Are you prepared financially for retirement?

Recent surveys suggest that about 44 percent of American workers who are saving in a workplace retirement plan feel confident they will retire comfortably. However, generation by generation, the numbers show that many individuals are way behind when it comes to reaching their savings goals.

A new survey from Natixis Investment Managers finds that 44 percent of American workers who participate in a 401(k) or other workplace retirement plan feel secure about their retirement, as long as they watch their spending .Another survey which found that more than half of adults are either somewhat more confident (30 percent) or much more confident (27 percent) about their ability to save for retirement than they were three years ago. 75% of Americans are rejecting financial help and that can spell disaster

Baby boomers

The oldest baby boomers are in their early 70s and possibly well into retirement by now. The youngest boomers are around age 55 with only a few years left to save. However, for most boomers, their savings aren’t ready for retirement; the median account balance for baby boomers is just $152,000.

That may sound like a lot of money, but the average person age 65 and up spends around $46,000 per year, according to the Bureau of Labor Statistics. At that rate, that $152,000 would barely last three years.

According to the Transamerica survey, most boomers realize their current savings won’t cut it – nearly 70% say they expect to work past age 65 or possibly not retire at all. However, only a quarter of them said they had a backup plan in case they were forced to retire earlier than they had anticipated.

How much should the average baby boomer have saved, then? It depends on how much you expect to spend each year, but you can estimate your retirement number by using the rule of 25. It’s based on the 4% rule, which states that you can withdraw 4% of your savings the first year of retirement, then adjust that number each subsequent year to account for inflation. The rule of 25 essentially allows you to work backward to figure out your total savings based on how much you expect to spend in the first year of retirement.

For example, say you expect to spend $46,000 in your first year of retirement. Multiply that by 25, and you get $1.15 million. (You can check your work by taking 4% of $1.15 million, which comes out to $46,000). Keep in mind that Social Security benefits will play a part here, too. If you expect to receive, say, $15,000 per year in benefits, that’s only $31,000 you’ll need to save on your own. Multiply that by 25, and your adjusted retirement number is $775,000

Gen Xers

Generation X-ers still have a few years left before retirement – but it’s approaching quickly. Individuals in this generation only have around an estimated median of $66,000 saved for retirement. With the youngest Gen X-ers in their early 40s, that’s a concerning number.

People this age also seem to be aware that they’re struggling. Only 14% say they’re “very confident” they’ll be able to retire comfortably, and nearly a third have taken a loan or withdrawal from their retirement account.

So how much work would it take for the average Generation X-er to get back on track? If you’re on the older side of the spectrum (about 54) with only $66,000 saved, you’ll need to dramatically take your savings to the next level. Even if you save $2,000 per month earning a 7% annual return, you’d only have around $500,000 saved by age 65. For those who are around age 40 with $66,000 saved, stashing away $800 per month will get you to savings of about $1 million by age 65.

Millennials

The median estimated amount in millennials’ retirement accounts is $23,000, which isn’t surprising considering they have a lot of time left to save for retirement. However, given their young age, millennials are very much engaged in the topic of retirement. More than half (53%) say they expect their primary source of income in retirement to be their personal savings (as opposed to a pension or Social Security benefits), and 72% say they’re interested in learning more about how to achieve their retirement goals.

Whether that $23,000 now will amount to enough savings in the future, though, largely depends on how much you’re saving and how long you have until retirement.

Millennials are classified as those born between 1979 and 2000, which is a huge range. If you’re a 40-year-old millennial with only $23,000 saved, you may need to supercharge your savings earlier rather than later. For example, if you want, say, $800,000 saved by age 65, you’d need to save roughly $900 per month for the next 25 years to reach that goal, assuming you’re earning a 7% annual rate of return on your investments.

What’s holding workers back ?

Ideally, each generation should be much farther toward their retirement savings goals — particularly because they have access to retirement plans provided by their employers.

But other financial concerns get in the way. The biggest one: daily living expenses, which was cited by 65 percent of respondents. Then there’s generational debt, with 43 percent; housing costs, 43 percent; and health-care costs, 32 percent. Surveys show that 22 percent of workers admitted to taking a lump sum distribution from their retirement funds without moving the money to another plan. It’s not all bleak when it comes to retirement. There will be other sources of income, such as Social Security or the proceeds you may see if you decide to sell your home. Workers would be wise to understand the benefits that contributing to a workplace plan can bring. That includes the potential savings from lowering your taxable income, the extra money you may receive from employer matches, and the potential to save more once you’re 50 and older through catch-up contributions.

What to do if you’re off track?

Even if your numbers align with the median amount people in your generation have saved, that doesn’t necessarily mean you’re saving enough. If you’re falling short, the best thing you can do is set a goal for yourself and make some lifestyle changes so you can save more.

First, figure out your retirement number so you have something to shoot for. Play around with a retirement calculator to see how much you should have saved by retirement and how much you’ll need to save each month to get there.

Once you have a monthly savings goal, take a good look at your budget to see where you can make cuts. These cuts don’t have to be drastic – saving a couple of hundred dollars by cooking at home more often or riding your bike to work rather than driving to save on gas can make a big difference. If you’re seriously behind, though, you may need to make some dramatic changes, possibly by downsizing your home or moving to a less expensive neighborhood.

Regardless of how you choose to save money, the best thing you can do if you’re behind on your saving is to realize you need to make a change and then create an action plan. By making an effort to get back on track, you’re already well on your way to achieving your retirement goal.

Tax Scams Continue!

During this period when annual income tax returns are being prepared, there are a number of cons and scams that everyone should be aware of.

Taxpayers, businesses and tax pros need to be alert for a continuing “tricky and clever” surge of fake emails, text messages, websites and social media attempts to steal personal information. Watch out for emails and other scams posing as the IRS, promising a big refund or personally threatening people. Don’t open attachments or click on links in emails

Senior citizens lose an estimated $2.9 billion annually from financial exploitation. Impersonating the IRS was the No. 1 scam targeting seniors in 2018.

Phone scams are another popular scam. Generally this involves aggressive criminals posing as IRS agents to steal money or personal information via phone scams or “vishing” (voice phishing). Beginning early in the filing season, the IRS generally sees an upswing in scam phone calls (often robo-calls) threatening arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other details.

Despite what the IRS terms “a steep drop in tax-related identity theft in recent years,” they continue to caution that scams remains serious. Tax-related ID theft occurs when someone uses a stolen Social Security number or ITIN to file a fraudulent return claiming a refund – and thieves constantly strive to find a scheme that works. Once their ruse begins to fail as taxpayers become aware of their ploys, they change tactics. Business filers should be aware that cybercriminals also file fraudulent 1120S using stolen business identities.

Another common thing scam artists use are flyers, advertisements, phony storefronts or word-of-mouth to attract victims promising overly large refunds – using such tools as fictitious rebates, benefits or tax credits – and they frequently prey on older Americans and low-income taxpayers and those who don’t have a filing requirement.

The best advice we can give is, “tax filer beware”. If it seems to good to be true, it probably is. The IRS will not make any phone calls or email you in order to collect money. Contact a tax professional before proceeding with anything related to income taxes that is out of the ordinary.

Why did I get audited by the IRS?

How does Amazon get away without paying taxes?

Amazon is a company with more than $232 billion in revenue and led by the world’s richest man Jeff Bezos and the company does not pay any tax taxes.

That annoyance boiled over in New York earlier in February when Amazon, which had been offered as much as $3 billion in tax incentives to build a second headquarters in Queens, dropped the plan amid fierce opposition from local politicians and community activists.

Despite having hundreds of billions in revenue, the company only booked about $11.2 billion in profit in 2018, creating a significantly smaller base on which taxes and offsetting credits and deductions are applied. The company says it pays all required federal, state and international taxes.

Corporate tax is based on profits, not revenues, and our profits remain modest, given retail is a highly competitive, low-margin business,” Amazon said in a statement, adding that it’s continuing to invest in its operations.

Amazon gets both the benefits mostly used by technology companies — deductions for paying employees in stock — as well as the write-offs for companies that rely heavily on building physical infrastructure.

The research and development credit — designed to encourage innovation in the U.S. — also amounts to up to a $419 million tax break for Amazon. Add in hundreds of millions of losses the company still has on its books held over from years before it turned a profit, and its U.S. corporate tax liability can be whittled down to zero.

One of the biggest factors changing Amazon’s financial filings isn’t a substantive change at all. A deduction for stock-based compensation, totaling nearly $1.1 billion in 2018, is now more prominently displayed in regulatory filings thanks to an accounting rule change.

So, for those who complain about Amazon not paying any taxes, in summary:

  • Their profits are not high enough yet to offset the billions of losses incurred as a startup which are carried forward.
  • Amazon invested heavily in research and development which receives a tax break but also has great impacts on innovation in the U. S.
  • They paid their employees $1.1 billion in stock-based compensation. This has had the effect of more taxes being paid since the income to the employees was taxed at higher rates than the maximum 21% corporate tax.

In summary, Amazon has been able to eliminate any taxes due to utilizing previous losses, investing heavily in innovation, and paying huge amounts of compensation to employees. The tax laws that were affected were designed to encourage exactly this kind of behavior.

Positive income tax news for owners of Real Estate

Recently announced by IRS

The new tax law now being dealt with in preparation of 2018 tax returns, had several items that needed clarification by the IRS. On January 19, 2019 the final regulations were released.

Among a host of other clarifications and interpretations, the regulations gave a much-welcomed surprise to the owners of rental real estate.

Pass through entities, which are generally LLC’s and S Corporations, that hold rental real estate, are deemed to be a “trade or business” thus qualifying for the 20% deduction of Qualified Business Income (QBI). The QBI deduction was put into law to try to establish some parity with the new 21% tax rate for C Corporations.

Here are some of the (unfortunately complicated) considerations in order to qualify:

• Interest in real property must be held for the production of rents

• Can consist of multiple properties

 • Individual or Relevant Pass-through Entities (RPE) must hold the interest directly or through a disregarded entity

 • Taxpayers must treat each property as a separate enterprise or treat all similar properties as a separate enterprise

• Commercial and residential property can’t be part of the same enterprise

• Cannot change treatment from year-to-year unless there is a significant change in circumstances 

• Real estate used as a residence by the taxpayer does not qualify

• Real estate rented or leased under a triple net lease does not qualify

• Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise

• Taxable years beginning before 2023 – 250 or more hours of rental services are performed with respect to the rental enterprise. This test can be met if a taxpayer has multiple entities and spends at least 250 or more hours on the total group, but logs must be maintained for proof!

• Taxable years beginning after 2022 – 250 or more hours of rental services in any three of the five consecutive taxable years that end with the taxable year -OR- 250 or more hours in each year for an enterprise held for less than five years

• The taxpayer maintains contemporaneous records, time reports, logs, or similar documents, regarding the following: – Hours of all services performed – A description of all services performed –

• Rental services included (for purposes of applying the 250- hour requirement): –

  • Advertising to rent or lease the real estate
  • Negotiating and executing leases
  • Verifying information contained in prospective tenant applications
  • Collection of rent –
  • Daily operation, maintenance and repair of property
  • Negotiating and executing leases
  • Verifying information contained in prospective tenant applications
  • Collection of rent –
  • Daily operation, maintenance and repair of property
  • Purchase of materials
  • Supervision of employees and independent contractors –
  • Rental services can be performed by employees, agents, and/or independent contractors of the owners

Rental services do not include:

  • Financial or investment management activities
  • Procuring property
  • Studying or reviewing financial statements or reports on operations
  • Managing or constructing long-term capital improvements
  • Time spent traveling to and from the real estate

The QBI 20% deduction is an extremely complicated provision of the new tax law, but can result in some considerable tax savings for those who qualify. Note that any qualifying trade or business qualifies. This blog just deals with the clarification that rental real estate is in fact a trade or business under this new law.

The 1040 Gets A New Look

The Internal Revenue Service has released the redesigned Form 1040, along with six related tax schedules, for next tax season after changes under the Tax Cuts and Jobs Act promised to simplify the tax preparation process.

The Republicans promised a postcard size form and the form, although bigger than a postcard, is shorter, but very deceiving. The prior form 1040, used through 2017, had 79 lines on the front and back, pages 1 and 2. What the new form has done is to push 56 of those lines onto 6 separate schedules to the form 1040.

So, for instance, Schedule 1, Additional Income and Adjustments to Income, is for taxpayers who have to report additional income, such as capital gains, unemployment compensation, prize or award money, or gambling winnings, or who have any deductions to claim, such as student loan interest deduction, educator expenses or self-employment taxes.

Schedule 2, Tax, is for those who are subject to the alternative minimum tax or need to make an excess advance premium tax credit repayment.

Schedule 3, Nonrefundable Credits, is for taxpayers who can claim a nonrefundable credit besides the child tax credit or the credit for other dependents, such as the foreign tax credit, education credits or the general business credit.

Schedule 4, Other Taxes, is for taxpayers who owe other taxes, such as self-employment tax, household employment taxes, additional tax on individual retirement accounts or other qualified retirement plans and tax-favored accounts.

Schedule 5, Other Payments and Refundable Credits, is for taxpayers who can claim a refundable credit aside from the Earned Income Tax Credit, the American Opportunity Tax Credit or the Additional Child Tax Credit. They may also have other payments, such as an amount paid with a request for an extension to file, or they want to report excess social security tax withheld.

Schedule 6, Foreign Address and Third Party Designee, is for taxpayers who have a foreign address or a third-party designee other than their paid tax preparer.

The most incredible aspect of this new approach to the complex requirements of form 1040, is the new IRS Section 199A which deals with the possible 20% deduction for “Qualified Business Income” (QBI) for taxpayers who are sole proprietors, or have ownerships in “pass-through” entities such as LLCs, and S Corporations. This extremely complex new deduction is listed on line 9 of the new 1040, and in parentheses is “see instructions”. However, as of January the IRS has not produced the instructions for  QBI or any other schedules or forms of form 1040.

See our blog posting on QBI. Since the regulations regarding this very complex code section have just been released, we will be posting blogs frequently on the most important aspects of this new tax provision.

Please call us if we can be of assistance in explaining and aspects of the new form 1040 and/or the new tax law and how it affects you. Since the IRS has not issued the final forms or instructions, we will have to wait until they do before any tax returns can be filed.

Clarification of deductibility of food and beverage expenses under the new tax law

The IRS on Wednesday issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Notice 2018-76). According to the IRS, the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but do not address the deductibility of expenses for business meals. This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.

Sec. 274(k), which was not amended by the TCJA, does not allow a deduction for the expense of any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished. Sec. 274(n)(1), which was amended by the TCJA, generally provides that the amount allowable as a deduction for any expense for food or beverages cannot exceed 50% of the amount of the expense that otherwise would be allowable.

Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

The IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.

The notice contains three examples illustrating how the IRS intends to interpret these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the game. The examples follow the AICPA’s recommendation that meal expenses be deductible when their costs are separately stated from the cost of the entertainment.

The IRS plans to issue proposed regulations and is requesting comments by Dec. 2 on the notice. It is also asking for comments on:

  • Whether further guidance is needed to clarify the interaction of Sec. 274(a)(1)(A) entertainment expenses and business meal expenses.
  • Whether the definition of entertainment in Regs. Sec. 1.274-2(b)(1)(i) should be retained and, if so, whether it should be revised.
  • Whether the objective test in Regs. Sec. 1.274-2(b)(1)(ii) should be retained and, if so, whether it should be revised.
  • Whether the IRS should provide more examples in the regulations.

Marshall Jones participates in Alpharetta Mayor’s Corporate Challenge

August 23, 2018 the team at Marshall Jones & Co participated in the Alpharetta Mayor’s Corporate Challenge 5k 2018. The Alpharetta Mayor’s Corporate Challenge raises over $100,000 each year to fund service projects in the area and around the world. A large amount of our team resides in Alpharetta and we loved being able to support the community plus improve our health! Charlie even won a medal for placing 2nd in his age group!

Greg Logan and daughter Lorelei participated in the Kids Fun Run together

Greg Logan and Anna Gusalova still smiling after running!

Charlie Jones and his prized medal!

The Most Talked About Provision of the TCJA

For business owners or individuals who have investments in businesses, the most talked about provision of the new tax law is IRC Section 199 (a)

Since the new law gives C corporations a flat rate of 21%, Congress felt the need to give a tax break to other businesses that are commonly known as “pass through entities”. S Corporations, LLC’s, LLP’s, partnerships, etc.

So, Section 199 (a) was created to accommodate this. It’s very complicated. What it basically says is that an entity’s  “Qualified Business Income (QBI)” MAY qualify for a 20% deduction. But there are tons of exceptions, limitations, and complications.

For instance: Specified Service Businesses (doctors, accountants, consultants, and many more) are limited in their QBI calculations to $415,000 (married filing jointly. MFJ). So a doctor who has QBI of $414,999, can get a 20% deduction of that number, or $82,999 deduction from taxable income. If the same doctor had QBI of 415,001, he/she would get no deduction.

The IRS has just (July 2018) released “proposed” regulations which try to clarify many of the complications. For instance. Does the income from a rental property qualify as QBI? The IRS’s answer is “it depends”. Can you aggregate QBI income from multiple entities that you have interests in? “It depends”.

We will be issuing a series of blog articles dealing with the most common of the items that are affecting most individuals and businesses. Please call us if you have any specific questions. There are planning opportunities for 2018 that can have a large effect of those who come under 199 (a).

Breaking news on cryptocurrency

The introduction of a cryptocurrency ETF (Exchange Traded fund) could catalyze an influx of institutional capital and open a new channel for investment in the sector. On June 26, 2018, the SEC received an application from Cboe Futures Exchange to launch the world’s first Bitcoin ETF

One of the first to launch Bitcoin futures, CBOE (Chicago Board Options Exchange) Global Markets has partnered with Van Eyck Investment and SolidX to introduce a Bitcoin ETF to global markets.

On June 26, the SEC received an application by CBOE to offer clients the buying and selling of SolidX shares, which are currently valued at approximately 25 bitcoin. If approved, accredited investors will be able to trade a Bitcoin ETF in the form of baskets of 5 SolidX shares (100 bitcoin) on the CBOE exchange.

This is one of the biggest news items since the advent of the Bitcoin several years ago. What this basically means is that an investor will be able to invest in cryptos by investing in the stock market through ETFs, and not buy cryptos individually.

Note that the most significant item regarding Bitcoin was the invention of the Blockchain, the technology that allows cryptos and many, many other things to be transferred totally secured over the Internet. This is why the large banks, accounting firms, brokerage firms and real estate companies are investing heavily in this technology. For instance, Etherum, the second largest crypto, has nothing at all to do with currency. It’s a platform for companies to build “smart contract” applications.