Author: draye

When to begin receiving your Social Security benefits is one of the most important decisions you will make in retirement. Many factors such as your health, financial position and desire to continue working will come into play when making this decision.

The amount of your monthly benefit is determined by the age at which benefits begin. To put it simply, the earlier you start benefits, the less you will receive each month and, conversely, the longer you wait to start benefits, the more you will receive each month.

You must first determine your Full Retirement Age which varies depending on your year of birth. For those born in 1943 or later, the FRA is between ages 66-67.  If you start your payments at your FRA, then you will receive 100% of your calculated benefit known as your Primary Insurance Amount (PIA).  You are eligible to begin your benefits as early as age 62 but your monthly benefit would be reduced by a formula depending on the number of months before your FRA.  If you were to delay your payments until after your FRA, you would receive an 8% increase in your payment for each year of delayed filing, up to age 70.  So for each month of delay, you would receive an increase of 2/3% (1/12 of 8%).

If your FRA was 66, then the percentage of your full benefit or PIA would fall within the following parameters:

Age 62                  75% of your full benefit

Age 66                  100% of your full benefit

Age 70                  132% of your full benefit

In a nutshell, this is the formula used to calculate your monthly retirement benefit. Again, the decision of when to file will depend on many factors including your life expectancy and relative financial position at retirement.

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

In many cases, the answer to this question is a resounding YES. Eliminating debt is a worthy goal and a key factor in building wealth. Removing that monthly obligation will free up funds that can be used to build up your retirement nest egg.  There is also an emotional side to this decision.  The fear of running out of money in retirement is very real for many retirees and having your mortgage out of the way would no doubt help to alleviate this fear.  The peace of mind that comes from owning your house mortgage-free cannot be quantified.

Tax reform has also changed the dynamics of this financial decision. As you approach retirement and continue to whittle down your mortgage balance, more of your payment is applied to principal and less to interest.  Starting in 2018, the standard deduction allowed against your taxable income has increased significantly.  For a married couple filing jointly, the standard deduction is $ 24,000 with an additional $1,300 per person if over age 65.  This combination of factors means that for many retirees, there will be no tax benefit from keeping a mortgage.

However, everyone needs to consider their own personal circumstances before making this decision. Obviously, if you have other higher interest debt, you would want to pay that off first.  Also, one would want to have a sufficient amount of cash reserves in the bank so that the payoff of your mortgage balance would not drain your cash position.

There is no doubt that a paid off mortgage will enhance your retirement. With tax incentives off the table, it just makes sense to put this obligation to bed.

 

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

Everyone hates the Alternative Minimum Tax or AMT. The AMT requires that you calculate your tax bill under a different set of rules and deductions, compare that number to your regular tax, and pay the larger of the two.  This decades-old measure was originally enacted to make sure the super-rich paid their fair share of taxes.  However, over the years it began to hit taxpayers of modest means.  As a result, the AMT has not been very popular in recent years and many have called for its repeal.

Last year, as tax reform was debated, Congress stopped short of doing away with the AMT but did succeed in taming the beast in a significant way. Two major changes were made as follows:

  1. The exemption amounts were raised from $ 84,500 to $ 109,400 for married taxpayers and from $ 54,300 to $ 70,300 for single filers.
  2. The phase-out range for these exemptions was increased significantly. Under prior law, you would start losing part of your exemption at income levels of $ 160,900 for marrieds and $120,700 for singles. Those numbers are now $ 1 million and $ 500,000, respectively. The result is that many more taxpayers get the benefit of the exemptions.

Because of these changes, the AMT is estimated to affect only about 200,000 tax filers in 2018 versus 5 million taxpayers who paid it under the old law. That’s a 96% drop!  This will bring welcome relief to the average taxpayers who were getting hit with this tax year after year.

 

 

David K. Raye, CPA, P.C.                     704-887-5298             www.davidrayecpa.com

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

One part of the Tax Cuts and Jobs Act that has not received a lot of attention is the change of calculation for the so-called “kiddie tax”. This tax applies to children who have unearned income in excess of $2,100.  The kiddie tax applies to children age 18 and under or age 19-23 for full-time students whose earned income is less than or equal to 50% of their support.

Under the old law, unearned income in excess of $ 2,100 was taxed at their parent’s income tax rate but the new law subjects this income to the same rates as a trust. As a result, unearned income would hit the top tax rate of 37% at the very low income level of $ 12,500.  The parent’s rate would only be that high if the parent’s income is over $ 600,000.  Therefore, the strategy of grandparents leaving a grandchild a traditional IRA, with the goal of achieving a longer distribution period may not be as attractive as it used to be.

Given this new reality, what can be done to work around the “kiddie tax”?

  • You can still gift modest amounts to children in UTMA accounts and keep their investment income below $2,100 by investing in growth stocks vs. dividend payers.
  • If a college age child has already inherited a large IRA, then reduce their distributions to the minimum required, borrow money to cover tuition and then pay off the debt with larger distributions once the child turns 24.
  • Name older children (age 24 and above) as beneficiaries of your traditional IRAs. Younger children could still be beneficiaries of Roth IRAs.

Leaving traditional IRAs to children or grandchildren is still a viable strategy but care must be taken to avoid or minimize the kiddie tax.

 

 

David K. Raye, CPA, P.C.                     704-887-5298             www.davidrayecpa.com

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

An investment vehicle that may be worth a second look in the wake of tax reform is Real Estate Investment Trusts or REITs. REITs are corporations that primarily invest in real estate and produce income from rental properties or from buying and selling properties.  They are usually sought out for their ability to produce an income stream since 90% of their income is paid out in the form of dividends.

The 20% deduction for pass-through income that was part of the recent tax law change will apply to holders of REITs. This means that investors in REITs will only pay tax on 80% of the dividends earned.  This automatically increases the return on investment for REITs making them an attractive investment.

The 20% deduction took effect January 1, 2018 and can be claimed on your personal tax return starting with the 2018 tax year. Taxpayers in the top income tax bracket of 37% will have an effective rate of 29.6% on their REIT dividends. Please see an investment advisor to find out what REITs may be right for you.

 

 

David K. Raye, CPA, P.C.                     704-887-5298             www.davidrayecpa.com

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

The choice of beneficiaries for your IRA or other retirement plans is one of many financial decisions that must be made during your lifetime. Generally, the goal is to maximize the deferral period so that the account can continue to grow tax deferred as long as possible.  Here is a quick rundown of the rules applicable to different types of beneficiaries.

Surviving spouses are the most common beneficiaries and generally get the most favorable treatment.  A surviving spouse can:

  • Elect to treat an IRA as their own if they are sole beneficiary
  • Defer Required Minimum Distribution (RMD) until the year the decedent/owner would have turned age 70 ½. The spouse would then take RMDs based on their own life expectancy.

The timing of RMDs for non-spouse beneficiaries varies depending on whether the decedent had already begun taking RMDs themselves.  When an owner dies before this point, RMDs for a non-spouse beneficiary can be calculated over the beneficiary’s life expectancy.  When the owner dies on or after their required beginning date, RMDs for the non-spouse beneficiary will be calculated based on the longer of the beneficiary’s life expectancy or the deceased owner’s remaining life expectancy.  Distributions would be required to start by December 31 of the year following the owner’s death.

If there are multiple beneficiaries, the life of the oldest is generally used but this can be avoided by splitting the IRA into separate accounts.  Then each individual beneficiary can take distributions based on their own life expectancy.  Splitting the account is especially crucial if there is a large age gap between beneficiaries.

It is also important to name contingent beneficiaries.  These individuals would be next in line to receive the IRA assets if the primary beneficiary dies or disclaims their interest.  IRAs that include a non-person beneficiary such as a trust or charity must take out that entity’s share of the IRA by September 30 of the year following the owner’s death.

These are just some of the general rules applicable to this very complex area of tax law. For more information on inherited IRAs, please call my office.

 

David K. Raye, CPA, P.C.                     704-887-5298             www.davidrayecpa.com

 

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

Tax revenue losses from the various exclusions, exemptions, deductions and credits that exist in the tax code are generally defined by the federal government as tax expenditures. The following is a list of the 10 largest individual tax expenditures according to the Joint Committee on Taxation, a nonpartisan, congressional group.  The listing includes how each of these tax expenditures fared in the recent tax reform bill passed by Congress and signed into law in December.

 

  1. Tax favored retirement plans and accounts – This includes IRAs, 401ks and the like. These breaks were mostly untouched by tax reform.
  2. Exclusion for employer provided health insurance – still alive and well
  3. Reduced tax rates for qualified dividends and long term capital gains – these rates did not change.
  4. Tax free Social Security benefits – no change. Benefits are taxed by some taxpayers depending on their level of income.
  5. State and local income and property tax deductions – This break received the biggest hit but still survived although capped now at $ 10,000 annually.
  6. Mortgage interest deduction – Mostly survived but home equity interest deductibility has gone away.
  7. Charitable contributions – This deduction isn’t going anywhere!
  8. Earned income credit – unchanged
  9. Child tax credit – This credit was increased and made available to many more taxpayers.
  10. Health premium tax credit – This Obamacare provision is unchanged (for the moment).

Not surprisingly, 9 of the 10 were either unchanged or barely touched. Only one, the state and local tax deduction, was drastically cut.  All this is generally good news for taxpayers who will continue to see the benefits of these various tax breaks well into the future.

 

David K. Raye, CPA, P.C.                     704-887-5298             www.davidrayecpa.com

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

Tax filing season is upon us once again. The following are some important dates and policies that will apply to the upcoming filing season.

 

  • The Internal Revenue Service will begin accepting 2017 tax returns on Monday, January 29.
  • This year’s filing deadline falls on Tuesday, April 17 since the normal deadline of April 15 is on a weekend and the Emancipation Day holiday in Washington, D.C. falls on the 16th.
  • It’s important to file your return as early as possible. You’ll get your refund quicker and help protect yourself from identify theft. ID thieves seeking refunds on fraudulent returns typically file them early before legitimate tax payers have a chance to file.
  • Some refunds will be held up until February 27. This applies to returns that claim the earned income tax credit or the refundable child tax credit.

The 2018 withholding tables have been released by the IRS. These new tables reflect the new law tax rates and brackets, the higher standard deduction and the removal of personal exemptions.  The IRS has told employers to use the new tables as soon as possible, but no later than February 15.  Many of you will see an increase in take home pay once the new tables kick in.

The IRS will be issuing a revised Form W-4 soon that reflects the new law. This is the form you give to your employer indicating the number of allowances used to withhold taxes.  You will not be required to submit a new W-4 but doing so could help to keep your withholdings in line so stay tuned for more information.

That is the latest news in the tax world. Please contact my office if you have any questions about the above information.

 

 

The tax reform bill is now completed with President Trump signing the Tax Cuts and Jobs Act of 2017 on December 22. Most of the new provisions will take effect on January 1, 2018.  The following are highlights of some of the major tax provision changes contained in the bill.

 

  • Individual tax brackets – Individual tax rates were reduced across the board. The new law replaces the current set of seven brackets with a different set of seven brackets as follows:
  •                                                                    New rates:       10%, 12%, 22%, 24%, 32%, 35%, 37%
  •                                                                    Current rates: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%
  • The standard deduction is increased to $ 12,000 for singles, $ 18,000 for heads of household and $ 24,000 for married filers. This will eliminate the need for many taxpayers to itemize deductions. Personal exemption deductions for taxpayer’s and their dependents will be eliminated.
  • Many itemized deductions will be repealed including property taxes on vehicles, unreimbursed employee business expenses and the home office deduction.
  • The deduction for state income tax and real estate property taxes is capped at $ 10,000.
  • Mortgage interest deductions will only be allowed on loans up to $ 750,000 down from the current $1,000,000. The deduction for interest on home equity loans will be eliminated.
  • Deductions for charitable contributions will be preserved.
  • The child credit will increase to $ 2,000 per child and a new $ 500 credit for non-child dependents will be implemented. The AGI threshold at which the credit is phased out is increased to $ 400,000 for joint filers and $ 200,000 for single filers. This will increase greatly those eligible for the child credit.
  • The alternative minimum tax (AMT) survives but the exemption amounts are modified so that fewer individuals will owe the tax.
  • The estate tax exemption will double to $ 10,980,000. There will be no change in the basis step-up rules for estates of any size.
  • For businesses, the corporate tax rate will be slashed to 21%, down from the current 35%. Pass-through entities like S-corporations and LLC’s will be provided a 20% deduction against their qualified business income. Special rules and limitations apply to this deduction.
  • Bonus depreciation will be increased from 50% to 100% deduction for property placed in service after 9/27/17. Businesses will be allowed to write off 100% of fixed asset purchases in the year of purchase.
  • For investors, the deductions for IRA and 401k contributions will remain unchanged and tax rates for capital gains and dividends will also remain the same.

 

These are just the highlights of a comprehensive overhaul of the tax code. Please contact me for questions related to the new law.

 

David K. Raye, CPA, P.C.                    704-887-5298             www.davidrayecpa.com

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation. 

Tax reform jumped another major hurdle this past weekend when the Senate passed its tax bill. The next step will be a House-Senate conference committee that will meet and reconcile the two bills and hammer out a final version that both chambers will then vote on.

The House and Senate generally agree on these changes:

  • Eliminate deductions for state and local income and sales tax. Preserves a deduction for real estate taxes capped at $ 10,000
  • Standard deductions increased to $ 12,000 for singles & $ 24,000 for married couples
  • Corporate tax rate lowered from 35% to 20%. (Senate effective date would be 1/1/19)
  • Personal exemptions will be eliminated.
  • Estate tax exemption is doubled to about $ 11 million (House would repeal the estate tax entirely in 2025)

There are still some major areas of difference between the House & Senate plans:

  • Tax rates – House would reduce to four brackets with top rate remaining at 39.6%.  Senate would have seven brackets with lower rates and a top rate of 38.5%
  • Health insurance – House no change. Senate would repeal the individual mandate to purchase health insurance.
  • Pass-throughs – House would cap the top rate at 25% for LLCs, partnerships and S corporations.  Senate would introduce a deduction of 23% of pass-through income.
  • Alternative Minimum Tax – House would repeal the AMT. Senate would keep it.

Congress will continue the effort to finalize these tax changes before the end of 2017. Most provisions will be effective January 1, 2018.

Stay tuned……

 

David K. Raye, CPA, P.C.

704-887-5298

www.davidrayecpa.com

 

*The information in this blog post is general in nature and not intended as specific advice. Please consult a tax advisor to see how this information applies to your specific situation. 


Contact

13850 Ballantyne Corporate Place, Ste. 500 Charlotte, NC 28277 Ph:(704) 887-5298

Name
Email
Message

Congratulations! Message sent.
Error! Please validate your fields.
© Copyright 2015 David K. Raye, CPA, P.C. Site Design by Ballantyne Designs