Tax Planning Strategies for Retirement

You’ve likely put aside money toward retirement to supplement social security and help ensure financial stability when you leave the workforce. Yet, have you thought about how your tax situation can impact your funds? To make the most of your retirement income stream, you’ll need a solid understanding of how all your assets work together and the tax implications of each.

How to Plan for Taxes in Retirement

Develop a successful retirement tax planning strategy by starting with the fundamentals.

Know Your Tax Bracket

Retirement savings generally fall into two categories — tax-deferred and after-tax. Under a tax-deferred account, such as a traditional IRA or employer-sponsored plan, you’ll pay taxes at your current bracket once you begin withdrawals. After-tax accounts, like Roth IRAs and regular savings, represent dollars you’ve already paid taxes on.

Younger workers may find themselves in lower brackets, like 10 or 12%, before transitioning into the 22 or 24% brackets as their earnings increase. High-wage earners can pay as much as 32 to 37% in taxes. 

Each of these scenarios calls for different retirement tax strategies, so it’s best to seek expert advice for your unique situation.

Diversify Your Account Types

For many, future tax brackets may differ from current ones, calling for diversifying among different account types for maximum withdrawal flexibility.

With a mix of pre- and post-tax assets, you and your tax advisor can create a plan with more control over your taxable income in retirement.

Know the Social Security Rules

While social security can provide an income stream as early as age 62, that may not be the best time for you to start collecting it. Opting for an earlier election can permanently reduce your expected monthly benefit. 

Social security benefits may be subject to taxation for those with significant income or plans to work after reaching full retirement age.

Marital status, such as divorce and widowhood, can also affect the ideal timing, so it’s best to consult with a financial professional for advice specific to your situation.

Use Your Retirement Assets Wisely

Under the current IRS rules, you must begin withdrawing traditional tax-deferred assets once you reach age 72. The amount you take — called your required minimum distribution (RMD) — changes each year and is a portion of the overall value of your IRA. 

Roth IRAs and Roth-based employer-sponsored plans have no RMDs, and withdrawals are tax-free once you meet the eligibility criteria.

Work with a retirement tax professional to develop a withdrawal strategy combining assets from both account types to help keep your income in the lower tax brackets.

Consider a Roth Conversion

With their tax-free withdrawals and no RMDs, Roth IRAs can be a powerful way to maximize savings and add diversity to a mostly pre-tax retirement portfolio. Many traditional IRA owners can convert all or a portion of their tax-deferred savings into a Roth account and pay taxes on the value at the same rate as ordinary income.

Consult with a tax-planning specialist to ensure a conversion doesn’t unexpectedly push you into a higher tax bracket.

Get Retirement Tax Advice You Can Trust

Marshall Jones has served tax planning and preparation needs in Atlanta for over 30 years, operating with a dedication to service, quality and integrity. We offer a full suite of services for individuals and companies across numerous industries.

Contact us online for more information or to request an appointment.

Retirement tax advice

Tax Tips For 2019 Year-End Tax Planning in Georgia

To ensure that you don’t have any surprises when filing your taxes it is important to meet with your Atlanta CPA when tax planning for your 2019 taxes. One of the most important reasons is to gain a better understanding of the new tax law.

Tax Tip #1: Ensure You are Continually Recalculating your Estimated Payments Throughout the Year

The tax brackets and laws around AMT have changed. It is important to make annualized calculations throughout the year to determine your quarterly payments. The last payment is due on January 15, 2020 and it is a very important deadline to avoid any underpayment penalties. If your 2018 adjusted gross income exceeded $150,000 ($75,000 for married filing separately), your 2019 estimated tax payments or withholding must equal at least 110% of your prior year tax liability, instead of the 100% required for other taxpayers. 

Fringe benefits are also table such as imputed income from group term life insurance or the use of your employer’s automobile for personal purposes. This could be additional compensation on your total tax liability and is your responsibility, not your employers.

Plan these appropriately as an overpayment is an interest-free loan to the government and while you will get the money back, the interim time could be used to make the money work for you. 

Tax Tip #2: Consider The Implications and Strategies for Your Passive Income

The laws around net investment income tax (NIIT) have also changed. Net investment tax includes interest, dividends, annuities, royalties, rent, and income from a trade or business that is considered passive activities. This is important to discuss with your CPA during your 2019 year-end tax planning as this additional tax could have an effect on your estimated payments. 

You may also want to consider grouping your trade or businesses if you own a business through an S-corporation or partnership. If you are thinking about selling your passive assets be sure to discuss the use of certain suspended losses which can reduce other income or gain under the general income rule.

Tax Tip #3: When Tax Planning for Individuals, Take Advantage of State Tax Credits

The 2017 tax law imposed a $10,000 limit on the deductibility of state and local income taxes. Many states created tax credit programs to provide you with federal charitable contribution deductions while simultaneously providing a tax credit against state income taxes. In June 2019, the IRS released Notice 2019-12 which provides a safe harbor to individuals who itemize deductions to treat, in certain circumstances, payments that are or will be disallowed as charitable contribution deductions under the final regulations laws state or local taxes for federal income tax purposes. It’s important to keep records to provide the amount of the contributions you make during the year. 

Tax Tip #4: Family Matters in Year-End Tax Planning

Taking advantage of the “kiddie tax” was always a very popular tax planning strategy. However, these rules changed beginning in 2018. Kiddie tax was widely used to transfer property to dependents in order to have the income taxes at a much lower rate. As of 2018, the law subjects the child to be taxed at the trust income rates (which are very similar to the individual tax rates). There are still positives to taking advantage of this, including defer income or possibly to have the child file their own return. It may also be feasible to transfer income-producing property to your children when they are no longer subject to kiddie tax rules since they will still likely have a lower tax rate.

Alimony rules have also hanged. If you are paying alimony, carefully review your situation with your CPA to ensure that you achieve the most desirable tax consequences. It may make sense to modify the agreements to recharacterize payments. Payment of alimony will be more expensive because payments will be made from after-tax rather than pre-tax dollars.

2020 Tax Planning? Marshall Jones’ Certified Public Accountants and Advisors can Help

Overall, having a trusted relationship with your tax advisor will help you to deal with these situations ahead of time. There are a variety of strategies that can be personally tailored to your situation. The Certified Public Accountants and Advisors at Marshall Jones are dedicated Tax professionals and can help you understand and plan for financial success in 2020. Contact Marshall Jones today using our online form or call us at (404) 321-2001.

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.

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.

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).

Tax Reform: Effects on Financial Planning

The recently passed tax reform bill has received a considerable amount of press, and for good reason. As the most comprehensive tax reform in over 30 years, the new tax laws will impact every individual & business in America. Its impact also extends to the way we approach financial planning for our clients.

Estate Planning

The most significant change in regards to estate planning is the doubling of the Estate & Gift Tax Exemption. Beginning in 2018, this means that individuals will be able to claim exemptions up to $11.2 million, and $22.4 million for couples. For many high net worth individuals, this could simplify estate planning, as only amounts over the exemption limits will be subject to Federal tax. This provision is set to expire at the end of 2025, at which time the exemption amounts will revert to their pre-2018 levels, with inflation adjustments.

Charitable Giving

For those who are charitably inclined, the doubling of the standard deduction means that giving levels may need to be increased in order to receive a tax benefit. For a married couple, if itemized deductions are under the new standard deduction amount of $24,000, there will be no tax benefit to itemizing. For individuals, this limit will be $12,000. In order to maximize the tax benefits, donors may want to consider the use of a Donor Advised Fund. A Donor Advised Fund allows taxpayers to contribute an amount of their choosing to the fund and take a tax deduction for the full amount in the year the contribution is made. They may then choose to direct gifts from the Donor Advised Fund to specific charities over an extended time frame.

The annual gift tax exclusion has also been increased to $15,000 per person for 2018, meaning that couples can gift up to $30,000 per year without incurring any tax, and without using any of their lifetime exemption amount. Single taxpayers can gift up to $15,000 per person.

IRA Recharacterizations

Under the new tax bill, the ability to recharacterize a Roth conversion is eliminated. Previously, taxpayers had up until the tax filing deadline plus extensions to recharacterize any amount converted from a Traditional IRA to a Roth IRA, if the account had fallen in value, or if the amount converted results in a higher tax than originally anticipated. Under the new laws, this will no longer be allowed. This is one of the few permanent changes within the bill. Note that this change only applies to the recharacterization of Roth conversions; contributions to either Traditional IRAs or Roth IRAs are still able to be recharacterized.

For planning purposes, this means that individuals wishing to convert need to be certain of their ability and willingness to pay the taxes. It will also likely lead to more conservative recommendations regarding the amount to convert in a given year. As always, a potential Roth conversion should be discussed with a tax professional prior to implementing.

Distributions from 529 Plans

Distributions from 529 Plans of up to $10,000 per year, per individual used for the cost of K-12 expenses will now be considered qualified and therefore will be non-taxable. Funds may be used for students enrolled in public, private or religious school. Post-secondary education expenses remain qualified.

While many of the changes within the tax reform bill are temporary and will revert back after 2025, some changes are permanent, including the increase in standard deduction, the elimination of the personal exemptions, the elimination of the ability to recharacterize Roth IRA conversions, and the changes regarding the use of 529 Plan funds.

Effect of new taw law on economy.

New tax law having positive effect on economy

According to the Wall Street Journal, July 13, 2018. The effect of the new tax law can be seen in June government statistics. According to the U. S. Treasury, tax revenues fell 7% in June compared to June 2017. Corporations and Individuals are lowering their tax payments and withholdings due to the lower rates. Even though revenues fell, the budget deficit narrowed to $74.86 billion from June 2017 because of a 9% drop in government outlays.