• Thinking of Tapping Your Retirement Savings? Read This First

    22 May 2017
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    Before you start tapping into your retirement savings, you may want to read this first:

    If you are under age 59½ and plan to withdraw money from a qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax on any previously un-taxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.

    The following exceptions may help you avoid the penalty:

    • Withdrawals from any retirement plan to pay medical expenses—Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 10% of your adjusted gross income. This is true even if you do not
    • IRA withdrawals annuitized over your lifetime—To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59½.
    • Employer retirement plan withdrawals—To qualify, you must be separated from service and be age 55 or older in that year (the lower limit is age 50 for qualified public-service employees such as police officers and firefighters) or elect to receive the money in substantially equal periodic payments after your separation from service.
    • Withdrawals from any retirement plan as a result of a disability—You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
    • IRA withdrawals by unemployed individuals to pay medical insurance premiums—The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 weeks during the year.
    • IRA withdrawals to pay higher education expenses—Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
    • IRA withdrawals to buy, build, or rebuild a first home—Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.

    You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed above may need to be met before qualifying for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call Dagley & Co. for assistance.

     

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  • Dodging Tax Penalties

    13 December 2016
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    After the holiday season, the tax season quickly approaches. During this time, many taxpayers realize they were penalized with a tax penalty from that year. With this, often times it’s the case that the taxpayer is not aware of the impact that these penalties can have on their wallet.  To help educate, Dagley & Co. has created a list of the most common encountered penalties and how to avoid them:

    Underpayment of Estimated Taxes and Withholding – Taxpayers are required to pay their tax liability as they go during the year, either through withholding or by making estimated tax payments. If the taxpayer owes more than $1,000 when filing his or her return for the year, the IRS will assess the underpayment of estimated tax penalty, which is currently 4% of the underpayment computed quarterly. There are “safe harbor” payments that can protect you from this penalty, which include payments in the following amounts: 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of the current liability or 100% of the prior year’s liability.

    Late Paying Penalty – When the tax owed on a return is paid after the un-extended due date of the tax return (usually April 15), the taxpayer is subject to a penalty of 1/2% per month (maximum 25%) on the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return. Many fail to realize that the extension does not include an extension to pay. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension.

    Late Filing Penalty – If the return is filed after the due date, including extensions, a late filing penalty of 4.5% per month (maximum 22.5%) applies. The automatic extended due date for 2016 returns is October 18, 2017, but an extension request form must be filed by the April 2017 due date to qualify. Thus, the penalty would generally apply to 2016 returns filed after October 18, 2017. If the return is over 60 days late, the minimum penalty for failure to file is the lesser of $205 or 100% of the tax shown on the return. While the obvious way to avoid a late filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect for filing late.

    Negligence – When underpayment is due to negligence on the part of the taxpayer or when there are errors in tax valuations, 20% of the tax underpayment is charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions. To reduce the chance that you may be subject to this penalty, be sure you provide all of your W-2s, 1099s, K-1s, etc. for the preparation of your return, complete any organizer that have been requested and ensure that you can substantiate all of the deductions you claim.

    Dishonored Check – The penalty for dishonored checks is 2% of the check amount, but if the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late payment charges, but the penalty rate is lower if you are on a payment plan.

    Missing ID Number – This penalty of $50 for each missing number is charged when a taxpayer doesn’t provide a required Social Security number (SSN) for him or herself, a dependent or another person on his or her tax return or doesn’t. It is also charged when the taxpayer doesn’t provide his or her SSN to another person or entity when required.

    Please note: There are more severe penalties (not mentioned) that apply to fraudulent actions/claims.  If you ever have questions related to these penalties, please give Dagley & Co. a call at  (202) 417-6640.

     

     

     

     

     

     

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  • Time to Start Thinking About Year-End Tax Moves

    21 November 2016
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    With 2017 just around the corner, it is time to think about actions you can take to improve your tax situation from 2016. In our opinion, this is something you probably want to get out of the way before the holiday season arrives. Dagley & Co. is always here to help in anyway possible in terms of your tax situations for both present and upcoming years.

    There are many steps that you can take before January 1 to save a considerable amount of tax. Here are a few that we gathered:

    Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2016. If it is not the maximum allowed for computing the credits, you can prepay 2017 tuition as long as it is for an academic period beginning in the first three months of 2017. That will allow you to increase the credit for 2016. This technique is especially helpful when a student has just started college in the fall.

    Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.

    Don’t Forget Your Minimum Required Distribution – If you are over 70.5 years of age and have not taken your 2016 required minimum distribution from your IRA or qualified retirement plan, you should do that before December 31 to avoid possible penalties. If you turned 70.5 this year, you may delay your 2016 distribution until the first quarter of 2017, but that will mean a double distribution in 2017 that will be taxed.

    Advance Charitable Deductions – If you regularly tithe at a house of worship or make pledges to other qualified charities, you might consider pre-paying part or all of your 2017 tithing or pledge, thus advancing the deduction into 2016. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next. If you are age 70.5 or over, you can also take advantage of a direct IRA-to-charity transfer, which will count toward your RMD and may even reduce the taxes on your Social Security income.

    Maximize Health Savings Account Contributions If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions earlier in the year. This opportunity applies even if you first become eligible in December.

    Prepay Taxes – Both state income and property taxes are deductible if you itemize your deductions and you are not subject to the AMT. Prepaying them advances the deductions onto your 2016 return. So if you expect to owe state income tax, it may be appropriate to increase your state withholding tax at your place of employment or make an estimated tax payment before the close of 2016, and if you are paying your real property taxes in installments, pay the next installment before year-end.

    Pay Tax-deductible Medical Expenses – If you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 10% of AGI floor for deducting medical expenses, or if adding the payments would put you over the 10% threshold. You can even use a credit card to pay the expenses, but if you won’t be paying off the full balance on the card right away, do so only if the interest expense on the credit card is less than the tax savings. You might also wish to consider scheduling and paying for medical expenses such as glasses, dental work, etc., before the end of the year. See the “Seniors Beware” article if you or your spouse is age 65 and over.

    Take Advantage of the Annual Gift Tax Exemption – You can give $14,000 to each of an unlimited number of individuals without paying gift tax each year, but you can’t carry over unused amounts from one year to the next. (The gifts are not tax deductible.)

    Avoid Underpayment Penalties – If you are going to owe taxes for 2016, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters.

    There are many different factors that go into each of the steps above. We  encourage all of our clients to contact Dagley & Co. prior to acting on any of the advice to ensure that you will benefit given your specific tax circumstances. Our phone number is: (202) 417-6640 and email: info@dagleyco.com.

     

     

     

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  • Do You Need a Mid-Year Tax Checkup?

    17 June 2016
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    Do you need a mid-year tax checkup? What major has happened to you lately? If you are inclined to procrastinate until the end of the year or, even worse, until tax-filing season to worry about your taxes, you may be missing out on opportunities to reduce your tax and avoid certain penalties. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them.

    ->Did you get married, get divorced, or become widowed?

    ->Did you change jobs or has your spouse started working?

    ->Did you have a substantial increase or decrease in income?

    ->Did you have a substantial gain from the sale of stocks or bonds?

    ->Did you buy or sell a rental?

    ->Did you start, acquire, or sell a business?

    ->Did you buy or sell a home?

    ->Did you retire this year?

    ->Are you on track to withdraw the required amount from your IRA (age 70.5 or older)?

    ->Are you taking advantage of the IRA-to-charity transfers (age 70.5 or older)?

    ->Did you refinance your home or take out a second home mortgage this year?

    ->Were you the beneficiary of an inheritance this year?

    ->Did you welcome a new child into your family? Time to consider a tax-advantaged savings plan!

    ->Are you taking advantage of tax-advantaged retirement savings?

    ->Have you made any significant equipment purchases for your business?

    ->Are you planning to purchase a new business vehicle and dispose of the old one? It makes a significant difference whether you sell or trade in the old vehicle.

    ->Are your cash and non-cash charitable contributions adequately documented?

    ->Did you, or are you planning to, make energy-efficiency improvements to your main home or install a solar system for your main or second home this year?

    ->Are you paying college tuition for yourself, your spouse or dependent(s)?

    ->Are you keeping up with your estimated tax payments or do they need adjusting?

    ->Did you purchase your health insurance through a government insurance marketplace and qualify for an insurance premium subsidy? If your income subsequently increased, you may need to be prepared to repay some portion of the subsidy.

    ->Do you have substantial investment income or gains from the sale of investment assets? If so, you may be hit with the 3.8% surtax on net investment income and need to adjust your advance tax payments.

    ->Did you make any unplanned withdrawals from an IRA or pension plan?

    ->Have you stayed abreast of every new tax law change?

    If you anticipate or have already encountered any of the above events or conditions, it may be appropriate to schedule a mid-year tax checkup and consult with Dagley & Co.—preferably before any of the events listed, and definitely before the end of the year.

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  • Business Owners: Beware of Massive Penalties for Health Reimbursement Plans

    16 July 2015
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    Times are changing for business owners: Beginning 2015, large employers (with 100 or more full-time equivalent employees) must begin offering health insurance coverage to their employees. Then, in 2016, employers with 50 or more equivalent full-time employees must do the same or face penalties, called the “large employer health coverage excise tax.”

    Employers with fewer than 50 full-time equivalent employees are never required to offer their employees an insurance plan, but qualified small employers who do provide coverage may qualify for the small business health insurance credit.

    In the past, many smaller employers have simply reimbursed their employees for the cost of insurance. They found it less expensive and had fewer administrative costs than having a group insurance plan. However, under the Affordable Care Act (ACA, or Obamacare for short), a group health plan that reimburses employees for the employees’ substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, most commentators believe an employer payment plan will fail to comply with the ACA annual dollar limit prohibition because an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement. Thus, reimbursement plans may be subject to a very draconian penalty.

    In February, the IRS issued Notice 2015-17, which provides small employers limited relief from the stiff $100 per day, per participant, penalties under IRC §4980D for health insurance reimbursement plans that had been addressed in Notice 2013-54. In particular, that notice provided:

    • Transitional relief for employers that do not meet the definition of large employers (i.e., employers with 50 or more employees). This relief is granted for all of 2014 and for January 1 through June 30, 2015; and
    • Relief for S corporations that pay for or reimburse premiums for individual health insurance coverage for 2% shareholders, as previously addressed in Notice 2008-1. The relief period is indefinite, and the IRS states that taxpayers may continue to rely on Notice 2008-1 “unless and until additional guidance” is provided.

    June 30, 2015 has come and gone – and so has the small employer relief. This means employers who still reimburse employees for their medical expenses are in danger of being subject to the $100 per day ($36,500 a year) per employee penalty. Compared to the annual $2,000 penalty that large employers face for not providing insurance to their full-time employees, the penalties on small employers are substantial enough to bankrupt them. So, the large employer who fails to provide any insurance pays a penalty of only $2,000 per year per employee while the employer who helps employees by reimbursing them for the cost of insurance gets hit with an up to $36,500-per-employee penalty.

    This is true even if the employer is a small employer (50 or fewer equivalent full-time employees) who is under no legal obligation to provide health insurance plans for its employees, but makes reimbursements simply to help the employees. Does this seem fair? We will let you form your own opinion.

    Will Congress step in to alleviate the problem? Maybe yes and maybe no, and employers must decide if it is worth the risk to depend on Congress to act. One firm, Zane Benefits, claims to have solved the problem with a reimbursement plan that complies with the code, while others argue that it does not.

    We hope this illustrates the importance of you understanding your risks if your business has a medical reimbursement plan and perhaps consider other options. Please get in touch with Dagley & Co. if you have questions.

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