April 2015 Letter

Happy tax filing month. To help celebrate, this month's newsletter has a fun tax quiz surrounding our first 1040 tax form introduced for the 1913 tax year. Also included is an article reviewing better alternatives for money parked in traditional bank accounts and an insightful article helping determine when filing a tax extension may make sense.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

1913 Form 1040 Quiz

How well do you know tax history?

As April is tax month, included here is a short quiz to see how well you know your tax history. While Abraham Lincoln's administration introduced the income tax to finance the Civil War, the first modern 1040 Individual Income Tax form was introduced in 1913. How well do you know what was on this original 1040? Enjoy!

What was the original due date of the initial 1040 tax form? March 1st, 1914. Failure to file on time could lead to a fine of between $20 and $1,000. A 30-day extension by reason of sickness or "absence" could be granted by the tax collector. Today we have an additional 45 days to file our tax returns (April 15th) and can file for a six-month extension. What was the tax rate applied to most individuals' income? The "normal" tax applied to most 1913 tax returns was 1%. If you had Taxable Income of over $50,000 you became subject to the "Super Tax". What was the maximum tax rate on these excess earnings?

Six percent. 2% was owed on income from $50,000 to $75,000. The maximum tax rate of 6% was owed on Taxable Income over $500,000. The 1913 tax brackets were; 1%, 2%, 3%, 4%, 5% and 6%. Compare this to our current tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Was there a marriage penalty built into the  original Form 1040? Yes. If single (or married but not living with your spouse) your exemption amount was $3,000. If you lived with your spouse your exemption amount was only $4,000. If both you and your spouse worked (a rare event in 1913), you could divide the $4,000 exemption any way you wished to minimize your taxes. Name two things that are currently taxed, but were not  taxed on the original 1040 tax form? There were many, but perhaps the most common untaxed items were dividends and net earnings from corporations that were already taxed. The double taxation of corporate earnings that we experience today would be added later. True or False. All the original tax returns required a signed affidavit  before an authorized officer of the government prior to being filed. True. All properly filed tax returns required affidavits made before an officer authorized by law to administer an oath of accuracy. This could be a justice of the peace, a magistrate, or a certificate of the clerk of the court. Mailing in your tax return was not an option in 1914.

Is an Extension a Good Idea?

The clock is ticking down to the pending tax-filing deadline of April 15th. Here are some examples when filing an extension might make sense other than rushing to meet the filing deadline.

Incorrect Form 1095-A. If you received health insurance through the new Healthcare (Marketplace) Exchange, you may have received an incorrect Form 1095-A recapping this activity. Over 800,000 of them were sent out in error. If it impacted you, it might make sense to wait for a corrected form. Other Form Errors. If you receive a W-2 or Form 1099 that has errors, you may also wish to wait until you receive a corrected form. This delay may help you avoid a tax form mis-match with IRS records if you file your tax return before the form is corrected.

	Missing K-1. If you have ownership in a small business, you should receive a K-1 summarizing your share of profits or losses. If the business entity is an LLC, you may have not yet received your necessary K-1. If this happens a tax extension may be necessary.
	Conflicting Dependents. If an ex-spouse or other individual used one of your dependents in error, you may wish to have the error corrected prior to filing your tax return.
	Self-employed Retirement Contributions. If you are self-employed you have until you file your tax return (including extensions) to fund your retirement account. This tax provision applies to SEP IRAs, solo 401(k)s, and SIMPLE accounts. By filing an extension, self-employed individuals give themselves up to six more months to fund a retirement account. This provision does not apply to Traditional or Roth IRAs.
	Recharacterizing Roth IRA Conversions. If you transfer funds from a Traditional IRA to a Roth IRA, tax is due based on the fair market value of the assets at time of transfer. If, after transferring the funds, the value of the investment goes down, you may be required to pay tax on an over-inflated value. By delaying the filing of your tax return, you can buy time to convert the funds back to the original retirement account and avoid paying taxes on the higher value.

Extensions Are a Last Resort

	Start the audit clock. It is usually best to file your taxes by the April 15th due date. By doing so, it starts the Federal audit clock. Remember the window to audit your federal tax return is generally the later of three years after the due date OR when you actually file your tax return.
	Pay your tax. If you decide an extension is the right course of action for you, the form must be filed on or before April 15th for an automatic six-month extension. While this extension does not delay the requirement to pay the taxes owed on or before the April 15th deadline, it does eliminate a possible late filing penalty.

Is There a Better Use for Your Bank Funds?

With interest rates at banks hovering near zero is there a better use for your savings besides traditional bank accounts? Here are a few ideas to consider. Remember to seek the advise of a trusted financial advisor prior to taking action to ensure the approach you wish to take is right for your situation. Fully fund an emergency account. Prior to doing anything else, review or establish your emergency fund. This fund should be sufficient to tide you over if you lose your job or have an unexpected need for cash. The amount needed varies from person to person but is typically from six months to twelve months of cash needs.

	Pay off credit cards. Why pay a bank or financial institution 9 to 20% on credit card debt when you only receive ½% on your savings account? So pay off all your credit card balances and then work to keep them at zero.
	Pay off other debt. Most interest expense is not deductible on your tax return. So paying down debt almost always provides a better return than holding funds in a low interest bank account.
	Put more into retirement accounts. Use excess cash to fully fund tax advantaged retirement savings options. This might include an employer provided 401(k) or a variety of IRA account options.
	Mortgage principal pay down. Even paying more principal on home mortgages and home equity loans can provide a better return than your bank savings account options. While these interest rates are now low and provide an itemized deduction opportunity on your tax return they are still a better return than parking excess cash in a bank account.
	Ladder CDs. Purchase a number of quality Certificates of Deposits (CDs) with different maturity dates. As each CD matures, roll the funds into a new longer-term CD. This way some CDs will mature each year making cash available, while still taking advantage of higher long-term interest rates. Example: purchase a one-year, a two-year, a three-year, a four-year and a five-year CD. When a CD matures, reinvest the funds into a five-year CD. Once built, your CD ladder will have one of your CDs maturing each year.
	Alternatives to banks. There are now opportunities to make direct loans to consumers and small businesses through alternative lending options. These alternatives to banks allow you access to those needing to borrow funds. While more risky, it is a way to give you access to those who need to borrow money.

There are many alternatives to leaving your money parked in low interest bank accounts. Just remember to conduct the proper research and seek professional help prior to taking any action.

As always, should you have any questions or concerns regarding your situation please feel free to call.

March 2015 Letter

This month's issue outlines the benefits and risks of reverse mortgages, includes a recap of all too common IRS tax scams, reviews some common educational benefits and provides a list of "frequently missing" information that can often hold up filing your tax return.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Is a Reverse Mortgage the Solution?

For many the transition to retirement means adjusting to a fixed income that is often lower than the income you received while employed. To make matters worse, the most valuable asset you have is usually your home, but it cannot be readily turned into cash. To help with this lack of financial liquidity, banks offer reverse mortgages as a way to tap into the equity of your home.

How a reverse mortgage works

A reverse mortgage is a special bank loan to a qualified senior citizen (age 62 and over) that enables older homeowners to tap the equity they have in their home. Importantly, no repayment of the loan is required until the home is no longer the borrower's primary residence. This means you can receive cash today based upon the equity of your home without making loan payments. The bank receives repayment for their loan out of the proceeds obtained when the home is sold at a later date.

Why does the bank do this?

First, the bank charges up-front fees to create the reverse mortgage.

Second, the bank still receives their interest, service fees and principal. They just need to be patient as the payments occur after the borrower leaves the home (usually when the house is sold).

Third, the bank has little risk. The bank is insured by a federal agency so their risk is controlled and they are guaranteed repayment.

What are the advantages?

	You can use the equity of your home without the burden of house payments or selling your home.
	You retain title to your home.
	It is a HUD program, ensuring Federal compliance and consistency within the program.
	Eligibility has few restrictions. You must be over 62, occupy the property as a primary residence, and own the home free and clear (or have little remaining balance on the mortgage).
	Most single-family dwellings qualify (up to a four unit dwelling).
	The amount that can be borrowed is based upon a HUD formula that uses the age of the youngest homeowner, interest rate, and appraised value of the home. There are also upper borrowing limits.
	Cash advances from the program can be used for any purpose.
	The income is tax-free and will not impact Social Security, Medicare, or Medicaid benefits.

What are the Pitfalls?

	The closing costs for a reverse mortgage are high. While all but the application fee can usually be folded into the reverse mortgage, the cost should be weighed against the outright sale of the home.
	Passing your home to your beneficiaries becomes limited. Once you move or pass away the reverse mortgage becomes payable. Your inheritance would then be reduced by the amount owed.
	What is the plan? If you are planning to move in the near future it may be better to sell your home to tap the equity versus undertaking the expense of a reverse mortgage.
	Is it a legitimate reverse mortgage? Make sure the reverse mortgage program is a HUD program. If not, the program may contain some unforeseen risks.

While not for everyone, reverse mortgages are an option to use the equity of your home if you are retired and on a fixed income. If you are interested, most programs provide a free face-to-face counseling session from an independent counselor prior to a bank being allowed to offer the reverse mortgage.

IRS Announces Annual Scams

Each year the IRS announces the "Dirty Dozen Tax Scams" they encounter most frequently regarding frivolous tax arguments and fraud. While seven of the "scams" are related to, "don't cheat we have our eyes on you," the other five are scams that all of us should be ready to detect so we do not become victims.

	Phone scams. This tax scam has appeared on the IRS list for many years. What is new this year is the increase in volume and the threatening nature of the calls. These scam artists often have some of your personal information and can fool your caller id to falsely identify themselves. How would you react if someone threatened you with jail time, deportation or license revocation? Remember, never give information over the phone to someone claiming to be from the IRS when they call.
	Phishing. This recurring scam involves receiving fake emails and website links that look like the real deal. The IRS will not send you billing information or refund information via email. Do not click on any link from an email received from the IRS unless you requested it. Remember the IRS does not initiate contact through emails.

	Identity Theft. The IRS is taking precautionary measures to curtail this problem. This year the IRS is limiting the number of direct deposits it will make to any single account. There are now taxpayer single use tax id's attached to tax returns that have had identity problems. Some states have even shut down software e-file transmissions from providers with possible fraud problems like Turbo Tax. Here is a link to the IRS identity protection page should you wish to know more. Reporting IRS identity theft
	Offshore accounts. The IRS has taken many enforcement actions in this area after breaking the long-standing secrecy wall of Swiss bank accounts. If you have money in foreign accounts, you must understand the reporting requirements or you could be subject to substantial fines.
	Fake Charities. After major disasters, many charitable givers are scammed into making donations to fake charities. In addition, new IRS charitable organization reporting requirements are not being followed by many organizations. This makes donations to them non-deductible. To protect against this, prior to donating funds make sure the charity is both legitimate and deemed a qualified charity by the IRS. If in doubt, you can always check to see if a charity is approved on the IRS web site. Here is a link to their tool. IRS Exempt Organization Check

Tax Breaks for Education

Studies by the Government Accounting Office (GAO) show that many taxpayers who are eligible for education related tax relief don't take advantage of it. The key reasons are:

There are too many programs. If one includes tax credits, expense deductions, and special savings programs, there are more than ten different tax breaks for education. The rules vary. Each educational tax break comes with a different set of rules. Different qualifying income levels, the age of a student, the level of education, the timing of expenses and their interrelationship all make navigation of your options complex. To help clarify your options here are three of the most popular educational tax breaks and some related tips.

	American Opportunity Tax Credit (AOTC). This is a maximum $2,500 credit for a student who could be you, a spouse, or a dependent of yours. The student must be enrolled at least half-time and the credit is available for up to four years of post-secondary education (college). This credit is a per student credit and may be refundable for up to 40% of the credit amount. Income limit: $90,000 single; $180,000 married filing joint
	Lifetime Learning Credit (LLC). The LLC is a maximum annual per taxpayer credit of $2,000. It is available to a student who is you, your spouse or a dependent. It covers any stage of post-secondary education as long as the student is enrolled in courses that lead to a degree, certificate or credential. The credit applies to 20% of the first $10,000 in qualified expenses. Income limit: $65,000 single; $130,000 married filing joint
	Tuition and Fees Deduction. This on again, off again tax benefit is still available for your 2014 tax return. While not currently available for 2015, this deduction has been extended so many times, that it may be extended once again. This deduction can cut as much as $4,000 off your taxable income.

Which is right for you?

Determining which program is right for you takes tax planning. Remember you may not double dip expenses OR programs. This means you may not use the same qualified educational expense for multiple programs (including applying the expense to any scholarship or other benefit). However, if you have more than one student, you can apply different programs to different students. Other considerations;

	The LLC is per taxpayer while the AOTC is per student.
	The income limitations are highest for AOTC.
	If considering graduate studies, you may wish to first use the AOTC as it is limited to four years of post-secondary studies.
	The LLC and AOTC are almost always a better option than the Tuition and Fees deduction. This is because a tax "credit" directly reduces tax, while the deduction reduces income.
	Remember there are other educational tax benefits. Some of these other programs include student loan interest deductions, using Coverdell Savings or 529 Savings programs, employer educational assistance, and special deductibility of certain US savings bonds.

Common Missing Tax Return Items

Want your tax return filed quickly and without error? Looking for a quick refund? Then double-check this list of items that are often overlooked. These missing items often cause delays in getting your tax return filed and your much anticipated refund into your hands.

Missing W-2 or 1099. Using last year's tax return, make sure all prior W-2s and 1099's are received and applied to your tax return. Missing items will be caught by the IRS's mismatch program. Missing 1095-A. If you have health insurance through an Exchange, you will need this form to file your tax return. Missing or invalid Social Security Number. E-filed tax returns will come to a screeching halt with a missing or invalid number.

	Dependent already claimed. Your return cannot be filed if there is a conflict in this area.
	Name mismatch. If recently married or divorced, make sure your last name on your tax return matches the one on file at Social Security.
	Inconsistent information. Most tax software programs will check a tax return for inconsistencies. When one occurs, they must be resolved prior to filing your tax return.
	No information for a common deduction. If you claim a deduction you will need to provide support to document the claim.
	Missing cost information for transactions. Brokers will send you a statement of sales transactions. If you do not also provide your cost and purchase information, the tax return cannot be filed.
	Not reviewing your return and signing your e-file approval. The sooner you review and approve your tax return, the sooner it can be filed.
	Forms with no explanation. If you receive a tax form, but have no explanation for the form, questions could arise. For instance, if you receive a retirement account distribution form it may be deemed income. If it is part of a qualified rollover, no tax is due. An explanation is required to file your information correctly.

Hopefully, by knowing these commonly missed pieces of information you can prepare to have your tax filing experience be a smooth one.

Alert. 800,000 Form 1095-A Errors In late February, the Government announced that 800,000 of the Form 1095-A's they sent to taxpayers who used Healthcare.gov to purchase their health insurance in 2014 have errors in them. If you are impacted, you will receive an announcement of the error. You can also check to see if your form is wrong by logging into your Healthcare.gov account. If you already filed your tax return, the Treasury Department is not requiring you to file an amended return. The corrected forms are being sent out in March, so you may need to wait for receipt of this form to file your taxes. Here is a link to the original announcement.Announcement: Form 1095-A Error

As always, should you have any questions or concerns regarding your situation please feel free to call.