How long should financial records be kept

What financial information should I keep for the future?

One way to cut down on the paperwork you should retain for more than one year is to transfer all of those records to a flash drive. Purchase a 32 GB flash drive online for $9. Generally a copy of your tax return that has been electronically filed can be saved in PDF format. If you prepare you own taxes using TurboTax or some other software, you have this option.

Then, you can simply copy that PDF onto your flash drive, and voila, you have a digital record that can be stored in your safe deposit box or other secure location.


Here is an overview of how long you should keep certain financial records:

Income tax records: Generally, you should keep your personal tax returns for three years, since the IRS has three years from your filing date to audit your return if there is a suspicion of good faith errors. This three year rule also applies if you discover a mistake in one of your old returns and decide to file an amended return to claim a refund. So the bottom line is to save all of your records that substantiate deductions, such as receipts, canceled checks, charitable contributions, mortgage interest, and others, for at least three years. The IRS has six years to audit your return if it is of the opinion that you underreported your gross income by 25 percent or more. Remember if you under report your income, you could go to federal prison.

IRA contributions: You should retain documentation of your Roth IRA contributions permanently, so that you can prove that you already paid tax on this money when the time comes to withdraw monies from this account. Each year you should receive a form 5498 from your IRA sponsor or trustee, setting forth the contribution that you made to that traditional IRA or Roth IRA.

Retirement plan contributions: Keep the quarterly statements from your plan until you receive the annual statement. If everything matches up, then you can shred your quarterlies, but be sure to retain your annual statements until you retire.

Bank records: Go through your checks annually and keep those related to taxes, business expenses, home improvements and mortgage payments. Shred the rest.

Brokerage statements: Keep these until you sell the securities. You will need the purchase record from your individual stock purchases or mutual funds to prove whether you have capital gains or losses at tax time. When you receive a form 1099-B from the brokerage firm, make sure that their reporting matches your monthly statements.

Bills: When you have a copy of the canceled check or online documentation that a bill has been paid, you can shred the bill. However, for your really big purchases such as appliances, jewelry, rugs, antiques, furniture and PC’s, be sure to retain your purchase receipt so that you can prove value in the event of loss or damage.

Credit card receipts and statements: For tax-related expenses, keep these for seven years. For other purchases, keep your original receipts until you match them up with your monthly card statement, then you can shred those receipts.

Paycheck stub or income statement: Keep these until you receive your W-2, and if everything matches, you should shred them. If they don’t match, ask for a corrected form, known as a W-2c.

House or condo records: Keep permanently everything pertaining to your purchase price or home improvements. Keep records of the expenses of buying or selling the property, such as legal fees and the realtor’s commission for 6 years after you sell the property. Retaining these records is important because any improvements you make in your house, as well as the expenses of selling it, are added to the cost basis, and reduces your taxable gain when you sell the property.

Medical bills: You should retain these until they have been paid; then save your proof of payment for at least one year. You will need these bills to document any medical expenses that you claim on your income tax returns, so if your medical expenses qualified you for a deduction, save that documentation for three years.

Claim these tax deductions if you're self-employed

FROM CBSNEWS.COM

For the self-employed, taxes are a huge deal. The total tax on your last dollar of income as a sole proprietor can be over 50 percent. That's because the top marginal federal tax rate is 35 percent and the Self-Employment, or SE, tax rate is 15.3 percent on every dollar of net profit earned up to $128,400 in 2018. On top of that you may have to add state and local income tax. For example, income taxes for New York City residents can be 10.5 percent, or more.

The good news is that when you're self-employed, you can claim many deductions that aren't available to those who earn income only from wages. Here are several deductions that will directly reduce your net income from self-employment and lower your federal tax and your SE tax liability.

Retirement plan contributions

Among the biggest deductions the self-employed can claim are the contributions they make to their retirement plan. This deduction can be claimed as an adjustment to income on line 28 of Schedule 1, which then reduces your total income on the new form 1040.

My favorite type of retirement plan is the Self-Employed 401(k) profit-sharing plan, which allows the self-employed to make contributions both as an employer and as an employee. This type of plan, which is easily set up at any major brokerage firm, lets you make an additional contribution that's a percentage of net profit (this is the employer's profit-sharing component of the contribution) and a fixed-dollar amount up to the 401(k) contribution limits (which is $18,500, and $24,500 for anyone over age 50 in 2018). The maximum pretax contribution is $61,000.

To be allowed to make a deductible contribution for your 2018 tax return, you must establish the SE 401(k) account before year-end. But if you don't, you can still open and fund a SEP IRA or a traditional IRA any time prior to your tax filing deadline, plus applicable extensions. You can make a deductible SEP IRA deduction of up to 25 percent of net profit from self-employment, up to a maximum contribution of $55,000 in 2018.

The down side of a SEP IRA is that it can be expensive if you have employees. As the employer, you must open a SEP IRA and contribute a uniform percentage of pay to a SEP IRA for each employee.

Business equipment

Another big tax break for the self-employed was expanded under the new tax law. Self-employed business owners can deduct the full purchase cost of qualifying equipment bought or financed after 2017. The limit in 2018 was increased from $500,000 to $1 million. This deduction applies to machinery and equipment used in the trade or business, including computer equipment, office furniture, tools and even vehicles used for business (some restrictions apply, like the $25,000 limit for sport utility vehicles). This also applies to improvements made to nonresidential real property such as roofs, heating, ventilation and air conditioning, fire protection, and alarm and security systems.

Business use of your home

If you've used part of your home for business, this is a great place to look for deductions. Using Form 8829, you can either tally up your actual business expenses in using your home, or you can use the Simplified Option for Home Office Deduction. The simplified option allows anyone who meets the criteria to claim a deduction of $5 per square foot, on a maximum of 300 square feet, for a total deduction of up to $1,500.

In addition to being much easier to calculate, the simplified method also allows you to claim the full amount of home-related deductions (for taxes and mortgage interest) on Schedule A, and when the home is later sold, there's no recapture of depreciation for the years you used this option. Claim the expense for business use of your home on Line 30 of the Schedule C, Profit of Loss from Business.

Business use of your auto

If you drive your vehicle for business purposes and you keep a record of the mileage and the purpose of each trip, those miles are eligible for this deduction. For your 2018 tax return, you can claim it using the standard mileage rate of 54.5 cents per mile. Claim the deduction for car and trust expenses on Line 9 of Schedule C.

Legal and professional services

The cost for services you've paid to other professionals, such as attorneys, inspectors, bookkeepers, etc. is another deduction for the self-employed. Even part of the cost for tax preparation (attributed to your self-employment activity) can be included on Line 17 of Schedule C. This is especially valuable because the new tax rules disallowed the deduction for tax-prep fees as a miscellaneous itemized deduction, but the portion of your fee attributed to your self-employment tax forms remains deductible.

Rent or lease

If you rent or lease space you use in connection with your business, make sure to claim this as a deduction on Line 20 of the Schedule C. If you pay utilities separately, don't forget to include those on line 25. 

Other expenses

Additional items the self-employed may be entitled to claim as deductions include:

• Half of the SE tax you pay
• Health insurance premiums you pay for yourself and dependents
• Advertising
• Cost of inventory
• Travel
• Costs of entertaining clients (limited to 50 percent of costs)
• Office supplies and related expenses
• Office equipment and furniture
• Commissions and fees paid
• Interest on loans used for business
• Taxes, fees and licenses

If you don't see a line specifically labeled on Schedule C for some of your business expenses, don't worry. List all other business-related costs, such as computer services, subscriptions, etc. on Part V, Other Expenses on the Schedule C, and the total of these other expenses are included on Line 27a.

Can I Deduct That As A Business Expense?

FROM FORBES.COM

I work with many business owners and by far, the most commonly asked question I get is, “Can I deduct that as a business expense?” As with all good tax law questions, it depends on a lot of factors — the type of expense, the type of business that you have and whether you can verify the purpose behind the expenses.

Here are some guidelines to help you decide whether the type of expense you want to deduct may work for your business.

Ordinary and necessary

 When thinking about any business expense, I like to start with two words —ordinary and necessary. These two words are at the center of how the IRS defines a business expense. But they may not mean what you think they do.

“Ordinary” in this context means the type of expense that a business like yours would normally take. For example, it’s common and accepted for tax preparers to have to pay for software, malpractice insurance and continuing education. Because these are common and accepted in the profession, they are considered ordinary expenses.

However, this point can get very business specific. It’s not ordinary for tax preparers to deduct breast implants as a business deduction. But for entertainers at strip clubs? It’s another story. Thus my tax preparation business wouldn’t be able to deduct that expense, but a stripper at the club in the city might.

The other part of the equation is necessary. I’m still not sure why the IRS uses this particular word since in this case it means “helpful and appropriate” for your trade or business, rather than mandatory or required as one might normally think necessary means. In any case, as long as it’s helpful, you can consider it a business expense.

If your expense fits these two criteria, you are 95% of the way to deduct that expense . However, there are a couple of caveats, which I will discuss later on.

Some common expenses

Industries aside, many businesses deduct a lot of the same type of expenses. Here are some of the common ones.

Travel

You can deduct expenses for traveling away from home for your business. That transportation includes airplanes, trains or automobiles. Additionally, you can expense taxies, Lyfts or Ubers to and from the airport or your hotel and work location. You can also claim baggage and shipping fees, lodging and meals and much more. (See Publication 463 for additional examples.)

The key here is determining your tax home, which is different from your family home. In general, your tax home is your main place of business. If you don't’ have a regular or main place of business due to your type of work, then your tax home is the place where you regularly live. This can get a little complicated, so if you’re at all unsure of your tax home, it’s best to check with your tax professional.

Car expenses

What if you travel primarily by car? This expense occurs often enough that Iwant to give it its own consideration. As with other travel expenses, you mustbe traveling for business. Additionally, you can’t deduct ordinary commuting from your family home to your place of business. You can deduct your actual expenses (gas, repairs, maintenance) or take the standard deduction, which is based on the miles that you drive (which is 58 cents/mile for 2019). You can also include tolls, parking and also rental cars that are used for business.

If you’re taking this expense for the first time, note that if you take actual expenses your first year, you’re stuck with taking actual expenses for the life of your vehicle. However, if you take the standard deduction your first year, you’re allowed to switch back and forth. (Yet another weird intricacy in the world of the IRS.)

Business use of home

Deducting a home office is another area where a two-word phrase comes in handy — exclusively and regularly. The space has to be used exclusively as a business space and regularly. Unlike “ordinary and necessary,” these words mean exactly you think they do. The space just has to be an office space and it has to be space that you use regularly. You can find more detail about this deduction here.

Some other commons ones:

• Employee and contractor pay — You can deduct what you pay for people that help you in your venture, whether they are a W-2 employees or independent contractors.
• Insurance — You can deduct insurance that is necessary for your job, such as liability, E&O insurance or essential employee insurance. However, you can’t deduct disability insurance for lost wages. That’s a personal expense, not a business expense (more on this later).
• Retirement plans — Contributions to retirement plans like solo 401ks, SEPs or SIMPLE IRAs are deductible, whether you’re contributing on your own behalf or for your employees.
• Office expenses — Save your receipts for software, pencils, paper, tissue etc. You can deduct any of these supplies from your bottom line.
• Interest and fees — If you’re paying interest and fees on money that you borrowed you can deduct that too.

Those are just the most common business expenses. There are lots of others. If you’re starting a business for the first time, I suggest looking over a Schedule C and reading the instructions to get a sense of what you can and can’t take.

Some pitfalls to avoid

So far, you’re probably thinking that deducting business expenses is easy. But there are some issues that can cause huge problems. Here are three important pitfalls to avoid when thinking about deducting business expenses.

You have to have a business

I know this may sound a bit obvious, but it’s not so far fetched for people to try to take business expenses while not having a business. In fact, before the Tax Cuts and Jobs Act, you could deduct some work-related expenses even as an employee. That deduction is gone for the time being, but it may come back after 2025.

For the most part, the IRS focuses on intent when considering whether something is a business venture. It looks at many factors such as:

• Do you put in the necessary time and effort to turn a profit?
• Do you have the necessary knowledge to succeed in this field?
• Do you depend on income from this activity?
• Have you made a profit in this activity in the past, or can you expect to make one in the future?

The IRS presumes that your activity is a hobby rather than a business if it hasn’t made a profit in three of the last five years (this is known as the hobby-loss rule). The presumption can be overcome, but if it’s not, all of the losses of the hobby will be capped at the hobby income.

You can’t take personal expenses

 Even if you have a business, you still can’t deduct any type of personal expense. These expenses include any type of personal, living or family expenses. For example, while childcare is likely common and helpful for any business, it’s considered a personal expense and non-deductible. The same goes with the premiums you pay for your disability and life insurance that I mentioned above.

If you have an expense — say travel or utilities — that is both business and personal, the IRS asks that you divide the costs within personal and business parts. So if you are using your cell phone for business and personal calls, you can split it between what you reasonably think could be business use and personal use (say 70/30).

Some expenses you can’t deduct all at once

 There are some expenses that you can’t deduct all at once because they are what the IRS considers capital expenses. You’re investing in your business when you buy furniture, computers, buildings or other large items. You’re also making a long-term investment when you cover start-up costs and improvements on your business facility. Because you’ll use them over multiple years, the IRS asks you to spread your deduction for them over multiple years as well. 

As a result, these expenses are taken over a specific amount of years, depending on the type of expense. Remember those breast implants I mentioned? Those had to be depreciated. If you have questions about this, make sure to ask your tax preparer to go over your depreciation schedule with you.

I hope you’ve found this summary helpful. As always, it’s best to make sure to learn the fundamentals and then seek out trusted advisors to help you navigate the details.

7 tax changes investors should watch for as they file

FROM www.bostonherald.com

Americans will face a slew of new rules during the first tax-filing season with the Tax Cuts and Jobs Act of 2017 in effect.

Here’s what changed for investors:
1. NO DEDUCTION FOR INVESTMENT EXPENSES
For taxpayers who itemize, the 2 percent miscellaneous itemized deduction was a handy catchall bucket for expenses such as investment fees and expenses and tax-preparation fees. It wasn’t easy to qualify for this deduction — your expenses had to top 2 percent of your adjusted gross income before you could claim them — but it was a nice option to have.

2. LOWER TAX RATES ON SHORT-TERM CAPITAL GAINS
Here’s some good news: The new tax law trimmed income tax rates . That means short-term capital gains — that’s money you make when you sell certain investments that you’ve held for less than a year — now also enjoy a slightly lower rate.
“If you’ve got short-term gains — those are taxed as ordinary income — they get the benefit of lower rates now, so there’s a bit of a break there,” says Tim Steffen, director of advanced planning at financial-services firm Baird, in Milwaukee.

3. THE NEW 20 PERCENT PASS-THROUGH INCOME DEDUCTION

If you’re a real estate investor — say, you purchase houses and rent them out, or some other such activity — there’s a chance the new 20 percent deduction on pass-through income will apply to you.
The rules are complex, but generally, to qualify for this deduction as a real estate investor, the IRS wants you to be operating a business. The IRS has announced some “safe harbor” rules to help clarify the types of activities that will allow real estate businesses to qualify for the deduction.
For example, you need to maintain separate books and records for this activity, and you or someone you hire must spend at least 250 hours a year managing your rentals, says Mark Luscombe, principal analyst with Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
But even if you don’t meet the safe harbor rules, you still might qualify. As noted, it’s complicated, so hire a tax pro if you think you might be eligible to claim this deduction.
Luscombe adds that investors in real estate investment trusts may enjoy the new deduction with respect to certain qualified dividends they receive from those REITs.

4. NO MORE ROTH RECHARACTERIZATIONS
Before the Tax Cuts and Jobs Act, converting a traditional IRA to a Roth IRA came with an out: By the tax-filing deadline — when you would have to pay income tax on the money you converted — you could reverse, or “recharacterize,” your decision.
In some cases, people were doing this if their investments in the account tanked between the time of the conversion and the tax-filing deadline. But now, no matter the reason, it’s no longer possible.

5. THE KIDDIE TAX IS A LITTLE DIFFERENT NOW
The way children’s unearned income (generally interest, dividends and investment gains) is taxed has changed. Previously, kids paid taxes at their parents’ rate on any unearned income over $2,100. Under the new rules, the rates for estates and trusts apply on unearned income over $2,100.
For the 2018 tax year, children pay 10 percent on net unearned income up to $2,550; 24 percent on any excess up to $9,150; 35 percent on any further excess up to $12,500; and 37 percent on any excess above $12,500. And for long-term capital gains and qualified dividends, the rates for estate and trusts apply: 0 percent up to $2,600, 15 percent from $2,600 to $12,700, and 20 percent on the excess above $12,700. (A 3.8 percent tax on net investment income may apply as well.)

6. IT’S EASIER TO PAY BACK 401(K) LOANS
Under the old rules, if you lost your job while you had a 401(k) loan outstanding, that loan became due within 60 days — and if you didn’t meet that deadline you risked owing taxes and a 10 percent penalty on that money.
The new tax rules give you until the tax-filing deadline (up to mid-October if you file an extension) to pay back your loan and avoid the taxes and 10 percent penalty.

7. YOU CAN SEND MORE TO YOUR RETIREMENT ACCOUNT
This has nothing to do with the new tax law and everything to do with the IRS’s annual inflation adjustments: Starting in 2019, you can contribute up to $6,000 ($7,000 if you’re 50 or older) to a traditional IRA or Roth IRA.

And don’t forget that you still have time to save on your 2018 taxes by putting money into a traditional IRA before April 15. Assuming you’re eligible to deduct your contributions, the amount you contribute will reduce your taxable income — and thus, your tax bill.
The maximum IRA contribution in 2018 was $5,500 ($6,500 if you’re 50 or older). Keep in mind that’s the max you can put in all of your traditional and Roth IRAs combined. And be sure to specify which tax year you want your contribution to go toward — 2018 or 2019.

Can't find paperwork you need for your taxes? Don't panic, you can fix this.

FROM www.chicagotribune.com

Lost or missing documents can turn tax season into a giant headache, but they don't have to stall you for long. Here are some common tax necessities that might go missing — and what a tax pro says you can do if they give you the slip.

Lost: Your W-2

What to do: Go to HR or your payroll department.

A W-2 reports how much your employer paid you during the tax year and how much tax it withheld on your behalf. Generally, employers have to provide W-2s to employees by Jan. 31. If yours is lost or never showed up, simply ask your employer for another one, says Mark Luscombe, a CPA and principal analyst at Wolters Kluwer Tax & Accounting. Check your old emails, too — many companies offer electronic access to company documents, including tax statements.

What else you can try: Call the IRS.

A W-2 reports how much your employer paid you during the tax year and how much tax it withheld on your behalf. Generally, employers have to provide W-2s to employees by Jan. 31. If yours is lost or never showed up, simply ask your employer for another one, says Mark Luscombe, a CPA and principal analyst at Wolters Kluwer Tax & Accounting. Check your old emails, too — many companies offer electronic access to company documents, including tax statements.

Lost: Old tax returns

What to do: Get a tax transcript from the IRS.

This lets you see most line items from your federal tax returns for the current tax year and for returns processed during the prior three years. You can also get basic data such as how you paid and your adjusted gross income for the current tax year and for up to the last 10 years. Tax transcripts are free, but note: They aren't the same as a photocopy of your tax return. If that's what you're after, you'll probably need to fill out IRS Form 4506 instead (and there's a fee).

What else you can try: Check with your tax software or tax preparer.

"If you were using a tax professional, they probably have it on file," Luscombe says. If you've been using tax software, your software provider might still have your old returns depending on the company and which version of the software you bought.

Lost: A 1099

What to do: Log in to your investment account.

The 1099 is a record that some entity or person (not your employer) gave or paid you money. There are many types of 1099s, though some of the most popular ones — the 1099-DIV, 1099-B and 1099-R — report dividends, capital gains and other income from investments or retirement accounts. If you've lost one of those, you can probably get another in the tax-documents section of your investment account's website.

What else you can try: Look at your year-end account statements.

Generally, attaching 1099s to tax returns isn't required unless taxes were withheld from the payments, so if you can find the information somewhere else — like on your account statements — you might be OK, Luscombe says . "As long as you can recreate the information from statements, some people suggest not even bothering to try to get the 1099," he says. "One, it's a lot of difficulty, and two, you don't have to send it to the IRS anyway." Also, whoever sends you a 1099 is supposed to send a copy to the IRS, which raises the risk that the IRS might mistake that second 1099 issuance for a second payment and think you got twice as much as you're reporting, Luscombe says.

Lost: Your 1098

What to do: Log on to your bank account

A 1098 shows how much interest you paid on a mortgage during the year — interest that could score you a tax deduction . Your mortgage lender likely provides access to this and other tax documents (such as your property tax payments) online.

What else you can try: Look at your year-end mortgage statement.

You're not required to attach your 1098 to your tax return, Luscombe says, so if you can recreate the information from your monthly mortgage statement or similar, chasing down another copy of your 1098 may be unnecessary. "I would only do that if you're not confident in the information that you have," he notes.

Lost: Enough time to do your taxes because you were hunting for lost documents

What to do: Get an extension.

If the wait for missing documents will go beyond April 15, you can use IRS Form 4868 to get an extension . That will in general give you six more months to track things down. But beware: An extension gives you more time to file your tax forms — it doesn't give you more time to pay your taxes. You'll still need to estimate how much tax you owe and include that amount (along with your extension request) by April 15. Interest and penalties may apply if you pay less than what you actually owe, so take your estimate seriously.

5 Last Minute Tips for Filing S Corp or Partnership Taxes

FROM /www.nav.com

Many of us recognize April 15th as tax day, and though that’s true for individuals, sole proprietors, and C Corps, S Corps and Partnerships must abide by different rules. According to the IRS, these two business entities must file their taxes by the 15th of the third month, or March 15. And, if you fall into that category, that means your taxes are due this Friday.

If you have yet to file your business taxes, and your business is considered an S Corp or Partnership, then you’ll need to act quickly if you want to meet the looming deadline. Here are a few considerations and tips that can help you beat the clock, plus one solution if you can’t.

Check New Tax Rules

In December of 2017, the current administration passed the Tax Cuts and Jobs Act, which directly impacted 2018 taxes for both businesses and individual files. For some businesses, particular those that are considered pass-through entities, like S Corps and Partnerships.

There are updates, including those that impact the following

• Deductions from qualified business income
• Limits to certain business activities
• Limits to business interest expense deductions
• Depreciation rules

For a full list explanation of how the Tax Cut and Jobs Act may impact your business, you can review the IRS Publication 5318: Tax Reform, What’s New for Your Business.

Keep in mind that many of these changes will impact your quarterly taxes and therefore should be considered in future planning, not just when filing your 2018 tax return.

Determine Required Forms

While all small businesses must file taxes, filing as an S Corp or a Partnership will require the use of different forms. For example, an S Corp will likely be required to file the 1120S or 1120 Sch. K-1, while a Partnership will be required to file form 1065.

There are, however, several documents that you may need to complete regardless of whether or not you are filing as an S Corp or a Partnership. This typically includes employment tax forms, like 940 or 941.  In addition, some businesses may also need to file 1099 and W2s.

Because tax requirements vary based on a variety of factors, including the type of industry into which the business falls (e.g., agriculture), employees hired, and business activities, it’s best to consult the IRS website for a full list of forms for which as S Corp or Partnership may be liable.

For example, both S Corps and Partnerships must file.

Gather & Verify Required Information

At this point, you likely have all the information you need. Generally, this includes information about payroll, shareholders, income, gains, losses, etc. Fortunately, if you’ve been using accounting and human resource software, much if this information should be readily available, with some programs offering easy integration with tax software.  

However, if you’ve reviewed all the required forms and find that you are missing information, then you’ll need to act quickly. Without the proper information, you may need to file an extension.   

Consider Using Tax Return Software

At this point in time, it may be difficult to secure the help of a real accountant or CPA, but if you’re not thrilled about filing taxes on your own, you may want to consider tax preparation software like TaxAct, TurboTax, or H&R Block.

Though you will need to pay to submit your taxes using this method, it can simplify and expedite the process. Plus, you may also be able to access professional advise, depending on the package you choose. Finally, using tax prep software can also help you navigate changes to the tax code and ensure that you take advantage of all applicable deductions.

File for an Extension

If you can’t complete your taxes on time, then you’ll need to file an extension or risk paying additional fees. To do so, you must complete Form 7004 by March 15th. This will give you an automatic extension with a new due date of Sept 15, 2019.  

Keep in mind that while this does bide you more time, you will still need to enter a “tentative total tax” amount, which means you’ll need to know approximately how much you owe, if anything. If you fail to provide an accurate depiction, you may be required to pay fines or penalty fees.  

Further, it’s important to note that Form 7004 is for federal, not state, extensions. If you don’t plan on submitting your state taxes on time, you’ll need to consult your state tax guidelines to determine the best course of action.

4 Tax Breaks Seniors Don't Want to Miss

FROM www.fool.com/

Everyone wants to pay as little as possible in taxes, but reducing tax liability is of special concern for seniors, many of whom are retired and living on fixed-income.

Fortunately, the government offers tax breaks to help older folks hold onto more of their hard-earned cash. Here are four tax deductions and credits every retiree needs to know about.

1. Larger standard deduction

Most people take the standard deduction rather than itemizing deductions -- or listing all their qualified deductions individually -- when filing their taxes. The standard deduction is a set dollar amount that you can subtract from your taxable income, based on your filing status. For most people, taking the standard deduction offers a better deal on your taxes than itemizing the deductions you're claiming.

Here are the standard deductions for each tax filing status:

Tax Filing Status	Standard Deduction for 2018
Single	$12,000
Head of household	$18,000
Married filing jointly	$24,000
Married filing separately	$12,000
Qualifying widow(er)	$24,000

DATA SOURCE: INTERNAL REVENUE SERVICE.

Adults who are 65 and older get an extra $1,600 added to their standard deduction if they're filing as single, head of household, or married filing separately. Married couples filing jointly may add another $1,300 for each spouse who is 65 or older, as can qualified widow(er)s. You must be at least 65 on Jan. 1, 2019, to qualify for this larger standard deduction for the 2018 tax year. This higher standard deduction reduces your taxable income, so you pay taxes on a smaller base amount, keeping more of your money.

2. Higher tax filing threshold

A higher tax filing threshold is not a tax break per se, but it may still help you save. You are required to file a tax return if you earned more than the standard deduction for your filing status. Because seniors have higher standard deductions, they can earn more money before being triggering the need to file a tax return.

Remember, taxable income includes money withdrawn from tax-deferred retirement accounts, and it may include your Social Security benefits, based on the result of the Social Security earnings test. This means your benefits may be taxed if your combined income -- your gross income, minus any tax deductions you qualify for, plus nontaxable interest and half of your Social Security benefits -- exceeds $25,000 for single adults or $32,000 for married couples.

If you're unsure whether you need to file a tax return, consult a tax professional or consider filing a return anyway. This is smart if you've had taxes withheld from your paychecks throughout the year or you qualify for refundable tax credits, like the Earned Income Tax Credit for low-income families, because you may get a nice refund back.

3. Tax Credit for the Elderly or Disabled

The Tax Credit for the Elderly or Disabled is worth anywhere from $3,750 to $7,500 for seniors 65 and older in 2018. This is a tax credit, not a tax deduction, so rather than reducing your taxable income, it reduces your tax liability dollar for dollar. So if you owe $5,000 in taxes and you qualify for a $5,000 tax credit, the two cancel each other out and you won't owe anything. You must be at least 65 by the end of the tax year in order to qualify for this credit.

The value of the credit will depend on your tax filing status and your income from other sources. You can calculate yours by following the instructions on the IRS Schedule R Form or by using its Interactive Tax Assistant tool. This is a nonrefundable tax credit, which means that you won't get any money back from the government if the credit you qualify for is larger than the amount you owe.

4. Catch-up contributions

Young working adults may contribute up to $19,000 to a 401(k) and $6,000 to an IRA in 2019. These limits are up slightly from $18,500 for 401(k)s and $5,500 for IRAs in 2018. But in either year, adults 50 and older are allowed to contribute an extra $6,000 to a 401(k) or $1,000 to an IRA. These are known as catch-up contributions, and they can help you increase your retirement savings and possibly reduce your taxes as well if you are closer to retirement.

Contributions to tax-deferred retirement accounts, like traditional IRAs and 401(k)s, reduce your taxable income in the tax year you make it. So if your salary was $50,000 last year and you contributed $5,000 to a 401(k), your taxable income would only be $45,000. By taking advantage of catch-up contributions to these accounts, not only do you increase your nest egg, but you also qualify for a bigger tax deduction this year.

Contributions to Roth 401(k)s and Roth IRAs will not reduce your taxable income for the year. The tradeoff is that you won't pay any taxes on Roth distributions in retirement like you will with tax-deferred retirement accounts. Stick to tax-deferred traditional 401(k)s and IRAs if you want to take advantage of the tax deduction this year.

If you use software to file your taxes or if you hire an accountant, you shouldn't worry about determining which tax deductions and credits you qualify for, or how much they're worth. But it still pays to understand the tax breaks that are available to seniors because you may want to modify your behavior, like increasing your tax-deductible retirement contributions, to reduce what you owe even further.

3 Tax-Deductible Investment Expenses

FROM /money.usnews.com

As investors file their tax returns, they’re discovering they can take fewer deductions related to investment expenses.

The new Tax Cut and Jobs Act, known as TCJA, wiped out a lot of the miscellaneous investment expenses that people wrote off previously, says David Faje, a certified public accountant and partner at Warady & Davis in Deerfield, Illinois.

Those prior federal tax deductions include brokerage fees, investment advisory fees, safe-deposit box fees, tax preparation fees, subscriptions to investing publications, anything that was directly connected to the production of investment income.

Investors who itemized taxes could deduct those types of fees if the costs exceeded 2 percent of their adjusted gross income, adds Jeff Moes, executive vice president and chief fiduciary officer at FineMark National Bank & Trust.

It’s likely that fewer people are itemizing their tax returns. While there remain a few tax-deductible investment expenses, as listed in IRS Publication 550, the increased standard deduction means a vast majority of people are no longer able to itemize. The standard deduction is $12,000 for single filers and $24,000 for married couples filing jointly.

The changes in the tax law will expire at the end of 2025 if Congress does not make the law permanent, so it will impact future tax write-offs for at least a few more years. Even with the changes, experts say there are still a few investment-related expenses that taxpayers can take. Here are three tax-deduction strategies that investors may be able to use for the 2018 tax year:

• Use capital losses to offset income.
• Deduct investment interest expenses.
• Turn qualified dividends into ordinary income
  

   

  Use Capital Losses to Offset Income

  Paul Joseph, founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan, says one of the remaining investment-related expenses that people can use to reduce their tax bill is writing off some capital losses.
  “That’s still in effect, and it’s not an itemized deduction as it goes on a different schedule,” he says. “It’s still $3,000 that you can use to offset income.”Capital losses occur when investors lose money on a security. Investors should keep an eye on their cost basis to see if they’re underwater on an investment, Faje says. Cost basis is the original value of an asset. If investors didn’t takes capital losses last year, they can’t use it to offset income as they file taxes this year. But they should make a plan to do that for next year’s taxes, he says.
  
  
  

  “Especially toward year-end, investors might want to think about tax-loss harvesting, which is selling securities they’ve lost money on to recognize that loss,” Faje says. Tax-loss harvesting is a strategy that involves selling off a security that has experienced a loss in order to offset taxes on capital gains and income.

  As painful as the fourth quarter sell-off might have been for some investors, that would have been a prime time to sell losing stocks and lock in enough capital losses.
  
  
  

   

  Deduct Investment Interest Expenses

   

  Investors who itemize can deduct investment interest expense against their net investment income. This expense occurs when people take out margin loans, which is money borrowed against the value of stocks or mutual funds. The money can be used to buy additional securities or used for other financial needs. That margin interest is deductible.

  Moes says investors who want to take advantage of this deduction must do some math to first find their net investment income. To calculate this expense, taxpayers need to take their gross income, subtract qualified deductions, net gains and other investment expenses – those miscellaneous expenses that can no longer be deducted. That total equals an investor’s net investment income. To take advantage of the deduction, the income must be more than the expense.

  For example, if an investor has investment income of $1,000 and interest expenses of $500, then he or she can deduct the interest expense of $500 on the tax return. “This is one of the only expenses that relates to production of stock and bond income that you’re (allowed) to deduct,” Moes says.
  

   

  Turn Qualified Dividends into Ordinary Income

   

  When investors buy securities, they may receive dividends, and they paid out as ordinary dividends or qualified dividends. Qualified dividends are taxed at a preferential rate of 15 percent and don’t count as net taxable investment income. Ordinary dividends are taxed at an investor’s income tax bracket, which means the tax rate could be as high as 37 percent.

  Craig Bolanos, founder and CEO of Wealth Management Group in suburban Chicago, says normally people wouldn’t want to turn qualified dividends into ordinary income unless they have a lot of investment interest expenses that they can’t write off.

  “It’s one of the little-known things that people should be doing that they’re not,” he says. “If you can’t (take) that investment expense because most of your taxable income is qualified dividends, good gosh almighty I’d be willing to turn those qualified dividends into ordinary income dividends to escape taxation.”

  For example, if an investor had $1,000 in investment income, but $2,000 in investment interest expenses, he or she could only deduct the first $1,000. By converting $1,000 of qualified dividends into ordinary income, the investor can deduct the other $1,000, which zeros out the net income.

  Faje says because the federal tax code changed so much, taxpayers shouldn’t just assume that the way they’ve always filed their taxes will be the best.

  “People should run a lot of different scenarios and projections to see how the different changes will impact them, not only this year, but going forward,” he says.