Author Archives: support33

Study the New Breaks for Student Loans

The tax law provides a limited deduction for interest paid on student loans. But some borrowers may get special treatment this year.

The Coronavirus Aid, Relief and Economic Security (CARES) Act grants more leeway to certain taxpayers. They don’t even have to make any payments on qualified student loans until October 1, 2020.

Generally, the CARES Act provisions for student loans apply to direct loans and Federal the U.S Department of Education (ED).

The annual deduction for student loan interest is limited to the first $2,500 of interest paid for qualified expenses. This includes tuition and fees; room and board; books, supplies and equipment; and other necessary expenses, such as transportation.

Certain requirements must be met. Notably, the deduction for student loan interest is phased out, based on income levels. But now the CARES Act provides the following benefits:

  • Payments on non-defaulted direct loans and FFEL loans currently owned by the ED are suspended from March 13, 2020 through September 30, 2020.
  • There is no interest accrual while the loan payments are suspended.
  • For credit reporting purposes, any payment that has been suspended under the new law is treated as if the borrower had made a regularly scheduled payment.
  • Involuntary collection of defaulted direct loans and FFEL loans is suspended until September 30, 2020.
  • If a borrower is forced to withdraw from school due to the COVID-19 pandemic, the Secretary of Education must cancel the direct loan associated with the payment period.

Finally, the CARES Act also includes a new variation of a popular employee fringe benefit. With a regular “educational assistance plan” (EAP), the first $5,250 of benefits paid to an employee is exempt from tax. The new law extends this EAP rule to payments on student loans through the end of 2020.

Small Business Tax Strategies

July 2020

Required Minimum Distributions for 2020

IRS provides welcome relief on required minimum distributions for 2020. Since we wrote that the stimulus law enacted on March 27 waived RMDs from IRAs and workplace retirement plans for 2020, we have received many questions. The most common query involves IRA and plan distributions already taken out in 2020.

People have until August 31 to return January through June payouts to the IRA or plan, such as a 401 (k) and treat the contributed funds as a tax-free rollover, IRS says in new guidance. It also waives the one-rollover-every-12-months trap for IRA owners who took RMD monthly installments in 2020. And rollovers of RMDs from inherited IRAs are permitted for this purpose.

More people qualify for a COVID-19 retirement-account-related easing. The 10% penalty on pre-age 59 ½ payouts from retirement accounts is waived on up to $100,000 of coronavirus-related distributions in 2020 from 401(k)s, 403(b)s and IRAs. Federal income tax on these distributions can be paid over three years, beginning twitch the payout year, unless the individual elects to pay the tax all at once. Additionally, amounts contributed to the account within the three-year time will not be taxable. They will be treated as rollovers, and any income tax that was paid will not be taxable. They will be treated as rollovers, and any income tax that was paid on the distribution can be recovered by filing an amended return on Form 1040X.

New IRS rules expand the definition of a corona-virus-related distribution. It covers payouts to account owners if they or their spouses were laid off or furloughed, saw work hours cut or less pay, had a job offer rescinded or work start date delayed, or had child care issues, all because of COVID-19. Also qualifying are distributions to people who own or operate a business that closed or reduced hours in the pandemic.

Remy Would Like You to Know

A client asked him this question: Can I deduct my dog’s veterinarian expenses as medical expenses? The answer is a resounding “no.” But that does not mean that you cannot derive some tax benefits from costs associated with your pooch.

Scour your records to find pet-related expenses that may qualify for tax breaks. It might be more common than you think.

Here are four prime examples:

  1. Unleash a deduction. Although you can’t deduct vet expense as medical expenses, you may write off costs, subject to the usual limits based on adjusted gross income, if you (or a family member) need a guide dog to help with your vision or hearing. This may include grooming expenses and veterinary care that is necessary to ensure the dog can perform its duties. Similarly, if you have been diagnosed with a physical or mental condition that benefits from a trained therapy animal, those costs may also count as medical expenses. The pet must be certified as treatment for a specific diagnosed illness or medical condition.
  2. Keep taxes at bay. Does your business have a sign warning visitors to beware of the dog? You may have found that keeping an intimidating breed at the place of business overnight is a successful deterrent to theft. In this case, you may deduct certain costs as “ordinary and necessary” business expenses, including items like food, training, and veterinary bills. Keep good records of business activities.
  3. Seek tax shelter. Perhaps you volunteer to spend time at an animal shelter and have even adopted a dog or a cat that would have otherwise been euthanized. As a result, you may be able to deduct unreimbursed charitable-related expenses if you itemize. For instance, if you foster a pet, you can write off costs for food, supplies and vet visits. And do not forget to add travel cost to and from the animal shelter. In lieu of actual vehicle expenses, you can deduct 14 cents per mile.
  4. Show some trust. A pet Trust is one way you may be able to ensure your pet is cared for after you are gone. Typically, the owner sets up a trust and designates a trustee (e.g., a family member or friend) to hold assets for the benefit of the pet. Then the Trustee makes payments from the trust as needed. If handled properly, it should not create any adverse estate tax consequences. Check into the applicable state laws relating to this issue. 

Small Business Tax Strategies
June 2020

Did You File a Paper Tax Return?

Checking on the status of a paper return you filed? You need lots of patience. Because of limited IRS staffing, there are significant delays in the processing of paper returns requesting refunds that were filed in March or later, the Service says. IRS is advising taxpayers not to call about the status of filed return or refund and is warning them not to file a second return. Essentially, it is a waiting game.

There is some good news. IRS will pay interest on delayed tax refunds. For returns filed by July 15, the interest will run from April 15 through the refund date. The Service says that it may send out refunds and interest payments separately.

The Kiplinger Tax Letter
June 2020

529 College Savings Plans

It’s summer, the weather’s getting hotter. And many families are thinking about college. Some have kids or grandkids who just graduated from high school and are on their way to college in August or September. Others have younger children or grandchildren and want to stash away a nest egg to help fund their future higher education expenses.  529 plans are a great college saving option. And surprise…they are not just for college.  Let’s focus on the ins and outs of these plans.

Contributions to 529 plans are treated as gifts to the beneficiary, but with a special twist. You can shelter from gift tax up to $75,000 in contributions per beneficiary this year ($150,000 if your spouse joins in). If you contribute the maximum, you will be treated as gifting $15,000 (or $30,000) to that beneficiary in 2020 and in each of the next four years…2021 through 2024.

You can’t deduct contributions to 529 plans on your federal tax return. But many states give residents a deduction or credit on state tax returns for payments made to their state’s 529. Maximum deductions and credits vary by state.

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers, and internet access. Funds can be withdrawn tax-free to cover off-campus housing, food, and utilities, but the payout can’t exceed the room and board allowance that the college includes in the cost of attendance. You should be able to get this from the school’s website.

What if the beneficiary decides not to go to college? There are options for the unused 529 funds. Distributions can be taken tax-free to pay for fees, books, and supplies for certain apprenticeship programs. Or you can roll over the money in the child’s account to a 529 college savings plan for another family member.

529 plans can help pay for K-12 education as well. Tax-free payouts of up to $10,000 per student per year can be taken from the 529 accounts to pay tuition for elementary and secondary private and parochial schools.  Note that the $10,000 cap doesn’t apply to 529 plan withdrawals to pay for college. The state tax treatment of distributions from 529 plans for K-12 education doesn’t always follow federal law.  Nonconforming states include California, Minnesota, Montana, New York, Oregon, and Vermont. Make sure to check the tax implications in your state.

You can also use up to $10,000 total in 529 funds to pay off college debt.

Keep this rule in mind if you use 529 funds for your kids’ education. And the money is refunded because the school closes for COVID-19 concerns.

The tax law waives tax and penalties if after a distribution is made from a 529 account, the student gets a refund from the school. To get relief, you must redeposit the funds into a 529 account with the same beneficiary within 60 days of receiving the refund.

The Kiplinger Tax Letter
June 2020

5 Tax Tips for Gig Economy

According to recent data from the Federal Reserve, nearly one out of every three Americans is involved in the gig economy (aka “sharing economy”).

Strategy: Find out about the tax consequences. Workers in the gig economy have tax obligations and opportunities like those of other self-employed individuals.

Notably, you must pay taxes on your earnings, but you could be entitled to some offsetting deductions.

Here are 5 tax tips that can help you avoid problems and maximize available tax benefits.

  1. Don’t hide taxable income. ‘Fess up to the IRS about the earnings from your gig, even if it’s only a sideline business. For instance, if you receive payment in the form of money, goods, property or services, the income is taxable on your personal return. In addition, separate cash tips must be treated as taxable income. See IRS Pub. 334, Tax Guide for Small Business, for more details.
  2. Report large cash transactions. Any business taxpayer, including a participant in the gig economy, who receives more than $10,000 in cash in a single transaction (or in a series of related transactions) is required to file Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, within 15 days after receiving payment.
  3. Green light biz deductions.  Generally, you can deduct ordinary and necessary business expenses incurred as a participant in the sharing economy, including deductions for your vehicle if you’re an Uber or Lyft driver. For 2020, you can use a flat rate of 57.5 cents per business mile (down from 58 cents per mile in 2019), plus related tolls and parking fees, instead of deducting your actual expenses. Similarly, an Airbnb landlord can write off most business expenses. Typically, the deductions are claimed on Schedule C as a self-employed.
  4. Avoid estimated tax penalty. If you’re participating in the gig economy, you will have to make quarterly installment payments of “estimated tax” or adjust your withholdings from another job, or both. Use Form 1040-ES, Estimated Tax for Individuals, to help figure out these payments. Generally, to avoid an estimated tax penalty, you must pay at least 90% of your current year tax liability or 100% of the prior year’s liability (110% if your AGI for the prior year exceeded $150,000).
  5. Keep good records. Recordkeeping is essential for tracking taxable income and deductible expenses. This also helps you substantiate claimed deductions if the IRS ever challenges them. Your recordkeeping system should include a summary of all business transactions. Generally, it is best to record transactions daily. Want to know more? The IRS has created the “Sharing Economy Resource Center”. It is designed to aid taxpayers participating in the gig economy.

Source: Small Business Tax Strategies, April 2020

The Secure Act Brings Bevy of Changes

The Holiday season brought a multitude of changes to retirement planning, with President Trump signing the Setting Every Community Up for Retirement Enhancement Act into law in December. Here are some of the most notable ways the Secure Act affects retirement savings so you can start adjusting your retirement strategy. (Unless noted, all changes apply starting in 2020.)

RMD begins at age 72. Required minimum distributions (RMDs) from 401(k) plans and traditional IRAs are a thorn in the side of many retirees. RMDs generally had to begin in the year you turned 70 ½.

The Secure Act pushes that age that triggers RMDs from 70 ½ to 72, which means you can let your retirement funds grow an extra 1 ½ years before tapping into them. That can result in a significant boost to overall retirement savings for many seniors.

The new rules apply to those who turn 70 ½ in 2020 or later. If you turned 70 ½ in 2019, you still must take your first RMD by April 1, 2020, and your second by year-end 2020.

No IRS age cap. With many people working and living longer, having a cap on IRA contributions was a hindrance for older workers. The Secure Act repeals the rule that prohibited contributions to a traditional IRA by taxpayers age 70 ½ and older. Now you can continue to put away money in a traditional IRA if you work into your seventies and beyond.

As before, there are no age-based restrictions on contributions to a Roth IRA. Workers 50 and older can contribute a combined total of $7,000 to a traditional and a Roth IRA for 2020.

‘Stretch’ IRA eliminated. Now for some bad news, which many of our readers feared coming true: The Secure Act eliminates the rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions from inherited accounts over their own lifetimes. Instead, all assets from an inherited IRA generally must now be distributed by non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule applies to inherited assets in 401(k) account or other defined contribution plan, too.)

There are some exceptions to the general rule: Distributions over the life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.

If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until the year that the deceased IRA owner would have reached age 72 (age 70 ½ before the new retirement law). And a surviving spouse still has the option to take the money as his or her own.

If you banked on having your heirs stretch the IRAs they were to inherit, it’s time to overhaul your estate plans. Some strategies to consider: doing Roth IRA conversions so your heirs will inherit tax-free income instead of taxable income from a traditional IRA, drawing down your IRA for living expenses and bequeathing other assets to heirs, and using RMDs to buy life insurance with heirs as beneficiaries for the income-tax-free death proceeds. Contact an estate-planning lawyer to redo any trusts you set up that incorporated the stretch strategy.

401(k) for part-time employees. Part-time workers need to save for retirement, too. However, employees who haven’t worked at least 1,000 hours during the year typically aren’t allowed to participate in their employer’s 401(k) plan.

That’s about to change. Starting in 2021, the new law guarantees 401(k) plan eligibility for employees who worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period. The new rule doesn’t apply to collectively bargained employees.

Source: Kiplinger Retirement Report, February 2020

Withhold on RMD to Simplify Paying Taxes

For many retirees, paying taxes isn’t a one-time-a-year task. Instead, many must pay estimated taxes four times a year. The first quarterly payment is due in April, the same day as your tax return for the prior year.

If you’re still working, you probably don’t need Form 1040-ES, which you use to figure estimated taxes. Withholding on your paychecks should ensure compliance with the tax system’s pay-as-you-earn demands. But if you’re retired, chances are you need to make estimated payments. Don’t assume payments are due every three months. The payment deadlines typically fall in April, June, September and the following January. You’re basically supposed to figure how much tax you’ll owe for the current tax year and send it along to the IRS in four equal installments.

Pay at least 90% of your current tax year’s liability or 100% of what you owed the previous tax year, and you will have done your duty and be protected from an underpayment penalty. (That 100% of last year’s taxes rises to 110% if your prior year adjusted gross income was more than $150,000.)

Not only can making those estimates be a pain, writing those checks can disrupt your cash flow. Many taxpayers simply divide the previous year’s tax bill by four and send 25% on each payment date to wrap themselves in the “100% of last year’s tax bill” exception.

But depending on the source of retirement income, you may be able to satisfy the IRS via withholding from those payments. Unlike withholding from paychecks, withholding from retirement income is almost always voluntary. (The exception: Nonperiodic payouts from company retirement plans, including lump sums, are hit with 20% withholding for the IRS.)

If you want federal taxes withheld from Social Security benefits, you must file form W-4V (“V” is for voluntary) with the Social Security Administration. You can ask that 7%, 10%, 12% or 22% of each monthly benefit be carved off for the IRS. When it comes to pension or annuity payments, you control how much will be withheld by filing a Form W-4P with the payor. The worksheet for the form is like the one that Form W-4 employees use to set withholdings from wages.

For IRS distributions, the law requires that 10% be withheld for the IRS unless you tell the custodian otherwise. You can block withholding altogether or ask that as much as 100% be withheld.

A Better Way

Speaking of IRAs, a little-known opportunity may free you from withholding on multiple income sources and from the hassle of filing estimated taxes. We call it the RMD solution.

Starting at age 72, retirees must take required minimum distributions from the traditional IRAs, based on the balance in the accounts on the previous December 31 divided by a factor provided by the IRS.

If you don’t need the money to live on, wait until December to take your RMD and ask the sponsor to withhold a big chunk for the IRS, enough to cover your estimated tax on the IRA payout and all of your other taxable income for the year.

Although estimated tax payments are considered made when you send in the checks – and must be paid as your receive your income during the year – amounts withheld from IRA distributions are considered paid evenly throughout the year, even if made in a lump sum payment at year-end.

So if your RMD is large enough to cover your entire tax bill, you can keep your cash safely ensconced in the IRA most of the year, avoid withholding on other sources of retirement income, skip quarterly estimated payments…and still avoid the underpayment penalty.

Source: Kiplinger Retirement Report, February 2020

Passing the Social Security Benefits Earnings Test

A big reason experts advise waiting until at least full retirement age to claim Social Security: You get to skip the benefits earnings test, which hits early claimers who are still working. But there are actually two earnings tests – and the second test can help early retirees leaving work midyear avoid the trap.

The Social Security Administration always applies the annual earning test first. Based on that test, the agency temporarily withholds $1 of a worker’s benefits for every $2 earned over $18,240 in 2020. In a year the worker hits full retirement age, the test is more generous – the worker forfeits $1 in benefits for every $3 in 2020 earnings above $48,600.

In the month a worker hits full retirement age – poof! – the earnings test goes away. The worker can earn whatever he or she likes, and the monthly benefit amount will be adjusted upward to consider all benefits forfeited in the past.

But if you’re tripped up by the annual test, you still have a shot at your full benefit. The agency will apply a monthly earnings test and set your payments according to whichever test is better for you. “It helps people who retire in the middle of the year not to be penalized,” says Jim Blair, a former Social Security district manager and a partner at Premier Social Security Consulting, in Sharonville, Ohio.

The monthly test can be used for only one year, usually the first year of retirement. And it comes into play generally for midyear retirees who have already earned more than the annual limit. Those who pass the monthly earnings test can receive 100% of their benefits for any whole month the agency considers them retired, regardless of total annual earnings.

Taking the Monthly Test

Here’s how the monthly earnings test works: If you are under full retirement age for all of 2020, you are considered retired in any month you earn $1,520 or less. If you reach full retirement age in 2020, you are considered retired in any month you earn $4,050 or less.

Say a beneficiary turns 62 in June. He wants to start benefits in July after working through the end of June and making $80,000 in 2020. On an annual basis, he’d get no benefit. But in July through December, if he earns $1,520 or less each month, the monthly earnings test would open the door to full benefits.

“You have to be careful if you go up to $1,521 – then the agency would add the $80,000,” Blair says. In that case, you would lose a check for that month, but not for the other months when benefits are below the monthly threshold. “A sneaky five-Friday payday month might end up passing the monthly earnings amount,” he says.

When retiring in the year you reach full retirement age, the earnings test only applies in the months prior to the month of your birthday. The higher threshold of $4,050 would apply if the monthly test is used in 2020. The earnings tests count only earned income from a job or self-employment; investment income, for example, and retirement-plan payouts are ignored.

If you work while claiming early benefits, call Social Security with your estimated earnings so you don’t get more benefits than you are due. “Eventually, earnings are posted to your record and they’ll see they overpaid,” Blair says. The agency will want the money back – and will withhold benefit checks until the overpayment is cleared.

Source: Kiplinger’s Retirement Report, February 2020

Paying Capital Gains Tax Twice Isn’t Nice

If you’ve invested in mutual funds, you have probably realized capital gains and dividends from your investments over the years.

Strategy: Don’t overpay your tax liability when you sell mutual fund shares. Despite improvements in digital record keeping, it’s still easy to inadvertently pay tax twice on mutual fund distributions when you’ve reinvested proceeds.

For example, say you bought mutual fund shares four years ago for $10,000. The fund paid out $500 in capital gain dividends each year for a total of $2,000. You elected to have these amounts reinvested in more shares of the fund. Then you sold all your shares in 2019 for $15,000.

Because you paid $10,000 and sold the shares at $15,000, you might think you had a $5,000 gain…right? Wrong. Your tax basis in the shares is $12,000 (original cost of $10,000 + $2,000 of reinvested dividends that you paid tax on). So, your taxable gain is actually $3,000 ($15,000 – $12,000). If you inadvertently report a $5,000 gain, you’re effectively paying tax twice on the $2,000 reinvested dividends. Note that the federal income tax rate on long-term capital gains and qualified dividends is 15% for most folks (20% for high-income investors).