Author Archives: Jeramiah Young

Fund Your Retirement or Your Child’s College?

As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education. If you are facing that dilemma, here are some thoughts:

Prioritize retirement over education

In most cases it is more important for parents to put the financial needs of their retirement ahead of their children’s college education. Here’s why:

  • Retirement funds will be used to cover your basic needs for daily life for as much as 20, 30 or even 40 years. While education for your children is important, it is secondary to your long-term well-being.
  • Financial aid and numerous other programs are available for your child to take advantage of to help them afford college.
  • If necessary, your child can take out student loans. While it may take years for them to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.

Ways to plan for both

There is plenty of opportunity to fund both retirement and college education in a tax-advantaged way. Consider funding basic retirement needs first, then look at educational savings accounts and related programs. Here are some suggestions:

  • Start saving early. Use time to help grow the value in your retirement and education savings accounts. Take advantage of employer-provided 401(k) or similar retirement programs, especially if there is an employer match. After that, look into a Coverdell Education Savings Account and a Section 529 savings account to maximize your education savings potential.
  • Research and apply for grants and scholarships. Start researching early, as there are college scholarships available for children as young as 5 years old!
  • Consider in-state public colleges. They are generally less expensive than private or out-of-state colleges. If an out-of-state college is preferred, check to see if they have reciprocity agreements with your home state.
  • Look into work-study programs. Many schools provide part-time jobs for students to help them pay for school while keeping up with their studies. These programs vary based on a student’s financial needs.

Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found. Call if you want to discuss your specific situation.

Hidden Back to School Tax Deductions

Summer is coming to a close and the back-to-school advertising blitz is underway. Hidden in some of those school expenses are tax deductions you can take advantage of. Here are some ways you can save:

  1. Watch for tax deductions on the supply list. Often schools send a list of requested supplies for the school year. Some of the items on the list are clearly for personal use (such as an eraser or a ruler) while other items on the list are often for school use and classroom use (such as 24 pencils or paper towels). Keep track of these non-cash classroom/school donations for possible charitable deductions.
  2. Donate funds versus taking the raffle ticket. Raffles, subscription drives and silent auctions are fun ways schools raise money. To maximize your ability to deduct your donations, forgo the possible prize. Then the entire donation is clearly deductible. Remember to ask for a receipt when making the donation.
  3. Don’t forget your out-of-pocket expenses for your volunteer activities. Perhaps you donate your time at school functions, donate books to the school library, or help assist the teaching staff. Your out-of-pocket expenses and your mileage should be tracked for charitable deduction purposes.
  4. Teachers, save your out-of-pocket expenses. A recent survey found that 94 percent of teachers spend their own money on classroom supplies — some as much as $1,000 per school year. Teachers are allowed to deduct $250 on their tax return even if they claim the standard deduction.
  5. Use checks, not cash. If you usually provide donations to the school in the form of cash (like providing additional money to help other kids go on field trips) make those donations in the form of a check. The check will serve to help prove your donation.

Bonus Savings Tip: When you get the school supply list, compare prices from online retailers to local brick-and-morter stores. You might be able to save some money — especially if you are buying for multiple kids. If you don’t have time to wait for them to ship, see if a local retailer will match the price.

Finally, don’t forget to review state rules for educational expenses. There are often credits available for out-of-pocket school expenses and other educational expenses.

Your Paycheck Might be Deceiving You

Assess your tax situation now to avoid a surprise in the spring

Major tax reform will have a noticeable impact on virtually all taxpayers this year. Will your total paycheck withholdings at the end of the year line up with the new changes? Here are a few of the major changes and why it might be a good idea to see if your withholdings will be adaquate to cover your tax obligation.

Key tax reform changes

  • There are no longer any personal exemptions.
  • The standard deduction increased to $12,000 for individuals and $24,000 for married couples.
  • The Child Tax Credit doubled to $2,000 per eligible child.
  • Limits have been added to deductions for state income, property and sales taxes.
  • Many itemized deductions are gone. This includes miscellaneous itemized deductions for investment fees, employee business expenses, and more.

Your paycheck withholdings might not be sufficient

You may have noticed a change in your tax withholdings earlier in the year due to these changes. These withholding changes were dictated by the IRS to employers in early February. While the IRS does its best to apply the tax law changes to the withholding tables, it’s not able to correctly estimate every individual tax situation. Even new W-4 forms used by employees to adjust withholdings is filled with rough estimates of the impact of these new rules. According to a recent announcement by the U.S. Government Accountability Office (GAO), as many as 30 million taxpayers may not have adaquate withholdings for 2018.

If you have not already done so, now is a great time to forecast your upcoming tax liability. Doing some tax planning this summer gives you time to adjust your withholdings if needed and possibly make estimated tax payments. An accurate forecast can provide you with the peace of mind that there will be few, if any, large tax surprises this year.

Now is a Great Time to Organize Your Tax Records

The time to organize your tax records is now. Waiting until the end of the year or, even worse, waiting until you are audited can lead to headaches. Here are some tips to get on top of your tax records.

Storage Hints
Organize your records by tax year. If you have not already done so, create a folder for the current year’s files. Here are some filing suggestions.

Tax return and support. Create a file with copies of your signed tax return(s) for the year. Include any support documents provided with your filed tax return.

Files in tax return order. Create your annual files to match the flow of your 1040 tax return. Here are some suggestions.

Income. Copies of W-2s, 1099s, Social Security statements, interest income, K-1s, and investment activity go in this file.

Charitable Donations. Create a separate file for cash donations and one for non-cash donations. Include a copy of your charitable mileage log in this file.

Medical and Dental. Create a file for all your medical related expenses. Include a copy of your medical related mileage log in this file.

Other itemized deduction file. In this file include all other proof of itemized deductions. This includes property tax statements, mortgage interest, and state income tax documentation.
Business activity. Have a file for each hobby and business activity. Include a copy of your business mileage log in this file.

Education. Create a file for all documents related to educational expenses. Include in it copies of invoices, tuition and fees. Include invoices for music lessons, instruments and any materials required to purchase for your student.

Other. Put all your miscellaneous receipts into this file. This includes receipts you are unsure about like receipts for daycare, Form 1095s and any other tax related items.
Statement file. Sort all your statements by vendor, then by month. Create a separate file for these statements. This can include bank statements, credit card statements, and investment account statements. Consider creating a digital back up copy of these statements and store them on a CD or USB drive.

The Digital Alternative
If more of your records are in digital format, consider creating a tax folder for each year on your computer and then place your digital records into sub-folders using the same sort as noted above. Create password protection for each folder.

Rotation idea
Finally, at the end of each tax year place a note on the tax return to confirm the date your tax return was sent into the federal and/or state government. Note on the outside of this file when you can toss the support documentation. Go back to old tax years and shred the old documents that are no longer needed. Do not take this action unless you know the length of time you will need to save these records.

Third Quarter Estimated Taxes Due

Now is the time to make your estimated tax payment

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The third quarter due date is now here.

Due date: Monday, Sept. 17, 2018
SPECIAL NOTICE: With major tax law changes in place for 2018, forecasting your tax obligation is more important than ever. If you need a review of your situation consider doing so immediately to avoid any surprises at tax time.

Remember, you are required to withhold at least 90 percent of your current tax obligation or 100 percent of last year’s obligation.* A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment is necessary. Here are some other things to consider:

Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. A quick payment at the end of the year may not help avoid the underpayment penalty.

W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough funds to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.

Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter when you pay your estimated taxes.

Don’t forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you’re required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you meet these quarterly estimated tax payments as well.

* If your income is over $150,000 ($75,000 if married filing separately), you must pay 110 percent of last year’s tax obligation to be safe from an underpayment penalty.

Salvage that Sunken Uncollectible Debt

Victims of reneged payment agreements might have a tax deduction

There are few things as frustrating as not being paid what is owed to you. If it becomes clear the debt is not going to be paid, you might be able to recoup some of the lost money via a tax deduction. The IRS has two classifications for bad debt: business and non-business, each with its own deductibility rules.

Business bad debt

In order to be considered a deductible business bad debt, the IRS states that the debt must be closely related to your trade or business. Business bad debt is typically unpaid customer invoices, but it can also include business-related loans. To qualify as a deduction, these two statements must be true:

  • The amount is already included as income or as an asset
  • The debt is considered to be partially or completely worthless

There are many ways to determine the worthlessness of a debt, but at a minimum, you should be able to produce a recap of collection efforts. You need to show the IRS that you did everything you could to collect the debt. If you determine the bad debt is valid, you can deduct it as a business expense.

Non-business bad debt

All bad debt not defined as business-related, is classified as non-business. For a non-business bad debt deduction, the debt must be considered 100 percent worthless. There is no partial deduction available. In addition, you need to prove that the debt is a loan intended to be repaid and not a gift – especially if loaned to a friend or family member. The best way to prove this is with a signed agreement.

If you determine the bad debt is valid, you can report the amount as a short-term capital loss. The loss is subject to capital loss limitations and you need to submit a statement with your tax return that includes the following:

  • Description of the debt
  • Amount of the debt and when it became due
  • Name of the debtor
  • Business or family relationship between you and debtor
  • Efforts you made to collect the debt
  • Why you decided the debt was worthless

While no one wants to be in a position to write off debt, it’s nice to know that you can at least benefit from a tax deduction. If you find yourself in this situation or are planning to loan funds in the future, call to set up a plan of attack.