What does your 1040 tell you?

Before we dig into the “year in review,” we’d like to mention a provision that was written in to the CARES Act regarding Donations. Beginning in 2020, there will be an “above the line” charitable deduction (maximum $300) that you will be able to take, even if you don’t itemize. So, save your receipts this year, even if you don’t itemize, those donations will reduce your 2020 tax liability.

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By  Kate Welker, CFP®

This week we would normally be seeing the tax deadline hit and the last minute rush of filers. With the deadline extended the filing season will be drawn out over three more months, but we still encourage you to finalize your return so you can plan accordingly for 2020. Once your return is done you should take time to review the returns and see what the numbers are telling you. Over my years of working with tax returns I have had way too many people tell me they just look to see if they have a refund or owe, sign the return, then stick it in their files. I challenge you not to be one of those individuals. Following are some items I like to look at when assisting with tax planning.

Large Refund- getting a refund is always nice, but if it is a large refund consider why it is so large. If you are over-withholding from your paycheck use the Tax Withholding estimator at www.irs.gov to see how you should adjust your W-4. Your end of the year refund would be smaller, but that could give you several hundred dollars more a month in your budget. 

Balance Due - If you owed over $1,000 on your return you will need to make changes or set up quarterly estimated payment to avoid being penalized on the next year’s return. You can also check the withholding tool at irs.gov to adjust your W-4. 

Credits - Look on your 1040 at lines 13a (Child tax credit) and 13b (other credits from Schedule 3). If there are entries on those lines you received a tax credit. A credit is a dollar for dollar reduction in your tax so changes in these year to year can make a large impact on whether you receive a refund or owe. Take a look at what the credit was for and if this is something that will be the same next year or will change. If you have a child turning 17 you will not receive the child tax credit of $2,000 the following year, this means your refund would be $2,000 less or you would owe $2,000 more. Conversely think about any credits you may qualify in future years. For example if there is a child heading to college you may qualify for the American Opportunity Credit which is up to $2,500. 

Dividends and Capital Gains - If you hold mutual funds or stocks in your portfolio you may have taxable income due to dividends or capital gains distributions. If you find these numbers are large you may want to speak with an advisor to make sure your portfolio is designed correctly for your needs and tax situation. 

Overall your tax return tells you a significant amount of information about your financial situation. These are just a few of the big items I take a look at, but each individual is different. It is one of the places where everything comes together for a quick snapshot. I really want to encourage you to take the time to pull out the papers and look it over, make sure you understand what your income and deductions are, and over time learn a little more about how your information comes together on that 1040 each year.

CARES ACT Part 1 - Recovery Rebate

By Amy Irvine, CFP®, EA, MPAS®, CCFC
FINANCIAL PLANNER

I started with this section because we feel it is important for our clients to know if they are or are not eligible for this rebate.

Over the weekend, I've noticed a great deal of confusion regarding this provision.  Let's start with what it is.

It is a rebate provided to those with eligible income (see below).  The bill actually uses the language "credit" for the first taxable year beginning in 2020.

What are the amounts?

• $1,200 single

• $2,400 joint return

• $500 per qualified child (under the age of 17)

Who is eligible?  

• $75,000 Single (and in my interpretation, married filing separate, since it states "as not described in paragraphs 1 or 2" listed below)

• $112,500 Head of Household

• $150,000 Joint

• If your income is above that limit, it will be reduced by 5% for each $100 of income over those thresholds.  Complete phase out:

  • $99,000 single

  • $146,500 Head of Household

  • $198,000 Joint

What tax year is this based on?

• 2019

• 2018 if you haven't filed your 2019 tax return

• If you haven't filed, the legislation states that they may use alternative information such as your SSA-1099.

What if my income is more in 2018 and 2019, but less in 2020?

• You will receive the credit when you file your 2020 tax return and benefit at that time.

What if my 2018 income was lower and I haven't filed 2019?

• As noted above, the rebate will be based on your 2018 income. 

• Interestingly, the language seems to read that if your 2019 income would have reduced your benefit, then you won't be subject to refunding the rebate.  

When should you expect to receive the rebate?

• "As soon as possible" is the language used.

• Our guess, Mid-May

Will these checks be taxable?

• No

SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019

At the very end of 2019 the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 was signed into law.  It gave this weeks blog author and Financial Planner, Amy Irvine, CFP®, EA, MPAS®, CCFC, flashbacks to the 2017 tax law changes that happened at the very end of that year too. There are a lot of little nuggets in this Act, below is our interpretation of the Good, the Bad, and the Weird …

The Good

• If you are turning under the age of 70½ this year, you can now push the required minimum distribution down the road.  The new age is now 72.

• Beginning this year (2020), if you continue to work past the age of 72 (was 70.5), you can now make a contribution to your Traditional IRA.  Prior to this Act, even if you had earned income, you couldn’t contribute once you reached the “magic” age.

• This does not change the Qualified Charitable Distribution age though, that is still 70½ 

• If you receive a stipend or fellowship, that is now considered qualifying income for an IRA (or Roth IRA) Contribution.

• Small businesses will be able to join a pooled employer plan (called a MEP or Multiple Employer Plan), which is meant to reduce the cost to small employers  And if the employer plan has an automatic enrollment feature, they get a small tax credit.

• If you are a volunteer firefighter or EMC, then you will have a one-year repeal of the SALT limit on your federal tax return.  Remember SALT stands for State and Local Tax.

• If you are planning on having a baby, or adopting a child, in 2020 you can now take a $5,000 distribution from your retirement plan WITHOUT penalty.  Of course you have to pay tax on it, but if you redeposit it within 60-days of withdrawing it, then it would not be considered taxable.

• We are thrilled that you can now withdraw up to $10,000 during your lifetime from a 529 plan to repay student loans WITHOUT tax or penalty.

The Bad

• If you turned 70½ in 2019 but elected to defer the RMD until 2020, sorry, but you still have to take it before April 1, 2020.  Also, only those that turn 70½ in 2020 can defer until age 72. If you’re 71, sorry, but you still have to take yours.

• Stretch IRA’s won’t be able to stretch as far in the future.  Historically, your beneficiaries have been able to elect to take the remainder of your IRA over their life expectancy.  That has been nixed in the SECURE Act and the maximum number of years they can defer the account is 10-years. This does not apply to spouses, disabled beneficiaries, chronically ill beneficiaries, certain minor children (until they reach age of majority) and existing inherited accounts.  Based on this, we will be looking at our clients situation to determine if it makes sense to convert taxable retirement accounts to Roth Sources.

• Employers will now be able to add annuity options to their retirement plan programs.  This was fought for very hard by insurance companies and we are very concerned about how this is going to play out. We are not the only ones that feel that way.    Read Rick Kahler’s commentary in an article published on December 30 - “Accessing the Damage Done by the Secure Act.”

The Weird 

We think these are weird considering the Act is called Setting Every Community Up for Retirement Enhancement and the following have absolutely nothing to do with retirement.

• The credit for installing an electric car charger has been restored

• Anyone under the age of 21 will be prohibited from purchasing cigarettes and e-cigarette products (i.e. vaping)

• The medical expense deduction was set to go up to 10%, but the Act has it at 7.5% once again in 2020.

• 529 plans can now be used to pay for Apprenticeships

We will be looking at each of our clients' individual situations to determine how this new Act will fit into their financial lives...so more to come!

Tips for a Low Stress Tax Season

In this weeks blog Financial Planner Becky Eason writes about the big "T" word, that's right - TAXES!

As the end of 2019 quickly approaches, it’s time to start thinking about taxes. As we all know, tax season catches up with us very quickly with the hustle and bustle of the holiday season, and the recovery period in the weeks after the holidays.

Our goal is to make your tax season as low stress as possible. A great way to begin your tax season, is to create an easily accessible folder to keep all of your tax documents in. As you receive these documents in the mail you should open the mail and review the document, then put it directly in your tax folder. If you have any documents that you think may be important, include them in the tax folder and your tax preparer can review them to see if they need to be included with your taxes. I’m a firm believer in the fact that it’s better to have too much information than not enough. Once you believe you have received all of your tax documents you could do a document comparison to your prior year tax documents to make sure it looks like you have everything. At this point you can grab your folder and send the documents off to your tax preparer, or in the case of self-preparing a tax return, you can go ahead and get started.

If you have someone prepare your taxes for you make sure that you let them know of any significant changes that you’ve had during the year. Some of these significant changes would include a change in marital status, filing status, dependents, address, new driver’s licenses, change of income sources, and if you made any estimated tax payments during the year, especially if this is something that you haven’t done in the past. Failing to update some of that information could result in having a rejected tax return or losing out on potential tax credits or deductions. It’s much easier on all parties if you remember to update this information right from the start. In your tax document folder that we talked about earlier, you could keep a running note page with updates that you want to make known or questions that you might have.  

Another tip I have is to review your driver’s license. To help reduce identity theft, some states, such as New York State, require the information on your driver’s license to be entered prior to filing. Make sure that your license hasn’t yet expired and that it won’t be expiring during tax season. If your license is going to expire between the time of giving your tax preparer your tax information and the time that you will be e-filing the return, you will want to let your tax preparer know, because in some states your tax return can’t be filed if your license is going to expire.

As tax season approaches do your best to not feel overwhelmed. We are here to help you and answer your questions. 

Uncork the FAFSA - College Planning

By: Becky Eason

Why complete the FAFSA?

As of October 1st, it’s officially FAFSA season for the 2020-2021 academic year. FAFSA stands for Free Application for Federal Student Aid and should be completed by all high school seniors who plan to attend a secondary education school as well as current college students who will be going to school again next year. This form is completed based on the prior year tax return, so if you, or your parents, have completed your 2018 tax return you are able to complete this application. As much as I’m sure you don’t like completing this form it’s very important that you do so, especially for the following reasons.

The primary reason that FAFSA needs to be filled out is that it’s required for financial aid. FAFSA needs to be completed by students who are attending public schools and many times for private schools as well. Did you know that every dollar you borrow in student loans will cost you approximately double by the time you pay back your loan? If you are eligible for any amount of financial aid anything that you receive will help you out tremendously when your student loans enter repayment status. If you receive $100 in financial aid that is actually like receiving $200 if you think about the amount in repayment terms. 

Even if you know or believe that you won’t be eligible for financial aid, it's important that you still complete the FAFSA. The reason for that is that in order to be eligible for federal student loans you need to have a completed FAFSA. Unfortunately, this is not a very well known fact and thus results in many students missing out on the advantages of federal student loans You may not be eligible for any financial aid but if you are able to get federal student loans it’s worth your time and effort to complete the FAFSA. So, why would you want a federal student loan over a private student loan? An advantage of all federal student loans is their built in death and disability clause. If the person who holds the student loan passes away before the loan is repaid it’s forgiven and the estate is not responsible for paying anything back. If the loan holder becomes permanently disabled they can apply for a disability discharge and if the discharge is granted then their federal student loans will be completely forgiven. Another reason for wanting a federal student loan is the ability to have an income based repayment option, especially for students who plan to enter a career that is eligible for Public Service Loan Forgiveness (PSLF). In no cases are private loans eligible for PSLF. Also, a federal student loan can be either subsidized or unsubsidized. A subsidized loan is need based, so not all who complete the FAFSA will be eligible for this loan but the unsubsidized loan has no need clauses attached to it. The great thing about the subsidized loan is that while the student is enrolled at least half time in college the government is paying the interest on the loan, whereas with the unsubsidized loan interest starts accruing as soon as the loan is taken out (as would a private student loan).  

Trust me, I know how dreaded it was to fill out the FAFSA but it is worth all of your time and effort. Please don’t delay in getting this completed, as schools have limited financial aid to offer and they do run out of money. Financial aid is offered on a first come first serve basis. 

Uncork Your Wealth - Discover the Difference Between HSA and FSA

In this week’s blog, Financial Planner Kerrie Beene, CFP® defines two benefit terms that often cause confusion:

The products available to us in the financial and healthcare industry can be confusing.  So, with the use of Health Savings Accounts (HSA’s) and Flexible Spending Accounts (FSA’s), we are combining the two worlds and this can be overwhelming when trying to pick a health care plan.  Healthcare plans vary from job to job and state to state, but most of the time the options include health care plans with HSA’s and FSA”s as one of the available plans, along with other plans. So what is the difference and should I choose one of these options?

Similarities 

• Both HSA’s and FSA’s are used in conjunction with your health care plan.  

• Both also reduce your income tax liability and help pay for medical expenses with pre-tax dollars

• You and your employer can deposit money into the account

• Debit/Credit Card offered to pay for expenses

• Must maintain receipts and records for expenses

Health Savings Account

• Used in conjunction with a High-Deductible Plan

  • For 2019, the IRS defines a high deductible as $1,750 for individuals and $2,700 for a family 

  • For 2020, the IRS defines a high deductible as $1,800 for individuals and $2,800 for a family

• Available to self-employed individuals

• Money deposited into the HSA is tax-deductible

  • Interest and earnings are tax-free 

• Withdrawals used to pay for medical expenses are tax-free

  • Withdrawals can be used for medical expenses, such as doctor visits, hospital stays, eyeglasses, contacts, dental procedures, prescription drugs, etc.

• HSA’s are portable

  • The account belongs to you 

  • You keep it even if you switch jobs

  • Money remains in the account from year to year, even if not used

  • Money can be invested within the account

• HSA funds can be used to pay insurance premiums if you are collecting federal or state unemployment benefits or you have COBRA insurance through a former employer

• The IRS also imposes contribution limits on the amount that can be deposited into an HSA account

  • For 2019, the maximum contribution is $3,500 for individuals and $7,000 for families, with a $1,000 catch-up amount for those 55 and older (including employer contributions)

  • For 2020, the maximum contribution is $3,550 for individuals and $7,100 for families, with a $1,000 catch-up amount for those 55 and older (including employer contributions)

Flexible Spending Account

• Used in conjunction with a Health Care Plan

• Not available to self-employed individuals

• Money deposited into the FSA is tax-deductible

• Withdrawals used to pay for medical expenses are tax-free

  • Withdrawals can be used for medical expenses, such as doctor visits, hospital stays, eyeglasses, contacts, dental procedures, prescription drugs, etc.

• FSA’s are not portable

  • The account belongs to your employer 

  • Money must be used by the end of the year or you lose it

    • There are a few exceptions some employers offer, such as being able to carry-over $500 or a 2.5 month grace period to use the funds. (Employers can offer either option, but not both)

• The IRS also imposes contribution limits on the amount that can be deposited into an FSA account

  • For 2019, the maximum contribution is $2,700 

  • For 2020, the maximum contribution is $2,750

• Employers often offer other types of FSA accounts 

  • Dependent Care Account - used to pay for eligible child and adult care expenses like daycare, before and after school care, nursery school, preschool, and summer day camp

  • Other FSA Accounts

    • Adoption Assistance

    • Transit and Parking

The most important things to do when trying to pick a health care plan:

• Understand your available options

• Know your annual healthcare expenses

• Understand the requirements for required documentation for tax purposes

• Don’t be scared to ask questions

Build Your Wealth by Taking Advantage of Benefits Open Enrollment

In this week’s blog, Financial Planner Kate Welker, CFP® defines top benefit terms to help demystify some of the confusing benefit terms.

In the next few weeks you may open your mail or email to see notices regarding open enrollment season through your employer. Open enrollment is a period of time you can make changes to your employee benefit options that are normally restricted. This is also a great time to review your entire benefits package and make any other adjustments as well. Let’s walk through a few options you may be looking at.

Health Insurance is the main thing most people think about during open enrollment. Compare the components of the plans offered and look beyond the premium. You will want to compare the deductibles, co-pays, and which providers are in-network. Also take the time to review the prescription plans against your current medications to see how those are covered.

The FSA or Flexible Spending Account is the next thing to consider. A flexible spending account allows you to contribute pre-tax dollars to cover out of pocket medical expenses including co-pays, medical supplies, dental, and vision expenses. If your benefits include access to an FSA this is a way to lower your taxable income and pay for expenses you would incur anyways. You will have to decide how much to contribute each pay period. Be sure to review the plan terms and not to contribute too much. If you have a balance at the end of the year the plan will allow you to either roll over $500 or spend it within a grace period.

The HSA or Health Savings Account is an option to consider if you have a high deductible health plan. To qualify you must have a deductible of at least $1,350 for an individual and $2,700 for a family plan. The contribution limits are much higher and depend on the type of insurance and other benefits you have. Like an FSA this account is used to cover out of pocket medical expenses and is an income tax deduction. Unlike an FSA, an HSA balance will roll forward year to year and the growth on the account also grows tax-free. Be sure to look for an employer contribution that may be offered and take full advantage of that contribution.

Dependent Care FSAs are like the medical FSAs, but for childcare. This includes daycare, preschool, summer day camp, and after school programs. Also included is adult daycare. If an adult is your qualifying tax dependent and they require care while you work this is an eligible expense. With a DCFSA you are able to contribute up to $5,000 pre-tax.. Some employers also offer a matching contribution into these accounts.

Other Benefits may be available to update at this time as well. Reach out to your HR department to ask about your benefits package and see if there is an option you were not aware of. Some employers offer additional insurances like pet insurance or unique legal services.  

Block out some time for yourself to be able to really read the information you are given and consider your options. Look at the bigger picture benefits like tax savings, lower taxable income reported, employer matches, and the satisfaction that you are getting the most benefit out of what is offered.