The IRS is opening the 2019 individual income tax return filing season on Jan. 27. Even if you usually don’t file until closer to the April 15 deadline (or you file an extension), consider being an early-bird filer this year. It can potentially protect you from tax identity theft. In these scams, a thief uses another person’s personal information to file a fraudulent return early in the filing sea son and claim a bogus refund. Then, when the legitimate taxpayer files, the IRS rejects the return because one with the same information has already been filed for the year. If you file first, any would-be fraudulent returns will be rejected by the IRS, rather than yours.
If you’re adopting a child, or you adopted one this year, there may be significant tax benefits available to offset the expenses. For 2019, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $14,080 of “qualified adoption expenses” for each adopted child. (This amount is increasing to $14,300 for 2020.) The credit allowable for 2019 is phased out for taxpayers with adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated when AGI reaches $251,160 for 2019 ($254,520 for 2020). We can help ensure that you meet all the requirements to get the full benefit of the tax savings available to adoptive parents.
As teachers head back to school, they often pay expenses for which they don’t receive reimbursement. Fortunately, they may be able to deduct some of them on their tax returns. You don’t have to itemize your deductions to claim this “above-the-line” tax break. For 2019, educators can deduct up to $250 of eligible expenses that weren’t reimbursed. Eligible expenses include books, supplies, computer equipment, software, other classroom materials, and professional development courses. To be eligible, taxpayers must be kindergarten through grade 12 teachers, instructors, counselors, principals or aides. They must also work at least 900 hours a school year in an elementary or secondary school.
If you’re lucky enough to be a winner at gambling or the lottery, congratulations! But be aware there are tax consequences. You must report 100% of your winnings as taxable income. If you itemize deductions, you can deduct losses but only up to the amount of winnings. You report lottery winnings as income in the year you actually receive them. In the case of noncash prizes (such as a car), this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year. These are just the basic rules. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.
Let’s say you’re buying a new car and want to get rid of your old one. You’ve heard ads claiming you can get a tax deduction for donating a car to charity. But this may not result in a big deduction — or any at all. It depends on whether you itemize and what the charity does with the vehicle. For cars worth more than $500, the deduction is the amount for which the charity sells the car. However, i f a charity uses the car in its operations or materially improves it before selling, your deduction is based on the car’s fair market value at the time of donating. You also must itemize deductions. You can’t claim a deduction if you take the standard deduction. Contact us for more details.
If you’re thinking about relocating to another state in retirement, consider the impact of state and local taxes. It may seem like a state with no income tax is a smart choice, but you also have to factor in property and sales taxes, as well as any state estate tax. If you make a move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. How? Take steps such as buying a new home, changing your mailing address, registering to vote and getting a driver’s license in the new state. Before deciding where to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises.
Did you receive a refund this year that was smaller than you were expecting? Or did you wind up owing additional tax when you filed your return? That might mean it’s time to check and adjust your withholding. This might be necessary due to changes in the Tax Cuts and Jobs Act or because something in your situation is different this year (for example, you got married, divorced, purchased a home or had changes in your income). The IRS has a withholding calculator where you can perform a paycheck checkup. You can access the calculator at https://bit.ly/2aLxK0A. Contact us if you need help determining whether you should adjust your 2019 withholding.
If you participate in a qualified retirement plan, such as a 401(k), you must generally begin taking required withdrawals from the plan no later than April 1 of the year after which you turn age 70½. However, there’s an exception that applies to certain plan participants who are still working for the entire year in which they turn 70½.
The basics of RMDs
Required minimum distributions (RMDs) are the amounts you’re legally required to withdraw from your qualified retirement plans and traditional IRAs after reaching age 70½. Essentially, the tax law requires you to tap into your retirement assets — and begin paying taxes on them — whether you want to or not.
Under the tax code, RMDs must begin to be taken from qualified pension, profit sharing and stock bonus plans by a certain date. That date is April 1 of the year following the later of the calendar year in which an employee: Reaches age 70½, or retires from employment with the employer maintaining the plan under the “still working” exception.
Once they begin, RMDs must generally continue each year. The tax penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t. However, there’s an important exception to the still-working exception. If owner-employees own at least 5% of the company, they must begin taking RMDs from their 401(k)s beginning at 70½, regardless of their work status.
The still-working rule doesn’t apply to distributions from IRAs (including SEPs or SIMPLE IRAs). RMDs from these accounts must begin no later than April 1 of the year following the calendar year such individuals turn age 70½, even if they’re not retired.
The law and regulations don’t state how many hours an employee needs to work in order to postpone 401(k) RMDs. There’s no requirement that he or she work 40 hours a week for the exception to apply. However, the employee must be doing legitimate work and receiving W-2 wages.
For a customized plan
The RMD rules for qualified retirement plans (and IRAs) are complex. With careful planning, you can minimize your taxes and preserve more assets for your heirs. If you’re still working after age 70½, it may be beneficial to delay taking RMDs but there could also be disadvantages. Contact us to customize the optimal plan based on your individual retirement and estate planning goals.
While the Tax Cuts and Jobs Act reduces most income tax rates and expands some tax breaks, it may cause you to see these five itemized deductions shrink or disappear when you file your 2018 tax return: 1) state and local tax, 2) mortgage interest, 3) home equity debt interest, 4) miscellaneous, and 5) casualty and theft loss. The combination of a much larger standard deduction and smaller itemized deductions may mean that, even if itemizing has typically benefited you, you might now be better off taking the standard deduction. Contact us for details.
The IRS opened the 2018 income tax return filing season on Jan. 28. Consider filing as soon as you can, even if you typically don’t file this early. It can help protect you from tax identity theft, in which a thief files a return using your Social Security number to claim a bogus refund. If you file first, it will be returns filed by any would-be thieves that are rejected by the IRS, not yours. Ot her benefits: You’ll get your refund sooner or, if you owe tax, you’ll know how much you owe sooner so you can be ready to pay it by April 15. Contact us with questions.
Raffles are popular fundraisers for not-for-profits. But they’re subject to strict tax rules. State laws on nonprofit-sponsored raffles vary, but you must comply with federal income tax requirements. First, you may owe unrelated business income tax unless your fundraiser is “substantially” staffed by volunteers. Second, raffle winnings must be reported to the IRS when the amount is $600 or more an d at least 300 times the raffle ticket price. Third, you need to withhold income tax from the winnings if the proceeds are more than $5,000. Contact us for details.
Americans support charities for a variety of financial, emotional and social reasons, and some of them aren’t so obvious. For example, wealthy donors may be motivated by not only tax and asset protection considerations, but also a desire to limit what they leave to their children to prevent a “burden of wealth.” Younger donors often want to “make a difference,” and donors of all stripes are motiva ted by a desire to make an altruistic impression. These individuals are more likely to give when asked by someone they know or when their gift will be publicized.