by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual
With fall in full swing, it’s the perfect time to start drafting a financial game plan for the holidays in order to avoid overspending, plunging into debt, and piling stress on top of an already stressful season. Here’s how you can hatch a holiday plan for this year and start saving for next year.
Create a Holiday Budget
You’ll first need a solid understanding of your financial situation. How much do you have in savings, and how much of that can be allocated to holiday spending? Or maybe you don’t have enough in savings, or you don’t want to dip into savings, preferring to rely on your discretionary income after monthly bills have been paid? Once you have a full picture, create a budget that works with your current financial circumstances.
It also helps to be mindful of optional spending over the next couple of months. For example, cut back on dining out and retail therapy. You could even cancel some monthly subscription services until after the holidays.
Next, using your budget as a guide, make a list of the items that you’d like to get for everyone on your list along with a set price point for each item. This might take a little research, but having a specific gift in mind and knowing the average market price will help to avoid making impulse purchases. This will also help to cut through the noise of holiday ads and promotions and hone in on sales and discounts for only the items on your list.
Don’t Lose Sight of Additional Holiday Spending
Keep in mind that gifts aren’t the only expense that will cut into your budget. Plan to be frugal with holiday meal shopping, including extra treats and baked goods. Don’t purchase something simply for the sake of tradition and try instead to tailor your holiday meal planning around the actual likes of the people who will be attending your get-togethers. This cuts back on both food waste and money waste. Other often overlooked expenses include gift wrap, holiday cards, mailing costs, and travel expenses.
Make a Plan for Next Year
To make a plan for next holiday season, start by tracking your spending during this holiday season to get a blueprint for average expenses. Then, decide on which strategies you’ll employ for next year’s savings. Here are a few suggestions:
- Open a holiday savings account. These are typically offered by credit unions, and they are often locked so you can’t access them until the holiday season.
- Set aside a portion of every paycheck specifically for holiday spending. You can even set up automatic transfers into a separate savings account, building the habit of saving in a “set it and forget it” way.
- Try the popular 52-week savings challenge. Start by saving $1 the first week of December, then $2 the next week, $3 the following week, and so on. By next holiday season you’ll have nearly $1,400 saved.
With a little foresight and preparation, holiday expenses don’t need to add stress to the festivities of the season.
by Stephen Reed | Estate Planning - Individual, IRS, News, Retirement, Tax, Tax Preparation - Individual
The Social Security Administration sends survivor benefits to about 6 million Americans every month, directed to widows, widowers, and children who have experienced the loss of someone who has paid into the social security program. Read on to find out who is eligible to receive survivor benefits and how to collect them.
Who is Eligible to Receive Survivor Benefits?
If you were married to your spouse for at least nine months before their death, you are eligible for social security survivor benefits. (The one exception to this length-of-marriage stipulation is if you are caring for a child of the deceased who is under 16 years old). Children of the deceased who are under 18 years old may also receive survivor benefits, as can disabled children under the age of 22. Finally, parents, stepparents, or adoptive parents who are at least age 62 and were dependent upon the deceased could potentially qualify for survivor benefits.
When Can You Begin Social Security Survivor Benefits?
Surviving spouses can begin collecting survivor benefits as early as age 60, but this will result in only about 70% of the amount the survivor could get if they wait until their survivor full retirement age, which is 66 for people born between 1945-1956 and gradually increases to age 67 for those born in 1962 or later. There are some exceptions to this as well: if you are disabled, you may begin collecting survivor benefits at age 50; any surviving spouse can collect a one-time death benefit payment of $255 at any age; and as noted above, survivors who are caring for a child of the deceased who is under age 16 can collect at any age.
How to Claim Social Security Widow and Widower Benefits
First, the death needs to be reported, which is a task that most funeral homes include as part of their service as long as the social security number of the deceased is provided. Documents needed to apply for Social Security survivor benefits include:
- Proof of death for the deceased in the form of a death certificate
- Social Security number of the deceased
- Social Security numbers of the survivor and any dependent children
- Your birth certificate
- Your marriage certificate
- Most current W-2 forms of the deceased
- Bank information for direct deposit
Once everything is submitted, you’ll be notified of your eligibility to receive survivor benefits.
How Much Will You Receive?
The amount you receive is determined by the deceased’s earnings and whether or not the deceased was collecting benefits (either full or reduced) at the time of death. The basic breakdown looks like this:
- For couples who hadn’t started receiving benefits: it’s recommended for the highest earner of the two to wait until age 70 to begin Social Security benefits. This generates a larger monthly benefit amount that becomes the survivor benefit if and when the first spouse passes away.
- If both spouses had already started claiming: the higher benefit amount becomes the survivor benefit while the lesser of the two benefit amounts will stop.
- If the deceased spouse had already begun benefits, but the survivor had not:
The surviving spouse will need to decide when they will claim survivor benefits in a way that is likely to give them more lifetime income.
In addition to whether or not either spouse was already receiving Social Security benefits at the time of death, the actual dollar amount a survivor receives will depend on how much money the deceased spouse paid into Social Security over their lifetime.
by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual
Before 1997, once a homeowner reached the age of 55, they had the one-time option of excluding up to $125,000 of gain on the sale of their primary residence. Today any homeowner, regardless of age, has the option to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) on the sale of a home.
What Is Capital Gains Tax?
When you sell property for more than you originally paid, it’s called a capital gain. You need to report your gain to the IRS, which will then tax the gain. Home sales can be excluded from this tax as long as the seller meets the criteria.
Who Qualifies for Capital Gains Tax Exemption?
In order to qualify a seller must meet the minimum IRS criteria:
- You’ve owned the home for at least two years.
- You’ve lived in the home as your primary residence for at least two years.
- You haven’t exempted the gains on another home sale in the last two years.
How to Calculate Gains and Losses
By keeping records of the original purchase price, closing costs, and improvements put into the home (you’ll need to present records and receipts when submitting your taxes), you can avoid being taxed on a significant amount of the profit you make when selling your property.
If, for example, you buy your home for $150,000 and put $20,000 into qualifying upgrades, your cost basis would be $170,000. If you sell the home ten years later for $300,000, the ‘gain’ on your house would be $130,000 (sale price – cost basis), which would have no tax implications because you’d have met the required criteria.
What If You Have More than $250k ($500k for married couples) of Gains?
You’ll be taxed for the amount of gains above $250,000 or $500,000 for married couples filing jointly. To help reduce this amount, keep detailed records of any improvements you put into the home as some improvements can be added to your cost basis, and will thus lessen the amount that needs to be reported.
by Jean Miller | Accounting News, Construction, Estate Planning - Individual, IRS, News, Tax Planning - Individual
As the values of homes around the country continue to rise, as well as the cost of rent, home ownership looks more and more appealing. In the past, homeowners have been able to deduct certain expenses on their tax returns. Yet, with the Tax Cuts and Jobs Act of 2017 (TCJA), homeowners may no longer qualify for the deductions that were once beneficial in homeownership. Did you know that TCJA is the biggest tax overhaul seen in the USA in 30 years? If you’re curious about how this might affect homeowners, here are highlights of the federal tax deductions for homeownership under the TCJA.
Even with an increase in the standard deduction this year, many homeowners will continue to see some tax relief. While there will be a decrease in available itemized deductions, a few items that have been deductible in the past may still benefit taxpayers this year and beyond. Deductions such as home mortgage interest, state and local property taxes, and amounts paid at closing continue to be likely deductions while filing in 2019. We recommend you consult with one of our tax professionals to ensure that you are maximizing your tax savings as a homeowner. You can also consult the IRS Publication 5307 here.
- Mortgage Interest Deduction – According to the TCJA, taxpayers can deduct mortgage interest paid on acquisition indebtedness up to $750,000. This deduction can also apply to a second property, so long as the indebtedness does not go above the $750,000. Home equity indebtedness is still deductible as long as the proceeds are used to buy, build, or improve the taxpayer’s home that secures the loan.
- Mortgage Insurance Deduction – When a homeowner chooses not to or is not able to put down 20% or more in a downpayment, primary mortgage insurance (PMI) is required to protect lenders. As of now, certain amounts paid until the end of 2017 remain deductible. Congress is still deciding whether this deduction will be permanently eliminated.
- State and Local Taxes – Taxpayers are now limited to a $10,000 itemized deduction for combined state and local taxes. Homeowners in states with high property and income taxes will face the most impact with this deduction limitation.
- Amounts Paid at Closing – Origination fees, loan discounts, or prepaid interest are not usually deductible in the year that they are paid, but instead over the life of a home loan. However, they may be currently deductible if the loan is used to purchase or improve the home and if that home also serves as collateral for the loan.
Despite the new tax changes under the TCJA, it’s unlikely to be the deciding financial factor for those who have already bought a home or are considering homeownership in the future. Some buyers may consider homeownership less attractive, which could result in lower home values and lower markets over time. According to Nolo, it is estimated that the tax benefits of owning a home will be less than in years past, putting many homeowners in the same place as renters. At this time, there is no clear-cut solution that results in the best solution for homeowners, but with the right financial planning from our CPAs, homeowners can find the best ways to maximize their tax savings and cash flow.
by Daniel Kittell | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual, Tax Preparation - Individual
You have several options when you inherit an IRA, so it’s no wonder that most people on the receiving end have questions about taking distributions, tax implications, and incorporating the inheritance into their existing financial plan. For starters, it helps to distinguish if you’ve inherited the IRA from a spouse or someone else.
For spousal beneficiaries, you can roll over the inherited IRA into your existing IRA and the earnings will continue to grow tax-deferred. You won’t have to start taking required minimum distributions (based on life expectancy) until you reach age 70 ½, but you’ll pay a 10% early-withdrawal penalty for funds you take from the account before age 59 ½.
Spousal beneficiaries are also entitled to any of the methods available to non-spousal beneficiaries, which include:
- Lump-sum payment: when you’re taking the money from an inherited traditional IRA, you won’t be charged a 10% early withdrawal penalty, even if you’re under age 59 ½, though you will still have to pay taxes on the money.
- Five-year distribution plan: there are no required minimum distributions, but all the money will need to be withdrawn from the account by the end of five years.
- Life expectancy method: if the original owner was older than the beneficiary, the beneficiary can use their own age and the IRS Single Life Expectancy Table to calculate how much they’re required to withdraw from the account each year (failure to take out the minimum requirement will result in a 50% penalty on the amount that was not withdrawn on time).
It’s important to note that non-spousal beneficiaries aren’t permitted to roll an inherited IRA into an existing IRA, and they must begin withdrawing assets no later than December 31 of the year after the account holder passed away.
Roth IRAs can usually be inherited tax-free, but you can’t keep the funds in the account forever. Non-spousal beneficiaries have to take annual distribution from the account based on their life expectancy (using IRS guidelines), starting the year after the original IRA owner dies, while spouses have the option of rolling a Roth IRA into their own account. Another option is to withdraw all of the money in the account within five years.
If you are in a similar situation and have questions about an inherited IRA, please feel free to contact me via email at dkittell@mkrcpas.com.
by Stephen Reed | Estate Planning - Individual, News, Retirement, Tax Planning - Individual
For many, even hearing the word investing seems like a frightening proposition filled with great risk and little reward. While investing your hard earned money certainly involves patience and a willingness to learn some key principles, it does not have to be the intimidating process that many make it out to be. According to research, there are four concerns people often cite when choosing not to invest: lack of knowledge or experience, lack of pricing transparency, distrust of the financial industry and the sheer complexity of investing. Below, we discuss ways to conquer each of these concerns and begin investing well.
LACK OF KNOWLEDGE/EXPERIENCE
We can’t sit here and act like investing is a walk in the park. It takes time, patience and at least a general understanding of some finance and investment principles. However, you do not need to have your MBA or have worked in finance for 10 years to grasp the fundamentals of investing. Luckily, we live in an age where you have a wealth of knowledge at your fingertips. A simple internet search can return articles, blogs, podcasts and more that discuss concepts such as long-term compounding of returns or diversification to lower risk. Solid research combined with common sense can put you well on your way to investing sensibly.
LACK OF PRICING TRANSPARENCY
Surely, there are often additional charges, such as fixed index annuities and variable annuities, that can seem confusing or excessive when considering the cost of investing. However, there are plenty of investment structures out there with clearly defined and labeled fees. Sites like morningstar.com allow you to search for investment quotes and discover the annual expenses and sales charges associated with that fund, providing you with a clear directive and comparison to invest where it makes the most sense for you.
DISTRUST OF THE FINANCIAL INDUSTRY
Markets shift on a daily, sometimes even hourly basis, and there are financial advisers out there who take advantage of people’s lack of knowledge, so while a dose of skepticism may be healthy when you begin investing, it should not stop you entirely. If you understand upfront that the markets will indeed fluctuate, sometimes dramatically, so you must remain patient, and know that every investment firm may not have your best interest in mind, you will enter the market cautiously and avoid falling into unknown investment traps.
COMPLEXITY OF INVESTING
Many financial firms will advise a plan of constantly scanning the market and jumping in and out of funds based on new data to be the smartest investor, a process that truly does sound complicated and confusing. However, while this process may work for some, it is not a one-size-fits-all formula. There are a variety of options, from total stock or bond market index funds to target fund portfolios, where you can build wealth for your future with less hassle and constant shifting.
Many let the fear of failure stop them from even trying, but you don’t have to let your fears control you. Be smart, consider your options and do some solid research to mitigate uncertainties, then get those feet wet and start planning and investing for your future, today.
