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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.

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 | Real Estate – Tax Basis April 24, 2019

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

In an earlier Tax Tip, different tax categories of real estate were briefly discussed. This week we will discuss how a tax gain or loss is treated upon sale by the various classifications as listed below:

1.    Principal residence – Your gain (loss) is calculated by subtracting your tax basis from your sales price. Your tax basis starts with your original cost, adds in any qualifying improvements, and includes most of the selling expenses you incur when sold. Provided certain tests are met, gain is excludable up to $500,000 on a joint return, or $250,000 for a single filer. Exception: Any depreciation taken after May 6, 1997 is usually taxable. Depreciation may have been taken on an office in the home or any business usage. Any loss upon the sale of a personal residence in non-deductible.

2.    Second home – Your tax basis is calculated in the same manner as a personal residence. Any gain is taxed as capital gain. No exclusion is allowed as with a personal residence. No one may designate more than one property as a personal residence. Just as with a personal residence, any loss upon the sale of a second home is non-deductible.

3.    Rental property – The tax basis is calculated in the same manner as a personal residence with one major exception.   Because rental properties are depreciated over time, basis has to be reduced by the depreciation allowed or allowable. Any gain on the sale of a rental property is taxed as capital gain. However, the gain attributable to the depreciation taken could be taxed as high as 25%. This in known as Section 1250 recapture. Any excess gain is taxed as normal capital gain with a maximum rate of 20%. A loss on the sale of a rental property is normally deductible as an ordinary loss (not subject to the $3,000 per year net capital loss limitation).

4.    Investment property – Depreciation is not normally allowed on investment property. A loss is deductible to the extent of capital gains plus $3,000 per year for joint or single filers, and $1,500 per year for a married filing separate return.

5.    Business property – Same as rental property above if owned individually.

6.    Gifted property – Your tax basis in a property received as a gift is the same as the basis was in the hands of the giver.

7.    Inherited property – Your tax basis in an inherited property is generally the fair market value of the property as of the date of death of the decedent, commonly called a “stepped-up basis”.

As noted above, gains and losses are often treated very differently depending upon the type of property. Please understand what your type of property is and that its character may change for a variety of reasons including your intentions. Being able to substantiate all of this may be important.

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 – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Mortgage and Real Estate Scams April 10, 2019

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

Computer hackers/cyber-terrorists are drawn to money like moths to a flame. And, significant monies exist in the mortgage and real estate industries. These types of transactions often involve very large sums of money. Since most people purchase and finance real estate transactions only on a sporadic basis they tend to be very trusting not knowing anything differently. Also, many of these financial institutions have streamlined their process via the internet in an effort to reduce their own expenses. This streamlining opens the doors to the criminals who may even be working for another country. Clicking on this link and that link and not knowing what is really behind the curtain is dangerous. Don’t just assume the email addresses, accounts numbers, and phone numbers that were emailed or called to you are correct. This is true not only for those individuals that are not computer and internet savvy but for the general public as a whole. There is nothing ever wrong with sitting down across the table with your representatives from your financial institution and getting their assistance. Monies that have been incorrectly wired to another country are typically irretrievable. You cannot be too careful!

The accompanying article offers further valuable information. 

                                By Mark Bradstreet

The last thing consumers should have to worry about is being scammed when they buy or rent a home, or consider refinancing options. Unfortunately, criminals are getting more creative in how they target their victims, leading to major financial headaches for their unsuspecting victims.

In 2017 alone, 9,645 victims reported real estate fraud, resulting in losses of more than $56.2 million, according to data from the Federal Bureau of Investigation’s Internet Crime Complaint Center.

Many people are too embarrassed to file complaints, making it harder to catch the scammers who repeatedly victimize unwitting homeowners and homebuyers, says Melinda Opperman, executive vice president of community outreach and industry relations with Credit.org — a nonprofit credit counseling agency and member of the National Foundation for Credit Counseling, or NFCC.

“It’s a huge problem,” Opperman says. “A lot of the time, people don’t realize that using public Wi-Fi connections where they conduct personal business through email or websites opens them up to [these scams] because the communications are not secure.”

Here are four common real estate and mortgage scams to keep on your radar — and tips to avoid becoming a scammer’s next victim.

1. Escrow wire fraud

What it looks like: You get an email, phone call or text from someone purporting to be from the title or escrow company with instructions on where to wire your escrow funds. Fraudsters set up fake websites that appear similar to the title or lending company you’re working with, making it seem like the real deal. Scammers use spoofing tactics to make phone numbers, websites and email addresses appear familiar, but one number or letter is off — an easy thing to miss at first glance, Opperman says.

So you follow the wire instructions and assume all is well when, in fact, you’ve just become the latest victim of escrow fraud. The scammers? They’ve withdrawn the funds from an offshore account somewhere and are sailing into the sunset with your hard-earned money. Meanwhile, you have few options for retrieving it.

How to protect yourself: Before you send money to a third party, go back to the original documents you received from your lender and call the phone numbers listed there to verify the wiring instructions you received. Never click on email or text links, or send money online, without verifying wire instructions with a live person on the phone from a number that you’ve called and verified, Opperman says.

Be wary of any email or text requesting a change to wiring instructions you already have, says Odeta Kushi, senior economist with First American Financial Corporation. Always confirm the escrow account number before wiring money, and call your settlement agent to verify the transfer of the funds immediately after you’re done, she advises.

2. Loan flipping

What it looks like: Loan flipping is when a predatory lender persuades a homeowner to refinance their mortgage repeatedly, often borrowing more money each time. The scammer charges high fees and points with each transaction, and homeowners get stuck with higher loan payments they can’t afford after being duped into borrowing most of their home’s equity, Opperman says.

Seniors with memory impairment are especially vulnerable to these scams because they have significant home equity and may not realize they’re being taken advantage of, Opperman says. Predatory lenders convince homeowners they can help them find a better loan product or use a cash-out refinance to pay for home renovations to make their homes more accessible as they age in place, Opperman says.

How to protect yourself: Elderly homeowners who have cognitive issues should involve a trusted relative or friend in any key financial discussion, especially about tapping home equity. If you’ve recently completed mortgage refinance, it’s usually not in your best interest to do another transaction right away, Opperman says.

If predatory lenders are actively seeking you out and you haven’t requested their help, that’s another warning sign that something is off. Work only with known banks or lenders, and question all fees and penalties presented to you, Opperman says. Lenders are required to provide loan estimates and closing disclosures that list all fees and third-party costs; review these documents carefully, or have a trusted advisor do this, if you are refinancing your mortgage.

3. Foreclosure relief

What it looks like: People who fall on hard times and get behind on their mortgage payments can become desperate to save their homes. That’s when scammers, who have access to public records of homes in pre-foreclosure, swoop in with offers of foreclosure relief to capitalize on homeowners’ vulnerability, Opperman says.

“Scammers will claim that they can help homeowners save their homes and reduce their mortgage payments for a large, up-front fee,” Opperman says, “but they often leave our clients in worse financial shape.”

Some fraudsters claim they’re affiliated with the government or government housing assistance programs, and can swindle homeowners out of hundreds or even thousands of dollars in fees, according to the Federal Trade Commission, or FTC.

How to protect yourself: The best way to avoid foreclosure is to work directly with your loan servicer to modify your existing loan, request forbearance, or make some other arrangement. Homeowners can first enlist the help of a HUD-accredited housing counselor to see what options they have, then include their counselor on a three-way call to their lender to find solutions, Opperman says.

“A scammer will tell you not to talk to your lender, and that’s a huge red flag,” Opperman says. “It’s hard to speak to your lender when you’re in imminent default or become delinquent because you’re afraid it might speed up [losing your home]. But you have to open the lines of communication with your lender.”

4. Rental scams

What it looks like: Scammers post property rental ads on Craigslist or social media pages to lure in unsuspecting renters, sometimes using photos from other listings. The scammers, who have no connection to the property or its owner, will ask for an upfront payment to let you see the property or hold it as a deposit. In reality, they’re just looking to get quick cash through nefarious means.

Rental scams are alarmingly common. An estimated 5.2 million U.S. renters say they have lost money from rental fraud, according to a recent survey from ApartmentList. Younger renters are the likeliest victims, with 9.1 percent of 18- to 29-year-old renters having lost money on such a scam, compared with 6.4 percent of all renters, the survey revealed. And of those who did lose money to scammers, one in three lost more than $1,000, likely after paying a security deposit or rent on a fake rental property, ApartmentList found.

How to protect yourself: Be suspicious of anyone who asks for a cash deposit upfront to see a property, says Nicole Durosko of Warburg Realty in New York City. Ensure you’re dealing with the real property owner before negotiating rental terms or seeing a property in person. You can search the local property appraiser’s website to find out who the current property owner is and look for contact information online.

“Avoid doing transactions via email or on the phone,” Durosko says. “It’s best to be face-to-face to confirm the property ownership, sign any required documentation, and [make a] payment.”

Use a check (never cash) to make a payment so you have an automatic receipt of it, Durosko advises. Finally, always insist on speaking with the property owner before signing a contract or making a payment if someone says they’re representing the owner. If someone claims to be a real estate agent, ask to see their license and take a picture of it so you can confirm the information online through your state’s division of real estate licensing, Durosko says.

Next steps to take if you’re targeted

Trust your gut if something doesn’t feel right or seems too good to be true. Work with only professional lenders associated with local and/or national trade associations, and ask for referrals from family members and friends. If you’re an older homeowner (or a caregiver to someone who is), be on your guard when companies pressure you to tap your home equity.

If you suspect a scammer is trying to target you, don’t open any email links or respond to any messages. Instead, report the activity to your local police department. To report fraud, identity theft or financial scams, visit the FTC’s complaint website, click on the FTC Complaint Assistant icon, and answer the questions.

Credit given to:  DEBORAH KEARNS@DEBBIE_KEARNS JANUARY 16, 2019 in MORTGAGES (BankRate)

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