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February 11, 2019

Need cash? You may have penalty-free options

Suppose you need cash quickly. Then you remember that you have an IRA. While you can't take out a loan from your IRA, you may have other options — including access to funds short-term without any tax consequences.

  1. 60-day IRA rollover: IRA withdrawals are generally taxed at ordinary income rates, plus a 10 percent penalty applies to distributions before age 59 1/2. However, you can avoid the tax and any penalty by redepositing ("rolling over") the funds into an IRA before the 60-day deadline. Only one such IRA-to-IRA rollover is allowed each year.

    Of course, using money from an IRA like a short-term loan is often a last resort. Consider your other options first.

  2. 401(k) loans: Other retirement plans often do allow loans. If your plan permits it, you may borrow 50 percent from your account balance, up to a maximum of $50,000. The loan must be repaid within five years. Although you're paying interest at a relatively low rate to yourself, the loan effectively reduces your retirement savings.

  3. Home equity loans: Banks generally offer lower rates for home equity loans than credit cards. However, the loan must be secured by your home. Also, recent tax legislation eliminates deductions for most home equity loans.

  4. Personal loans: With a personal loan, you don't have to put up your home as collateral, but the interest rate is likely higher than the rate for a home equity loan. Generally, the loan term is one to five years.

  5. Credit cards: This is a common way to borrow money, but it's costly. Typically, the interest rates hit double digits. If you're buying an expensive item you may benefit from an introductory no-interest card.

You'll need to consider the best solution for your situation. Call if you have questions about tax consequences surrounding IRA withdrawals and contributions.

February 4, 2019

Consider this when choosing to file jointly or separately

If you're married, it's better to file a joint tax return, rather than separately ... right? That's usually true, but not always. It depends on your situation.

Deductions may play a role in your return status

Generally, the tax rate structure encourages couples to file joint returns. Nevertheless, you may be better off filing separately if one spouse has a disproportionate amount of expenses subject to a deduction "floor."

For example, say your annual adjusted gross income (AGI) is $150,000, while your spouse is a part-timer with an AGI of $20,000 a year. In 2018, you had unreimbursed medical expenses of $1,000, but your spouse incurred $9,000. Under recent legislation, the floor for deducting medical expenses in 2018 is 7.5 percent of AGI. (It reverted to 10 percent of AGI in 2019.)

If you file a joint return, you get no medical deduction even if you itemize, because your total expenses of $10,000 doesn't exceed 7.5 percent, or $12,750, of your combined AGI.

However, things change if you and your spouse file separately. While you still won't get a deduction, your spouse will be able to deduct the excess above 7.5 percent of their AGI, or $1,500. So your spouse's deduction is $7,500 — a big difference!

Filing separately wont help with state and local taxes (SALT)

The new law limits the annual SALT deduction to $10,000 for 2018. So if you live in a high-tax state, you may think that filing separately would provide a higher combined SALT deduction. No so. The annual limit is $5,000 for married couples filing separately.

For instance, if you pay $9,000 in SALT and your spouse pays $1,500, you can deduct $10,000 if you file jointly. But filing separately would provide a $5,000 deduction for you and $1,500 for your spouse, for a total deduction of only $6,500.

Truth be told, your return status depends on your unique circumstances. Call for help with determining the best approach on your tax return.

January 28, 2019

Use your tax refund for an IRA contribution

You may already know that contributions to a traditional IRA may be deductible on your personal tax return (subject to certain limits). You're allowed to deduct a contribution on your 2018 return that is made as late as April 15.

But are you aware that you can use this year's tax refund to make your IRA contribution for the 2018 tax year?

How to fund your IRA with a refund

The IRS says it's OK to use this year's tax refund to make your 2018 IRA contribution as long as you meet the April 15 deadline. If you want to use this strategy, however, you'll want to file your tax return early.

Here's how it works: You can contribute up to $5,500 to a traditional IRA for 2018 ($6,500 if you're age 50 or older). All you have to do is claim the IRA contribution on your 2018 return and then ensure the same amount is deposited in your IRA by April 15.

The ability to deduct contributions is phased out if you (or your spouse) actively participate in an employer's retirement plan, and your income exceeds a certain level. For instance, the deduction is gradually reduced for a single filer with a modified adjusted gross income (MAGI) between $63,000 and $73,000 on a 2018 return. Further calculations to determine your maximum contribution amount will be needed if your income falls inside a phaseout range.

The IRA refund strategy is especially beneficial for taxpayers who are struggling to make ends meet, but still want to save for retirement

Extensions are not allowed for IRA contributions, so don't procrastinate! Typically you can file your tax return starting as early as late January.

June 25, 2018

Turn your refresher course into a tax break

Maybe you feel the need to brush up on your skills in your particular line of work. One option is to take a refresher course at a local college this summer. What makes it even more enticing? You may be able to deduct the cost as a business expense.

Make sure your class qualifies for a deduction

If you're an employee or self-employed and rack up some business education expenses (like refresher classes), the cost will qualify as an ordinary and necessary business expense only if it passes one of these two tests:

1. The education is required by your employer or by law to keep your current job.

2. The education maintains or improves skills needed in your present work.

However, you can't deduct any of your expenses — even if you meet either one of the two tests stated above — if the class is needed to meet the minimum educational requirements of your current position or it qualifies you for a new trade or business.

The IRS takes a notoriously tough stance on what constitutes a "new trade or business," and the courts usually back it up. For instance, deductions have often been denied in the past for nurses who take courses that might lead toward a career as a physician. Although, if you're merely studying new developments in your chosen field, you should be OK.

A new tax law snag

Previously, unreimbursed employee business expenses, including costs of business education, could be deducted as miscellaneous expenses on your personal tax return. Under new tax laws, deductions for miscellaneous expenses are suspended from 2018 through 2025. That means no write-off is available this year.

Luckily, you may be able to arrange for reimbursements from your employer. Reimbursement payments are generally tax-free to recipients and deductible by the employer. If an employer uses a formal educational assistance plan, they can take advantage of a tax exclusion of $5,250 per employee.

June 18, 2018

Can you deduct medical expenses you paid for your relative?

New tax laws lowered the medical deduction threshold for 2018 to 7.5 percent of adjusted gross income (AGI) from 10 percent. But that's still a pretty high bar to clear. Fortunately if you scour your records, you may find expenses to put you over the top — including amounts paid for relatives.

Here's what counts for medical deductions

An expense generally counts toward the medical deduction threshold if it involves medical care for yourself or immediate family. Medical care costs can include such things as surgeries to equipment such as wheelchairs.

Medical expenses you've paid on behalf of other family members may also count, but it can get tricky. Typically, you can deduct medical expenses if the relative would have qualified as your dependent.

To have a relative qualify as your dependent, you must provide more than half of the relative's annual support. He or she also can't have more gross income than the $4,050 personal exemption listed in the tax code.

However, their expenses still count toward your medical deduction if they fail the dependency test solely because they had more gross income than the personal exemption limit.

Here's an example: Mom receives $5,000 in annual income from investments, but her rent costs her $12,000 a year. So you help her out by paying the $7,000 difference. Although she wouldn't qualify as your dependent due to the gross income limit, you still provide more than half of her support. If you then pay a $1,000 medical bill for Mom, the expense is added to your total.

Double-check to see if you can benefit from this little-known rule for medical expenses. The deduction threshold returns to 10 percent of AGI in 2019, so this may be your last chance. Give us a call for assistance.

June 11, 2018

How to lock down the home sale exclusion

Good news if you're selling your home: The home sale exclusion wasn't touched by the massive tax law changes. Arguably one of the biggest tax breaks to be left intact, it allows you to exclude capital gains tax on the first $250,000 in profit from a sale of a home. The maximum home sale exclusion is doubled to $500,000 if you're married and file jointly.

How the exclusion works

The basic requirements are relatively simple. To qualify, you must have owned and used the home as your principal residence at least two of the previous five years. For example, if you live in a home for two years and then move full-time to a vacation home for three years, you can still qualify for the exclusion on the sale of the first home.

Consider these factors if you're determining whether or not you can take advantage of the home sale exclusion:

  • The years you own and use your principal home don't have to be consecutive. For instance, you might live in a principal residence for one year, switch to another home in the second year and then move back to the first home in the third year.
  • Joint filers can claim the maximum exclusion if either spouse owned the home for at least two out of the last five years leading up to the sale date, both spouses have lived in the home for two out of the five years and neither spouse has elected the exclusion within the last two years. This could be crucial for recently divorced or remarried taxpayers.
  • Generally, a short temporary absence won't count against you. A college professor on sabbatical or snowbirds spending winters in Florida should be OK.
  • If you split time between two homes during the year, the place where you stay most often is generally treated as the principal residence. Therefore, to claim the exclusion for a home, make sure you reside there more than half the year for at least two years.

You may qualify for a partial exclusion if you sell a home before you meet the two year requirement due to an employment change, health issue or some other unforeseen event. In this case, then exclusion is prorated based on your use.

Call us if you have questions about how the home sale exclusion could help you save on your 2018 tax bill.

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