Category Archives: Financial Strategies

Mid-Year planning – Rates, Roths and Rules

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Checking your income tax planning now is a good idea – tax planning can be done year-round.  As with any planning, acting while you can have an impact is best.  Tax laws may change before the end of 2022, e.g. Secure Act 2.0 may be adopted, but it’s still wise to know where you stand now. 

The IRS seems to have a similar thought about tax planning as they created a website with tools and resources at Steps to Take Now to Get a Jump on Your Taxes – if you check it out, let us know what you think.

First question:  did you get a tax refund, or did you owe? 

Refunds

Some people enjoy seeing a big refund, but as you may have heard, you are giving the government an interest-free loan with your money.  If you want to save, there are better ways, like an auto-debit to an IRA or to a savings account.

Not sure what happened to your refund?  There is a updated IRS tool for “where’s my refund” that now goes back three years at “Where’s My Refund?” 

The tool confirms receipt of your tax return, shows if the refund has been approved and indicates when it will be or has been sent.  If three weeks pass without receiving the refund, then you may want to contact the IRS.

Owed taxes

If you owed a significant amount for 2021, the IRS has another tool that helps make sure you have enough withheld for 2022 at Tax Withholding Estimator.  This way you can avoid penalties and interest for under withholding. 

If you do not get clear answers using the estimator tool, try comparing your 2022 paystub to your 2021 tax return, review the IRS guidance at Publication 505, or contact us for help.  

Second question: what happens if you act now?

Marginal vs. average tax rate

Knowing the rate at which additional net income will be taxed helps you make decisions such as the one in the next section, whether to convert an IRA to a Roth IRA or not. 

The marginal rate is your tax bracket, the rate at which the last portion of your income is taxed.  Any additional income would be taxed at this rate.  Your average tax rate is the percentage of income taxes to total taxable income.  You can have a low average rate but hit a high marginal rate, which may mean that taking more income into the current year would be costly. 

Time to convert to a Roth IRA?

The decision to convert a traditional IRA to a Roth IRA depends on several factors.  One is the rate of tax you pay now compared to the rate you expect to pay in retirement.  If your rate will be the same at retirement as now, then there are many reasons to convert, such as no required minimum distributions at retirement for a Roth IRA.  If your tax rate at retirement will be significantly less than currently, then converting now would be less tax efficient. 

If you want more on this decision, see “To Roth or not to Roth?” or check out Pros and Cons here.

Also, we discussed the back-door Roth IRA in our year-end post on 2021 tax planning.  

Last question:  how with this affect the rest of your finance?

Coordinate with investing and estate planning

Make sure any changes take for tax reasons do not foul your investment or estate planning. For more on estate planning, see estate planning checkup post. 

Summary

As you review your 2022 tax planning, check your 2021 returns for ideas on what to adjust, consider the impact of future tax rate increases and act when the impact on other planning also makes sense. 

Let us know if you have any questions. 

Good luck

How not to fall for Phishy IRS calls and other Scams

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These days, nearly all of us get calls, e-mails and text messages trying to gain access to our finances.  You have probably seen or heard of the call “from Amazon” about a new iPhone order, the call “from Social Security” indicating that your number has been suspended, which requires your immediate action with someone on the phone, the e-mail with a “voicemail message” attached for you to click on to hear, and the e-mail with an “invoice” for you to approve.  There are many more forms and styles, and more keep coming.

This post focuses on the calls purporting to be from the IRS, and the purpose of this post is to help make you more wary so you do not fall victim to any of these scams. 

The IRS recently posted its dirty dozen for 2021, a list of scams that focuses on Pandemic-related scams, like unemployment claims, but also fake charities, urgently seeking donations, and offer in compromise scams, claiming to have ways to reduce your taxes owed.  There are other scams that target elderly or people for whom English is a second language.  And some scams offer to file conservation easements and improper business credit claims for you.   

Calls “from the IRS”

The call insisting that you owe the IRS and need to pay is a scan that has been around for some time.  The IRS website, and the recorded message when you are on hold contacting the IRS, says:

  • The IRS won’t initiate contact by phone, email, text or social media asking for Social Security numbers or other personal or financial information. 
  • The IRS generally first contacts people by mail – not by phone – about unpaid taxes.
  • The IRS may attempt to reach individuals by telephone but will not insist on payment using an iTunes card, gift card, prepaid debit card, money order or wire transfer.
  • The IRS will never request personal or financial information by e-mail, text or social media.

Furthermore, the IRS will ask you to confirm your identity before discussing any tax matters with you. 

Protect your tax filings

To help insure that no one can file under your social security number, the IRS suggests obtaining an ID PIN for filing your tax returns.  The PIN is now available to all taxpayers; you include it when you file your tax returns so that the IRS can verify that it is you filing.  This prevents others from filing bogus refund claims under your social security number. 

You can also include your driver’s license when filing, so the IRS and state revenue departments can verify that it is you filing, not an imposter. 

Be Vigilant

To protect your finances, you need to be vigilant.  Before you answer the phone, what does the caller ID say?  Is it a legit company or “unknown”?  Before you respond to an e-mail, does the address look like a real customer service company site or something random?  Is the grammar or content in the call or message off?  If it seems off, it probably is. 

Usually, you can find safe and easy ways to confirm the information in question by placing your own call or logging onto the related website online, rather than responding directly. 

The IRS recommends setting up multi-factor identification to access your financial information.   The IRS suggests more steps here:

  • Using anti-virus software and set it for automatic updates. Anti-virus software scans existing files and drives on computers – and mobile phones – to protect from malware.
  • Using a firewall to shield digital devices from external attacks.
  • Using backup software/services to protect data. Making a copy of files can be crucial, especially if the user becomes a victim of a ransomware attack.
  • Using drive encryption to secure computer locations where sensitive files are stored.  Encryption makes data on the files unreadable to unauthorized users.
  • Creating and securing Virtual Private Networks. A VPN provides a secure, encrypted tunnel to transmit data between a remote user via the Internet and the company network. Search for “Best VPNs” to find a legitimate vendor; major technology sites often provide lists of top services.

Conclusion

If something smells “phishy,” it probably is.  So be cautious, even suspicious of interaction asking for personal and financial information.  Set up two-factor verification and an IRS PIN.  And let me know if you have questions or concerns.  I will try to help.

Estate planning checkup: why you don’t, why you should

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Why you don’t:

We have written previously stressing the need to have an estate plan, so you do not leave a mess, and why you may need life insurance to protect others.  Few people will disagree with the need to have a current plan and to provide for survivors, but not everyone acts.  

So, why is it that people fail to take action?  Rick Kahler wrote recently about Overcoming Client Procrastination with Financial Planning.  In his post, he lists factors that cause people to put off action that agree is important to address: 

  1. Avoidance.  Feelings of self-doubt, fear of pain or anxiety around the task, depression, fear of asking for help, lack of trust.
  2. Perfectionism.  Fear of failure, fear of being criticized (both externally by others and – often more powerfully – internally by parts of yourself).
  3. Ambiguity.  Lack of clarity about the task, feeling overwhelmed, difficulty prioritizing in the absence of a crises, being focused on immediate tasks.
  4. Narcissism.  Over-confidence in getting it done at the last minute. Needing chaos or pressure to provide adrenaline, the ability to focus to the exclusion of everything else, and a feeling of being fully alive.
  5. Physical Issues.  Fatigue, illness.
  6. Lack of knowledge.  Not knowing what you don’t know, unsure how to get needed help and information.
  7. Financial.  Not having the funds to take the necessary action.   

Do any of these apply to you?  If so, we can help so please contact us. 

Why you should:

One reason to review your estate plan is that the Biden administration may seek changes to the estate and income tax laws; you want to make sure your documents have the flexibility to address these changes.  The current federal gift and estate tax credit is close to $12 million.  However, it is scheduled to drop to between $5.5 and $6 million in 2025 and the administration may push for a lower credit to be imposed sooner.  Also, the administration may try to eliminate the step-up in basis at death.  We will continue to monitor any proposed law changes and post updates. 

There are other tax law changes to address, such as the elimination of the “stretch IRA.”  You may need to revise your beneficiaries.  Also, you will want your executor or personal representative to elect portability of your federal credit to minimize taxes and may want your documents to address the generation skipping transfer tax credit.

Another reason to act is to provide for your digital assets, something old documents may not address.  For example, you can give your attorney-in-fact under your durable power of attorney access to your digital assets and you can assign your digital assets to your revocable trust so your trustee has access.  Digital assets include e-mail and text messages, photographs, videos and other files on your computer, on-line accounts such as your investments and social media, or even intellectual property and patent rights.  You may also have collectibles that need to be addressed,

Another reason to act is to ensure that someone knows how to access all your passwords if something happens to you.  Create your own “Rosetta Stone,” a document telling them how to access your digital life, with IDs and passwords, and then make sure an immediate family member or close friend knows where to find it.  This way, they can locate all your important documents, find assets and insurance, and handle your social media if something happens.  You may also want to provide a memorandum to your personal representatives and trustees detailing your wishes, including thoughts on when to distribute to children, protecting from creditors, and even burial or cremation.

If you to take the time now to review and update your plan, be sure:

  • that you have documents that are in order,
  • that the documents are correctly executed,
  • that you provided adequate resources for survivors, including life insurance, and
  • that your beneficiary designations and asset ownership all coordinate with your documents.

When you do, you will have improved matters for you and your family! 

Contact our office if you have any questions or comments. And be well!

Some relief in the Pandemic

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News from the IRS on deducting PPE in the Pandemic:

Face masks and other personal protective equipment to prevent the spread of COVID-19 are tax deductible

WASHINGTON — The Internal Revenue Service issued Announcement 2021-7 today clarifying that the purchase of personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus are deductible medical expenses.

The amounts paid for personal protective equipment are also eligible to be paid or reimbursed under health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), health reimbursement arrangements (HRAs), or health savings accounts (HSAs).

For more information on determining what is deductible, see Can I Deduct My Medical and Dental Expenses? and Publication 502, Medical and Dental Expenses.

Some IRS suggestions on 2020 tax filings

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Here is a good news release from the IRS site worth reviewing

Important reminders before filing 2020 tax returns

WASHINGTON — Following an unpredictable year with many changes and challenges, the Internal Revenue Service today shared important reminders for taxpayers who are about to file their 2020 federal tax returns.

Choose direct deposit
The safest, most accurate and fastest way to get a refund is to electronically file and choose direct deposit. Direct deposit means any tax refund is electronically deposited for free into a taxpayer’s financial account.

Eight out of 10 taxpayers get their refunds by using direct deposit. It is simple, safe and secure. This is the same electronic transfer system used to deposit nearly 98% of all Social Security and Veterans Affairs benefits into millions of accounts.

Earned Income Tax Credit 
The Earned Income Tax Credit (EITC) can give qualifying workers with low-to-moderate income a substantial financial boost. EITC not only reduces the amount of tax someone owes but may give them a refund even if they don’t owe any taxes or aren’t required to file a return.

People must meet certain requirements and file a federal tax return in order to receive this credit. The EITC assistant on IRS.gov can help people determine if they qualify.

The IRS reminds taxpayers that they may elect to use their 2019 earned income to figure the EITC if their 2019 earned income is more than their 2020 earned income. For details, see Publication 596, Earned Income Credit. Taxpayers also have the option of using their 2019 income to figure the Additional Child Tax Credit for 2020.

Taxable unemployment compensation
Millions of Americans received unemployment compensation in 2020, many of them for the first time. This compensation is taxable and must be included as gross income on their tax return.

Taxpayers can elect to have federal taxes withheld from their unemployment benefits or make estimated tax payments, but many do not take these options. In that case, taxes on those benefits will be paid when the 2020 tax return is filed. Taxes can be paid throughout the year. For safe and secure ways to pay taxes electronically go to IRS.gov/payments.
 
Taxpayers can find more details on taxable unemployment compensation in Tax Topic 418, Unemployment Compensation, or in Publication 525, Taxable and Nontaxable Income, on IRS.gov.

Interest is taxable income
Many individual taxpayers who received a refund on their 2019 tax returns also received interest from the IRS. The interest payments were largely the result of the postponed filing deadline of July 15 due to the COVID-19 pandemic.

The 2019 refund interest payments are taxable, and taxpayers must report the interest on their 2020 federal income tax return.

The IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10. The average refund interest amount is $18, but the amount for each taxpayer varies based on the tax refund that the taxpayer received. Form 1099-INT will be issued no later than Feb. 1, 2021.

Home office deduction 
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy.

However, the Tax Cuts and Jobs Act suspended the business-use-of-home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. IRS Publication 587, Business Use of Your Home, provides more on the home office deduction.

Workers moving into the gig economy
Many people found different employment in 2020, including jobs in the gig economy. Taxpayers must report income earned in the gig economy on their tax return. However, gig-economy workers generally do not have taxes withheld from their pay as salaried workers normally do. The IRS encourages people earning income in the gig economy to consider making quarterly estimated tax payments to stay current with their federal tax obligations.

Charitable donation deduction for people who don’t itemize
Individuals who take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.

Before making a donation, the IRS reminds people they can check the special Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.

Under this change, individuals can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2020. This deduction does not apply to donated property. The maximum deduction is $150 for married individuals filing separate returns. More information is available in Publication 526, Charitable Contributions, on IRS.gov.

Disasters such as wildfires, flooding or hurricanes 
Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. Some 2020 tax deadlines in certain counties have been extended into 2021 due to recent wildfires, hurricanes or flooding.