April, 2020 | Live a Life By Design

IRA Law Changes That Affect You Now!

Posted on April 28, 2020April 28, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

If you are receiving required minimum distributions from an IRA, you may have an opportunity to lower your tax burden for 2020! The Coronavirus Aid, Relief and Economic Security (CARES) Act includes a waiver for required minimum distributions for 2020. This provides immediate relief to taxpayers who were being forced to pay tax on the distribution but had no economic need. Another reasoning for this provision of the Act was to allow investors to retain their investments within their IRAs during a time our economy was contracting. Further, the required minimum distribution is based on the balance of the account at December 31, 2019. The markets were much higher than they are currently. The waiver applies to traditional and Roth inherited IRAs, too.

To provide immediate tax reduction, individuals under the age of 59½, who need funds to continue their lifestyle, may receive up to $100,000 of IRA premature distributions in 2020 and the 10% penalty for early distribution will be waived. However, the distribution is taxable. Good news for these individuals is that the tax due on the distributions may be evenly spread over three (3) tax years to be repaid.

If you are in the process of preparing and filing your 2019 individual income tax returns, you may contribute to your 2019 IRA up to July 15, 2020. This contribution would normally be allowed only to the date of April 15. By providing taxpayers the opportunity to build additional cash flow for their households, the extension of time to fund an IRA may allow investors to open or fund an IRA that otherwise would not be feasible.

Limits for IRA contributions for 2019 remain at $6,000 for Roth and Traditional IRAs. For those age 50 or older, an additional “catch-up” contribution of $1,000 is allowed. If you or your spouse, as married filing joint tax filers, wish to contribute to an IRA for 2019, your modified adjusted gross income must be $103,000 or less. If you are a single filer, your modified adjusted gross income must be $63,000 or less to contribute the full amount allowed in a Traditional or Roth IRA. The limit for IRA contributions for the 2020 tax year are the same as those in 2019.

Earnings limits for contributions to an IRA, while participating in an employer plan, are increased to $65,000 for single filers and $104,000 for married filing joint filers. The preceding amounts of modified adjusted gross income allow the taxpayer(s) to fully deduct their IRA contributions.

Lastly, one of the better changes to the IRA rules, for 2020, is the allowance of contributions to an IRA by individuals older than 70½. There is no age limit to make contributions to a Traditional or Roth IRA in 2020. This is a big bonus for many individuals who are savers. A tax deduction that you get to keep in your own account!?!? Welcome to the crazy world of taxation in the United States. See you on the golf course!

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Strategies for Using Your Stimulus Check

Posted on April 17, 2020April 17, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

Have we secretly transported to another universe? We can’t sit in a restaurant and eat dinner. We can’t attend a movie theatre. We can’t even visit our friends. All of these changes in life because of one thing – a virus. Have we experienced a paradigm shift in our lifestyle in the United States? I say NO WAY!

The United States Treasury has begun the process of issuing stimulus payments to qualified American citizens. Checks and direct deposit payments started crediting the checking and savings accounts of my fellow countrymen earlier this week. Most of us will receive a benefit of $1,200, some will receive a lesser amount and others will receive nothing. What do you do with this sudden inflow of money?

One of the most basic strategies of using your stimulus benefit is to establish a plan that addresses your most critical needs. For example, if you are in need of shelter, food or medicine, you should utilize the funds for these purposes. What if your mortgage is a federally-backed loan (such as FHA loans)? You may be granted payment relief for 6 – 12 months! If you are renting, perhaps your landlord will allow you to defer a month or two so that you can focus on the more important matter of your health. Any medicines you may require to maintain your health would be the focus for using your stimulus check.

If your basic living needs are met, you should consider saving the stimulus funds to enhance your emergency funds. It is vital that you maintain a minimum of 60 – 90 days of living expenses in a readily available account for emergencies. Guess what? The current pandemic we are living through is one of the emergencies for which this fund would be utilized! By maintaining access to funds that will allow you to live your life as you desire, at least for a period of time despite the ever-changing world around you, is both comforting and empowering. To know that your lifestyle can continue through times of struggle gives you the mental confidence to meet other challenges that may arise in life.

Let’s assume that you accumulated ample savings in your emergency fund. You may wish to review your debts and pay down, or even better pay off, certain high interest debts such as credit cards. I am not a big fan of credit cards due to the ease of abuse of such unsecured credit that allows individuals to live beyond their means. The phrase my father often tells me come to mind pertaining to credit cards – “give a man enough rope and he will hang himself”. During times of economic distress, many credit card companies will lower your interest rate for a period of time, if you contact them, and have been making your payments consistently and on time. Once the card is paid in full, place it in a zip-lock bag, then place the bag in a plastic container of water. Next, place the container in your freezer. This will require some effort on your part to free the card from the ice causing you to expend energy and time thinking about the use of the card.

Should you have none of the above needs, consider yourself a lucky person! The use of your stimulus benefit could be a very positive act such as contributing to an Individual Retirement Account (IRA) for a tax deduction. By saving for your future with an IRA, you will be preparing for the future in a bold way. Your needs are met today, for the next 90 days and for your future!

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Relief is on the Way!

Posted on April 3, 2020April 9, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

These are truly unprecedented times for us as Americans! As businesses deal with the disruption, the U.S. Treasury has designed a few programs to help our citizens with relief. This article will be part one of a two-part series on the various methods and programs for individuals and businesses to seek relief. We will focus on individual relief provisions in this first article.

No doubt that you have heard many acronyms and strange titles assigned to laws passed by Congress but this one may be the most unique. CARES Act is the short name for the Caronavirus Aid, Relief and Economic Security Act. Whew! That is a mouthful. The primary purpose of this bill is to enhance our economy by infusing capital into the hands of citizens and businesses to continue to weather this difficulty. President Trump signed the bill into law on March 27, 2020.

Many of you will be receiving a stimulus check in the amount of $1,200 for each individual and $500 for each child under the age of 17. To receive these funds, you must have filed a tax return for 2018. If you haven’t filed a return for 2018, it is highly recommended that you do so promptly to qualify for this nontaxable benefit payment. For those who filed their 2019 returns before the pandemic worsened in the United States, your 2019 return will be utilized for purposes of qualifying for the stimulus benefit payment.

To qualify for the $1,200 payment, a phase-out, or disqualifying level of income is between $75,000 to $99,000 as an individual or $150,000 to $198,000 as a joint filer. If you did not file a return for 2018 because your income was lower than the filing requirement and you are a Social Security Benefits beneficiary, you will not need to file any returns and the information from SSA will be used to determine your benefit payment qualifications. Many questions exist about the qualifications of the recipients’ income in 2020, which is the year the stimulus payment is received. As an experienced CPA with a Masters in Tax, I expect those individuals that received the stimulus payment based on income reported in 2018, in other words have not filed their 2019 returns, and exceed the income limits for 2020, will not be required to repay the compulsory stimulus payments. We will continue to monitor IRS guidance on this issue.

Typically, a taxpayer would be required to report distributions from an employer retirement plan when received with the resulting tax and premature distribution penalty, if applicable, assessed on their income tax returns. However, for those individuals diagnosed with COVID-19, who receive a distribution from their 401(k)-plan account, the 10% penalty is waived on early withdrawals up to $100,000. The withdrawal will be taxable but the tax associated with the withdrawal will be spread over a three-year period.

If you own an IRA and were subject to required minimum distributions, you may elect forgo your distribution for 2020 and not be subject to a penalty. This waiver applies even if you were not impacted by the pandemic. This is an excellent planning point and may save retirees unnecessary income taxes at a time our economy is in recovery.

Charities have been stricken particularly hard during this economic halt experienced in our country. To address the issue of revenue loss for these types of organizations, Congress included a provision in the bill that allows individuals to deduct “above-the-line” contribution of a total $300 or less made to qualified charities. To determine the qualified status of a charity, you may find the list of approved charities at the IRS website (irs.gov).

For those individuals who claim itemized deductions on their returns, the limitations for qualified charitable contributions has been increased to allow unlimited deductions in individuals. Another income tax planning point would be to consider charitable contributions more earnestly in 2020 than prior years. You may experience considerable tax savings!

It is critical that you be proactive in the process for applying for additional aid, if needed. This is the time to reach out to your neighbors and check on the welfare of the more senior members of our community. Many families may weather the financial storm but the emotional toll of self-isolation and social distancing may be far worse. Send a note to a friend, place a call to a neighbor for no other reason than sharing a discussion about something positive. This is what makes our nation so exceptional – caring for those who may be suffering worse than you.

Be safe and stay well. We will get through this challenge and become a better community in the process.