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New Tax Deadline Is Official -- July 15, 2020
Both the IRS and Treasury have announced that the deadline to file AND pay your individual federal income tax for the tax year of 2019 has been extended to July 15, 2020.
Many states have extended their deadlines as well; please check with us to determine the deadline applicable to you if you live in a state that requires state income tax filing and payment.
If you cannot file your return by July 15, 2020, we can help you file an extension until October 15, 2020. The payment is still due by July 15, however.
If you are due a refund, we encourage you to file as soon as possible so you can get that cash influx as early as possible.
For a while last week, we relied on a tweet from Treasury to document this news. But news releases were posted over the weekend to both the IRS site: https://www.irs.gov/newsroom/tax-day-now-july-15-treasury-irs-extend-filing-deadline-and-federal-tax-payments-regardless-of-amount-owed and Treasury: https://home.treasury.gov/news/press-releases/sm953 documenting the changes in deadlines.
There’s a lot to worry about right now. If one of the things you’re worried about is your taxes, let us take that worry off your plate so you can focus on other things. We’re here for you when you’re ready.
Tax TipsVolume 9, Issue 22For distribution 4/20/20; publication 4/23/20
Inherited IRAs and the SECURE Act of 2019
At the end of 2019, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was signed into law, modifying RMD (required minimum distribution) rules for inherited IRAs and retirement accounts.
Under the SECURE Act, inherited IRAs and retirement accounts must be distributed and taxed within 10 years of the original owner’s death. Prior to the SECURE Act, inherited IRAs were frequently referred to as “stretch” IRAs, as they allowed non-spouse beneficiaries to take relatively small distributions over the course of the beneficiary’s life. The benefit to this was the ability to keep the bulk of the investment in a tax deferred or tax free (Roth IRA) environment.
By capping the lifespan of the inherited IRA at 10 years, the IRA beneficiary’s ability to grow the account over decades in either a tax-free or tax-deferred environment has been significantly impacted. Additionally, the new rules put a burden on beneficiaries in the form of tax acceleration by greatly increasing a beneficiary’s taxable income--especially in situations where the beneficiary has income of their own—resulting in a higher tax rate.
Exceptions to the SECURE Act
Positive Changes
Under old tax law, a taxpayer could make IRA contributions until they reached age 70 ½. This has been modified by SECURE Act; now, workers of any age can contribute to a retirement account. This change will make it easier for seniors to make contributions and back-door Roth IRA contributions.
If you need help minimizing your taxes on your retirement income, it’s best to make a plan and create projections based on your desired distributions. Give us a call or email us any time to set up your tax planning session.
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Insert a link to your newsletter, web site or blog before you post these:
Our latest blog: Inherited IRAs and the SECURE Act of 2019. Subscribe here: [link]
Do you know about the SECURE Act that was signed into law at the end of 2019? Find out how inherited IRAs and retirement accounts are affected: [link]
Tax Tip: Under the SECURE Act, inherited IRAs and retirement accounts must be distributed and taxed within 10 years of the original owner’s death. [link]
The 10-year cap on inherited IRAs does not affect surviving spouses. They can treat the inherited IRA as though if it were their own. Read more: [link]
Minor children, while still a minor, are exempt from the SECURE Act’s 10-year lifespan cap. [link]
The SECURE Act increases the age at which a taxpayer must begin taking required minimum distributions (RMDs) from age 70 ½ to 72. Find out why this is beneficial for taxpayers: [link]
Not sure how the newly signed SECURE Act might affect you? Read more about the SECURE Act here: [link]
Sign up for our newsletter: Inherited IRAs and the SECURE Act of 2019 [link]
Tax Tips Volume 9, Issue 21 For distribution 4/6/20; publication 4/9/20
The New W-4 Form
At the beginning of the 2020 year, the IRS debuted a revised version of the W-4 form, with the intent of determining an employee’s federal tax withholding with greater accuracy.
Tips for Completing the New Form
Even though the new W-4 form may feel more complex to the average taxpayer, it is a relatively straightforward form with comprehensive directions written in an easy-to-understand format. Provided that the taxpayer has their most current tax return to refer to, completing the new W-4 should be a painless process that results in substantially improved withholding accuracy.
Income Tax Withholding Assistant for Employers
There is also a new tool available for employers that do not use an automated payroll system and calculate their own payroll by hand. It will ease the transition to the redesigned withholding system and help them determine the right amount to withhold from workers’ pay for employees that complete the W-4. You can find it here:
https://www.irs.gov/businesses/small-businesses-self-employed/income-tax-withholding-assistant-for-employers
Our latest blog: The New W-4 Form. Subscribe here: [link]
Are you familiar with the new W-4 form? Get tips on how to complete the new W-4 form here: [link]
Tax Tip: The only portion of the new W-4 that is mandatory to complete is Step 1 (name and filing status) and Step 5 (signature). [link]
All new employees, as well as existing employees who want to adjust withholdings, must complete the new W-4 form. [link]
If you have your most current tax return to refer to, filling out the new W-4 should be a breeze. [link]
If a taxpayer itemizes their deductions, it is beneficial to complete the Deductions Worksheet located on page 3 of the W-4. Find out more here: [link]
Do you feel that the new W-4 form is more complex? Here are some tips that will make filing the new W-4 easier for you! Find out more: [link]
Sign up for our newsletter: The New W-4 Form [link]
Tax TipsVolume 9, Issue 20For distribution 3/23/20; publication 3/26/20
Why Getting a Tax Refund Is Not Necessarily Good
Everyone loves getting a tax refund, right? Not us! We’ll explain why; but first let’s cover some basics about filing deadlines and refund timing.
Preparing, Filing and Acceptance of Returns
There are several steps your tax professional goes through with your return. Here is a very rough, general rundown:
1. Client (you) signs engagement letter (legal agreement documenting the services to be performed) and authorization to efile electronically. This starts the relationship. 2. Tax professional collects documents from the client after providing them with a list or what we call internally an “organizer.” 3. Tax professional prepares the return from the data received. This is the step where the tax professional uses their skills to look for discrepancies and opportunities. There may also be some reconciliation, ticking, and tying that are done to validate the numbers. 4. Tax professional asks any questions that arise from the preparation step. Client also has a chance to ask questions once a draft copy of the return is presented to them. 5. Tax professional finalizes the return and prepares the deliverables. Depending on what service you’ve selected, this may include a copy of the return, a cover letter, an estimate for next year, and suggested planning activities you can do to save on next year’s tax bill. 6. Tax professional collects payment from the client if they haven’t done that earlier. 7. Tax professional e-files the return. 8. IRS usually accepts the return within 2 days of the time it’s filed.
Filing Early
Filing early has its advantages, especially if you are expecting a refund. You remember how crowded it is at the malls before Christmas, right? Your tax preparer has exactly 11 weeks from the time the first return can be filed (this year it was February 27, 2020) to the deadline (April 15, 2020) to get either everyone’s return filed or to file an extension for more time.
There’s even less time for corporations: this deadline is March 16 this year, with an option to extend.
Filing early, just like shopping early for Christmas, means less wait time all around and more peace of mind. Please consider sending your tax preparer your documents as soon as you receive them, especially if you have a fairly simple situation. They will thank you for being early!
Checking Up on When You’ll Get Your Refund
The good news is you don’t have to call the IRS to find out when you might be getting your refund. Once your tax return is filed and accepted, it takes anywhere from 1 week to 2 months to get you refund. It’s fastest if you selected direct deposit and filed electronically, and slowest if you requested a check and filed by mail.
A couple of other things can slow a refund as well. If you claimed the Earned Income Tax Credit or the Additional Child Tax Credit, your refund may be slower.
To check on your refund status, you’ll need your social security number, your filing status (as in Single, Married Filling Joint, etc.) and the exact amount of your refund. Use this link provided by the IRS to check your refund status: https://sa.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp
Why Aren’t Refunds Good News?
Refunds are good news when they are small. But we don’t feel big refunds are ever good news. When you’re owed a refund, it means you loaned the government your hard-earned money all of last year without charging them interest. The money that’s tied up in your tax refund could have been working for you all this time, through investments in stock, real estate, retirement accounts, business deals, or at the simplest, a savings account.
Better tax planning should allow you to manage your payments to the IRS, whether they are withheld from your paycheck or you make quarterly estimated payments. Refunds only occur when you overpay.
If you don’t want to get a refund in 2021, please ask us about our tax planning services. We can make sure you don’t give out any more big loans for free.
Our latest blog: Why Getting a Tax Refund Is Not Necessarily Good. Subscribe here: [link]
Do you love getting a tax refund? Find out why getting a big tax refund isn’t as great as you might think: [link]
Tax Tip: Filing early, just like shopping early for Christmas, means less wait time all around and more peace of mind. [link]
Tax refunds only occur when you overpay. [link]
When you’re owed a refund, it means you loaned the government your hard-earned money all of last year without charging them interest. [link]
Once your tax return is filed and accepted, it takes anywhere from 1 week to 2 months to get you refund. Find out more here: [link]
Expecting a big tax refund? Be sure to file your tax return early to get your refund earlier, but don’t jump for joy just yet. Find out why: [link]
Sign up for our newsletter: Why Getting a Tax Refund Is Not Necessarily Good [link]
Tax TipsVolume 9, Issue 19For distribution 3/9/20; publication 3/12/20
Stock Compensation Plans
If you are one of the rising number of employees receiving some form of stock compensation through your job, you know how confusing it can be to understand how each type works and the varying tax considerations you need to be aware of. Here’s a quick description of the most common plans.
Stock Options
Having a stock option gives you the right to purchase a certain number of shares of company stock at a pre-set price, which is called the “exercise price.” How they are taxed depends on the type of stock option:
Nonqualified Stock Options: The difference between the value of the shares on the purchase date and the price you are paying is the “spread” and is included in your wages, with taxes withheld on it, in the year of exercise. Incentive Stock Options: When you exercise the options/buy the stock, you do NOT have to include the “spread” in your ordinary income as with NSOs, although the ISO spread may in some cases trigger alternative minimum tax (AMT).
Nonqualified Stock Options: The difference between the value of the shares on the purchase date and the price you are paying is the “spread” and is included in your wages, with taxes withheld on it, in the year of exercise.
Incentive Stock Options: When you exercise the options/buy the stock, you do NOT have to include the “spread” in your ordinary income as with NSOs, although the ISO spread may in some cases trigger alternative minimum tax (AMT).
Employee Stock Purchase Plans (ESPPs)
Employee Stock Purchase Plans allow employees to purchase employer’s stock at a discount, usually through contributions made via payroll deductions. The employee contributes to a stock purchase fund and, at certain points during the year, the employer uses the funds to purchase stock for him/her at a discount.
Taxation occurs upon the sale of the stock. The calculation of the amount of ordinary income vs. capital gain depends on whether the ultimate sale of the stock constitutes a qualifying or disqualifying disposition.
Restricted Stock
Restricted Stocks are granted to an employee. They are nontransferable and can be forfeited under conditions such as employment termination or inability to meet certain performance benchmarks. The employee is granted shares over a period of time, according to a vesting schedule lasting several years, and also receives voting rights. How they are taxed depends on whether an 83(b) election has been made:
Without 83(b) election: The entire amount of the stock – the fair market value on the vesting date (the date that restrictions on your stock rights lapse) – is included in ordinary income/reported on W-2 in the year of vesting. With 83(b) election: The value of the stock on the grant date, not the vesting date, is reported as ordinary income/taxed in the year granted.
Without 83(b) election: The entire amount of the stock – the fair market value on the vesting date (the date that restrictions on your stock rights lapse) – is included in ordinary income/reported on W-2 in the year of vesting.
With 83(b) election: The value of the stock on the grant date, not the vesting date, is reported as ordinary income/taxed in the year granted.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a promise by the company to grant a set number of shares of stock upon completion of a vesting schedule. The employee is granted shares of stock after vesting and forfeiture requirements have been met and does not have voting rights during the vesting period since no stock has been issued.
The fair market value of the stock on the vesting (or settlement) date is reported as ordinary income/on the W-2 in the year of vesting and, once sold, the difference between the sales price and the fair market value on the vesting date is reported as a capital gain or loss.
If you have questions about the tax treatment of your stock compensation plans, please feel free to reach out.
Our latest blog: Stock Compensation Plans. Subscribe here: [link]
Having a stock option gives you the right to purchase a certain number of shares of company stock at a pre-set price, which is called the “exercise price.” Find out more: [link]
Employee Stock Purchase Plans allow employees to purchase employer’s stock at a discount, usually through contributions made via payroll deductions. [link]
A Restricted Stock Unit (RSU) is a promise by the company to grant a set number of shares of stock upon completion of a vesting schedule. [link]
Restricted Stocks are granted to an employee. They are nontransferable and can be forfeited under conditions such as employment termination or inability to meet certain performance benchmarks. [link]
How your company shares are taxed depends on the type of stock option. Find out here: [link]
Sign up for our newsletter: Stock Compensation Plans [link]
Tax TipsVolume 9, Issue 18For distribution 2/124/20; publication 2/27/20The Augusta Rule: How to Receive Tax-Free Income
What is the Augusta Rule?
The Augusta Rule, known to the IRS as Section 280A, allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return.
Originally created to protect residents of Augusta, Georgia who would rent out their homes to attendees of the annual Masters golf tournament, the Augusta Rule applies to any taxpayer who owns a home in the United States, provided that your home is not your primary place of business.
How Does it Work for the Homeowner?
So long as the home you own is not your primary place of business, you can rent it out for up to 14 days and not report that income on your individual tax return. The rent you charge must be reasonable and in-line with what the rental market supports; charging $1000 per night when comparable houses rent for $200 per night is not considered reasonable!
Homeowners can rent their house to individuals looking for vacation opportunities or they can rent their house to a business owner who intends to use it for business purposes.
Shifting Income from Your Business
If you are a business owner and do not use your home as your primary place of business, employing the Augusta Rule can be an effective strategy for moving income away from your business and shifting it to personal income, where there would be no tax consequence.
For example, as a business owner, you host a monthly meeting with your Board of Directors. Under the Augusta Rule, your business can pay you a reasonable amount to rent your house to conduct the once-per-month meetings. Provided that the total rental period doesn’t exceed 14 days and the rent charged is reasonable, your business is able to deduct the rent payment on the business tax return and you won’t have to report this as income on your personal taxes!
Having documentation to support your claiming this as a business deduction is critical—to prove the rent was reasonable, you could print rental quotes for similar meeting locations. To document that a meeting occurred, you could keep minutes or other records of business discussions.
Our latest blog: The Augusta Rule: How to Receive Tax-Free Income. Subscribe here: [link]
The Augusta Rule, known to the IRS as Section 280A, allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return. Find out more: [link]
So long as the home you own is not your primary place of business, you can rent it out for up to 14 days and not report that income on your individual tax return. [link]
Can you benefit from tax savings using the Augusta Rule? [link]
Homeowners can rent their house to individuals looking for vacation opportunities or they can rent their house to a business owner who intends to use it for business purposes. Find out more here: [link]
The Augusta Rule applies to any taxpayer who owns a home in the United States, provided that your home is not your primary place of business. Find out here: [link]
Sign up for our newsletter: The Augusta Rule: How to Receive Tax-Free Income. [link]
Tax TipsVolume 9, Issue 17For distribution 2/10/20; publication 2/13/20Are You a Non-Filer? What to Do If You Haven’t Filed Tax Returns in Years
In addition to the personal stress it can cause, failing to file your taxes for many years can lead to serious consequences, not only with the IRS, but with other agencies that require you to show tax returns. This could lead to repercussions such as not being able to obtain a passport, apply for a mortgage, or even losing assets you own.
If you don’t file a tax return voluntarily, the IRS will create a substitute return on your behalf using information that was reported to them. You may not receive credit for deductions and exemptions that you would have ordinarily been entitled to receive.
Claiming a Refund
If the IRS creates a substitute return on your behalf and you had an overpayment of taxes, they will not process the refund. If you are due a refund, you must file a return within 3 years of the original due date, otherwise the IRS will keep your money!
What to Do If You’ve Received a Notice from the IRS
Often, you’ll receive a notice from the IRS when they’ve created a substitute return on your behalf and determined that you owe taxes. It’s imperative to take action before the IRS begins the collection process, otherwise they may levy your wages or bank account, or file a federal tax lien.
If you need wage and income information to help prepare a past due return, you can request a transcript from the IRS by filing Form 4506-T.
If you think you can hide from the IRS, think again. Technology has allowed the IRS to catch up with more than seven million non-filers, and they are cracking down on them in 2020.
What to Do If You Can’t Pay the Balance Owed
It’s important to file all tax returns that are due, even if you can’t afford to pay the balance owed in full. Filing past due returns can limit interest charges and late payment penalties.
If you need more time to pay, qualifying for an installment agreement can give you up to 72 months to repay your outstanding balance owed. In some instances, you may be able to settle your tax debt for less than you owe by filing an Offer in Compromise. Seek advice from a tax professional to see which option best suits your situation.
Our latest blog: Are You a Non-Filer? Subscribe here: [link]
If you don’t file a tax return voluntarily, the IRS will create a substitute return on your behalf using information that was reported to them. Find out more: [link]
If the IRS creates a substitute return on your behalf and you had an overpayment of taxes, they will not process the refund. [link]
It’s imperative to take action before the IRS begins the collection process, otherwise they may levy your wages or bank account, or file a federal tax lien. [link]
It’s important to file all tax returns that are due, even if you can’t afford to pay the balance owed in full. [link]
If you need wage and income information to help prepare a past due return, you can request a transcript from the IRS by filing Form 4506-T. Find out here: [link]
Sign up for our newsletter: What to Do If You Haven’t Filed Tax Returns in Years [link]
Tax TipsVolume 9, Issue 16For distribution 1/27/20; publication 1/30/20Protect Yourself from Tax Scams
There are many tax scams out there with the purpose of stealing your identity, stealing your money, or filing fraudulent tax returns using your private information. Tax scammers work year-round, not just during tax season and target virtually everyone. Stay alert to the ways that criminals pose as the IRS to trick you out of your money or personal information.
IRS-Impersonation Telephone ScamAn aggressive and sophisticated telephone scam targeting taxpayers, including recent immigrants, has been making the rounds throughout the country. Callers claim to be employees of the IRS, but are not. These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets from information gathered from online resources, and they usually alter the caller ID (caller ID spoofing) to make it look like the IRS is calling.
If the phone is not answered, the scammers often leave an urgent callback request. Victims are often told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation, or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Alternatively, victims may be told they have a refund due to try to trick them into sharing private financial information.
Phony IRS Emails — “Phishing”Scammers copy official IRS letterhead to use in email they send to victims. Emails direct the consumer to a web link that requests personal and financial information, such as Social Security number, bank account, or credit card numbers. This practice of tricking victims into revealing private personal and financial information over the internet is known as “phishing” for information.
The IRS does not notify taxpayers of refunds or payments due via email. Additionally, taxpayers do not have to complete a special form or provide detailed financial information to obtain a refund. Refunds are based on information contained on the federal income tax return filed by the taxpayer.
The IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts. If you receive an email from someone claiming to be from the IRS and asking for money, take the following steps:
Ways to Protect Yourself from Scams
Here are eight ways to stay safe this tax season:
If you have any questions about any situations that come up, please know we’re here for you; just ask!
Our latest blog: Protect Yourself from Tax Scams. Subscribe here: [link]
There are many tax scams out there with the purpose of stealing your identity, stealing your money, or filing fraudulent tax returns using your private information. Find out more: [link]
Scammers copy official IRS letterhead to use in email they send to victims. [link]
Tax scammers work year-round, not just during tax season and target virtually everyone. [link]
The IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts. [link]
Stay alert to the ways criminals pose as the IRS to trick you out of your money or personal information. [link]
Sign up for our newsletter: Protect Yourself from Tax Scams. [link]
Tax TipsVolume 9, Issue 15For distribution 1/13/19; publication 1/16/20TCJA: Understanding Changes to Mortgage Interest Deductibility
The Tax Cuts and Jobs Act of 2018 changed both the type of mortgage interest that can be deducted as well as the amount of interest that can be deducted.
Acquisition Debt vs. Equity Debt
Acquisition Debt is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and must be secured by the taxpayer’s residence.
Equity Debt is all other debt secured by the taxpayer’s residence, such as home equity proceeds that are used to pay off credit card debt, purchase a vehicle, take a vacation, etc.
Under the TCJA, all equity debt is non-deductible, even if incurred prior to December 15, 2017. However, if the proceeds from home equity debt are used to buy, build, or substantially improve the property that secures the debt, the debt can be considered acquisition debt. Acquisition debt is deductible, but different rules apply depending on the date it was incurred.
New Limits
For mortgages acquired after December 15, 2017, taxpayers can write off interest paid on indebtedness of $750,000 or less. If mortgage indebtedness exceeds $750,000, only a percentage of the interest can be deducted.
Example: A taxpayer purchases a house for $1 million and closes escrow on 12/31/17. He secures a mortgage of $800,000. He is entitled to deduct interest on only $750,000 of the mortgage because the debt was incurred after 12/15/17. He will receive no tax benefit for the interest paid on the other $50,000 portion of the loan.
Grandfathered Debt (Mortgages acquired on or before December 15, 2017)
A taxpayer can write off interest paid on mortgages that have an acquisition debt of up to $1 million dollars. Equity indebtedness is no longer allowed, even if incurred prior to December 15, 2017.
Example 1: In 2015, a taxpayer bought a house for $1.3 million dollars. Their mortgage was $1 million. In 2016, they took out a $100,000 equity line to pay off credit card debt. Under old tax law, the taxpayer could deduct the full interest paid on both the $1 million mortgage and the $100,000 equity line. Under the TCJA, even though the loans fall within the guidelines of grandfathered debt, the interest paid on the $100,000 equity line is not deductible because the proceeds of the loan weren’t used to buy, build, or substantially improve the property that the debt is secured by.
Example 2: Using the same scenario above, assume that the $100,00 equity line was used to improve the property that secures the debt (ex: kitchen remodel.) Even though it would fall within the guidelines of acquisition debt, it would still be non-deductible, since the total acquisition indebtedness would exceed $1 million.
Example 3: In 2014, a taxpayer bought a house for $900,000 and secured a first mortgage in the amount of $800,000. Later that year, the taxpayer took out a $100,000 equity line to fund an addition made to the house. The full mortgage interest paid would be deductible on both loans because it would be considered acquisition debt, the debt is grandfathered, and the indebtedness falls below $1 million.
Refinancing Grandfathered Debt
A taxpayer can retain the grandfathered $1 million interest limitation, even if they refinance after 12/15/17. However, the refinanced debt can’t exceed the mortgage balance at the time of refinancing, unless the additional amount can be considered acquisition debt and the total indebtedness falls below $1 million.
Example 1: a taxpayer secured a mortgage prior to 12/15/17 in the amount of $800,000. In 2018, the taxpayer refinances the debt and takes out an additional $150,000 from the home’s equity to pay off credit card debt and to purchase a new car. The taxpayer’s new 1st mortgage is $950,000. Even though the taxpayer’s mortgage has been grandfathered with the $1 million limitation, he can only deduct interest paid on $800,000 because the additional indebtedness is considered non-deductible equity debt.
Example 2: Using the same scenario above, assume that $100,000 of the equity was used to remodel the kitchen and bathrooms of the house, and the other $50,000 was used to purchase a new car. The new 1st mortgage is $950,000. Of that, the taxpayer is allowed to deduct interest paid on the $800,000 grandfathered loan balance plus $100,000 of the equity proceeds because they can be classified as acquisition debt and fall under the $1 million grandfathered limitation. The $50,000 used to purchase a car is non-deductible. As a result, the taxpayer can deduct interest paid on the mortgage of $900,000, even though his new first mortgage is now $950,000.
Taxpayer Education and Accurate Recordkeeping is Essential
With the complexity of the tax law changes, you can see how great communication between you and us can help us help you receive the greatest tax benefit allowable. Not only will we need to ask more detailed, in depth questions surrounding your mortgage indebtedness, but you will need to keep thorough records of refinances and equity debt that qualify as acquisition debt.
Our latest blog: TCJA: Understanding Changes to Mortgage Interest Deductibility. Subscribe here: [link]
Do you know the difference between acquisition debt and equity debt and how it affects mortgage interest deductibility? Find out more: [link]
Tax Tip: A taxpayer can write off interest paid on mortgages that have an acquisition debt of up to $1 million dollars for mortgages acquired on or before 12/15/2017. [link]
Under the TCJA, all equity debt is non-deductible, even if incurred prior to December 15, 2017. [link]
A taxpayer can retain the grandfathered $1 million interest limitation, even if they refinance after 12/15/2017. Find out more here: [link]
How did the Tax Cuts and Jobs Act of 2018 affect mortgage interest deductibility? Find out here: [link]
Sign up for our newsletter: TCJA: Understanding Changes to Mortgage Interest Deductibility. [link]
Tax TipsVolume 9, Issue 14For distribution 12/30/19; publication 1/2/20Tax Strategies for the Retired Taxpayer: Convert your IRA’s Required Minimum Distribution into a Qualified Charitable Distribution
After years of saving for retirement, it’s time to start using those savings—even if you don’t really need to. Once you reach 70 ½ years old, you must begin taking annual distributions from your qualified retirement plan. This is called a required minimum distribution (RMD.) If you don’t take your RMD, the IRS imposes a severe penalty—it’s a tax of 50% of the amount that was not withdrawn in time! Additionally, any RMD taken is considered ordinary income and will count toward your taxable income for the year.
What if you don’t need that money for current living expenses? An excellent alternative to consider is converting your IRA’s RMD into a qualified charitable distribution (QCD.)
A QCD is a direct transfer of your IRA funds to a qualified 501 (c)(3) charitable organization. QCDs can be counted toward satisfying your RMD for the year, as long as the amount is $100,000 or less per taxpayer. For a QCD to count toward your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is typically December 31st.
What is the benefit to making a QCD?
QCDs don’t count as taxable income! As long as basic requirements are met, most of which are mentioned above, your RMD will not be included in your ordinary income. QCDs don’t require you to itemize, which means that with the new tax law changes, you may take advantage of the higher standard deduction while still using a QCD for charitable giving.
Scenario:
Taxpayer John Smith is 71 years old and retired. His wife is 67 years old and still employed. They both collect Social Security and have comfortable investment income. Taxpayer Smith must take an RMD from his retirement plan. Most of their itemized deductions were a result of charitable giving, but due to the recent tax law changes, they expect to fall within the significantly increased standard deduction. Knowing that he won’t be itemizing his deductions any longer, Taxpayer Smith still wants to be charitable, but is looking for a way to offset his taxable income. In this situation, Taxpayer Smith should consider converting his RMD into a QCD—that way, he can take advantage of the more favorable standard deduction, have the RMD not included in his taxable income, and support his preferred charitable organizations!
How is a QCD treated for tax reporting purposes?
Contact us to find out more about strategies for the retired taxpayer.
Our latest blog: Tax Strategies for the Retired Taxpayer: Convert your IRA’s Required Minimum Distribution into a Qualified Charitable Distribution. Subscribe here: [link]
What are the benefits of converting your IRA’s required minimum distribution into a qualified charitable distribution? Find out more: [link]
Tax Tip: If you don’t need the money from your required minimum distribution (RMD) to cover current living expenses, you could consider converting your IRA’s RMD into a qualified charitable distribution (QCD). [link]
Did you know that QCDs don’t count as taxable income? [link]
If you don’t take your required minimum distribution once you’re 70 and a half years old, the IRS imposes a severe penalty—a tax of 50 percent of the amount that was not withdrawn in time. Find out more here: [link]
Want to support your favorite charitable organization AND exclude required minimum distributions from your taxable income? Find out how here: [link]
Sign up for our newsletter: Tax Strategies for the Retired Taxpayer: Convert your IRA’s Required Minimum Distribution into a Qualified Charitable Distribution. [link]
