Confidence Wealth & Insurance Solutions March 20, 2017 No Comments

Four Ways to Double the Power of Your Tax Refund

The IRS expects that more than 70% of taxpayers will receive a refund in 2017.¹ What you do with a tax refund is up to you, but here are some ideas that may make your refund twice as valuable.

Double your savings

Perhaps you’d like to use your tax refund to start an education fund for your children or grandchildren, contribute to a retirement savings account for yourself, or save for a rainy day. A financial concept known as the Rule of 72 can give you a rough estimate of how long it might take to double what you initially save. Simply divide 72 by the annual rate you hope that your money will earn. For example, if you invest your tax refund and it earns a 6% average annual rate of return, your investment might double in approximately 12 years (72 divided by 6 equals 12).

This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Fees, expenses, and taxes are not considered and would reduce the performance shown if they were included.

Split your refund in two

If stashing your refund away in a savings account or using it to pay bills sounds unappealing, go ahead and splurge on something for yourself. But remember, you don’t necessarily have to spend it all. Instead, you could put half of it toward something practical and spend the other half on something fun.

The IRS makes splitting your refund easy. When you file your income taxes and choose direct deposit for your refund, you can decide to have it deposited among two or even three accounts, in any proportion you want. Qualified accounts include savings and checking accounts, as well as IRAs (except SIMPLE IRAs), Coverdell Education Savings Accounts, health savings accounts, Archer MSAs, and TreasuryDirect® online accounts. To split your refund, you’ll need to fill out IRS Form 8888 when you file your federal return.

Double down on your debt

Using your refund to pay down credit card debt or a loan with a high interest rate could enable you to pay it off early and save on interest charges. The time and money you’ll save depend on your balance, the interest rate, and other factors such as your monthly payment. Here’s a hypothetical example. Let’s say you have a personal loan with an $8,000 balance, a 12% fixed interest rate, and a 24-month repayment term. Your fixed monthly payment is $380. If you were to put a $4,000 refund toward paying down your principal balance, you would be able to pay off your loan in 12 months and save $780 in interest charges over the remaining loan term. Check the terms of any loan you want to prepay, though, to make sure that no prepayment penalty applies.

Be twice as nice to others

Giving to charity has its own rewards, but Uncle Sam may also reward you for gifts you make now when you file your taxes next year. If you itemize, you may be able to deduct contributions made to a qualified charity. You can also help your favorite charity or nonprofit reap double rewards by finding out whether your gift qualifies for a match. With a matching gift program, individuals, corporations, foundations, and employers offer to match gifts the charitable organization receives, usually on a dollar-for-dollar basis. Terms and conditions apply, so contact the charitable organization or your employer’s human resources department to find out more about available matching gift programs.

¹IR-2017-01, irs.gov

Confidence Wealth & Insurance Solutions February 24, 2017 No Comments

401(K) Withdrawals: Beware the Penalty Tax

You’ve probably heard that if you withdraw taxable amounts from your 401(k) or 403(b) plan before age 59½, you may be socked with a 10% early distribution penalty tax on top of the federal income taxes you’ll be required to pay. But did you know that the Internal Revenue Code contains quite a few exceptions that allow you to take penalty-free withdrawals before age 59½?

Sometimes age 59½ is really age 55…or age 50

If you’ve reached age 55, you can take penalty-free withdrawals from your 401(k) plan after leaving your job if your employment ends during or after the year you reach age 55. This is one of the most important exceptions to the penalty tax.

And if you’re a qualified public safety employee, this exception applies after you’ve reached age 50. You’re a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.

Be careful though. This exception applies only after you leave employment with the employer that sponsored the plan making the distribution. For example, if you worked for Employer A and quit at age 45, then took a job with Employer B and quit at age 55, only distributions from Employer B’s plan would be eligible for this exception. You’ll have to wait until age 59½ to take penalty-free withdrawals from Employer A’s plan, unless another exception applies.

Think periodic, not lump sums

Another important exception to the penalty tax applies to “substantially equal periodic payments,” or SEPPs. This exception also applies only after you’ve stopped working for the employer that sponsored the plan. To take advantage of this exception, you must withdraw funds from your plan at least annually based on one of three rather complicated IRS-approved distribution methods.

Regardless of which method you choose, you generally can’t change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do modify the payments (for example, by taking amounts smaller or larger than required distributions or none at all), you’ll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-age 59½ SEPP distributions (unless another exception applies).

And more exceptions…

Distributions described below generally won’t be subject to the penalty tax even if you’re under age 59½ at the time of the payment.

Distributions from your plan up to the amount of your unreimbursed medical expenses for the year that exceed 10% of your adjusted gross income for that year (You don’t have to itemize deductions to use this exception, and the distributions don’t have to actually be used to pay those medical expenses.)
Distributions made as a result of your qualifying disability (This means you must be unable to engage in any “substantial gainful activity” by reason of a “medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”)
Certain distributions to qualified military reservists called to active duty
Distributions made pursuant to a qualified domestic relations order (QDRO)
Distributions made to your beneficiary after your death, regardless of your beneficiary’s age

Keep in mind that the penalty tax applies only to taxable distributions, so tax-free rollovers of retirement assets are not subject to the penalty. Also note that the exceptions applicable to IRAs are similar to, but not identical to, the rules that apply to employer plans.

Confidence Wealth & Insurance Solutions January 25, 2017 No Comments

Tax Season Starts This Week: Don’t Forget These 5 Tax Deductions

5 Essential Money-Saving Tips for Your Tax Returns

Monday, January 23^rd, marked the official start of tax season. It was the first day tax returns could be filed. For millions of Americans, this can be a stressful time because A) either they’re unsure of how to fill out the often complicated forms or B) they have a hunch they’ll be writing Uncle Sam a big check when that tax bill comes.

For other people, this could be a nice windfall. A 2016 report by Turbo Tax states that 45 million taxpayers claimed $1.2 trillion in itemized deductions on their 1040s, while those who just claimed the standard deductions accounted for about $747 billion.¹

A standard deduction is basically whether you file as head of household, married filing jointly, married filing separately and single. You can also claim extra standard deductions for age (65 or older) and blindness.²

If you qualify for a piece of that 1.2 trillion-deduction pie, it can make a big difference on how much you end up owing. So before you sit down to do your taxes or hand them over to your accountant cousin, be sure to review these deductions!

PRO TIP: Remember the money you save now, can be invested into a great pre-tax retirement fund for later.

1.) Dependents (Other than Children)

Depending on a few qualifying factors, the following people can be claimed as dependents: parents, grandparents, stepchildren, in laws, foster children, cousins and boyfriends or girlfriends.³

2.) Moving for a New Job

If you relocated more than 50 miles from your home because of work, you can deduct this from your taxes. You are allowed to deduct “reasonable moving expenses,” but not food. This mean you are 100% responsible for all of those road-trip diner meals.⁴

3.) Charitable Contributions

Did you clean out your closet last year and donate shoes, electronics and other items? If so, don’t forget to deduct it! Every bit counts – even the ingredients in a soup or dessert you made for a shelter or other such charitable organizations.⁵

4.) Mortgage Interest Payments

Homeowners get to write off their interest – so if you paid interest on a mortgage in 2016, you can claim that as a deduction.⁶

5.) Energy Efficient Improvements

This is your last chance to cash in on being Earth-friendly, as 2016 is the cutoff for claiming energy-saving home improvements on your returns. The max amount you can claim – in total, over the course of all your returns, is $500 based on 10 percent of the purchase price.⁷

This is just the tip of the iceberg when it comes to itemized deductions. For example, if you work from home and use a room exclusively for your work, you can take a home office deduction for that “work” room.

You still have a few months to submit your taxes, so be sure to take your time to understand all of the itemized deductions available to you. While it might seem like a chore now, you will definitely be glad you got it right when Uncle Sam sends you his bill.

¹https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/The-10-Most-Overlooked-Tax-Deductions/INF12062.html
²https://www.irs.com/articles/understanding-standard-deduction
³https://www.irs.gov/publications/p17/ch03.html#en_US_2016_publink1000170962
⁴https://www.irs.gov/taxtopics/tc455.html
⁵ttps://turbotax.intuit.com/tax-tools/tax-tips/Tax-Deductions-and-Credits/The-10-Most-Overlooked-Tax-Deductions/INF12062.html
⁶https://www.irs.gov/publications/p936/ar02.html
⁷http://www.kiplinger.com/slideshow/taxes/T054-S001-overlooked-tax-deductions/index.html

Confidence Wealth & Insurance Solutions February 19, 2015 No Comments

Last-Minute Tax Tips

It’s that time of year again–tax filing season. And while many taxpayers like to get a head start on filing their returns, there are those of us who always find ourselves scrambling at the last minute to get our tax returns filed on time. Fortunately, even for us procrastinators, there is still time to take advantage of some last-minute tax tips.

If you need more time, get an extension

Failing to file your federal tax return on time could result in a failure-to-file penalty. If you don’t think you’ll be able to file your tax return on time, you can file for and obtain an automatic six-month extension by using IRS Form 4868. You must file for an extension by the original due date for your return. Individuals whose due date is April 15 would then have until October 15 to file their returns.

In most cases, this six-month extension is an extension to file your tax return and not an extension to pay any federal income tax that is due. You should estimate and pay any federal income tax that is due by the original due date of the return without regard to the extension, since any taxes that are not paid by the regular due date will be subject to interest and possibly penalties.

http://www.nbcnews.com/nightly-news/infographic-have-you-filed-your-taxes-yet-n77881

Try to lower your tax bill

While most tax-saving strategies require action prior to the end of the tax year, it’s still not too late to try to lower your tax bill by making deductible contributions to a traditional IRA and/or pre-tax contributions to an existing qualified Health Savings Account (HSA). If you’re eligible, you can make contributions to these tax-saving vehicles at any time before your tax return becomes due, not including extensions (for most individuals, by April 15 of the year following the year for which contributions are being made).

For tax year 2014, you may be eligible to contribute up to $5,500 to a traditional IRA as long as you’re under age 70½ and have earned income. In addition, if you’re age 50 or older, you may be able to make an extra “catch-up” contribution of $1,000. You can make deductible contributions to a traditional IRA if neither you nor your spouse is covered by an employer retirement plan; however, if one of you is covered by an employer plan, eligibility to deduct contributions phases out at higher modified adjusted gross income limits. For existing qualified HSAs, you can contribute up to $3,300 for individual coverage or $6,550 for family coverage.

Use your tax refund wisely

It’s easy to get excited at tax time when you find out you’ll be getting a refund from the IRS–especially if it’s a large sum of money. But instead of purchasing that 60-inch LCD television you’ve had your eye on, you may want to use your tax refund in a more practical way. Consider the following options:

Deposit your refund into a tax-savings vehicle (if you’re eligible), such as a retirement or education savings plan–the IRS even allows direct deposit of refunds into certain types of accounts, such as IRAs and Coverdell education savings accounts.
Use your refund to pay down any existing debt you may have, especially if it is in the form of credit-card balances that carry high interest rates.
Put your refund toward increasing your cash reserve–it’s a good idea to always have at least three to six months worth of living expenses available in case of an emergency.

Finally, a tax refund is essentially an interest-free loan from you to the IRS. If you find that you always end up receiving a large income tax refund, it may be time to adjust your withholding.

Beware of possible tax scams

Though tax scams can occur throughout the year, they are especially prevalent during tax season. Some of the more common scams include:

Identity thieves who use your identity to fraudulently file a tax return and claim a refund.
Callers who claim they’re from the IRS insisting that you owe money to the IRS or that you’re entitled to a large refund.
Unsolicited e-mails or fake websites, often referred to as “phishing,” that pose as legitimate IRS sites to convince you to disclose personal or financial information.
Scam artists who pose as tax preparers and promise unreasonably large or inflated refunds in order to commit refund fraud or identity theft.

The IRS will never call you about taxes owed without sending you a bill in the mail. If you think you may owe taxes, contact the IRS directly at www.irs.gov. In addition, the IRS will never initiate contact with you by e-mail to request personal or financial information. If you believe that you’ve been the victim of a tax scam, or would like to report a tax scammer, contact the Treasury Inspector General for Tax Administration at www.treasury.gov/tigta.

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