May 2017 Letter

Spring is in the air and before you know it summer will be upon us. It's the time of year when couples tie the knot; some of the tax to-dos for the newly married are enclosed. Unfortunately it's also audit season. One common audit trigger is incorrectly reporting business versus hobby activity; included here are some dos and don'ts. Also included are a list of tips for working into retirement age, as well as an article on the most effective ways to protect yourself from identity theft.

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Marriage Tax Tips

If you recently got married, plan to get married, or know someone taking the matrimonial plunge, here are some important tax tips every new bride and groom should know.
Notify Social Security. Notify the Social Security Administration (SSA) of any name changes by filling out Form SS-5. The IRS matches names with the SSA and may reject your joint tax return if the names don't match what the SSA has on file. Address change notification. If either of you are moving, update your address with your employer as well as the Postal Service. This will ensure your W-2s are correctly stated and delivered to you at the end of the year. You will also need to update the IRS with your new address using Form 8822.
Review your benefits. Getting married allows you to make mid-year changes to employer benefit plans. Take the time to review health, dental, auto, and home insurance plans and update your coverage. If both of you have employer health plans, you need to decide whether it makes sense for each of you to keep your plans or whether it's better for one to join the other's plan as a spouse. Pay special attention to the tax implication of changes in health savings accounts, dependent childcare benefits and other employer pre-tax benefits. Update your withholdings. You will need to recalculate your payroll withholdings and file new W-4s reflecting your new status. If both of you work, your combined income could put you in a higher tax bracket. This can result in reduced and phased-out benefits. This phenomenon is known as the "marriage penalty." Update beneficiaries and other legal documents. Review your legal documents to make sure the names and addresses reflect your new marital status. This includes bank accounts, credit cards, property titles, insurance policies and living wills. Even more importantly, review and update beneficiaries on each of your retirement savings accounts and pensions. Understand the tax impact of your residence. If you are selling one or two residences, review how capital gains tax laws apply to your situation. This is especially important if one of you has been in your home for only a short time or if either home has appreciated in value. This review should be done prior to getting married to maximize your tax benefits. Sit down with an expert. It is natural for newlyweds to focus their attention on the big day. There are so many decisions to be made from selecting a venue to planning the honeymoon. Because of this, reviewing your tax situation often is an afterthought. Do not make this mistake. A simple tax and financial planning session prior to the big day can save on future headaches and avoid potentially expensive tax mistakes. If you'd like a review of how marriage will affect your tax and financial situation, call at your earliest opportunity.

Business or Hobby?

When you incorrectly claim your favorite hobby as a business, it's like waving a red flag that says "Audit Me!" to the IRS. However, there are tax benefits if you can correctly categorize your activity as a business.
Why does hobby versus business activity matter? Chiefly, you're allowed to reduce your taxable income by the amount of your qualified business expenses, even if your business activity results in a loss. On the other hand, you cannot deduct losses from hobby activities. Hobby expenses are treated as miscellaneous itemized deductions and don't reduce taxable income until they (and other miscellaneous expenses) surpass 2 percent of your adjusted gross income. Here are some tips to determine whether you can define your activity as a business.
BUSINESS versus HOBBY You have a reasonable expectation of making a profit. Profit Motive You may sell occasionally, but making money is not your main goal. You invest significant personal time and effort. You depend on the resulting income. Effort and Income It's something you do in your free time; you make the bulk of your money elsewhere. Your expenses are ordinary and necessary to run your business. Reasonable Expenses Your expenses are driven by your personal preferences and not strictly necessary. You have a track record in this industry, and/or a history of making profits. Background You don't have professional training in the field and have rarely or never turned a profit. You have multiple customers or professional clients. Customers You have few customers, mainly relatives and friends. You keep professional records, including a separate checkbook and balance sheet; you have business cards, stationery and a branded business website. Professionalism You don't keep strict professional records of your activities; you don't have a formal business website or business cards. The IRS will consider all these factors to make a broad determination whether you operate your activity in a businesslike manner. If you need help ensuring you meet these criteria, reach out to schedule an appointment.

Six Tips for Working Beyond Retirement Age

Two-thirds of the Baby Boomer generation are now working or plan to work beyond age 65, according to a recent Transamerica Institute study. Some report they need to work because their savings declined during the financial crisis, while others say they choose to work because of the greater sense of purpose and engagement that working provides. Whatever your reason for continuing to work into your golden years, here are some tips to make sure you get the greatest benefit from your efforts.
Consider delaying Social Security. You can start receiving Social Security retirement benefits as early as age 62, but if you continue to work it may make sense to delay taking it until as late as age 70. This is because your Social Security benefit may be reduced or be subject to income tax due to your other income. In addition, your Social Security monthly benefit increases when you delay starting the retirement benefit. These increases in monthly benefits stop when you reach age 70.
Don't get bracket-bumped. Keep in mind that you may have multiple income streams during retirement that can bump you into a higher tax bracket and make other income taxable if you're not careful. For instance, Social Security benefits are only tax-free if you have less than a certain amount of adjusted gross income ($25,000 for individuals and $32,000 for married filing jointly in 2017), otherwise as much as 85 percent of your benefits are taxable. Required distributions from pensions and retirement accounts can also add to your taxable income. Be aware of how close you are to the next tax bracket and adjust your plans accordingly. Be smart about health care. When you reach age 65, you'll have the option of making Medicare your primary health insurance. If you continue to work, you may be able to stay on your employer's health care plan, switch to Medicare, or adopt a two-plan hybrid option that includes Medicare and a supplemental employer care plan. Look over each option closely. You may find that you're giving up important coverage if you switch to Medicare prematurely while you still have the option of sticking with your employer plan. Consider your expenses. If you're reducing your working hours or taking a part-time job, you also have to consider the cost of your extra income stream. Calculate how much it costs to commute and park every day, as well as the expense of meals, clothing, dry cleaning and any other expenses. Now consider how much all those expenses amount to in pre-tax income. Be aware whether the benefits you get from working a little extra are worth the extra financial cost. Time to downsize or relocate? Where and how you live can be an important factor determining the kind of work you can do while you're retired. Downsizing to a smaller residence or moving to a new locale may be a good strategy to pursue a new kind of work and a different lifestyle. Focus on your deeper purpose. Use your retirement as an opportunity to find work you enjoy and that adds value to your life. Choose a job that expresses your talents and interests, and that provides a place where your experiences are valued by others.

Do-It-Yourself Identity Theft Protection

Identity theft is a growing problem in the United States, and dozens of companies offering various forms of identity theft protection have sprung up to combat it. Unfortunately, these services often do little to actually protect people's identities, according to a study released by the U.S. Government Accountability Office (GAO). Both the GAO study and consumer protection organizations like The Identity Theft Council point out that consumers have more effective, low-cost methods to protect themselves from identity theft. Here are some of their tips:
Monitor your own credit. You can get a free credit report from each of the three credit reporting agencies once a year at www.annualcreditreport.com. You can stagger your request from each agency so that you can check your credit history for any suspicious new account openings every four months. In addition, one of the most effective things only you can do yourself is to scan your monthly credit card and bank account statements. If you see any irregularities, contact the financial institution at once and let them know if you believe any charges are the result of identity theft.
Place a fraud alert. You can place a free fraud alert on your identity if you believe you've become vulnerable for any reason, either because you lost your wallet, had your home or car broken into, or had your information stolen online. All you have to do is call any of the three credit reporting agencies (Equifax 1-888-766-0008; Experian 1-888-397-3742; or TransUnion 1-800-680-7289) and they will notify the other two. Placing a fraud alert lasts for 90 days. Any credit provider will have to take extra steps to verify the identity of any person who tries to use your credit and open new accounts. It can be renewed for free every 90 days. Freeze your credit. If you aren't going to be applying for new credit for a while, one of the most effective things you can do to combat identity theft is to put a temporary freeze on your credit. You'll have to call each of the three credit reporting agencies and may be required to pay a small fee ($5 to $10 each) to freeze your account, after which no one will be able to access your credit to open new accounts. It won't affect your credit rating or your ability to use your existing accounts. Keep in mind that while this shuts down other people from accessing your credit, it also stops you from opening new accounts. It typically takes three days for the agencies to unfreeze your accounts, so keep that in mind if you want to apply for new credit, or need to allow a potential new employer to access your credit report as part of a background check. Do your taxes early. One of the most common kinds of identity theft is when people use a stolen Social Security number and other personal information to file a fraudulent tax return in the hope of snatching a refund. Your best defense is to simply file your return as soon as possible. Once the IRS receives your return, it shuts the door on potential identity thieves.

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

April 2017 Letter

Happy tax filing month! To help celebrate, this month's newsletter includes a tax quiz exploring the history of taxation in the United States. Also included is a reminder to help your favorite charitable organizations retain their nonprofit status, a simple four-step household budget building process and a reminder of some popular tax breaks that are no longer available in 2017.

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2017 Tax Quiz

Here is a quiz to see how well you know your income tax history.

Before the creation of the income tax, how did the U.S. government generate revenue to pay its expenses? a. Taxes – on business income b. Tariffs – on foreign imports c. Plunder – from assets seized during war d. Inflation – printing money to pay its debts b. Tariffs on foreign imports. Before the 16th Amendment that made the collection of income taxes official, the U.S. federal government was mainly funded through taxes on foreign imports, called tariffs. How much of the federal government's current revenue comes from individual income taxes? a. Less than 10 percent b. About half c. About 90 percent d. Nearly all of it

b. About half. In the 2015 tax year, 47 percent of federal government revenue came from individual income taxes. Payroll taxes paid by employers and employees for Medicare and Social Security made up 33 percent and corporate income taxes made up 11 percent. The remainder was miscellaneous other taxes including excise, estate, and gift taxes. 1987 marked the first year the IRS required taxpayers to report their dependents' Social Security numbers on their tax returns. The result was many children magically "disappeared" compared with those claimed in 1986. How many dependents evaporated into thin air after this law change? a. more than 1 million b. 1 to 2 million c. 3 to 4 million d. 5 to 6 million e. more than 7 million e. More than 7 million. These disappearing dependents put an exclamation point on an epidemic of tax cheating. Many U.S. corporations consider moving their headquarters overseas to save money on taxes. What is the highest marginal tax rate charged to corporations in the United States? a. 12.5% b. 20.6% c. 30% d. 38.9% e. 55% d. The 38.9% U.S. marginal corporate tax rate is the third highest in the world according to the Tax Foundation. The difference between U.S. tax rates and rates in other countries (e.g. Ireland at 12.5%) puts corporations in a no-win position. Either face shareholder wrath and potential lawsuits for overpaying income tax, or feel the wrath of consumers and political pundits for moving the corporation overseas to save money. Bonus: Which two places have a higher corporate tax rate than the United States? A: Puerto Rico (39%) and Saudi Arabia (55%)

Three Popular Tax Breaks are Gone

As you make plans for the 2017 tax year, take note that three popular tax breaks expired last year and won't be available unless Congress acts to extend them.
Tuition and fees deduction. You used to be able to deduct as much as $4,000 in college tuition and fees as an adjustment to taxable income. This provision was popular because it provided an alternative to other credits and did not require you to itemize deductions to receive the tax benefit. While this tax benefit is currently expired, several tax breaks geared toward students still exist: • student loan interest expense deductions • student education savings plans (529 plans) • education credits such as the American opportunity credit and the lifetime learning credit
Mortgage insurance premiums. The ability to deduct the cost of mortgage insurance premiums as an itemized deduction expired last year. This expired benefit used to phase out for taxpayers with more than $100,000 in adjusted gross income. Mortgage insurance is typically required of homeowners with a less than 20 percent down payment on their home purchase. Lower senior threshold for medical expense deductions. The threshold for deducting itemized medical expenses raises to 10 percent of adjusted gross income for all taxpayers beginning in 2017. Prior to this, those age 65 or older had a lower 7.5 percent threshold. Only unreimbursed, qualified medical expenses in excess of 10 percent of your adjusted gross income can now be taken as an itemized deduction. For example, if a 70 year old taxpayer has $50,000 in adjusted gross income, he could have deducted his medical expenses that exceeded $3,750 as an itemized deduction. This year that number rises to $5,000 with the same income, putting it that much further out of reach for seniors. Remember to plan for these changes. But also keep an eye on future action from Congress that could bring these dead tax deductions back to life.

Spring into Household Budgeting

Spring is in the air! As you're wrapping up your tax filing for 2016, now is a natural time to either create a new budget or refresh your existing budget. Here's how:

Organize your data. Gather all your bank, credit card and income statements for the last several months to a year. Calculate how much income versus spending you have for each of these months. Using software can make these budgeting steps easier. There are several online budget applications available for free, including Mint.com and Personal Capital, as well as paid software such as Quicken and You Need a Budget (YNAB).

	Sort your expenditures. Break down your expenses for each month into categories, such as mortgage or rent, utilities, groceries, vehicle, insurance, household goods, restaurants and entertainment. As you go through the categories, you will be able to distinguish those that are set costs, such as mortgage, insurance and utility payments. You'll also see those that are flexible, such as restaurants and entertainment. This is a revealing part of the budget exercise. You may not have realized how much you are spending at coffee shops, for example, until you lay out your spending in a budget. If you notice a particular kind of spending that is unnecessary, you could create a subcategory to track it. For example, track snacks and junk food within your grocery category, or track parking tickets within your vehicle category.
	Set financial priorities. Now that you have clear categories for how you've spent your money, write down a list of your financial priorities. These could be things like building a savings account for emergency expenses, growing your retirement savings, paying down debt, or saving for your children's education. If you're not spending enough on your priorities, resolve to shift more of your spending from the flexible categories. Changing spending habits can be hard to do all at once and it's easy to slide back into old habits. Using a budget keeps you honest with yourself and allows you to gradually shift your spending to better reflect your priorities.
	Create your cushion. In addition to building up an emergency fund to cover three to six months of expenses, consider creating a month-to-month cushion. After you've set your budget, set aside a small percentage of your monthly income for your "cushion." Your cushion is there to give you some leeway if you make mistakes and go over budget over the course of the month. Think of it as your margin of error. If you get to the end of the month without going over budget, give yourself a small reward or at least a pat on the back. Rewarding yourself will help reinforce positive financial habits in the months to come.

Nonprofit Annual Filing Due

Annual reporting is required for all organizations that wish to keep their nonprofit status intact. The due date for this filing is May 15, 2017 for calendar-year organizations. Here's how you can help ensure your favorite charities stay compliant.
Check online. The IRS has a master list of charitable organizations recognized as nonprofits in good standing. Here is a link: IRS Exempt Organizations Select Check Remind the organization. Many small nonprofits like youth sporting groups and local school booster clubs often forget about this reporting because officers are constantly rotating in and out of the organization.
Encourage them to make a simple filing. If the charitable organization has less than $50,000 in gross receipts, they can comply by sending in an 990-N e-postcard. Larger organizations must fill out Form 990. Avoid losing status. Failure to file could cause your favorite charity to lose their nonprofit status. This can have a cascading effect on all those donating who wish to deduct their donation on their tax returns.

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