Fix Your Overfunded Accounts

Home office deductions

Is socking away large sums in a tax-deferred retirement account ever a bad idea? It is when you exceed the annual IRS limits. Whether intentional or not, the penalties can be painful. Here’s how overfunding occurs and what steps to take to fix the problem.

How overfunding happens

Overfunding retirement accounts happens more than you may realize. It can be the result of a job change that causes you to participate in two different employer retirement plans. Sometimes people forget they made IRA contributions early in the year and do it again later. Others forget that the IRA limit is the total of all accounts, not per account. The rules are complicated. Traditional IRAs can’t be contributed to after age 70½, while Roth IRA contributions are subject to income limits. Plus all contributions are predicated on having earned income.

IRAs

The annual Roth and Traditional IRA contribution limit is $5,500 ($6,500 if age 50 or older). If you surpass this amount, you pay a 6 percent penalty on the overpayment every year until it’s corrected, plus a potential 10 percent penalty on the investment income attributed to the overfunded amount.

The fix: If the overfunding is discovered before the filing deadline (plus extensions), you can withdraw the excess and any income earned on the contribution to avoid the 6 percent penalty. You will potentially owe a 10 percent penalty in addition to ordinary income tax on the earnings of the excess contributions if you’re under age 59½. Often you can apply the contribution to the next year. If your issue is due to age (70½ or older for a Traditional IRA) or income limit (for a Roth IRA), consider recharacterizing your contribution from one IRA type to another.

401(k)s

The rules for correcting an overfunded 401(k) are a little more rigid. You have until April 15 to return the funds, period. The nature of the penalty is also different. The excess amount is taxable in the year of the overfunding, plus taxable again when withdrawn. So, you could pay the penalty multiple times on the same amount. And, in certain cases, overfunding a 401(k) could cause it to lose its qualified status.

The fix: If you suspect an overpayment situation, contact your employer as soon as possible. Adjust your contribution amount before the end of the year and try to get the problem resolved that way.

Dos and Don’ts of Business Expensing

Home office deductions

Knowing whether you can or can’t expense a purchase for business purposes can be complicated. However, there are a few hard-and-fast rules to help you.

According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are common and accepted in your business, as well as helpful and appropriate. You’ll need to maintain records (such as statements and ledgers) and supporting documents (receipts and invoices) to substantiate your deductions. Certain expenses are subject to extra requirements, as described below.

Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.

Do: + Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.
+ Deduct travel-related meal costs, but only up to the 50 percent limit allowed by the IRS.
Don’t: Rely on estimates to determine the business vs. personal components of your expenses.
Deduct any of your travel expenses if your trip is primarily for personal purposes.
Deduct any of your meal costs if they could be considered unreasonably extravagant.

Entertainment expenses need to be either directly related to or associated with the conduct of your business. That means that business is the main purpose of the activities and it’s highly likely you’ll get income or future business benefits. Expenses from entertainment that aren’t considered directly related may still be deductible if they are associated with your business and happen right before or after an important business discussion.

Do: + Keep records of entertainment expenses, including who was present and clear descriptions of the nature, dates and times of the pertinent business discussions.
+ Deduct up to 50 percent of entertainment expenses, as allowed by the IRS.
Don’t: Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges) that are not related to business activity.

Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).

Do: + Log odometer readings for each business trip and record your business purpose.
+ Claim actual business deductions by applying the ratio of your business-miles-to-total mileage.
Don’t: Claim mileage or expenses pertaining to commuting to and from work.

If you have any questions about how to handle your business expenses, reach out for further guidance.

The Right Ingredients to Improve Your Credit Score

Credit Score Ingredients

Your credit score is important. It dictates how easy it is to obtain a loan for a car, house, or business acquisition. Your score is expressed as a number that ranges between 300 and 850 points. The closer you are to 850 points, the more likely you are to receive a loan and the less you’ll pay in interest. So, how is your credit score calculated and how can you improve it?

 

 

Credit score ingredients

1 Payment history, 35 percent. The most important element of your credit score is your payment history, or your record of paying your bills on time. Lenders place such a premium on this element that even one payment made later than 30 days after the due date can have a drastic effect. It can drop your score by as much as 100 points, according to FICO, the company that sets the credit score standard.
1 Credit card debt usage, 30 percent. Lenders like to see that you aren’t getting close to using your maximum credit card limit each month. For the best score, you should keep your monthly debt between 10 percent and 30 percent of your maximum limit. The lower the better. A great place to start is to understand your spending limits on your credit cards and keeping any balance on your cards below the 30 percent threshold.
1 Credit age, 15 percent. You get a better credit score depending on how far back your credit goes. The age of your credit is the average of all your accounts, so if you open a lot of new accounts, this will shorten your credit age and start to lower your credit score.
1 Account mix, 10 percent. Lenders like to see that you have a track record of paying a variety of different kinds of debts, such as credit cards, mortgages, car, and business or education loans.
1 Credit inquiries, 10 percent. Each time you apply for a new credit card, a new loan, or ask for a substantial increase in your credit limits you generate a “hard inquiry” on your credit report. It’s a sign that lenders are checking into your credit history to determine your risk. While that’s not necessarily a bad thing, trying to open too many new accounts in a short period of time is seen as a red flag by lenders.

 Key ideas to improve your credit

Bullet Point Pay your bills on time. Ask your credit card providers or lenders to set all your due dates on the same day, and then set a reminder in your calendar. Consider using auto-pay for more important bills like credit cards and mortgage payments.
Bullet Point Manage your credit card debt limits. Ask your credit issuers to increase your card line limit. You can also limit the amount of credit card debt you accumulate by paying your bill in full each month, stop using a card but not closing the account, or switching to cash as you approach your line limits.
Bullet Point Build a credit history. The sooner you get started in establishing a credit history, the sooner you’ll establish a track record of payments that give lenders confidence in your ability to repay debt.
Bullet Point Create variety. Manage your debt, but understand that making student loan payments on time, paying off credit card debts and other loans can present you as a quality credit risk to prospective lenders.
Bullet Point Manage your credit hits. Try to limit the number of new accounts you open over a short period of time. Each hard inquiry will only impact your credit score by a few points, but each one stays on your credit report for two years.
Bullet Point Know your number. Last, but not least, know your credit score. Sometimes a low score can be the result of an error in your credit history or a recent identity theft problem. You have the right to receive your credit report free once per year from each of the major credit reporting agencies. Here is the link: AnnualCreditReport.com