Last Year’s Tax Bill Makes This Year’s Opportunity

Hand moving chess piece

For the first time in many years, it looks like a last minute tax law change will not upset your ability to fulfill a well thought out tax plan. In addition to making last minute moves to reduce your tax obligation, consider some opportunities to take advantage of recent legislation.

Educators. The $250, above the line deduction is now permanent. If you are a qualified teacher, please make sure you save receipts for your out-of-pocket classroom expenses.

Action: Add up your receipts now. If less than $250, consider your needs prior to the end of the year to maximize your use of this tax law.

Small Business. There are numerous provisions for small business tax savings opportunities in recent tax legislation. Most of them benefit specific industries, but a couple are worth considering for most businesses.

Action: Consider 1st year bonus depreciation and Section 179 provisions to expense qualified capital equipment purchases. Also review your possible use of the Research Credit recently made a permanent part of the tax code.

Seniors who donate. If a senior age 70½ or older, you can now make direct contributions to charities from qualified retirement accounts. The limit is $100,000. The benefit of these direct contributions is they control your adjusted gross income to help you become more tax efficient.

Action: Consider a direct contribution to a preferred charity, especially if you would make the donation with after-tax funds anyway.

Sales tax or state deduction. The option to deduct general sales tax as an itemized deduction versus using state income taxes is now permanent.

Action: Review your situation. If you anticipate low or no state income taxes, but could itemize, you may wish to use this deduction. Remember to keep receipts of any large purchases to track large sales and use tax payements.

Everyone’s health care reporting. Remember to look for your Form 1095 this year. It should accurately report your family’s health care coverage. Many providers of this form have had a hard time getting this information from insurance carriers.

Action: Look for this form in January. Confirm that the information is correctly reported. Notify the provider immediately if the form contains any errors.

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NEW! College Aid Financial Package (FAFSA) Timing

FAFSA Student Aid

Annual FAFSA filing availability is now.
If you have a child in college or entering college during the next school year, you need to read this.

The time to apply for federal financial aid is now.

The new application timeframe

The Free Application for Federal Student Aid (FAFSA) is now available for the 2017 – 2018 school year. The FAFSA application process opened on October 1st. This is a major departure from prior years when the new application was made available three months later, on January 1st.

The time to file is now

The earlier you file your application, the earlier you will receive aid packages from most participating schools. The application is used to receive grants, federal loans, and work study awards. Here are some hints to make sure the application process works in your favor.

Mortarboard Bullet Point Create your signature PINs. If you have not already done so, both the student and parent will need to set up an electronic signature within the FAFSA system. You cannot submit the FAFSA form without this.
Mortarboard Bullet Point File the FAFSA early! As soon as possible, fill out and submit your FAFSA. Your current and prospective college student will start to see reminders to communicate this filing date change. Filing early maximizes your chances of receiving aid. It also minimizes your chances of missing an unknown application deadline.
Mortarboard Bullet Point Getting tax records is now easier. With this earlier timing, you can now use last year’s (2015) tax information when filling out the application. There are IRS tax return data retrieval tools within the online application to automate this process.
Mortarboard Bullet Point Let your advisor know. If you have a child ready to attend college, stay in touch with your financial advisor. Managing your assets to present a good financial picture starts before your student’s junior year in high school.
Arrow Student and parent Social Security Numbers
Arrow Driver’s license
Arrow Federal tax information for the student and parent
Arrow Record of any untaxed income (excluding retirement account balances)
Arrow Balances of the following
  • Cash, savings and checking accounts
  • Investment asset balances
  • Other assets
Arrow FAFSA PIN

Filling out the form can be a daunting task for the uninitiated, but with proper preparation you can get your form done in quick order.

Tips to Make School Expenses Deductible

Apple and pencils

It seems like summer has just begun and the Back-to-School advertising blitz has already started. Are there tax savings opportunities within this nightmare for our kids? Certainly, if you are tax smart about your spending. While the amounts may be small, they can add up in a hurry. Here are some ideas:

 

 

 

Check mark Purchasing the class supply list could have deductions in it. Often schools send a list of requested supplies for the school year. Some of the items on the list are clearly for personal use (such as an eraser or a ruler) while other items on the list are often for school use and classroom use (such as 24 pencils or paper towels). This classroom supply technique effectively transfers the school expenses to our children. Keep track of these non-cash classroom/school donations for possible non-cash charitable deductions.
Check mark Donate funds versus buying the supplies. Instead of buying the classroom supplies yourself, consider providing a check written to the school as a donation. This helps in two ways: First, it becomes a clear cash donation with a canceled check as a receipt. Second, if your school has a good supply agreement, the purchasing power of your donation will go further.

Check mark

Whenever you donate, get a written confirmation from the school or your child’s teacher representing the school. Most teachers do not have the form, so bring one with you that the teacher can sign. You can get the directions on www.irs.gov or simply use a respected charitable group like Goodwill, or the Red Cross for a format to copy.
Check mark Leverage the school’s PTA. This non-profit parent group, if a qualified charitable organization, is a great resource to help your school AND help you get deductible donations for funds you would otherwise provide to your child’s school.
Check mark Use checks not cash. If you usually provide donations to the school in the form of cash (like providing additional money to help other kids go on field trips) make those donations in the form of a check. Cash donations without receipts are not deductible.
Check mark Donate funds versus taking the raffle ticket. Raffles, subscription drives, and silent auctions are fun ways schools raise funds. To maximize your ability to deduct your donations, forego the possible prize. Then the entire donation is clearly deductible.
Check mark Don’t forget your out-of-pocket expenses for your volunteer activities. Perhaps you donate your time at school functions, donate books to the school library, or help assist the teaching staff. Your out-of-pocket expenses and your mileage should be tracked for charitable deduction purposes.
Check mark Teachers, save your out-of-pocket expenses. The $250 deduction for qualified educators out-of-pocket classroom expenses is a popular tax provision in Congress that is now a permanent part of the tax code.

Finally, don’t forget to review state rules for educational expenses. There are often credits available for out-of-pocket school and other educational expenses.

Tax Planning Season is Now

Tablet, spreadsheet, calculator, and coffeeTake multiple years of last minute tax law changes, add major sections of the tax code that expire each year only to be extended, and mix in major pre-formulated tax code changes. All this adds up to lots of potential for tax savings, but only if you plan accordingly. This is especially true in the following cases.

Check mark You have a child entering college. There are so many different college tax breaks, it is hard to determine which ones might make the most sense for your situation. This includes the American Opportunity Tax Credit, the Lifetime Learning Credit, Tuition and Fees Deduction, Coverdell Plans, 529 Plans, and student loan interest deductibility.
Check mark You wish to explore charitable giving strategies. Consider donating appreciated stock instead of cash. If you are over the age of 70 consider donating directly from a qualified retirement account instead of using after-tax savings.
Check mark Review the now permanent tax provisions. Late 2015 legislation made many popular tax breaks permanent. Do you know what they are and how they may impact you this year? These include an educator $250 expense deduction, sales tax as an itemized deduction alternative, expanded American Opportunity Tax Credit, and an expanded Earned Income Tax Credit.
Check mark Other changes may require a look. In addition to the tax provisions above, certain events may dictate a need for a quick tax review. Key among them are:

Check Getting married
Check Recently divorced
Check Birth or death in the family
Check Age triggering events (like retirement)
Check Kids entering or leaving school
Check Moving to a new state
Check Major purchase or sale of key assets including your home
Check Large refund or tax bill last year

Please call if you wish a review of your tax situation.

A Dozen Financial Topics High School Students Should Know

High school banking

1 How bank accounts work. Provide your student a basic understanding of checking accounts and savings accounts. Show your new banking customer how to use checks and debit cards to pay for goods with their funds. Teach them how to access their accounts and reconcile their statements each month.
2 How credit cards work. Teach your child how credit cards work. Stress the importance of understanding that credit card spending actually creates a loan. Too many young people create credit card debt that they are unable to pay back. Emphasize the importance of not carrying a balance by paying off credit card debt each month.
3 Tax basics. You do not need to create a tax expert, simply a smart consumer that understands the basics of tax. When your student receives their first paycheck, walk through their paystub to explain Social Security, Medicare, federal tax withholdings, and state tax withholdings.
4 The power of the retirement account. While a tough concept for a young person, let them know the availability of long-term savings tools like a Roth IRA. The wise saver can create a self-made millionaire by starting their retirement savings at a young age.
5 How credit scores work. While no one really knows all the aspects that go into creating a credit score, you still have access to a free credit report each year. Consider walking through your child’s free credit report with your student.
6 Spending within your means. Save first then spend. This is a simple concept that is hard to accomplish. By teaching your student this habit early, you give your child a fighting chance of creating strong financial habits.
7 The art of saving. Part of spending within your means implies that your student has healthy savings habits. Walk your child through the techniques that work for you. Perhaps it is setting up a separate savings account. Perhaps it is putting a set amount away each month.
8 The strength of investing. The most valuable investment a young person can make is in themselves. Whether it is a college degree or a trade school diploma, your student can create tremendous value in skills that will provide a positive financial return each year.
9 Mutual fund and stock understanding. With an understanding of self-investment, next consider teaching your student some of the basic investment alternatives available to them. Stocks and mutual funds are most common, but also consider explaining bonds, CD’s, annuities and other investment tools.
10 Budgeting. Help your student create a basic budget and then help them track their savings and spending against this budget.
11 Cash flow. The hard way to learn the lesson of cash flow is when bill collectors are calling and there simply isn’t money to pay them. When creating an initial budget, show your student the flow of funds each month. An easy example of this is to show the flow of funds that relate to a car. There are everyday expenses like fuel, there are monthly expenses like a car payment, and there are periodic expenses for car insurance.
12 Calculation of net worth. Assets (what you own) minus liabilities (what you owe others) equals net worth. This is the math of banks and businesses. The sooner your student understands this concept, the easier it will be to plan to purchase a car, a house, or any other item of value.
13 The bankers dozen: The value of identity.Perhaps one’s personal identity is the most undervalued asset owned by your student. Online media may seem free, but your student has paid for this access with their identity. With the advent of identity theft, government/employer access to personal online information, and the proliferation of online advertising, consider helping your student understand the value of having a small online footprint. Help them establish healthy habits that will protect their personal information.

 

Déjà vù All Over Again

1040 and Gavel

Will the habit of late law changes continue?
The Congressional habit for repeatedly making late tax law changes is now so bad that the IRS is reserving blank lines on the form 1040 for possible law changes this month. Given the potential for retroactive tax law changes in 2015, please prepare for the extension of the following tax laws that expired in 2014. While there is no guarantee that tax law extensions will be made, by being prepared with the proper documentation you can take advantage of any forecasted changes.
Gavel Bullet Educator’s $250 tax deduction
If you are a teacher and have out-of-pocket expenses please keep your receipts. You may be able to deduct up to $250 of qualified expenses even if you do not itemize deductions.
Gavel Bullet State sales tax itemized deduction option
Keep receipts of any large purchases. The sales tax provision allows for you to take either a general sales tax deduction or a state income tax deduction as an itemized deduction.
Gavel Bullet Direct contribution from retirement accounts for qualified seniors
In 2014, qualified seniors who donated funds directly from their retirement plan could exclude the plan withdrawal from income. Hold off using this technique in 2015 until you receive confirmation from Congress this tax law is extended.
Gavel Bullet Itemized deduction for mortgage insurance premium costs
Keep your mortgage insurance documentation for a potential itemized deduction.
Gavel Bullet Changes in small business depreciation
Through late November, 2015 there is no longer bonus first year depreciation. In addition, Section 179 amounts are greatly reduced from $500,000 in qualified assets to $25,000. Even if the law changes, you have little time to purchase and install equipment. Please plan accordingly.
If other late law changes impact you, rest assured those changes will be applied to your tax return as they become known.

Want Federal Money for College?

FAFSA Student Aid
Prepare now for your FAFSA filing

The Free Application for Federal Student Aid (FAFSA) is often the starting point to help families finance the ever challenging cost of a student’s college education. The application is available starting January 1st. The earlier you file your application, the earlier you will receive aid packages from most participating schools. The application is used to receive grants (free money!), federal loans, and work study awards. Here are some hints to make sure the application process works in your favor.

 Mortarboard Bullet Point Create your signature PINs now. Both the student and parent will need to set up an electronic signature within the FAFSA system. You do not have to wait until January to set these up, so do it now. You cannot submit the FAFSA form without this.
Mortarboard Bullet Point File the FAFSA early! As soon as possible after January 1st, fill out and submit your FAFSA. You will start to see reminders in the press in late December, but November is a great time to estimate your year-end tax obligation. Filing early maximizes your chances of receiving aid. It also minimizes your chances of missing an unknown application deadline.
 Mortarboard Bullet Point Start organizing your tax records. You can fill out and submit the FAFSA form before you finalize your tax return. If you choose this route, you will estimate your tax figures for the FAFSA and then go back later and update your FAFSA with actual numbers. Start organizing your tax records now, so you are in a good position to estimate your tax return.
Mortarboard Bullet Point Let your advisor know. If you have a child ready to attend college, stay in touch with your financial advisor. Managing your assets to present a good financial picture starts before your student’s junior year in high school.
Mortarboard Bullet Point Collect needed information. To fill out a FAFSA you will need the following;

Arrow Student and parent Social Security Numbers
Arrow Drivers license
Arrow Federal tax information for the student and parent (actual or estimated) for current year and actual information from the prior year
Arrow Record of any untaxed income (excluding retirement account balances)
Arrow Information for balances of the following

  • Cash, savings and checking accounts
  • Investment asset balances
  • Other assets
Arrow FAFSA PIN
Mortarboard Bullet Point Involve your student. The FAFSA is a student application for assitance. Use this application process to help your student feel ownership of their educational journey.

Every January, the www.fafsa.gov web site is heavy with activity as students start submitting their FAFSA forms. Please ask for assistance if you need help with any part of the FAFSA submission. The form can be a daunting task for the uninitiated, but by proper preparation you can get your form done in quick order.

IRS Erroneously Denies Educator Deduction Claims

During its annual review of the tax filing season, the Treasury Inspector General for Tax Administration (TIGTA) discovered the IRS was incorrectly denying educator expense deductions for some taxpayers.

Teacher DeskThe deduction

In 2014, qualified educators could reduce their income by up to $250 for classroom related expenses. This deduction is available whether or not a taxpayer itemizes their deductions.

The problem

The IRS was denying the deduction if the taxpayer could be claimed as a dependent on someone else’s tax return. This denial impacted young teachers and others who could use the tax benefit.

What you need to know

The $250 educator expense deduction is one of the tax provisions that is repeatedly expiring only to be extended once again by late Congressional action. As of now the benefit is not available in 2015. In all likelihood, the benefit will be available once again. In the meantime,

Paperclip Bullet Point If you took the deduction in 2014 and you are challenged by the IRS, ask for help. A quick review and clarifying letter should help you retain your deduction.
Paperclip Bullet Point If the tax law is extended unchanged into 2015, remember you can take the deduction even if you can be claimed as a dependent on someone else’s tax return.

 

 

Financing for College? Be Creative.

Tax Benefits of Being a Sole ProprietorCan you or your child manage to graduate from college without having a mountain of debt? The Federal statistics suggest it is unlikely. But if you are creative, perhaps you can reduce the financial burden you are facing.

Creative funding does not replace the basics

Remember to fill out the FAFSA and submit it on time. This is the federal blueprint to get your aid package. Also check reliable sources to ensure you are taking advantage of the common available support. High School guidance counselors and prospective colleges are great resources to help you understand what is available for you.

A web site like the non-profit Collegeboard.org is a great place to start. This site has resources to help walk you through the financial aid process and it has tools to help search for scholarships.

Some creative ideas

Here are some, beyond the obvious, ideas to help augment money to pay for school.

Arrow Tutor. If you are good in math, writing, or any other subject consider tutoring others to earn some additional income. You can schedule this around your class time and can feel good about helping other students.
Arrow Work study. Some financial aid packages include a work study element. But if you don’t qualify for traditional work study think creatively. Are there privately run businesses on or by campus? Perhaps the local coffee shop needs help. Is there a little retail store students go to for supplies? Go where the students go, they are targets for employment.
Arrow Be an entrepreneur. Campuses are like small towns. The students need services. Computer repair, transportation, hair services, running errands, and more. Is there a little business opportunity for you? If this is an avenue for you, make sure you understand the local rules for running your small service business.
Arrow Leverage your youth activity. If you danced or played soccer as a youth, consider offering your services as a paid teacher or coach. Local clubs and studios would love to have trained help in their organization. And if you have a passion for the activity, it is a great way to recharge.
Arrow Set up your own internship. Many schools will have programs to support internships with businesses. For every one formal program the school offers, there are hundreds of small businesses in the same field that could use the same type of help. Why not contact local businesses in the field of your choice. Perhaps it is a small accounting firm or a free-lance graphic design company. Can your graphic and web skills be used at a local business that cannot afford their own staff?

If you think creatively, there are many opportunities to reduce the financial burden of college. Just ensure the time spent in augmenting your finances does not get in the way of performing well in the classroom.

As always, should you have any questions or concerns regarding your situation please feel free to call.

How well do you know tax history?

As April is tax month, included here is a short quiz to see how well you know your tax history.

While Abraham Lincoln’s administration introduced the income tax to finance the Civil War, the first modern 1040 Individual Income Tax form was introduced in 1913. How well do you know what was on this original 1040? Enjoy!

Question What was the original due date of the initial 1040 tax form?
Answer March 1st, 1914. Failure to file on time could lead to a fine of between $20 and $1,000. A 30-day extension by reason of sickness or “absence” could be granted by the tax collector. Today we have an additional 45 days to file our tax returns (April 15th) and can file for a six-month extension.

Question What was the tax rate applied to most individuals’ income?
Answer The “normal” tax applied to most 1913 tax returns was 1%.

Question If you had Taxable Income of over $50,000 you became subject to the “Super Tax”. What was the maximum tax rate on these excess earnings?
Answer Six percent. 2% was owed on income from $50,000 to $75,000. The maximum tax rate of 6% was owed on Taxable Income over $500,000. The 1913 tax brackets were; 1%, 2%, 3%, 4%, 5% and 6%. Compare this to our current tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Question Was there a marriage penalty built into the
original Form 1040?
Answer Yes. If single (or married but not living with your spouse) your exemption amount was $3,000. If you lived with your spouse your exemption amount was only $4,000. If both you and your spouse worked (a rare event in 1913), you could divide the $4,000 exemption any way you wished to minimize your taxes.

Question Name two things that are currently taxed, but were not
taxed on the original 1040 tax form?
Answer There were many, but perhaps the most common untaxed items were dividends and net earnings from corporations that were already taxed. The double taxation of corporate earnings that we experience today would be added later.

Question True or False. All the original tax returns required a signed affidavit
before an authorized officer of the government prior to being filed.
Answer True. All properly filed tax returns required affidavits made before an officer authorized by law to administer an oath of accuracy. This could be a justice of the peace, a magistrate, or a certificate of the clerk of the court. Mailing in your tax return was not an option in 1914.