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Adjusting Withholding Saved 44% of the Tax Bill

adjusting withholdingAdjusting withholding can sometimes produce a surprise.

While preparing a client’s tax return the other day, the result was that he had nearly a $5,000 refund coming. Often when we have a large refund coming we think “Nice! It’s like an unexpected gift!” But as you’ll see below, this is not a gift – it’s actually costing quite a lot in taxes in this particular case.

Naturally, as in most cases like this, I reviewed his income sources and withholding to see if there was anything obvious that we could change for him that would make his withholding more efficient.

You see, it’s most efficient to have no refund at all from the IRS when your taxes are prepared. In fact, owing an amount up to just south of $1,000 is  the most efficient outcome. This is because you’re getting the use of that grand of income tax throughout the year with no cost. In other words, through the year the IRS has loaned you nearly $1,000 and charged no interest.

The $1,000 amount is important here – because if you have more than $1,000 owed in taxes two or more years in a row, the IRS begins to get annoyed about it. As a result, they assess a penalty for underpayment of tax when you owe too much year after year. But if you keep the amount owed down to $1,000 or less, no harm.

So anyhow, I started reviewing my client’s sources of income and withholding, and here’s what I found (income amounts adjusted for annual increase where applicable):

Source Income Withholding
Interest $550 $0
Dividends $550 $0
IRA Distributions $28,000 $4,000
Pension $13,000 $2,000
Social Security $39,000 $4,000
Totals $81,100 $10,000

Projecting income tax for 2017, we found the following:

Interest & dividends $1,100
IRA Distributions $28,000
Pension $13,000
Taxable Social Security* $20,960
Adjusted Gross Income (AGI) $63,060
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $5,031.50
Withholding $10,000
Refund or (payment) $4,968.50

Now, reviewing the withholding amounts, it’s obvious that there are three places to reduce excess withholding to rectify this situation. One could stop the withholding altogether from the Social Security benefits, for example, and the result would be a refund of $968.50 – giving him access to $4,000 of his refund throughout the year. In other words, instead of $2,916.67 each month, his and his wife’s SS benefits could be $3,250.

Likewise, he could eliminate the $2,000 of withholding from his pension. This single move would bring down his refund to $2,968.50, bumping up his pension payments to $1,083 per month instead of $916.67.

Lastly, he could reduce his withdrawal from the IRA by $4,000, which would begin to make other changes in his overall tax situation. He’s making the withdrawal in that amount by choice in order to cover his income needs. So truly what he needs from the IRA is $2,000 per month, since he needs income of approximately $5,800 a month for his living expenses. Below is the outcome if he reduces his overall IRA withdrawal by the amount of the withholding, $4,000 (since it’s all excess withholding).

Interest & dividends $1,100
IRA Distributions $24,000
Pension $13,000
Taxable Social Security* $17,560
Adjusted Gross Income (AGI) $55,660
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $3,921.50
Withholding $6,000
Refund or (payment) $2,078.50

When we reduce his IRA distribution by $4,000 ($333.33/month, all of which was being withheld unnecessarily), his taxable Social Security income adjusts*. Now his taxable SS is only $17,560. So reducing his IRA withdrawal by $4,000 and thereby reducing his withholding by $4,000 results in a total tax of $3,921.50 – and he still has a refund coming in the amount of $2,078.50!

Keeping in mind that he has an income requirement of $5,800 per month, we make another adjustment to his withholding – we eliminate the $2,000 of withholding from his Pension payments. By doing this we can reduce his IRA withdrawals by an additional $2,000 per year.

Interest & dividends $1,100
IRA Distributions $22,000
Pension $13,000
Taxable Social Security* $15,860
Adjusted Gross Income (AGI) $51,960
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $3,366.50
Withholding $4,000
Refund or (payment) $633.50

You guessed it, this drops his taxable Social Security again. Only $15,860 is now taxed, and his total tax is down to $3,366.50 – and he still has a refund of $633.50 coming!

Taking it a step further, we can reduce the withholding on his Social Security payments by $1,000 – so that now he has only $3,000 being withheld. Covering his income need only requires a withdrawal of $21,000 from his IRA – which adjusts his taxable Social Security down, so that only $15,010 is taxed. His resulting tax bill is now only $3,089. When he files his return, he’ll owe a total of $89.

Interest & dividends $1,100
IRA Distributions $21,000
Pension $13,000
Taxable Social Security* $15,010
Adjusted Gross Income (AGI) $50,110
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $3,089
Withholding $3,000
Refund or (payment) ($89)

Let’s try one more step: drop the withholding on Social Security benefits to $2,000. Or easier, leave the pension withholding as it is and eliminate withholding on the SS payments. Because of this, we can reduce the IRA withdrawal to a total of $20,000. This drops the taxable Social Security down to $14,160 and his tax down to $2,811.50! After his withholding of $2,000, he will owe $811.50 in tax.

Interest & dividends $1,100
IRA Distributions $20,000
Pension $13,000
Taxable Social Security* $14,160
Adjusted Gross Income (AGI) $48,260
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income (AGI minus Std Ded & Exemptions) $24,960
Tax $2,811.50
Withholding $2,000
Refund or (payment) ($811.50)

Throughout this example, the net amount of income received each month remains roughly the same. In every instance there is approximately $5,800 per month to live on. In the end though, he’s paying $2,220 less in taxes and the IRS is loaning him $811.50 interest free through the year. That’s a reduction of 44% in taxes!

So – when you see a high refund on your tax return, don’t look at it as a “gift”. It’s a pretty expensive gift if that $4,968.50 has cost you an extra $2,220 in taxes!

* Taxation of Social Security is very complicated. See the article How Taxation of Social Security Benefits Works for more details.

** The client in question and his spouse are both over age 65, so their Standard Deduction is increased to a total of $15,200.

Sorry to Rain on your Parade

I wanted to take a brief moment to remind our readers of a fundamental investing truth that tends to get overlooked, forgotten, or deliberately disregarded during times of market euphoria.

Think about this. If you had a million dollars at the beginning of 2016 to invest and I said that over the year that there would be a Supreme Court vacancy, the Cubs would win the World Series, interest rates would rise, and Donald Trump would become president – would you invest that million dollars in the market? I would bet that many people would not. They would guess that 2016 would be a dismal year for market returns. Yet, in 2016 the Dow returns 13.4% and the S&P 500 returned 9.5%!

With all of that uncertainty and the improbable happening, the market still had a great year of returns. Those who stayed invested were rewarded. Those who sold (say, in early November) missed out.

Now, allow me to rain on your parade.

Expect to lose. The truth we have to remember is that with all of the good years of returns will come the years of losses. It can be easy to get caught up in the excitement and euphoria of a booming and rising market. Real discipline comes when markets go down. Investors must remember their goals, their time horizon and most importantly – that their portfolio returns are a functions of good asset allocation, diversification and time.

I would argue that anyone can stay invested and adhere to their goals when markets are rising. It becomes extremely important to stick to your plan and just as important, keep investing, when markets are falling during times of abysmal performance.

This is where a qualified, professional fiduciary planner can help. He or she can help with the behavioral aspect of your plan and provide objective advice and reasoning when you may want to act irrational. For many investors, this is worth above and beyond the fee they pay to the advisor (as it should be).

So when markets are high and your portfolio looks amazing it’s ok to enjoy it. Just remember to expect that there will be lean times as well. If you expect rain, you’re better prepared to weather the storm.

How Taxation of Social Security Benefits Works

taxation of social securityYou probably are aware that a portion of your Social Security retirement benefit may be taxable.  Do you know how the tax is calculated?  Or how the taxable portion of your benefit is determined?

The Rules

There are a couple of different levels of income that determine how much of your Social Security Benefit is taxed.

But first we must define Modified Adjusted Gross Income (MAGI). This is your Adjusted Gross Income (line 37 of Form 1040) plus all of your tax-exempt income.

Next is to define Provisional Income (PI). This is your MAGI plus 50% of your Social Security benefits.

Now to the taxation levels: The first taxation level is $32,000 of Provisional Income for a married couple filing jointly (MFJ) or $25,000 for single, head of household and qualifying widow(er) filing statuses.  If your Provisional Income is less than this first level for your filing status, none of your Social Security benefit is taxable.

The second taxation level is $44,000 for MFJ or $34,000 for the single filing statuses.  If your Provisional Income is greater than the first taxation level but less than the second taxation level, then as much as 50% of your Social Security benefit may be included as taxable income.

If your Provisional Income is above the second taxation level, then up to a maximum 85% of your Social Security benefit may be included as taxable income.

Like most calculations in the tax code or where Social Security is involved, it’s a mess to understand.  I’ll give you some examples below to illustrate how this works.


Here are a few examples:

Example 1. Married Filing Jointly, MAGI = $15,000; SS = $15,000; therefore Provisional Income (PI) = $22,500

1. MAGI $15,000
2. Half of SS Benefit $7,500
3. Provisional Income (PI) line 1 plus line 2 $22,500
4. First Taxation Level $32,000
5. Subtract line 4 from 3 – if less than zero, enter zero $0
6. Multiply 50% Level by .5 $0
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 – if less than zero, enter zero. $0
9. Multiply line 8 by .85 $0
10. Add line 6 and line 9 $0
11. Multiply line 2 by 1.70 $12,750
12. Lesser of line 10 or line 11 is added to your income as taxable $0

Since the PI is less than the First Taxation Level, none of the SS benefit is taxed.

Example 2. Married Filing Jointly, MAGI = $25,000; SS = $20,000; PI = $35,000

1. MAGI $25,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $35,000
4. First Taxation Level $32,000
5. Subtract line 4 from line 3 $3,000
6. Multiply 50% Level by .5 $1,500
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 – if less than zero, enter zero. $0
9. Multiply line 8 by .85 $0
10. Add line 6 and line 9 $1,500
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $1,500

Since the 50% taxation level amount is greater than zero, half of the amount above the 50% taxation level will be added to the taxable income for the couple.  None of the benefit is included at the 85% taxation rate.

Example 3. Married Filing Jointly; MAGI = $45,000; SS = $20,000; PI = $55,000

1. MAGI $45,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $55,000
4. First Taxation Level $32,000
5. Subtract 1st from PI (50% level) $23,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000 $6,000
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 $11,000
9. Multiply line 8 by .85 $9,350
10. Add line 6 and line 9 $15,350
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $15,350

Since the SS benefit is greater than the upper taxation limit, a portion of the benefit is included at the 50% rate, and another portion is included at the 85% rate, for a total addition of $15,350 to taxable income for the couple.

Example 4. Married Filing Jointly; MAGI = $55,000; SS = $20,000; PI = $65,000

1. MAGI $55,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $65,000
4. First Taxation Level $32,000
5. Subtract 1st from PI (50% level) $33,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000 $6,000
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 $21,000
9. Multiply line 8 by .85 $17,850
10. Add line 6 and line 9 $23,850
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $17,000

Since the PI is greater than the 85% level, we did the same type of calculation as in Example 3, except that this time the total of the 50% taxed amount and the 85% taxed amount was greater than 85% of the overall SS benefit, so only that amount ($17,000) is added to the taxable income for the couple.

Hopefully these examples will help you to better understand how the amount of taxable Social Security benefit is calculated for various situations.

Tax Impacts of Early Withdrawals from Your IRA

early withdrawalsA common situation that we run across is when someone would like to make early withdrawals from an IRA or 401k plan. As you might expect, there is taxation of the money withdrawn in most cases. There can be other taxes, and certain early withdrawals can be tax-free. The nature of the taxation depends on the circumstances around your early withdrawals.

The IRS recently published Tax Tip 2017-09, which lists some important facts about early withdrawals from retirement plans. The complete text of the Tip follows below.

Early Withdrawals from Retirement Plans

Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are a few key points to know about taking an early distribution:

  1. Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
  2. Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional 10 percent tax.
  3. Nontaxable Withdrawals. The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.
  4. Check Exceptions. There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
  5. File Form 5329. If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return. Form 5329 has more details.
  6. Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file a tax return. The tax software that taxpayers use to e-file will pick the right tax forms, do the math and help get the tax benefits they are due. Seven out of 10 taxpayers qualify to use IRS Free File tax software. Free File is only available through the IRS website at

More information on this topic is available on

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Additional IRS Resources:

Ruminations on Market Direction

A few weeks ago a prospective client called our office and was looking for help in a few different areas. One of those areas was advice on investment selection and asset allocation. Initially, the individual seemed like they may be a good fit. The individual was mentioning long-term time frames, buy and hold, value, and other terminology that seemed in-line with our firm’s investment philosophy.

Then just a few minutes after exclaiming all of that, the individual then mentioned that they were looking for someone who could tell them “what kind of a market we were in” on an ongoing basis. I paused briefly and asked what the individual meant. They told me that they were looking for someone to tell them if we were currently in a growth market, value market, etc.

Immediately I knew that this potential relationship would not be coming to fruition. Politely, I told the individual that if they ever found someone who could accurately tell what kind of market we were in to let me know. I wanted in on that too!

The reality of the situation and what the individual wanted is that it’s nearly impossible to tell what kind of market we’re in. There may be lucky guesses from time to time – but they are just that – guesses. And, if anyone could accurately and repeatedly guess what kind of market we were in, where it was headed, etc., they would be one wealthy individual and would certainly not be sharing that skill with anyone else.

My best guess is that we’re currently and will always be in a stock market, a volatile market, and an uncertain market. Can I say that over long periods of time that the market generally goes up? Yes. Is it without risk, uncertainty, and turmoil? No. Will there be times (and certainly long time frames) of downs and suboptimal outcomes? Yes.

They key to stomaching all of the uncertainty and volatility is to determine what your time frame is, what the goals for your investing are, and then choose an asset allocation that provides the best fit. Generally, this means buying and allocating among low-cost index funds. With index funds individuals can buy and hold the index in many different markets such as stocks, bonds, international, real estate, etc.

Individuals that are more conservative don’t have to invest aggressively, but they may need to invest more to make up for expected lower returns from the conservative portfolio. Additionally, investors that are aggressive need to understand that they must remain aggressively invested even when times look or are bad. As during down times their portfolios will lose more than conservative investors.

And when markets are going down and fear and panic are starting to take hold of investors, individuals need to remain calm, remember their goals and time frame, and do everything in their power to resist the urge to sell. In fact, they should consider buying more – since prices are dropping and have fallen. Easy in theory, extremely difficult in reality (see our “Hot Stove” post).

It is impossible to tell where markets are going. So making predictions on their direction is frivolous. Instead, investors can focus on what they can control – their emotions, their asset allocation, their expenses and their goals. Markets will be markets and will continue to provide volatility and uncertainty. Perhaps that is the only thing we can predict.

Answers to Common DIY Income Tax Questions

DIY income tax questionsDo-It-Yourself or DIY Income tax filing software is very common, pervasive and easy-to-use these days. Many folks are taking advantage of this option for filing their taxes each year – but it’s not infallible. There is only so much that can be automated with the software. Certain things you’ll need to know for yourself. If you don’t know these things ahead of time you’ll need to know how to fix them later.

Over the course of many years of questions from DIY income tax preparers, we’ve noticed a few patterns of common questions. Below are listed some of the most common questions and answers to those questions.

Answers to the Most Common DIY Income Tax Questions

1. Question: I’ve already filed my income tax return and I just received another W2 (or 1099, or whatever additional form). Should I file an amendment right now?

Answer: You should wait until your original return has completely processed before you file your amendment. You should then file your amended return (see the article at this link for more information about filing an amended tax return) as soon as possible. Delays in filing your amended tax return can result in penalties and interest charges.

2. Question: I’ve already filed my income tax return and I just received another W2 – but it’s only for a small amount. When I completed the amendment return there was no (or only a very small) difference in my tax owed or refunded. Will the IRS just adjust my return, or should I file the amendment?

Answer: Under-reporting of income can result in penalties and interest to you. You should file an amendment to ensure that all of your income has been properly reported, even though the result is no (or a very small) change to your tax. This way the IRS has record that you have reported all of your income.

Properly reporting all income when you are aware of it can be helpful to your case when you have mistakenly under-reported. If you disregard the additional income reported to you, it can be misconstrued as income tax evasion (strong word, I know). The IRS views minor infractions like this in a more positive light if you self-report your overlooked income as soon as possible.

3. Question: How can I find out if my tax return has been completely processed?

Answer: You can use the Where’s My Refund? tool on the IRS website to check the status of your return.

4. Question: I mistakenly claimed my child on my tax return as a dependent and I’ve already filed my return. The child’s father was supposed to claim the child. How can I fix this so that the father can file and claim the child as a dependent? A variation on this question is where a child has claimed him or herself as a dependent on his or her own tax return and it’s preferred to have the parent claim the child as a dependent.

Answer: In order for someone else to claim a dependent that someone else has already claimed, the original return must be amended, removing the dependent from the return. This amendment must be completely processed before the dependent can be claimed on another return.

5. Question: I have filed an amended return to remove a dependent from the return (we’ll call this Return #1) so that someone else can claim the dependent on their return (we’ll call this Return #2). The amendment has not processed completely yet, and the filing date is very near. How do we handle this situation?

Answer: There are a couple of different ways to handle this situation:

a) You can file an original return (Return #2) without claiming the dependent. Then, once the amendment (Return #1) has processed completely, an amendment can be filed on Return #2 to include the dependent. This has the benefit of providing some refund (if a refund is due) while waiting for the amendments to process.

b) You can file a request for extension (see this link for information about filing an extension) on Return #2. Then once the amendment has completely processed, assuming that it is processed before October 15, you can go forward with the filing of Return #2. The downside to this method is that you must pay any tax anticipated upon filing the request for extension, but that would be the case if you were able to file the original return on time.

6. Question: I filed my original tax return and have received my refund already. I’ve discovered that I need to file an amendment to my return. Can I cash the check, or do I need to send it back and wait for my amendment to process?

Answer: You are free to do what you wish with your original refund. However, if your amendment results in a negative difference in your refund – that is, if it results in a payment required – you should send along the payment required with your amended return. If your amendment results in additional refund, you’ll receive an another check.

7. Question: My husband and I are in the process of getting a divorce, but it was not finalized before the end of the year. I filed my tax return with the status of Married Filing Separately, and he filed his return with the status of Married Filing Jointly. His return was rejected – what do we do?

Answer: While you are married, either you both file your returns with the filing status of Married Filing Separately or you file one return together with the status of Married Filing Jointly. You can resolve this by amending your (accepted) return to change to Married Filing Jointly and include your husband on the return. Otherwise, your husband can file a return with Married Filing Separately as the status.

In most cases the status of Married Filing Separately (MFS) is a disadvantage over the status of Married Filing Jointly (MFJ). Many credits and deductions are not allowed when using the MFS status.

8. Question: I didn’t use my tuition payment (1098T) on my 2015 tax return. Can I just claim this payment when I file my 2016 income tax return?

Answer: Tax years are separate units for most every item. Income, credits, and deductions are specific to the tax year that they were earned or paid out. So if you want to claim credit for tuition payment made in 2015, you will need to amend your 2015 income tax return. It is not allowed to claim a 2015 credit or deduction on your 2016 return.

Do you have questions? Leave your questions in the comments below and we’ll do our best to answer them where we can!

IRS Warns of Phishing Scam

fishingThis tax season the IRS has been tracking a scam that targets certain employers. It’s a particularly nasty one, hitting where the email targets clerical employees, impersonating someone higher in the organization, asking for W-2 information. With this information the scammer can steal identities.

The scam started out targeting corporations, but now it has evolved to start hitting schools, restaurants, and other organizations. It’s possible that some of these organizations’ less formal management structure may introduce gaps in the process which might provide exploitation opportunities for the scammers.

The complete text of the IRS’s most recent notice about this scam follows below:

Dangerous W-2 Phishing Scam Evolving;
Targeting Schools, Restaurants, Hospitals, Tribal Groups and Others


IR-2017-20, Feb. 2, 2017

WASHINGTON – The Internal Revenue Service, state tax agencies and the tax industry issued an urgent alert today to all employers that the Form W-2 email phishing scam has evolved beyond the corporate world and is spreading to other sectors, including school districts, tribal organizations and nonprofits.

In a related development, the W-2 scammers are coupling their efforts to steal employee W-2 information with an older scheme on wire transfers that is victimizing some organizations twice.

“This is one of the most dangerous email phishing scams we’ve seen in a long time. It can result in the large-scale theft of sensitive data that criminals can use to commit various crimes, including filing fraudulent tax returns. We need everyone’s help to turn the tide against this scheme,’’ said IRS Commissioner John Koskinen.

When employers report W-2 thefts immediately to the IRS, the agency can take steps to help protect employees from tax-related identity theft. The IRS, state tax agencies and the tax industry, working together as the Security Summit, have enacted numerous safeguards in 2016 and 2017 to identify fraudulent returns filed through scams like this. As the Summit partners make progress, cybercriminals need more data to mimic real tax returns.

Here’s how the scam works: Cybercriminals use various spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2.  This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES).

The Security Summit partners urge all employers to be vigilant. The W-2 scam, which first appeared last year, is circulating earlier in the tax season and to a broader cross-section of organizations, including school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare and shipping and freight. Those businesses that received the scam email last year also are reportedly receiving it again this year.

Security Summit partners warned of this scam’s reappearance last week but have seen an upswing in reports in recent days.

New Twist to W-2 Scam: Companies Also Being Asked to Wire Money

In the latest twist, the cybercriminal follows up with an “executive” email to the payroll or comptroller and asks that a wire transfer also be made to a certain account. Although not tax related, the wire transfer scam is being coupled with the W-2 scam email, and some companies have lost both employees’ W-2s and thousands of dollars due to wire transfers.

The IRS, states and tax industry urge all employers to share information with their payroll, finance and human resources employees about this W-2 and wire transfer scam. Employers should consider creating an internal policy, if one is lacking, on the distribution of employee W-2 information and conducting wire transfers.


Steps Employers Can Take If They See the W-2 Scam

Organizations receiving a W-2 scam email should forward it to and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to them should file a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.

Employees whose Forms W-2 have been stolen should review the recommended actions by the Federal Trade Commission at or the IRS at

Employees should file a Form 14039, Identity Theft Affidavit, if the employee’s own tax return gets rejected because of a duplicate Social Security number or if instructed to do so by the IRS.

The W-2 scam is just one of several new variations that have appeared in the past year that focus on the large-scale thefts of sensitive tax information from tax preparers, businesses and payroll companies. Individual taxpayers also can be targets of phishing scams, but cybercriminals seem to have evolved their tactics to focus on mass data thefts.

Be Safe Online

In addition to avoiding email scams during the tax season, taxpayers and tax preparers should be leery of using search engines to find technical help with taxes or tax software. Selecting the wrong “tech support” link could lead to a loss of data or an infected computer. Also, software “tech support” will not call users randomly. This is a scam.

Taxpayers searching for a paid tax professional for tax help can use the IRS Choosing a Tax Professional lookup tool or if taxpayers need free help they can review the Free Tax Return Preparation Programs. Taxpayers searching for tax software can use Free File, which offers 12 brand-name products for free, at Taxpayer or tax preparers looking for tech support for their software products should go directly to the provider’s web page.

Tax professionals also should beware of ongoing scams related to IRS e-Services. Thieves are trying to use IRS efforts to make e-Services more secure to send emails asking e-Services users to update their accounts. Their objective is to steal e-Services users’ credentials to access these important services.

Tax Refund Myths Debunked

Recently the IRS published a Special Edition Tax Tip which debunks some very common myths about your income tax refund. You may find some of these surprising. These myths are pervasive and can lead you astray if you believe them. In my experience the information in the Tip below is great advice for finding information about your tax refund.

The complete text of the Tip (IRS Special Edition Tax Tip 2017-02) follows below:

IRS Debunks Myths Surrounding Your Tax Refund

As millions of people begin filing their tax returns, the Internal Revenue Service reminds taxpayers about some basic tips to keep in mind about refunds.

During the early parts of the tax season, taxpayers are anxious to get details about their refunds. In some social media, this can lead to misunderstandings and speculation about refunds. The IRS offers these tips to keep in mind.

Myth 1: All Refunds Are Delayed

While the IRS issues more than 90 percent of federal tax refunds in less than 21 days, some refunds take longer. Recent legislation requires the IRS to hold refunds for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until mid-February. Other returns may require additional review for a variety of reasons and take longer. For example, the IRS, along with its partners in the states and the nation’s tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud. The IRS encourages taxpayers to file as they normally would.

Myth 2: Calling the IRS or My Tax Professional Will Provide a Better Refund Date

Many people mistakenly think that talking to the IRS or calling their tax professional is the best way to find out when they will get their refund. In reality, the best way to check the status of a refund is online through the “Where’s My Refund?” tool at or via the IRS2Go mobile app.

Taxpayers eager to know when their refund will be arriving should use the “Where’s My Refund?” tool rather than calling and waiting on hold or ordering a tax transcript. The IRS updates the status of refunds once a day, usually overnight, so checking more than once a day will not produce new information. “Where’s My Refund?” has the same information available to IRS telephone assistors so there is no need to call unless requested to do so by the refund tool.

Myth 3: Ordering a Tax Transcript a “Secret Way” to Get a Refund Date

Ordering a tax transcript will not help taxpayers find out when they will get their refund. The IRS notes that the information on a transcript does not necessarily reflect the amount or timing of a refund. While taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation, they should use “Where’s My Refund?” to check the status of their refund.

Myth 4: “Where’s My Refund?” Must be Wrong Because There’s No Deposit Date Yet

The IRS will update “Where’s My Refund?” ‎on both and the IRS2Go mobile app with projected deposit dates for early EITC and ACTC refund filers a few days after Feb. 15. Taxpayers claiming EITC or ACTC will not see a refund date on “Where’s My Refund?” ‎or through their software package until then. The IRS, tax preparers and tax software will not have additional information on refund dates.

The IRS cautions taxpayers that these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27 – if there are no processing issues with the tax return and the taxpayer chose direct deposit. This additional period is due to several factors, including banking and financial systems needing time to process deposits. Taxpayers who have filed early in the filing season, but are claiming EITC or ACTC, should not expect their refund until the week of Feb. 27. The IRS reminds taxpayers that President’s Day weekend may impact when they get their refund since many financial institutions do not process payments on weekends or holidays.

Myth 5: Delayed Refunds, those Claiming EITC and/or ACTC, will be Delivered on Feb. 15

By law, the IRS cannot issue refunds before Feb. 15 for any tax return claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC). The IRS must hold the entire refund, not just the part related to the EITC or ACTC. The IRS will begin to release these refunds starting Feb. 15.

These refunds likely won’t arrive in bank accounts or on debit cards until the week of Feb. 27. This is true as long as there is no additional review of the tax return required and the taxpayer chose direct deposit. Banking and financial systems need time to process deposits, which can take several days.

See the What to Expect for Refunds in 2017 page and the Refunds FAQs page for more information.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

IRS YouTube Videos:

Substantial Earnings Years of Credit

substantial earningsHow does the substantial earnings years of credit work for Windfall Elimination Provision?

In this article I wanted to expand on a question that came in via the comments recently, because it addresses a theme I’ve seen often:

I have several years where I was just under the substantial earnings cutoff and 25 that are way over. Do you get partial credit for the years that did not reach the substantial floor?

Overview of Substantial Earnings

When your Social Security benefits are subject to the Windfall Elimination Provision (WEP), there is a way to reduce and possibly eliminate the effect of the WEP. This reduction is accomplished by way of the substantial earnings credit. Substantial earnings years of credit are earned when you have worked in a Social Security-covered job and you have earned at least the substantial earnings limit for that particular year.

The substantial earnings limit is set for each year (click the link to see the substantial earnings limits). This figure is specific to the year.

In order to begin reducing the WEP impact, you must have earned substantial earnings in 21 or more years. For each year earned, from 21-30 years, 10% of the WEP impact is eliminated. With 30 or more years of substantial earnings, WEP impact is completely eliminated.

It’s Black or White

However, if in any particular year you earned even one dollar less than the figure for the year in question, you do not earn the credit for that year. On the other hand, if you have earned more than the substantial earnings limit in any particular year, the excess earnings above the limit are not credited to another year – you can only earn one year of credit in any tax year. And you can’t combine years where you were under the limit to produce additional years of credit.

So in answer to the reader’s question, “just under the substantial earnings cutoff” doesn’t provide a partial credit. So, those several years where the reader was just under the limit produce no years of credit for him. Plus, even though he earned “way over” the limit in 25 other years, he has only earned 25 years of credits for those years.

My response to the question, with the above facts in mind, is as follows:

Unfortunately, no. It’s black or white, you either earned above the threshold or you didn’t. And there is no combining years, either.

Planning Without Assets

Many individuals, especially after graduating college have an enormous amount of human capital but very little when it comes to financial capital and investable assets. A common question or concern may be that they are of little interest to financial planners because they don’t have any investable assets or wealth. Let me say that this is both correct and incorrect thinking – depending on the financial planner – and just as important; how the financial planner is paid.

Let’s start with the correct version first. Financial planners are paid in a number of different ways from commission, fee-only and fee and commission. Focusing on fee-only planners for a moment, these planners may be compensated by the hour, retainer, or as a percentage of assets the planner manages for the client. If a fee-only planner is only compensated by assets under management, then the planner may not be interested in helping individuals that have no assets to invest. Thus, the client would be correct in thinking that they are of little interest to that particular planner. This is assuming, of course, the client understands the differences in how planners are compensated.

If we look at the incorrect version, the client is incorrect because they may be able to find a planner that can assist them, but whose planning and help for the client can be charged by the hour, or retainer (e.g. monthly). In this example, the client can receive excellent planning and advice, and not have to worry about satisfying a specific asset or net worth minimum.

I think it’s fair to state that planners that have minimums aren’t wrong in doing so. It simply means they have a business model that works for them based on specific goals for their firm and economies of scale. Additionally, AUM clientele and high net worth individuals are a specific market that may be best served by firms with AUM minimums.

However, for individuals starting out, and potentially reading this post, with little no financial capital and net worth but are interested in a plan to get to that goal, firms with hourly charges or retainers may be a great fit – while still getting expert, fiduciary advice.

Rollover Risk

rollover-risk-by-marcin-wicharyThe idea of an IRA rollover, or a rollover IRA, isn’t necessarily a cosmic mystery – this happens all the time.  You leave your job, and you rollover your 401(k) to an IRA.  No problem, right?  Unfortunately, there often are problems with the process of moving funds from one account to another – because there are a couple of very restrictive rules regarding how this process can and cannot be done.  It’s not terribly complex, but you’d be surprised how easily these rules can trip you up.

Rollover Risk

Let’s start with a few definitions:

A Rollover is when you take a distribution from one qualified plan or IRA custodian, in the form of a check made out to you, and then you re-deposit that check into another qualified plan or IRA account (at a different custodian).

A Trustee-to-Trustee Transfer (TTT), even though it is often referred to as a “direct rollover”, is treated differently from the Rollover (described above).  These transfers, being from one custodian to another (the money never gets into the taxpayer’s hands) is an instantaneous transfer, so the 60-day rule has no bearing on it.  Also, the TTT is not restricted to the OPY rule.

The restrictions on a true Rollover (from one IRA to another IRA) are:

  1. the deposit into the new account must be made no more than 60 days after the distribution from the old custodian; and
  2. a rollover can only be done once every 365 days (and yes, 366 days if February 29th is included!).

One exception to the “once-per-year” (OPY) rule is that this only applies to IRA-to-IRA rollovers.  Rollovers to or from an employer plan (either to or from an IRA or another employer plan) are not subject to the OPY rule.  Also, Roth conversion is not subject to the OPY rule as well.  This rule allows only one Rollover for ALL IRAs per year. See the article The One-Rollover-Per-Year Rule: Revised for more information.


There are a few situations where an automatic waiver of the OPY rule can be applied:

You qualify for an automatic waiver if all of the following apply:

  • The financial institution receives the funds on your behalf before the end of the 60-day rollover period.
  • You followed all of the procedures set by the financial institution for depositing the funds into an IRA or other eligible retirement plan within the 60-day rollover period (including giving instructions to deposit the funds into a plan or IRA).
  • The funds are not deposited into a plan or IRA within the 60-day rollover period solely because of an error on the part of the financial institution.
  • The funds are deposited into a plan or IRA within 1 year from the beginning of the 60-day rollover period.
  • It would have been a valid rollover if the financial institution had deposited the funds as instructed.

If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement or use the self-certification procedure to make a late rollover contribution.

Why is this so important? When would you make more than one rollover in a year?  One case might be where you were waiting for maturity of certain instruments in one IRA (like a CD, for example) and through the course of less than a year, you had two CDs come due and you took rollover distribution from each in separate checks.  The second (and any subsequent) check in the 12 month period would be disallowed and considered a taxable (and most likely penalized) distribution.

Two more rules on rollovers

In addition, the TTT helps to avoid any issues with another rule on rollovers: you are required to rollover the same property that was distributed.  This means that the IRA account owner cannot receive cash as a distribution and then rollover stock shares that he’s purchased with the cash.  Likewise, you couldn’t receive shares of stock in one company, sell the shares and purchase stock in another company and rollover the new shares. One exception to this rule is that if you receive property from a company plan (like a 401(k)), you can sell the property and rollover the cash into an IRA.

If one of those transactions occurs, your rollover funds are considered excess contributions (above and beyond the annual limit) and you would be subject to 6% excess accumulation tax per year that the funds were in the account, on top of being taxed on the original distribution, and quite likely penalized as well.

The last rule I have to offer is the fact that a non-spouse beneficiary can never do a 60-day rollover; they must always do a TTT – as any check written to a non-spouse beneficiary is considered a taxable distribution, and there is no relief available if this mistake is made.

So a good rule of thumb is this: unless there is a very compelling reason, you should always go with a Trustee-to-Trustee transfer when rolling funds to an IRA – this way you’ll avoid some very unpleasant results.  If you have to do the other kind of rollover – make sure you haven’t done another within a year and you’ll be golden.

Tax Time To-Do List

Now that tax time is around the corner I thought I’d put together a handy guide in case you find yourself in need of delegating your tax prep and return to our firm. As a reminder, both Jim and I are enrolled agents with the IRS and in addition to federal taxes we are capable of preparing and filing your state (nationwide) tax return as well. Here are some items to gather and consider.

  1. Organize your W2s. Gather all of your tax information from your respective employer(s). This also includes any 1099-MISC income if you operated as an independent contractor.
  1. Organize your other tax forms. This include other 1099 forms such as 1099-DIV, INT, as well as 1098 forms for student loan and home mortgage interest. Don’t worry, most of these forms are in the process of being mailed or emailed to you if hold such accounts.
  1. Organize your receipts. If you’re self-employed or incurred non-reimbursed expenses as an employee, these may be deductible. If you’ve used a credit or debit card for these expenses, they can be tracked and some companies will let you categorize them. Additionally if you use an online site such as Mint, you can create your own expense reports for easier access and organization. Examples of such expenses include meals and entertainment (at 50%), self-employed health insurance premiums, supplies, and others.
  1. If you travel a lot for work you may be entitled to a deduction. Throughout the year you (obviously) kept track of your trips in a journal or with an app. Organize this and make sure it’s accurate.
  1. Have you maxed out your IRA? Remember you have until you file or the tax deadline (whichever is sooner) to make your full IRA contributions for 2016.

Although this list is not exhaustive, it can help give you an idea of what deductions you may be allowed, and how to get organized. Of course, part of what we do is to look for additional deductions and credits you qualify for. If you’d like our help, please let us know.

Filing for Social Security Survivor Benefit alone, preserving Retirement for later

7cdfzmllwom-william-boutAfter all of the changes that have been put in place for Social Security benefits in the past year, there is still one situation that allows for some planning. Knowing about this situation can help if you happen to be in the right circumstances.

If your spouse has passed away and you are due a Survivor Benefit, there may be a strategy for you to maximize benefits. This is because, of all types of Social Security benefits, the Survivor Benefit may still be filed for separately from the Retirement benefit based on your own record.

Why would you want to do this? Well, if your own Retirement benefit either is or will be larger than the Survivor Benefit, it might make sense for you to delay receiving your Retirement Benefit until later. In the meantime, if you’re at least age 60 and not earning more than the income limits, you may want to take advantage of the Survivor Benefit while you delay your Retirement Benefit.

Restricting the Survivor Benefit

For example, Marie’s husband Jake recently passed away. Jake was 66 years old, and had been receiving his own Social Security retirement benefit for a couple of years. His current benefit was $1,500 per month.

Marie is 64, and her own benefit will be $1,500 when she reaches Full Retirement Age (FRA) of 66. Marie is ready to retire from work, and she has two options available at this point:

1) She could file for all available benefits, which would result in a monthly benefit of approximately $1,352. If Jane does nothing more, that would be her benefit (basis) for the rest of her life, except for COLAs.

2) On the other hand, Marie could file for Survivor Benefits only, which would provide her with the same benefit as above, $1,352. But by restricting her application to the Survivor Benefit only, Marie has the option to later file for her own retirement benefit. If she only waits until her Full Retirement Age, Marie could step up her benefit amount to $1,500 per month upon reaching age 66.

Further, Marie could delay filing for her own benefit as long as possible, to age 70, and thereby maximize her retirement benefit to $1,980.

How it works

In the example above, Marie’s own retirement benefit at her age 64 is reduced to $1,300. The Survivor Benefit based on Jake’s record is reduced as well, but only to $1,352. When Marie files for benefits, if she makes no action to restrict her application, she is filing for (effectively) the largest possible benefit, considering all benefits that are available to her.

If Marie doesn’t restrict her application specifically to the Survivor Benefit alone, she has effectively filed for her own Retirement Benefit at the same time. This is because an application for any Social Security benefit is considered to be an application for all available benefits unless the application’s scope is restricted.

However, if Marie does restrict her application to the Survivor Benefit only, she preserves the option to later file for her own retirement benefit. Having restricted her application only to the Survivor Benefit, her own retirement benefit can continue to grow in value since she has not filed for it. Then later she can file for her own benefit – at any time when her own benefit is larger than the Survivor Benefit.

Note: It doesn’t matter if Marie and Jack were divorced, as long as the marriage lasted at least 10 years. As a surviving divorced spouse, Marie would have the same options available to her as a widowed spouse.

How do you do this?

There are a couple of different ways to accomplish the restricted application for Survivor Benefits.

In the online application for benefits, there is a screen called Additional Benefits (ADDB), which has a question:

If claimant is filing as a surviving spouse, is the claimant filing for benefits on own record?

Answering “No” to this question will restrict your application to only the Survivor Benefit.

Another way to restrict the application is to include an unequivocal statement on your application such as:

I do not wish this application to be considered an application for retirement benefits on my own earning’s record.


I filed on <date> for all benefits for which I may be eligible except for retirement benefits on my own earnings record.


I wish to exclude retirement benefits on my own earnings record from the scope of this application.

If including a statement (instead of the online answer of “No”) it is important to NOT include qualifying phrases in your statement. Examples of such statements are “at this time” or any statement regarding planning to file for other benefits in the future. These qualifying statements will cause the statement to be rejected.

After-Tax Investment Considerations

Some individuals have the ability to contribute after-tax amounts to their employer-sponsored plans such as a tax-deferred 401k or a defined benefit pension. Generally, since these amounts are after-tax, the contributions start adding up to a sizable amount known as basis. Basis is simply the amount of after-tax money put into these accounts that is not taxed when it’s withdrawn. However, any earnings on the basis are taxable.

Individuals considering contributing after-tax amounts to the above plans may also consider if it makes sense to contribute to a non-qualified brokerage account. Like the aforementioned employer-sponsored plans, contributions to a non-qualified brokerage account are made with after-tax dollars, thus they can build a sizable basis – which is not taxed when withdrawn. Also, like the above employer-sponsored accounts, any earnings are subject to taxation. The major difference is in the way the earnings from the non-qualified account are taxed.

Earnings on after-tax contributions to employer-sponsored plans are taxed at the individual’s ordinary income tax rate. However, earnings on after-tax contributions to a non-qualified brokerage account are taxed more favorably as long-term capital gains (assuming they are held for longer than one year). Although the non-qualified account may seem like the way to go, there are a number of items to consider before choosing which account to place your after-tax money.

One area to explore is how retirement income is taxed in your state. Some states such as Illinois currently do not tax retirement income. Thus, the earnings from the after-tax 401k or pension contributions would not be taxed at the state level, only federally. Earnings from the non-qualified account would be taxed both at the state and federal level.

Additionally, consider the amount of risk the contributions are being exposed to in their plans. Most non-qualified brokerage account and employer-sponsored 401k risk is the responsibility of the individual or employee. However, some defined benefit pension plans bear all the investment risk while providing a nice crediting interest rate. Thus, if an employer-sponsored defined benefit pension allows after-tax contributions, credits interest at 7.5% (accurate as of this writing for some pensions) and bears all of the investment risk, an individual may find that they are willing to pay a higher percentage in tax for the corresponding interest rate credit and transfer of investment risk.

Other considerations include the individual’s goals for the money at retirement and at death. For example, a 401k will have required minimum distributions (RMDs) at age 70 ½. Non-qualified brokerage accounts do not. Furthermore, most beneficiaries that inherit a 401k account must take RMDs based on the life expectancy of the beneficiary. Taxation is still at the ordinary income tax rate on earnings, but the after-tax amount still constitute basis. Beneficiaries of non-qualified brokerage accounts experience a change in their tax basis. In other words, the account value on the date of the account owner’s death becomes the beneficiary’s new tax basis. Thus, any earnings above that amount are taxed as long-term capital gains rates.

For defined benefit pensions, the beneficiary would be the spouse. At the death of the account owner, the spousal beneficiary would receive whatever annuity payout was agreed upon when the pension was initiated. However, if the employee was single or the spousal beneficiary dies; these payments cease. There’s no account balance to inherit or additional beneficiary to receive the pension.

4 Things to Consider About Healthcare in Retirement

heres-health-by-robert-brookAs we all are painfully aware, the costs and complexity of healthcare are skyrocketing, and nothing seems to be slowing things down.  Granted, the incoming administration is making overtures to give attention to the problem, but… as we all know, paths to places we don’t want to go are often paved with good intentions.  At this point I would not hold my breath for the next great proposal on healthcare costs, the problem is enormous and not easily resolved.

Recent information from Fidelity suggests that a 65-year-old couple who retired in 2016 can expect lifetime healthcare costs to top $260,000 over their remaining lifetimes.  And that doesn’t include long-term care (nursing home or assisted-living) costs.

Four Things to Consider About Healthcare in Retirement

  1. It’s not solely Medicare. If you haven’t checked into it yet and you believe that Medicare could be your only insurance in retirement, you’re in for a surprise. With the co-payments, “holes” in coverage, and coinsurance payments, it’s almost a requirement that you have a supplemental healthcare policy to help out. Industry averages for a couple, aged 65 and in good health, start around $7,000 per year and go up from there.
  2. Retiring early increases the costs. If you’re planning to retire early (and therefore lose employer-provided health coverage) you’ve got to replace it somehow.  These policies are even more expensive than the Medicare supplement policies discussed above – and much more variable due to the complexities of coverage.  This portion of your early retirement deserves (requires!) quite a bit of planning ahead, as healthcare costs could be a significant portion of your monthly expenses in retirement.
  3. It doesn’t help to wait. Are you just starting to consider your options and are close to retirement?  If so, you’re quite a bit behind the curve – there are several things that could be done in the five to ten years prior to retirement that might help you with the costs.  For example, if you’re a little overweight, or a smoker, rectifying these things five or ten years before retirement can have a significant impact on your costs. Participating in a health savings account (HSA) coupled with a high-deductible health plan (HDHP) can position you well for a transition into retirement as well.
  4. Knowledge is helpful. Health insurers use a special report, called a Medical Information Bureau (MIB) report to help determine your eligibility for coverage.  Think of it like a credit report on your health.  You can order your own MIB report, in order to look things over to see if there are any red flags (much the same as reviewing your credit report).  If you have a denial of coverage on your report or any issues that could adversely impact your ability to get coverage, it’s best to know that up front and work with an agent or broker who specializes in your issues.

Although these things may seem like a lot of work, they’re excellent considerations to take into account as you plan for your healthcare in retirement.  And – most financial planners these days, myself included, can help you work through the decision-making process.  It’s not simple, and mistakes can be quite costly.

How to Make Your Saving Automatic

Sometimes it can be difficult to save for emergencies or for retirement. While physically not demanding, the mental strain can be a hump that is hard to get over. In other words, we experience a little bit of “pain” or mental anguish if we have to physically hand over money or write a check.

So how can we overcome this anguish? Automate.

First, determine how much you need for an emergency. This can either be to start the fund or to replenish amounts that have been used. Generally, it’s a good idea to have 3 to 6 months of non-discretionary expenses (expenses that don’t go away if you lose your job or become disabled) set aside in an FDIC insured bank account. Some individuals may find it more comforting to have 6 to 9 months or 9 to 12 months. It’s up to you.

For retirement, I recommend saving 15 to 25 percent of your gross income. If this amount seems too high, consider reading our numerous articles on paying yourself first. It’s not too high. Perhaps your spending is? Ok – back to the main topic.

Once you have these amounts established arrange to have your paycheck deducted for each fund. There are a couple of ways that this can be done. First, you can have your employer (if they allow it) take some of your check and deposit it into your checking account. Then, arrange to have your emergency fund contribution sent to a specific savings account. If your employer doesn’t allow this, simply arrange to have a certain amount transferred from your checking to emergency savings on a monthly basis – until it’s at your desired amount.

If you think you’ll be tempted to spend this money, consider having your emergency fund at another bank or credit union. This relates to the mental and physical strain of accessing the money. That is, if you really need it (for an emergency) then you can get it. Otherwise, you’re more likely to leave it alone.

For your retirement account you can arrange to have your retirement contributions automatically deducted into your employer sponsored plan (401k). If you’ve maxed out contributions or your employer doesn’t offer a plan arrange to have an automatic deduction taken from your checking account to your IRA. Many people contribute to the 401k and IRA directly from their paycheck. If your employer offers this, take advantage of it.

I would recommend having these deductions come out the day after you’re paid. That way, it’s not only automatic, but it reduces the temptation to spend first, and then save. Instead, you’re paying yourself first and living off of the rest – and you’ve made it automatic.

6 Year End Tips for a Financially Productive 2017

Maroon Bells – Photo courtesy of Jason Raskie

As 2016 comes to a close in a few weeks and we start into 2017, here are some good tips to consider to start 2017 off with some good strategies that will hopefully become habits.

  1. If you’re not doing so already, set up your payroll deductions to save the maximum to your 401k. There’s plenty of time to your payroll allocated so your deductions start coming out on the first paycheck in January. The 2017 maximum contributions are $18,000 for those under age 50 and $24,000 for those age 50 or older. To deduct the max, simply take the number of pay periods you have annually and divide it into your maximum contribution amount. This will allow you to save the maximum amount over 2017. Consider doing the same to maximize your IRA contribution. Those limits are $5,500 (under 50) and $6,500 (over 50) respectively.
  1. Check your allowances on your W4. If you’ve been paying in quite a bit of tax at tax time or receiving a huge refund it may be that you’re having too little or too much withheld from your paycheck. Consider adjusting these amounts in order to improve withholding efficiency. There are also paycheck calculators online to help identify what your check will look like after withholding and retirement contributions.
  1. Refresh or build your emergency fund. Generally, this is 3 to 6 months of living expenses if you lose your job, become disabled, etc. Some individuals prefer 9 or even 12 months set aside. Whichever amount you choose, make sure it’s funded. A simple savings account with FDIC insurance is a great place to keep this money.
  1. Have an old 401k or IRA sitting idle? Now is an excellent time to consolidate those funds into one IRA with one custodian. This makes life simpler regarding keeping an eye on the funds as well and sticking to your investment and asset allocation strategies.
  1. Review your annual spending/budget. Take a look at your spending over the previous 12 months. Are there any changes you’d like to make? Any room for improvement? Chances are you may identify some favorable and not-so-favorable spending patterns that occurred throughout the year. Could you reallocate some money to retirement saving or emergency fund money? If tracking seems daunting, consider an app or website that helps with this type of planning such as Quicken or These tools allow an individual to see how they’re spending money daily and allow the creation of customized budgets and spending goals. They’re also very efficient and time-saving.
  1. Be sure to remember your 2016 required minimum distribution (RMD) and start thinking about your 2017 RMD. The tax penalty is pretty harsh at 50% of the amount not withdrawn. Don’t need the RMD money? Consider reinvesting it into a non-qualified account or using it to build your emergency fund.

IRS’ 2017 Mileage Rates for Taxes

The Internal Revenue Servicmileagee today issued the 2017 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. These rates are for use on your 2017 income tax return, filed by April 2018.

Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 53.5 cents per mile for business miles driven, down from 54 cents for 2016
  • 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
  • 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains unchanged.   The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements are described in Rev. Proc. 2010-51. Notice 2016-79, posted today on, contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Many Happy Returns*

Al Capone Arrest Record

I was recently talking with an acquaintance who told me about a friend of his that had not filed a tax return for several years… Now, we all know that burying our head in the sand is no way to deal with *any* problem – but especially this one.

Right off the top of your head, I’m sure you can name a few folks who have been “taken down” by the IRS for tax evasion.  Let’s see… for starters, Wesley Snipes, Sophia Loren, Richard Hatch, Leona Helmsley, Richard Pryor, Pavaratti, Martha Stewart, Elton John, Nicholas Cage, Heidi Fleiss… the list goes on.

And then there is probably the most powerful, certainly the most influential, of all of these:  Al Capone.  The granddaddy of ’em all. Legend has it that the notorious gangster once remarked that tax laws were a joke because “the government can’t collect legal taxes on illegal money.”  The IRS charged the infamous Chicago mob boss with failure to pay four years’ worth of taxes. Capone was sentenced to 11 years in jail and an $80,000 fine in 1931.

My point in listing all these names is to show just how pervasive and powerful the IRS can be.  Even the likes of Al Capone (as well as, believe it or not, former Vice President Spiro Agnew, and even a former IRS commissioner, Joseph Nunan) couldn’t escape the long arm of the Treasury Department.

Now, if you happen to be in a position where you have not filed tax returns for some time, or if you are simply having difficulty paying the taxes that you owe, Uncle Sam has many options to help you work things out.  On the IRS’ website ( you’ll find information on how to work out a plan with the Treasury Department in order to get you back on track.

And if you need help in working with the IRS for any reason, don’t hesitate to contact me.

* My original tax preparation service was named MHR Income Tax Service – MHR stood for “Many Happy Returns”
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