Category Archives: Values
What it means to file a federal tax return extension
Posted On: 3-20-2017 | Posted By: WK Staff
As the April 18 individual tax filing deadline approaches, you might be wondering: Should I file an extension? There are advantages to applying for an extension of time to file a federal tax return with the IRS, but it might not be the right thing to do in every case. Read on to learn about the factors you should take into consideration when determining whether an extension is right for you.
When you file for an extension, you are asking the IRS for an additional six months to file your tax return. For the 2016 tax year (returns that are filed in 2017), an extension will extend the filing deadline for personal tax returns from April 18 to October 16. Businesses can also request an extension, which pushes the deadline to September 15.
Key benefits of filing an extension
- Six extra months to finish up your tax return. Having extra time to finish your return is often necessary, especially if you are still waiting for tax documents to arrive in the mail or you need additional time to organize your tax deductions. Extensions also provide extra time to file your gift tax return.
- Reduce late penalties. There are two basic penalties the IRS typically imposes: a late filing penalty of 5 percent per month on any tax due, plus a late payment penalty of half a percent per month. If you file an extension and then file by the extended deadline of October 17, you’ll avoid the 5 percent per month late filing penalty. If you file after October 17, the late filing penalty will begin from October 17, which creates a deferral of this penalty.
- Preserve your tax refunds if you file after the extended deadline. Some people end up filing several years late, and there’s a three-year deadline for receiving a refund check from the IRS. This three-year statute of limitations begins on the original filing deadline (April 18, 2016, for the year 2015). With an extension, the refund statute of limitations is extended by six months, which can preserve the ability of taxpayers to receive their federal tax refund even if they get behind in submitting their tax return.
- Provide extra time for self-employed persons to fund a retirement plan. Self-employed persons may want to fund a SEP-IRA, solo 401(k) or SIMPLE-IRA plan for themselves. Filing an extension provides these taxpayers with an extra six months to fund their retirement plan. Note: solo 401(k) and SIMPLE plans need to be set up during the tax year, but funding the plan can occur as late as the extended deadline for the previous tax year. With a SEP-IRA, however, entrepreneurs can open and fund a SEP-IRA for the previous year by the extended deadline if they filed an extension.
- Additional time to recharacterize an IRA contribution. If your IRA is funded by the April deadline, you can change the nature of the IRA by the October extended deadline. Essentially, you can turn your traditional IRA contribution into a Roth IRA, or a Roth IRA contribution into a traditional IRA contribution. This is helpful if you’re not sure what type of IRA you are eligible for. You can even use this provision to recharacterize a Roth conversion back to a traditional IRA.
- Provide additional time to make various elections on your tax return. There are a wide variety of decisions that can be made on the tax return, such as deciding whether to depreciate equipment or take a Section 179 deduction, and whether to carry back or forward any business losses. Those decisions must be made when the tax return is filed. Filing an extension gives you extra time to make those decisions.
Is There a Downside to Filing an Extension?
An extension might not be right for every situation, and not everyone is eligible for file an extension. Consider these issues before requesting additional time for file.
- Extra time to file doesn’t mean extra time to pay. An extension will give you extra time to file your return, but any tax is still due by the original deadline; because you estimate the amount due, you can unknowingly pay too little, and still owe a penalty on the remaining amount due. Estimates to avoid underpayment penalties for the succeeding year are based upon the prior year, making it difficult to prepare accurate estimate amounts for the first three quarters of the succeeding year. An extension can help reduce penalties, but any outstanding balance will still be charged a late payment penalty (0.5 percent per month) and interest (right now at 3 percent annually). An extension can help reduce your penalties if you cannot afford to pay in full by the deadline.
- Some people aren’t eligible for extensions. Taxpayers who were approved for an offer in compromise[KD1] must file by the April deadline during their five-year probationary period. An offer in compromise is a request, filed by a tax payer who is unable to pay a prior balance due, and who can prove financial insolvency or extenuating circumstances, to reduce the amount of interest, penalty, and tax due on a prior period. These requests must be submitted with adequate documentation to substantiate the request, and then must be accepted by the Internal Revenue Service to become valid. If you don’t file by the April deadline, the IRS can revoke your offer in compromise and reinstate the original amount you owed.
- An extension won’t give you extra time to fund an IRA. Contributions to a Traditional IRA and/or Roth IRA are due by the original April deadline.
- An extension won’t give married couples extra time to switch from joint to separate returns. Married taxpayers who filed jointly by the April deadline can, if they wish, switch to the married-filing-separately status by April 18 by amending their tax return.
- An extension will also extend the statute of limitations by six months. This means, for the tax year 2016, instead of the statute of limitations ending on April 15, 2020, it would end on October 15, 2020. This extends the amount of time the IRS can audit and assess taxes on items that may have been mistakenly reported.
If you would like to discuss whether filing an extension is right for you and how it could affect you, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.
OTHER STORIES FOR YOU
CONSIDER USING HOME EQUITY LOANS TO CONVERT INTEREST PAID INTO A DEDUCTIBLE EXPENSE. Many individuals and families make significant payments on personal loans each year, and sadly, the interest payments made on these personal loans are not deductible. There might, however, be a way for you to convert this debt from a personal loan to a home equity loan so that the interest you pay becomes eligible for a deduction.
CLAIMING A PARENT OR GRANDPARENT AS A DEPENDENT. If you provide care for a parent or grandparent, you might be able to claim them as a dependent on your personal income tax return and be able to take a dependency exemption. There are three tests that must be met in order to qualify for the dependency exemption: the member of household or relationship test, the gross income test, and the support test. All three of these tests must be met in order to claim the exemption.
WOULD YOU LIKE TO PUT MORE MONEY AWAY FOR RETIREMENT? As we near the end of the year, it is a good time to start thinking towards the future and your ultimate goal…retirement! If you are ready to start saving or to increase the amount you are currently contributing, now is a great time to consider your options.
Tax implications of required minimum distributions from retirement accounts
Posted On: 2-7-2017 | Posted By: WK Staff
Individual retirement accounts (IRAs) and defined contribution plans can be great tools to help you save for retirement. Whether you have an IRA, a SEP, a 401(k), or some other tax-deferred retirement plan, you may not realize that you are required to take annual distributions from your retirement account once you reach a certain age.
These distributions, which the Internal Revenue Service refers to as “required minimum distributions,” vary in amount based on the value of your account and your age. In this article, we will discuss the tax implications of required minimum distributions and offer you strategies you can implement to use them to your advantage.
Required minimum distributions – basic overview
Generally, as an account owner, you are required to begin taking annual minimum distributions from your retirement accounts by April 1 of the year following the year you turn 70 ½. Under some defined contribution plans like 401(k)s and 403(b)s, you may be able to push this requirement back by a few years if you continue to work full time. The amount of the distribution you are required to take is determined annually using a table provided by the IRS. The larger your account balance, the larger distribution you are required to take.
If you have more than one IRA, you must calculate your required minimum distribution for each account separately, but you have the freedom to withdraw the total amount from whichever account(s) you choose. 401(k)s are stricter and require you to take distributions from each account separately. Your plan administrator can help calculate this amount for you.
You are, of course, free to withdraw more than the calculated minimum distribution if you so choose. These excess withdrawals will not count toward future years’ required distributions; they will simply be considered excess and voluntary withdrawals.
Minimum distributions are required for tax-deferred plans like traditional IRAs, 401(k)s, 403(b)s, SEPs, and SIMPLEs. Roth retirement plans are exempt from required minimum distributions until the date of death of the account’s original owner.
Tax consequences of required minimum distributions
Required minimum distributions have the same income tax consequences as any other withdrawal that you make from your account once you reach retirement age. For tax-deferred plans like traditional IRAs and many 401(k)s, earnings and pre-tax contributions are taxed at regular income tax rates when you withdraw the money. Owners and secondary beneficiaries of Roth retirement accounts can generally take distributions completely tax-free.
If you do not withdraw the required amount in a given year, a steep penalty of 50% of what you should have withdrawn will be assessed.
Tax planning strategies using required minimum distributions
Begin taking withdrawals before you are required to
Taking smaller distributions when you reach age 59 ½ and throughout your 60s would decrease the overall value of your retirement account so that when you turn 70 ½, your required distributions would be smaller than they would otherwise be. With appropriate planning, this strategy could keep you in a lower tax bracket throughout retirement and save you income taxes over time. If you are still working at the employer that sponsors the account you are planning to withdraw from, check your plan administrator’s in-service distribution rules.
Change your withdrawal frequency
You can elect to withdraw your required minimum distribution at any time, in any amount, in any frequency throughout the calendar year as long as you withdraw the full amount by December 31. (Remember that the first year you are required to take a distribution, your withdrawal deadline is extended to April 1 of the next year.) This gives you the freedom to match your withdrawal frequency with expenses you expect to incur throughout the year.
Reinvest the money
If you do not need the money from the required distribution to cover your living expenses, you are free to invest your withdrawal into a non-retirement account. Yes, you will still pay the tax on the withdrawals (if required), but you can turn that mandatory distribution back into money-earning potential. For example, purchasing municipal bonds would allow any future income earned from those contributions to grow free from federal income tax.
Convert to a Roth IRA
To convert your traditional IRA into a Roth IRA, you will need to pay the tax upfront on the converted balance, but you would be exempt from the minimum distribution requirement going forward. Additionally, all future withdrawals will be tax-free provided you meet the 5-year rule (talk to your advisor for more details). If you do not need the required minimum distributions to cover your living expenses, converting your traditional IRA to a ROTH IRA has potential to be a money-saving solution for your future heirs. After the conversion, all earnings will be free from tax for both you and your heirs, and neither you nor your heirs will be required to pay taxes when you or they pull the money out.
Turn your required distribution into a tax-free charitable contribution
Qualified charitable distributions (QCDs) are a way to contribute funds from your retirement account without any tax consequences to you. To be eligible for the tax savings allowed by a QCD, you must be 70 ½, and you must send the funds directly from your retirement account to the qualified charity. These QCDs are limited to $100,000 annually, but they count toward your required distributions for that year. So, for example: if your required minimum distribution were $20,000 in the current year and you made a $15,000 QCD, only $5,000 of the required minimum distribution would be taxed as income to you. You do not get an itemized deduction for the contribution, but reducing your income provides a better benefit than taking the itemized deduction. There is some reporting required on your federal tax return when you make a QCD, but many people use this tax-saving strategy to make contributions to charities that they would have otherwise made at death.
The ideal tax-planning strategy looks different for each taxpayer. If you would like to discuss these strategies and create an individualized retirement plan to fit your and your family’s needs, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.
OTHER STORIES FOR YOU
TO CONVERT OR NOT TO CONVERT YOUR IRA? Converting a traditional Individual Retirement Account to a Roth IRA might benefit certain taxpayers. Is a conversion right for you? Below, we help you understand the decision factors and implications involved.
WOULD YOU LIKE TO PUT MORE MONEY AWAY FOR RETIREMENT? As we near the end of the year, it is a good time to start thinking towards the future and your ultimate goal…retirement! If you are ready to start saving or to increase the amount you are currently contributing, now is a great time to consider your options.
WHAT HAPPENS WHEN YOU HAVE LOSSES IN AN IRA? It’s certainly commonplace that investments lose value from time to time. What does that mean when the investment is in your Individual Retirement Account?
How should I fill out my W-4?
Posted On: 2-7-2017 | Posted By: WK Staff
When starting a new job, it’s very important that you accurately fill out the Form W-4 provided by your employer and keep it updated as you experience big life changes, such as a change in marital status or a change of address. Knowing how to correctly fill out your W-4 can help you avoid owing money to the IRS or paying more taxes than you need to.
The Personal Allowances Worksheet helps you obtain the number of allowances that will be placed on Line 5 of the Form W-4. This form is retained by your employer and your payroll provider, and the IRS may request to review these allowances in a few rare circumstances. The fewer allowances that you claim, the more taxes are withheld from each paycheck; the more allowances you claim, the fewer taxes are withheld from each paycheck.
If you are single and you do not claim any dependents, the worksheet recommends that you claim “1” allowance for yourself. You do, however, have the option to claim “0,” and many people do. If you claim zero allowances, more taxes will be taken out of each paycheck. Taxpayers with dependents will most likely write a number greater than “1” depending on how many dependents they have. The exemptions that a taxpayer selects may change based on the number of allowances his or her spouse claims, as well.
Being single or married can also affect how much is withheld from your paychecks. Selecting “single” will result in withholding more than if you were to select “married”.
Line 6 on a W-4 is to designate any additional amount of money that you want taken from each paycheck. Most employees whose only source of income is wages reported on a W-2 do not need to utilize this line. One circumstance where this would be necessary is if you expect to owe a lot of money to the IRS because of some other revenue stream you have outside of your W-2 income.
It is also important to fill out the state’s Form W-4 in order to have the correct amount withheld for the state income tax. Missouri is one of a number of states that require a separate Form W-4 and is just as important to fill out as the federal Form W-4. Click here for a full list of which states accept federal Forms W-4 or if they have their own state forms.
It is very important that the W-4 be filled out correctly in order to ensure that you are paying the correct amount of taxes to avoid any sort of surprises at the end of the tax season. Forms W-4 can be changed anytime throughout the year, not just when you start a new job or waiting until a new year and there is no limit on how often they can be changed.
If you have any questions about how to correctly fill out a Form W-4, contact your WK advisor at (573) 442-6171 or (573) 635-6196.
OTHER STORIES FOR YOU
WOULD YOU LIKE TO PUT MORE MONEY AWAY FOR RETIREMENT? As we near the end of the year, it is a good time to start thinking towards the future and your ultimate goal…retirement! If you are ready to start saving or to increase the amount you are currently contributing, now is a great time to consider your options.
REPORTING PERSONAL USE OF EMPLOYER-PROVIDER VEHICLES. Does your organization provide vehicles for employees to use for business? Does the employee also drive the vehicle for personal use? If so, you’ve got an additional administrative issue to contend with each new year: generally, the value of an employer-provided vehicle is a fringe benefit which might need to be included as employee compensation on a Form W-2.
WHAT HAPPENS WHEN YOU HAVE LOSSES IN AN IRA? It’s certainly commonplace that investments lose value from time to time. What does that mean when the investment is in your Individual Retirement Account?
What happens when you have losses in an IRA?
Posted On: 9-29-2016 | Posted By: WK Staff
It’s certainly commonplace that investments lose value from time to time. What does that mean when the investment is in your Individual Retirement Account?
Most IRA account holders cannot benefit from deducting losses if their IRA loses value. The benefit of IRA accounts is that they are long-term investments providing for tax deferred growth. IRAs are structured so that any tax impact is deferred until money is actually withdrawn from the IRA in a distribution from the account. (Traditional vs Roth IRA: which is right for you?)
It’s almost always better to do your asset re-allocation inside the IRA plans rather than to take distributions and have the money outside of the IRA plans. Traditional IRA account holders who only put in tax deductible contributions can never recognize a loss because tax was never paid on the contributions and therefore, they have no tax basis to deduct.
Traditional IRA account holders who made nondeductible contributions and Roth IRA holders will have basis from the nondeductible contributions made over the years but would only be able to claim a loss when all IRAs of the same type are cashed out. In other words, you’d have to cash out all your traditional IRAs or all your Roth IRAs. Keep in mind you cannot cash out only your nondeductible IRAs, as all traditional IRA accounts would have to be liquidated to obtain the loss deduction.
Losses in Roth IRA accounts work a little better than traditional IRA accounts. If the values of your Roth IRAs have dropped below your total contributions, then the entire value of the accounts can be cashed out and you might be able to take a deduction for the loss without the distribution being subject to the early distribution penalty.
If the IRA account holder’s standard deduction amount is greater than the combined itemized deductions, the account holder will get no benefit from the loss. Even if the combined itemized deductions exceed the annual standard deduction amount in the year of the distribution, the tax benefit is mitigated since those losses are treated as miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation reported on Schedule A, rather than a capital loss. Unfortunately miscellaneous itemized deductions can also be adjusted out by the alternative minimum tax, which further erodes the tax benefit of claiming the loss.
If the Roth IRAs have lost value but their combined value is not below the total amount of contributions made into the accounts, then there is no loss for tax reporting purposes. At this point, it makes more sense to hold on to the accounts rather than liquidate the accounts and maintain the tax-deferral on the gains you already have in the Roth IRA accounts.
A traditional IRA can be converted to a Roth by including the amount of the rollover as part of gross income in the year of conversion, less any basis in the traditional IRA due to nondeductible contributions. If an individual converts a traditional IRA to a Roth which quickly loses value, it may be of benefit for the individual to recharacterize the conversion if you are still within the permitted time period and not pay tax on the conversion. You could then reconvert in a subsequent year if the desired investment value recovers.
Be sure to check with your WK advisor before you cash out IRA accounts so you understand the tax consequences. Contact us at (573) 442-6171 or (573) 635-6196 and we’ll be glad to help.
OTHER STORIES FOR YOU
TRADITIONAL VS. ROTH IRAS — WHICH IS BEST FOR YOU? Choice is a good thing, but informed choice is even better! When it comes to selecting a retirement savings vehicle, you can choose between traditional and Roth Individual Retirement Accounts (IRAs), which have unique advantages and tax consequences. To get the most benefit from your savings, carefully evaluate the differences between traditional and Roth IRAs, consider your personal circumstances, and choose the IRA that works best for you.
TAX PLANNING FOR HIGH-INCOME EARNERS. Between now and the end of the 2016 election cycle, one theme we will likely hear from all candidates is the need for tax-code simplification. The reason is simple: tax law is complex, and that complexity is magnified for those individuals with high incomes.
HOW THE AMT WORKS. Have you been required to pay the Alternative Minimum Tax, or AMT, in the past? It’s a tool used to ensure taxpayers with higher incomes pay at least a minimum amount of income tax. If you’ve been subject to the AMT in the past, or might be in the future, read on for a primer on the subject.
FAFSA changes you’ll welcome
Posted On: 3-10-2016 | Posted By: WK Staff
Have you ever struggled to complete and submit timely the Free Application for Federal Student Aid (FAFSA) for yourself or your college-bound child? If so, relief is at hand. Last year, the U.S. Department of Education announced changes to the FAFSA process intended to align the timing with college application cycles and provide more time to complete the forms with information more readily available.
While the FAFSA process currently opens on January 1 and closes June 30 for the school year beginning the following fall, the process will now open on October 1 of the year preceding the school year. So, beginning October 1, 2016, students and families can complete the application for the 2017-2018 school year. The FAFSA process will continue to close on June 30.
The second major change is that students can use income information from an earlier tax year to complete the FAFSA. Beginning with the FAFSA process opening this fall, students and their families can use 2015 income information instead of 2016 income. This will avoid a common practice of students completing the FAFSA with estimated income in an effort to meet state financial aid deadlines, which often fall in March.
Below is a chart provided by the Department of Education designed to help illustrate the changes.
You should be aware that the Department of Education made another change, one that is probably not as welcome: the “asset protection allowance” (APA) is now lower. The APA allows families to save without having that amount count against them in the determination of how much financial aid the student can receive. The lower the APA, the more income the family is deemed to have to spend on tuition and other expenses, and the less financial aid the student will likely receive. The APA for the 2016 – 2017 school year is published in the Federal Register.
Campus visits, college applications and anticipating a new season of life can be exciting and a little tense, but applying for financial aid has been downright stressful for some. With these new changes to the FAFSA process, students and their families should see some deadline-related relief as they determine how to fund higher education expenses.
OTHER STORIES FOR YOU
BACK-TO-CAMPUS TAX PLANNING TIPS. As your college-aged children head back to campus, it’s a good time to think about some of the tax planning opportunities related to education expenses. There are plenty of tax incentives available to help lessen the burden of paying for college, and we want to make sure you are aware of them and can take advantage of any that apply to your situation.
TAX PLANNING FOR HIGH NET WORTH INDIVIDUALS: CHARITABLE GIVING. In our previous article on tax planning for high net worth individuals, we discussed strategies for reducing taxable income. One such strategy deserves special focus – charitable giving.
K-1 INSTRUCTIONS. Find K-1 instructions for S corporations, partnerships and fiduciaries here.
Social Security strategy deadline approaches
Posted On: 3-8-2016 | Posted By: WK Staff
The Bipartisan Budget Act of 2015 made drastic changes to Social Security claiming strategies used by married couples to increase their lifetime benefits. The Act, which was signed into law on November 2, 2015, effectively shuts down the “file and suspend” and “restricted application” strategies that taxpayers have used in the past. However, the law did allow for a small window of opportunity to take advantage of these strategies before they are completely eliminated. Requests to file and suspend must be made on or before April 29, 2016.
File and Suspend
Retirement benefits will be permanently increased by the use of delayed retirement credits (DRCs) if the individual delays receiving benefits until after reaching full retirement age (FRA), which is age 66 for workers born between 1943 and 1954. DRCs are earned for each month an individual delays receiving Social Security benefits beyond the full retirement age up to a maximum of four years. Each year an individual delays receiving payments, his or her benefit grows by 8%. Therefore, for workers with an FRA of 66, Social Security benefits are maximized upon reaching age 70.
The file-and-suspend election allows an individual to file for benefits but suspend the receipt of those benefits until a later date. The individual continues to earn delayed retirement credits until he or she actually starts receiving benefits. The file-and-suspend strategy has two main benefits over simply waiting to claim benefits at age 70.
- Spousal Benefit. By filing and suspending, a worker makes his or her dependents (usually a spouse or child) eligible to receive benefits to which they are entitled. A dependent cannot receive benefits on the worker’s record until after the worker has filed for their own benefits. By electing to file and suspend, the retiree allows their spouse to take advantage of the restricted application.
- Lump Sum Payout. If at a later date the retiree regrets the decision to suspend his benefits (e.g. his life expectancy is reduced), he can receive a lump sum benefit retroactively to the month in which he filed and suspended benefits.
See our previous article for additional details on the use of the file-and-suspend strategy.
Window of Opportunity
The Bipartisan Budget Act of 2015 allowed for a six-month window in which an individual could still file and suspend benefits to take advantage of the two benefits outlined above. Note, however, that the restricted application is only available to individuals who turned age 62 before January 1, 2016. The Social Security Administration issued guidance on February 18 clarifying the effective end date for the file-and-suspend strategy. Though previously some Social Security experts had anticipated the deadline to be April 30, 2016, requests to file and suspend must be made on or before April 29, 2016.
Contact your WK advisor at (573) 442-6171 or (573) 635-6196 to discuss whether the file-and-suspend strategy makes sense for you.
OTHER STORIES FOR YOU
FEDERAL ACT ELIMINATES SOME SOCIAL SECURITY CLAIMING STRATEGIES. The Bipartisan Budget Act of 2015, signed by President Obama on November 2, 2015, eliminated a number of Social Security claiming strategies. The bill refers to these claiming strategies as “unintended loopholes” that were being exploited by some individuals and families to significantly increase their lifetime benefits.
HOW TO DEDUCT BUSINESS MILES. Do you take advantage of mileage deductions to reduce your taxable income? Which miles you deduct depends largely on whether you can claim a home office deduction or not. Read on to learn how to properly deduct mileage when you use your personal vehicle for business purposes.
RECORD RETENTION SCHEDULE. Do you ever wonder how long you should keep old financial records?
How to deduct business miles
Posted On: 1-28-2016 | Posted By: WK Staff
Do you take advantage of mileage deductions to reduce your taxable income? Which miles you deduct depends largely on whether you can claim a home office deduction or not. Read on to learn how to properly deduct mileage when you use your personal vehicle for business purposes.
Standard mileage for employees
If you use your vehicle for business purposes and your employer does not reimburse you for mileage, you are allowed to take a deduction for those miles driven while on business. Examples include:
- travel from one office or worksite to a second office or worksite;
- travel to and from the airport for a business trip;
- business-related errands such as trips to the bank, office supply store, or post office;
- miles driven from your office to meet with clients for business; and
- travel from home to a temporary work location that lasts less than one year.
Commuting is not eligible for a mileage deduction. Commuting is considered travel from home to a principal place of business or another place where you have worked or expect to work for more than a year. So, your daily trip from home to work is not deductible.
In 2016, the optional standard mileage rate is 54 cents per business mile driven. Read our related article on the various 2016 mileage rates here.
Business miles when claiming home office deduction
When your residence is used as your principal place of business and you meet the qualifications for the home office deduction, miles driven from home to other work locations are effectively converted from nondeductible commuting miles to deductible business miles. There are a few items that should be considered when determining the deduction.
The first item to consider is whether or not the residence is exclusively used on a regular basis as a principal place of business. One way this requirement can be met is if the residence is used for the administrative or management activities of your business, but only if there is no other fixed location where you conduct substantial administrative or management activities of that business. Please note that employees (as opposed to self-employed individuals) wishing to meet this test have to also demonstrate that the exclusive use is for the convenience of the employer. Your WK advisor can discuss this requirement with you in more detail.
The second item of importance when determining the deductibility of transportation expenses is adherence to the strict substantiation requirements. Generally, to satisfy these requirements, a log should be kept showing personal versus business mileage and personal versus business expenses, including the amount and date of each expenditure.
If the first and second items discussed above are met, the costs of traveling between the home office and other work locations in the same trade or business, regardless of whether the work location is regular or temporary, and regardless of distance, are deductible transportation expenses, as opposed to nondeductible commuting costs. The deductibility of these transportation expenses can be valuable, as they aren’t subject to the amount limitations imposed on home office expenses.
For guidance in deducting business miles you drive this year, contact your WK advisor at (573) 442-6171 or (573) 6196.
OTHER STORIES FOR YOU
IRS LOWERS STANDARD MILEAGE RATE FOR 2016. The optional standard mileage rate used to calculate the cost of operating a vehicle for business purposes will be set at 54 cents per business mile driven on January 1, 2016. This is a decrease from 57.5 cents per mile in 2015.
HOW RETIREMENT AGE IMPACTS SOCIAL SECURITY AND OTHER BENEFITS. As we age, most birthdays are just about getting another year older. But as we reach retirement, birthdays take on new meaning: various ages signify new options available to collect Social Security benefits and other retirement income.
RECORD RETENTION SCHEDULE. Do you ever wonder how long you should keep old financial records?
Tax planning for high net worth individuals: Charitable giving
Posted On: 1-7-2016 | Posted By: WK Staff
In our previous article on tax planning for high net worth individuals, we discussed strategies for reducing taxable income. One such strategy deserves special focus – charitable giving.
Before we begin, the discussion of charitable giving as a tax-planning strategy is in no way intended to imply that charitable giving is strictly a tax-savings vehicle. Charitable giving is a way for individuals to express their values, which is ultimately more important to them than any tax savings.
However, one cannot ignore the tax impact of charitable giving. Understanding the tax implications of charitable giving allows an individual to more accurately assess the true “cost” of making such a contribution. For those looking for ways to give more, this is an important consideration.
First, the type of property donated has an impact on the tax consequences of the donation. If an individual owns appreciated stock, and has held that stock for more than one year, a gift of this stock would result in two benefits to the donor. First, the full value of the stock is allowed as a charitable deduction. In addition, the donor does not have to recognize the appreciation on the stock as income. Thus, the built-in capital gain is not taxed, but the donor receives the full fair market value of the stock as a deduction.
One downside for this type of deduction relates to income limitations. Generally, an individual’s donations for the year are deductible up to 50% of that individual’s adjusted gross income. In the case of non-cash donations, such as stock donations, that limitation is 30%.
A second consideration is how to make the contribution. For example, an individual may desire to make a very large contribution in one year (for example, in a year in which an individual has a large income event) but does not necessarily know how he or she wants to distribute those donations among various charities. One option would be to utilize a donor-advised fund. A donation to a donor-advised fund is deductible in the year of the contribution, but the funds can be distributed to the charity (or charities) in subsequent years. The donor is allowed to advise on where the contributions eventually go, but he or she does have to give up control of the grant-making process.
Similarly, for those individuals who desire more control, or wish to leave behind a legacy, consideration can be given to the establishment of a private foundation. A private foundation generally has a mission statement to convey the donor’s charitable vision. The private foundation will have a board of directors or trustees, including a combination of the donor, donor’s family, advisors, and independent parties.
As with a donor-advised fund, contributions to a private foundation are deductible when made to the foundation, even though the grants are made in future years. Cash donations to a private foundation are limited to 30% of adjusted gross income (as opposed to the usual 50% limitation) and non-cash donations are deductible up to 20% of adjusted gross income (as opposed to the usual 30% limitation). Private foundations entail more administration, regulation, and disclosure than a donor-advised fund, so it is crucial that an individual works with a trusted group of advisors during this process. The benefit to the donor is that the private foundation provides that individual with total control over the grant-making process.
As it relates to charitable giving, there is significant flexibility in how gifts can be made, and this article only begins to touch upon the many considerations. For example, for those with charitable intentions and estate-planning concerns, the use of charitable trusts may provide a solution to accomplish both.
If you want to discuss any of these options in more detail, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.
OTHER STORIES FOR YOU
TAX PLANNING FOR HIGH-INCOME EARNERS. Between now and the end of the 2016 election cycle, one theme we will likely hear from all candidates is the need for tax-code simplification. The reason is simple: tax law is complex, and that complexity is magnified for those individuals with high incomes.
WHY CONSIDER AN IRREVOCABLE TRUST? A variety of estate planning tools are available these days, but one we see used frequently is an irrevocable trust. This tool allows you to gift assets in the way you choose, provides tax benefits, and allows for creditor protection. And, irrevocable trusts can be used for reasons other than estate planning, so it might be helpful even if you don’t consider yourself especially wealthy.
TAX BENEFITS OF CHARITABLE DONATIONS. Whether you are donating cash, stock, used goods or your time, charitable donations provide a benefit to the recipient organizations and the community. As a bonus, they can help reduce your taxable income. We’ve summarized some basic information you need to know when making charitable donations.
Values – WK resources for individuals and families
If you are interested in personal tax, estate planning, retirement planning, residential real estate and other money matters that affect you and your family, we recommend the Values newsletter.
