BIDaWIZ Blog » TAX PLANNING

Do I Have To Repay The First Time Homebuyer Credit Immediately?

The BIDaWIZ Team — Wed, 03 Jun 2015 11:01:40 +0000

The first-time homebuyer credit for homes purchased in 2008, with few exceptions, must be repaid over a 15 year period and takes the form of a $7,500 interest-free loan. What happens if the home is sold or no longer is your primary residence? In this instance, the repayment may be due in the year that chance occurs as referenced in IRC Section 36.

Is the repayment limited if I sell to an unrelated party?
Possibly. The tax increase due to accelerated repayment is limited to the amount of gain (if any) from the sale. To determine the gain for this purpose, a taxpayer must reduce the adjusted basis in the home by the amount of the first-time homebuyer credit that has not been repaid. This means that if you had a loss, you would reduce the basis in the property.

What if there is an involuntary conversion of the home?
In this case, the accelerated repayment requirement does not apply if a taxpayer purchases a new primary residence within two years from the date when the disposition or the cessation of use occurs. The general repayment rules apply to the new principal residence as if it were the converted home.

What if the taxpayer passes away?
If a taxpayer dies during a repayment period, no credit repayment is required for the year of death or any subsequent taxable year.

How is the credit repaid?
To repay the credit, the taxpayer must increase the Federal income taxes by 6 2/3% (or 1/15) of the amount of the credit for each taxable year in the 15 year repayment period. The repayment period begins with the second taxable year following the year of qualifying home purchase.

2014 Year End Tax Planning Strategies You Need To Know

The BIDaWIZ Team — Tue, 30 Dec 2014 19:45:09 +0000

Unfortunately, many taxpayers often visit year-end tax planning strategies after the New Year or when April 15th approaches. Before you say goodbye to 2014, there are several tax savings strategies that you may be able to implement now. If you wait until after December 31st, it will be too late.

Reduce taxable income with 401(K) contributions
Taxpayers can contribute up to $17,500 ($23,000 if 50 or older) to their 401(k) accounts and lower their taxable income by that same amount (IRC Sections 402(g) and 414(v)). Contributions can significantly reduce a taxpayer’s liability if made by December 31st. For instance, a taxpayer may be able to lower their ordinary income tax bracket all together, which can translate into a lower capital gains tax due on any realized gains for the year. Not to mention, taxpayers may even avoid the investment income surtax. Individual taxpayers with net investment income and a modified adjusted gross income of $200,000 or more ($260,000 or more for joint filers), are subject to a 3.8% surtax on unearned income, including interest, dividends, royalties, rents and capital gains.

Harvesting investment losses to offset capital gains
Taxpayers can also lower their taxable income by realizing capital losses. After netting capital gains against losses, taxpayers can offset up to $3,000 of ordinary income and carry-forward the remaining amount for future years. Please note that the character of the investment as long-term versus short-term will impact the way in which gains and losses are netted. Separately, keep in mind that wash-sale rules apply only to losses.

Donate to charity
Contributing to charity also reduces income tax. The general rule is that you cannot claim a charitable deduction that exceeds 50% of your Adjusted Gross Income (AGI) in any one year. If you donated property and it appreciated, then the limit drops to 30% of your AGI. If your donation does happen to exceed these limits, you may carry forward the unused portion of the charitable deduction for five years.

Please note that you must itemize deductions to claim a charitable donation. Generally, you will itemize deductions if it’s greater than your standard deduction. This is referenced in IRC Section 170 and IRS Publication 521. On another note, a recently passed tax extender allows taxpayer to make tax deductible charitable donations from their IRA’s required minimum distribution.

Review estimated state taxes
Taxpayers can pay their 2015 estimated state taxes in December instead of January to further reduce taxable income. This would not be recommended for taxpayers that are subject to Alternative Minimum Tax (AMT) in 2014.

Sales tax deduction
Taxpayers living in states without an income tax such as Florida, Texas, Washington, Nevada and others, may want to make large purchases by year end. In this regard, they can elect to deduct their state and local general sales taxes.

Consider payments associated with the standard deduction versus itemizing
While the tax benefit comparison of electing the standard deduction versus itemizing can be a useful exercise in maximizing tax savings in a given year, the benefit can be greater if utilized over a period of two years. Specifically, the taxpayer may be able to boost overall deductions for every two-year period by alternating between the standard deduction and itemizing each year.

More tax questions? Browse answers or ask tax questions online. You can also find an accountant online here.

Inherited IRA Withdrawal Options

The BIDaWIZ Team — Wed, 22 Oct 2014 19:24:49 +0000

I recently inherited an rollover IRA account from my deceased father. I’m required to select a distribution option, which I am having difficulty understanding. Can you briefly explain the following options: total distribution, systematic/RMD for inherited or Roth inherited IRA?

Elect a direct distribution
In this instance, all assets in the IRA are distributed to you at once. You will pay income taxes on the distribution all at once. This is the option in which you will likely pay a significant amount of taxes in year 1.

Systematic/RMD for inherited
You can elect to open an inherited IRA in which the distributions will be based on your life expectancy. Specifically, distributions must begin no later than 12/31 of the year after the account holder died and your annual distributions are spread over your life expectancy. This is determined by your age in the calendar year following the year of death and reevaluated each year.

There’s another option in which you can elect the 5 Year Method. With this method, you can also transfer the assets into an inherited IRA held in your name. You can withdraw at any time up until 12/31 of the fifth year after the year in which the account holder died. You are taxed on each distribution.

Roth Inherited IRA
This option would only be applicable if you were converting the funds into a Roth IRA. This would not be the best option for you if you are looking to reduce your tax exposure.

What is my best option?
Of the above options, the Systematic/RMD option will help you defer your tax exposure over time. This may be of interest to you, if you’re looking to reduce your tax liability in year 1.

More Questions? Try our professional tax research service.

Tags: tax questions, roth 401K questions

What Is The Health-Care Insurance Penalty?

The BIDaWIZ Team — Sat, 04 Oct 2014 00:04:21 +0000

This will be the first year that the health-care changes passed in 2010 will have an impact on those that opt out of coverage. Specifically, under the Individual Shared Responsibility Provision, individuals that are subject to the penalty will have to remit payment with their 2014 tax returns on April 15th. The penalty will not apply to those that obtain health insurance coverage through their employer or a state sponsored exchange. Still, there are certain groups that will pay hundreds and in some cases thousands in penalties.

Who will be subject to the health-care penalty?
It’s likely that very wealthy families that want to self-insure or utilize a nonconforming policy will be subject to the penalty. On the other end of the spectrum, there will be healthy younger individuals that would rather pay the penalty than monthly health insurance premiums. Independent contractors in their 20s and 30s are likely to represent the largest segment of this group.

How much is the penalty?
The penalty is equivalent to the greater of 1% of your household income or a flat amount. The flat amount is equivalent to $95 per adult and half that for children under 18 with a cap of $285. Unfortunately, the flat amount increases significantly to $325 in 2015 and $695 in 2016 per adult and half that per child with a maximum of $975 in 2015 and $2,085 in 2016. In addition, the percentage of household income rises from 1% in 2014 to 2% in 2015 and 2.5% in 2016.

How will the IRS enforce the penalties?
It will be difficult for the IRS to enforce a penalty in the 2014 tax year as the IRS will only be privy to a limited amount of information. However, for the 2015 tax year, insurers and employers will be required to send the IRS plan participant data that can be matched against the individual tax returns.

Are any groups exempt from the penalty?
Yes, certain religious groups, Indian tribes, those covered by Medicare, illegal immigrants as well as prisoners are exempt from the penalty.

More Questions? Ask your health insurance tax questions or find a cpa online.

Do Beneficiaries Have To Take RMDs?

The BIDaWIZ Team — Fri, 19 Sep 2014 21:31:01 +0000

Those fortunate enough to be named a beneficiary of a retirement account will want to know the nuances for reporting income on their tax return. This is specifically important when the account holder passes away before or after the time they are supposed to take required minimum distributions (RMDs).

What are required minimum distributions?
Traditional IRA and 401(K) account holders are required to start taking minimum distributions when they reach the age of 70 ½, even if they are still working for an employer at the time. However, in the first year they are required to take distributions, they can defer it until April 1st of the following year.

What if the account holder passes away after taking RMDs?
The beneficiary must take the RMD in the year the account owner dies if the process was already started by the deceased. However, if the RMD was already taken for the year, then no RMD would be necessary as the requirement was already satisfied. This is referenced in IRC Section 401(9)(A).

Separately, please also note that if the designated beneficiary is not the surviving spouse, distributions (based on the beneficiaries life expectancy) must commence no later than the end of the calendar year immediately following the calendar year in which the participant died. The beneficiary’s life expectancy is determined by using his/her age in the calendar year immediately following the account holder’s death. This distribution period is reduced by “one” for each year that has elapsed since the date life expectancy was first calculated.

What if the account holder passes away before their required beginning date?
The beneficiary is not required to take a distribution for the year in which the account holder passes away. Rather, they only need to start taking RMDs on their own inherited account by 12/31 of the following year.

More Questions? Try our professional tax research service.

Tags: tax questions, 401K questions, 401k tax questions, Ryan Himmel

Should You Elect To Make Roth 401(K) Contributions?

The BIDaWIZ Team — Thu, 28 Aug 2014 22:02:18 +0000

Most employees are familiar with the concept of socking away a portion of their paychecks toward their 401(K). However, few realize that they also have the option to contribute to a Roth 401(K) plan. In fact, since this new plan became available in the market in 2006, only 11% of eligible employees elected this option. Are you also missing out on a great retirement planning opportunity?

How does a Roth 401(k) work?
If you’re well-versed with the mechanics of a Roth IRA, this type of employer-provided retirement account should be fairly intuitive. This account allows the employee to designate Roth contributions of up to $17,500 or $22,500 if older than 50 (reference IRC Section 402(g)). Similar to a Roth IRA, the contributions are made with after-tax dollars, but appreciate tax-free over time. A key benefit of the Roth 401(K) is that there is no income limit as is the case with a Roth IRA. You can earn $1 million and still be eligible.

How is this different from a traditional 401(k)?
The contribution limits are both the same, but Roth contributions are taxed now while contributions for a traditional 401(K) are deferred until you withdraw the funds. Thus, it’s generally best for young employees to contribute to a Roth 401(K) when their tax rate is lower than it will be when they eventually withdraw from the account. A traditional 401(K) on the other hand can be more advantageous for individuals that are in a higher tax bracket now than they will be later in life. However, this logic is not always the case as detailed below.

Roth 401(K)’s aren’t just for younger workers
There are a number of reasons why even baby boomers may want to consider a Roth 401(K). First, this type of plan provides greater flexibility as you can avoid required minimum withdrawals after age 70 1/2. You would just need to roll over your Roth 401(k) to a Roth IRA. In addition, if you need the monies for an emergency, you will not have to worry about potential large tax liabilities as is the case with a traditional 401(K) plan. Furthermore, it’s important to acknowledge that having tax-free monies when you retire can be very useful as it will not impact the taxability of your Social Security benefits or your Medicare eligibility.

How do I know if my employer offers this option?
There’s likely a 50/50 chance that your employer provides you with this option as it is estimated that almost 50% of all employers offer this plan as per a recent study by AON Hewitt. However, even if they do not currently provide this option, it is very easy for them to make this change. We would recommend that you inquire with the benefits department at your employer about this possibility.

More Questions? Try our professional tax research service.

Tags: tax questions, roth 401K questions, 401k tax questions, Ryan Himmel

Should You Expect To Pay The Alternative Minimum Tax This Year?

The BIDaWIZ Team — Fri, 07 Mar 2014 16:05:03 +0000

Even with the recent adjustments to the alternative minimum tax (AMT), many taxpayers can expect to fall into this trap. Specifically, many households earning over $200,000 will be subject to this tax with the highest percentage having taxable income between $200,000 and $500,000 as suggested by a recent study conducted by the Tax Policy Center.

Will I be subject to the alternative minimum tax?
The recent adjustments enacted by lawmakers help, but they aren’t a complete fix as they don’t account for the years of inflation that wasn’t incorporated into the tax. The AMT exemption for joint filers is $82,100 for 2014 ($52,800 for single filers) and the top nominal AMT tax rate is 28%. However, these exemptions begin to phase-out when joint filers earn $156,500 ($117,300 for single files). Thus, the AMT exemption isn’t exactly as advertised. Thus, you could lose certain high deductions for items such as as state and local taxes, second mortgages not used for improving your home, dependents and incentive stock options granted through your employer. Taxpayers with families and second mortgages will continue to feel the brunt of the pain. Plus, investors with a large percentage of investment income to total income can expect to be subject to the tax.

How can I minimize my exposure to AMT?
We would recommend that you try to reduce your taxable income by contributing to retirement plans (IRAs, 401ks) and utilizing certain medical plans (FSA, HSAs). If you’re self-employed, try to reduce your business income as much as possible on the actual business return and not on your personal return.

We also advise our clients to be mindful of large changes to their income and plan for it over a period of time. It’s quite possible that you may be able to stagger the income or decrease over a period of time, which will reduce your exposure to AMT.

Lastly, try to determine in advance whether or not you’ll be subject to the tax. There’s no way to know whether or not you’ll be subject to the tax without running the numbers on a return. You can easily determine this by estimating your income and expenses during the year. This will help you to avoid surprises and proactively manage your exposure to the tax.

More Questions? Browse Answers or ask your amt questions online.

Should You Invest In Obama’s myRA Retirement Accounts?

The BIDaWIZ Team — Fri, 31 Jan 2014 22:08:45 +0000

President Obama recently announced plans to create a new retirement account backed by the United States government. The primary objective of the plan is to provide Americans with another option to save for retirement if their employer doesn’t provide a plan. While the plan offers certain benefits, it’s definitely not for everyone. Find out if this plan is right for you.

What is a myRA retirement account?
This retirement account is very similar to a Roth IRA in that the contributions to the plan will grow tax-free provided that the holder doesn’t withdraw from the account until they reach the age of 59 1/2. In addition, the maximum contribution limits of the lesser of $5,500 or your compensation will apply to this account as it does for a Roth IRA. However, there will not be an early withdrawal penalty of 10% of the earnings if the holder withdraws before reaching 59 1/2 as is the case with Roth IRAs and there will not be a fee for opening an account.

Another key benefit is that the account is backed by the United States government. This means that you effectively cannot lose your investment in the account. Having said that, low risk investments typically translate into low returns. Specifically, the accounts will be pegged to the same interest rates as the Thrift Savings Plan’s Government Securities Investment Fund, which offers annual returns of 1-3%. The returns will compound over time and you’ll have the tax-free benefit, but when you factor in inflation, the returns are minimal.

Who is eligible for the account?
The President intends to launch the myRA accounts for those that aren’t offered a retirement plan by their employer and earn less than $191,000 annually. This myRA account could cover roughly half of all full-time employees and over three quarters of all part-time workers.

Are there any restrictions?
Yes, once the account grows to $15,000 or it’s been open for 30 years, whichever occurs sooner, the myRA must be rolled over into a private-sector Roth IRA. As such, accounts can be taken by the employee from one job to the next, and they can be rolled into an Individual Retirement Account at any time.

More Questions? Ask your ira tax questions online.

Common Mistakes When Choosing a 529 College Savings Plan

The BIDaWIZ Team — Fri, 24 Jan 2014 20:53:02 +0000

A 529 college savings plan offers many parents and future college students with an attractive option for socking away funds for tuition expenses. While the plan offers many benefits, the account holders don’t always understand the mechanics of how the plans work and how they can be used effectively. Find out if you understand the complete capabilities and limitations of these plans.

What’s a 529 college savings plan?
Contributions to these state sponsored educational savings plans grow tax-deferred, and distributions to pay for the beneficiary’s college costs are tax-free. Expenses for the plan can be used for tuition, fees, books, supplies, and equipment. Room and board are also covered by the plan as long as the beneficiary is a student for at least half of the school year.

What if I withdraw the funds and pay the tuition the next year?
The 529 plan is part of the Internal Revenue Code. As such, the timing for withdrawing funds from the account and using them to pay for tuition must occur in the same tax year. This means that if you withdraw funds from a 529 plan at the end of 2013, they must be used to pay 2013 tuition bills. Otherwise, you may have to pay taxes on what was supposed to be tax-free earnings.

Claiming the state tax deduction properly
Most states also offer a state tax deduction for contributing to the plan. For instance, a married couple filing jointly with a New York State sponsored plan, could deduct up to $10,000 of their contribution; married filing separate filers would be able to deduct up to $5,000 per year. Please note that in most states like New York, the 529 plan account holder is only allowed one deduction per year even if they own another 529 plan account. In addition, if a grandparent or third party wants to contribute to a 529 plan and claim the state tax deduction, they would have to open a separate 529 plan account from the parent.

Take into account scholarships and educational tax credits
You need to plan ahead when considering how much money you should withdraw from the 529 plan when it’s time to pay for tuition. If you withdraw enough to cover all of tuition for the year and later find out that the student qualifies for a partial scholarship and/or an educational tax credit, you may not be able to use all of the 529 plan distribution tax-free. You cannot combine 529 plan distributions to cover the same expenses that are covered by a scholarship or tax credit.

If you do happen to withdraw too much from the 529 plan, you could always rollover the excess amount into another 529 account within 60 days. Please note that you’re only allowed only one rollover for each 529 account you own within any 12 month period.

More tax questions? Browse answers or ask your 529 plan questions online.

Why You Should Contribute To Your IRA In January

The BIDaWIZ Team — Fri, 17 Jan 2014 23:17:59 +0000

Most IRA account holders have contributed to their accounts for the 2013 tax year even though they technically have until the April 15th tax due date to do so. Having said that, there are number of reasons why you should have contributed in January of the preceding year.

Why wait until the end of the year to contribute to your IRA?
There are still a large number of IRA account holders that wait until January to April 15th of the following year to contribute to their account. In some cases, this is for valid reasons. For instance, the IRA account holder may not have a reasonable estimate of their expected income for the year. However, if you do have knowledge of your income and your likely eligibility, there are more reasons to contribute to your IRA account in the beginning of the year than to wait until the following year.

Delaying IRA contributions can translate into less gains?
Assuming the market is going up, you will lose out on over a years worth of investment gains if you decide to delay contributions until the beginning of the following year. In addition, the gains compound every year if you decide to contribute in the beginning of each year. For instance, the difference between an IRA account holder that contributes in the beginning of each year versus one that waits until the following year, could be in the tens of thousands of dollars by the time the taxpayer reaches retirement age.

Pay less in taxable gains
By contributing to your IRA in the beginning of the year, you also avoid paying taxes on any gains. There could be significant tax savings by putting money towards these tax-advantaged accounts in the beginning of the year. The savings also compounds each year.

More Questions? Try our professional tax research.