Use Your Tax Refund Wisely

Roth BasicsThree of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully. Here are some ideas:

4 Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.
2 Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you’re 50 years old or older.
3 Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don’t own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early.
4 Invest in yourself. Sometimes the best investment isn’t financial, but personal. If there’s a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.
5 Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn’t the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains’ pleasure centers more than receiving the equivalent amount.1

If a refund is in your future, start planning now on how it can best help your financial situation.

Know Your Audit Risk

Audit Risk Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared. Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book.

Areas that get attention:

Bullet Point Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS.

Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more.

Bullet Point Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.

Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented.

Bullet Point Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially “noncash” donations of property with unclear value.

Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction.

Bullet Point Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony.

Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you.

Bullet Point Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies.

Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

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Know Your Audit Risk

Audit Risk

Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared.

Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book.

Areas that get attention

Bullet Point Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS.

Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more.

Bullet Point Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.

Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented.

Bullet Point Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially “noncash” donations of property with unclear value.Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction.
Bullet Point Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony.Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you.
Bullet Point Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies.Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

Tick Tock. Tax Reduction Ideas Still Available

Tax MazeAs the end of the year approaches, there is still time to make moves to manage your tax liability. Here are some ideas to consider.

 

Icon Maximize your retirement plan contributions. This includes traditional IRAs, Roth IRAs, and SEP IRAs for self-employed. Given the contribution limits in 2017 are not increasing, now is the time to maximize the contribution potential for this year and plan for next year’s contributions.
Icon Estimate your current and next year taxable income. With this estimate you can determine which year receives the greatest benefit from a reduction in income. By understanding what the tax rate will be for your next dollar earned, you can understand the tax benefit of reducing income in this year versus next year.
Icon Make charitable contributions. Consider which tax year will benefit most from your charitable giving of cash and non-cash items. Shift your giving into the year that will provide you the most benefit.
Icon Take capital losses. Each year you can net capital losses against capital gains. You can also deduct up to $3,000 in excess losses against your other income. Start to identify which investments may make sense to sell to take advantage of this. If planned correctly, these losses can offset ordinary income.
Icon Consider donating appreciated stock. This strategy gives you a charitable deduction for the market value of the stock, while not having to pay capital gains tax on the charitable gift. If you provide an annual pledge sheet to your church, this can be a great way to maximize your gift while giving needed funds to your church at the beginning of the year.
Icon Standard or itemized deductions. The standard deduction for 2016 is $12,600 for joint filers and $6,300 for single filers. If your itemized deductions are close to these amounts, consider shifting the deductions into next year. You can then maximize the benefit of itemizing into one tax year.
Icon Retirement plan distributions. If you are age 70½ or older, take your required minimum distributions for the year. If you are retired, but younger than 70½, consider taking tax efficient distributions from your retirement accounts. By paying some tax now, you may avoid paying higher taxes later when you have to follow the minimum distribution rules.
Icon Consider tax legislation. Please recall that tax laws passed in late 2015 made many temporary tax savings permanent and extended others into 2016. So save classroom related receipts if you are a teacher. Consider charitable contributions from your retirement plan if you are a senior. Keep receipts of large purchases to track a potential sales tax deduction.

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

Non-profit Annual Filing Due

Food donationsAnnual reporting is required for all organizations that wish to keep their non-profit status intact. The due date for this filing is May 16, 2016 for calendar year organizations. How can you help ensure your favorite charities stay compliant?

 

Check mark It is not too difficult. If the charitable organization has less than $50,000 in gross receipts, they can comply by sending in a Form 990-N e-Postcard. Larger organizations must fill out Form 990 or Form 990-EZ.
Check mark Failure to file could cause your favorite charity to lose its non-profit status. This can have a cascading effect on all those donating who wish to deduct their donation on their tax returns.
Check mark Check on-line. The IRS has a master list of charitable organizations recognized as non-profits in good standing. Here is a link: Exempt Organizations Select Check
Check mark Remind the organization. Many small non-profits like youth sporting groups and local school booster clubs often forget about this reporting because officers are constantly rotating in and out of the organization.

Be a Better Charitable Giver

Donation Jar

Simple moves to make your giving go further

These days, we all want our money to go further and charitable donations are no exception. Yet sometimes, even well-intentioned gifts may end up going to a poorly run charity or the charity does not receive the full benefit of your gift.

Here are some tips to ensure that your donation makes the biggest impact:

Light Bulb Research the Charity. Make sure the charity you donate to is a good steward of your resources. Websites like www.charitynavigator.org track the financial health and effectiveness of charities. Effective charities spend 75% or more of their resources on their services and 25% or less on fundraising and administrative costs.
Light Bulb Be Proactive. Identify the causes that are most important to you and your family and then target those organizations – it’s just too easy to give haphazardly to whomever asks you for money.
Wallet Do Not Give Over the Phone. Charitable telemarketing campaigns generally use for-profit fundraisers who take a percentage of your gift. This means the charity often receives substantially less of your donation if you give over the phone. If you truly support the organization, hang-up. Then contact the charity directly to make your donation.
Circular Arrows Focus Your Support. Focus on one or two charities that you are passionate about. Repeat donations from reliable donors save charities money because they don’t have to go looking for more donors and are not wasting money trying to woo uncommitted, one-time donors.
Communication Arrows Share Your Intentions. Whether your donation is a one-time gift or part of a long-term commitment, tell the charity so that they do not continue to spend money on seeking more donations from you.

As part of your holiday season of giving, consider giving to a favorite charity. It can also serve as part of your year-end tax planning.

Tax Savings Ideas are Still Available

As the end of the year approaches, there is still time to make moves to manage your tax liability. Here are some ideas to consider before the glitter ball drops in Times Square.

Icon Maximize your retirement plan contributions. This includes IRAs and 401(k) plans at work. Given the contribution limits in 2016 are not increasing, now is the time to maximize the contribution potential for this year.
Icon Estimate your current and next year taxable income. With this estimate you can determine which year receives the greatest benefit from a reduction in income. By understanding what the tax rate will be for your next dollar earned, you can understand the tax benefit of reducing income for this year versus next year.
Icon Make charitable contributions. Consider which tax year will benefit most from your charitable giving of cash and non-cash items. Shift your giving into the year that will provide you the most benefit. Remember to track your charitable mileage. It is deductible as well.
Icon Take capital losses. Each year you can deduct up to $3,000 in capital losses in excess of capital gains. Start to identify which investments may make sense to sell to take advantage of this. If planned correctly, these losses can offset ordinary income.
Icon Consider donating appreciated stock. This strategy gives you a charitable deduction for the market value of the stock while not having to pay capital gains tax on the charitable gift. If you provide an annual pledge sheet to your church, this can be a great way to maximize your gift while giving needed funds to your church at the beginning of the year.
Icon Standard or itemized deductions. The standard deduction for 2015 and 2016 is $12,600 for joint filers and $6,300 for single filers. If your itemized deductions are close to these amounts, consider shifting the deductions into next year. You can then maximize the benefit of itemizing into one tax year.
Icon Retirement plan distributions. If you are age 70½ or older, don’t forget to take your required minimum distributions for the year. If you are retired, but younger than 70½, consider taking tax efficient distributions from your retirement accounts. By paying some tax now, you may avoid paying higher taxes later when you have to follow the minimum distribution rules after reaching 70½ years old.
Icon Consider pending tax legislation. There may be late breaking tax legislation once again. Should this happen, please be prepared to move quickly to take advantage of any tax law extensions. Save receipts if you are a teacher. Consider charitable deductions from your retirement plan if you are a senior. Keep receipts of large purchases in case sales tax is added as an itemized deduction in lieu of taking a state income tax deduction.

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

B-Corps; What are They?

Kickstarter, a popular crowdsource company that helps new inventors raise money to fund their creative projects, recently announced they are becoming a Benefit Corporation. While many of us may not know what this means, the move by Kickstarter is becoming more popular. Here is what you need to know.

Benefit Corporation defined

Per benefitcorp.net:

A Benefit Corporation voluntarily meets standards of corporate purpose, accountability, and transparency.

Bullet Purpose: Benefit Corporations have a corporate purpose to create a materially positive impact on society and the environment.
Bullet Accountability: Benefit Corporations are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment.
Bullet Transparency: Benefit Corporations are required to make available to the public, except in Delaware, an annual benefit report that assesses their overall social and environmental performance against a third party standard.

Seedlings on coinsHow is this different?

When a traditional company takes actions that do not maximize their value, they can be vulnerable to owner lawsuits. To solve this problem, some states allow companies to legally organize themselves as B-Corps or Benefit Corporations. The B-Corp formation provides the company legal protection from shareholders while pursuing a social mission. This social mission is made public. Here are some examples;

Arrow Patagonia (outdoor gear): Commitment to the environment
Arrow King Arthur Flour (baked goods and flour): Sustainable living environment; ending child hunger
Arrow Ben and Jerry (ice cream): Advance new models of social justice that are sustainable and replicable
Arrow Kickstarter: Commitment to arts and culture
Click here to see the Benefit Corporation Charter of Kickstarter

Other things to note

Arrow Benefit Corporations can be private OR publicly owned.
Arrow The profits may or may not be as high as a typically organized corporation.
Arrow Benefit Corporations often give part of their profits to a worthy cause.

While an investment in a B-Corp may not be profit maximizing, you may feel a little better about where you put your money. As with any investment, please understand your risks and ask for help before investing.

Extender Bill Passes

A visible expression of confusion in tax policy out of Washington D.C. is the treatment of a short list of tax laws that have been extended only to expire once again. In late December, Congress finally acted to extend many of these tax provisions for 2014. Here is a list of the commonly used tax provisions that will be available to you when you file your 2014 tax return.

On Switch Icon Teacher $250 deduction for qualified classroom expenses.

Bullet Icon Impacts: All qualified educators including those who do not itemize their deductions.
On Switch Icon Deduction for state and local general sales taxes (in place of state income tax deduction)

Bullet Icon Impacts: All taxpayers in states without income taxes who itemize deductions and taxpayers who have high sales tax obligations versus state income tax obligations.
On Switch Icon Deductibility of home mortgage insurance premiums.

Bullet Icon Impacts: All qualified home owners who carry mortgage insurance.
On Switch Icon Tuition and fees deduction

Bullet Icon Impacts: All students who can benefit from this additional program to help reduce the cost of their education.
On Switch Icon 50% additional first year depreciation deduction and higher Section 179 expense limits. The new Section 179 annual expense limit is now $500,000 (up from $25,000 prior to the extension.)

Bullet Icon Impacts: All businesses who have acquired and placed qualified assets into service during 2014.
On Switch Icon Tax-free contributions from qualified retirement plans for charitable contributions.

Bullet Icon Impacts: All qualified taxpayers 70½ years old (or older) who made charitable contributions directly from their traditional IRAs.

There are many other provisions in this tax law. Clarifications on the signed bill will become known over the next few months. Please remember these extended tax laws are not in place for the 2015 tax year.

Last-Minute Tax Moves

There’s still time

As 2014 winds down, there is still time to reduce your potential tax obligation. Here are some ideas to make your 2014 tax return less of a burden on your wallet.

Expenses icon Defer income or accelerate expenses. Remember individual taxpayers are on the “cash basis” of accounting for income tax purposes. That means your income is taxable when you receive it and expenses count when you pay them. With this knowledge consider making deductible payments prior to the end of the year. Examples could be property tax payments, mortgage interest payments, and charitable donations. Shift the expense or revenue into the tax year that will be most beneficial for your tax situation. This review is especially important if you are nearing retirement.
Give to Charities icon Give to charities. Consider making end of year donations to charities of your choice. Remember donations of property in good or better condition and your charitable mileage are also deductible. Receiving proper documentation that acknowledges your contributions is important to ensure you obtain the full deduction.
Donate Stock Consider donating appreciated stock. By donating appreciated stock owned one year or longer to a favorite charity, you receive two benefits. First, you will not have to claim the capital gain on the appreciation of your investment. Second, you can claim the higher market value of the stock as your contribution amount. The procedure you need to follow to qualify your donation of appreciated stock is fairly strict. Ask for help from your broker and the charitable organization to ensure it is done correctly.
Gifts icon Consider gifts. Each year you may gift up to $14,000 without tax consequences to as many individuals as you choose. Consider any gift giving you wish to make up to the annual limit. This could include gifts of cash or property, including investments.
Capital Loss icon Make effective use of capital losses. Remember up to $3,000 in net capital losses can be claimed each year. This loss limitation is calculated after netting all your capital losses against any capital gains. By careful planning you can take advantage of this loss amount each year.
Fund Account icon Fund tax-deferred retirement accounts. An easy way to reduce your taxable income is to fully fund retirement accounts that have tax-deferred status. The most common accounts are 401(k)s, 403(b)s, and various IRAs (Traditional, SEP, and SIMPLE).
Distributions icon Retirement account distributions. If you are over the age of 59 you will want to review whether taking distributions from your retirement plans makes sense. This is especially important if you are over the age of 70½ when required minimum distributions (RMD) must be made. Remember, removing a planned amount from your retirement accounts each year may be more tax efficient than waiting until you are “required” to do so using the RMD rules when you are older.

This is a short list of some of the ideas you can use to lower your tax obligation in 2014. If interested, call to review your situation.