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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 Basis is simply the amount of after-tax money put into these accounts that is not taxed when it’s withdrawn.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brokerage account are made with after-tax dollars, thus they can build a sizable basis – which is not taxed when withdrawn.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 […]

Many Happy Returns*

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 […]

Penalties for Changing SOSEPP

What are the penalties for changing your SOSEPP? If you don’t know, that’s another name for a 72t distribution. IRS has some severe penalties if you change your payment plan.

Tax-Loss Harvesting: It’s Never Too Late

Tax-loss harvesting is a tax move that can help with your income tax burden when you’ve experienced a loss with your investments.  Briefly, this is where you have a taxable account, holding stocks, bonds, or mutual funds and the market declines leaving your holdings in a loss situation.  Once you sell the holding, you have realized the loss, which enables you to take advantage of the tax laws and deduct those losses, first against any gains in your account(s), and then at a rate of $3,000 per year against ordinary income. This is similar to the famous move that Mr. Trump (and I would be shocked if Mrs. Clinton never took a loss against future taxes) used to avoid future income taxes. This was recently discovered in Trump’s tax records and made out to be a fatcat loophole – at least by the media – when actually anyone can take advantage of […]

SOSEPP & How a QDRO Affects It

In addition to the 72(t) exception available for folks with a QDRO (see this post), there is also the question of how a QDRO impacts an established Series of Substantially Equal Periodic Payments (SOSEPP) – which, as we know, once established can only be changed one time. Although not definitive, below are summaries of three Private Letter Rulings (PLRs) that seem to suggest first of all that making the distribution is not subject to the 10% penalty when a QDRO or divorce decree is involved, pursuant to the regulation in Code section 72(t)(4)(A)(ii). Private Letter Rulings for SOSEPP 1) The transfer to a taxpayer’s spouse pursuant to a divorce decree of 50% of each of three separate IRAs owned by the taxpayer from which the taxpayer had already begun receiving “substantially equal periodic payments” did not result in a modification where the taxpayer’s spouse was two years younger and would commence […]

Tax Benefits for Job Hunting

The IRS recently published their Summertime Tax Tip 2016-24, entitled “Looking for Work May Impact Your Taxes”, with some good tips that you should know as you go about job hunting.  The text of the actual publication from the IRS follows, and at the end of the article I have added a few additional job-related tax breaks that could be useful to you. Looking for Work May Impact Your Taxes If you are job hunting in the same line of work, you may be able to deduct some of your job search costs. Here are some key tax facts you should know about when searching for a new job: Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation. Résumé Costs.  You can deduct the cost of preparing and mailing your résumé. […]

401(k) & Qualified Domestic Relations Orders (QDRO)

An exception to the 10% penalty on distributions from a qualified plan (but not an IRA, an IRA is split via a transfer incident to a divorce, which is not an automatic exception) Qualified Domestic Relations Order, or QDRO (cue-DRO).  A QDRO is often put into place as part of a divorce settlement, especially when one spouse has a qualified retirement plan that is a significant asset. What happens in the case of a QDRO is that the court determines what amount (usually a percentage, although it could be a specific dollar amount) of the qualified retirement plan’s balance is to be presented to the non-owning spouse.  Once that amount is determined and finalized by the court, a QDRO is drafted and provided to the non-owning spouse. This document allows the non-owning spouse to direct the retirement plan custodian to distribute the funds in the amount specified. In the case of a QDRO, the owning spouse will […]

Qualified Charitable Distributions for 2016

Individuals needing to take their required minimum distributions (RMD) for 2016 may consider having all or part of their RMD distributed as a Qualified Charitable Contribution (QCD). In order to qualify, the following rules must be met. The individual taking the QCD must be age 70 ½. The maximum allowed QCD is $100,000 per individual, annually. The QCD must come from an IRA. QCDs from 401(k)s, 403(b)s, 457(b)s, SEPs, SIMPLEs are not permitted. An individual may roll over an amount to their IRA and then made the QCD. The QCD is counted toward the individual’s RMD for the tax year. If the RMD was already taken, the QCD cannot be retroactively made. The QCD must be made directly to the charitable organization. Generally, the charity must be a public charity. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made allowing QCDs from IRAs permanent. The tax benefit from […]

5 Tax Credits You Don’t Want to Miss

As individuals begin to file their tax returns for 2015 here are some tax credits that some individuals may qualify for to help reduce, if not eliminate their tax liability. Child Tax Credit. This credit may be worth up to $1,000 per child, depending on income. The child must be under age 17 at the end of 2015, as well as be a dependent and a US citizen. Additional information can be found in Publication 972. The American Opportunity Tax Credit. This tax credit for education expenses is allowed for parents for up to the first four years of post-secondary (college) education. The benefit of this credit is that it is a “per student” credit. This means the credit can be taken for multiple children in college. The maximum credit per student is $2,500. Additional information can be found here. The Lifetime Learning Credit. Like the AOTC, this credit can […]

Tips for Tax Time

Given that it the start of tax season and individuals will be gathering and preparing their 2015 tax return information, I’d thought I’d put together some basic tax tips. Individuals may consider thinking about these items in order to have a smooth and (hopefully) stress-free 2015 tax season. Additionally, I’ve included a link to our 2015 Tax organizer. Please feel free to use it at your convenience to get your “tax ducks in a row”. Furthermore, please let us know if you’d like us to prepare and file your taxes for you. Many current clients have found Blankenship Financial to be cost effective and efficient compared to other big-named tax preparation services. As Enrolled Agents both Jim and I are well qualified to handle most tax matters and returns. And now with the tax tips… Beware the non-tax man cometh! Each year we field calls from clients and prospective clients […]

What to Do if You’re a Victim of Tax Fraud

Hopefully this will never happen to you but in the unfortunate event you become of victim of tax fraud there are some steps that you can take to help alleviate the concern that someone has stolen your identity to file a fraudulent tax return in order to receive the refund. Generally, the first sign of fraud appears when you try to file our return electronically. Most e-file providers receive acknowledgements from the IRS that the return was successfully e-filed. If a return is rejected, a code will return with the rejection indicating what the issue is. For example, a sign of fraud will indicate that the Social Security numbers used to file your return were previously used in the same tax year for another return. If you know you didn’t previously file, then fraud is likely. If you feel you’re the victim of fraud, here’s what you can do: Contact […]

Forget to Take Your RMD?

In case you forgot to take your required minimum distribution (RMD) for 2014 there’s still hope in order to avoid the 50% (yes, that’s FIFTY percent) penalty of the amount not withdrawn. If you missed taking the RMD for 2014 here’s what you can do. According to the IRS the penalty may be waived if you can establish that it was due to reasonable error that you didn’t take the RMD and that reasonable steps are being taken to remedy the error. That is, take the 2014 RMD right away (or as soon as you can let your custodian know) and it might not be a bad idea to take the RMD for 2015 as well (just to be on the safe side). Once that’s done you or your tax professional need to fill out Form 5329 as well as a letter explaining the reason for not taking the RMD. […]

Important Tax Numbers for 2015

For 2015 the IRS has given the new limits regarding retirement contributions as well as estate and gift tax exemptions. Regarding retirement contributions employees may now defer $18,000 annually to their employer sponsored plan including a 401k, 403b, and 457 plans. This is an increase from last year’s $17,500 amount. Additionally, employees age 50 or older can now make an age based catch-up contribution of $6,000 which is a $500 increase from last year’s $5,500 amount.

Your Year-End Bonus

As the end of the year approaches many employers will pay and many employees will receive year-end bonuses. While often the icing on the cake for a productive year employee should be aware of the tax consequences of their bonus. Percent vs. Aggregate Method When it comes to taxing the bonus an employer may choose the percentage method versus the aggregate method. Under the aggregate or wage holding bracket method the employer will use the withholding tables generally used for the employee normal paycheck. Then, the supplemental wages are aggregated with the employee’s normal pay and taxes are withheld accordingly.

Social Security Wage Base Projected for 2015

Update 10/22/2014: The wage base has been set for 2015. See the article Social Security Wage Base Set for 2015. According to the Social Security Administration trustees, the Social Security wage base for 2015 is projected to be $119,100.  This represents an increase of $2,100 from the 2014 wage base of $117,000. This is an increase of 1.79% – and won’t be finalized until October when the other increases for Social Security amounts are announced. This is a relatively small increase when compared to recent annual increases we’ve seen.  The previous 3 years’ increases have averaged 3.09%. This is different from the COLA (Cost of Living Adjustment), which has increased an average of 2.27% in the past three years. The 2014 COLA (applicable to 2015 benefits and other figures) will be released later in the year, typically in October.

A Quick Trick to Reduce Your Tax Liability

Now that most folks are recovering from tax time there may be some individuals that paid an excessive amount of tax to Uncle Sam and are looking for ways to reduce their tax liability for next year. This post will be short and sweet, but hopefully it will drive a few points home. The best way to explain this is through an example. Let’s say that Mary and her husband Paul both work and file their taxes jointly. Their tax liability for 2013 was $4,000 – meaning that’s the amount of the check they wrote to the IRS. Needless to say, they are both looking for a potential way to reduce that liability – at least in the here and now. In this case, their marginal tax rate is 25%. The quick trick in this example is to take their tax rate which is 25% and divide it into their […]

Tax Time is Over. Maybe.

For most folks tomorrow marks the one week anniversary of filing their 2014 tax return. Not much needs to be done after they’ve filed except for deciding to have more withheld in 2014 for those folks who had to write a check to Uncle Sam or deciding what to do with the refund (hint: put it in an IRA) for those folks who got a refund. What happens when the return may have been submitted with mistakes or perhaps costly errors? Generally, if the error is minor the IRS will correct errors or accept returns without certain forms or schedules attached. For those returns that have a change in filing status, income, deductions, and credits then filing an amended return will most likely be appropriate. For those folks needing to file an amended return they are allowed to file using form 1040X. Form 1040X will allowing corrections to earlier filed […]

What’s in Store for 2014?

A few weeks ago I was interviewed by a local business journal about our firm’s thoughts as to how the market would react in 2014 and how to best prepare for that reaction. Essentially, the journal was asking us to predict where the market would be in 2014. Most of our clients know the answer I am about to write, which was, “No one can predict the direction of the market with any degree of accuracy.” “If that were the case, (as I told the interviewer) neither she nor I would be having this interview.” In other words, we’d be clinking our glasses on our respective tropical beaches because we’d have gotten filthy rich predicting and timing the moves of the market. Markets are pretty efficient – meaning that the price of any particular stock in any particular sector, industry or country is generally priced based on all available information […]

Charitable Donations

This time of year many people find it in their hearts to give. They’ll give to friends, family, loved ones and charitable organizations that can help maximize the gift such as a church, charity, or foundation. Last week I had written about the law of reciprocity and giving, and this week I’d like to mention how you can make your giving work in favor when tax season rolls around. As of this writing there are about 11 days left in 2013. Some individuals will be looking to see how much they can give or how much more they can give in order to receive the biggest tax deduction they can for charitable giving. Of course, gifts to friends and family are not deductible, but there are times when gifts or donations are completely deductible and may be to the tax advantage of the person giving or donating the gift. According to […]

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