Tax Planning

Despite the changing economy, real estate remains one of the most reliable ways to build wealth. The downside to that is, the more wealth you build, the more taxes you usually have to pay. For many, finding legal ways to lower taxes is an ongoing hunt. Surprisingly, the government has actually given active real estate investors a very simple—and legal—way to defer capital gains tax on real estate transactions. Yet many seasoned investors don’t use it. Why not? For the most part, it may be because a lot of people aren’t aware of it. 

What is the 1031 Exchange Tax Deferral?

The 1031 exchange tax deferral allows real estate investors to defer taxes by selling and then buying more properties within a certain time frame, and which fall into certain categories. In a traditional real estate transaction, you might buy a property, wait for its value to appreciate, then sell it at a profit. You’d then pay taxes on the profit. Those taxes can really take a bite out of your profit; plus they reduce the amount of money you have to invest in another piece of property. This can really hold you back as far as wealth building. 

With the 1031 exchange, you buy and sell a property as usual, but instead of paying taxes on the profit, you defer taxes by following the next steps and rules set up in the tax code. The rules include:

• Hold the property for about a year to demonstrate your investment objective

• Identify between one and three properties to buy within 45 days of selling the old property

• Close on the new property within 180 days of selling the old property

• The new property has to be a like-kind property, such as a single family home and a single family home, or an apartment building and an apartment building

• Buy and sell properties in one name only

• Never take personal possession of the funds at any point in the transaction (use an intermediary to facilitate this)

As long as you follow the guidelines, the buy, sell, buy transactions qualify as a 1031 exchange and you can defer taxes on the sale. In fact, you can keep doing this as many times as you want during your lifetime. When you pass on, your heirs won’t have to pay taxes on those sales, either. If they sell your current property, they only pay tax on the current market value. Essentially, this gives you perpetual deferred taxes. 

Mistakes to Avoid

There are a number of very strict rules with the 1031 Exchange. Following are some of the most common reasons transactions end up being disqualified for Section 1031 benefits.

Offering Cheap Rent to Family Members

The 1031 exchange rules don’t prohibit you from renting out your investment property to family members or friends. Collecting rent from anyone deems it a bona fide investment. However, in order to avoid getting disqualified, you’d have to charge fair market value for the rental. That means no breaks of any kind for your beloved son/daughter, etc. The IRS may look closely at your 1031 transactions, so be sure to actually collect that fair market rent, too, so you can show receipts and deposits if you’re audited.

House Hacking

Duplexes are real property and so qualify under the 1031 exchange rules. But primary residences don’t qualify. If you’ve purchased a duplex or another multi-unit investment property and you plan to live in part of it while you rehab the other part, it then becomes a primary residence. This disqualifies your transaction for the 1031 exchange benefit.

Forming a Business Entity

One of the caveats of qualification is that the title of both properties must be in the same taxpayer’s name. So if you buy a rental under John Smith, the purchase of your replacement property must also be in the name of John Smith. Now, let’s say that you make a killing on your rentals and you decide to form a company out of this real estate investing business. You name your business John Smith, Inc., because you’re aware of the IRS 1031 rule. But John Smith the individual taxpayer is not the same as John Smith, Inc., the taxpaying company. Come tax time, you’re going to owe the capital gains tax on the sale of that first property. Another scenario would be if you buy an investment property yourself and then you get married and decide to add your spouse to the title and then from there on out you purchase 1031 exchange properties in both your names. Technically, you could be disqualified on the grounds that your spouse’s name wasn’t on the original title. The safest thing is to keep the names on all your titles identical, including spellings, nicknames and suffixes like jr. and sr. You can use any taxpayer entity you like, but it must remain constant throughout all your 1031 exchanges.

Investing Overseas

You can certainly buy a vacation rental property overseas and maybe get a nice return, but it won’t qualify as like-kind under Section 1031. As stated by the IRS, “…real property in the United States is not like-kind to real property outside the United States.”

Disguising a Fix and Flip

The 1031 exchange is not permitted for fix and flips. It’s intended for investment properties; “real property held for productive use in a trade or business or for investment.” Most investment properties need at least some rehab before they can cash flow. It’s fine to fix up your investment rental property so you can get the highest possible rent. What isn’t fine is to buy a distressed property, fix it up and then pretend to try to rent it out just long enough until you can flip it and do a 1031 exchange. This is the reason why most CPAs recommend holding your 1031 investment properties for at least a year before doing the 1031 exchange. 

There are lots of rules regarding the 1031 exchange; many of them time-sensitive. While it may feel scary to attempt to do 1031 exchanges, remember that with the guidance of a qualified CPA and an intermediary, it’s perfectly safe and legal. Don’t miss out on this opportunity to defer capital gains tax indefinitely on your real estate investment properties. 

 by Kate Supino

Every year, millions of taxpayers in the U.S. dutifully submit their tax returns, along with whatever taxes they owe to the government. But there is also a large percentage of people who find themselves short and can’t pay their taxes. Many struggle to meet their daily financial needs, let alone come up with the money to give to Uncle Sam. But not paying taxes has serious repercussions, including severe penalties, wage garnishment or even imprisonment. If you find yourself in this situation, this is the time to talk to your CPA about your options. 

Adjust Your Withholding

Ideally, you shouldn’t owe anything to the IRS on April 15th, and they shouldn’t owe you anything. For many people all over the U.S., this doesn’t pan out, for any number of reasons. Either people are having too much taken out of each paycheck and they get a refund, or they have too little withdrawn from each paycheck and they end up with a tax bill. 

Go to your company’s HR department and ask to confirm your withholding numbers. If you consistently owe taxes at the end of the year, bump up your withholding amount. If you need advice about how much to increase it, consult with your CPA, who can make calculations based on previous tax returns to come up with a reasonable withholding amount. 

Request a Payment Plan

Did you know that the IRS is not completely oblivious to the fact that many people can’t pay their taxes? In order to help out, the IRS offers a payment plan. This enables you to pay off whatever you owe, a little bit at a time. This is all done online, so you don’t  even have to visit a government office to apply. If accepted, you’ll be able to choose from a short-term payment plan of 120 days or less, and a long-term payment plan if the repayment period is longer than that. 

Not everyone will qualify, since there is an application and approval process. A pro tip is, give yourself more time than you think you’ll need to pay off the tax bill. It’s better to meet the terms of your agreement over a longer term than to default on your payments. Defaulting will almost certainly disqualify you from being accepted for a payment plan in the future. 

Request an Installment Agreement

If for some reason you don’t qualify for an online payment plan, you can apply for an installment agreement. This is for very long-term repayments that may meet or surpass 10 years. Hopefully your tax debt isn’t so high that you need 10 years to pay it off. An installment agreement, or IA, is mostly for high income individuals who haven’t paid taxes for many, many years. 

File For an Extension

The worst thing you can do if you can’t pay your taxes is ignore it by not filing at all. The IRS will quickly get wind of your missing tax return and the penalties can be severe. Get together with your CPA and file a tax extension. This will give you six more months to legally file your return. The important thing to know about tax extensions is, it doesn’t give you a “pass” on your tax bill. You still owe your tax bill on the 15th, no matter if you file the tax form or not. But if you can’t pay on the 15th and you file an extension, the IRS knows that you’re being responsible and trying to take care of it. Just know that when the 6-month deadline comes around and you pay your tax bill along with your tax return, you will likely receive a bill from the IRS for interest on the amount during that 6-month time period. 

Make Changes For the Future

With proper planning, you should be able to fairly easily manage your tax bill in the future. It will take some discipline and sacrifice, but at the end of the day you’ll rest easier when you know that you don’t owe anything to Uncle Sam. Here are some simple changes you can make that will protect your future ability to pay taxes:

Open a Second Savings Account

Many people don’t realize that you can have multiple savings accounts at their bank, but this is a good strategy. Open up a savings account that’s separate from your household savings account. This is going to be your tax savings account. You don’t want to mingle it with your regular emergency savings account, because this is money you won’t touch under any circumstances.

Automatic Deposits

Next, set up automatic deposits from your checking account. For whatever tax bracket you’re in, set aside that percentage to be deposited into your tax savings account. Most banks offer this automatic transfer service. So, if you’re in the 15% tax bracket and you get paid twice a month, have an estimated 7.5% from each paycheck deposited into your bank, automatically transferred into your tax savings account.

Come tax time, you’ll have the money you need to pay your tax bill in full. And, if you end up having more than Uncle Sam requires on April 15th, you can pat yourself on the back, because that extra money is now yours to be transferred into your personal savings account for your own use.

You may have even more options than the ones listed here, if you can’t pay your taxes. Your CPA is the best source for what to do in this situation. They can be your financial confidant and even your representative when it comes to dealing with the IRS. Get in touch today to learn more.

by Kate Supino

Being self-employed these days is more common than ever before. More people are deciding that it’s better to be their own boss rather than punch a time clock. In addition, the gig economy, as it’s called, means that more people are opting to “piecemeal” their income, getting work here and there instead of working for an employer. However, being self-employed brings its own unique set of challenges and freedoms. Chief among these challenges is the responsibility of handling your own taxes, including making quarterly tax payments. Unlike traditional employees, self-employed individuals must estimate and pay taxes on their income throughout the year. Of course, this isn’t a literal need to handle your own taxes. Most savvy self-employed people hire a CPA to handle taxes, since they are often even more complicated than if the person worked for a separate company. Still, there is some planning to do when it comes to quarterly taxes, so that the outgoing money doesn’t take you off-guard.

What Are Quarterly Taxes?

Quarterly taxes, also known as estimated taxes, are payments made four times a year to cover income tax, self-employment tax and other related taxes. The IRS requires self-employed individuals to make these payments if they expect to owe $1,000 or more in taxes when their annual return is filed. Your CPA can advise you as to whether or not you’re required to pay quarterly taxes.

The Impact on Cash Flow

Coming up with the money to pay quarterly tax payments can be challenging for the self-employed. One main reason is that cash flow is a common challenge for people working for themselves. It certainly takes some experience and finesse to ensure positive cash flow each month, even in a traditional business environment. For this reason, it’s helpful to learn how to calculate your estimated tax payments ahead of time. Your CPA can help you with this task, but you should learn how to do it, as well.

Calculating Your Estimated Tax Payments

1. Estimate Your Annual Income

Start by estimating your total income for the year. This includes income from all sources, such as freelance work, gig economy jobs, and business profits.

2. Calculate Your Adjusted Gross Income (AGI)

Your AGI is your total income minus any adjustments, such as retirement contributions and health insurance premiums.

3. Determine Your Taxable Income

Subtract your standard deduction or itemized deductions from your AGI to get your taxable income.

4. Apply the Appropriate Tax Rates

Use the current year’s tax rate schedules to estimate your tax liability. Don’t forget to include self-employment tax, which covers Social Security and Medicare taxes.

Understanding Self-Employment Tax

Self-employment tax is a significant part of your estimated taxes. It comprises Social Security and Medicare taxes and is calculated at a rate of 15.3% of your net earnings from self-employment. This includes both the employer and employee portions of these taxes.

Making Your Quarterly Payments

Once you’ve calculated your estimated taxes, it’s time to make your payments. The IRS has set specific due dates for these payments:

• April 15 for income earned from January 1 to March 31

• June 15 for income earned from April 1 to May 31

• September 15 for income earned from June 1 to August 31

• January 15 of the following year for income earned from September 1 to December 31

You can make your payments online through the IRS Direct Pay system, by mail using Form 1040-ES, or via the Electronic Federal Tax Payment System (EFTPS).

Protect Yourself by Setting Aside Money for Taxes

To ensure that you always have the cash available to pay your quarterly taxes, experts recommend that you set aside the money. Don’t even factor it into your income. One of the biggest challenges for self-employed individuals is setting aside enough money to cover their quarterly tax payments. Here are some tips to help you get it done:

1. Create a Separate Tax Account

Open a separate bank account dedicated to your tax savings. Transfer a portion of your income to this account regularly. It could be as simple as a second savings account, connected to your business checking account. Keep it at the same bank so you can transfer money into it in seconds.

2. Use a Percentage Method

Calculate a percentage of your income to set aside for taxes. A common recommendation is to save 25-30% of your earnings. Get together with your CPA to figure out what percentage you should use. If it consistently ends up being too much or too little, you can always tweak it.

3. Automate Your Savings

Consider setting up automatic transfers to your tax savings account to ensure you consistently save money for your quarterly payments. Depending upon your banking institution, you could automatically have a certain amount transferred each time you make a deposit.

Benefits of Paying Quarterly Taxes

By now, you may feel like paying quarterly taxes is a burden. But there are some advantages that come with the territory, including:

Avoidance of Penalties

Paying quarterly taxes if you fall into the correct category isn’t an option; it’s obligatory. By paying them as directed you can avoid hefty IRS penalties.

Better Management of Cash Flow

When you know you have to pay quarterly taxes, you may have a tendency to pay closer attention to your cash flow, which is always a good thing.

Peace of Mind

It feels good to know that you’re in compliance with the law. This may reduce stress and allow you to focus on growing your business.

Planning for quarterly taxes as a self-employed individual requires diligence and careful calculation. By estimating your income accurately, setting aside money regularly, keeping detailed records, and staying informed about tax laws, you can ensure that you meet your tax obligations and avoid unnecessary penalties. Remember, consulting a CPA can provide additional peace of mind and help you navigate the complexities of self-employment taxes.

by Kate Supino

People can have strange relationships with money. For some, it’s a powerful tool to get what they need. For others, it’s a necessary evil; something they have to contend with to live in this world. Some people want to accumulate as much money as possible; others believe that wealthy people must have done something bad to get where they are. The psychology of money and our relationship to it isn’t just fiction. It’s a genuine field of study called Behavioral Economics.

Behavioral economics combines parts of psychology and parts of economics to shed light on why people make the choices they do. An essential understanding is that people don’t always make the most rational decisions or the ones that seemingly would offer the optimal results. This is true even in situations where the person has all the experience and information to make the smartest decision. Often, money decisions are made based on emotions. Consider an example like a gambler, who knows the odds are against them, sees their stack of chips getting shorter, knows their bank account is nearly in the red, yet continues to place bets. The more you understand behavioral economics, the more control you may have over the way your personal relation with money influences your financial choices.

The Money Mindset

The money mindset is the way you think about money. When you think about money, how do you envision it? Do you feel like everybody else has money and no one wants to give you any? Do you feel like money is abundant in the world and all you have to do is step into the abundance? When you get money, does it instill a sense of fear or a sense of empowerment? Your upbringing, experience and your surrounding culture all play a significant role in how you perceive matters of money. It’s worth spending some quiet time thinking about how you feel and think about money. This is the first step in taking control over your financial decisions.

Loss Aversion

Loss aversion is a core concept in behavioral economics. It’s a kind of psychological bias where the pain of losing money is more strongly felt than the joy of gaining money. If a person has loss aversion, they may immediately get fearful when they come into money because they are afraid of losing it; so much so that it nearly overrides the pleasure of getting the money. Those with loss aversion tend to be very conservative with their money. They may avoid investments altogether, opting instead for a savings account, or even hiding money in the house. Their financial decisions are often driven by fear instead of logical reasoning.

Anchoring

Anchoring is a cognitive bias that appears in behavioral economics as well as other areas of psychological study. Anchoring is when a person anchors their choices on a specific reference point. The danger is when the reference point is no longer valid. In finances, a person may anchor decisions to how much their first paycheck was, or the value of an item when they first purchased it. For example, have you ever visited an elderly family member whose collection of Beanie Babies has taken over a guest bedroom? They’re anchoring their hoarding on the big financial bubble that Beanie Babies created years ago, when they first came out. Since then, so many Beanie Babies have been made that they will likely never be worth much more than retail. But that person can’t see that their decision is based on an anchor point that is now irrelevant. It’s important to regularly reassess anchor points to ensure they are still accurate in current economic conditions.

Herd Behavior

Herd behavior is more prevalent now than ever. From social media influencers to flashy money gurus, everyone seems to be “following” someone. Our natural instinct to be social means that we want to be part of a group. People tend to buy when and what everyone else is buying, and sell when and what everyone else is selling, irrespective of the underlying value of the asset. We all want a piece of the money pie. But herd behavior often leads to bubbles and crashes in financial markets. It can also lead to personal financial ruin. It’s not a good way to approach finances because everyone has unique goals and financial circumstances. While it’s important to stay abreast of market trends, it’s never a good idea to blindly follow where others lead, no matter how many other followers they have.

Sunk Cost Fallacy

This is a tendency to keep throwing good money after bad. In finance, it’s a behavior to continue investing in something because of the resources already committed, even when it no longer makes financial sense. In investment, this might manifest as holding onto a stock or asset that is continuously losing value. The person doesn’t want to admit that the original plan didn’t work. The previous investment influences the decision to remain committed, when in reality, the amount of previous investment is unrelated to the potential outcome.

Overconfidence

This is a cognitive bias reflected by overestimating one’s own abilities or intellect. In finance, it can manifest as taking exceptional risks, based on the belief that the person has a special talent that others lack. It may make a person believe that they can outperform the market. It can also manifest as an unwillingness to listen to sound advice, even when that person has paid for or requested the advice in the first place.

It can be exceedingly helpful to make efforts to understand one’s own relationship to money and to making financial decisions. One of the recommended paths to a better understanding is to talk to a CPA for unbiased guidance on tax-related matters. For more information, contact your CPA today.

by Kate Supino

If you’re a business or self-employed, you have to deal with estimated tax payments. These are used to pay alternative minimum tax, income tax and self-employment tax. Many people find estimated tax payments to be a nuisance, and they wonder if they are mandatory. The fact is, the IRS is within its rights to penalize taxpayers who miss estimated tax payments, so it’s worth the time to fully understand what estimated tax payments are, and your obligations for payment.

What Are Estimated Tax Payments?

Estimated tax payments are payments made to the IRS and state tax departments throughout the year on income that isn't subject to withholding. This typically includes income from self-employment, business earnings, interest, rent, dividends, and other sources.

The U.S. income tax system is a pay-as-you-go system, meaning taxes must be paid as you earn or receive income during the year. If you don't have enough tax withheld, such as is the case with a traditional paycheck, or if you don't make the appropriate estimated tax payments on money you earn elsewhere, you could face a penalty for underpayment at the end of the year.

Who Has to Make Estimated Tax Payments?

If you earn money that doesn't already have tax payments taken out of it, then chances are you have to make estimated tax payments. This includes small business owners, gig economy workers, freelancers and even side business hustlers. It also specifically includes:

• S corporation shareholders

• Sole proprietors

• Partners

• Individuals as noted above

If the expected tax due by the filing deadline is at least $1,000, then estimated tax payments have to be made. In the case of corporations, the minimum is $500, not $1,000.

Now, some of these may go unnoticed by the IRS for a while, such as gig economy workers and side business hustlers, but once the IRS catches up, penalties will follow unless estimated tax payments have been made.

Who is Exempt From Making Estimated Tax Payments?

If you meet all three of the following conditions, you’re exempt from making estimated tax payments:

1. You were a resident alien or U.S. citizen for the entire tax year

2. You did not owe any taxes the previous year

3. Your prior tax year encompassed 12 months

How and When Are Estimated Tax Payments Made?

Estimated taxes are paid on a quarterly basis, so they happen four times a year. Each period has its own due date. The date of the postmark is considered the date of payment. However, most people make their estimated tax payments online, since it’s more efficient, easier and more secure. This is done using the EFTPS system, which is online. Corporations don’t have a choice; they must utilize the EFTPS system.

Note that if the due date for a period falls on a weekend or legal holiday, the due date becomes the next day that isn’t a weekend or legal holiday. So, if the due date is a Sunday, the due date becomes Monday. If the due date is Memorial Day, the new due date is the next day, which would be a Tuesday.

If, for any reason, you don’t wish to wait until the end of the quarter to pay your estimated taxes, you can pay more often using the EFTPS system. They can be made weekly, bi-weekly or monthly, if that fits in better with your budget.  As long as the total due is paid by the quarterly deadline, all is well.

Penalties Regarding Underpayment or Nonpayment of Quarterly Taxes

Many people don’t realize it, but they may incur a penalty for underpayment or nonpayment of estimated taxes even if they end up getting a tax refund at the end of the year. Again, this relates to the pay-as-you-go system of U.S. taxes. But this is a legal option that isn’t always enforced.

If you owe less than $1,000 in taxes, or if you paid at least 90% of your taxes, the IRS may forgo issuing a penalty. However, it’s best not to take that chance, and just pay the estimated taxes as required because, yes, they are required.

Tips to Make Estimated Tax Payments on Time

Making estimated tax payments on time comes down to being organized. But here are some tips to make it easier.

1. Hire a CPA

When you have a CPA working for you, you don’t have to think about estimated tax payments. They can send you the payment coupon with the due date on it, to which you attach a check and mail. Or, your CPA can mail the check for you with your permission. Or, your CPA can access your EFTPS account online and take care of the payments for you throughout the year and email you the confirmation. It’s all part of the service that a CPA can provide.

2. Mark Your Calendar

Use your calendar to set up recurring due dates for estimated tax payments. Even better, set up a second set of recurring dates a week from the actual due date so you can ensure you have enough cash to cover the tax payment in a liquid account.

3. Utilize the Option to Pay More Frequently

If you find it burdensome to come up with a large sum each quarter, make smaller weekly or bi-monthly payments using the EFTPS system. This way, it can feel like you’re not making huge lump sum payments four times a year.

Estimated tax payments are no one’s favorite part of paying taxes in the U.S. But they are a requirement that comes with a penalty for ignoring them. If you have questions about how to possibly reduce your estimated tax payments, or for better ways to manage this tax obligation, contact your CPA for counseling.

- by Kate Supino -

If you’re a business or self-employed, you have to deal with estimated tax payments. These are used to pay alternative minimum tax, income tax and self-employment tax. Many people find estimated tax payments to be a nuisance, and they wonder if they are mandatory. The fact is, the IRS is within its rights to penalize taxpayers who miss estimated tax payments, so it’s worth the time to fully understand what estimated tax payments are, and your obligations for payment.

What Are Estimated Tax Payments?

Estimated tax payments are payments made to the IRS and state tax departments throughout the year on income that isn't subject to withholding. This typically includes income from self-employment, business earnings, interest, rent, dividends, and other sources.

The U.S. income tax system is a pay-as-you-go system, meaning taxes must be paid as you earn or receive income during the year. If you don't have enough tax withheld, such as is the case with a traditional paycheck, or if you don't make the appropriate estimated tax payments on money you earn elsewhere, you could face a penalty for underpayment at the end of the year.

Who Has to Make Estimated Tax Payments?

If you earn money that doesn't already have tax payments taken out of it, then chances are you have to make estimated tax payments. This includes small business owners, gig economy workers, freelancers and even side business hustlers. It also specifically includes:

• S corporation shareholders

• Sole proprietors

• Partners

• Individuals as noted above

If the expected tax due by the filing deadline is at least $1,000, then estimated tax payments have to be made. In the case of corporations, the minimum is $500, not $1,000.

Now, some of these may go unnoticed by the IRS for a while, such as gig economy workers and side business hustlers, but once the IRS catches up, penalties will follow unless estimated tax payments have been made.

Who is Exempt From Making Estimated Tax Payments?

If you meet all three of the following conditions, you’re exempt from making estimated tax payments:

1. You were a resident alien or U.S. citizen for the entire tax year

2. You did not owe any taxes the previous year

3. Your prior tax year encompassed 12 months

How and When Are Estimated Tax Payments Made?

Estimated taxes are paid on a quarterly basis, so they happen four times a year. Each period has its own due date. The date of the postmark is considered the date of payment. However, most people make their estimated tax payments online, since it’s more efficient, easier and more secure. This is done using the EFTPS system, which is online. Corporations don’t have a choice; they must utilize the EFTPS system.

Note that if the due date for a period falls on a weekend or legal holiday, the due date becomes the next day that isn’t a weekend or legal holiday. So, if the due date is a Sunday, the due date becomes Monday. If the due date is Memorial Day, the new due date is the next day, which would be a Tuesday.

If, for any reason, you don’t wish to wait until the end of the quarter to pay your estimated taxes, you can pay more often using the EFTPS system. They can be made weekly, bi-weekly or monthly, if that fits in better with your budget.  As long as the total due is paid by the quarterly deadline, all is well.

Penalties Regarding Underpayment or Nonpayment of Quarterly Taxes

Many people don’t realize it, but they may incur a penalty for underpayment or nonpayment of estimated taxes even if they end up getting a tax refund at the end of the year. Again, this relates to the pay-as-you-go system of U.S. taxes. But this is a legal option that isn’t always enforced.

If you owe less than $1,000 in taxes, or if you paid at least 90% of your taxes, the IRS may forgo issuing a penalty. However, it’s best not to take that chance, and just pay the estimated taxes as required because, yes, they are required.

Tips to Make Estimated Tax Payments on Time

Making estimated tax payments on time comes down to being organized. But here are some tips to make it easier.

1. Hire a CPA

When you have a CPA working for you, you don’t have to think about estimated tax payments. They can send you the payment coupon with the due date on it, to which you attach a check and mail. Or, your CPA can mail the check for you with your permission. Or, your CPA can access your EFTPS account online and take care of the payments for you throughout the year and email you the confirmation. It’s all part of the service that a CPA can provide.

2. Mark Your Calendar

Use your calendar to set up recurring due dates for estimated tax payments. Even better, set up a second set of recurring dates a week from the actual due date so you can ensure you have enough cash to cover the tax payment in a liquid account.

3. Utilize the Option to Pay More Frequently

If you find it burdensome to come up with a large sum each quarter, make smaller weekly or bi-monthly payments using the EFTPS system. This way, it can feel like you’re not making huge lump sum payments four times a year.

Estimated tax payments are no one’s favorite part of paying taxes in the U.S. But they are a requirement that comes with a penalty for ignoring them. If you have questions about how to possibly reduce your estimated tax payments, or for better ways to manage this tax obligation, contact your CPA for counseling.

- by Kate Supino -

While it's easy to plan out your day or week, doing your estate planning can be far more complicated. Unfortunately, many people put it off as long as possible, or even fail to create any plan whatsoever. If you are beginning your estate planning journey, it is important to avoid common mistakes along the way. Failing to do so can have tremendous consequences, especially regarding the distribution of your assets, the tax impact on your estate, and much more. To ensure everything goes smoothly when the time comes, avoid these estate planning mistakes.

Not Planning for Long-Term Care

While your health may be good at the moment, chances are it won't stay that way as you age. Believe it or not, almost 70% of people over the age of 65 will require some form of long-term care at the end of their life, be it a nursing home, home-health aide, or other type of care. Unfortunately, these don't come cheap. A home-health aide can cost as much as $50,000 annually, while a private room in a nursing home can exceed $100,000 per year. Rather than look the other way and hope for the best, talk with your CPA about purchasing disability and long-term care insurance.

Failing to Update Beneficiaries

When you initially create your estate plan, don't assume it won't need to be changed at some point. In many cases, people you may have named as beneficiaries may move to other states or elsewhere. While it may be no big deal now, failing to update your beneficiaries and their contact information in your estate plan can lead to big problems when you pass away. Should beneficiaries not be able to be located, where your assets go may be determined by the courts, instead of you and your will.

Failing to Consider Estate Tax Liability

If you assume your estate is so small that tax liability won't be an issue, think again. On both the state and federal government levels, revenues are declining at a rapid pace, meaning new taxes may be on the horizon. Along with a wealth tax, talk with your CPA about what impact it will have on your estate should the state and federal government decide to raise income taxes or estate taxes.

Improper Ownership of Assets

Should you and your spouse have property that has been kept separate from one another in terms of legal ownership, this is one area that needs to be addressed when doing your estate planning. This is especially important if you own a business or have retirement accounts, since this can impede the smooth transfer of assets and property upon your death. Also, you may want to think twice before you use the old trick of selling property to your children or other family members for only $1. In the eyes of the IRS, these transactions can create a gift tax liability, forcing you to possibly file a gift tax return.

Forgetting about Income Taxes on Beneficiaries

Along with forgetting about estate tax liability, many people also make the mistake of not considering the impact of income taxes on their beneficiaries. Unfortunately, inherited accounts such as an IRA or 401(k) may be subject to required minimum distributions, known as RMDs. In many instances, these RMDs are taxed as ordinary income and at very high tax rates, which could be a double whammy on your heirs. Rather than let this happen, learn how your CPA can help you convert certain retirement accounts now so that your heirs can avoid an unexpected tax burden later on.

Not Planning for Your Minor Children

Even though you are planning on being around for many decades and expect to be able to raise your kids, the fact is you never know what the future may hold. Therefore, don't make the mistake of failing to have a plan in place for your minor children should the unexpected happen in the years ahead. Along with naming a guardian for your children in your will, also leave money for their care, and make sure you have specific instructions in place for how the money is to be used to care for your children. If you don't and instead leave it to the guardian's discretion as to how the money is used, problems are likely to occur.

Not Maximizing Tax Benefits from Charitable Giving

Like many people, you probably have some charities you would like to leave money to upon your passing. In years past, you could do this as part of your estate planning and reap many tax benefits. However, with the passage of the 2017 Tax Cut and Jobs Act, it is harder to itemize these deductions and reap tax benefits. To come out on top in this area, discuss estate planning and gifting techniques with your CPA, which may include charitable remainder trusts and donor-advised funds.

Failing to Plan for Asset Liquidity

After your death, it will be very important for your family to have access to enough cash to keep things going smoothly during the transition process. Unfortunately, many people who do their estate planning fail to think about asset liquidity. When this happens, it can be hard for families to pay off debts, keep a business operating, and much more. To avoid this problem, discuss how much liquidity your family would need with your CPA, and also learn how having life insurance policies in place can often solve this problem.

Rather than make these mistakes when doing your estate planning and creating unexpected and costly problems for your family during a very difficult time, follow the advice of your CPA and create an estate plan that gives you and your family peace of mind.

As you look ahead to retirement, one of the most important things is making the maximum contributions to your various retirement plans. In 2022, cost-of-living adjustments have resulted in many popular plans now allowing for increased contributions. To make sure you contribute as much as possible toward your retirement, here are some of the 2022 retirement contribution limits that may apply to your situation.

SIMPLE Retirement Accounts

For those of you who are self-employed, a SIMPLE retirement account can make life much easier once you stop working and start relaxing. Like many other retirement accounts, the contribution limit for SIMPLE accounts has increased. In 2022, you are now allowed to contribute as much as $14,000 to your account, an increase of $500 from last year's $13,500. However, if you are age 50 or older, the catch-up contribution with the SIMPLE account remains unchanged at $3,000. Since retirement planning for self-employed individuals is almost always more complex, seek expert guidance from a CPA you know and trust.

401(k), 403(b), 457, Thrift Savings Plans

Like millions of employees today, it is likely you participate in your company's 401(k), 403(b), 457, or a Thrift Savings Plan. If so, get ready to contribute a bit more to these plans in 2022. For all of these plans, the maximum amount you are allowed to contribute has increased by $1,000, going from 2021's $19,500 to $20,500 in 2022. Unfortunately, just as it was with the SIMPLE retirement account, the amount of money that can be allocated for a catch-up contribution for those past age 50 has not increased. For 2022, this amount remains at $6,500.

Traditional IRA

Perhaps the most popular of all types of retirement accounts, the traditional IRA is also one of the most complex when it comes to contribution amounts and the changes usually associated with them each year.

In 2022, the annual contribution limit on your traditional IRA will remain at $6,000. Like other plans, the catch-up contribution limit has also not changed with the traditional IRA. For 2022, this means the limit for you and others who are 50 or older will stay at $1,000, since it is not subject to the cost-of-living adjustment.

Phase-Out Ranges in 2022 for Traditional IRA

Should you meet certain conditions, you may be able to deduct the contributions you make to your traditional IRA. To find out if you can, it's always best to consult with your CPA.

However, if you or your spouse were covered by a retirement plan through an employer, your deduction may be either reduced or phased out until it is eliminated. Of course, this will depend on such factors as your income and filing status. Should neither you nor your spouse be covered by a retirement plan at your job, your deduction's phase-out amounts do not apply.

As for phase-out ranges for 2022, single taxpayers who are covered by an employer's retirement plan have a phase-out range of $68,000 and $78,000, which is a $2,000 increase from 2021.

For married couples filing jointly and who have an employer retirement plan that covers the spouse who makes the IRA contribution, the phase-out range increases $4,000 from 2021, with the 2022 range being $109,000 and $129,000.

If you are an IRA contributor who is not covered by an employer retirement plan but are married to someone who is covered, the deduction is phased out should your income as a couple be between $204,000-$214,000, which is a $6,000 jump from 2021.

Finally, if you are married, choose to file a separate return, and are covered by an employer retirement plan, your phase-out range will not be subject to an annual cost-of-living adjustment. Thus, this means it will remain at a range of $0-$10,000.

Roth IRA

Like the traditional IRA, the Roth IRA is a very popular retirement plan for many people. Just as with the standard IRA, the Roth IRA has also seen some changes in its contribution limits for 2022.

For singles and heads of household, the phase-out range for you if you make a contribution to your Roth IRA will range from $129,000-$144,000, a $4,000 increase from last year. Married couples filing jointly have an income phase-out range between $204,000-$214,000, a $6,000 increase from one year ago. Finally, like the traditional IRA, a married person who files a separate return and contributes to a Roth IRA will see no change to the yearly cost-of-living adjustment, with the range remaining at $0-$10,000.

Saver's Credit

Also known as the Retirement Savings Contributions Credit, the Saver's Credit is aimed primarily at low to middle-income workers. In 2022, the income level for this credit has increased slightly for everyone across the board. Married couples filing jointly will see an income limit increase from $66,000 up to $68,000. Heads of household will go from $49,500 up to $51,000, while single individuals and those who are married but file separately will experience a 2022 increase from $33,000 up to $34,000.

How You Can Benefit from Retirement Contribution Limit Changes

Since you now know that you can make higher contributions to most of your standard retirement plans in 2022, there are numerous ways these changes may benefit you in the years ahead.

To begin with, contributing more to your retirement plans may allow you to retire sooner than you anticipated. Along with this, you can maximize the employer match that often accompanies such plans as a 401(k), which can help your retirement savings grow at a faster pace. Finally, remember that any contributions made to your 401(k) are done so on a pre-tax basis, meaning you won't need to pay income taxes on that money this year.

With so many changes taking place regarding retirement contribution limits in 2022, now is the time to schedule a consultation with your CPA. No matter what type of retirement plans you have, getting advice you trust will be crucial to helping you achieve your retirement goals.

With tuition rates and fees going up every year, seeing your child graduate with their college degree may sometimes feel like an impossible dream. However, it doesn't have to be like this. In fact, if you start planning early on and explore various options, you may find that paying for your child's education may be easier than you expected. To make sure the money is there when it's time for your child to start college, here are a few savvy money moves for your consideration.

Whole Life Insurance Policy

Yes, if you have taken out a whole life insurance policy on yourself, you can actually use the cash value of the policy to help pay for your child's education. A very popular option with more and more parents, these policies build up a cash value over time, which can become quite substantial. If you want to access your policy's cash value, you can do so in three ways. First, you can take out a loan against the policy's value, then pay it back to restore the policy back to its original value. Second, you can take a withdrawal of cash value. Should you do this, you will not have to pay it back, but your policy's death benefit will be reduced. Finally, you can choose to surrender the policy altogether, which is not recommended unless you know the insurance coverage will no longer be needed. Also, remember that if you use this option, this income will not need to be reported on financial aid forms, making your child eligible for additional financial aid.

Education Tax Credits

If you paid out thousands of dollars for your child's tuition, fees, books, and other related expenses, you may be able to use education tax credits to recoup some of your money. One of the most popular has been the tuition and fees deduction, which lets parents deduct $4,000 from their gross income on their tax returns. To take advantage of this, you and your spouse will need to file as married filing jointly and earn less than $130,000 annually. However, if you earned between $130,000-$160,000 and filed jointly, a $2,000 deduction may be yours for the taking.  

Grants and Other Financial Aid

Between the U.S. Department of Education and assistance given to students by individual colleges and universities, you'll be happy to know that more than $120 billion in grants and other forms of financial aid is given to students each year. To get your piece of the pie, you and your would-be college student should sit down and fill out a Free Application for Federal Student Aid Form, commonly referred to as FAFSA. This should be done early on during your child's senior year in high school, since financial aid is usually first come, first serve. Should your child be awarded a federal Pell Grant, this can give them about $6,000 per year for their tuition, fees, books, and other materials. Also, many students are able to get work-study jobs on campus as part of their financial aid package, which lets them gain experience while earning money at the same time.

Focus on Scholarships

Surprisingly to many parents, college scholarships are not just awarded to students who make straight As or are star athletes. In fact, there are many scholarships that focus more on a student's creativity. For example, if you've got a child who likes to think outside the box, Duck Brand Duct Tape hands out a $10,000 prize each year to students who create prom outfits from duct tape. By doing a little research, you can find many other types of scholarships for almost anything.  

Have a 529 Plan

Once your child is born and you have some money you can afford to set aside for their education, starting a 529 Savings Plan is a very smart and effective way to have their college costs covered. Similar to retirement plans, the 529 Plan lets you use stocks, bonds, mutual funds, and money-market funds to accumulate money in your plan. Best of all, you won't be required to pay taxes on whatever money is earned through this account if the money is used only for college-related expenses. Available in all 50 states, the 529 Plan gives you the option to invest in a plan outside of your own state. However, be aware that your tax deduction is usually much better if you invest in your state's plan.

Parent PLUS Loan

If you are not averse to taking out a loan to pay for your child's college education, you might want to consider a Parent PLUS loan. Given out by the U.S. Department of Education, this type of loan has pros and cons.  On the positive side, it is not a need-based loan, you can borrow an amount up to the cost of your child's tuition, interest rates are fixed, and the loan's interest is tax-deductible. As for the cons, you will need to have an excellent credit score, the interest rates are high, and you must start repaying the loan only 60 days after you receive the funds. 

Rely on Other Family Members

In many cases, paying for a child's education involves many family members besides just parents. Between grandparents, aunts and uncles, and even close family friends, you may be surprised at just how willing others who love your child want to contribute to their education.  By joining forces and creating a "tuition team," you and your entire family can gain peace of mind and start making plans to attend your child's graduation ceremony in four years. 

Whether you go the standard route and use a 529 Plan or have your child qualify for large amounts of financial aid or instead team up with your extended family to raise the necessary funds, it will be well worth it when you see your child walk across a stage holding their college degree.

When the golden years approach, many soon-to-be retirees start looking for better horizons. A higher quality of life often means relocating to a new state. When it comes time for you to retire, you may get the relocation bug, like many other retirees before you. While a considerable number of retirees stay right where they are, thousands of retirees decide to up stakes and move. There are many reasons why retirees move. They include:

Wanting to Downsize

Lots of retirees decide to sell the family home and move so they can downsize their lives. The home where they reared children and hosted dinner parties is too large to be practical. They’re empty-nesters who want to uncomplicate their lives. They don’t want the hassle of cleaning a four-bedroom house with stairs. So, they put on a garage sale, sell what they don’t need and downsize to a smaller living arrangement. 

Adjusting to a Fixed Income

Another big reason why retirees often move is because they are now living on a fixed income. They want to minimize energy bills and their living expenses in general. Moving into a condo, they can enjoy reduced energy bills that will help keep money worries at bay.

Desire For a More Temperate Climate

Retirees also move because they can’t deal with winter anymore. They aren’t so young to be able to adeptly deal with snow and ice, so they opt to move to a location where winters are less harsh or non-existent. 

Opportunity to Leverage the Housing Market

Sometimes retirees move to take equity gain from their homes. When a person has lived in their home for several years, home values may have increased to the point where the retiree can gain a lot of cash simply by selling the home and moving into a smaller home or condo. Then they can take those gains and invest them to supplement their retirement accounts. 

Reduced Taxes

Savvy retirees move where they can enjoy reduced taxes. They know that even downsizing might not be enough if the taxes are high where they live. This often necessitates not just moving across town, but to a whole new state. This is why choosing from the best tax states for retirees makes good economic sense. 

Why Retire in a New State?

For many of the reasons mentioned above, retirees often opt to retire to a new state instead of simply moving to a nearby town or city. Retiring to a new state can offer its own benefits, like:

• Interesting new places to dine

• Different culture

• New people to meet

• Change of climate

• Better tax situation

• Less crime

• Be closer to grandchildren

• And more…

The Best Tax States For Retirees

Taking into consideration that it’s smart to try to lower taxes when you’re relocating, the following are the best tax states for retirees:

Tennessee

Tennessee is nicknamed “the volunteer state.” Presumably, this is because residents of Tennessee are generous with their time. That’s great for retirees who enjoy volunteering in their free time. But this is also one of the best tax states to retire in because Tennessee has no income tax, including no tax on social security income. Furthermore, there is zero inheritance tax and estate tax, which makes it ideal for beneficiaries of retirees. Property taxes are well below the national average, and there are property tax relief programs in place for lower-income seniors. Homeowners aged 65 and older also enjoy a property tax freeze. 

Florida

Florida has been a favorite retiree destination for decades. Whether you’re planning to relocate to The Villages or somewhere else, you’ll enjoy numerous tax benefits from the sunshine state. Although it has higher than average living costs, it does have the 5th lowest overall tax burden in the country. It also has no state income tax, and does not tax social security income. 

Arkansas

Arkansas may not be the obvious retiree destination, but there are good tax reasons to relocate there. Arkansas has a median property tax rate of just $612 per year, no estate or inheritance tax, and a tiered income tax system that favors lower-income retirees. Plus, there are no taxes on social security income.

Delaware

Delaware often rates as one of the best states for retirees. It has no sales tax, lower than average property taxes, no estate or inheritance taxes and very low income tax rates. It’s also another state where social security income is tax-free. 

New Hampshire

New Hampshire doesn’t offer year-round sunshine, but it does offer no sales tax, and no tax on social security, pensions and retirement account distributions. The biggest downside to retiring in New Hampshire is that property taxes in New Hampshire are higher than average.

Hawaii

Surprisingly, Hawaii rates as one of the best states for retirees as far as taxes go. Property taxes are fairly low, and social security income is not taxed. Also, retirees won’t get hit with taxes on retirement account distributions or pension accounts. Sales tax hovers around 4%, since localities are permitted to add as much as .5%. However, groceries are taxed, which isn’t the case in many other states.

Wyoming

Wyoming offers low sales tax, and income, inheritance or estate tax. Those are huge benefits, considering that Wyoming also has a lovely weather climate, where snow shovels are not needed. 

When it comes time to make your retirement plans, make sure you include your CPA in the conversation. Your CPA can help you to make smart decisions that could shield you from higher taxes on the sale of your home, property and any business assets you may have. No matter where you relocate in retirement, you’ll want to ensure that your fixed income goes as far as possible. 

REFERENCE: https://www.kiplinger.com/retirement/601814/most-tax-friendly-states-for-retirees