by Daniel Kittell | Accounting News, CPA, IRS, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
Whether you’re working with a robust tax refund, a work bonus, or an inheritance of some kind, here’s a list of positive moves to make with that windfall.
Evaluate Your Debt
There’s “bad” debt and “good” debt. Good debt is an investment that will grow in value or generate long-term income, such as student loans or home equity loans. Bad debt is anything that quickly loses value, doesn’t generate income, and/or has a high interest rate, such as credit cards and cash advance loans. Whenever you come into extra funds, it’s recommended to pay down or pay off bad debt as a top priority.
Consider Your Emergency Fund
Your rainy-day fund should be stocked with at least three months’ worth of living expenses. If yours isn’t there yet, think about boosting it with your refund. If you are a business owner or your income fluctuates, consider shooting for six months’ worth of living expenses.
Fund Your 401(k)
This is a good time to open or boost contributions to your 401(k) or individual retirement account. The 401(k) contribution limit for 2020 is $19,500 for those under age 50, and taxpayers over age 50 are allowed an additional “catch-up” contribution of $6,500.
Open a Roth IRA
If you’re married filing jointly and have a combined adjusted growth income of less than $196,000, you can contribute up to $6,000 to a Roth IRA. The adjusted growth income cap for single filers is $124,000. This is meant to be a long-term money management move, but if you need to withdraw sooner, you can do so tax-free and penalty-fee, though you may owe taxes and penalties on any earnings (not regular contributions) you withdraw.
Invest in Stocks
Assuming you’ve paid off debt, built up your emergency savings fund to three to six months’ worth of living expenses, and boosted your retirement fund, you could think about consulting a financial professional to build a stock portfolio that aligns with your financial goals and personal risk tolerance. Or, if you’re stock market savvy, you can open a brokerage account on your own and start investing in a stock you believe has the potential for growth.
Additional money moves you could make with your refund (again, assuming debt, emergency savings, and retirement funds are taken care of) include making home improvements; opening up a savings account for something big, like saving for a down payment on a house; or donating to charity.
by Jean Miller | Accounting News, CPA, News, Resources, Retirement, Tax, Tax Planning - Individual, Technology
A new scoring model from Fair Isaac Corp., the company behind the FICO score, is set to be implemented later this year by Equifax and other major credit bureaus. The popular score is commonly used by lenders to determine your eligibility and interest rate for certain loans. Read on to find out if it could affect you.
Consumers in Debt
The new model, FICO 10, will start incorporating consumers’ debt levels into its tabulation, which could cause a decrease in score for some overextended consumers, particularly those who have both personal loans and rising debt. This change is speculated to create greater divide to scores in the 600s. If your score is in the 600s and you’re making payments on time and hacking away at debt, your score could increase. On the other hand, if you’re struggling to pay off debt and missing payments, your score could go down.
Combat Credit Card Spending
FICO 10 will give more consideration to how consumers have changed their payment history in the previous two years, benefitting individuals who are making progress in paying off debt and judging more harshly those who show increasing financial strain. Currently, credit card utilization, which is the percent of your available credit lines you’re using, accounts for 30% of your score, but it could become even more important in FICO 10. The goal is to keep your utilization as low as possible, so be sure to pay balances in full each month or at least keep the balances low. One option to paying off credit card debt is to consolidate it by taking out a personal loan, but this only works if you use that loan to pay off debt while refraining from piling new debt on your credit cards.
Create a Monthly Budget
Because delinquent payments will carry greater weight in the new model, it’s crucial to pay bills on time, so if missing payments is a habit or even an occasional slip-up, you’ll want to be more mindful of this. The best way to keep up with payments is to create a monthly budget. This will not only help with keeping payments at the forefront of your mind (and on your calendar), but you’ll have a better overall picture of your finances and whether or not you’re overspending. Also consider enrolling in autopay, with your loan or credit card payments automatically taken from your bank account at the same time each month.
Though banks and lenders decide which credit model they’ll use, Fair Isaac claims that FICO is used in 90% of all lending decisions, so take the next few months to make changes that will start cutting away at high interest rate debt and provide better overall financial wellness.
by Stephen Reed | Accounting News, CPA, IRS, News, Retirement, Tax, Tax Planning - Individual
As an American worker, relinquishing part of your income to taxes is standard practice, but once you move out of the workforce, much of your retirement income is subject to taxes as well. Below are some possible taxes you could face in retirement.
Social Security Taxes
If you have income in addition to Social Security, you will likely lose a portion of your benefits to federal taxes. To determine if your Social Security benefit will be taxable, you need to determine your provisional income. This is your income outside of Social Security—including pension payments, traditional 401(k) and IRA withdrawals, and income from a part-time job—plus half of your yearly benefits. If your provisional income totals more than $25,000 for individuals and $32,000 for couples, 50% of your Social Security benefit will be taxable. If your provisional income exceeds $34,000 for individuals and $44,000 for couples, up to 85% of your Social Security benefit will be subject to tax.
Retirement Plan Penalties
A common tax deduction tactic among workers is to deposit money in an IRA shortly before filing taxes in order to defer paying income tax on the new contributions, but this is not an option after age 70 ½. Additionally, if you miss a required distribution from your retirement accounts after age 70 ½, you will incur a 50% penalty, which is added to the income tax due on retirement account distributions. However, Roth IRAs don’t have distribution requirements in retirement, and workers older than 70 ½ might be able to delay 401(k) distributions.
Taxes on Pension Income
With the possible exception of military or disability pension, you should expect to pay taxes on pension income. However, if you contributed after-tax dollars to your pension, you won’t be required to pay tax on that part of the contribution.
Taxes on Investment Sales
If you intend to sell some investments in retirement, expect to report that sale on your tax return as a short-term or long-term capital gain or loss. Long-term gains are generally taxed at a lower rate than other types of income, but you must hold the investment for at least a year and a day in order to qualify for long-term gains. Interest income and dividends will also continue to be taxed as they were before retirement.
by Daniel Kittell | Accounting News, Fraud, IRS, News, Online Payment, Professional Services, Resources, Tax, Tax Planning - Individual, Tax Preparation - Individual, Technology
The start of a new year is a time for fresh starts and new goals, but it’s also the beginning of the oft-dreaded tax season, which means Tax identity thieves are on the lookout for information they can use in order to create fraudulent tax returns. Here are some tips to help protect yourself from tax identity theft during tax season.
File Early to Prevent Tax Identity Theft
Tax-related identity theft most commonly occurs from February to early March because thieves want to beat real taxpayers to the punch by filing fraudulent returns before legitimate ones. Because the IRS allows only one tax return per Social Security number per year, your best defense against identity theft is to file your taxes as early as possible.
Use E-File Instead of Postal Mail
An e-filed tax return arrives instantly at the IRS, which then sends back an acknowledgement receipt. At this point you’ll be notified if there’s any suspicious activity, such as possible identity theft. The quicker you know, the quicker you can deal with it. Before you e-file, however, be sure that your firewall, antivirus, and anti-spyware software are all up to date. If you do send your tax return in by post, think about taking it directly to the post office rather than letting it sit in your mailbox.
Don’t Fall for Scams
The IRS will not contact you by phone, email, or text to ask for personal or financial information. Never give out your Social Security number, passwords, PINs, and credit card or bank information to someone who reaches out via these channels. Official correspondence from the IRS is issued in the form of a letter and sent through the mail. However, scammers are getting increasingly clever, and sometimes phony links can look just like the real IRS website. If you ever have questions about the legitimacy of an IRS related query, your best bet is to call the IRS at 800-829-1040.
Protect Your Financial Accounts
Start by using a different password for each of your financial accounts, preferably one that combines letters, numbers, and special characters. It’s also wise to use a two-factor authentication when available, which requires you to verify your login—typically a code sent via call or text.
How to Report Tax Identity Theft
If you’re a victim of tax-related identity theft, you’ll find out when you try to file your return and learn that a return has already been filed with your Social Security number, or you’ll receive a letter from the IRS stating that a suspicious return using your Social Security number has been identified. If either of these happen, you should do the following:
- Complete a paper return. As shocking as it is to learn that you’ve been the target of identity theft, you still need to file your tax return. In order to avoid tax penalties or late fees, submit a paper return by the filing deadline.
- Go to IdentityTheft.gov to file a report with the FTC and IRS.
- File an Identity Theft Affidavit (Form 14039). Fill out and attach this form to your paper return. It will make its way to the Identity Theft Victim Assistance Organization, which will work on your case. Be prepared to submit various forms of documentation proving your identity.
- Contact the three major credit bureaus—Equifax, Experian, and TransUnion—and ask them to place a fraud alert on your credit records. You should also consider asking them to freeze your credit in case the thief should try to open new credit accounts in your name.
- Request a copy of the fraudulent return via Form 4506-F. Seeing the fraudulent return will help you determine the specifics of the theft, such as what family information has been compromised.
- As a precaution, delete any stored credit card numbers from shopping sites and change saved passwords to online accounts.
If you have questions on tax identity theft or would like to discuss your 2019 tax return, please feel free to email me at dkittell@mkrcpas.com or call 317.549.3091.
by Pete McAllister | Accounting News, Estate Planning - Individual, News, Resources, Retirement, Tax, Tax Planning - Individual
Even those of us who have the best intentions with our money can fall victim to bad financial habits, which can cause unnecessary stress and anxiety. Some of the most common bad habits we fall into include:
- Impulse spending
- Not budgeting (or not sticking to a budget)
- Spending more than you earn
- Relying on credit cards
- Falling into the trap of convenience
Breaking bad financial habits takes time, intention, and effort. Below are some ideas for starting better habits to get your money to work for you.
Start an Emergency Savings Account
This isn’t anything you haven’t been told before, but if you want to quit the cycle of credit card debt, you’re going to need a savings account to fall back on in times of financial hardship or unforeseen costs. Start with a goal of saving $1,000 specifically for emergencies, so next time your car needs work, for example, you’ll have the funds to pay for it rather than sinking farther into credit card debt.
Budget
Nothing says “taking control of my money” like creating a budget that works for you. When you assign a purpose to every dollar, not only are you actively monitoring your income and spending habits, but you’re avoiding debt and reaching your financial goals more quickly. The trick is sticking to it. It’s important to track your spending monthly, and revisit your budget at the beginning of each month, adjusting as needed with the goal of spending less than you bring in. If you know you have a bigger expense coming up later that month, or even in a few months, you’ll have a big picture of your finances and you can begin to make a plan for saving. You can also decide what your priorities will be for that month, and start saving toward your goals.
Make a Plan to Get Out of Debt
Credit cards, student loans, and car payments eat into your budget, and limit the amount of money you can put toward retirement and other financial goals. In short, debt limits your choices.
One popular and time-tested method of getting out of debt is often referred to as the snowball method. You start by paying off the smallest debt, then once that’s paid off, you add that monthly payment toward the next smallest debt until that one’s paid off. For example, if your smallest debt is a doctor bill for $200 and you make arrangements to pay $50 per month until it’s paid off, for the next four months you’ll pay that $50 to your doctor’s office while paying the minimum on every other debt. Once the doctor bill is paid in full, you add that $50 to the monthly payment of your next smallest debt while continuing to pay the minimum on your other larger debts. As each debt is paid off, you’re adding more to the next debt and building momentum until even your largest debt is paid off.
Save for the Future and Start Investing
Once you set up an emergency savings account and pay off your debt, you can begin to save more aggressively. The first step is to bulk up your emergency savings fund to the equivalent of six months of living expenses so you’ll have something to fall back on in case of a major unexpected life event, such as a job loss. Once this is accomplished, you can grow your wealth by investing your money. You’ll need to work with a financial planner to help advise you in investments and diversify your portfolio.
Stay Focused
It’s easy to get off track and lose focus when paying off debt, keeping on track with your budget, and saving for the future, so it helps to have some goals in mind. Whether your goals include a vacation home on a tropical island, paying for you child’s college education, or achieving early retirement (or maybe all three), keep these goals at the forefront of your mind whenever you lose steam. You can even create a vision board and put it someplace where you’ll see it every day, reminding you that good financial habits will pay off in the end.
If you have questions on setting healthy financial goals or would like to discuss your 2019 tax return, please feel free to email me at pmcallister@mkrcpas.com or call 317.549.3091.
by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, Healthcare, News, Retirement, Tax Planning - Individual, Tax Preparation - Individual
As the clock winds down to the end of the year, there are a few last-minute money moves to make in order to lower your tax bill.
Maximize Your 401(k) and HSA Contributions
While tax deductible contributions can be made to traditional and Roth IRA accounts until April 15 of 2020, the deadline for 401(k)s and HSA accounts is December 31 of this year. You can contribute up to $19,000 to a 401(k), 403(b), most 457 plans, and federal Thrift Savings Plans (plus $6,000 in catch-up contributions for those who are 50 or older). As for HSA accounts, the maximum contribution for 2019 is $3,500 for individuals and $7,000 for family coverage. And if you’re 55 or older you can contribute an additional $1,000.
Start Thinking About Retirement Contributions for 2020
Retirement contributions to 401(k)s have increased for 2020. Individuals can contribute $19,500 next year, and those 50 or older can contribute an additional $6,500. If you prefer to spread out your contributions evenly throughout the year, you’ll need to adjust your monthly contribution amounts by January.
Take Advantage of Your Flexible Spending Account
Funds in a flexible spending account revert back to the employer if not spent within the calendar year. Some companies might provide a grace period extending into the new year, but others end reimbursements on December 31.
Prevent Taxes on an RMD with Charitable Donations
After seniors reach age 70 ½ they must take a required minimum distribution each year from their retirement accounts (an exception to this rule is a Roth IRA account). Seniors who aren’t dependent on this money for living expenses should consider having it sent directly from the retirement account to a charity as a qualified charitable distribution, effectively preventing the money from becoming taxable income.
Consider a Roth Conversion
Because withdrawals from traditional IRAs are taxed in retirement while distributions from Roth IRAs are tax-free, you might think about converting some funds from a traditional IRA to a Roth IRA. Just be sure this move doesn’t tip you into the next tax bracket. You’ll need to pay taxes on the initial conversion, but the money will then grow tax-free in the Roth IRA.
Take Stock of Losses
Sell any losses in stocks for a deduction of up to $3,000, but be aware that purchasing the same or a substantially similar stock within 30 days of the sale would violate the wash-sale rule. If that happens your capital loss would be deferred until you sell the new shares.
Meet with a Tax Advisor
If you’re unsure whether or not you’re ending the year in a favorable tax bracket, check in with an advisor who can identify actionable steps to reduce taxable income through retirement contributions or itemized deductions.
