Category Archives: Individual

Individual Federal and State Tax Tips by Hedley & Co. CPA with offices in Clifton Park, NY serving Saratoga County, Albany County Schenectady county and beyond.  We help prepare individual tax returns year round.  Tax planning is an essential part of your tax preparation.

more income tax changes

More About Tax Changes

Income Tax Changes 2018 and Beyond

While most taxpayers are now aware of lower federal tax brackets and other changes in the Tax Cuts and Jobs Act of 2017, some may be unaware of less publicized provisions of the new law. These tax changes feature a little goods news, and a bit of bad news.

BAD NEWS

Bad news first. Previously, you could deduct a variety of miscellaneous itemized expenses if they were more than 2% of your adjusted gross income. This provision is gone, which is bad news for people who spend significant money on uniforms, professional development and anything else job-related that employers don’t reimburse. Teachers, though, at least get to keep a $250 deduction for classroom and development expenses.

Other deductions that are gone include advisory fees, tax preparation costs and job search expenses. Also significant for homeowners in high-tax states is how much they may deduct annually for state, local, sales and real estate taxes. The limit is $10,000.

GOOD NEWS

If you still itemize, one piece of good news is that starting in 2018, there are no longer income limitations as to who can itemize. Those taxpayers who want to give more of their income to qualified charities are in luck. The cap on charitable contributions as a percentage of adjusted gross income increased from 50% to 60%.

The Alternative Minimum Tax exemption increased from $84,500 to $109,400 for married taxpayers filing jointly and from $54,300 to $70,300 for single taxpayers. The exemptions also phase out at much higher numbers than before.

MORE GOOD NEWS

One final huge plus for those with significant assets is the doubling of the federal estate tax exemption to $22.4 million for couples and $11.2 million for individuals. While on the subject of estates, also remember that the annual gift tax exemption per person rose from $14,000 in 2017 to $15,000 this year, indexed for inflation. Talk to your tax professional to learn more.

 

Original article published in Client line

2018 The Year of the Divorce

2018 Setting Up to be the Year of the Divorce

The Tax Cut and Jobs Act of 2017 will likely make 2018 the Year of the Divorce.

Anyone who has been contemplating divorce may be pushed to carry it out because of the
incentive created in the latest tax reform act.

For 75 years, the tax law allowed alimony (spousal maintenance) payments to be
deducted from the payor’s taxable income. However, the new tax law will no longer
allow the payor to deduct alimony payments nor require the payee to include alimony
received as taxable income. This change will be effective for divorce agreements
executed or modified after December 31, 2018.

Impact on Alimony

Unfortunately, alimony currently is a great tool in negotiating the final details of a
divorce and without the tax incentive, many divorce experts fear negotiations will be
more difficult and the payee spouse will receive less money because more will be going
to taxes.

As an example, assume alimony is set at $36,000/year and the payor spouse is in a higher
33% tax bracket and the payee spouse is in a lower 15% tax bracket. The payor would
have a tax deduction of $11,880 and the payor would pay tax of just $5,400 on the same
income. Between the two spouses, they save $6,480 in taxes and the payor spouse
received a tax benefit to make the payments more affordable and the payee spouse, who
actually received the money, would pay taxes on it. With the new tax law, the higher-
income spouse will have to not only pay $36,000 to the other spouse but, will have to pay
taxes of $11,880 on the $36,000 as well. Or, if the payor is only willing to pay the after-
tax equivalent the payment will be $24,120 while the payee spouse would expect the
same after-tax payment under the prior law of $30,600 per year.

Impact on Child Support

In addition, some states like New York, take alimony into effect when calculating child
support. Child support calculations currently take into account the combined net incomes
of both parties. Since the alimony payor’s net income will go down and the payee’s net
income will go up, the amount of child support received will go down if states do not
modify their formulas for child support.

Also, current prenuptial agreements may have assumed a tax deduction for alimony
payments which may have unintended consequences if not modified before December 31,
2018.

We have all heard of the marriage tax penalty but after 2018 there will certainly be a
divorce tax penalty as well.

If you are in the process of a divorce or contemplating one, let us help. Visit
http://www.hedleycpa.com/individual-services/divorce- financial-planning/ for more
information on how we can help.

A Bucket Strategy To Go With Your Bucket List

A Bucket Strategy To go with Your Bucket List

The baby boomers have re-defined everything they’ve touched, from music to marriage to parenting and, more lately, to what “old” means—60 is the new 50! Longer, healthier living, however, can put greater stress on the sustainability of retirement assets.

There is no easy answer to this challenge, but let’s begin by discussing one idea—a bucket approach to building your retirement income plan.

The Bucket Strategy can take two forms.

The Expenses Bucket Strategy

With this approach, you segment your retirement expenses into three buckets:

  • Basic Living Expenses—food, rent, utilities, etc.
  • Discretionary Expenses—vacations, dining out, etc.
  • Legacy Expenses—assets for heirs and charities

This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend.¹,² Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity.³

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

The Timeframe Bucket Strategy

This approach creates buckets based on different timeframes and assigns investments to each. For example:

  • 1-5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  • 6-10 Years: This bucket is designed to help replenish the funds in the 1-5 Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
  • 11-20 Years: This bucket may be filled with investments such as large-cap stocks that offer the potential for growth.²
  • 21+ Years: This bucket might include longer-term investments such as small-cap and international stocks.²

Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-10 Years bucket even though it’s not quite time.

A bucket approach to pursue your income needs is not the only way to build an income strategy. But it’s one strategy to consider as you prepare for retirement.

  1. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less that the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus his or her original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
  2. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.
  3. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2017 FMG Suite.

Can You Avoid Early Withdrawal Penalties from your Retirement Account?

How can you avoid Early Withdrawal Penalties?

If you’re saving for retirement in a qualified plan sponsored by your employer, such as a 401(k), or in a traditional individual retirement account (IRA), you need to remember that the IRS generally imposes a 10% penalty on any withdrawals you make before you turn age 59½.* This penalty is in addition to any income taxes due on the withdrawal. However, there are several exceptions that may apply.**

DISABILITY OR DEATH

Both qualified retirement plans and IRAs allow penalty-free distributions in cases of disability or death. “Disability” generally means that the individual is unable to engage in any “substantial gainful activity.”

UNREIMBURSED MEDICAL BILLS

Withdrawals from an IRA or a qualified retirement plan to pay deductible medical expenses that exceed 10% of adjusted gross income may avoid early withdrawal penalties. The withdrawal must occur in the same year the expenses are paid.

HEALTH INSURANCE PREMIUMS

You can make penalty-free withdrawals from an IRA to pay health insurance premiums if you have received unemployment compensation for at least 12 weeks (or could have except for being self-employed).

FIRST-TIME HOMEBUYER EXPENSES

You can withdraw up to a maximum of $10,000 penalty free from your IRA to buy, build, or rebuild a principal residence for an eligible first-time homebuyer. (The buyer can be yourself, your spouse, or any child or grandchild of you or your spouse, provided the buyer and his/her spouse have not owned another principal residence for at least two years.) This is a lifetime limit.

HIGHER EDUCATION EXPENSES

You may make penalty-free withdrawals from your IRA to pay qualified higher education expenses for you, your spouse, or any children or grandchildren of you or your spouse.

EQUAL PAYMENTS

Withdrawals from an IRA or qualified retirement plan that are part of a series of substantially equal periodic payments over your lifetime or the lifetimes of you and the designated beneficiary may be penalty free. (Requirements apply.)

* A 10% penalty may also apply to taxable distributions taken from a Roth IRA prior to the owner turning 59½, but a different set of rules applies.

** The list presented is not all-inclusive

tuition tax credits

Tuition Tax Credits

Education Tuition Tax Credits

College expenses are on the rise. The College Board reports that the average cost of a college education, including room and board, has risen faster than the inflation rate in recent years, topping $20,000 for public four-year institutions and $45,000 for private colleges for the 2016-2017 academic year.*

For many Americans, this burden may be alleviated through the use of education tax credits. There are two types — the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both require that qualified education expenses be incurred by you, your spouse, or a dependent, and credits may not be combined for any one student for a single tax year.

AMERICAN OPPORTUNITY TAX CREDIT

The AOTC provides a dollar-for-dollar tax reduction of up to $2,500 of the cost of tuition, books, and other required course material for up to four tax years. Specifically, the tuition tax credits is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000 (for each qualifying student). Should the credit exceed the amount of tax you owe, you may be eligible for a refund of 40% of the credit or $1,000, whichever is less.

You may generally claim the full AOTC if your modified adjusted gross income (MAGI) for the tax year is under $80,000 ($160,000 if married filing jointly). However, the credit starts to phase out once MAGI exceeds those levels and is no longer available once MAGI reaches $90,000 ($180,000 if married filing jointly).

LIFETIME LEARNING CREDIT

The LLC is a tuition tax credit of up to $2,000 per tax return for tuition and fees, calculated as 20% of the first $10,000 of expenses. In contrast to rules under the AOTC, qualified expenses for the LLC do not include academic supplies, and no portion of the credit is refundable. However, the LLC is available for an unlimited number of years, and it does not require the student to be enrolled in a degree program.

You may receive the full credit if your MAGI is less than $56,000 ($112,000 if filing jointly). The amount of the LLC phases out when MAGI falls between $56,000 and $66,000 ($112,000 and $132,000 if married filing jointly) and is not available when MAGI exceeds these upper limits.

* The College Board, Tuition and Fees and Room and Board Over Time (Public school costs are based on in-state rates.)

We can help you take advantage of the tax credits you are allowed with our tax preparation service. 

CDFA Certified Divorce Financial Analyst

Why Use a CDFA in your Divorce?

A Certified Divorce Financial Analyst (CDFA) Can Help

The process of a divorce can last a year or more. A Certified Divorce Financial Analyst (CDFA) can explain all the financial aspects of your decisions and help you to make smart choices throughout the process.

A CDFA works with you and your attorney to forecast the long-term impact of the divorce settlement. This includes tax liabilities, long term and deferred savings, retirement and college savings plans.

What is the real cost of your divorce?

A CDFA can assist you on planning a budget and help you adjust to the cost of your new living arrangements. Life insurance, health insurance and cost of living increases need to be considered when agreeing on a financial settlement.

There are a lot of misconceptions around the divorce process. A CDFA can help cut through the financial lingo and bring greater understanding to your situation. A CDFA can also help you build a realistic, stable financial budget for both the long and short term

A CDFA will help you take stock of your current financial situation, including:

  • The current balance in all bank accounts
  • The value of any brokerage accounts
  • The value of investments, including any IRAs
  • Your residence(s)
  • Your autos
  • Your valuable antiques, jewelry, luxury items, collections, and furnishings
  • Examine copies of the past two or three years’ tax returns
  • Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse
  • Examine papers relating to insurance-life, health, auto, and homeowner’s-and pension or other retirement benefits
  • List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

This will help you to make smart decisions regarding how debts incurred during the marriage are to be paid off and obtain preliminary information for the eventual division of property. Assessing the above is critical in planning a secure financial future.

Contact our office – we have the areas only Certified Divorce Financial Analyst who is also a CPA.  A true asset to your post-divorce financial planning process.

spending plan

Create a Spending Plan & Get a Handle on Your Finances

Create a Spending Plan

Does it seem as if your paycheck is here one minute and gone the next? If your money disappears before you know it, you might need a way to keep better track of your spending. A budget — or spending plan — can help you take control of your finances to make sure that you’re spending wisely.

FOLLOW THE TRAIL

The first step is to find out where your money is going. And the only way to do that is to keep track of everything you spend, including cash purchases. Ideally, you’ll be able to gather spending data for three months (although one month may be more realistic). There are software programs and mobile apps that can help simplify the process.

Add up how much you’re spending in specific categories during a one-month period, and use those figures to project your future expenses. To improve accuracy, add up any and all irregular expenses (insurance premiums, taxes, etc.), divide the total by 12, and include that amount as a monthly expense. Obviously, spending projections should not exceed your income.

PRIORITIZE YOUR EXPENSES

Household expenses generally fall into two main categories. Non-negotiable expenses are the expenses you must pay, such as your mortgage or rent, utilities, phone service, and insurance. Groceries and any personal or student loans also fall into this category.

Negotiable or discretionary expenses are for things you want but don’t necessarily need, such as premium cable service, dinners out, and pricey vacations. If your cash flow is negative, reducing discretionary expenses will help you get from red to black.

MAKE SAVINGS AN ITEM

Your budget should include “savings” as an expense category. Direct the money into an emergency fund, a retirement savings account, a college savings account (if applicable), etc. Your budget should also reflect your priorities. You don’t necessarily have to give up expensive splurges, as long as you can fit them into your spending plan.

It will probably take some tweaking to finalize a workable spending plan, but it is well worth the time and effort.

The Home-Sale Gain Tax Exclusion

A Big TAX BREAK
Who doesn’t love a tax break? The reality is that for many taxpayers, there aren’t too many tax breaks they can take. However, if you’re thinking the time is right to put your house on the market and it has appreciated in value, you may be eligible for one of the most valuable tax breaks of all — the home-sale gain tax exclusion.

THE NUTS AND BOLTS
Here’s how it works: If you make a profit when you sell your principal residence, all or part of your gain may be tax free. Eligible individual filers may exclude up to $250,000 of gain from their income; married couples filing jointly may exclude up to $500,000 of gain.

USE AND OWNERSHIP TESTS
In general, this tax break is available only once every two years. To qualify, you generally must have owned and used the home as your principal residence for at least two years (a total of 24 full months or 730 days) during the five-year period ending on the date of the sale. The ownership and use periods don’t necessarily have to coincide.

Only one spouse must pass the ownership test, although neither spouse may have excluded gain from a previous home sale during the two-year period ending on the sale date. As for the use test, both spouses must pass it.

REDUCED EXCLUSION MAY BE AVAILABLE
If you have to sell your home because of a change in employment, you move for health reasons, or there are other qualifying “unforeseen circumstances,” you might qualify for a reduced exclusion. The amount of the reduced exclusion is based on the portion of the two-year use and ownership periods you satisfy.

 

The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.   Content courtesy of Client Line Newsletter

MANAGING TAXES on Your Retirement Savings

Managing Taxes on Your Retirement Savings

The money you save and invest in your traditional individual retirement account (IRA) or 401(k) plan can compound tax deferred for as long as you keep the money in your retirement account. Unfortunately, however, you’ll have to pay income taxes on withdrawals. How can you manage the taxes on your retirement savings? These strategies could help.

MAINTAIN YOUR TAX DEFERRAL

Cashing out a 401(k) means you may end up owing a 10% early withdrawal penalty as well as income taxes, leaving you with significantly less money to spend or reinvest. Instead, keep the money in the plan or roll it into another employer’s tax-deferred retirement plan or an IRA.

FOCUS ON RMDS

Generally, you are obligated to start taking annual required minimum distributions (RMDs) from your tax-deferred accounts after you reach age 70½. If you fail to make a required withdrawal, you’ll face a penalty of 50% of the amount that should have been withdrawn.

Taking smaller distributions before you are required to spreads the tax bill over a greater number of years, which could keep you in a lower tax bracket. A tax projection can help you see if this strategy might be beneficial.

OPEN A ROTH IRA

With a Roth IRA, contributions are nondeductible but earnings are potentially tax free. Roth IRA owners can qualify for tax-free withdrawals of earnings once they reach age 59½ (or meet other conditions) and have had a Roth IRA for five years. By allocating a portion of your retirement savings to a Roth IRA, you are positioning yourself for tax-free investment growth and withdrawals.*

CONSIDER TAX RATES

If you hold equities in a retirement account, any gains will be taxed at your regular — likely higher — income tax rate upon withdrawal from your account. It’s generally preferable from a tax-reducing standpoint to focus on keeping more highly taxed income-producing securities, such as bonds, in retirement accounts.

* Eligibility for Roth IRA contributions depends on income. There are no income restrictions on converting a traditional IRA to a Roth IRA, but a conversion does result in taxable income.

Home Office Tax Tips

Home Office Tax Tips

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.  Here are some home office tax tips that may help you make the best choice for your situation.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowners insurance. You can deduct only the business portion of your indirect expenses.

WHAT SPACE CAN QUALIFY?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following.

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

SIMPLIFIED OPTION

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.