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Should I Tap into my Retirement Funds?

Often if you are in dire need for money the most tempting area to look is your IRA, 401(k), and other qualified retirement accounts. These funds, set aside for your retirement, may seem to be the answer to your financial woes.

Should I take an early withdrawal?

Is it a good idea to tap into retirement account funds prior to reaching age 59½? Here are some things to consider:

  • The penalty. Retirement funds taken out for non-qualified use are not only subject to regular income tax, but are also subject to a 10% early withdrawal penalty.
  • Debt collectors love it. Debt collectors are commonly prohibited from access to your retirement accounts. So if you are using the funds to put off debt collectors, be aware that you may be using funds that might be protected if you became insolvent.
  • There is an opportunity cost. Currently the funds in your traditional IRA, 401(k), and similar retirement plans grow tax deferred. So a dollar today will compound until you withdraw the funds at retirement. This growth is lost with early withdrawals.
  • Not for your kids. It is usually not a good idea to use early withdrawals to help pay a child’s debt or school costs. There are better ways to help children financially than to pay the stiff penalty on your early withdrawal.

If you still need to make the early withdrawal

  • Withdraw “after-tax” contributions first. This can be Roth IRA contributions or other after-tax contributions. Why? Since these funds have already been taxed, there is often no additional tax burden or early withdrawal penalty.
  • Certain withdrawals from qualified plans are allowed. This includes hardship withdrawals for qualified medical expenses, qualified educational expenses, and up to $10,000 to purchase a first time home.
  • Consider taking out a loan from your employer-provided 401(k). You will then repay this loan to your retirement account with interest. But be careful, you are required to repay any outstanding balance when you leave your job.
  • Look into substantially equal payments. Look into taking the distributions as part of a series of substantially equal periodic payments over your life expectancy. If done right, this can help avoid the 10% early withdrawal penalty.

While it is never a great idea to tap into funds that are specifically set aside to make your retirement stress-free, if you must do so it is worth being thoughtful about how you go about the withdrawal.

The IRS Says “Gotcha!”- Late filing of S corporation and partnership returns can be costly

The last couple of years, the IRS has been penalizing late filers of S corporation and partnership tax returns. This despite the fact that late filing of the tax returns (Forms 1120S and 1065), due March 15th, often does not impact the receipt of the taxes due on April 15th. Those that are getting this penalty are often couples and other small firms who have formed these business entities to provide legal protection for their shareholders.

How much is the penalty?

The penalty is calculated based on each partial month the return is late times the number of shareholders or partners. The fine is $205 per shareholder or partner per month. So a return filed 17 days late with no tax due could cost a married couple with an S corporation $820 in penalties!

What you need to know

If you have an S corporation or other partnership, either file an extension or submit your tax return on time. Remember, an extension gives you six months to file and you do not owe the tax until the flow-through tax return due date (typically April 15th).

If you receive a penalty, challenge it. A well-worded request for reversal of the late filing penalty may be successful. Remember, the Treasury Department is still receiving the taxes owed to them on a timely basis.

Where's My Tax Return?- Common items that are often forgotten

Wondering why your tax return is not finished? Often the delay can come from one or two items that were overlooked and are needed to complete your tax return. Here are some of the most common:

Missing Statements. This includes all W-2s and 1099s including any related to gambling winnings, income, interest, and mutual funds.

Dependent conflict. You claim a dependent on your tax return, but your child claimed themselves as a dependent or an ex-spouse has already filed a tax return with the same dependent’s social security number.

Mismatched names. You recently got married, but did not change your name with the Social Security Administration.

Missing deduction documentation. Common among them are; charitable contribution recap, medical expense documents, child-care forms, property tax forms, home sales records, pension statements, and retirement forms.

Waiting for your review. You need to sign your tax return and/or return a signed Form 8879 saying your return is ready to file electronically.

Receiving documentation late. The closer to the April filing deadline your documents are received, the greater the potential back log of return processing. In tax return processing (and receiving a refund), the early bird not only gets the worm, it also gets the worm faster.

If a missing item is requested of you, the sooner you can provide the information the better. It always takes a bit more time to review your return after setting it aside for a missing item.

Great New Option to Reduce Student Loan Debt- Newly passed tax law could benefit many

In late 2019 the bill passed to keep the government open includes a number of hidden gems. This is one for anyone with a mountain of student debt.

What? This Form 1099 is Wrong!- What to do to fix this thorny problem

Vendors are not perfect. What should you do when you receive a tax form that is in error?

2020 Mileage Rates- New mileage rates announced by the IRS

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Last Minute Tax Law Changes- What everyone needs to know

Late on Friday December 20th a new 1,770 page bill was signed into law. Deep within the pages of the bill are a number of retroactive tax law changes to current and expired tax laws. These new law extenders are in place for both 2019 and 2020. Here is what you need to know:

2019 Tax Law Changes

  • The tuition and fees deduction is available. The above the line deduction for up to $4,000 in qualified tuition and fees that expired is now available once again. You will need to evaluate this tax break versus others like the American Opportunity Credit and the Lifetime Learning Credit.
  • Mortgage Insurance Premiums as an itemized deduction. If your mortgage bank requires insurance on your loan and the loan qualifies, you may once again deduct this premium as an itemized deduction.
  • Medical expense deduction threshold stays at 7.5%. Prior rules had the threshold set at 10%. To deduct qualified expenses, your costs need to exceed this amount of your adjusted gross income.
  • Mortgage forgiveness is not income. If a bank forgives mortgage indebtedness, it is typically income to you. Now qualified principal residence indebtedness that is forgiven may be excluded from income with the reactivation of this tax law.
  • Disaster area filing extensions. In addition to allowing taxpayers to take penalty-free money out of retirement accounts for 2018 and 2019 in federally declared disaster areas, the new rules create an automatic 60-day filing extension for future declared disaster areas. In the past, the IRS issued these filing extensions on a case-by-case basis.

Other developments to come

Many other changes are in the bill. These impact retirement accounts and numerous other areas of the tax code for future years. For instance, changes include: eliminating the contribution age limit when funding traditional IRAs, moving the required minimum distribution from age 70½ to 72, penalty-free withdrawals from retirement accounts for new births and adoptions plus much more.

Next week will cover the numerous changes beyond the 2019 tax year!

Missing a Form? Not an Excuse.

If you don’t receive a W-2 or 1099, is this a defense to protect yourself from not reporting the income during an audit?

In short, the answer is no. You are required to report your income whether your employer or customer filed the correct form or not. So what can you do to ensure you do not find an audit surprise in your future due to a simple omission of income from a report you did not receive? Here are some tips:

  • Keep good records. Do not depend on someone else’s records to file your taxes. Keep your own records and then use them to ensure the information on your tax return is accurate.
  • Make a list. Start making a list of your employers and others you believe should be sending you a W-2, 1095, 1098, 1099 or other tax form. Put the list in a file and check off each name when you receive their form. Use last year’s tax return to help you create your initial list.
  • Double check. When you receive the forms, review your records to see if you agree with the information reported to you. Use your last paycheck stub to check your wage reporting, use your bank statement to confirm interest income, use your investment statements to confirm stock and mutual information and use invoices to confirm miscellaneous income.
  • Take charge. If you are missing a form or the form received is in error, contact the firm supplying you the information and get it corrected as soon as possible. If tax filing due dates are approaching, you may need to file an extension while waiting for the corrected form.
  • Record the correct information, no matter what. Record the correct information on your tax return, even if you lack the required form. Not receiving a tax form is not a workable audit defense.

If you receive a notice from the IRS regarding a possible missing item, consider filing an information request to see what the IRS has on file for you. It may help better identify the area of mismatch.

No Check! Where's Your Proof?- What you need to do NOW!

Year-end is a good time to ensure you have proper documentation to substantiate your tax deductions. This is important as many banks start deleting online documentation that is over one year old.


Two things have happened over the past ten years that have greatly reduced the ability to have a canceled check as proof when the auditor comes calling. The first is the advent of online bill paying services. The second is a regulation commonly known as Check 21. With online bill paying, you pay a bill via an online banking service. Your only receipt is often just an entry in your checking account. With Check 21, the law allows banks to digitally capture the check and then destroy the paper copy without returning it to you. So what do you do if you need proof that you paid for a tax deductible item?

Some Tips

  • Know your bank. Understand what your bank keeps and for how long. This includes digital statements and digital copies of checks (both front and back). Understand if there are any fees charged if you need to request copies of payments.
  • Retain copies of all bank statements. Review your records to ensure you have copies of all monthly bank statements. This is often the starting point for an IRS agent that wants proof of payment, so it should be yours as well. These copies may be in either paper or digital format. Download online copies of your statements and place them in a password protected file.
  • Collect copies of tax related proof of payment. Go through your statements and mark the payments that will, in all likelihood, be used as a tax deduction. Make sure you have copies of the front and back of each of these payments. If you do this work now, the copies are often still available online for no fee. Even online bill payments often have a digital copy that can be used.
  • Get independent acknowledgements. If you have larger payments you should also make sure you have independent acknowledgement from the merchant or organization to substantiate the deduction. This is true for charitable contributions of $250 or more, and any business or medical expenses.

While having the traditional proof of an expenditure is now harder to come by, the IRS understands that approved technologies are changing the type of substantiation available for them to review. By being on top of this documentation at the end of each year, you can save yourself a lot of headaches should you ever need to prove your deductions.

Big Changes for Form W-4- Now is the time to review your tax withholdings

Just when you thought you had a firm grasp on all the tax changes, the IRS is making a dramatic change to the way tax withholdings are calculated on your paycheck. Form W-4, used to calculate your paycheck withholdings, has had a major overhaul, and the changes go into effect on Jan. 1. Here’s what you need to know:

The withholding allowance system is gone. The previous form converted your tax situation into a number to determine the proper withholdings. You would take one allowance for yourself, your spouse and each dependent. The new form nixes the numeric allowance system, and instead asks you to provide estimates for income, deductions and credits. A new worksheet is included to help households with more than one job calculate the amount to withhold.

More accurate paycheck withholdings.The goal of the new form is to help you anticipate your tax liability in the new income tax environment. If properly prepared, this new version should provide payroll processors with the information they need to more accurately calculate the tax withholdings from your paychecks. But to accomplish this, you will need to make calculations and fill out worksheets on the front end.

Required for withholding changes after December. You are not required to submit a new form for 2020, but any changes to your withholdings after Dec. 31 will have to be done using the new version of Form W-4. Old forms using the allowance system will no longer be allowed to update your withholdings.

Tax planning is more important than ever. Unless you have a very straightforward tax situation, you will now need to provide a basic tax forecast on the new Form W-4. Accounting for all income, deductions, credits and potential changes to your situation that may arise in the next year are key components to an accurate forecast. Running through the tax planning process now will get your tax withholdings started off right for 2020.