Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb.

If you fail to follow the rule I’m about to reveal, you can face two big problems.

• First, your check will be shorted by 20 percent.
• Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else.

There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA.

This is easy to do. Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer).

Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

If you want to discuss the trustee-to-trustee rollover with me, please don’t hesitate to call me on my direct line at (805) 264-3305.

Sincerely,
Bob
Robert W Craig, EA Tax Services

P.S. Also use the trustee-to-trustee rollover when moving your IRA to another IRA.

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Tax Traps to Avoid in Retirement

Tax Traps to Avoid in Retirement
By Charles Sherry, M.Sc.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

It’s a quote that comes down to us from Benjamin Franklin, who uttered the phrase in 1789.

Taxes–federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and cigarettes and alcohol. There has even been a rising chorus that is calling for a special tax on junk food.

Yes, Ben Franklin nailed it. We can’t escape taxes. Before we jump in, let me say that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.

As I always emphasize, feel free to reach out to me with specific questions, or consult with your tax advisor.

That said, let’s get started.

1. Estimated quarterly tax payments may be required.

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck.

When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.

You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.

If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.

But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty.

Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to me.

Check out this IRS link: https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

Link to IRS Withholding Calculator: https://www.irs.gov/payments/tax-withholding

2. Social security may be taxed.

If you file as an individual and your combined income (adjusted gross income?+ nontaxable interest?+?half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

If the total is more than $34,000, up to 85% of your benefits may be taxable. Additionally, 13 states–Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia–tax Social Security.

3. Beware of the required minimum distributions for retirement accounts.

Let me put this right up front: failure to take the required distribution could subject you to a steep penalty.

Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.

However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, RMDs must begin once the account holder is 70½, regardless of whether he or she is retired (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).

RMDs are not required for Roth IRA owners.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.

If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.

4. The hidden cost of selling your primary residence.

Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.

If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (IRS: Publication 523 (2017), Selling Your Home).

The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (IRS: Questions and Answers on the Net Investment Income Tax).

The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.

There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points I’ve shared, we are happy to assist. Please email me at rcraig1044@aol.com or call me at (805) 264-3305 and we can talk.

Bob

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2018 New IRS Withholding Calculator and Article

The new tax law could affect how much tax someone should have their employer withhold from their paycheck. To help with this, the IRS urged taxpayers to visit the Withholding Calculator on IRS.gov. The Withholding Calculator can help prevent employees from having too little or too much tax withheld from their paycheck. Having too little tax withheld can mean an unexpected tax bill or potentially a penalty at tax time in 2019. And with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks. Please click this link which will take you to the IRS website with information on the new tax law and how it affects your paycheck:

https://www.irs.gov/newsroom/irs-encourages-paycheck-checkup-for-taxpayers-to-check-their-withholding-special-week-focuses-on-changes

If you have questions please feel free to contact me.

Bob
Robert W Craig, EA Tax Services

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Proving Travel Expenses After Tax Reform 2018

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.

And tax reform did not change the rules that apply to your other travel expense deductions.

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas.

From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
2. Time. Your dates of departure and return, and the number of days on business.
3. Place. Your travel destination described by city or town.
4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove:

• every expenditure for lodging, and
• every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available. I suggest saving ALL receipts regardless of amount.

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains:

• the name of the hotel,
• the location of the hotel,
• the date, and
• separate amounts for charges such as lodging, meals, and telephone.

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the:

• name and location of the restaurant,
• date and amount of the expenditure, and
• number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

• Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
• Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
• Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
• Costs for baggage and shipping of business items needed at your travel destination
• Costs for lodging and meals (meal costs include tips to waiters and waitresses)
• Costs for dry cleaning and laundry
• Costs for telephone, computer, Internet, fax, and other communication devices needed for business
• Tips to bellmen, maids, skycaps, and others

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either:

• have the corporation reimburse you for the expenses, or
• have the corporation pay the expenses.

If you would like my help in planning the business and personal parts of your next trip, please don’t hesitate to call me.

Sincerely,
Bob
Robert W Craig, EA Tax Services (805) 264-3305

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2018 Client Business Meals Update

Here’s the updated strategy on deducting business meals with your clients or customers: deduct your client and business meals as if tax reform never took place. At first glance it appeared that the new tax law that went into effect on January 1, 2018 would disallow business meal deductions along with entertainment. Looking deeper it appears that was not their intent.

Wow. Is this aggressive? Not if:
• the IRS comes out with regulations that follow a model set by the American Institute of CPAs, or
• the Joint Committee on Taxation in its explanation of the Tax Cuts and Jobs Act (TCJA) states that client and business meals continue as deductions, or
• lawmakers enact a new tax code section that authorizes client and business meal deductions.

How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.

Let’s put it this way: if you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:

• The name of the person you had the meal with.
• The name of the restaurant where you had the meal.
• A short description of the business discussed.
• If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and itemized list of food and drink consumed.

If you want to discuss the business meals deduction with me, don’t hesitate to call.

Note that meals associated with customer or client entertainment (eg, eating while at the theater or baseball game) are NOT deductible due to the new tax law in 2018. Business deductions for entertainment are gone-period.

Sincerely,
Bob (805) 264-3305

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The Unpardonable Sin in an IRS/FTB Audit

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really must keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records, and not having a good log is the biggest unpardonable sin of an IRS/FTB audit. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

  Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method).

  The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

  Technology & APP’s: With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

  If you would like an example of what a mileage log should look like, feel free to contact Bob at (805) 264-3305.

Robert W Craig, EA Tax Services
431 2nd Street, Suite 3
Solvang, CA 93463
email: rcraig1044@aol.com

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Tax Reform Changes the Alimony Game!

Tax reform changes the alimony game.

This may or may not have any relevance to you, but if it does, you will want to move quickly.

The Tax Cuts and Jobs Act (TCJA) eliminates tax deductions for alimony payments that are required under post-2018 divorce agreements.

More specifically, the TCJA’s new denial of alimony tax deductions applies to payments required by divorce or separation instruments:

• executed after December 31, 2018, or
• modified after that date, if the modification specifically states that the new TCJA treatment of alimony payments now applies.

Example. Betsy is divorcing Tim, and Betsy will pay $120,000 a year in alimony. If Betsy can deduct the $120,000 in her 50 percent combined federal and state income tax bracket, her net cost is $60,000 ($120,000 x 50 percent).

To look at the alimony in another light, with no tax deduction Betsy has to earn $240,000, then pay taxes of $120,000 in her 50 percent bracket, before she can give Tim the $120,000.

Regardless of how you look at the cost of alimony, the loss of the alimony tax deduction is huge.

Note: You deal with a judge (court) to finalize the divorce. This could take some time, so don’t procrastinate, or you’ll surely miss the deadline.

To qualify as deductible alimony, your divorce must satisfy a list of specific tax-law requirements. We should review your divorce if you are in this process.

Sincerely,
Bob
Robert W Craig, EA Tax Services (805) 264-3305

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Time Limit to Correct Social Security Earnings Statement Before It’s Too Late!

Here’s a link to an important article about keeping a eye on your social security earnings records.

There are strict time limits on fixing any errors in your social security earnings record that you need to be aware of. Not correcting the error(s) in a timely fashion could cost you benefits for a lifetime.

http://socialsecurityintelligence.com/check-your-social-security-earnings-statement-before-its-too-late/

If you have any questions about this please feel free to call me.

Bob
Robert W Craig, EA Tax Services
(805) 264-3305

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How To Handle a Traditional IRA Inherited from a Non-Spouse

Traditional individual retirement accounts (IRAs) became available in 1974 and have been around ever since. This makes your odds of inheriting a traditional IRA pretty good.  

The purpose of this letter is to look at some of the rules that apply when you inherit an IRA from someone other than your spouse.

  Traditional IRA Inherited from a Non-spouse

  Death after start date. If you inherit an IRA from an owner who dies upon attaining age 70 1/2 or later, the IRA must distribute any assets that remain to you (the beneficiary) over the longer of your expected life span or the deceased owner’s expected life span (before death).

  With the exception of separate accounts, if there is more than one beneficiary, the rule requires distribution of the deceased owner’s traditional IRA over the longer designated beneficiary’s life expectancy or the owner’s life expectancy. For this tax rule, the beneficiary with the shortest life expectancy (usually the oldest person) is the designated beneficiary.

  If the owner divided the IRA into separate accounts for the beneficiaries, the accounts act as separate IRAs for distribution purposes.

  Death before start date. If the owner dies before his or her required start date (age 70 1/2), the IRA must distribute any remaining assets under either

 

  • the five-year rule, which requires that the IRA distribute the assets within five years after the death of the owner, or
  • the life expectancy rule, which requires that all remaining assets be distributed over the life span of the designated beneficiary.
 

As you receive the monies from the inherited traditional IRA, you pay taxes at ordinary income rates.  

Planning Strategy  

To minimize taxes for your beneficiaries, aim to stretch out the distributions for as long as possible. This makes the five-year plan rarely a good idea. But it does shine the light on youth. The younger the surviving beneficiaries, the more stretch you create.  

By stretching out non-spouse inherited IRA distributions for as long as possible, you can turn a potential tax danger into a tax benefit. IRA stretching is a proven and widely used method in estate planning. It also allows the IRA’s assets to continue to grow tax-deferred, so with wise investments you could create your own legacy.  

You likely need to know the basic rules that apply to inherited IRAs because you have high odds of both inheriting a traditional IRA and leaving one to your named beneficiaries.  

If you would like to discuss IRAs in more detail, simply give me a call.  

Sincerely,

Bob Craig
Robert W Craig, EA Tax Services
431 2nd Street, Suite 3, Solvang, CA, 93463
(805) 264-3305
email: rcraig1044@aol.com

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5 Arrested in IRS Impersonation Scam

Five suspects have been arrested for involvement in a growing IRS impersonation scam that has bilked an estimated $36.5 million from 6,400 victims nationwide, federal officials said Tuesday.

I have personally received many calls from clients and others saying that they have been contacted by the IRS to “pay up or go to jail”. As these are being reported to the IRS by us and taxpayers, it’s good to know some progress is being made. To read more click the link below…

http://www.usatoday.com/story/money/2016/05/24/five-arrested-irs-impersonation-scam/84874934/

If you or anyone you know has received these threatening calls, please refer them to the following link: http://www.bobcraig.biz/irs-and-phishing-scams/

Thank you,
Bob

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