for a myriad of reasons. Some specialize in business dealings such as mergers, acquisitions, etc. Mr. Jeff Senney, a prominent business attorney with Pickrel, Schaeffer and Ebeling, wrote the following article which discusses a deduction that owners, or equity investors, of an Ohio business who file an Ohio individual income tax return may be eligible to take each year. The deduction is commonly known as the Ohio Small Business Deduction (SBD) and began in its earliest form in 2013. The SBD allowed the taxpayer to deduct 50% of up to $250,000 of Ohio business income, for a maximum deduction of $125,000. In 2014, the deduction increased to 75% of $250,000 for a maximum deduction of $187,500. Adjustments were required also, such as add-backs for retirement contributions, the self-employment tax deduction, and the self-employed health insurance deduction that were reported on the taxpayer’s federal return for both 2013 and 2014. The deduction remained at 75% for 2015 and the requirement to add back the above-mentioned adjustments was eliminated. In its current form, the deduction is for 100% of $250,000. We hope you enjoy Jeff’s article as reproduced below.

      – Norman S. Hicks, CPA

For 2016 (and subsequent years), each individual small business owner filing single or married filing jointly is eligible for a “small business” income tax deduction (SBD) against their state income tax liability equal to 100% of the first $250,000 of business income the owner receives or is allocated from a sole proprietorship or pass-through entity (“PTE”). Married filing separate taxpayers will be able to deduct 100% of business income in 2016 but only up to $125,000. Any remaining business income above these threshold amounts is taxed at a flat 3% rate.

For tax years 2014 and 2015, the SBD percentage for all taxpayers was only 75%.

PTEs include partnerships, “S” corporations and limited liability companies (“LLCs”). Income generated by the business and passed through to the owners/investors is subject to personal income tax. The deduction was originally applicable only for Ohio-sourced business income. But beginning in tax year 2015, the deduction was expanded to include eligible business income from all sources.

Individuals who directly or indirectly through a tiered structure own at least a 20% interest in profits or capital of a PTE may also include their wages and guaranteed payments from that PTE in the calculation of the SBD. It was not originally clear whether the direct or indirect ownership included constructive ownership from family members. But the Ohio Department of Taxation has recently made clear that stock attribution among family members (such as husband to wife) does not count in determining whether the individual owns the requisite 20% interest.

Taxpayers who failed to claim the SBD on their originally income tax returns should give serious thought to filing amended returns to claim the SBD for all open years. While the SBD is referred to as the “small business deduction,” there is no limit on gross receipts or assets that the PTE can have.

The SBD can be taken not only by Ohio residents on all their business income received, but also by Ohio nonresidents and part-year residents.

While electing to be included in a composite tax return makes financial sense in most states, taxpayers could be missing out on the SBD tax savings available in Ohio. A PTE cannot deduct the SBD on a composite tax return filed on a taxpayer’s behalf, and the SBD cannot be claimed on any other non-individual tax return, such as a trust return and even a nonresident withholding return. Accordingly, if an individual taxpayer has been included in a composite return or has had withholding performed by a PTE, the taxpayer may be paying more Ohio tax than necessary.

Many taxpayers may not have taken the SBD because they mistakenly thought they were required to own 20% or more of a PTE in order to qualify for the SBD. But that is not the case. The 20% ownership requirement only applies to deduction of compensation and guaranteed payments. Taxpayers owning less than 20% are still eligible to claim the SBD on their share of other qualifying business income.

Many taxpayers also do not realize that the 20%-or-more requirement only needs to be met once during a tax year. If an individual owner meets the 20% ownership test at any point during the calendar year, the individual’s entire year of compensation or guaranteed payments may qualify as business income. While not entirely clear, it is likely the Ohio Department of Taxation would try to deny the SBD where a husband and wife transferred ownership back and forth during a year in order to make them both 20% owners on at least one day during the year.

Credit given to Jeff Senney. He can be reached at 937-223-1130 or Jsenney@pselaw.com or https://www.pselaw.com/attorneys/jeffrey-senney. Jeff’s article can be found at: https://www.pselaw.com/ohio-small-business-deduction-take-it/ 

Thank you for all of your questions, comments and suggestions for future topics. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.  

This Week’s Author – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | How to Avoid being Overwhelmed in Times of Death and Illness? August 7, 2019

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

What do you do when one spouse refuses to be or has not been invited to be involved with finances but then an unexpected death or illness occurs?

Dealing with death and illness is a difficult time for a spouse and the family, no matter the circumstances. When the spouse is unaware of how the finances have been handled, it may lead to frozen accounts and assets. Gary Altman, an estate planning attorney in Rockville, MD., explained that it is common to find families in this situation. He recently had a client who had to ask her brother-in-law for financial assistance. Altman stated that his client did not have enough money in their joint accounts. She was unable to make ends meet because the accounts were in her husband’s name alone and the financial institutions will freeze the single-owner accounts when a person dies. 

Financial professionals and attorneys know that these times are sensitive, delicate and trying. They also have encountered many times that the surviving spouse who was hands-off has to deal with missing information and does not have complete knowledge of their net worth or where accounts are held. The surviving spouse will most likely be overwhelmed with the financial decisions while trying to cope with the day to day emotions of grief and loss. Grieving can cause a person to have high emotions, which may lead to unclear decisions. According to Susan Bradley, founder of Sudden Money Institute, grief can reduce cognitive capacity. She recommends that the surviving spouse focus on what is important or pressing during this time. For example, the survivor should pay the bills that are essential to live each day. Slowing down and realizing what is truly important throughout this time will allow prioritizing urgent matters, most importantly, dealing with emotions and getting through the day one step at a time. The surviving spouse should wait until he or she is no longer in shock to make financial decisions and understand their financial needs. 

Here are steps couples should take to prevent frozen accounts when faced with death or illness:

1.    Hire a financial planner who specializes in estate settlement and an accountant to file tax returns for state and/or federal estate tax returns. Establishing a financial advisor, that both spouses like and trust, can reduce these overwhelming decisions that one might need to make without an advisor. Each spouse should be confident and comfortable with this person.

2.    Make sure both spouses give the executor permission to manage digital assets. Enabling both spouses to have access to and control over assets will reduce potential problems in the situation of death or illness. Another way to ensure immediate access is by stating “transferable on death.” This may be done when the couple sets up the account. 

3.    Stay up to date with your online service software to track every account and asset. This will ensure secure accounts and assets. Assets that are jointly held or are held in the survivor’s name alone are protected, unless the survivor co-signed or guaranteed the debts.

Here are steps a surviving spouse should take when dealing with death or illness:

1.    Order multiple copies of the death certificate to use to reassign financial accounts and settle the estate. The death certificate will allow you to contact the spouse’s employer to ask about a 401(k), pension, stock options and life insurance, etc.  

2.    Contact the estate attorney, accountant and financial adviser. Update your will after shock has worn off. 

3.    Gather and rename household bills, bank, brokerage, insurance, and credit-card statements in your name alone. 

4.    Create a new financial plan after you have understood immediate expenses and are able to make long-term decisions. 

Credit given to:  Tergesen, A. (2019, March 29). Estate Planning for the Uninitiated. 

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 | Growing up to be Entrepreneurs July 31, 2019

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

While the majority of us will spend most of our careers working for someone else, having an entrepreneurial spirit or background can open up new possibilities and ways to approach everyday life. The following article was published in the Wall Street Journal on April 28, 2019 by Molly Baker.

                              -Brianna Anello

From the very beginning, Bob Burch has exposed his children to entrepreneurship. When his first daughter, Neely, was born, Bob Burch’s first instinct was to introduce Neely to the office. So, he brought her by to show her off on their way back from the hospital. This poses the famous question on whether entrepreneurs are born or made? Throughout the Burch family this can be seen in both aspects. Entrepreneurships started with Mr. Burch and his brother Chris. They are the founders of a successful retail clothing line, Tony Burch. 

Mr. Burch believes a crucial part of becoming an entrepreneur is nurturing a sense of entrepreneurship. Immersion started at an early age for the Burch children, from encouraging local lemonade sales to teaching them what you need to start a business, to going across the country to show his family potential business ventures. They believe that entrepreneurs should be independent, creative and persistent when wanting to start their own business. These experiences have taught the Burch family lessons that they will hold close to their heart for the rest of their lives. 

Today the three oldest children are travelling the same path as their father, in becoming successful entrepreneurs. Roby, Bob’s son, will never forget his dad’s words of wisdom, “I can’t teach you how to be a lawyer, and I can’t teach you how to be a doctor. I can teach you how to be in business for yourself and how to be good at it.” The Burch children believe their parents, Bob and Susan, never really had certain hopes and dreams for their careers. Bob and Susan wanted their children to think beyond what college they wanted to attend or what they wanted to be when they grew up. They encouraged their children to think big. The process to thinking big included engaging and debating at the dinner table over work ideas. Bob explains that there is no such thing as solo effort. This process is a team effort and will enable the children to release their creativity. At the table, the children also absorbed business lingo and the strategies that they may use one day.

Entrepreneurship is about having the “ready for anything” mindset. One example Bob recalls is the most memorable turnaround story. When he was launching his first fashion show, the first truckload of products arrived and the sweaters had sleeves three inches too short. At this time, he didn’t have the time or money to replace them. Bob and his brother were on their toes. They created a design where Oxford shirt sleeves were rolled over the misfit sweater. It allowed them to showcase their go-to fashion and created opportunity to be successful and avoid potential failure. Because of this fashion show the business earned $100 million in annual sales. 

All of these lessons have influenced the Burch children’s careers. In college, Chloe and Neely pursued online ventures separately. Since they have joined forces, their handbags line is in more than 140 retailers nationwide. Their experiences have even helped their younger brother Roby. Roby is currently trying to launch a premium outdoor lifestyle brand. Bob believes that working as a team has not only created a bond between them, but will lead them to a more fulfilling life.

Credit given to:  Baker, M. (2019, April 29). A Generation of Siblings, Raised to Be Entrepreneurs. 

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 | IRS Audit Rate Falls – Should You Relax? July 24, 2019

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

I cringe every time the newspaper headlines read that the IRS audit rate is falling. My worries are that our clients may become lazy on their record keeping along with the retention of appropriate supporting business documentation (e.g. receipts, cancelled checks, deposits slips, paid bills, invoices, etc.). Thankfully, my fears have remained unfounded as the stakes are too high with the IRS to become complacent.

As a side note, many taxpayers fail to realize that if your record keeping is poor – the IRS simply won’t use your records. Instead, the IRS may consider all of your deposits as taxable income whether they were otherwise taxable or not. And, if no supporting documentation was retained then all of your expenses may be disallowed. Ouch!

On May 21, 2019, the WSJ ran an article authored by Richard Rubin, IRS’s Audit Rate Continues to Fall. This article below shares further insights on who is being audited and to what extent the IRS budget is being increased.  

                                                                    -Mark Bradstreet

WASHINGTON—The Internal Revenue Service audited just 0.59% of individual tax returns last year, marking the seventh consecutive annual decline as the tax agency copes with smaller budgets and fewer workers.

That total was down from 0.62% the year before and hit the lowest mark since 2002, according to data released Monday.

Audits of the highest-income households dropped sharply, to their lowest levels since the IRS began reporting that data in 2008. In fiscal 2018, the IRS audited 6.66% of returns of filers with more than $10 million in adjusted gross income, down from 14.52% in 2017. Among households with income between $1 million and $5 million, the audit rate dropped from 3.52% to 2.21%.

The IRS released the data as it is trying to persuade Congress to make long-run investments in the agency’s technology and enforcement staff. So far, however, key Republicans in Congress remain skeptical, and there are mixed signals about whether the government will reverse the steady decline in tax enforcement.

“I’m not averse to beefing up their budget a little bit but I want to see results,” said Sen. John Kennedy (R., La.), who heads the subcommittee that oversees the IRS budget. “I’ve got a lot of confidence in the new commissioner and in the new secretary, but I’m not into just throwing money at the wall because the bureaucracy says we need more.”

President Trump has proposed boosting the IRS’s budget by 1.5% for the fiscal year that starts Oct. 1, to $11.5 billion from $11.3 billion, including a down payment on improving the agency’s technology.

The administration also is proposing a $15 billion, decadelong increase in IRS enforcement funding, which the agency says would generate $47 billion in additional federal revenue. That net gain of more than $30 billion would come from enforcing existing laws.

The IRS has been shrinking steadily, partly because electronic filing has increased its efficiency. But many of the recent changes have stemmed from Republican spending cuts after they took control of the House in 2011 and after the IRS said in 2013 that it had improperly scrutinized some conservative nonprofit groups.

Adjusted for inflation, the 2019 IRS budget is smaller than in 2000 and is 19% below peak funding in 2010, according to the Government Accountability Office. The agency’s workforce declined 4% in 2018 and is now 21% below where it was eight years ago, and the number of examiners that performs audits shrunk 38% from 2010 to 2017, according to the agency’s inspector general. Those cuts came as Congress handed the IRS more responsibility to administer the Affordable Care Act and police offshore bank accounts.

Declining IRS resources contributed to the decline in audits but weren’t the only cause, said David Kautter, assistant Treasury secretary for tax policy, who was acting IRS commissioner for much of fiscal 2018.

“In this age of technology, it’s easier to identify areas of noncompliance,” he said Monday.

Democrats say the IRS budget cuts are disproportionately benefiting high-income households.

“Republicans in the Senate and the House have been very much geared towards a policy that has produced lots of poor people being audited and lots of well-off people basically getting off the hook,” said Sen. Ron Wyden (D., Ore.), the top Democrat on the Senate Finance Committee. “It takes more resources. There’s no way around it.”

Mr. Kennedy said he wants more details on the IRS modernization plans, pointing to the agency’s difficulties overhauling its technology.

Sen. James Lankford (R., Okla.) said he wants more updated information on the tax gap—the difference between taxes owed and taxes paid—which should be released in the coming months.

“We need to be able to see it and know what we actually could get a return on, from enforcement,” he said.

The Congressional Budget Office estimates that an extra $20 billion spent on IRS enforcement could yield $55 billion over the next decade and more beyond that as audits generate revenue. Once the IRS completed staff training and computer upgrades, the government could get as much as $5.20 in additional revenue for every $1 spent, according to CBO.

The agency started 2,886 criminal investigations in 2018, down from 5,234 just five years earlier, according to the agency’s inspector general. The IRS criminal investigations unit had 26% fewer special agents than it did in 2012.

The IRS also has fewer employees working to collect taxes from people who already owe. Each collections officer generates about $2 million a year, which means the smaller IRS is leaving $3.3 billion a year on the table, just from collections, according to the agency’s inspector general.

Tax experts say the agency’s performance could be improved through better taxpayer service and a simpler tax system. So would rules that gave the IRS more information about sources of income—such as profits from cash businesses—that they lack now.

Taxpayers are extremely likely to comply with tax rules when the IRS independently has access to information about their finances. Wages reported on Form W-2 almost always show up on tax returns. When the IRS doesn’t have withholding payments or information, people are more likely to underreport their income.

“I don’t believe the solution is more agents, more audits and more intrusive government into taxpayers,” said Rep. Kevin Brady (R., Texas), the top Republican on the House Ways and Means Committee. “I think it’s smarter audits.”

But the drops in enforcement and the IRS budget have run in tandem, and the nonpartisan estimates from CBO, GAO and the IRS inspector general say reversing the spending cuts would generate money.

“We’re just in never-never land here. The IRS has had its capacity to do its job attacked. There’s no other way to say it,” Rep. Earl Blumenauer (D., Ore.) said at a recent hearing. “They can’t keep pace with what they’re up against.”

Credit given to:  Richard Rubin. This article was written May 20, 2019. You can write to Richard Rubin at richard.rubin@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 | What May Be The Best Investment Ever? July 17, 2019

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

Longer ago than I care to admit, a client gave me some sage advice that I have never been able to improve upon. His father had told him that the best investment you can ever make is in yourself. One reason being is that there is no other investment that you will have ever more control over. I have found this advice to be very profound and useful.

Ted Jenkin, co-CEO and founder of oXYGen Financial offers further thoughts on this topic as published in the WSJ on June 17, 2019.  

                                -Mark Bradstreet

Invest 2% of your income in you

When we think about investments, we often direct our attention to categories such as stocks, bonds and real estate. What we often don’t think about is our most valuable asset: our ability to earn an income and to make that income grow faster.

Almost 20 years ago, I met a successful business owner who gave me a simple lesson: Invest 2% of everything you earn annually back into your ability to grow your income.

What does this mean exactly? Investing in you is like diversifying your portfolio of investments. You might take a chance and invest in that side hustle you think could be a business. Take a training course or advanced education that could further your current career. Invest in a personal coach who could improve your business performance. It could mean investing in an exercise or nutrition program that could give you more stamina every day to accomplish more.

It’s the best advice I’ve ever received—and I do it every single year.

Credit given to:  Ted Jenkin, co-CEO and founder of oXYGen Financial

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 | 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 Tip of the Week | When The Questions Are The Answers June 26, 2019

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

Let’s take a break from tax topics this week. Yes, even I sometimes get tired of talking about income taxes. So, the topic this week is about leadership. All of us lead someone. Of course, the most important person to lead is yourself. And, as the old saying goes, if you can’t lead yourself then how can you lead someone else?

True leaders don’t give out answers. Often, they don’t know the answers. But the good leader knows their staff has inside them the answers that they seek. Good questions from a good leader help reveal these answers.  

This is further explained along with some examples in the following WSJ article, To Be a Better Leader, Ask Better Questions written by Hal Gregersen. It was published on Tuesday, May 14, 2019.  

                               -Mark Bradstreet

It is often said that the definition of insanity is doing the same thing over and over, and expecting a different outcome.

Well, the same can be said of questions: Keep asking the same kind of question, and it is insane to think you are going to get a different kind of answer.

If you want a dramatically better answer, the key is to ask a better question.

In that one simple statement I have found a career’s worth of research, teaching and advisory work. No one raises an objection when they hear it—who could argue with the value of brilliant reframing? But at the same time, that statement alone is rarely enough. Most people want to be handed the five paradigm-smashing questions to ask.

Unfortunately, that isn’t possible. But what is possible is creating the conditions where the right questions are more likely to bubble up. To that end, here are some clear, concrete, measurable steps that any boss—or anyone, for that matter—can take to come up with those paradigm-smashing questions we all seek.

1. Understand what kinds of questions spark creative thinking.

There are lots of questions you can ask. But only the best really knocks down barriers to creative thinking and channel energy down new, more productive pathways. A question that does has five traits. It reframes the problem. It intrigues the imagination. It invites others’ thinking. It opens up space for different answers. And it’s nonaggressive—not posed to embarrass, humiliate or assert power over the other party.

One CEO I know is aware that his position can get in the way of getting honest information that will challenge his view of things. Instead of coming at his managers with something like, “Competitor X beat us to the punch with that move—how did we let that happen?” he gets more useful input with questions like, “What are you wrestling with and how can I help?” He asks customers and supply-chain partners: “If you were in my shoes, what would you be doing differently than what you see us doing today?”

Think about how these questions change the whole equation. People don’t start off defensive. The problem isn’t already tightly framed. The questions are open-ended, and the answers can be imaginative—rather than telling the boss what he wants to hear.

If you want to turn this first point into a trackable activity, how about this: Start noting in a daily diary how many questions you’ve asked that meet the five criteria.

2. Create the habit of asking questions.

Many bosses simply aren’t used to asking questions; they’re used to giving answers. So, in the early stages of building your questioning capacity, it’s helpful to start by copying other people’s questions. It’s the equivalent of practicing your scales. Once you’ve got the scales down, you can start to improvise.

You could do worse than to follow the questions asked by management thinker Peter Drucker, who liked to jump-start strategic thinking by asking: “What changes have recently happened that don’t fit ‘what everyone knows’”?

Another example: A leader in a consumer packaged-goods company constantly asks: “What more can we do to delight the customer at the point of purchase? And what more to delight them at the point of consumption?”

Again, think about what that does. Sure, the CEO could constantly repeat that the company wants to satisfy consumers. But by asking this question, it builds the habit of thinking in questions. And that, in turn, leads to daily inquiry about matters large and small, and an organization that keeps pushing its competitive advantages forward.

3. Fuel that habit by making yourself generate new questions.

Don’t stop with that generic question set, no matter how well you think it covers the bases. It will become just another activity rut reinforcing today’s assumptions if you and others become too familiar with it. Your goal is to generate new and better questions, not to cap your questioning career at the level of playing flawless scales.

New Perspectives, New Solutions

If you or your team are stuck on a problem, stop and spend four minutes generating nothing but questions about it. As in brainstorming, go for high volume and do no editing in progress. This will often yield a new way to look at the challenge and at least one new idea to solve it. Here’s an example of a question burst:

Instead, every day, note something in your environment that is intriguing and possibly a signal of change in the air. Then, restrain yourself from issuing a comment on it—or if it’s your habit, a tweet—and instead take a moment to articulate the questions it raises.

Then share the most compelling of those questions with someone else. Engage with it for a minute. To some extent, this is doing “reps,” exercising your questioning muscles so they’ll be strong enough when the occasion demands. But it’s also more than that, because chances are it will actually be one of these many, seemingly small, questions that yields your next big breakthrough.

Let me offer a well-known example. Blake Mycoskie was in Argentina when by his account he noticed a lot of children running around barefoot. He didn’t need to ask why they didn’t have shoes—obviously they were poor—but here’s the question it brought him to: Is there a sustainable way to provide children with shoes without having to rely on donations? And thus, he launched the social enterprise Toms, with its famous “one-for-one” business model.

4. Respond with the power of the pause.

When someone comes to you with a problem, don’t immediately respond with an answer. This is harder than it sounds, because you have probably internalized a sense long ago that you’re the boss because you’re decisive and have good judgment—in other words, you have the best answers.

Instead, make it your habit to respond with a question—ideally one that reframes the problem, but at least one that draws out more of your colleague’s thoughts on the matter. I’m not talking about the cop-out rejoinder of, “Well, what do YOU think we should do?” Help the person think through how the decision should be made, with questions like: “What are we optimizing for?” “What’s the most important thing we have to achieve with whatever direction we take?” Or: “What makes this decision so hard? What problem felt like this in the past?”

The payoff here comes in two forms. You’re teaching the colleague the value of pausing to get the question right before rushing to the answer. And nine times out of 10, you’re going to wind up with a better answer than the one you would have blurted out with less deliberation.

5. Brainstorm for questions.

This is an idea that is so simple, and involves an exercise so fast, that it constantly surprises me how effective it is. Whenever you or your team is at an impasse, or there is a sense that some insight is eluding you regarding a problem or opportunity, just stop and spend four minutes generating nothing but questions about it. Don’t spend a second answering the questions, or explaining why you posed a certain one. As in brainstorming, go for high volume and do no editing in progress. See if you can generate at least 15-20.

Eighty percent of the time, I find, the exercise yields some new angle of attack on the problem, and it virtually always re-energizes people to go at it with renewed gusto.

Here’s an example from an innovation team in a consumer-goods company. Struggling to come up with a new concept to test, we tried one of those question bursts. It started with, “What if we launched a response to [a competitor’s product] and did it better?” But soon enough it arrived at, “Are we stuck on assuming a certain price range? What if a customer was willing to give us 10 times that—what could we deliver that would be that valuable to them?” Bingo—the team zeroed in on that question as having real juice in it, and started generating more exciting ideas.

6. Reward your questioners.

Finally, keep track of how you respond when someone in the room asks a question that challenges how you’ve been approaching a problem or feels like it threatens to derail a solution train already leaving the station.

I remember hearing from executives at one company that the boss always surprised his top team by being willing to hear out even the craziest ideas. When others in the room were shaking their heads and hastening to move along, he would be the one to say, “Wait, say more…” to find the part of that flight of fantasy that could work.

If there’s one constant theme here, it’s the idea that bosses should reconceive what their primary job is. They aren’t there to come up with today’s best answers, or even just to get their teams to come up with them. Their job is to build their organization’s capacity for constant innovation.

Their enterprise’s future—and their own career trajectory—depends on their resolve to ask better questions.

Credit given to By Hal Gregersen. Dr. Gregersen is executive director of the MIT Leadership Center, a senior lecturer at the MIT Sloan School of Management and author of “Questions Are the Answer.” He 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 Tip of the Week | 529 Plans June 5, 2019

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

529 PLANS are confusing! And, that is an understatement…especially since on the surface they seem sooooooooo straightforward. But once you look behind the curtain one can start to see their turns and twists along the way with some far-reaching complications that are rarely considered. Personally, I think their tax savings feature is overrated in many cases…BUT having said that, I am not sure of many better ways to save for someone’s education including that of your grandchildren. American families currently have $329 billion in 529 Plans. Hopefully, these 529 Plans will reduce the need for students’ loans. That would be a blessing!  

Chana R. Schoenberger wrote the following article (The 6 Biggest Questions about ‘529’ Plans) for the WSJ as published on Monday, March 4, 2019.  

                                      –    Mark Bradstreet

Four years ago, we started answering readers’ questions on saving and paying for higher education, especially about how best to use tax-advantaged “529” accounts.

In all, we have answered more than 200 questions, with the help of experts. But readers’ questions continue to pour in, in part because the rules about 529s are so confusing—and keep changing. For instance, families are now allowed to use 529 money to pay for private K-12 schooling, not just college. And the Fafsa financial-aid process now looks back two years, not one, at student income when determining aid.

To mark this column’s fourth anniversary, we revisited six recurring 529 questions that we receive in readers’ emails. We asked two experts to help answer these greatest-hits questions: Michael Frerichs, the state treasurer of Illinois and vice chairman of the College Savings Plans Network, an association of state 529 plan administrators; and Mark Kantrowitz, the publisher and vice president of research at Miami-based Savingforcollege.com.

What is the advantage of 529s over other ways of saving for college?

Experts say that 529 accounts are still one of the best ways to save for college, mainly because of the tax benefits.

When you deposit money in a 529 account, it is considered a gift to the beneficiary. It grows tax-free in the account until you withdraw it for the beneficiary’s qualified educational expenses, which can include tuition, room and board, a computer and certain expenses. If you follow these rules, you don’t incur any tax, state or federal, on withdrawals. Some states also offer tax deductions or credits for investing money in a 529, Mr. Frerichs says. (In some cases, residents must invest in their own state’s plan; other states confer these benefits on any resident contributing to any plan.)

There are other benefits. Anyone can contribute, putting in up to $15,000 annually before paying taxes. You can also pre-fund an account, putting in up to $75,000 ($150,000 for married couples filing jointly) at one time and choosing to use up to five years’ worth of your annual pretax limit, Mr. Frerichs says.

What’s more, “most plans have very low minimum-contribution limits, and most accounts are protected from creditors’ claims in bankruptcy, making them attractive to families regardless of income level,” says Mr. Frerichs.

If my child ends up not using all the money in the 529 for educational purposes, how can we withdraw it or use it?

This is one of the most advantageous features of a 529 account: “There is no time limit on when the money in a 529 plan must be used, so you could just keep the money in the 529 plan account, earning tax-free returns,” Mr. Kantrowitz says.

Your child may wish to go to graduate school later on. You also have the option to switch the beneficiary of the account to any of the original beneficiary’s direct relatives, including siblings, cousins or even yourself.

“You don’t need to be pursuing a degree or certificate, so you can use 529 plan money to pay for continuing education,” Mr. Kantrowitz says.

If you leave the money in the account, your grandchildren could one day use it—even if they aren’t yet born today.

“A 529 plan is a great way of leaving a legacy for future generations,” he says.

If you choose to take the money out of the account without using it for qualified educational purposes, you will incur a 10% federal penalty on the gains portion of any withdrawals, plus federal and state income tax on gains, says Mr. Frerichs. Some plans may also charge extra fees or penalties if you withdraw money in this manner, he says.

You won’t have to pay the penalties if you withdraw the money because your child has received a scholarship or because you’re using the American Opportunity Tax Credit for higher education, Mr. Kantrowitz says. But you may have to repay any state-tax benefits you’ve received if you make a nonqualified withdrawal.

What is the best way to have a 529 account for financial-aid purposes: owned by the grandparents or owned by the parents?

“From a financial-aid perspective, it is generally better to have a 529 plan be owned by the student’s parents than the grandparents,” Mr. Kantrowitz says. You can work around this, but it is complex.

The key here is understanding the way that financial aid is computed. Most colleges use the federal government’s standardized Fafsa (Free Application for Federal Student Aid) online application to decide how much money a family can afford to pay for college—the Expected Family Contribution, or EFC—and how much they will need in scholarships or loans. (Some colleges use a different form, the CSS Profile.)

$329 billion?

The amount that American families have in ‘529’ plans, or an average $24,153 an account.

—College Savings Plans Network

“The smaller the percent value included in the EFC, the greater the potential financial aid,” Mr. Frerichs says.

Colleges make this decision by scrutinizing a family’s income and assets as well as their obligations, such as the number of other children they have in college. When they look at 529s, they note the ownership of the account. If a parent owns the account, or if it is a custodial 529 with the parent as custodian, the account is considered at 5.64% of its value. That is much lower than an account the student owns outright, such as an UGMA or UTMA savings or brokerage account, which would be considered at 20%, Mr. Frerichs says.

If anyone else owns the 529 account, whether it is a grandparent or any other person, that account doesn’t show up on the FAFSA as an asset at all. But when the student begins withdrawing money from the account to pay for school, the money is considered untaxed income on the following year’s FAFSA. That will cut financial-aid eligibility by as much as half of the withdrawal, Mr. Kantrowitz says.

For instance, he says, $10,000 in a parent-owned 529 plan might reduce aid eligibility by as much as $564, which is a lot less than the $5,000 reduction in financial aid for $10,000 in a grandparent-owned 529 plan when the student begins making withdrawals.

If you have a grandparent-owned account and want to get around this problem, there are some fixes. You can switch the account owner to the parent, although some plans don’t allow this unless the original owner has died.

You can wait until you’ve filed the FAFSA, then roll over a year’s worth of distributions from your grandparent-owned 529 into a parent-owned one in the same state’s plan (otherwise, you risk sparking state-tax consequences).

“If you wait until after the FAFSA is filed and use the money before the next FAFSA, it will have no impact on aid eligibility,” Mr. Kantrowitz says.

You can also withdraw money for a qualified expense after Jan. 1 of the student’s sophomore year (if the student plans to finish in four years; otherwise, do this two years before the student intends to graduate). The FAFSA looks back two years, so this will mean that the grandparent-owned plan won’t affect financial aid for college at all. However, this strategy won’t work if the student plans to apply for financial aid for graduate school right after finishing college, he warns.

You always have the option to take the money out of a grandparent’s 529 after college is finished and use it to pay off student loans, but that is an unqualified expense, so expect to pay the penalties and taxes on the earnings portion, he says.

How can we maximize our child’s eligibility for financial aid while still saving as much as we are able to pay for college?

Your best bet here is to use a 529 with the parent as the owner and the student as the beneficiary. “In particular, the money is reported as a parent asset on the FAFSA, so you’re no worse off from a financial-aid perspective than if you had saved in a taxable account in the parent’s name, though you do have significant tax savings,” Mr. Kantrowitz says.

One way to save for college without any impact on financial aid is to open a Roth IRA or qualified annuity in the student’s name. These are treated like grandparent-owned 529s: They’re not counted as assets on the FAFSA, but once you withdraw money to pay for college, it is considered untaxed income to the student, and counted at up to 50%, even if your withdrawal is a tax-free return of Roth IRA contributions, Mr. Kantrowitz says.

The benefit of a Roth IRA for this purpose is it hedges against the possibility that your student won’t go to college; this way, at least you’ll have started saving for the student’s eventual retirement in a tax-advantaged manner.

If your student comes into a large amount of money suddenly, and you’d like to get it out of the FAFSA’s view, annuities are the easiest way. Qualified annuities are ignored as assets on the Fafsa.

“Or invest the money in a small business that is owned and controlled by the family, taking advantage of the small-business exclusion on the Fafsa,” Mr. Kantrowitz says.

Note that these considerations don’t mean that you are better off not saving for college, on the hope that the college will give your student a scholarship. Scholarships are unusual, and full scholarships extremely rare. If you want to avoid student loans, to the extent possible, you should save as much as you can, even if it means your EFC is a bit higher than it would otherwise be.

“It is important to note that saving for college is highly beneficial and will have very limited impact on any potential financial aid,” Mr. Frerichs says.

Is it advisable to use 529 money for K-12 schooling, or should we save it for college?

It is certainly your option, under the new tax law, to use the money for private kindergarten-to-12 tuition and some expenses (though some states aren’t yet conforming to that federal change, as far as state taxes). But this negates the main benefit of 529s.

“529 plans are most attractive to parents because they can save for a longer period of time and prepare for the rising costs of higher-education expenses,” Mr. Frerichs says.

Some people think that sending their children to private school will help their chances of winning a college scholarship. But that is only partially true, Mr. Kantrowitz says. Private-high-school graduates win on average about $1,000 more in scholarships to college, but they’re also more likely to enroll at private colleges, which are more expensive than public colleges. This means that spending family 529 money to pay for private school won’t necessarily mean that the student will face smaller tuition bills for college.

Because your earnings will compound over time, you should start by saving for college first so your money will have time to grow, he says. You would also want a different mix of investments for K-12 school and for college, since you might wish to downshift the riskiness of your investments as tuition bills get closer. If you choose to use 529 money for a K-12 school, you might consider opening two separate 529 accounts for your student, so you can change the investment mix, Mr. Kantrowitz says.

The Savingforcollege.com site has a calculator you can use to explore the trade-offs.

What are the consequences if I change the owner of a 529 account?

Most plans permit the owner to name a successor in case of death, and some also allow a joint account owner.

If your plan permits you to change ownership, note that such a change might affect your student’s eligibility for financial aid (see question above). The owner is the person who holds full control over the beneficiary’s money in the account, so be careful to choose an owner you trust if it isn’t yourself, Mr. Kantrowitz says.

For plans that don’t allow ownership changes, you could roll over the balance of your 529 into a different 529 for the benefit of the same student or a member of the beneficiary’s family. It is also possible to do this manually, by taking a distribution from the original account and contributing it to another account within 60 days, Mr. Kantrowitz says. You may need to locate both accounts in the same state for tax purposes.

Be careful that the new account represents the rollover money correctly, with the new statement showing what money you contributed and what was gains, he says.

Credit Given to:  Chana R. Schoenberger. Ms. Schoenberger is a writer in New York. She can be reached at reports@wsj.com. This appeared in the March 4, 2019, print edition as ‘What You Need to Know About the New Tax Law and The 6 Biggest Questions About ‘529’ Plans.’

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.