Tis the Season – Things to Know Before Filing Your Taxes

February 7, 2012

Everyone loves a good tax tip. And now that tax season is in full swing, the IRS and other experts have started to issue tip after tip after tip. Here’s a recap:

Getting a jump on your taxes long before the April deadline is the best tip of all. To do so, the IRS recommends gathering your records in advance, including W-2s and 1099s. In addition, the IRS recommends getting the right forms, all of which are available 24 hours a day, seven days a week at the IRS’ Web site, www.IRS.gov. That site also has some helpful calculators to get you started.

That being said, tax payers should avoid getting too early a jump on their taxes. With the preferential qualified stock dividend rate, complicated foreign tax credits, lower capital gains rates and other changes over the last few years, many investors are finding that they receive Revised 1099s, or other tax reporting documents, well into March. If you’ve already filed your return, this can lead to costs of re-filing an amended return that you may wish to avoid. The best bet may be to get your tax return all completed, and then hold off filing it until the end of March, to see if any amended 1099s arrive.

Of course, keeping organized, thorough records is the key to filing on time. The IRS suggests that you can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year and help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property – should be kept longer.

To be sure, some citizens wonder whether they need to file a tax return. According to the IRS, you must file a tax return if your income is above a certain level and that amount varies depending on filing status, age and the type of income you receive. For example a married couple, under age 65, generally is not required to file for the 2006 tax year until their joint income exceeds $16,900. Even if you do not have to file, the IRS notes that you should file to get money back if Federal Income Tax was withheld from your pay, or you qualify for certain credits.

It’s also important to choose your correct filing status, of which there are five options. According to the IRS, your federal tax filing status is based on your marital and family situation. It is an important factor in determining whether you must file a return, your standard deduction and your correct amount of tax.

Besides choosing the correct filing status, it’s important to calculate whether you should itemize deductions or not? And that will depend on how much you spent on certain expenses last year. According to the IRS, money paid for medical care in excess of 7.5 percent of adjusted gross income (AGI), mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions in excess of 2 percent of AGI can reduce your taxes. If the total amount spent on those categories is more than the standard deduction, you can usually benefit by itemizing. The standard deduction amounts are based on your filing status and are subject to inflation adjustments each year.

Also of note, if you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the IRS and may have to pay tax on the gifts (if, including prior taxable gifts, in excess of your $1 million lifetime exclusion). The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value. Gifts include money and property, including the use of property without expecting to receive something of equal value in return. There are some exceptions to the tax rules on gifts.

In some cases, a taxpayer may want to consider using a paid tax preparer. If so, the IRS has tips on its Web site to follow. Of note, only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Although you might not find that you need the services of a paid CPA or accountant every year, having a relationship established when unexpected opportunities or events occur will make getting timely professional input that much easier. Someone who knows your income and deduction patterns, and can quickly answer routine questions or research the more complicated issues, may well be worth the price – even in the years when things seem straightforward.

When completing your tax return, make sure that you take your time, double-check your math and verify all Social Security numbers. Math errors and incorrect Social Security numbers are among the most common mistakes found on tax returns.

And remember, if you are getting a tax refund, consider making an automatic contribution to your IRA; this is the first year that this can be done.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Kristine McKinley, a local member of FPA.  Kristine is a fee only financial planner serving the greater Kansas City area.

Yes You CAN Donate Your 2010 RMD to Charity!

December 20, 2010

Good news for charitable IRA owners over age 70 ½… the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed last week by President Obama, extends the ability to give up to $100,000 directly from your IRA to a charitable institution, tax-free.  Furthermore, because this bill was passed so late in the year, you get an extra month to complete the transfer and have it count for your 2010 taxes (transfers made in January 2011 will count as if they were made in 2010).

If you’re not familiar with charitable IRA donations, for the past few years taxpayers age 70 ½ or older have been able to make direct transfers of up to $100,000 per year from their IRA to a charity.  By giving the money directly to charity (rather than receiving the distribution then later cutting a check to your favorite charity), taxpayers were able to exclude the IRA distribution from their income.

This was a great strategy for IRA owners who didn’t need the money from the required minimum distribution as they won’t have to pay a large tax bill for IRA withdrawals that they wouldn’t otherwise have taken (if not required to by the RMD rules).

The direct transfer strategy not only reduced their taxable income, but it also reduced their adjusted gross income, which resulted in many taxpayers having less of their Social Security income taxed; it also allowed taxpayers to qualify for credits and deductions that they would not have qualified for otherwise because their income was too high.

This IRA donation strategy was introduced in the Pension Protection Act of 2006 and was originally only intended to apply to the 2007 tax year.  It was later extended to include 2008 and 2009.  IRA owners who have taken advantage of this strategy were hoping that it would be extended for 2010, but for a while it didn’t look like it would happen.  Thankfully, Congress included a provision in the tax bill passed last week to extend the ability to donate IRAs directly to charity for not only 2010, but 2011 as well.

Since this bill was passed so late in the year, you may have already taken your 2010 RMD and written a check to your favorite charity.  You can still deduct your donation on Schedule A: Itemized Deductions (if you itemize your deductions).  However, please note that you can’t do both.  If you do a direct transfer to a charity from your IRA you will exclude the distribution from your income; if you write a check to a charity you will deduct it on Schedule A.

Thanks to Kay Bell at Bankrate.com for the update on RMD charitable donations in “How the New Tax Law Affects Your 2010 Taxes”.

Kristine McKinley is a fee-only financial planner located in Lee’s Summit, Missouri.  Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis.  To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.

President Obama Expected to Sign New Tax Bill Today

December 17, 2010

new tax bill“We had a responsibility to protect middle class families from a tax increase that would have hit their paychecks and harmed the recovery” – Treasury Secretary Timothy Geithner statement after the House passed the newest tax bill last night.

Nothing like waiting til the last minute…

Financial advisors have been preparing their clients for higher taxes as we waited for Congress to do something to stop the Bush era tax credits from expiring at the end of this year.

Given the slow recovery the economy is experiencing an increase in taxes that would have resulted had the Bush tax cuts not been extended would have been a tough blow, especially for the middle income class.

Congress finally passed a bill that would extend the Bush tax cuts, as well as introduce a few new ones.  The bill, called the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 is expected to be signed by President Obama later today.

Here are some of the highlights of the new tax bill:

  • The current tax rates have been extended for two years.  They were scheduled to go up in 2011.  The 10% bracket was going to disappear, and most of the other tax brackets were going to go up, which would have been devastating to taxpayers in this economy.  Hopefully the economy will have grown and will be stable before tax rates do go up in 2013.
  • The current capital gains and dividends rates have been extended through 2012.  This will give many people an opportunity to sell positions that have a gain before capital gain rates go up.
  • The Alternative Minimum Tax (AMT) exemption will remain at the higher levels for two more years, giving relief to middle income taxpayers who would have to pay AMT without this band-aid.  I’m still looking for permanent AMT changes in the future.
  • The new tax bill includes a payroll tax deduction for workers.  Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011.
  • Unemployment benefits will be extended for another 13 months, giving people who have been unemployed for an extended time period more time to find another job (with unemployment rates still close to 10% this was to be expected).
  • The estate tax has been reinstated for 2011, but the top tax rate will be 35% and the exemption amount will be $5 million per person and $10 million per couple.  Without this tax bill, the estate tax would have been reinstated at 55% with only a $1 million exemption.

These are just a few of the provisions included in the new tax bill.  The response to the new tax bill has been mixed.  Some economists say this bill will boost economic growth and create millions of jobs.  Others are calling this bill “weak stimulus”.  While I’m not sure how much this bill will boost the economy, I do believe that if the Bush tax cuts were allowed to expire the higher taxes that would have resulted would have been very difficult for taxpayers in this struggling economy.

For more information on the new tax bill and how it will affect you, please visit Tax Cut Deal: How it Affects You at CNNMoney.com.

Time Running Out to Do a Roth IRA Conversion in 2010

December 9, 2010

roth ira conversion 2010As we near the end of 2010, many people are wondering if a Roth IRA conversion is the right move for them.

Why so much focus on Roth IRAs this year?  The rules that determine who can convert a traditional IRA to a Roth IRA have been changed which will allow more people to convert to Roth IRAs.  Before 2010, only people with modified adjusted gross incomes of less than $100,000 could convert.  Starting in 2010, this income limitation has been lifted, meaning most people are eligible to convert their traditional IRAs to Roth IRAs.

In addition to the income limitation being lifted, the IRS is allowing taxpayers who do a Roth IRA conversion in 2010 to spread their taxes out over two years.  So instead of paying it all on your 2010 tax return, you can pay half in 2011 and half in 2012.

This may seem like a no-brainer for people who want to do a Roth IRA conversion in 2010, but don’t leap before you look.  Just because you can do a Roth IRA conversion in 2010 doesn’t mean you should do a Roth IRA conversion in 2010.

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Time Running Out for 2009 RMD Relief

November 26, 2009

People who received unwanted RMDs in 2009 have just a few days left to roll those RMDs back into their IRAs, thus eliminating the tax bill from the original distribution.

RMDs Suspended

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) suspended required minimum distributions (RMDs) for 2009.  If you’re not familiar with RMDs, these are distributions that you are required to take from your traditional IRA and employer sponsored plans (401Ks) beginning at age 70 ½.

This is a one-time suspension of RMDs, effective for 2009 only.  This suspension was created in response to the sharp declines in the stock market, with the purpose of allowing individuals to keep the funds invested in their IRAs instead of being forced to take distributions when the market, and thus their account values, were significantly down.

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1099-B Forms Delayed This Tax Season

January 14, 2009

The IRS has announced that brokers may furnish certain composite annual tax reporting statements by Feb. 17, 2009, without penalty.

The notice provides that the new February due date established under a recent law change to provide Form 1099-B information to customers also applies to other tax information customarily reported to customers with Form 1099-B statements, such as interest and dividends.  This means that customers can expect to receive Forms 1099-INT and 1099-DIV late as well.

If you normally receive Forms 1099-INT, 1099-DIV and 1099-B for investment income and transactions, be aware that these forms will arrive later than usual this year.  Some clients have reported that they have received letters from financial institutions saying not to expect these forms until the end of February (although the official due date is February 17).

As a tax preparer, I’m not particularly happy about this change, but on the bright side, I’m hoping the extended deadline will cut down on the number of corrected 1099s issued this tax season.

Seniors Get a Tax Break in 2009 – Congress Suspends RMD

December 12, 2008

I know many people were hoping this would pass for 2008 rather than 2009, but I guess late is better than not at all.

Congress approved legislation this week that will provide some relief to Americans over 70 1/2 who have suffered significant losses in their IRA accounts.  The bill will temporarily suspend the excise tax that is levied when seniors fail to the the required minimum distribution (RMD) from their retirement accounts.

This penalty is waived for 2009, which means that seniors will not be required to take withdrawals from their tax deferred retirement accounts during 2009, which will hopefully give these accounts time to recover before the 2010 required distribution.  Unfortunately, this law does not apply to 2008 when it would have made the most difference to investors who have lost significant amounts in their accounts.

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Home Energy Credits Back For 2009 Only

December 2, 2008

A new tax law in 2006 allowed homeowners to claim credits for purchases that make their homes more efficient.  This law was originally only for purchases or improvements made in 2006 and 2007, but has been extended by the Emergency Economic Stabilization Act of 2008 to include 2009 (not sure why but 2008 was skipped).

Here is a refresher on the original law (edited for 2009):

During 2009, individuals can make energy-conscious purchases that will provide tax benefits when filling out their tax returns. Manufacturers offering energy efficient items such as insulation or storm windows can assure their customers that their energy efficient items will qualify for the tax credit if certain energy efficiency requirements are met.

This tax law change provides a tax credit to improve the energy efficiency of existing homes. The law provides a 10 percent credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

* Insulation systems that reduce heat loss/gain
* Exterior windows (including skylights)
* Exterior doors
* Metal roofs (meeting applicable Energy Star requirements).

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Watch Out for Capital Gain Distributions in 2008

December 1, 2008

Despite widespread stock market losses in 2008, several mutual fund companies have announced that they will make capital gain distributions to shareholders in mid-December.

This is a double whammy to investors because shareholders who hold mutual funds in taxable accounts must pay taxes on those capital gain distributions even if those capital gains were reinvested in the fund.  This may seem unfair when 1) you didn’t receive the money, and 2) your fund suffered a large loss for the year.

So why do mutual fund companies distribute capital gains to shareholders when the fund itself has incurred a loss for the year?  There are three reasons that funds are making payouts, even though they’re up to their ears in losses:

First, emerging markets and energy funds had big gains when the year began and realized some gains along the way. Then they suffered redemptions, which means that those gains have to be spread among fewer shareholders (i.e., the shareholders who did not bail have to pay the price for those who are trying to time the market).

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Donating Your RMD To Charity – Law Extended for 2008 & 2009

December 1, 2008

Update:  The Tax Relief Act of 2010 extends the ability to donate your RMD to charity for both 2010 and 2011.  For more information, please read “Yes You CAN Donate Your 2010 RMD to Charity”.

The Pension Protection Act of 2006 allows IRA owners age 70 1/2 or older to make direct transfers of up to $100,000 per year from their IRA to a charity. The provision became available for IRA distributions taken after Aug. 17, 2006 and originally only applied through the end of 2007.  Note: the Emergency Economic Stabilization Act of 2008 extends this law to include 2008 and 2009.

Distributions can be made from taxable funds in an IRA or Roth IRA, but not from employer plans or SEP and SIMPLE IRAs. The distribution will not be taxable to you, but you don’t get to deduct the charitable contribution on your tax return. This is more advantageous to taxpayers because even though you get a charitable deduction if you take the IRA withdrawal and report that amount in income, many taxpayers do not itemize, and therefore they don’t always get to take advantage of the deduction.

The direct transfer from the IRA to the charity can also satisfy a person’s required minimum distribution for the year. If you are charitably inclined, it may be best to contribute from the IRA, at least up to the RMD amount thereby avoiding that amount being included in income. This will lower your adjusted gross income (AGI) and might avoid or lessen the amount of Social Security benefits that are taxed.

The reduction in AGI can also increase tax deductions, exemptions or credits that are pegged to AGI either in terms of specified amounts or as a percentage of AGI. The distributions are deemed to come from income first if the IRA has non-deductible contributions. This contrasts with the normal pro-rata rule that applies to other IRA distributions where there are after-tax funds in the IRA.

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Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri. Kristine focuses on providing fee-only financial planning, investment advice, and tax preparation to individuals and families from all income levels. Continue reading About Us

In the News

Kiplinger Magazine/NAPFA (February 2013) – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation. Click here for more News...