October Extended Due Date Just Around the Corner

Article Highlights:

  • October 15 is the extended due date for filing federal individual tax returns for 2018.
  • Late-filing penalty
  • Interest on tax due.
  • Other October 15 deadlines.

If you could not complete your 2018 tax return by the normal April filing due date and are now on extension, that extension expires on October 15, 2019. Failure to file before the extension period runs out can subject you to late-filing penalties.

There are no additional extensions (except in designated disaster areas), so if you still do not or will not have all of the information needed to complete your return by the extended due date, please call this office so that we can explore your options for meeting your October 15 filing deadline.

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns is September 16 (September 30 for fiduciary returns). So, you should probably make inquiries if you have not received that information yet.

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states.

In addition, interest continues to accrue on any balance due, currently at the rate of 5% per year. This rate is subject to adjustment quarterly.

If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please call this office immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined to avoid the potential penalties.

Additional October 15, 2019 Deadlines – In addition to being the final deadline to timely file 2018 individual returns on extension, October 15 is also the deadline for the following actions:

  • FBAR Filings – Taxpayers with foreign financial accounts, the aggregate value of which exceeded $10,000 at any time during 2018, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The original due date for the 2018 report was April 15, but individuals have been granted an automatic extension to file until October 15, 2019.
  • SEP-IRAs – October 15, 2019 is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2018. The deadline for contributions to traditional and Roth IRAs for 2018 was April 15, 2019.
  • Special Note – Disaster Victims – If you reside in a Presidentially declared disaster area, the IRS provides additional time to file various returns and make payments.

Please call this office for extended due dates of other types of filings and payments and for extended filing dates in disaster areas.

Who Claims the Children You or Your Ex-Spouse?

Article Highlights:

  • Custodial Parent
  • Dependency Release
  • Joint Custody
  • Tiebreaker Rules
  • Child’s Exemption
  • Head of Household Filing Status
  • Tuition Credit
  • Child Care Credit
  • Child Tax Credit
  • Earned Income Tax Credit

If you are a divorced or separated parent with children, a commonly encountered but often misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue between parents; however, tax law includes some very specific but complicated rules about who profits from the child-related tax benefits. At issue are a number of benefits, including the children’s dependency, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and, in some cases, even filing status.

This is actually one of the most complicated areas of tax law, and inexperienced tax preparers or taxpayers preparing their own returns can make serious mistakes, especially if the parents are not communicating well. If parents will cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually, and compensate for it in other ways.

Physical Custody (Custodial Parent) – If a family court awards physical custody of a child to one parent, tax law is very specific in awarding that child’s dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, the custodial parent may release that dependency to the non-custodial parent for tax purposes by completing the appropriate IRS form. The release can be granted on a yearly basis or for multiple years at one time. But once made, it is binding for the specified period.

CAUTION – The decision to relinquish dependency should not be taken lightly, as it impacts a number of tax benefits.

Joint Custody – On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules, the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year; or if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income will claim the child as a dependent. Parents in the process of divorcing should be aware that for tax purposes, the IRS’s rules as to who can claim a child’s dependency takes precedence over what a divorce decree says or what a judge may have ruled. So, for example, if the family court awards full custody of a child to Parent A but says that Parent B can claim the child as a tax dependent, the IRS’s position is that the child is a tax dependent of Parent A unless Parent A releases the dependency to Parent B, as explained above.

Child’s Exemption Allowance –While there is no longer (through 2025) a monetary tax deduction (also referred to as an exemption allowance) for a dependent child, it still matters who claims the child as a dependent because certain tax credits are only available to the taxpayer claiming the child as a dependent.

Head of Household Filing Status – An unmarried parent can claim the more favorable head of household, rather than single, filing status if he or she is the custodial parent and pays more than half of the costs of maintaining, as his or her home, a household that is the child’s principal place of abode for more than half the year. This is true even when the child’s dependency is released to the non-custodial parent.

Tuition Credit – If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whoever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar, while deductions reduce income to arrive at taxable income, which is then taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, of which 40% is refundable. However, both education credits phase out for higher-income taxpayers. For instance, the AOTC phases out between $80,000 and $90,000 for unmarried taxpayers and $160,000 and $180,000 for married taxpayers.

Child Care Credit – A nonrefundable tax credit is available to the custodial parent for child care while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that if the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent can still qualify to claim the child care credit, and it cannot be claimed by the noncustodial parent.

Child Tax Credit – A $2,000 credit is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $200,000 for unmarried parents and $400,000 for married parents filing jointly.

Earned Income Tax Credit (EITC) – Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency of a child or of children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose dependency has been released by the custodial parent.

As you can see, some complex rules apply to the tax benefits provided by the children of divorced parents. It is highly recommended that you consult this office to prepare your return. If you are the custodial parent, you should also consult with this office before deciding whether to release a child as a tax dependent.

Tax Issues That Arise When Converting a Home into a Rental

Article Highlights:

  • Reason for Conversion
  • Basis
  • Depreciation
  • Cash Flow versus Tax Profit or Loss
  • Passive Losses
  • Home Gain Exclusion

There are many reasons to convert a home into a rental, such as to ensure that a prior home produces income and appreciation after the owner buys a new home; to maximize the tax benefits for an elderly person who can no longer live alone by delaying the sale of that person’s home; and to ensure that a home provides value when its owner takes a temporary job assignment in a different location. Some homeowners even mistakenly think that, when a home has declined in value, converting it into a rental can allow them to deduct that loss. Regardless of why an individual makes such a conversion, a number of tax issues come into play as a result of that decision.

Basis – The basis of the converted property is a good starting point for examining these conversion-related tax issues. The basis is the starting value that is used to calculate gains or losses for tax purposes. The basis is also used to determine the amount of depreciation that can be claimed. Generally, for depreciation purposes, a property’s depreciable basis on the date of the conversion is the lower of its adjusted basis (the original cost, plus the value of any improvements, minus the deducted casualty losses) or its fair market value (FMV).

Example #1: A home’s original purchase cost was $250,000; the homeowner later added a room at a cost of $50,000. At the time of the conversion, there are no casualty losses, so the home’s adjusted basis is $300,000 ($250,000 + $50,000). By comparison, the property’s FMV is $350,000, so the depreciable basis for the rental is the lower of the two amounts: $300,000.

 

Example #2: If, on the date of the conversion, a home has the same adjusted basis as in Example #1, but its FMV is only $225,000, then the depreciable basis used for the rental is equal to $225,000, as that is the lower of the two amounts.

When a home’s FMV is less than its adjusted basis on the date of conversion, as in Example #2, the rental has dual bases:

(1) If the rental is subsequently sold for a loss, the basis for loss is the FMV on the date of the home’s conversion. Because losses from the sale of personal-use properties (such as homes) are not deductible, this rule prevents homeowners whose homes have declined in value from converting them into rentals in order to claim tax losses.

(2) If the rental home is subsequently sold for a profit, the basis for the gain is the property’s adjusted basis.

Depreciation – Depreciation is an allowance that both accounts for wear and tear and provides a systematic way for the owner to recover the initial investment in the property. This is necessary because tax law doesn’t allow homeowners to deduce the entire cost of a residential rental at one time. Despite this statutory allowance for the depreciation of residential rentals, real properties have historically appreciated rather than depreciated, so this allowance typically provides a significant tax advantage (i.e., a write-off). Here is how to determine the depreciation for a residential rental: First, reduce the basis by the value of the surrounding land (as land is not depreciable) to get the value of the improvements to the home; then, multiply that value by .03636 (the depreciation rate). Generally, the value of the land is based on a property-tax statement. For example, if a property-tax statement values an entire property at $240,000 and its land at $80,000, then 1/3 of the basis ($80,000 / $240,000) is allocated to land; the remaining 2/3 is allocated to improvements. Thus, if the basis is $300,000, then the depreciable improvements are valued at $200,000 (2/3 × $300,000), and the annual depreciation deduction is $7,272 (.03636 × $200,000).

Rental Cash Flow versus Taxable Profit or Loss – Cash flow is the net amount after subtracting expenses from rental income, and the taxable profit or loss is the rental income minus any allowable tax deductions. Of course, higher cash flow is always better, but it is particularly important to avoid having a rental with a negative cash flow. The following example compares cash flow to taxable income.

COMPARISON OF CASH FLOW AND TAXABLE INCOME
 Income/Expense Cash Flow ($) Taxable Income ($)
Rental Income 30,000 30,000
Mortgage Payment <23,000>
Mortgage Interest <20,700>
Real Property Tax <2,400> <2,400>
Insurance <1,800> <1,800>
Maintenance & Repairs <400> <400>
Gardening <800> <800>
Depreciation <7,272>
Total Expenses  <28,400> <33,372>
Cash Flow   1,600 
Taxable Income <3,372> 

The major difference between cash flow and taxable income is that cash flow includes the deduction for the entire mortgage payment (not just the interest) but does not include the deduction for depreciation. In the above example, the rental has $1,600 in positive cash flow for the year but also has a passive loss (tax write-off) of $3,372.

Passive Losses – Losses from residential rental real estate are classified as passive and can only offset passive income; deductions from passive losses are also limited to $25,000 per year for most taxpayers with adjusted gross incomes (AGIs) of $100,000 or less. This limit is then ratably phased out for AGIs up to $150,000. Thus, taxpayers’ ability to benefit from a tax write-off on a rental is dependent upon their AGIs. The good news is that the passive losses in excess of this limit carry over to future years and can be used to offset other passive income in those years; in addition, any unused carryforward amount and any passive losses in the sale year are deductible in full once the rental is sold.

Home Gain Exclusion – IRC Section 121 allows homeowners to exclude up to $250,000 of gains from a home sale if they owned and used that home (as their primary residence) for at least 2 of the 5 years prior to the sale date. The amount that can be excluded jumps to $500,000 for married couples who are filing jointly – provided that both have used the property as a primary residence for 2 out of the prior 5 years and at least one has owned the property for 2 out of the prior 5 years. This is a very important consideration because, once a home is converted into a rental, the homeowner(s) will lose the ability to exclude gains after 3 years (because at that point, it is no longer possible to meet the 2-out-of-5-years qualifications).

Even when a homeowner sells a rental property after its conversion but before the exclusion expires, any depreciation that was claimed during the rental period must be recaptured as taxable income.

As shown above, there are many important tax issues related to converting a home into a rental, even aside from the problems related to acting as a landlord. Please call this office if you need assistance with these tax issues or would like help deciding whether to convert a home into a rental.

2019 Business Due Dates

September 16 – S Corporations

File a 2018 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of K-1 (Form 1120S) or a substitute Schedule K-1.

September 16 – Corporations 

Deposit the third installment of estimated income tax for 2019 for calendar year

September 16 –  Social Security, Medicare and withheld income tax

If the monthly deposit rule applies, deposit the tax for payments in August.

September 16 – Nonpayroll Withholding/

If the monthly deposit rule applies, deposit the tax for payments in August.

September 16 – Partnerships

File a 2018 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.

September 30 – Fiduciaries of Estates and Trusts

File a 2018 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 1/2 months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

Scammers are getting more creative: watch for these new phone and email rip-offs

We’re not out to steal their money — just their time. When fraudsters call to say we’re about to be arrested for tax debt, our Social Security number has been “suspended,” or a loved one is in trouble, we play along.

This gives us valuable insight into how the scams operate, while wasting the time these jerks could spend victimizing more vulnerable people.

We have our work cut out for us. Government-imposter frauds have scammed people out of at least $450 million since 2014, according to the Federal Trade Commission. Interestingly, people ages 20 to 59 are more likely to report being defrauded this way than those 60 and over, but older people tend to lose more money. The median individual reported loss was $960, but it was $2,700 for people 80 and older, the FTC said in a July report.

You don’t have to engage with the bad guys to help thwart them. Answering the phone when scam artists call can put you on a “sucker list” that will prompt more calls.

But you can sign up for free “watchdog alerts” from AARP’s Fraud Watch Network, report scam attempts to the FTC and warn loved ones about the latest schemes, such as these three.

Government impostors

Fraudsters are nothing if not flexible. As media coverage of IRS-imposter calls increased last year, scammers switched to impersonating Social Security investigators. The crooks often use software to spoof caller ID services into showing phone numbers for the Social Security Administration or its fraud hotline.

Doug Shadel, AARP’s lead researcher on consumer fraud, recently pretended to take the bait. He returned a robocall from a group of these impersonators and was told the FBI was about to arrest him for opening 25 fraudulent bank accounts. To help the “investigators,” Shadel was advised to move all the money in his legitimate bank accounts to prepaid cards issued by “government-certified” stores such as Apple, Target, CVS or Walgreens. Then, Shadel was supposed to give the caller the cards’ serial numbers so the information could be added to his “file” — allowing the bilkers to steal the money.

Details of these scams might seem absurd, but con artists are exceptionally good at creating an atmosphere of fear and urgency so you’ll react emotionally, Shadel says.

“Once you’re in that state of fear, it swamps all reason,” he says.

Variations on this scheme include warnings that your Social Security number has been suspended because of suspicious activity or that your help is needed to investigate a crime, such as immigration fraud. Know this: Social Security numbers can’t be suspended, investigators typically don’t enlist civilians, and government agencies don’t call out of the blue, says Kathy Stokes, director of AARP’s fraud prevention programs.

“Anyone calling from the government saying there’s a problem and you owe money is a scam,” she says.

Source: https://www.marketwatch.com/story/scammers-get-more-creative-watch-for-these-new-phone-and-email-rip-offs-2019-08-16?mod=personal-finance

How to Write Off Worthless Stock

Article Highlights:

  • Tax Loss for a Security Sold or That Is Worthless
  • Proving Worthlessness
  • Selling a Worthless Stock by Year-end
  • Brokers May Accommodate Clients
  • Capital Loss Deduction

If you are like most investors, you occasionally will pick a loser that declines in value. Sometimes, a security can even become worthless when the issuing company goes out of business.

Gains and losses for securities, including stock, stock rights, bonds, debentures, and similar debt instruments, are not recognized for tax purposes until the securities are sold or become worthless. If the security is sold for a loss, the date of loss is easily determined since it is the sale date. However, for worthless stocks, it is not that easy to determine the date of loss, and taxpayers cannot just pick the year they want to for claiming the loss.

The IRS says a stock is worthless when a taxpayer can show that the security had value at the end of the year preceding the deduction year and that an identifiable event caused a loss in the deduction year. Just because an issuing company has filed bankruptcy does not necessarily mean its stock is worthless in that year. The company could be in reorganization, or the stock might not be worthless until a later year.

Whatever you do, don’t wait until it’s too late to take your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, the current year’s loss will be denied. Your only recourse at that point is to amend your prior year’s return to claim your loss, provided the three-year statute of limitation has not expired. If the loss is claimed too early, the IRS will also deny it (making you wait until a subsequent year when the stock actually becomes worthless).

Talk to your broker before the end of the year if you have holdings that have lost all, or nearly all, of their value and you want to be able to claim your investment in them as a loss on your 2019 return. Most brokerage firms will purchase worthless stock for a nominal amount (one cent) just to provide closure for their clients. This is probably the best solution for tax purposes. The sale will appear on Form 1099-B issued by the broker, and then you won’t have to debate with the IRS over when the stock became worthless.

As a reminder, losses from sales of capital assets such as stock are first used to offset any capital gains on the return for the year of the sale. If the amount of the gain isn’t enough to absorb all of the losses, up to $3,000 ($1,500 if married filing separate) can be used to offset other types of income. If there is still capital loss remaining, it is carried forward to the next tax year and, if necessary, to future years, until it is used up.

Tax Ramifications of Disposing of a Vehicle

Article Highlights:

  • Trading in a Vehicle
  • Selling a Vehicle
  • Gifting a Vehicle
  • Donating a Vehicle to Charity

If you are buying a new car, are you wondering what to do with the old one? You actually have a number of options, some of which have tax implications and some of which don’t. These options include trading the car in with the dealer, selling it to a third party, donating it to a charity, gifting it to someone, or even keeping it as a second car. Here are the details for each. Note: This article does not discuss in detail how to treat the disposition of a vehicle used for business.

Trade-In – Although you may be able to get more for your car by selling it yourself, trading the car in with the dealer eliminates the hassle of selling the vehicle and is the option selected by many people when they purchase a new car. Prior to the passage of the tax reform, if a vehicle was used partially for business and the disposition of that vehicle would have resulted in a gain, it was better to trade the vehicle in because the tax law allowed the gain to be deferred. However, that is no longer an option, and now, whether you trade in your vehicle or sell it to a third party, it is treated as a sale.

If a car has been used 100% for personal purposes (no business use), whether you trade it in or sell it generally makes no difference since, except in rare cases, the vehicle will have declined in value and there would be no gain from the transaction. When there is a loss from the sale of personal-use property, tax law does not allow the loss to be deducted. On the other hand, the law says that when a personal-use item such as a vehicle is sold for a profit, the profit is taxable.

Sell the Vehicle – In this Internet age, a variety of online sites exist with firms that will let you know the value of your used vehicle; an example is Kelly Blue Book. There are also used car dealers that will buy your car and relieve you of all the DMV transfers and sales tax issues. Of course, you can sell it yourself through online sites such as Craigslist or perhaps by just placing a “for sale” sign in the car, in which case you need to make sure the title is properly transferred so you have no future liability. You also need to be cautious of potential buyers, to make sure someone does not try to scam you with a hot check or the promise of a future payment. In most states, vehicle sales are “as is” sales, provided you do not attempt to conceal a material defect.

Gift It to Someone – It is quite common for individuals to gift their old car to a child, a family member, or an acquaintance. There are no gift tax ramifications as long as the fair market value (FMV) of the vehicle is less than the annual gift tax exclusion amount ($15,000 for 2019). Where a married couple jointly makes the gift, the annual gift tax exclusion applies to each spouse; thus, the vehicle’s value could be as much as $30,000 without any tax ramifications. If the vehicle’s FMV exceeds those limits, a gift tax return is required. The gift is not allowed as a charitable contribution on the former owner’s income tax return, even if the person to whom the car is given is “needy.”

Donate the Vehicle to Charity – You’ve probably seen or heard ads urging you to donate your car to charity. But donating a vehicle may not result in a big tax deduction or any deduction at all. A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is a number of rules that, in some cases, limit the amount of the charitable deduction to $500.

The deduction is limited for motor vehicles (as well as for boats and airplanes) contributed to charity whose claimed value exceeds $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.

If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals every day for a year or driving 10,000 miles during a one-year period while delivering meals.

The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the poor and distressed or the underprivileged who need a means of transportation. In this case, the fair market of the vehicle is used to determine the amount of the contribution.

Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgement from the donee. To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.

Acknowledgement by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good -faith estimate of the value of any such goods or services or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.

Foreign Account Reporting Requirements

U.S. citizens and residents with a financial interest in or signature or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the year. The due for 2018’s report was April 15, 2019, with an automatic 6-month extension to October 15, 2019. Failure to file can result in draconian penalties. Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System and not as part of the individual’s income tax filing with the IRS.

Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

You may also have an additional requirement to file IRS Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and you and your spouse file a joint return, you must file Form 8938 if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high as $50,000.

As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. Please call our office with questions or if you need assistance in meeting your foreign account reporting obligations.

The Fed just cut interest rates: Here’s what it means for you

The Federal Reserve’s decision to cut interest rates 25 basis points for the first time in over a decade marked a dramatic shift in monetary policy.

It will be felt by Americans across the board.

After raising the federal funds rate nine times in three years, with the last move coming in December as financial markets were melting down, concerns about a slowing economy caused the Federal Open Market Committee and Chairman Jerome Powell to reverse course.

Now, interest rates are historically low, which leaves the central bank with little wiggle room in the event of a recession or if the economy stumbles. The current target range for its overnight lending rate is 2% to 2.25%.

For consumers, the so-called Powell Pivot could mean a reprieve in escalating borrowing costs, which can impact your mortgage, home equity loan, credit card, student loan tab and car payment. At the same time, savings account rates may fall.

Here’s a breakdown of what may happen to your loans and savings:

Credit cards: Interest you pay may go down a bit

Most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.

With a rate cut, the prime rate lowers, too, and credit cards likely will follow suit. For cardholders, that means they could see that reduction in their annual percentage yield, or APR, within a billing cycle or two.

On the heels of the previous rate hikes, credit card rates now stand at a record high of 17.85%, on average, according to Bankrate.com.

Almost half of all cardholders do not pay their credit card bill in full each month and, as a result, the average household with credit card debt pays over $1,150 a year in interest, according to a report by NerdWallet.

Considering that the average household currently owes $8,390, credit card users would save roughly $1.5 billion in interest as a result of a quarter-point rate cut, a separate report by WalletHub found.

However, that may result in little benefit per cardholder with APR’s still near record highs. For example, a customer with a credit card balance of $1,400 at a 14.4% rate would only see their financing charge decrease by about 30 cents each month, according to Mike Kinane, the head of U.S. Bankcards at TD Bank.

Better yet, shop around for a zero-interest balance transfer offer and aggressively pay down your credit card debt “without the headwind of interest costs,” advised Greg McBride, the chief financial analyst at Bankrate.

At any time, cardholders to can also reach out to their issuer directly to request a break on interest rates.

Savings: Depositors get squeezed

Only recently have savers started to benefit from higher deposit rates — the annual percentage yield banks pay consumers on their money — after those rates hovered near rock bottom for years.

Since the central bank raised the federal funds rate nine times in three years, the highest yielding rates are now paying over 2.5%, up from 0.1%, on average, before the Fed started increasing its benchmark rate in 2015. One online bank — Green Dot — recently introduced the highest yielding bank account in the industry at 3%.

With an annual percentage yield of 3%, a $10,000 deposit earns $300 after one year. At 0.1%, it earns just $10.

“Savers are in a position now where they can earn more on their savings than the rate of inflation,” McBride said.

After the rate cut, those deposit rates will come down to some extent. Some already have.

“The only real losers in all of this are people with online-only savings accounts, whose yields we expect to drop by around 11 basis points,” said WalletHub CEO Odysseas Papadimitriou.

Yet online banks are still able to offer higher-yielding accounts because they come with fewer overhead expenses than traditional bank accounts and savers can snag significantly higher savings rates by shopping around.

Alternatively, consumers can lock in an even higher rate with a 1-, 3- or 5-year certificate of deposit (top yielding rates average 2.6%, 2.75% and 3%, respectively) although that money isn’t as accessible as it is in a savings account and, for that reason, does not work well as an emergency fund.

Mortgages: Time to consider a refi

The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes.

As a result, mortgage rates are already substantially lower since the end of last year.

The average 30-year fixed rate is now about 3.93%, the lowest since November 2016, according to Bankrate.

That means that if you bought a house in the last few years, consider refinancing at a lower rate, McBride advised. If you can shave half a percentage point off your rate, that would save the average homeowner $125 a month, he said.

On the heels of the Fed decision, this represents the single greatest saving opportunity for consumers, McBride added.

Many homeowners with adjustable-rate mortgages, which are pegged to the prime rate, will see their interest rate go down as well, although not immediately as ARMs generally reset just once a year.

The Fed’s first rate cut in over a decade will also make it slightly cheaper for consumers to borrow money from a home equity line of credit or pay back their current HELOC loan. Unlike an ARM, HELOCs could adjust within 60 days so borrowers will benefit from smaller monthly payments within a billing cycle or two.

However, the savings may end up being only a few dollars a month, according to Holden Lewis, NerdWallet’s home expert.

Auto loans: Shoppers have more room to negotiate

For those planning on purchasing a new car, the Fed decision likely will not have any big material effect on what you pay. For example, a quarter-point difference on a $25,000 loan is $3 a month, according to Bankrate.

“That’s not going to translate into any notable difference for would-be car buyers,” McBride said.

Auto loan rates are still relatively low, even after years of rate hikes. Currently, the average five-year new car loan rate is 4.72%, up from 4.34% when the Fed started boosting rates, while the average four-year used car loan rate is 5.41%, up from 5.26% over the same time period, according to Bankrate.

But the rate cut also lowers financing costs for car manufacturers and dealers as well. That means “you can be a little bit more aggressive in your negotiations,” said Tendayi Kapfidze, the chief economist at LendingTree, an online loan marketplace.

“You might be able to negotiate a cheaper price on the actual car,” he said.

Student loans: Some good news for grads with private loans

While most student borrowers rely on federal student loans, which are fixed rate, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings.

Private loans may be fixed or may have a variable rate tied to the Libor, prime or T-bill rates, which means that when the Fed cuts rates, borrowers will likely pay less in interest, although how much less will vary by the benchmark.

If you have a mix of federal and private loans, consider prioritizing paying off your private loans first or refinance your private loans to lock in a lower fixed rate, if possible.

(A college education is now the second-largest expense an individual is likely to incur in a lifetime — right after purchasing a home. The average graduate leaves school $30,000 in the red, up from $10,000 in the early 1990s.)

Source: https://www.cnbc.com/2019/07/31/heres-what-that-fed-rate-cut-means-for-you.html

Minimizing Tax on Social Security Benefits

Article Highlights:

  • Income as a Factor
  • Filing Status as a Factor
  • 85% Maximum Taxable
  • Base Amounts
  • Deferring Income
  • Maximizing IRA Distributions

Whether your Social Security benefits are taxable (and, if so, the amount that is taxed) depends on a number of issues. The following facts will help you understand the tax ability of your Social Security benefits.

  • For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before reduction due to payments withheld for Medicare premiums). The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not included in the computation because they are not taxable under any circumstances.
  • The amount of your Social Security benefits that are taxable (if any) depends on your total income and marital status.
  •  If Social Security is your only source of income, it is generally not taxable.
  •  On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.
  •  If you are married lived with your spouse at any time during the year, and file a separate return from your spouse using the married filing separately status, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return and thus reducing the amount of Social Security income subject to tax.
  • The following quick computation can be done to determine if some of your benefits are taxable:
    Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.

    Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

    The base amounts are:

  • $32,000 for married couples filing jointly;
  • $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
  • $0 for married persons filing separately who lived together during the year.

Where taxpayers can defer their “other” income from one year to another, such as by taking Individual Retirement Account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to another. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.

Individuals who have substantial IRAs—and who either aren’t required to make withdrawals or are making their post-age 70.5 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one may not work for another.

If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give us a call.