Tax Planning Archives - The Free Financial Advisor

Are Business Gifts Tax Deductible?

January 20, 2021 by Jacob Sensiba Leave a Comment

How do you strengthen relationships with customers and/or business partners? A tried and true way is using gifts. However, gifts cost money, so the next question is, are business gifts tax deductible?

The straight answer is yes, but it’s much more nuanced than that.

There are limitations

Business gifts are tax deductible, up to a certain dollar amount. You can deduct no more than $25 of the cost of the gift you give to each person through the course of the year.

Incidental costs such as engraving, packaging, and shipping are not included in the $25 limit as long as it doesn’t add substantial value to the gift.

Gifts that cost $4 or less are not included in the $25 limit IF the company name is permanently placed on the item and the gift is widely distributed.

Entertainment

Any item that can be considered a gift or entertainment is usually considered entertainment and is deducted at 50% of the value of the gift. For purchases that fall under both categories, use the “gift deduction” on lower-cost items and the “entertainment deduction” on items larger than $50.

Gifts to others

If you and your spouse give gifts to the same person, you’re treated as one taxpayer. The same rule applies to partnerships.

Gifting to a customer’s family counts as a gift to that customer, unless the customer’s family member(s) is a client as well.

The $25 limit only applies to gifts given to individuals. Gifts given to other companies, generally, don’t apply and are fully tax deductible.

Gifts to employees are taxable compensation.

Other relevant information

Keep adequate documentation that includes the purpose of the gift, what was spent, the date of purchase, and the business relationship.

Gifts given to a 501(c)3 non-profit are tax-deductible. Up to 25% of taxable income for a corporation.

A large majority of the information I have listed above came from the IRS publication about “Gift taxes”.

Why Understanding Your Paycheck Stub Is Important

November 25, 2020 by Jacob Sensiba Leave a Comment

Understanding your paycheck stub is essential. Your paycheck stub is included when you get paid. Whether you do direct deposit or get paper checks, the pay stub will show important information about your pay.

There are several key pieces to the paycheck stub – gross earnings, taxes, deductions, and net earnings. There are also other, seemingly, unimportant things on your paycheck. The information included on a paycheck stub include:

Hours works
Wages earned – gross and net
Overtime
Benefits – i.e. health insurance premium payment, retirement plan contributions
Taxes – federal, state, fica (social security 6.2, medicare 1.45, and .9 surtax if you earn over $200,000
Year to date info – hours, wages, taxes, benefits, etc.\
Personal information – name, address, social security number
Date of pay period
Pay rate
PTO, sick days, vacation days

Why is understanding your paycheck sub so important?

A pay stub is a way of keeping accurate records. It shows what employees worked, what they were paid, what taxes were taken out, retirement contributions, etc.

Because it’s your responsibility to report and address discrepancies. If you think you got paid less than you were supposed to or worked more than what’s reported, you need to bring that up. If your deductions (retirement plan contributions, taxes, health insurance premiums) appear to be less or more than you assumed, you need to bring that up.

Why are those things important?

What you earn is what allows you to afford to live. If you worked more or worked overtime, and it wasn’t reported correctly, your paycheck can suffer.
Taxes are incredibly important – if you expect to get money back on your tax return, but come to find out they weren’t withholding enough, you can end up owing instead. Your withholdings are very important to understand.
Health insurance premiums – if you’re not paying enough, your policy can cancel due to non-payment. What happens then? You go to the doctor and pay through the nose because you don’t have coverage?
Retirement plan contributions – If they “contribute” too much, you will have less on your check. If they “contribute” too little, your nest egg will suffer.

Paycheck stubs are incredibly important. They help you and your employer keep track of pertinent information, like taxes, health insurance premiums, retirement plan contributions, and your salary. Make sure you understand it and make sure you address any sort of discrepancy. That’s your responsibility.

Is It Safe to Throw Away Bank Statements?

October 28, 2020 by Jacob Sensiba Leave a Comment

Before we answer the question as to whether or not it’s safe to throw away bank statements, we need to cover how long you should keep certain statements. The following list is provided by TrueShred.

Statements to shred right away:

Sales receipts (unless you need them for tax purposes; in that case, scan them first)
ATM receipts
Packing slips and online purchase orders
Canceled and voided checks (that aren’t tax-related)
Utility, internet, and cell phone bills (once paid)
Credit card, insurance, and bank account solicitations that come in the mail
Expired warranty coverage
Correspondences from the DMV or IRS (once settled)
Travel-related materials (besides your passport)

List of documents to throw out after 3 years

Bank statements
Credit card statements (once paid)
Pay stubs (once checked against your W-2 for accuracy)
Medical bills (once paid and free of insurance disputes)

List of documents to throw out after 7 years

Tax returns
W-2s
Tax-related receipts and canceled checks
Records for any tax deductions you took
Other tax records

List of documents to throw out (variable intervals)

Auto titles (keep for as long as you own the car)
Home deeds (keep for as long as you own the property)
Disputed medical bills (keep until the issue is resolved)
Home improvement receipts (keep until you sell your house and pay any related capital gains taxes)

List of documents to keep forever

Birth certificates
Adoption papers
Social Security cards
Marriage certificates
Divorce decrees
Citizenship papers
Passports
Death certificates

You should keep these documents in a very safe place. I’d recommend a fireproof safe to keep these things protected.

How should you dispose of sensitive documents?

It is safe to throw away your bank statements, as long as you do so in a particular fashion. If you have a significant amount of paperwork, hire a shredding service. If you don’t have that type of volume, put it through a shredder. Tearing the papers up once or twice won’t do the trick.

Another safe disposal method, as recommended by Patch.com is to wrap up unused or spoiled food with the sensitive documents, and throw them in the refuse bin. Scavengers are more likely to “skip over” the refuse bin when they’re looking for sensitive information for identity theft purposes.

Below, are several ways to dispose of your sensitive documents without the use of a shredder. This list is provided by WigglyWisdom.com.

Hand shred – tear up the paper with your hands. Make sure you tear the vital information and place it in separate recycling bins.
Burn them – local ordinances can hinder your ability to do this, so be sure to check the laws for your municipality. Tear up the paper first, in the same way, you would for point #1, in case a piece of paper flies away.
Compost – paper breaks down and can add carbon to your compost pile.
Soak them in water – 24 hours in a bucket of water can leave your documents illegible.

There are three other items on that list if you’d like to learn a little more.

Conclusion

Bank statements and other financial documents contain incredibly sensitive information. It’s important you a) keep proper records and b) dispose of these items in a safe manner.

Earlier this year, I wrote a piece about the most important financial documents. If you’d like to learn more, go check that out here.

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see website for full disclosures: www.crgfinancialservices.com

How to Avoid NJ Exit Tax

October 14, 2020 by Jacob Sensiba Leave a Comment

Federal income taxes are the same for every state. The only difference is how much money you make and what tax bracket you fall in.

State taxes are a completely different story because each state has its own rules. New Jersey is a perfect example with their “Exit Tax”. In this article, we’ll talk about ways to avoid NJ exit tax.

What’s the deal?

When you sell your NJ home and then move out of state, you have to pay the NJ exit tax.

When you sell a home, regardless of the state you live in, you have to pay tax on any gains you made. How much tax you pay depends on how long you owned and lived in the home.

According to NJMoneyHelp.com, “On June 29, 2004, New Jersey enacted P.L. 2004, Chapter 55, which requires sellers of real estate who are not residents of New Jersey to make an estimated income tax payment on the gain from the sale.”

It has nothing to do with selling and moving out of state. It’s just about selling the home and paying taxes on any gains made at the time of closing. The rule was enacted to ensure that NJ would receive the taxes owed on the property regardless if the seller was an NJ resident or not.

If you do not fill out one of the forms (see below) and pay the estimated taxes owed, the deed may be rejected.

Exemptions

There are 1 of 4 forms that you need to file when selling a home in NJ. Form GIT/Rep 3 Seller’s Residency Certification/Exemption – has 8 exemptions. The first applies to NJ residents. The remaining exemptions are listed below:

Real property was used as a principal residence and qualifies under IRC Section 121 of the Internal Revenue Code which excludes up to $500,000 of gain for married taxpayers, $250,000 for single taxpayers. Remember this does not include vacation or investment homes.
Addresses a mortgagor conveying the property to a mortgagee in foreclosure.
Seller is a governmental agency.
Seller is not an individual, estate, or trust, i.e. corporation, partnership, etc…
Total consideration is $1,000 or less
Gain from the sale will not be recognized if qualified under Sections 721 (contribution to a partnership), 1031 (like-kind exchanges), 1033 (involuntary conversions) and non-non-like kind property received
Transfer is by an executor/administrator of an estate pursuant to decedent’s Will

If one of these exemptions doesn’t apply to you, then you’ll have to pay tax on the proceeds and fill out Form GIT/Rep 1 or 2.

Conclusion

There are several ways to avoid NJ exit tax, but if you don’t qualify for one of those ways, make sure you fill out one of those forms and pay the taxes due.

When are Per Diem Payments Taxable?

September 2, 2020 by Jacob Sensiba Leave a Comment

Per diem payments are used when businesses have employees that travel. These payments are designed to relieve the employee from certain costs associated with traveling. Particularly meals and incidentals (ground travel, laundry, room service, etc.), and lodging.

This is great for both the business and the employee, but there are certain situations when per diem payments are taxable. In this article, we’ll explore exactly when an employee will pay per diem tax.

Two types

There are two types of per diem payments, meal-only, and meal and lodging. The names imply their use. One pays for meals, the other pays for meals and lodging.

It’s important that we specify the meals must be “non-entertainment related” meals.

Stipulations

As with many parts within the tax code, per diem rules are very specific. Meals and lodging have different rates.

Also, different cities have different rates. These differences are typically relegated to “big cities” and “small cities”, with bigger cities getting the larger rates. This is referred to as the high-low method. Businesses may also make payments based on the state in which you travel.

The per diem payments must be equal to or less than the federal allowable limit (depending on what method is selected). The employee is responsible for filing an expense report within 60 days. The expense report needs to include, date and location of the trip, purpose of the trip, and lodging receipts (if the meal-only option is selected).

You’re not allowed to “transfer credits”. What’s meant by this is if you use less on your lodging than is allotted, you can’t use the excess on food, or vice versa.

Tax Consequences

As I mentioned in the introduction, per diem payments can have tax consequences.

If per diem payments over the limit are taxable on the employee’s wages
If an expense report isn’t filed, or the filed expense report doesn’t include the required information, those per diem payments become taxable to the employee.
If the employer allows you, the employee, to keep whatever you don’t spend.

If you travel for business and receive per diem payments, just make sure you keep good records, and you hang onto your receipts. It’s better to have too much information than not enough.

Should You Report Income From the Sale of Your Home on Your Income Taxes?

July 13, 2020 by Tamila McDonald Leave a Comment

The United States tax code is complex. Many taxpayers have trouble figuring out what does and doesn’t need to be reported as income, particularly if the money is related to the sale of personal property. In many cases, the value of a person’s home goes up in the years after they buy. When this occurs, there is a financial gain from the sale, creating a profit. If you’re asking yourself, “Is money from the sale of your house considered income?” here’s what you need to know.

[Read more…]

Why Your Will Should Be Up To Date

April 8, 2020 by Jacob Sensiba Leave a Comment

With the Coronavirus making its way through countries and countless healthcare systems, it’s a good opportunity to check in with everyone about their will and general estate planning.

We’ve written a couple of posts about the finer details of estate planning, but one of the most important things you can do is make sure that you have an updated will.

Beneficiaries

A beneficiary is anyone that will receive an asset, or assets when you pass away. You will have beneficiaries listed on your retirement accounts and life insurance policies. They can also be added to brokerage accounts via a Transfer on Death (TOD) designation.

It’s important to note that beneficiary designations and TOD designations bypass probate. The assets that the deceased owned at the time of death do not need to go to court. They go directly to the beneficiary (beneficiaries) listed on the account.

So…why is it so important to keep your beneficiaries up to date? The obvious answer is because life changes all the time.

Life Changes

People get married, divorced, re-married, etc. People have kids or marry someone that already has kids. The more grim circumstance is when a beneficiary predeceases you. It’s unfortunate, but something that does happen.

When you assign beneficiaries, there is often a box you can check labeled “per stirpes”. This simply means that if one of your beneficiaries passes before you do, that beneficiaries portion would be received by their children instead.

Not only can changes take place with your beneficiaries, but they can also change with the people you’ve entrusted with your estate. Roles like the power of attorney and executor.

Again, people can pass away before you and/or relationships can fall out of favor.

When it comes to your assets, those change often too. Good or bad years in the stock market can see drastic fluctuations in portfolio value.

Moving will change your residence, but it can also change your net worth depending on the value of your new home and how much you owe on that home. Remember Finance 101? Net worth = assets – liabilities?

Consequences

There could also be consequences for not having an updated will. The wrong beneficiaries could receive assets. Your power of attorney could be your brother and not your sister.

You actually have a much higher net worth than you thought, so now your heirs will have to pay estate taxes. Had you known that, you could have taken advantage of the gift tax exclusion and shared your wealth in order to bring your net worth down to avoid taxes.

To sum things up, you need an updated will because the items within it are going to change…plain and simple.

401k Withdrawal Taxes and Penalties

December 18, 2019 by Jacob Sensiba Leave a Comment

The 401k has grown in popularity over the last couple of decades because pensions have all but vanished; as a result, strategies around taking withdrawals and how to limit taxes and penalties are extremely prevalent.

In this article, we’re going to discuss the common penalties and taxes, and some of the strategies you can deploy to reduce them.

When a penalty typically applies

In almost all cases, a penalty applies if you withdraw from your account before the age of 59 ½. This is a 10% tax penalty. (Be advised: All withdrawals are subject to ordinary income taxes)

There is also a tax penalty if you fail to withdraw your Required Minimum Distribution (RMD). This applies to individuals over the age of 70 ½. This penalty, however, is 50% of the amount you should’ve withdrawn.

There are several exceptions, however.

Additionally, with the new Secure Act, there have changes to required minimum distributions, contributions, and others. For more information, click here.

When you are exempt from penalty

Withdrawal after 59 ½
Left employer after 55
Left employment in public safety after 50
Death distributions: your beneficiary is able to take distributions without penalty, regardless of their age
Totally and permanently disabled as defined by the IRS
72t rule – Agree to withdraw the same amount for a fixed period of five years or until you turn 59 ½, whichever is greater.
Unreimbursed medical expenses: You’re allotted to withdraw the unreimbursed medical expenses minus 10% of your adjusted gross income
If you over contribute to your retirement plan for the year, you’re allowed to withdraw the excess without incurring a penalty.
IRS Tax Levies
Divorce: Depending on your state and how you settle the divorce with your former spouse, he/she can withdraw their respective portion without penalty
Roth conversion: you pay taxes on the conversion, but there is no 10% tax penalty

*All exceptions may have certain requirements that need to be met to qualify for the exemption. Please check with your 401k Plan Administrator and Financial Advisor regarding your personal situation.

Taxes

With regard to tax-saving strategies on 401k withdrawals, there are no short-cuts or exceptions like there was for the penalty section.

The best way to save money on taxes when taking distributions is to be strategic.

If the expense you are withdrawing for is something that can be planned ahead of time, determine your current tax bracket, figure out how much you’ll need at that future date, and withdraw slowly over time (how much you withdraw depends on how soon you’ll need it).

For example, if you are in the 22% tax bracket, are $10,000 from going into the next bracket, and need $40,000 for a down payment in 4 years, then withdraw just under $10k each year.

This assumes that your income and tax bracket will stay the same.

Another way to go about it is to utilize Roth conversions. If the intention is to minimize or eliminate your tax liability for retirement, do a Roth conversion every year. Just be mindful of where you are in your current bracket, so you aren’t bumped into the next one.

In this example, however, it can be counter-intuitive because in most cases, your tax bracket in retirement is lower than it was while you are working. This is commonsense, though. You’re making less, so logically you would be in a lower bracket.

With regard to taxes, it comes down to math. If you need to withdraw from your 401k, crunch the numbers and figure out how you can do that while limiting your tax exposure.

Why I Love The Roth IRA

June 5, 2019 by Jacob Sensiba

The Roth IRA started in 1997 and it changed the retirement savings game.

It’s probably my most recommended retirement savings vehicle, other than your employer-sponsored plan of course. You have to get that match!

The Roth IRA can be your primary retirement account or a nice complement to a work-based plan.

Here’s why I love the Roth IRA.

Tax-free withdrawals! That’s right, if you save for retirement using the Roth IRA, you get to take that tax-deferred (don’t pay taxes while money grows) savings out of your account without paying taxes.

While you’re working, you generally have two options (besides contributing to your 401k or Simple IRA) do I contribute to a Roth IRA or a Traditional IRA? The amount of money you make plays a little bit of a factor, as the Roth IRA has an income limit ($137,000 – single, $203,000 – married filing jointly).

However, a back-door contribution is available. That’s where you make a contribution to a traditional IRA and roll the money from there into a Roth IRA. Be advised: You’ll be taxed at the time of the rollover.

That aside, contributions to a traditional IRA are tax-deductible (an income limit applies here). Conversely, contributions to a Roth IRA are not tax deductible.

Here’s why I like to recommend the Roth. I’d save for retirement, without getting that tax-deduction and pay $0 taxes upon withdrawal in retirement. At that point in time, your ability to earn more money is either dramatically reduced or gone completely.

It’s at this point when you need that money the most. I’d rather pay for it now and benefit from it later.

With all that said, I suppose I should list all the characteristics of a Roth IRA.

For 2019, the contribution limit is $6,000. If you are 50 or older, you can contribute an extra $1,000. Be advised: these contributions limits change often. Consult the IRS website for up to date information.
Because the money in the account was already taxed, there are no mandatory withdrawals. Uncle Sam got his cut already so you can let that baby grow for as long as you want.
If you withdraw before 59 1/2, you’ll pay a 10% tax penalty
There are exceptions to this penalty, however.
- Death
- Disability
- Use up to 10% on your first home purchase
- Pay for higher education
- Medical costs are more than 7.5% of your AGI
- Can pay health insurance premiums if you’re unemployed
- The IRS has a tax levy against you
You can make contributions for the prior “tax” year up to April 15th.
If you withdraw your savings within 5 years of your first contribution, you’ll pay some taxes on your withdrawal.
- Note: The 5-year clock starts ticking on January 1st of the year you made your first contribution

Conclusion

As I said, the Roth IRA is a great savings vehicle. Whether you use it on its own or use it as a complement to an employer-sponsored plan, it has a place in everybody’s retirement plan.

One last thing I want to mention. My reasoning behind why I recommend the Roth IRA so often is my personal belief. Please use your situation and your money/retirement philosophy when making this decision. It also pays to talk to a professional to see what they’re thoughts are, as well.

A Few Tax Tips Suitable for Anyone

April 10, 2019 by Jacob Sensiba Leave a Comment

Seeing as how next Monday is tax day, I thought it would be fitting to write about taxes. This article will have little to do with income taxes, however.

Instead, I’ll be focusing on the taxability of retirement accounts and brokerage accounts.

Qualified Accounts

A qualified account is pretty much anything that has a tax advantage. Tax advantage simply means that the investments inside the account grow tax-deferred – you aren’t taxed on the growth within the account, and/or the money can be withdrawn tax-free.

There are several different kinds of qualified accounts. Instead of listing them all, I’m going to list a few of the common ones and link to an article containing all the accounts and what they’re about.

401k – The most common employer-sponsored retirement account. It’s not offered by all employers, but the money going into the account is pre-tax. Additionally, the money grows tax-deferred. However, when withdrawn, the money is taxable as income according to your tax bracket.
Traditional IRA – This is an individual retirement account. This type of account is contributed to using post-tax money, but most people are able to deduct the contribution on their taxes. However, there is a level of income when you no longer qualify for that deduction. The money is taxable when withdrawn as income.
Roth IRA – Also an individual retirement account, but with three key differences. One, the money that’s contributed is not tax-deductible. Two, the money is tax-free when withdrawn. Three, not everyone is eligible to open a Roth IRA once a certain level of income is reached.

Each of these plans has unique characteristics and rules. I encourage you to give this article a read to learn more about them. (Note: income eligibility for IRAs is listed in this article)

Non-qualified accounts

No bells or whistles. These accounts are designed to hold your cash, securities, and give you the ability to invest and trade.

Qualified accounts do the same thing, but have tax-advantages. Non-qualified accounts don’t.

There are usually two types of accounts: individual and joint. An individual account is for one person. A joint account is for two or more.

With a non-qualified account, there are two things you have to pay attention to.

Capital gains/losses – A capital gain is when you sell an investment for more than what you paid for it and a capital loss is the exact opposite. A capital gain comes in two variations. Short-term, which is when you held an investment for less than one year and is taxed at your income tax bracket. Long-term, when you held an investment for longer than one year and is taxed at a reduced tax rate.
Dividends/interest – These are paid by the company or fund and are taxed as income.

Tax return as savings

The last thing I wanted to talk about is your tax return and how you use it/view it. There are three types of returns. When you owe, when you break even, and when you get money back.

What I try to do, and what I generally recommend people do, is get as close to breaking even as you can. This just means you paid about the exact amount in taxes that you should have. No more, no less.

Here’s when I’m okay with people getting money back.

As a collective, we are horrible at saving money. The statistics show it. Now if you go through the year and pay more taxes than you need to and want to use that tax return as a makeshift savings account, then have at it.

My philosophy is if it helps you save money and it works for you, then do it. Some people need that type of set up.

Regular savings account don’t work for everyone because often, they are able to access the money whenever they want/need to. If you’re using your tax return as your savings vehicle, you don’t have that opportunity.

Conclusion

Love it or hate it, taxes are a part of life, and they won’t go away. There are certain strategies and certain accounts you can utilize to help make them more manageable/bearable.

If you’d like to learn more about anything discussed here and for my disclosures, visit my company’s website!

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

There are limitations

Entertainment

Gifts to others

Other relevant information

Related reading:

Why is understanding your paycheck sub so important?

Why are those things important?

Related reading:

Statements to shred right away:

List of documents to throw out after 3 years

List of documents to throw out after 7 years

List of documents to throw out (variable intervals)

List of documents to keep forever

How should you dispose of sensitive documents?

Conclusion

Related:

What’s the deal?

Exemptions

Conclusion

Related Reading:

Two types

Stipulations

Tax Consequences

Related reading:

Beneficiaries

Life Changes

Consequences

Related Reading:

When a penalty typically applies

When you are exempt from penalty

Taxes