The Obama Administration is proposing a change to the FAFSA process (for federal financial aid for college students). Instead of having to pull your tax records out of a file [or calling your tax preparer to get a copy :) ], you may have the option of importing your needed tax info from the IRS database. It seems like this would improve accuracy and cut down on confusion as well. It may raise some privacy concerns, so we will see where this goes.
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I hope none of you ever need this advice, but if you find yourself in the middle of a divorce situation there are tax issues to consider. This article highlights eight of the issues and their consequences.
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The general rule is that if you withdraw traditional IRA funds before age 59 1/2 then you will pay a 10% penalty on the early withdrawal (plus regular US and state income taxes). For every rule there are exceptions, and if you meet one of these exceptions you can avoid the 10% penalty (but not the income taxes).
Exceptions:
1. Permanent Disability
2. Death of the IRA Owner
3. For Medical expenses that are greater than 7.5% of your adjusted gross income.
4. To help pay for a first-time home purchase ($10,000 max)
5. To pay higher education (college) costs for you, a spouse, a child, or a grandchild.
6. To pay back taxes to the IRS after a levy has been placed against the IRA
7. To pay medical ins. premiums after losing your job (and being on unemployment for 12 weeks)
8. As part of substantially equal periodic payments based on your life expectancy.
9. Ordered by a domestic relations court (divorce settlement).
Keep in mind that you can always take the original contributions from a Roth IRA out without penalties or taxation (see here why I love the Roth so much).
Exceptions:
1. Permanent Disability
2. Death of the IRA Owner
3. For Medical expenses that are greater than 7.5% of your adjusted gross income.
4. To help pay for a first-time home purchase ($10,000 max)
5. To pay higher education (college) costs for you, a spouse, a child, or a grandchild.
6. To pay back taxes to the IRS after a levy has been placed against the IRA
7. To pay medical ins. premiums after losing your job (and being on unemployment for 12 weeks)
8. As part of substantially equal periodic payments based on your life expectancy.
9. Ordered by a domestic relations court (divorce settlement).
Keep in mind that you can always take the original contributions from a Roth IRA out without penalties or taxation (see here why I love the Roth so much).
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When times are tight, and you need the cash, you may be tempted to raid your 401K funds to make ends meet. Or it may be that you've been laid off (or you company has ceased to exist) and they need to distribute your funds. Here are your options for a 401K, as well as the tax implications of each.
Still Employed - Hardship Withdrawals
"While you are employed by the company that offers a 401(k), you usually have
an opportunity to access savings under certain hardship conditions. The
drawback however, is that qualifying for this provision can be difficult. Just as
the IRS has its list of qualifying financial hardships (medical expenses or
disability), individual plans often do as well. That means you must qualify under
both sets of rules, which may be more difficult. Another drawback of a hardship withdrawal before age 59 ½, is the 10% penalty on whatever you’ve withdrawn. The withdrawal is also taxed as income. Taxes and penalties can make a hardship withdrawal expensive."
Still Employed - Non-Hardship Withdrawals
"Not every plan allows non-hardship withdrawals. If yours does, you have an
opportunity to take money out of your account and redistribute it as you see fit.
Generally the best bet is to roll the amount into an IRA. That way you avoid taxes,
and you have a larger range of investment options, usually with lower
administrative fees. Rollovers made directly to the owner of the 401(k) must be
reinvested in a qualified plan within 60 days or be faced with a 10% penalty."
Still Employed - Loans
"If you’re in a bind, a 401k loan may be your only remaining option. A loan from your
401(k) allows you to borrow against your savings. Some use restrictions similar
to those for hardship withdrawals. The loan must be paid back, usually within
five years, and loans cannot be rolled over into an IRA. However, if you leave a
company and still have an outstanding 401(k) loan, you’re oftentimes required
to pay it back in a short amount of time, usually one to two months."
No Longer Employed with the Company - Lump Sum Withdrawal
"If you are under 59 1/2 then you will face a 10% early withdrawal penalty as well as federal and state income taxes. So you will likely lose 40% or more to the government by going down this path. The IRS mandates that 20% of the withdrawal be withheld from the payment (but this is clearly not enough to cover the tax bill, so don't spend it all).
If you are over 59 1/2 then the penalties won't apply, but you will still have to report all the withdrawals as income, which could push you into a higher income tax bracket if the retirement savings are substantial.
No Longer Employed with the Company - Rollover to IRA
This is probably the ideal option in most cases because it will avoid taxation on the withdrawal. The ideal scenario is a direct rollover between the two trustees, where you never touch the money. Once the money is in the IRA, you have a few withdrawal options depending on what you age is.
Source 1
Source 2
Still Employed - Hardship Withdrawals
"While you are employed by the company that offers a 401(k), you usually have
an opportunity to access savings under certain hardship conditions. The
drawback however, is that qualifying for this provision can be difficult. Just as
the IRS has its list of qualifying financial hardships (medical expenses or
disability), individual plans often do as well. That means you must qualify under
both sets of rules, which may be more difficult. Another drawback of a hardship withdrawal before age 59 ½, is the 10% penalty on whatever you’ve withdrawn. The withdrawal is also taxed as income. Taxes and penalties can make a hardship withdrawal expensive."
Still Employed - Non-Hardship Withdrawals
"Not every plan allows non-hardship withdrawals. If yours does, you have an
opportunity to take money out of your account and redistribute it as you see fit.
Generally the best bet is to roll the amount into an IRA. That way you avoid taxes,
and you have a larger range of investment options, usually with lower
administrative fees. Rollovers made directly to the owner of the 401(k) must be
reinvested in a qualified plan within 60 days or be faced with a 10% penalty."
Still Employed - Loans
"If you’re in a bind, a 401k loan may be your only remaining option. A loan from your
401(k) allows you to borrow against your savings. Some use restrictions similar
to those for hardship withdrawals. The loan must be paid back, usually within
five years, and loans cannot be rolled over into an IRA. However, if you leave a
company and still have an outstanding 401(k) loan, you’re oftentimes required
to pay it back in a short amount of time, usually one to two months."
No Longer Employed with the Company - Lump Sum Withdrawal
"If you are under 59 1/2 then you will face a 10% early withdrawal penalty as well as federal and state income taxes. So you will likely lose 40% or more to the government by going down this path. The IRS mandates that 20% of the withdrawal be withheld from the payment (but this is clearly not enough to cover the tax bill, so don't spend it all).
If you are over 59 1/2 then the penalties won't apply, but you will still have to report all the withdrawals as income, which could push you into a higher income tax bracket if the retirement savings are substantial.
No Longer Employed with the Company - Rollover to IRA
This is probably the ideal option in most cases because it will avoid taxation on the withdrawal. The ideal scenario is a direct rollover between the two trustees, where you never touch the money. Once the money is in the IRA, you have a few withdrawal options depending on what you age is.
Source 1
Source 2
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IRS Installment Agreement
For more info on these, you can read here. In order to apply fill out IRS Form 9465, Installment Agreement Request. They will want the balance paid off in 3 years max. You will owe penalties and interest.
IRS Partial Payment Installment Agreement
Similar to a regular Installment Agreement (above) except the payments do not pay off the tax debt in full. After the terms of the Installment Agreement are fulfilled, the remainder of the IRS Tax Debt is forgiven. Although requesting a Partial Payment Installment Agreement with the IRS is easier than submitting an Offer in Compromise, it’s still tricky. First, you need to write a letter stating your request for a Partial Payment Installment Agreement and submit it to the IRS along with IRS Form 9465 and IRS Form 433-A.
Borrowing from a bank or credit card
If you have the option of borrowing from a bank to pay off your tax debt, this will give you the best rates. Penalties and Interest assessed by the IRS on Tax Debts are a lot higher than a typical loan from the bank. A typical Bank Loan, if you can get one, is around 6.5% interest versus Penalties and Interest on an IRS Debt which is usually 8% compounded daily. A Credit card will most likely have a much higher rate and should be seen as a much later option.
Offers in Compromise
Read more here about this possible but unlikely solution to settle with the IRS on a lower amount.
Source
For more info on these, you can read here. In order to apply fill out IRS Form 9465, Installment Agreement Request. They will want the balance paid off in 3 years max. You will owe penalties and interest.
IRS Partial Payment Installment Agreement
Similar to a regular Installment Agreement (above) except the payments do not pay off the tax debt in full. After the terms of the Installment Agreement are fulfilled, the remainder of the IRS Tax Debt is forgiven. Although requesting a Partial Payment Installment Agreement with the IRS is easier than submitting an Offer in Compromise, it’s still tricky. First, you need to write a letter stating your request for a Partial Payment Installment Agreement and submit it to the IRS along with IRS Form 9465 and IRS Form 433-A.
Borrowing from a bank or credit card
If you have the option of borrowing from a bank to pay off your tax debt, this will give you the best rates. Penalties and Interest assessed by the IRS on Tax Debts are a lot higher than a typical loan from the bank. A typical Bank Loan, if you can get one, is around 6.5% interest versus Penalties and Interest on an IRS Debt which is usually 8% compounded daily. A Credit card will most likely have a much higher rate and should be seen as a much later option.
Offers in Compromise
Read more here about this possible but unlikely solution to settle with the IRS on a lower amount.
Source
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If you are relatively healthy and self employed, then the HSA is the medical plan for you.
It combines a high deductible medical insurance plan with a savings account that offers tax benefits. When you go to the doctor (which is rarely since you are a healthy person), then you pay the brunt of the doctor bill. You save considerably on your monthly insurance premiums becuase of your high deductible.
Ideally you would put the savings from your lower insurance premiums into your Health Savings Account. This is just a cash savings account that has been designated for Health savings. It must be designated as a HSA when it is opened. Contributions to this account are tax deductible on the first page of your tax return, which is a good thing, just trust me. You can contribute as much as 3,000 if you are single and 5,950 if you are a family plan. Money in the account continues to be available (unlike a flex account at work) even if it is not used.
For more info on HSA's, here is a link.
It combines a high deductible medical insurance plan with a savings account that offers tax benefits. When you go to the doctor (which is rarely since you are a healthy person), then you pay the brunt of the doctor bill. You save considerably on your monthly insurance premiums becuase of your high deductible.
Ideally you would put the savings from your lower insurance premiums into your Health Savings Account. This is just a cash savings account that has been designated for Health savings. It must be designated as a HSA when it is opened. Contributions to this account are tax deductible on the first page of your tax return, which is a good thing, just trust me. You can contribute as much as 3,000 if you are single and 5,950 if you are a family plan. Money in the account continues to be available (unlike a flex account at work) even if it is not used.
For more info on HSA's, here is a link.
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If you have had debt forgiven/cancelled by a credit card company or other creditor, then you have likely learned this rule the hard way...the IRS declares that you have received income and owe them some tax. They look at it as if the creditor paid you the money and then you used it to pay off the loan. So unless it meets one of the following exceptions, you must declare the forgiven debt on your tax return. The exceptions:
- Bankruptcy
- Insolvency, which means basically that your total debts are more than the fair market value of your total assets
- Certain farm debts
- Non-recourse loans, which are loans for which the lender cannot pursue you personally in case of default
- Forgiveness of Qualified Principal Residence Indebtedness (this is a newer exception that was part of the stimulus bill)
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The general rule is that if ten years have passed since the IRS first discovered your tax debt then they can't collect the debt from you anymore. (Good luck making it that long without being levied or garnished). It becomes illegal for the IRS to contact you regarding the debt 10 years after they determine you owe it.
That is the general rule, but here are the exceptions that extend the 10 years:
For more details about this you can read here...
That is the general rule, but here are the exceptions that extend the 10 years:
- Filing An Offer in Compromise
- Being in litigation with the IRS
- Request a Collection Due Process Hearing
- Federal Lawsuit: If the IRS sues you the statutes can be extended
- Signing a Waiver: Signing a waiver might be required for things like setting up an Installment Agreement with the IRS.
- Ch. 7 or Ch. 13 Bankruptcy
For more details about this you can read here...
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If you drive an older car that gets poor gas milage, a proposed new law (which has not passed yet - so don't take action until it does) could offer a voucher toward the purchase of a slightly more efficient car. Think of it as an auto industry stimulus payment that may also benefit you. More details and full listing of the proposed rules are found here.
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If you are a user of Microsoft Money you might want to consider switching to Quicken (or another program like mint.com). That is because Microsoft is phasing out their Money program. Here are more details about how you can ease the transition from Money to Quicken.
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If student loans are eating up your budget, you should look into the new income based repayment program. It caps the monthly payments based on your income levels and could even lead to some of your debt being forgiven. They have created a video that helps explain the program and have more details here.
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Most people realize that their payments to a day care facility qualify them for the child care credit on their tax return. But you may not realize that payments to send you kid to a day camp (not overnight camps) also qualify for the credit, so be sure to save your receipt. So enjoy your summer break, and enjoy the break you get from the IRS for sending your kid to summer camp!
More info...
More info...
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Here is an article about the difficulties and procedures of declaring financial hardship with the IRS.
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When you hire a new employee, be sure to have them complete all the necessary payroll paperwork.
Form W-4
Form NC-4
Form I-9
You don't submit these to the government but should keep them on file indefinitely. However, the following form does need to be submitted to NC.
NC New Hires Notification Form or Online
Form W-4
Form NC-4
Form I-9
You don't submit these to the government but should keep them on file indefinitely. However, the following form does need to be submitted to NC.
NC New Hires Notification Form or Online
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If you have independent contractors, be sure to get a form W-9 from them (before you pay them a dime). Aside from making it much easier to issue them a 1099, it also helps establish that they were a contractor and not an employee. You should also strongly consider having them complete an independent contractor agreement (example).
In considering whether someone is an independent contractor or an employee, the IRS has put together a list of 20 questions that will help you make that determination.
In considering whether someone is an independent contractor or an employee, the IRS has put together a list of 20 questions that will help you make that determination.
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In order to make home ownership even more accessible to first time buyers, the IRS has changed the rules on the $8000 tax credit to make it available at closing if you use the right lender. So now you don't have to wait until your file your return to get the $8000.
More info...
More info...
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You can deduct IRA losses that you may have realized recently from the stock market dive. They are not capital losses, but limited miscellaneous itemized deductions. That means they must exceed 2% of your income and you need to be someone who would already itemize on your return. However, with the level of losses that many people have seen, this threshold may not be too hard to reach.
It would be hard to have a deductible loss in a Traditional IRA, because most people make tax-deductible contributions to their traditional IRA and have no basis. No basis means you have no loss according to IRS rules.
A Roth IRA is different because you are making after-tax contributions. That means that if you account is worth less today than the sum of all your prior contributions, you have a tax deductible loss. You would need to liquidate the account in order to take the loss (no partial liquidations).
Keep in mind that once the money is withdrawn from the account, you can only put it back in at the rate of 5,000 a year.
To read more...
It would be hard to have a deductible loss in a Traditional IRA, because most people make tax-deductible contributions to their traditional IRA and have no basis. No basis means you have no loss according to IRS rules.
A Roth IRA is different because you are making after-tax contributions. That means that if you account is worth less today than the sum of all your prior contributions, you have a tax deductible loss. You would need to liquidate the account in order to take the loss (no partial liquidations).
Keep in mind that once the money is withdrawn from the account, you can only put it back in at the rate of 5,000 a year.
To read more...
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I realize that most families are just trying to get by in this economy, but when you are choosing a retirement vehicle to invest in I would encourage you to look to the Roth IRA. Take advantage of whatever match your company will offer through their 401K or other plan, but then try to max out your Roth IRA. I know this plan isn't perfect for everyone, but it will be perfect for the majority.
Why do I love the Roth so much... flexibility and tax free withdrawals. You can virtually use your Roth as a savings account, taking the contributions back out if you ever need them without facing penalties and taxes (there is a five year rule before withdrawing contributions). Try that on any other retirement account. Actually, don't try it, just trust me that you don't want to do it.
Want more reasons to love the Roth?
Why do I love the Roth so much... flexibility and tax free withdrawals. You can virtually use your Roth as a savings account, taking the contributions back out if you ever need them without facing penalties and taxes (there is a five year rule before withdrawing contributions). Try that on any other retirement account. Actually, don't try it, just trust me that you don't want to do it.
Want more reasons to love the Roth?
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Those with high cash investments can rest a little easier. The FDIC and NCUA Insurance levels of $250,000 were extended another few years and will now expire December 31, 2013.
Also, keep in mind that most banks have enrolled in the TAGP plan which offers unlimited insurance to non-interest bearing accounts (checking accounts - see footnote one). Unless you are a business you shouldn't have too much cash laying around in a noninterest bearing account though.
For more info...
Also, keep in mind that most banks have enrolled in the TAGP plan which offers unlimited insurance to non-interest bearing accounts (checking accounts - see footnote one). Unless you are a business you shouldn't have too much cash laying around in a noninterest bearing account though.
For more info...
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