Timing is Everything

Time is the one facet we humans can’t command in life. You may attempt to manage it, schedule it or even slow it down but you can never make time work to your will and wishes. In that similar regard, the Internal Revenue Code, which is the law guiding the assessment, reporting and payment of various types of taxes in the United States, works in a similar manner when it comes to retirement contributions to Individual Retirement Accounts (IRA).

The law allows an individual with earned income, and meets other criteria, to contribute to an IRA annually. However, there is no ability by the taxpayer to stretch the period for contributions beyond the original due date of their individual income tax return. Typically, filers of Form 1040, the U.S. Individual Income Tax Return, are required to file their returns on or before April 15 of each year. This year is an exception because of Good Friday being April 15 and returns are due on April 18.

An additional three days is granted to those wishing to contribute to their IRA and claim a tax deduction for 2021. This timing of the contribution applies to Roth IRA and Health Savings Account contributors as well.

One of the greatest benefits of contributing to your retirement in this manner is that the IRS helps you make the payment by reducing your tax liability by the amount contributed. The maximum contribution amount for 2021 is $6,000 unless you are age 50 or older which grants you an additional $1,000 “catch up” contribution for a total of $7,000. Keep in mind that this is an individual contribution limit. A married couple filing a joint return may be entitled to a $14,000 tax deduction if both qualify for IRA contributions. This is significant savings for most filers.

If you are self-employed, more good news for your contribution timing to another type of IRA called a Simplified Employee Pension Individual Retirement Account (SEP-IRA). The contribution timing of this particular type of plan is allowed until the filing of your return, which may include extensions of time to file. For example, an individual may extend the time for filing, not delaying the payment of tax, of her return for 2021 until October 17, 2022. These additional months to file your return may allow the accumulation of funds to maximize your contribution, and resulting deduction, for 2021 retirement purposes.

This type of IRA allows a much greater deduction than a Traditional IRA. Based on your net self-employment income, reduced by a portion of your FICA and Medicare to be assessed on such income, you may contribute up to $58,000 for 2021 and deduct it against your income. This sounds like a circular equation but it is a very valuable deduction and may apply to those that have self-employment income.

The tax deadline is fast approaching! Seek out the advice of a CERTIFIED FINANCIAL PLANNERTM professional to help you maximize your tax savings. My philosophy has always been “it is better to pay yourself first”. By contributing to your IRA consistently over a period of years, you will gain confidence for your future success in retirement and save significant taxes along the way. Now, go smell the roses and place a smile on your face!

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Bringing Clarity to Gift Taxes

Many of us have worked extremely hard in life to accumulate a substantial amount of assets to fund our future retirement. The younger generation is buying homes, attending college, and beginning their lives in a way they had been accustomed from their parents. However, in the words of the great songwriter, Bob Dylan, “these times they are a changin’” accurately describes the economic environment for Millennials and Gen-Zs in 2022.

To ease some of the fiscal burden experienced by our children and grandchildren, gifts are often given to them. As you are aware, there are no free lunches in life – even if you paid tax on the funds when you earned them – and you wish to gift funds to your heirs. Each year the annual exclusion, an amount the IRS deems to be free from reporting as a taxable gift, is announced. In 2022, the amount a person may give another without reporting the gift is $16,000.

If your spouse and you wish to help your child’s family purchase a new home, while keeping the monthly mortgage payment at a level the child can service, many resort to gifting cash to the heir. Assume the child is purchasing a $250,000 starter home (yes, I know that is a lot of money for a starter house but re-read the Bob Dylan quote in the first paragraph of this article) and the required deposit is 20% of the purchase price. To accumulate the $50,000 down payment would require considerable time and savings for your heir. 

To reduce the timeline for saving the funds, you simply wish to gift the funds to your child and her spouse. If the structure of the transaction is performed correctly, your children will be in a house before you can say “straight amortization.” One parent may give each of the children, your daughter, and her spouse, $16,000 each or $32,000 in total. We are still short of the down payment amount but let us keep designing our gifting plan. The other parent may gift the same amounts to the daughter and spouse and – voila – we now have $64,000 available for the down payment of the new residence.

Now, the question arises, how do you report these gifts on a return to the IRS? An IRS Form 709 is required to be filed by April 15 of the year after gifts have been transferred to a donee. However, you are only required to file this form if your total gifts per donee exceed the annual exclusion amount ($16,000) in the calendar year. In our previous example, you will note that the parents gave only $16,000 to each of the donees thereby preventing the need for filing a gift tax return.

What happens when you gift a total of more than $16,000 to a donee? How much tax is owed on this transaction? Good news, again! Should you give a donee more than $16,000 in a given calendar year, a gift tax return is filed but the excess amount over the $16,000 is offset by your lifetime exclusion of $12.06 million. My point is that you have a considerable amount of gifting to be performed before taxation occurs in most cases.

Another strategy we employ with our clients is the funding of a grandchild’s education. By making a gift to fund the entire education estimated costs, the grandparent may gift five years of annual gifts in one year and elect to be prorated over the five-year period. For example, Grandpa Bob wishes to send Timmy to the University of Oklahoma in 15 years. Bob may gift a total of $80,000 to a fund that will grow and provide for Timmy’s educational needs when he reaches the age for college. Bob will file a Form 709 and pay no gift tax under the previously stated strategy.

Another misconception of gifting is that the donee believes she owes income tax on the gift. By its definition and nature, a gift is something given to another without consideration being transferred to the donor. In simple language, you can receive a million-dollar gift and pay no income tax. Is this a great country or what?!?

To avoid estate and gift taxes, as well as the reduction of income taxes, it is vital that you plan accordingly prior to transferring your gift. Certain assets contain characteristics that may require special treatment under the Internal Revenue Code. It is critical that you consider the tax implications prior to effecting the transaction. A CPA and CERTIFIED FINANCIAL PLANNERTM professional can help guide you in the gifting process in conjunction with your overall estate planning desires. Taxes may be a part of life, but they do not have to be the primary part of your life.

See you on the jogging trail!

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Why Itemize Deductions?

Remember the old days when you could gain a tax benefit for paying your property taxes in December, generously donate to qualified charities and deduct your mortgage interest? Those deductions from the good old days are still available, but you must have a significantly greater amount of them to itemize and gain a benefit on your personal income tax return. 

The standard deduction for married filing joint taxpayers for 2021 is $24,800 and $25,900 for 2022. For most families, the standard deduction threshold is far higher than they would normally have claimed as itemized deductions. One of the purposes for such a level of standard deductions is to simplify the tax filing for millions of Americans.

Within the itemized deductions additional limits exist. For example, to claim a deduction for your healthcare expenses for 2021, you are required to consider a “floor” of 7.5% or 10%, depending on your adjusted gross income. To create a deduction, consider maximizing your medical expenses by combining qualifying expenses in one year. Another, and more effective method, is to take advantage of any medical employer benefits offered to you.

Some companies offer their employees a “cafeteria” plan or IRC §125 plan that allows for pre-tax contributions to an account that the employee controls and utilizes for co-pays, deductibles, etc. By contributing to this plan in a pre-tax manner, you have avoided the limits caused by the “floor” mentioned above. This means you gain full benefit from the first dollar spent on your qualified medical care.

Income, property and other taxes are allowed as itemized deductions for individuals. The best method of taking advantage of these expenses is to maximize the deductibility of your income tax withholding. For example, let’s assume you are self-employed and the company you own is a partnership, limited liability company taxed as a partnership or an S corporation. These entities distribute the profits to the partners, members or shareholders for taxation at the individual level. Known as conduit returns, all income, losses, gains, credits, etc. will be reported by the owners on their individual returns and taxed for federal and state purposes.

However, some states have enacted legislation that allows the entity to pay the tax on behalf of the owners. By paying the state income tax at the entity level, the owners will receive full benefit of the taxes paid without concern for the $10,000 limitation otherwise required to compute their itemized deductions. Depending on the taxpayer’s income, these savings could be sizeable.

Charitable contributions are another important itemized deduction. Many people do not think about non-cash charitable deductions when preparing their returns. For example, let’s assume you donate your old living room furniture to a qualified charity in 2021. The value of the furniture, determined by IRS-approved methods, would be a deduction on your 2021 return. Proper receipts and other procedures must be followed to deduct the non-cash donation.

You can claim a greater amount of itemized deductions by reducing your adjusted gross income. One of the easiest methods of reducing your income is to contribute to your employer-provided retirement plan. Consequently, this is a great way to increase your future savings since most employers match the contributions you defer from your paycheck.

Another method of lowering your adjusted gross income is to contribute to a Health Savings Account (HSA) if your health insurance qualifies. This is another form of “have your cake and eat it, too!” By contributing to your HSA, unlike the previously mentioned cafeteria plan, you may accumulate the account for many years and utilize for other medical payments after retirement. For example, if a doctor orders rehabilitative therapy in a nursing facility, the funds in your HSA may be utilized to pay these out-of-pocket medical expenses.

The simple act of itemizing your deductions for personal income tax preparation has become more difficult but not impossible. With a little planning and thought throughout the tax year, you may save your family significant federal and state income taxes. This area of tax law is complex. Seek out the assistance of a Certified Financial PlannerTM professional to help guide you through the maze of tax laws to gain the most benefit for your family.

It is truly an honor to share with you each week. This Holiday Season, consider the true wealth you possess in your life – family, friends and faith.  

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IRA Planning for 2021

The pandemic of the past two years has brought a tremendous amount of pain to many lives but there is a positive aspect in that dark cloud of gloom. One of the best attitudes, when performing tax and financial planning for your family, is to seize opportunities that are given you. In other words, capitalize on the negatives that impact your life and make the proverbial “lemonade from lemons.”

Many businesses are suffering net operating losses during 2021. If you are an owner of the business and the operation is conducted as a sole-proprietorship, partnership or S-Corporation, you may have a valuable tax saving asset in your future. The net operating losses of these entities are claimed on the tax returns of the owners. For example, if you were a fifty percent (50%) partner in a partnership that lost $100,000 in ordinary income for 2021, you would receive the benefit of $50,000 loss to be reported on your personal return. 

With your personal return reporting a loss, or much lower income than you otherwise typically report, your Traditional IRA is holding a great value in it beyond its balance. Consider the conversion of your Traditional IRA, in whole or in part, to a Roth IRA prior to the end of 2021. A taxable event will be triggered when the conversion is performed but your tax computation is based on your taxable income which, when claiming your share of the net operating loss, may be lower than your typical year sheltering the income from the conversion from taxation.

The purpose for converting your Traditional IRA to a Roth IRA is to change the future taxability of the account. You will be taxed on distributions received from the Traditional IRA in the future. The Roth IRA does not mandate required minimum distributions to you at age 72 as a Traditional IRA. Also, you may use the benefits of the Roth IRA to accumulate tax-free income streams from a very young age.

If you believe tax rates are going down in the future, you may wish to contribute to a Traditional IRA to enjoy the current tax savings. However, if you think tax rates will be higher in the future, you may wish to forgo the tax deduction of today and contribute to a Roth IRA.

Both types of IRA may invest in many different types of investments – stocks, bonds, mutual funds, etc. The structure and taxation of the two IRA types are the distinguishing benefits each allows for a taxpayer. The IRS continues to close loopholes such as “back door” Roth IRA conversions and other planning opportunities. 

To maximize your opportunities for most challenges in life, it is always an innovative idea to allocate your investments between qualified and nonqualified accounts. Qualified accounts such as IRAs and 401(k) plans are generally taxable upon distribution of the assets to the owner. However, nonqualified accounts such as transfer on death accounts and joint accounts pay taxes during the growth of the assets. When you wish to retire, the type of account may play heavily in your financial plan design.

IRAs are tremendous tools for tax planning. Don’t assume that you simply invest in the IRA every April to save taxes. There are so many other uses of IRAs for estate planning, gifting and lifetime income planning that are often overlooked. As retirement planning experts, we have witnessed a tremendous number of people who fail to maximize the benefits of IRAs. 

Proper allocation of your assets is necessary to stage a retirement plan that will serve you well in life. Seek out the assistance of a CERTIFIED FINANCIAL PLANNERTM professional to help you plan for the future that you wish to achieve. Remember, when you fail to plan, you plan to fail. Be the exception. Take a pragmatic approach to your lifetime of income and enjoy the best of life on your terms. See you on the walking trail! 

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U.S. Proposed Tax Policy Review

No other area of life, for United States citizens, causes as much anxiety and grief as the income tax. The cost of our republic is not cheap; however, we could do a better job in developing our revenue system and dispensing the funds in a more appropriate manner according to the fiscal experts found at the coffee shops across our country. 

Recently, a proposal is being considered, for purposes of raising the revenue in our country, to tax individuals earning above a certain limit on the increase in the value of their assets (i.e., investments, real estate, etc.). This is a “value-added” tax approach that stems from European countries who, by the way, discontinued the system because it created a precipitous decline in investment, loss of overall national revenue and its citizens left the country for a better way of life. The premise is that your investment portfolio would be taxed based on the growth you have experienced in the tax year regardless of selling any assets and recognizing a gain. For example, let’s assume Charlie invested his savings of $1,000 in a stock that rose in value to $2,000. Under the proposed tax law change to tax the growth, Charlie would owe tax on the $1,000 growth but he has no cash to pay the tax. This is the dilemma created by this type of tax policy. In a nation that seeks fairness and opportunity to all citizens, this is an example of bad policy.

Another area of policy posed by Congress seeks out those that are not paying their fair share (well, according to certain members of Congress). A tax policy that seeks to segregate and apply to only certain individuals (i.e., billionaires) would be unfair, not because the billionaires can’t afford it, but rather that the Internal Revenue Code should not seek out a certain group of the population to punish but rather seek to be applied fairly to all of citizens. It would not be good policy to start building a revenue-generating tax system that punishes achievers and rewards those that lack ambition or adventure to risk it all for the sake of growth.

One last area we will explore today is the desire of the U.S. Congress to become more entangled in the lives of our citizens. Recently, a proposal was offered to require your local bank to report all transactions, of $600 or more, in your bank accounts to the IRS for examination and scrutiny. Some exceptions apply such as your SSA Benefits and U.S. Government Pension payments. The purpose of this proposal is to ferret out tax cheats and increase the amount of revenue from unreported, or underreported, income. A bigger issue is at stake in this type of proposal. What about the privacy of our citizens? Sure, I want everyone to pay their fair share of tax but what about the liberties of those that already pay their fair share? Let’s assume you receive a gift from Aunt Betty for $15,000 for graduating college or a birthday? The IRS would require your explanation, and proof, that such item was not taxable. The burden of proof would lie with the taxpayer in this case.

There are better methods of closing the tax reporting gap than to invade the personal bank accounts of our citizens, many of which are law-abiding citizens. 

Our system of taxation is one based on honor and honesty. It is important that our tax code be constructed with the same traits. I do not deny that many citizens fail to honestly pay their fair share of taxes. However, punishing all citizens for the actions of a few does not merit the loss of individual rights and freedoms. 

Taxation is a valid means for funding many of the necessary programs that support our citizens. It is truly a fact that one can rely on only two things to occur in life – death and taxation.

If you think you are paying too much in taxes, seek out assistance from a CPA or contact a CERTIFIED FINANCIAL PLANNERTM professional to help you gain control of your financial life. 

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Change — The Most difficult Task To Accomplish

Life happens with – or without – our consent! One of the most problematic areas of life is managing the fast-paced world of ever-changing financial, tax and estate information. In the past two weeks, the United States Congress has proposed more than ten bills, between the Senate and the House of Representatives, to increase tax revenue for the United States of America. Some of these proposed bills would impact your family. Others will impact families with greater wealth. Too often elected officials feel that they must act, whether it is a good outcome or bad one, to give the appearance of working for their electorate. Change is one outcome of working in our government and the impact is real.

As a CERTIFIED FINANACIAL PLANNERTM professional, one of the areas of control we bring to our clients is change. Of course, life is going to change almost daily. However, when you have a plan of action, with an expert in the field of planning guiding you through the maze of change, your probability of achieving your intended outcomes is much higher. Our role is to help you understand the impact of the changes on your personal life and finances. Frequently, you are subjected to changes without your knowledge. Consider inflationary impact on your investments.

One need only watch a few minutes of network television news daily to know her life is being impacted in positive and negative ways. Inflation has risen to 5.4% in 2021, according to the U.S. Bureau of Labor and Statistics, and may not have reached its peak. How does this affect your life? Think about the different consumer goods you purchase in a typical week. How much has gasoline, milk, bread and medications increased in the past year? Has your income maintained the pace of this increased cost of living? In most instances, the answer to this question is “no”.

What you need is to formulate a plan that considers inflation as a pressure on your family’s budget. One of the economic factors that is pertinacious is inflation. This challenge to the value of a dollar is always a factor in planning. The bigger question is how much will inflation be in 2022, 2023 and 2024? If I knew the answer to this quandary, well, I would be on an island in the Caribbean sipping on an iced tea while watching the sun set. Oh, back to reality.

One mitigating approach to combatting the negative impact of inflation is to invest in assets that are inflation resistant. For example, you wouldn’t wish to buy a 30-year U.S. Treasury Bond while inflation is rising. The impact of inflation on the value of the security is considerably negative. However, you may wish to analyze your portfolio for investments in stocks that are more growth oriented to overcome the inflationary pressure you are experiencing.

Another area of change for which we have no control is the loss of a spouse or other family member. This type of change, we refer to as familial change, is difficult for most families to navigate, particularly when the person was a breadwinner for the family. What do you do now? It is critical that you seek the appropriate counseling from a licensed therapist or group to deal with grief. The next step would be to regain control of your finances. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to help gain clarity of focus and to manage the change to your best outcomes. When you meet with someone to discuss your personal finances, it takes a tremendous amount of trust. The good news is that you will gain significant optimism from the assistance that will empower you with confidence that life is back to your design.

Change will be present in our lives forever. However, you have the power to determine if the changes control you or you control the effects of the changes. One powerful tool in maintaining your control is to have a plan. Contact a CERTIFIED FINANCIAL PLANNERTM professional to help you gain control of your financial life. See you on the jogging trail! 

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Year-End Tax Planning Ideas

When is the best time to plan for lowering your income tax bill? Everyday! As we rapidly approach Halloween, it triggers in my mind a few activities that should be addressed by individuals who desire to pay less in income taxes for 2021. Most Americans will not itemize deductions due to the higher standard deduction allowed in the CARES Act of 2020. There remains plenty of other options for lower your bill payable to Uncle Sam.

First, the easiest method of lowering your tax bill is to pay yourself first. Before you get confused from reading the previous sentence, think about areas of tax law that benefit you such as deferring income or contributing to qualified accounts. If you are working with an organization that provides a retirement plan, review the plan documentation and determine if you can make additional contributions to the plan or at least increase your deferral for 2022.

The maximum amount of deferrals you may direct to your employer’s plan depends on the type of plan offered. For example, if your employer offers a 401(k) plan, did you contribute the maximum for your age? If you are under the age of 50, the maximum you could contribute for 2021 is $19,500. You do not have to contribute this amount, but this is the maximum allowed. However, for those of us age 50 or older, an additional $6,500 catch-up provision is allowed in 2021. This is a total of $26,000 of income removed from your taxable income for 2021. This is a valuable reduction in tax burden…for now.

Should you work for any entity that does not provide a retirement plan, consider a contribution to a traditional IRA before April 15, 2022. You may contribute up to $6,000 in a traditional IRA on or before the deadline and escape taxation on this amount income for 2021. If you are 50 years of age or older, you may contribute another $1,000 of catch-up contributions.

If you are self-employed and desire to save taxes in 2021, you may wish to consider a SEP Plan, which is a retirement plan for self-employed individuals. This plan is especially helpful in contributing larger amounts of money to grow your retirement savings. The limit for contributions in this type of plan for 2021 is $58,000 or 25% of your self-employment compensation whichever is lower. If you wish to establish this type of plan, you must form and fund the plan prior to the filing of your 2021 income tax return including extensions of time to file.

Administratively, it is important to initiate the organization of your tax documents for the year. Don’t wait until April 15, 2022, to begin this process. Your taxes are becoming more complicated each year. I know it sounds good, but every time Congress passes a “tax simplification” bill, the Internal Revenue Code gets more confusing. Oh well. There are far worse ramifications that may occur in life.

At the time of writing this article, Congress was mired in conflict as to the amount of a funding bill for improvements to the infrastructure, which is very broadly defined in the bill. Is the amount $6 trillion, $3.5 trillion or $1.5 trillion? No matter how quickly you read the prior sentence, it is a lot of money. What makes it more difficult when planning your taxes for a certain year is that the law continues to change on a rather chaotic basis. 

My approach would be for Congress to set a deadline such as October 31 of each year to pass any tax bills. This would allow for ample time to make changes to forms and IRS software to accurately process the upcoming tax returns for the year. In the past two years, primarily due to COVID-19 and the stimulation of the economy with three tax bills, the IRS has been overwhelmed with a task that is insurmountable. Hopefully, we will know the applicable tax laws for 2021 before yearend. 

It is wise to visit with your CPA or CERTIFIED FINANCIAL PLANNER™ professional to help you get a handle on your tax burden before it becomes a real challenge. See you on the jogging trail!

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Deductions or Credits?

One of the most confusing components of the Internal Revenue Code of the United States of America is the difference between deductions and credits. Let’s explore a few of these differences and provide you a guide as to how to select the appropriate approach to lower your income taxes for 2021.

Many younger, married couples desire to own a home. In 2021, due to the effects of the pandemic on supply chains and logistics, the cost of the various materials to build a home has risen significantly. A good method of lowering the overall cost of the home is to take advantage of any credits that may be available to you for home ownership. For example, when renting a personal residence, you receive no income tax benefits for your monthly rental payments. However, when you are investing in a personal residence, the current law allows deductions for ad valorem taxes and mortgage interest. 

Notice in the previous sentence I used the word “deductions”. What if you had a more advantageous means of benefitting from home ownership? The First-Time Homebuyer Credit is available for those individuals who have not owned a principal residence in the 3-year period ending on the date of the purchase of the principal residence to which this credit applies. To many millennials, this is an incentive to invest in real estate for potential growth in the future.

The credit amount for purchasing your home, for tax year 2021, is limited to $8,000 or ten percent of the purchase price of the residence.

Additional considerations must be examined to determine qualification for the credit such as purchase price limitations of the home, modified adjusted gross income of the taxpayer (buyer) and the location of the property. Claiming this credit may sound confusing but the benefits exceed the time involved to determine qualification. Consult with your tax adviser or Certified Financial Planner™ professional prior to purchasing your first home to determine if you qualify for this generous credit.

The benefit of a tax credit as opposed to a tax deduction is that a credit offsets your tax liability dollar-for-dollar. For example, lets assume, in a very simplistic example, that you calculated your tax liability for the year 2020 and you owe $15,000 of tax and had $6,000 of federal income tax withholding from your paycheck. This would require you to pay the $9,000 deficiency out of your savings when filing your return. However, if you had qualified for a credit that would offset the deficiency of $9,000, say the First-Time Homebuyer Credit of $8,000, you would only need $1,000 of your savings to completely pay your tax bill.

The deductions for mortgage interest and ad valorem taxes are opportunities to save additional taxes but credits are more valuable to you due to the ability to offset the tax burden directly. Further, you may not accumulate a sufficient amount of itemized deductions for the year in which you buy your first home. The mortgage interest and associated taxes would not be helpful in lowering your income taxes if you can’t exceed the allowed standard deduction.

One of the bedrock principles of tax planning is to take advantage of legal opportunities to lower your tax burden to the lowest possible amount legally owed. Judge Learned Hand’s quote of patriotism in taxation comes to mind – “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” 

Well said, Judge Hand. I’ll see you on the jogging trail!

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Your Philosophy of Taxes is Critical to your Success

It is time to file your 2020 individual income tax returns. Many people face this task with trepidation and stress. To help you focus on this important obligation of all Americans, I am providing you some simple, yet effective, strategies to reduce this process to its simplest form.

First, do not procrastinate until April of each year to begin preparing for this required activity. Too many of us dislike the process of gathering and organizing our information to perform the task of preparing our returns. Do you remember the question about tackling big projects? You know, “How do you eat an elephant?” The answer for the previous query, as well as the approach to your organization of tax information is the same, “one bite at a time”.

Every month, when you receive your bank and credit card statements, review them and highlight the line items that may be an income or deduction for your returns. Take a blank piece of paper and record the line items in their respective categories you determine on the paper. This sheet of paper will be your accumulator of all the monthly items of income or deductions for you.

Provide the sheet along with all your information returns received from your employer, banks, payers, investment accounts, etc. to your tax preparer as soon as possible in the month of February. Why so early? Keep in mind that most tax preparers work on a First-In-First-Out Method of completing returns for their clients. Also, by providing this information early in the term of tax season you will be gaining access and services from your preparer before the fatigue and craziness of tax season sets in.

Second, think about the types of deductions you can perform that allow you keep control of your money. Of course, I am referring to contributions to your employer-provided retirement plan, Traditional Individual Retirement Accounts and Roth Individual Retirement Accounts. What a great opportunity you have available to increase your security for the future while taking a current tax deduction on your returns! 

Because of the pandemic, you have an additional month to contribute to your IRA or Roth IRA. If you wish to contribute to these tax-qualified accounts and claim the deduction on your 2020 income tax return, you must do so by May 17, 2021. The maximum contribution for individuals under age 50 is $6,000 for the 2020 tax year. For those of us 50 years of age or older, $7,000 is the contribution limit. The question becomes “how much should I contribute?” Of course, the answer may differ for everyone based on his or her particular facts and circumstances. However, I do have an answer that applies – as much as you are allowed by law! 

Once your tax year has lapsed, your available deductions are limited. It is imperative that you take advantage of the provisions within the Internal Revenue Code and maximize your tax savings each year. A wise, old proverb found in the Bible guides us about managing our money properly: “Of what use is money in the hand of a fool, since he has no desire to get wisdom.” A friend asked me why money is so important to me. I informed him that money is not important to me, it is the freedom it affords me that is priceless.

Your philosophy toward filing and paying taxes should be one of gratitude. There are many people in countries without basic living needs such as running water, highways to drive on, food that is edible and medical care for the elderly and children. How are these programs funded in the United States of America? With our tax dollars! One of my favorite quotes of Judge Oliver Wendell Holmes, “Taxes are the price we pay for a civilized society.” Be grateful you pay income taxes each year. This act of filing and paying taxes means that your family had a means of support and enjoyed far more of life than many others may.

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Tax Relief For Recent Disaster Victims

The Internal Revenue Service (IRS), a branch of the U.S. Treasury Department in which we are all familiar, issued a news bulletin today that described the tax relief provided Oklahomans whose lives were significantly disrupted by recent snow and winter storms. President Biden declared the State of Oklahoma a disaster area availing the leaders of our state, counties and municipalities to receive Federal Emergency Management Agency assistance for housing and other human needs. Taxpayers are entitled to relief, too!

To avail yourself to the relief granted by the IRS, you must live or have a business in the affected disaster area. All of Oklahoma’s seventy-seven counties were declared disaster areas allowing all citizens that need tax relief may receive it. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines. For example, any business or individual tax returns, and related payments, required between February 8, 2021, and April 15, 2021, will now be due on June 15, 2021.

This relief will generally apply to most types of tax returns and payments. For example, if you are an individual or joint filer, your return would typically be due on April 15, 2021. Considering the relief granted by the IRS, your return is now due on June 15, 2021, without the filing of an extension of time to file or the payment of any tax owed. For those individuals subject to estimated tax payments, primarily self-employed or those with non-wage income, you will not be required to remit your first quarter tax payment until June 15, 2021. 

One word of caution. Quarterly tax payments are due on April 15, June 15, September 15, and January 15 for calendar-year filers such as individuals. This would mean that your estimated tax payment due on April 15 and the second quarter tax payment due on June 15, 2021, are both due on the same day. Therefore, you are liable penalties should both payments fail to be remitted timely. 

Some good news is found in the emergency relief declaration! For individuals who wish to contribute to an Individual Retirement Account (IRA) or Roth Individual Retirement Account (Roth IRA) they have until June 15, 2021, to make their contribution for a possible 2020 income tax deduction. This is the time to take advantage of the two-month period for reducing your taxes and contributing to your future for qualified individuals!

For those taxpayers who suffered a casualty loss caused by the disaster, the option to claim the loss on the return in the year the casualty occurred or claim on the preceding year (2020) is available. This election, which must be claimed on a timely filed return, and may help relieve the tax burden some taxpayers would otherwise have been required to pay on June 15, 2021.

Should you receive a notice of penalty for late payment of your 2020 income taxes or estimated tax payments for those filed on June 15, 2021, the IRS will provide abatement of the penalties by calling the telephone number provided on the notice. It is wise to consult with your CPA or tax preparer to determine what steps should be taken to achieve the relief sought from this declaration.

Other types of taxpayers are allowed additional time to file returns, too. For example, if the entity is a corporation, partnership, trust or exempt organization, with an original due date for the 2020 tax return between February 8 and April 15, the due date is now June 15, 2021. However, any Forms W-2 or 1099 that are due by February 28, 2021, should be filed in a timely manner or an extension of time filed with the IRS. 

If your records were destroyed during the disaster, the IRS will provide, free of charge, copies of previously filed tax returns for affected taxpayers. What can be better than that?

For two consecutive years our state, and its wonderful citizens, have been subjected to significant disruption caused by natural disasters. Let us hope Mother Nature is not serving up a trifecta! 

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