Getting Ready for Tax Time

Tax time doesn’t have to be stressful. These three tips will help you get your tax preparer what they need in plenty of time for April 15th.

That’s right… it’s tax time! What can you do now before you provide your documents to your tax preparer? With a bit of forethought and preparation, you can make this year’s taxes go as smoothly as possible.

Actually, there’s no grand secret to filing taxes in an easy and efficient manner; it’s simply a matter of setting a system of organization and sticking to it. An old shoebox, while compact and useful, is not the most effective system for holding your financial information in an easy-to-access manner.

Here at Donnelly Tax Law, we help you gather your documents into our secure file system from wherever you are in the world.

Tax Time Tip 1 - Keeping Track of Receipts

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Even if you don’t get a single write-off for receipts, it’s well worth your time to keep them in logical order. There are plenty of programs that let you scan receipts and organize them on a computer or tablet. Or if you don’t like a digital system, a notebook and glue stick can work.

The benefits of keeping receipts are twofold: You can find any receipts if they’re eligible for tax purposes and you’ll have the receipt if something breaks.

Tax Time Tip 2 - File Paystubs and Invoices

It’s worth getting slightly more technical if you’re going to take your taxes seriously. When you end up paying an unusually large tax bill or receiving a large return, you need to find out what caused it. You’ll usually discover that the withholding was off all year.

Check the IRS tax withholding tables. If you leave your W-4 as is, you can wind up withholding too little, which can bring penalties. Track your income and the tax that comes out on a monthly basis. This information is right on your paystub. Put it into an Excel file and compare it to the tax bracket and rate you should be paying. This will prevent nasty shocks — you’ll be able to adjust withholding early to avoid a larger, year-end discrepancy between what you should have been paying and what you were paying. File a new W-4 to make changes.

This is especially important this year, as the IRS has issued a radically new Form W-4. Filling out a new one is not mandatory (unless you’re starting a new job), but it may be wise. Be sure to provide a recent paystub so your tax professional can advise you on filling out a new form.

READ MORE: IRS Releases Radically New Form W-4

Tax Time Tip 3 - Life Changes

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Did you have a child in the new year? Get married or divorced? There is a whole range of life changes that should automatically prompt you to make tax-related changes, including a marriage, a divorce, the birth of a child, a second job and a new house. These changes will affect you whether you are a regular employee or a contract worker. Be sure to organize all your W-2 and 1099 forms.

There are also new rules on retirement accounts, regarding minimum distributions. Some of these changes could affect your estate plan, as laws have changed regarding inherited retirement plans. So be ready to provide any statements or paperwork you received regarding IRA, 401(k) or similar plans.

Clients of Donnelly Tax Law get our annual Tax Preparation Questionnaire that guides you through these life changes, so that we don’t miss any information that will affect your return.

Make Tax Time Go Smoothly

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Finally, provide last year’s tax returns as well. This is especially important if you did your own taxes last year, or worked with another preparer.

In the long term, get serious about keeping organized records, watching your withholding, planning your deductions and reviewing your tax return. If you do, when tax season comes each year, it will be more bearable and easier to handle. Prepare your questions and concerns for when the answers to your tax questions surface. Hit the ground running!

© 2020

Relieve Yourself of Tax Time Worry

Even with being organized, tax time can be a stressful and confusing experience to navigate. If you need help and don’t want to do it on your own, Donnelly Tax Law can prepare your taxes for you. Schedule a consultation to get started. 

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Child Tax Credit Offers $2000 Per Child

The child tax credit is temporarily increased. Find out for how long and what qualifies you to benefit from this provision of the Tax Cuts and Jobs Act.

The enhanced child tax credit is one of the provisions of the Tax Cuts and Jobs Act of 2017 designed to lower overall tax liability for middle-class families.

Increases in the Child Tax Credit

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The child tax credit is temporarily increased from $1,000 to $2,000 per qualifying child for tax years 2018 through 2025. As much as $1,400 of that amount is refundable. The child tax credit now includes a new $500 nonrefundable credit for qualifying dependents other than qualifying children. In addition, more families will be able to take advantage of the credit due to an increase in the adjusted gross income phaseout thresholds.

Although the deduction for personal and dependency exemptions is temporarily repealed for tax years 2018 through 2025, the definition of a dependent is still applicable for the child tax credit and other tax benefits. A qualifying child for purposes of claiming the $2,000 child tax credit is the same as that for claiming a dependency exemption, except that the child must not have attained the age of 17 by the end of the year and must be a U.S. citizen, national, or resident.

How to Claim the Child Tax Credit

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A taxpayer must include on his or her return a qualifying child’s Social Security number (SSN) to receive either the refundable or nonrefundable portion of the credit with respect to that child. A SSN issued by the Social Security Administration (SSA) to the qualifying child is valid for purpose of the refundable portion only if the child is a U.S. citizen or the SSN authorizes the individual to work in the United States. In addition, the SSN must be issued to the qualifying child on or before the due date of the taxpayer’s return.

The $2,000 child tax credit per qualifying child phases out once the taxpayer’s modified adjusted gross income (MAGI) exceeds $400,000 if married filing jointly, or $200,000 for all others. The new phaseout threshold is more than double the old phaseout threshold and will allow more taxpayers to benefit from the child tax credit. The credit is reduced by $50 for $1,000 (or fraction thereof) that a taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold amount. The threshold amounts are not indexed for inflation.

Non-Qualified Children

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For each dependent who is not a qualifying child for purposes of the child tax credit, the Tax Cuts and Jobs Act provides a new nonrefundable credit of $500, if the dependent is a qualifying relative (and not a qualifying child) for purposes of claiming a dependency exemption; or a qualifying child over the age of 16. In addition, a taxpayer who cannot claim the child tax credit because a qualifying child does not have a SSN may nonetheless qualify for the nonrefundable $500 credit for the child. To claim the $500 credit, the taxpayer must include the dependent’s SSN, taxpayer identification number (TIN), or adoption taxpayer identification number (ATIN) on his or her return.

Let Us Help You With The Child Tax Credit

If you have any questions related to your eligibility or the available amount of the tax credits, please schedule a consultation with us today. We are here to help you understand how you may benefit.

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4 Tips for Planning for Your Post-Retirement Future

As we age, the importance of financial planning becomes a greater priority. Learn about the many factors that affect retirement planning.

With age, the focus often turns from planning for the purchase of a bigger home to planning to have enough income to live well after retirement. Many factors contribute to this calculation, but following are four common considerations:

Do I need an income portfolio for retirement?

Spending down the money you’ve saved and planned for over your working life is a concept that makes many of us uncomfortable. It may mean going below whatever benchmark figure we struggled to achieve. It takes a mental leap to realize that what you really saved for is spending down. The primary consideration isn’t whether you need an income portfolio, but rather is whether you have a tax-efficient, diversified income fund that will give you the income you need to maintain the lifestyle you want to have.

Should I invest in stocks and bonds?

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Because your ultimate goal is having the income you need on an annual basis, the answer is that you need a mix so that you can maximize the inflation-adjusted after-tax return on your investments. As has been obvious recently, the stock market can be erratic. High-quality bond rates stay stable even when stocks fall. That’s why financial advisers recommend having both in your portfolio. The percentage of each fluctuates with factors, such as age and risk tolerance.

Is it a smart idea to have a mortgage?

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Maybe. It depends on your goals. But here’s something to consider: will you make more by paying down your mortgage and investing that money than you will by paying a mortgage? The calculation to consider is whether your mortgage rate is higher or lower than the value of the tax deduction for your mortgage.

Should I buy long-term care insurance?

This can be a tricky question, in part because the thought of not having a plan in place feels so unsettling. But here are some facts to think about: Most women who need long-term care need it for about 2.5 years; men need it for about 1.5 years — which means you will need at least $300,000 (in today’s dollars) to fund this expense.

High-net worth individuals can plan to self-fund; those with few assets will have to rely on Medicaid and other government programs. People in the middle can choose to use assets like the sale of their homes to fund their care, or they can purchase a long-term care or hybrid life/long-term care product — each of which offers advantages and disadvantages.

Any money you spend on long-term care will decrease the amount you can leave to your heirs.

These are but a few of the questions that need to be answered as you plan for your financial future. Many factors affect the answers that are right for you as you plan for a comfortable, stress-free retirement, but having a plan that addresses these four issues is a good start. For other considerations and guidance, contact us today.

© 2020

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Yet Another ‘Real Housewives’ Star in Tax Trouble

Anyone can find themselves in tax trouble, even ‘Real Housewives of Orange County’ star Kelly Dodd who owes more than $23,000 to IRS.

One of the stars of the Bravo reality TV series Real Housewives of Orange County is in debt to the IRS.

Kelly Dodd and her ex-husband Michael Dodd owe $23,386.62 for unpaid taxes for the years 2015 and 2016, according to documents obtained by The Blast.

Tax Trouble Can Happen To Anyone

Kelly and Michael Dodd were married for 11 years, until their divorce in 2018.

Dodd joined the cast of Real Housewives of Orange County during the show’s 11th season.

Her fiery Latin lineage and unfiltered opinions have been bringing the heat ever since she joined the cast,” Bravo’s website says.

Dodd is not the first cast member from the Real Housewives series to get in tax trouble. In the last year, four other cast members have faced IRS liens.

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IRS Publishes Inflation Adjustments for 2020

The IRS has announced the tax year 2020 annual inflation adjustments, including the tax rate schedules and other tax items. Learn how it may affect you.

As it typically does, the IRS has made inflation adjustments for various tax items for the coming year — 2020. More details can be found in Rev. Proc. 2019-44. Below are the adjustments that apply to a wide range of taxpayers.

Inflation Adjustments

The standard deduction for married filing jointly rises to $24,800 for tax year 2020, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,400 for 2020, up $200, and for heads of households, the standard deduction will be $18,650 for tax year 2020, up $300.

The personal exemption for tax year 2020 remains at 0, as it was for 2019. This elimination of the personal exemption was a provision of the Tax Cuts and Jobs Act.

Marginal rates: For tax year 2020, the top tax rate remains 37% for individual single taxpayers with incomes higher than $518,400 ($622,050 for married couples filing jointly). The other rates are:

  • 35% for incomes over $207,350 ($414,700 for married couples filing jointly).
  • 32% for incomes over $163,300 ($326,600 for married couples filing jointly).
  • 24% for incomes over $85,525 ($171,050 for married couples filing jointly).
  • 22% for incomes over $40,125 ($80,250 for married couples filing jointly).
  • 12% for incomes over $9,875 ($19,750 for married couples filing jointly).
  • The lowest rate is 10% for single individuals with incomes of $9,875 or less ($19,750 for married couples filing jointly).

For 2020, as in 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

inflation adjustments

Additional Inflation Adjustments

The alternative minimum tax exemption amount for tax year 2020 is $72,900, and it begins to phase out at $518,400 ($113,400 for married couples filing jointly, for whom the exemption begins to phase out at $1,036,800). The 2019 exemption amount was $71,700, and began to phase out at $510,300 ($111,700, for married couples filing jointly, for whom the exemption began to phase out at $1,020,600).

The new maximum earned income credit amount is $6,660 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,557 for tax year 2019.

The qualified transportation fringe benefit now has a monthly limitation of $270. The monthly limitation for qualified parking is the same, up from $265 for tax year 2019.

The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,750, up $50 from the limit for 2019.

The annual exclusion for gifts is $15,000 for calendar year 2020, as it was for calendar year 2019.

This is not a comprehensive list, and there are subtleties that you should discuss with a professional in the new year.

© 2019

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How to Avoid the Top 10 Estate Planning Errors

Estate planning can get very complicated, and by the time you realize you’ve made a mistake, it may be too late. Learn more and be prepared.

There are myths and misconceptions about estate planning. Here are the top common mistakes to avoid and help your family save thousands of dollars in unnecessary taxes and probate fees:

Estate Planning Errors to Avoid

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1. Beneficiary omissions — Not naming contingent beneficiaries or failing to review beneficiaries often enough. This may subject your estate to probate, creditors and delays.

2. No stretch IRA — No contingent beneficiary on an IRA may mean there is no stretch IRA, a valuable tax break that enables someone who inherits an IRA to draw out distributions over his or her life expectancy if the original beneficiary has died.

3. Forgetting to change an ex-spouse on an IRA — Your new spouse becomes your beneficiary the day you get married, but not in an IRA. This can have disastrous consequences for your new spouse and family.

Minors, Ownership, and Residuary Clause in Estate Planning

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4. Leaving assets directly to a minor without dealing with guardianship issues — Who will handle their inheritance? The phrase “for their benefit” welcomes a whole host of potentially abusive interpretations.

5. Ownership mistakes and imbalances — If too many assets are in one spouse’s name, it could wreak havoc with tax planning. One spouse may have a much larger IRA and own a vacation house in his or her name only. By shifting the house or investment to the other spouse, the estate becomes more equalized, possibly reducing taxes.

6. Not having a residuary clause — A residuary clause covers items not named in a will or included in a trust. These can include items you don’t yet own but will before your death. Sometimes there are things you might not even know you own.

7. Not planning for the unexpected — There are a multitude of things that could happen, such as a sudden decline in your spouse’s health or a change in your assets. You can address this by having assets go to a trust. You can control how, to whom and when money gets distributed.

What Estate Planning Brings Up

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8. Not dealing with your own mortality — Don’t leave your family ruined because you don’t want to admit to yourself that you are going to die someday. Don’t make matters worse by failing to plan.

9. Not updating your will — Many changes take place within a family or business structure. Ensure the assets you leave behind are given to the people you intended to have them.

10. Not planning for disability — An unexpected long-term disability can affect your personal and financial affairs in myriad ways. Decisions such as who will handle your finances, raise your children or make health care decisions on your behalf are essential. It may be necessary to appoint a power of attorney or create a living trust to work on your behalf if you’re unable to do it for yourself.

Benefits of Estate Planning

You can benefit from having an estate plan. Not only can it help maximize the actual value of the estate you pass on to your heirs and beneficiaries, but you’ll also have an opportunity to make informed decisions concerning how your assets should be handled while you are still alive.

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Strategic Tax Planning and Itemizing

Why use good tax planning? The changes made by the Tax Cuts and Jobs Act of 2017 continue to make itemizing deductions out of reach for most taxpayers.

The Tax Cuts and Jobs Act of 2017 (TCJA) made major changes that affect how individual taxpayers can claim deductions. For individual taxpayers, the biggest changes were (1) the increase in the standard deduction, which significantly raised the threshold for claiming itemized deductions; (2) the elimination of some itemized deductions (e.g., moving expenses) and the higher cap on others (e.g., the jump to 10 percent threshold for medical expenses to be deductible); (3) the $10,000 cap for state and local taxes; and (4) the much higher estate tax exemption.

Changes to Tax Planning

The result is that only about 10 percent of American households can itemize their deductions. This may change in 2025 when some of the changes made by the TCJA are scheduled to sunset, if they aren’t made permanent before then.

Despite these changes, good tax planning may make it possible to itemize deductions in some areas. There is a caveat: it may be possible to itemize only in alternate years or if there is an exceptional life event.

The following four deductions may make it possible for taxpayers to exceed the standard deduction and itemize:

Medical Expenses

Medical expenses are deductible to the extent they exceed 10 percent of adjusted gross income (AGI). For most people, health insurance covers most of the expense and their out-of-pocket expenses won’t meet the threshold. Some exceptions, however, may make it possible to exceed it:

  • Long-term care is expensive, and it usually isn’t covered by insurance.
  • Dental and orthodontic costs are allowed. Many people either don’t have dental insurance or the insurance doesn’t cover the entire expense.
  • Major health events with noncovered expenses. Noncovered drugs and other unforeseen expenses can be deducted.

Depending on your particular situation, expenses like these may put you over the threshold, either annually or in intermittent years. Keep in mind that even with this, you must still exceed the standard deduction ($12,200 for individuals and $24,400 for married individuals filing jointly in 2019) to be able to itemize.

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State and Local Taxes (SALT)

The $10,000 cap on the SALT deduction applies to both individual and joint filers. Consequently, all taxpayers who reach that cap are $10,000 closer to the standard deduction — which means that for 2019 single taxpayers are nearly to their $12,200 standard deduction and joint filers are almost halfway to their $24,400 standard deduction threshold. These taxpayers should pay close attention to their other deductions. When they are all “bundled” together, the threshold may be met.

Charitable Giving

Depending on income and level of giving, it may be possible to take this deduction annually. Donors who don’t give enough to meet the standard deduction threshold still have options: they can make their donations every second or third year (depending on their budget), or they can contribute to donor-advised trusts, which allow donors to take a deduction in the year of the gift and designate charities as recipients later. These trusts generally have fees.

Other Deductions

It may be possible to itemize other deductions as well, including miscellaneous deductions not subject to the 2 percent AGI floor (e.g., gambling losses), interest paid for investment purposes and Ponzi scheme losses.

Most taxpayers don’t have enough in itemized deductions to claim them annually. With good tax planning, however, it may be possible to claim them in intermittent years. Schedule a consultation today for other tax-planning strategies.

©2019

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