Asset Planning, Inc Blog

The latest from the team.

Important Factors to Consider When Paying Off Your Mortgage

The flowchart below covers important decision-making factors a client must consider when paying off their mortgage, such as:

  • Thoroughly weighing the pros and cons involved in this big decision, and how they specifically relate to their financial situation.
  • Recognizing what degree of flexibility they may or may not have after paying off the mortgage.
  • Considering any tax implications that may result from paying off the mortgage.
  • Identifying sound reasons for paying off the mortgage, and determining the best course of action if applicable.

Should-I-Pay-Off-My-Mortgage-2022.pdf

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CARES Act Stimulus Summary

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. This is a $2 trillion emergency fiscal stimulus package to help reduce the economic damage caused by the virus and “stay at home” policies. The following is a summary of the main provisions for individuals.

Recovery Rebates:

  • The CARES Act provides for recovery rebate checks of up to $1,200 for individuals with adjusted gross income (“AGI”) up to $75,000 ($2,400 for joint filers with AGI up to $150,000) plus an additional $500 for each child under the age of 17 for US taxpayers through an advance refundable tax credit against 2020 income taxes. There is a phase out of the rebate, which causes a $50 reduction in the rebate for every $1,000 of AGI above these thresholds. For example, individuals with no children having an AGI of more than $99,000 and married couples with no children filing jointly having an AGI of more than $198,000 would be phased out completely and receive no recovery rebate check. The advanced payment of the recovery rebates will be based on the AGI reported on tax returns filed for 2019, and if no such tax return has been filed for 2019, the AGI reported on the 2018 filed tax returns will be used.
    • The rebate check will be sent directly to the bank account on file with the IRS for your 2019 or 2018 tax return. If the account is closed or there is no account on-file then a check will be mailed.
    • You can receive the rebate if you are retired and receive social security or a pension as long as your AGI is within the limits listed above.

Retirement Accounts:

  • Required Minimum Distributions are waived in 2020 for all retirement type accounts (401K, 403B, 457, IRA and Beneficiary IRAs). If you already took part or all of the RMD you might have the option of returning them except for beneficiary IRA distributions.
    • We are waiting to hear more details on the charitable contributions that are paid with RMD funds and we will be in contact with those clients that make charitable contributions from their RMDs to let them know their options for 2020.
  • Individuals under age 59 ½, may take coronavirus-related distributions from qualified retirement plans (IRA, 401K) of up to $100,000 without the distributions being subject to the 10% early distribution tax. The distributions are still subject to federal income tax, but the tax owed can be spread over three years.
    • In order to get these favorable terms, you will have to prove that you were adversely affected by the coronavirus.

Unemployment:

  • Regular unemployment payments, which are about 55% of your normal pay are increased by $600 per week for a maximum of 4 months. The benefit period is also extended by 13 weeks. It is normally 26 weeks maximum in California, so it can now go to 39 weeks.

There are also several small business and self-employed benefits provided by the CARES Act. We recommend that you discuss with your accountant or business manager the different options and if you should apply and take advantage of them.

Hope you are staying safe, sane, and healthy!

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New Tax Deadlines

In an effort to help you understand the ever-changing tax deadlines, we went to the source (IRS, CA FTB) to get the details. The following is a summary of the new deadlines that we thought you should know about:

The IRS extended the tax filing deadlines for your 2019 taxes from April 15 to July 15, 2020. The IRS also clarified other details that we thought were important:

  1. You also have until July 15 to contribute to an IRA account and have it posted to the 2019 tax year.
  2. For those of you that pay estimated taxes, the IRS stated that the first-quarter 2020 estimated tax payment that would have been due on April 15 is now delayed to July 15. BUT the second 2020 estimated tax installment is still due June 15, 2020 This makes the second payment due before the first payment! Hopefully America is back up and running so this does not become an issue but, if not, we expect the IRS to issue another statement regarding the due dates.
  3. The IRS also clarified that taxpayers “do not have to be sick, or quarantined, or have any other impact from COVID-19” to qualify for the new deadlines.
  4. California is following the IRS filing guidelines.
  5. Note, if you think you will receive a refund, go ahead and file as soon as possible.

California Property tax is still due on April 10, 2020. This is paid to the county that you live in. The state of California is encouraging the counties to waive penalties for late payments. The county tax collectors have the authority to waive penalties resulting from a late payment due to “reasonable cause and circumstances beyond the taxpayer’s control. Relief under this rule is discretionary and will be evaluated on a case-by-case basis. Taxpayers unable to pay by April 10 will need to request relief and demonstrate to the tax collector that the inability to make a timely payment was due to the COVID-19 pandemic. For example, the Los Angeles County Tax Collector has set up a special team to process penalty relief requests, and has advised impacted taxpayers to submit a request for penalty relief online, beginning on April 11.

In Orange County, Shari Freidenrich, the county treasurer-tax collector released the following statement “For taxpayers that do not make payment of property taxes due to COVID-19 by April 10, we expect them to submit a Penalty Cancellation Request Form and documentation to support the cancellation of penalties as allowed in limited circumstances under current state law.”

As soon as the stimulus bill is finally approved, we will post a summary of the final package. This will include the payroll tax, unemployment, small business loans and stimulus check guidelines.

Stay safe, sane and healthy!

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FSA Eligible Items on Amazon

There is now a whole section of Flexible Spending Account eligible items available on Amazon. In case you don't know what an FSA is, it is an account that you put pre-tax money into that you use to pay out-of-pocket health care costs with. The limit per person each year is $2,650 and most plans require that you use up that amount each year. Even though there is a limit of $2,650 a year you are not required to contribute that much. You can estimate what you think you spend per year and only contribute that amount. People use their FSA accounts to pay for copays, deductibles and prescriptions but there is a lot of over the counter products that meet the eligibility requirements ranging from blood pressure testers all the way to sunscreen and lotion.

Most of the time FSA owners will pay for these out of pocket expenses and then submit a claim form to be reimbursed but there is another option. You can now request a debit card for your FSA and pay directly for these expenses using that card. If you would like to order from Amazon, you would enter your FSA credit card information and select that card as your form of payment. When I was looking on Amazon I simply searched for FSA eligible items and was amazed at all of the products that were available and that I would be able to use for my family on a daily basis. This is a great way to use up the funds in your FSA account.

If you do not have a Flexible Spending Account, it may be something to look into. Not all employers offer them, but it doesn't hurt to ask your human resources department. Remember whatever you do contribute will reduce your taxable income because the contributions are made pre-tax. It's really a great way to pay for your out-of-pocket health care costs.

When googling FSA eligible products, I noticed that there were a lot of other stores that offer them as well. I just love the convenience and delivery options of Amazon, especially if you're a Prime member.

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IRA Contributions

While we are deep in the midst of tax season, we thought it was a good idea to remind our clients to get in their 2018 IRA contributions. If you are planning on dropping off a check to us the deadline to get them in is Wednesday, April 10th. This will ensure that your contribution is made before the April 15th tax deadline.

2018 contribution limits are $5,500 or $6,500 if you are over the age of 50

Also, now is as good a time as any to get in your 2019 contributions especially because the limits have been increased. The sooner you get these in the longer they have to grow in your IRA which means more retirement funds for you!

2019 contribution limits are $6,000 or $7,000 if you are 50 years of age or older

When it comes to non-deductible IRA contributions please be sure that you are keeping a record of these contributions by completing tax form 8606 for each year you make a non-deductible contribution. We have run into a few cases where no record is kept, and our clients are left scrambling to find that information when it is time to take distributions from their IRAs. This information will be needed to figure out what amount of your distributions will be counted as taxable income to you, so it is very important.

If you have any questions, please don't hesitate to call us.

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Earned Income and Social Security Tax

We came across an article on InvestmentNews.com written by Mary Beth Franklin. It gives a great explanation as well as examples and limits on how Social Security benefits are taxed if you are planning on working while collecting social security. Definitely worth a read if you have any income from other sources while collecting Social Security.

 

Click here to read the full article

 

 

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IRA & 401k Contributions Increase for 2019

2019 annual contribution limits for eligible tax filers:

401(k), 403(b), most 457 plans, and Thrift Savings Plan is increased from $18,500 to $19,000.

IRA contributions increased from $5,500 to $6,000 per year. The age 50+ catch-up contribution limit remains at $1,000.

Tax deduction and Income limitations for 2019:

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2019:

If single or joint married taxpayers are not covered by a work retirement plan, they may fully deduct traditional IRA contributions. Other tax filers may partially or fully deduct contributions if they meet the below exceptions:

  • Single taxpayers covered by a work retirement plan, can fully deduct if modified Adjusted Gross Income (AGI) is below $64,000. A partial deduction is allowed if modified AGI is between $64,000 to $74,000
  •  Married Joint taxpayers, where the spouse making the IRA contribution is covered by a workplace retirement plan, can fully deduct if modified AGI is below $103,000. A partial deduction is allowed if modified AGI is between $103,000 to $123,000
  • Married Joint taxpayers, where the spouse making the IRA contribution is not covered by a workplace retirement plan, but the other spouse is, can fully deduct if modified AGI is below $193,000. A partial deduction is allowed if modified AGI is between $193,000 to $203,000

The Modified AGI phase-out range for Roth IRA contributions is $122,000 to $137,000 for singles and heads of household, $193,000-203,000 for married couples filing jointly.

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Trump's Proposes to Extend RMD Age

President Trump issued an executive order directing the Treasury Department to extend the age for required minimum distributions from retirement accounts. Currently the age is 70 1/2. His reasoning is that people are working and living longer. This can be good news for some of our clients who don't necessarily need to take the withdrawals at 70 1/2. Here is an articles from Forbes with some pros and cons to the proposed change.

Read Here

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Deadline for 2017 IRA Contributions

The deadline for getting your 2017 IRA contributions to us is Wednesday, April 11th. Tax season is an extremely busy time so the sooner you get these in the better. Feel free to stop by the office anytime from 8am-4pm to drop them off.

Have a great weekend!

Melani

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Tax Reform: Summary of Changes

President Trump signed the tax reform bill this morning. Most provisions are set to take effect in 2018, but many of those are also set to expire or sunset in 2025. Here's a summary of what we think are the major changes that will affect our clients. We will have a more in-depth analysis and summary in our year end newsletter.

1. Reductions in individual tax rates. The bill retains the current structure of seven investor tax brackets, but lowers five of them. It also includes the sunset provision, meaning it's a temporary arrangement from 2018 to 2025.
Here's the breakdown of the new vs. current marginal tax rates:

Current Marginal Tax Rate

Proposed Marginal Tax Rate

Income Level (Single Filers)

Income Level (Couples Filing Jointly)

10%

10%

$0 -- $9,525

$0 -- $19,050

15%

12%

$9,525 -- $38,700

$19,050 -- $77,400

25%

22%

$38,700 -- $82,500

$77,400 -- $165,000

28%

24%

$82,500 -- $157,500

$165,000 -- $315,000

33%

32%

$157,500 -- $200,000

$315,000 -- $400,000

35%

35%

$200,000 -- $500,000

$400,000 -- $600,000

39.60%

37%

$500,000 and up

$600,000 and up

2. Reduction in corporate tax rate to a maximum rate of 21% (a reduction from 35%). Also, corporate income earned abroad and brought back to the United States will be taxed between 8 and 15.5%, instead of the current 35%. These are permanent reductions.

3. Standard Deductions increasing nearly 90%. For married couples filing jointly, the standard deduction rises to $24,000 from $12,700; for single filers, it moves to $12,000 from $6,350.

4. Additional changes to Itemized Deductions. These vary, and some might be more impactful than others.

  • Personal exemption ending, but child tax credit increasing. The bill ends the personal exemption of $4,050 for you, your spouse, and your dependents; it doubles the child tax credit to $2,000 per dependent child under age 17.
  • Limits to state and local taxes ("SALT"). Under the bill, you may only deduct up to $10,000 in state and local taxes, including sales, income, and property taxes. This deduction was not previously subject to limitation.
  • Caps on mortgage interest. The bill allows mortgage interest deductions for current homeowners, but caps the interest deduction at $750,000 in mortgage debt for homes bought in 2018 and beyond, down from the $1 million limit in place now. It eliminates deductions for interest on home-equity loans, as well as deductions for moving expenses and employer-provided expense reimbursements (except for members of the military).
  • Expands medical deductions. Current law allows for deduction of medical expenses over 10% of adjusted gross income (AGI). The bill lowers the threshold to 7.5%.

5. Changes to estate planning.  The bill doubles the estate tax exemption to $10 million, but it's also indexed for inflation after 2011. The bill also calls for doubling the value threshold on the 40% levy on estates worth nearly $11 million for individuals and $22 million for couples. The estate tax exemption also has the sunset provision, meaning that the bill calls for a reversion back to current exemption amounts in 2026.

6. Charitable deductions. Although the current tax deductions stay in place, the doubling of the standard deduction to $24,000 essentially raises the threshold on deductibility. Taxpayers will have to itemize donations to get the benefit.

      From all of us at Asset Planning, Inc. we wish you a wonderful Holiday Season!


*Asset Planning, Inc. does not provide tax advice. We suggest clients consult with a tax-planning professional with regards to their personal circumstances.

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