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.

Overtime Rules Go Into Overtime

Time Clock

The fate of a Labor Department rule extending mandatory overtime pay to workers by doubling the eligible salary cap is uncertain under the new presidential administration.

The rule introduced by the Labor Department under the direction of former President Barack Obama increases the salary cap for workers eligible to receive mandatory overtime to $47,476. It extends mandatory overtime, or time-and-a-half pay, to workers primarily in managerial or administrative roles in the retail, restaurant, and nonprofit industries.

Opponents of the rule won a court injunction blocking it in November 2016. The case may be abandoned altogether depending on the priorities set by President Donald Trump’s appointee to lead the Labor Department. Andrew Puzder, chief executive of fast food corporation CKE Restaurants Holdings Inc. (owner of Hardee’s and Carl’s Jr.) is undergoing Senate confirmation for the role. Until the case is resolved, the previous salary cap of $23,660 remains in place.

 

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Reminder: It is Tax Scam Season Too

hidden person

Imagine you receive a call from an IRS agent who says you owe back taxes and threatens to arrest you if you don’t immediately make a payment over the phone.

Thousands of Americans faced this situation in 2016, though the people on the other end of their phone lines weren’t actually from the IRS. They were scam artists calling across the world from Mumbai, India. Their aggressive intimidation of U.S. taxpayers brought in $150,000 a day until police cracked down on their call center.

Amazingly, con artists impersonating IRS agents were involved in a quarter of all the consumer fraud incidents reported to the Better Business Bureau last year, making it by far the most common financial scam. With the new tax-filing season underway, now is the time to be especially vigilant.

Top scams of 2016 graphic

The threatening approach used in Mumbai is just one variety of IRS scam. Another involved sending emails from fake IRS addresses telling taxpayers that due to a mistake they were owed larger refunds. According to the email, all they had to do was provide their bank information and prepay the tax due on the larger refund. Once they made the prepayment, both the scammer and their supposed refund disappeared.

See through any IRS scam

By following a few guidelines you can see through any IRS scam:

Bullet Point Digital communication is a big no. The IRS will never initiate contact with you via email, text message or social media, nor will they request personal or financial information over those channels. If you do get an email communication purporting to be from the IRS don’t click on any links or open any attachments. Instead, forward the email to phishing@irs.gov.
Bullet Point Mail first. The first contact from the real IRS will be through the mail. If you get a letter from the IRS that is unexpected or suspicious, it should have a form or notice number searchable on the IRS website, www.irs.gov. Compare what you find there with what you received. If it doesn’t look right, you can call the IRS help desk at 1-800-829-1040 to question it.
Bullet Point  Never pay by phone. A legitimate IRS agent will never make a call to demand immediate payment of a bill or ask you to provide your debit or credit card information over the phone. If you are suspicious, ask for the employee’s name, badge number and phone number. A real IRS agent won’t hesitate to provide this information. You can then politely end the call and dial the IRS at 1-800-366-4484 to confirm the person’s identity.

 

When Converting to a Roth Makes Sense

Roth Basics

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.

Roth Basics…

 

 

Major benefits of a Roth IRA:

Thumbs Up Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement.
Thumbs Up Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½.
Thumbs Up Unlike Traditional IRAs, there are no minimum required distribution rules.

Downsides of a Roth IRA:

Thumbs Down Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds.
Thumbs Down If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty.

Things to consider

Prior to making the decision to convert funds into a Roth IRA, consider the following:

Arrow You should have enough money outside of your retirement account to pay the tax on the conversion.
Arrow A Roth makes the most sense if you think you will face higher tax rates when you retire.
Arrow A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren’t careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits.
Arrow A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense.

It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

2017 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2017. The business mileage rate decreases by 0.5 cents while medical and moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.

2017 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 53.5¢
Medical/Moving 17.0¢
Charitable Work 14.0¢
Mileage Rates

Here are the 2016 rates for your reference as well.

2016 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 54.0¢
Medical/Moving 19.0¢
Charitable Work 14.0¢
Mileage Rates

Remember to properly document your mileage to receive full credit for your miles driven.

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.

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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Private Agencies to Start Collecting for IRS

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What you need to know

In late 2015 Congress required the IRS to turn over uncollected taxes it is no longer pursuing to outside collection agencies. The agencies are now selected and in early 2017 they will begin their collection efforts. This will impact all of us. Here is what you need to know.

Alert icon Turn up your scam alert. Rest assured the IRS identity scam epidemic is going to hit a new high as these scam artists now will try to impersonate collection agencies. Never pay a collection agency directly for any tax owed. Always send any payments directly to the IRS. If you do not think you owe money to the IRS, ask for help.
Agencies icon Four agencies have been authorized. Only four collection agencies have been authorized to collect unpaid taxes for the IRS. They are:
Conserve Fairport,
New York
Pioneer Horseheads,
New York
Performant Livemore,
California
CBE Group Cedar Falls,
Iowa
Notice icon You will receive written notice…twice. Before an outside agency calls you, the IRS will send two written notices to you and your representative about the transfer of the bill to an outside collection agency. Without these notices, you must assume any contact with a collection agency saying they represent the IRS is a scam.
Payment icon No payment to the agency. These collection agencies may not receive direct payment. You will be asked to use the IRS online payment system or to send your payment into the IRS. Payment is to be made to the U.S. Treasury and not to the collection agency.

Unfortunately, these agencies are going to begin their collection process right in the middle of this year’s tax filing season. So be prepared now and ask for help if you may be impacted by this change within the IRS.

Holiday Money Savings Tips

Happy holidays giftTo many the holidays are “the most wonderful time of the year” but, to those on a tight budget the holidays can be very stressful. Why not save money this season by following some of these easy tips:

 

 

 

Question Holiday Cards: Send a holiday postcard rather than a card or letter to reduce postage costs. You can even recycle old cards you did not use from prior years.
Question Wrapping Paper. Use your children’s artwork, or have them help you decorate a roll of plain paper. Ask your local wallpaper store if they have old samples they would be willing to give you. You will not only save money, but you will make a gift that is much more memorable.
Question Decorations. Decorate with nature–use pinecones and evergreen boughs around your home. Fill glass vases with peppermint, colored M&Ms, pistachios, or your favorite candy.
Question Entertainment. Check out your favorite holiday movies from the library, drive around town to see Christmas lights, take a winter wonderland hike, or go caroling.
Question Gift-giving. Ask your family or friends to consider drawing names this year. Have everyone bring one gift and then play a gift-swapping game to see who gets what. To make gifting even less expensive, ask everyone to bring something from their home that they enjoy but no longer need.
Question Don’t buy it, make it. Why not give a gift that truly comes from you. It might be something you make, or bake, or it might be a gift of your time. Some ideas? Offer free babysitting service, dog or cat watching, lawn care or gardening services. Your limit is your imagination.