COVID | Live a Life By Design

Stimulus Funds Are Not Free Money

Posted on March 19, 2021March 19, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

You can always count on change occurring in life. First, a pandemic that intrudes in all aspects of our world and, second, the federal government creating responses to the environmental changes. Many Americans will receive, or may have already received, additional economic stimulus payments in the amount of $1,400. Congress has an interesting approach to naming legislation and this most recent law is no different – The American Rescue Plan Act of 2021.

To receive the full amount of stimulus payment, individuals in the U.S. must have a Social Security Number and report adjusted gross income on their 2021 income tax return of $75,000 or less. If the adjusted gross income is higher than $75,000 but less than $80,000, the recipient will retain a portion of the $1,400. In other words, if you report $80,000 or more on your income tax return for 2021, you will be required to repay, through a lower refund amount, the advanced stimulus payment.

One of the changes for this round of stimulus payment is those who qualify for the funds. Unlike previous stimulus payments in 2020, the current stimulus funds are available to individuals, children and non-child dependents. For example, a family of four would receive a total stimulus payment of $5,600. This is helpful for families that are suffering from the effects of COVID-19 but, as my dad would always warn, “nothing in life is free”. The total cost of The American Rescue Plan Act is $1.9 trillion. As of the date of this writing, the United States of America owed more than $28 trillion to its bondholders and other creditors. This debt equates to $85,000 per citizen and $224,000 per taxpayer!

How do we repay such a debt burden? Well, I have good news and bad news. Let’s start with the good news. Individuals who are age 50 or older may not see a significant change in their share of the indebtedness or reduction in their lifestyle due to draconian income tax rates imposed on their earnings. The bad news is that our children and grandchildren will be carrying a heavy burden during their lifetimes to pay for our current overspending.

But, wait, there are other means of resolving our colossal debt balance. One of the most painful would be to cut government spending. Have you ever been given something and had it taken away once you were getting comfortable with its benefits? Not much fun. Cost cutting is one of the most effective yet politically costly methods of resolving our national debt.

Another painful method to resolving the debt crisis (and that is what we have) is to increase tax rates on taxpayers’ income. At one point in the history of our country, to fund World War II, the top marginal rate for income tax was 94%. I am not advocating we return to such a drastic increase in taxes but paying taxes is a price for living in a civilized society.

Perhaps the most convenient, and difficult, method of paying off the national debt is empowering our economy to grow at a faster rate. There were decades in the United States that our country’s growth rate would average 3% annually. What would happen to our country if we could double our growth rate to 6% for a 5-year period? Full employment and taxes rolling in to the U.S. Treasury at a much higher volume would provide the resources for liquidating the national debt.

To fairly apply these potential pain points, to all citizens, equitably is the most difficult task of any elected official. If we consider the opportunities that we could offer our future citizens by paying off our debt and investing that portion of our annual budget in the areas of technology, infrastructure and job creation that improve quality of life, we could truly increase the lifestyle of all citizens.

Now that you understand “free” stimulus isn’t actually free, how do you feel? My goal was not to bring about negative feelings but rather for all of us to fully acknowledge that my wise, old dad was correct – “there are no free lunches in life, someone is paying for it”.

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New Year, New Opportunities, New Tax Laws

Posted on January 15, 2021January 15, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

If there is one thing in life you can count on, that would be income tax changes! Over the past few months, we have seen changes in our world that create anxiety for many people – elections, natural disasters, COVID-19, etc. One of the best methods of understanding the factors of anxiety is to acknowledge who controls the process – you. I’ve said it many times, but it is most important that you invest in yourself by taking care of your mental health. By feeding on a diet of negative news on the TV, you implant in your brain the thoughts that control your psyche for the day. Rather than listening to or watching these events that cause you to be anxious, consider reading a good book or walking in the park to gain a fresh perspective about life.

We can’t totally ignore life because we do owe a duty as citizens of the greatest country on the planet. Annually you are asked by the federal, state and local governments to report certain assets, income and other activities for purposes of paying your fair share of the burden to live in a civilized society (well, somedays it may not seem civilized, but it is). Former Justice of the Supreme Court, Oliver Wendell Holmes, coined the phrase applying taxation as the price for a civilized society but, as citizens, we are owed a duty by those elected to represent us to utilize our taxes in a meaningful way that brings order to our world.

Before you file your 2020 individual income tax return, you may want to consider these important changes that may help your family. President Trump signed the Consolidated Appropriations Act, 2021on December 27, 2020. The law impacts individuals in a manner that helps provide family support and small businesses with additional payroll assistance.

No doubt you have watched the news lately and determined that your bank account may contain $600 more than you originally noted. For those individuals who filed electronic returns for 2019, and whose bank information was on the return, many received their stimulus payments the first week of January. One misunderstanding about the Recovery Rebate Credits of $600 is that the payment is a credit against 2020 income taxes. Individuals with adjusted gross income in excess of $75,000, or joint filers with adjusted gross income in excess of $150,000, are not eligible to receive the stimulus payment.

Teachers also receive additional relief for personal protective equipment costs that may be deducted as qualified educator expenses. This above-the-line deduction is helpful to reduce adjusted gross income which lowers the overall hurdle of other expenses the family may incur such as medical expenses that are deductible as itemized deductions.

If you are unable to itemize deductions but wish to continue to support your local qualified charitable organization, you may do so. The law changes in 2020 allows an above-the-line deduction for qualified charitable donations in the amount of $300.

As we begin a new year for our lives to enjoy, it is critical that we recall the reasons for the founding of the United States of America. The preamble to our constitution provides us a goal for which we must, in a collective manner, strive toward: 1) establish a system of laws and justice equally applied to all citizens; 2) create and maintain a defense of our nation from enemies; 3) promote the general welfare of our citizens; and 4) secure the blessings of liberty. We are a nation of people with one common interest – freedom. Our nation is the beacon to all other nations on the planet as an example for true independence and the opportunity for every citizen to be successful on their own terms. Happy New Year!

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Do You Qualify For A Penalty-Free Distribution From Your IRA?

Posted on November 20, 2020November 20, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

Many people possess an Individual Retirement Account (IRA) or employer plan that holds assets for their future financial security. Due to the substantial economic impact caused by the coronavirus, the IRS provided relief to individuals in the form of more liberalized distribution options for these types of accounts.

However, the misunderstanding of many citizens is that anyone under the age 59½ can take a distribution from their IRA without incurring the typical 10% additional tax (or penalty) for premature withdrawals. This misunderstanding could cost you a significant amount of money, including additional penalty and interest, if you fail to pay the correct amount of tax on the distribution.

To qualify for relief from the premature distribution penalty, you must be a “qualified” individual as defined in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020. A qualified individual is one that has met one of the following criteria:

You have been diagnosed with COVID-19 or SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention (CDC);
Your spouse or dependent is diagnosed with one of the above viruses;
You suffered adverse financial consequences as a result of being quarantined, furloughed, laid off or had work hours substantially reduced due to the pandemic;
You have been unable to work caused by a lack of childcare due to the pandemic; or
You suffered adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to the pandemic.

As an individual with evidence of one of the criteria applying to your situation, and the proof would be required of you, the 10% additional tax on early distribution would not apply. However, federal and state income taxes would apply in this instance. Relief is provided by the IRS in the payment of the income tax due on the distribution by reporting one-third of the income on your individual return over a three-year period beginning with 2020 or the year you receive your distribution. For example, if you requested and received a $12,000 distribution from your IRA, you may include $4,000 of the distribution in each of the next three tax returns filed beginning with your 2020 return. Of course, if you wish to report the entire distribution in the year of receipt, you may do so and pay the total amount of tax due.

Lastly, what happens if you decide to return or repay the distribution to your account? Additional relief is provided in this instance. If you have reported one-third of the distribution on your tax return for 2020 and 2021 but decide to return the funds to your IRA in 2022, you may file an amended income tax return for 2020 and 2021 to receive your refund of taxes paid in these years associated with the pandemic relief. The repayment of the funds would be treated as if they were repaid in a direct trustee-to-trustee transfer and no federal income tax would be due on the distribution.

In most cases, the perception of relief is far different than its actual purpose. Too many people hoped that a carte blanche relief approach would be offered and anyone, for any reason, could take a penalty-free distribution and that would be the end of the matter. Our tax code is not an area of law that is easily amended or comprehensive enough in its nature that revenue generation may be left out of the analysis.

Tax law is not simple to understand. To help your family and you make sense of these complex laws and regulations, seek out the advice of a CERTIFIED FINANCIAL PLANNER™ professional for an analysis and planning meeting to reduce your tax burden. Judge Learned Hand remarked, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that platform which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Now, that alone should help you enjoy a Happy Thanksgiving!

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Tax Law Changes Due to COVID-19

Posted on July 3, 2020July 2, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

Many U.S. citizens have been subjected to financial and other difficulties due to the pandemic. In March, 2020, the U.S. Treasury Department issued an extension of time for filing, and paying, income taxes for individuals. The good news is that you have until July 15, 2020, to file your 2019 individual income tax returns and pay your taxes. Even better news is that you will not be penalized for filing the returns and paying your taxes after April 15, 2020, which is the original legal due date. This exception for the filing date is only applicable to this year due to the disruption in the economy and the “safer at home” implementation protocol for reducing the spread of COVID-19.

Confusion arises when you are one of the taxpayers required to make estimated tax payments to resolve your tax liability. For example, the typical estimated tax payment schedule would be April 15, 2020, June 15, 2020, September 15, 2020 and January 15, 2021. The confusion arises when the original due date for your 2019 return has been extended beyond the payment date for your second quarterly estimated tax payment. To reconcile this quandary, the IRS changed the order of the required estimated tax payments to be as follows: 1^st quarter – July 15, 2020; 2^nd quarter – July 15, 2020; 3^rd quarter – September 15, 2020; and 4^th quarter – January 15, 2021.

Additional time to file returns and pay taxes is an anomaly for U.S. tax filers. Typically, an extension of time would be requested by filing a Form 4868 with the IRS on or before April 15. Consequently, if additional time is needed to complete and file your 2019 returns beyond the extended due date of July 15, you must file a Form 4868 to request additional time to file until October 15, 2020. Remember, the tax you owe for 2019 must be paid by July 15, 2020, or additional penalties and interest may be incurred. To alleviate these onerous penalties and interest, remit your estimated amount owed with your filing of Form 4868.

For those of us that are charitably minded but lack the required level of expenses that qualify for itemizing deductions on our individual return, the IRS is allowing an “above-the-line” deduction of $300 for qualified charitable contributions. My philosophy is to support my favorite qualified exempt organizations despite the ability to deduct the contribution. The pandemic has dealt a cruel blow to the finances of many exempt organizations during a time the need is much greater than anticipated. Take advantage of this opportunity to provide support for our citizens in need of these services and deduct up to $300 without itemizing your deductions for your 2020 income tax returns.

Individuals who wish to be generous in their contributions to exempt organizations can donate even more than the previously law allowed in 2020. Under prior law, the limit for cash donations was increased from 50% to 60% of the taxpayer’s adjusted gross income. The CARES Act suspends the limit of 60% and allows you to contribute 100% of your adjusted gross income to qualified exempt organizations. This provision of law was intended to help the funding shortfalls of the exempt organizations during the pandemic. The suspension applies to cash contributions only (of course, a check or other forms of cash will suffice) and not to contributions of property. Let’s support these organizations that provide a substantial service to our communities!

Lastly, join me in taking the necessary actions to eliminate or thwart the spread of the virus. Each of us has a responsibility in our community to do our part. Adhere to the three “W’s”: Wear a mask, Wait for six feet in distance between you and others in small gatherings to avoid close contact and Wash your hands. All people, including our friends in other countries, should care for one another and work together to rid our world of this deadly virus.

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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!