Monthly Archives: March 2015

Family Home Loan: Interest May Not Be Deductible

2015_04_01 Home Loan InterestMany of us have taken out a home loan. It is not uncommon for individuals to loan money to relatives to help them buy a home. In those situations, it is also not uncommon for a loan to be undocumented or documented with an unsecured note. The unintended result is that the home buyer cannot claim a tax deduction for the home loan interest paid on the loan given by their helpful relative.

The tax code describes qualified residence interest as interest paid or accrued during the tax year. This is on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. It also provides that the term “acquisition indebtedness” means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. There are also limits on the amount of debt and number of qualified residences that a taxpayer may have for purposes of claiming a home mortgage interest tax deduction. For the purchase of this article, those details are not covered. This article focuses on the requirement that the debt be secured.

Secured Debt

Secured debt means a debt that is on the security of any instrument. These include a mortgage, deed of trust, or land contract:

  1. that makes the interest of the debtor in the qualified residence-specific security of the payment of the debt,
  2. under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated, and
  3. that is recorded, where permitted, or is otherwise perfected in accordance with applicable state law.

In other words, the home is put up as collateral to protect the interest of the lender.

Thus, interest paid on undocumented loans, or documented but unsecured notes, is not deductible by the borrower. Yet it is fully taxable to the lending individual. The IRS is always skeptical of family transactions. Do not get trapped in this type of situation. Take the time to have a note drawn up and recorded or perfected in accordance with state law.

Do you have questions about Home Loan Interest?

If you have questions related to this situation or other issues related to the deduction of home mortgage interest, please give call our office at 781-849-7200.

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Tax Season is Here – Only 2 Weeks Left!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

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Installment Sale is a Useful Tool to Minimize Taxes

Selling a property one has owned for a long period of time will frequently result in a large capital gain. And reporting all of the gain in one year will generally expose the gain to higher than normal capital gains rates. This is and subjects the gain to the 3.8% surtax on net investment income added by Obamacare.

2015_03_26 Installment SaleCapital Gain Rates

Long-term capital gains can be taxed at 0%, 15%, or 20% depending upon the taxpayer’s regular tax bracket for the year. At the low end, if your regular tax bracket is 15% or less, the capital gains rate is zero. If your regular tax bracket is 25% to 35%, then the top capital gains rate is 15%. However, if your regular tax bracket is 39.6%, the capital gains rate is 20%. As you can see, larger gains push the taxpayer into higher capital gains rates.

Surtax On Net Investment Income

Tax law treats capital gains as investment income. Upon which higher-income taxpayers are subject to a 3.8% surtax on net investment income. The exception to this is those capital gains derived from a trade or business. A large gain generally pushes a taxpayer’s income over the threshold for this tax. For individuals, the surtax is 3.8% of the lesser of:

  1. The taxpayer’s net investment income or
  2. The excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount for his or her filing status.

The threshold amounts are:

  • $125,000 for married taxpayers filing separately.
  • $200,000 for taxpayers filing as single or head of household.
  • $250,000 for married taxpayers filing jointly or as a surviving spouse.

This is where an installment sale could fend off these additional taxes by spreading the income over multiple years.

How does an installment sale work?

If you sell your property for a reasonable down payment and carry the note on the property yourself, you only pay income taxes on the portion of the down payment that represents taxable gain. In addition, any other principal payments received in the year of sale will also be subject to capital gain. You can then collect interest on the note balance at rates near what a bank charges. For a sale to qualify as an Installment Sale, at least one payment must be received after the year in which the sale occurs. Installment sales are mostly used when the property that is sold is real estate, That real estate cannot be used to report the sale of publicly traded stock or securities.

Example of How An Installment Sale Works

Example: You own a lot for which you originally paid $10,000. You paid it off some time ago. This left you with no outstanding mortgage on the lot. You sell the property for $300,000 with 20% down and carry a $240,000 first trust deed at 3% interest using the installment sale method. No additional payment is received in the year of sale. The sales costs are $9,000.

Computation of Gain
Sale Price $300,000
Cost < $10,000>
Sales costs < $9,000>
Net Profit $281,000
Profit % = $281,000/$300,000 = 93.67%

Of your $60,000 down payment, $9,000 went to pay the selling costs. This leaves you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202 ($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. In addition, the interest payments on the note are taxable and also subject to the investment surtax.

Thus in the example, by using the installment method the income for the year was reduced by $224,798 ($281,000 – $56,202). How that helps the taxpayer’s overall tax liability depends on the taxpayer’s other income and circumstances.

Additional Considerations When Contemplating an Installment Sale

Existing Mortgages

If the property you are considering to sell is currently mortgaged, that mortgage would need to be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan. However, there might be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan.

Tying Up Your Funds

Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in 5 years. However, a large lump sum payment at the end of the 5 years could cause the higher tax rate and surtax to apply to the seller in that year. Therefore, close attention needs to be paid to the tax consequences when structuring the installment agreement.

Early Payoff of the Note

The buyer of your property may decide to pay off the installment note early or sell the property, in which case your installment plan would be defeated. The balance of the taxable portion would be taxable in the year the note is paid off early or when the property is sold. The exception would be unless the new buyer assumes the note.

Tax Law Changes

Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase.

Does an installment sale work in all situations?

Not always. To determine whether an installment sale will fit your particular needs and set of circumstances, please contact Alex Franch, BS EA at 781.849.7200 for assistance in planning your real-estate transactions. Worthtax has locations in Quincy, Weymouth and Dedham..

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Turning 70 1/2 this year? You may face a number of special tax issues.

If you are turning 70 1/2 this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles.

Traditional IRA Contributions

2015_03_25 are you turning 70 1-2, required minimum distributionYou cannot make a traditional IRA contribution in the year you reach the age of 70 1/2. Contributions made in the year you are turning 70 1/2 (and from then on) are treated as an excess contribution. These are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned.

You can avoid the penalty. How? By removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year. Also, including the interest earned on the excess in your taxable income.

Even though you can no longer make contributions to a traditional IRA in the year you are turning 70 1/2, you can continue to make contributions to a Roth IRA. The contribution is not to exceed the annual IRA contribution limits. This is provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution.

If you are married to a non-working or low-earning spouse who has not yet reached age 70 1/2 and you have earned income, your earnings can still be used to qualify your spouse for a contribution to a spousal IRA. Even if you are turning 70 1/2 or older and can’t contribute to your traditional IRA, the spousal IRA would still qualify.

Required Minimum Distributions (RMDs)

Let’s face it, you have to start taking your deductions sometime. You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70 1/2. The distribution for the year in which you turned 70 1/2 can be delayed to the subsequent year without penalty if the distribution is made by April 1 of the subsequent year. That means two distributions must be made in the subsequent year: the delayed distribution and the distribution for that year. In the following years, your annual RMD must be taken by December 31 of each year.

Still Working Exception

If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70 1/2. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the still working exception, your RBD is postponed to April 1 of the year following the year you retire.

Example: You are turning 70 1/2 in 2015, but you chose to continue working; you did not retire until June of 2017. Provided your employer’s plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2018.

Caution: This exception does not apply to an employee who owns more than 5% of the company. There is no “still working exception” for IRAs, Simple IRAs, or SEP IRAs.

Excess Accumulation Penalty

When you fail to take an required minimum deduction, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year.

Example: Your required minimum deduction for the year is $35,000. You only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000).

The IRS will generally waive the penalty for non-willful failures to take your required minimum deduction, provided you have a valid excuse and the under-distribution is corrected.

Turning 70 1/2 Can Be Complicated

As you can see, turning 70 1/2 can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your required minimum distribution for the year, please give our office a call at 781-849-7200.

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Interest on My Vehicle Loan, Is It Tax Deductible?

2015_03_19 Car Loan interest, vehicle loan, consumer loan 16608570278_e16367b878Interest on your vehicle loan, did you wonder how to claim it on your taxes? Is it tax deductible? That depends, how is the vehicle is being used? Is it for business or personal use, the tax form on which the expenses are being deducted, and the type of loan you secured.

If the loan were a consumer loan secured by the vehicle, then the following rules would apply:

  • If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule. Only then is the business portion of the interest deductible as business interest. The personal portion of the interest will not be deductible.
  • If the vehicle is being used in part for business as an employee and the expenses are being deducted as an itemized deduction. In this case, neither the business portion nor the personal portion of the interest will be deductible.
  • If the vehicle is entirely for personal use. None of the interest will be deductible. This is because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.

Other Alternatives for Deductible Interest on a Consumer Loan

As an alternative to a nondeductible consumer loan, you might consider purchasing that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest tax deductible.

Before borrowing against the home, you should consider the following:

  • Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.
  • When buying a car, you can sometimes get very favorable interest rates or a rebate. To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
  • It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.
  • If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.

Were you hoping to deduct your vehicle loan interest?

Do you need assistance deciding what coarse of action is best for you and your business? There are less than three weeks to go to file your taxes. Do you have questions about filing your tax refund? If you have thoughts, questions or concerns about a strategy, contact us or visit any one of our locations. We have an ultra-convenient service and can schedule an appointment for you. You may also leave your comments below or post on our FacebookGoogle+ or LinkedIn pages.

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Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

– – – – – – – – – –

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Tax Tips for the Well-traveled Businessperson

Tax Tips for the Well-traveled Businessperson
Article Highlights:
Acceptable Records
Meals
Spouse Expenses
Food and lodging expenses are generally deductible when away from home for business purposes. This may be particularly beneficial for self-employed individuals who travel extensively. Like everything involving taxes, there are rules to follow.
The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of each expense. Diaries and logs should be notated close to the time of the expense; newly created diary, log and calendar entries made months (or years) later when the IRS requests documentation in an audit are less likely to pass muster than those that were prepared when the travel and expenses occurred.
Keep good records of your travel expenses.
Document the business purpose and the expected business benefit.
Retain your travel itinerary to document the business activity while away.
Travel expenses are deductible only if the individual is away from his or her “tax home” for more than one business day. “Tax home” usually means the individual’s regular place of business.
Meal expenses are only deductible if the trip is overnight or long enough that there is a need to stop for sleep or rest in order to properly perform one’s duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of meal expenses, a “standard meal allowance” ranging from $46 to $71 per day can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.
Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation noted above.
Taking the Spouse Along? – Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer on business unless the:
(1) The spouse or dependent is an employee of the taxpayer, and
(2) The travel of the spouse, dependent or employee is for a bona fide business purpose, and
(3) The expenses would otherwise be deductible by the spouse, dependent or employee.
Strategy – The law allows a deduction for the single rate for lodging, and there is frequently no rate difference between one and two occupants for a room. Thus, virtually the entire lodging expenses for an accompanying spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if traveling by vehicle, the entire cost of the transportation would be deductible. This generally also applies to taxis at the destination. The only substantial cost that is not allowed is the costs of the spouse’s meals that, even if they were deductible, would be reduced by the 50% rule. If traveling by air or rail, the cost of the spouse’s tickets is also not deductible.
Have questions about business travel expenses? Give our office a call.
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The Joseph Cahill | WorthTax newsletter is available via e-mail on a free subscription basis. You can subscribe or unsubscribe at any time. For more information about – Joseph Cahill | WorthTax, go to http://worthtax.com.

2015_03_17 Tax tips 6720951131_b89caa0d51The following tax tips may save you some headaches when it comes to filing your taxes. Food and lodging expenses are generally deductible when away from home for business purposes. This may be particularly beneficial for self-employed individuals who travel extensively. Like everything involving taxes, there are rules to follow.

Tax Tip 1: Accurate Records and Receipts

The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of each expense. Diaries and logs should be notated close to the time of the expense; newly created diary, log and calendar entries made months (or years) later when the IRS requests documentation in an audit are less likely to pass an audit than those that were prepared when the travel and expenses occurred.

  • Keep good records of your travel expenses.
  • Document the business purpose and the expected business benefit.
  • Retain your travel itinerary to document the business activity while away.

Travel expenses are deductible only if the individual is away from his or her “tax home” for more than one business day. “Tax home” usually means the individual’s regular place of business.

Meal expenses are only deductible if the trip is overnight or long enough that there is a need to stop for sleep or rest in order to properly perform one’s duties. The amount of the meal expenses must be substantiated. Instead of keeping records of the actual cost of meal expenses, a “standard meal allowance” ranging from $46 to $71 per day can generally be used. This depends on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

Lodging expenses must be substantiated with actual receipts. Lodging is 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified. This is because meals have the 50% limitation as noted above.

Tax Tip 2: Taking the Spouse Along

Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer on business unless the:

  1. The spouse or dependent is an employee of the taxpayer, and
  2. The travel of the spouse, dependent or employee is for a bona fide business purpose, and
  3. The expenses would otherwise be deductible by the spouse, dependent or employee.

Strategy

The law allows a deduction for the single rate for lodging, and there is frequently no rate difference between one and two occupants for a room. Thus, the entire lodging expenses for an accompanying spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Therefore, if traveling by vehicle, the entire cost of the transportation would be deductible. This generally applies to taxis at the destination. The only substantial cost that is not allowed is the costs of the spouse’s meals, Even if the meals were deductible, they would be reduced by the 50% rule. Also note that if you are traveling by air or rail, the cost of the spouse’s tickets is not deductible.

Do you have questions or do you need more tax tips?

With less than one month to go, do you have questions about filing your tax refund? If you have thoughts, questions or concerns about how your taxes are filed, contact us or visit any one of our locations. We have an ultra-convenient service and can schedule an appointment for you. You may also leave your comments below or post on our FacebookGoogle+ or LinkedIn pages.

Maybe you know someone who can benefit from this information, feel free to share:
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Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

—————————-

The Joseph Cahill | WorthTax newsletter is available via e-mail on a free subscription basis. You can subscribe or unsubscribe at any time. For more information about – Joseph Cahill | WorthTax, go to http://worthtax.com.

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Massachusetts Tax Refund (or Federal): Checking the Status is Easy

If you already filed your Massachusetts or federal tax return and are due a refund, you can check the status of your refund online.

Federal/IRS – Where’s My Refund?

Where’s My Refund? is an interactive tool on the IRS web site. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your federal income tax refund information nearly 24 hours a day, 7 days a week.

wheres_my_refund_engIf you e-file your federal return, you can get refund information 24 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive federal tax refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available starting four weeks after mailing your return. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter:

  • Your Social Security Number (or Individual Taxpayer Identification Number);
  • Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
  • The exact refund amount shown on your tax return.

Once your personal information has been entered, one of several personalized responses may come up, including the following:

  • Acknowledgement that your return was received and is in processing.
  • The mailing date or direct deposit date of your refund.
  • Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where’s My Refund? feature.

Where’s My Refund? provides the most up-to-date information the IRS has. There’s no need to call the IRS unless Where’s My Refund? tells you to do so. The database is updated every 24 hours – usually overnight – so you only need to check once a day.

There’s an App for That

IRS2Go is the IRS’ first smartphone application that lets taxpayers check on the status of their federal income tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Google Play Store to download the free IRS2Go app.

More Questions or Issues?

Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

If you’re still unable to resolve your issue, you can contact the IRS toll-free at 800-829-1040 or contact a local Massachusetts IRS Taxpayer Assistance Center.

Massachusetts/DOR – Webfile for Income

webfileMassachusetts allows you to check your Massachusetts tax refund status on their website, but you need to register with the Massachusetts Department of Revenue in order to do so.

Registering

To create a Login User Name and Password to access your account in WebFile for Income, you will need one of the following:

  • A current year four digit PIN which is only available if a pre-printed tax return was mailed to you. If you did not receive a pre-printed tax return you must select one of the other options. You will not be able to obtain a PIN by contacting the Department of Revenue.
  • Your Massachusetts tax return filed for one of the last four years. You will need your refund or tax due amount from this return.
  • If you do not have either a PIN or have not filed a Massachusetts tax return in the past four years, you should select the “I do not have either” option.

The system will ask you for your name, Social Security Number, email address, and phone number. It will then ask you to create your own User Name, Password, select a secret question and provide the answer to that question.

User Name: Your User Name is the name that you choose to serve as your WebFile for Income identity. Your User Name is not case sensitive.

Password: Your password is the private combination of letters and numbers you chose when signing up for WebFile for Income. Your password is case sensitive and it must be between 8 and 15 characters, have at least 1 upper and 1 lower case letter, and 1 digit. (i.e. Example1)

Secret Question and Answer: You will select a secret question from the drop down menu and provide an answer to the question selected. The answer is case sensitive so please record your secret answer exactly as you have entered it (including correct placement of upper and lower case). The Secret Question and Answer will be known only to you, and can be used in the future to reset your password if you forget it.

There’s an App for That – for Massachusetts Tax Refund, too!Massachusetts Tax Refund

Massachusetts WebFile Mobile is the DOR’s first smartphone application that lets taxpayers check on the status of their Massachusetts tax refund. Apple users can download the free Massachusetts WebFile Mobile application by visiting the Apple App Store. Android users can visit the Google Play Store to download the free Massachusetts WebFile Mobile app.

Having problems?

You can contact the Massachusetts Department of Revenue for help with your state tax refund at 800-392-6089 or browse their help library online at this link.

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Want Your Tax Refund Faster? Use Direct Deposit

2015_03_12 Direct Deposit Tax RefundDo not wait around for a paper check if you want your tax refund faster. Have your federal and state tax refund deposited directly into your bank account. Selecting Direct Deposit is a secure and convenient way to get your tax refund money into your pocket faster.

  • Speed – When combining e-file with direct deposit, the IRS will likely issue your refund in no more than 21 days.
  • Security – Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen.
  • Easy – Simply provide this office with your bank routing number and account number when we prepare your return and you’ll receive your refund far more quickly than you would by check.
  • Convenience – The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.
  • Eligible Financial Accounts – You can direct your refund to any of your checking or savings accounts with a U.S. financial institution as long as your financial institution accepts direct deposits for that type of account and you provide valid routing and account numbers. Examples of savings accounts include: passbook savings, individual development accounts, individual retirement arrangements, health savings accounts, Archer MSAs, and Coverdell education savings accounts.
  • Multiple Options – You can deposit your refund into up to three financial accounts that are in the your name or your spouse’s name if it is a joint account. You can’t have part of the refund paid by paper check and part by direct deposit. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions. Check with your bank or other financial institution to make sure your direct deposit will be accepted.
  • Cannot Be to a Third Party’s Bank Account – To protect taxpayers from scammers, direct deposit tax refunds can only be deposited into an account or accounts owned by the taxpayer. Therefore, only provide your own account information and not account information belonging to a third party.
  • Fund Your IRA – You can even direct a refund into your IRA account.

To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have these numbers available at your appointment.

Do you have questions about filing for your tax refund?

With just about one month to go, do you have questions about filing your tax refund? If you have thoughts, questions or concerns about how your taxes are filed, contact us or visit any one of our locations. We have an ultra-convenient service and can schedule an appointment for you. You may also leave your comments below or post on our FacebookGoogle+ or LinkedIn pages.

Maybe you know someone who can benefit from this information, feel free to share:
Linkedin - Joseph Cahill / WorthTaxTwitter - Joseph Cahill / WorthTax / WorthTaxPrepFacebook - Joseph Cahill / WorthTaxGoogle+ - Joseph Cahill / WorthTaxalignable_logo - Joseph Cahill / WorthTax

 

Tax Season is Here!

Time flies – before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment and learn about our client discounts here.

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Spousal IRA: Do Not Overlook

2015_03_10 Spousal IRASpousal IRA is one frequently overlooked tax benefit. Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes: wages, tips, bonuses, professional fees, commissions, alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule. They allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation.

The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse ($5,500 for years 2013 through 2015). If the non-working spouse is age 50 or older, the spouse can also make “catch-up” contributions (limited to $1,000 for 2013 through 2015). This raises the overall contribution limit to $6,500. These limits apply provided the couple together has compensation equal to or greater than their combined IRA contributions.

Example: Tony is employed and his W-2 for 2015 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $5,500 to an IRA for 2015.

The contributions for both spouses can be made either to a Traditional or Roth IRA. Or, it can be split between them. This is as long as the combined contributions do not exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:

  • Traditional IRAs – There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse. This is only if the couple’s adjusted gross income (AGI) does not exceed $183,000 in 2015 (up from $181,000 in 2014). This limit is phased out in 2015 for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014).
  • Roth IRAs – Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $183,000 in 2015 (up from $181,000 in 2014). The contribution is ratably phased out for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $193,000.

Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $183,000. Had the couple’s AGI been $188,000, Rosa’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,750 because of the phaseout. The other $2,750 could have been contributed to a nondeductible Traditional IRA. 

Questions About Spousal IRA or Tax Deductions?

If you would like to discuss IRAs, retirement planning or need assistance with your taxes, please contact contact us or visit any one of our locations. WorthTax uses a triple check accuracy system to make sure your taxes are done right. You may also leave your thoughts, questions or comments below or post on our FacebookGoogle+ or LinkedIn pages.

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Retirement Savings: the Earlier, the Better


Retirement SavingsGenerally, teenagers and young adults do not consider the long-term benefits of retirement savings. Their priorities for their earnings are more for today than that distant and rarely considered retirement. Yet contributions to a retirement savings plan early in life can enjoy years of growth and provide a substantial nest egg at retirement.

Due to its long-term benefits of tax-free accumulation, a nondeductible Roth IRA may be the best option. During most individuals’ early working years, their income is usually at its lowest. This allows them to qualify for a Roth IRA at a time where the need for a tax deduction offered by other retirement savings plans is not important.

Because retirement savings will not be their focus at that age, young adults may balk at having to give up their earnings. Parents, grandparents, or other individuals might consider funding all or part of the child’s Roth contribution. It could even be in the form of a birthday or holiday gift. For example, take a 17-year-old who has a summer job and earns $1,500. Although the child is not likely to make the contribution from his or her earnings, a parent could contribute any amount up to $1,500 to a Roth IRA for the child.*

But keep in mind that young adults, like anyone else, must have earned income to establish a Roth IRA. Generally, earned income is income received from working, not through an investment vehicle. It can include income from full-time employment, income from a part-time job while attending school, summer employment, or even babysitting or yard work. The amount that can be contributed annually to an IRA is limited to the lesser of earned income or the current maximum of $5,500.

Parents or other individuals who contribute the funds need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability.

Consider what the value of a Roth IRA at age 65 would be for a 17-year-old who has funds contributed to his or her IRA every year through age 26 (a period of 10 years). The table below shows what the value will be at age 65 at various investment rates of return.

Value of a Roth IRA—Annual Contributions of $1,000
for 10 years beginning at age 17
Investment Rate of Return 2% 4% 6% 8%
Value at Age 65 $23,703 $55,449 $127,900 $291,401

What may seem insignificant now can mean a lot at retirement. Individuals who are financially able to do so should consider making a gift that will last a lifetime. It could mean a comfortable retirement for your child, grandchild, favorite niece or nephew, or even an unrelated person who deserves the kind gesture.

*Amounts contributed to an IRA on behalf of another person are nondeductible gifts by the donor. They are counted toward the donor’s annual $14,000 (2014 and 2015 gift exclusion per done).

Questions About Retirement Savings?

If you would like more information about Roth IRAs or gifting contributions to a Roth on behalf of someone else, please contact contact us or visit any one of our locations. You may also leave your thoughts, questions or comments below or post on our FacebookGoogle+ or LinkedIn pages.

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IRA Rollover Limits: Beware of 2015 Changes

IRA RolloverFor many years, the tax code has allowed an individual to take a distribution from his or her IRA account, This allowed the tax payer to avoid the tax and early distribution penalties if the distribution is redeposited to an IRA account owned by the taxpayer within 60 days of receiving the distribution. However, beginning this year, taxpayers will be limited to one IRA rollover per year.

Early in 2014, in a tax court case, the court ruled that taxpayers could only have one IRA rollover per 12-month period. This was contrary to the IRS’s long-standing one rollover per every IRA account every 12 months. This far more liberal position had also been included in published IRS guidance. However, contrary to general public opinion, guidance provided by the IRS in their publications is not listed, carries no weight in audit nor court, and only represents the IRS’ interpretation of tax law.

As a result, the IRS has been forced to adopt the Court’s more restrictive position, It did not apply the new interpretation until this year. This gives taxpayers time to become aware of the new restrictions. The IRS is modifying its published 2015 guidance to reflect this new position.

The IRS announced in November that the one-per-12-month-period IRA rollover rule also applies to Simplified Employer Pension Plans (SEPs) and SIMPLE plans. Included in the November announcement, the IRS indicated it would not count a distribution taken in 2014 and rolled over in 2015 (within the 60-day limit) as a 2015 rollover.

Not counted towards the one-per-12-month rule are traditional to Roth IRA conversions or trustee-to-trustee IRA transfers. These are where the funds are directly transferred from one IRA trustee to another.

Questions About Your IRA Rollover?

Do you have questions about the one-per-12-month limit? Please call this office if you are planning an IRA distribution and subsequent IRA rollover. If you have questions, thoughts or concerns regarding how to file IRA rollover information, WorthTax can help. We will review your taxes for you and advise you what is best for your tax filing status. We guarantee our pricing and discounts are available. Please feel free to contact us, leave your comments below or post to on our FacebookGoogle+ or LinkedIn pages.

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Time flies! Before it slips away, call Alex Franch, EA at 781-849-7200 for your appointment. Learn about our client discounts here. See our locations.

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