Get a head start on your tax planning by reading about four new laws to help you in 2020. Also included in this edition are mistakes to avoid when refinancing your mortgage. Also, High School students! Here’s how you can make college more affordable. And finally, how to eliminate a tax surprise
Please call if you would like to discuss how this information could impact your situation. If you know someone who can benefit from this newsletter, feel free to send it to them. Next month –
- September 7 – Labor Day
In this issue:
- NEW Tax Rules for 2020!
- Don’t Make These Mortgage Refinancing Mistakes
- High School Students! Here’s How You Can Make College More Affordable.Students can earn college credits while still in high school
- How to Eliminate a Tax Surprise
NEW Tax Rules for 2020!
Here are several new tax laws passed this year to consider as you start planning your 2020 tax obligation.
- Make up to $300 of charitable contributions. For the 2020 tax year only, an above-the-line deduction of $300 is available to all Americans who want to make a charitable contribution. You can donate to more than one charity, but the total amount of contributions must be $300 or less to be able to take an above-the-line deduction. While you will still need to itemize your deductions if you want a tax break for donations greater than $300, this above-the-line deduction for $300 or less helps alleviate the elimination of the charitable deduction for most taxpayers. (NOTE: $300 is the maximum above-the-line deduction per tax return, regardless of filing status.)
What you need to do. Donate $300 to your favorite charitable organization(s) by December 31, 2020. You must receive a written acknowledgment from the charitable organization(s) to which you made the $300 contribution before filing your 2020 tax return.
- Donate up to 100% of your income. The normal contribution limit of 60% of your income is suspended for 2020, allowing you to contribute as much of your income as you want to various charities.
What you need to do. While only a tax break for a few taxpayers, this initiative is meant to help struggling charities during the pandemic. If you are considering additional giving, you must make your charitable contributions by December 31, 2020. Remember to obtain written acknowledgment from each charity you made a donation to before filing your 2020 tax return.
- Use retirement savings to pay for birth or adoption expenses. Adding a child to your family is very expensive. To help with these costs, you can now cash out up to $5,000 per parent from your retirement accounts to pay for birth and/or adoption expenses. While the withdrawal won’t be hit with the 10% early withdrawal penalty, you’ll still have to pay income taxes.
What you need to do. Consult your financial advisor or benefits coordinator to find out how to withdraw the funds from your retirement accounts. Since this withdrawal will deplete your retirement savings, first consider whether you have other sources of cash to cover expenses.
- No age limit for contributing to IRAs. You can now contribute to an IRA regardless of your age as long as you have earned income. The old rule prevented you from contributing to an IRA past age 70½. The IRA contribution limit for 2020 is $6,000 if you’re under age 50 and $7,000 if you’re over age 50.
What you need to do. Consider getting a part-time job or doing some consulting work if you project that you won’t have earned income by the end of 2020. You can then use this earned income to fund your traditional or Roth IRA.
Don’t Make These Mortgage Refinancing Mistakes
With 30-year fixed rate mortgages approaching historical lows of 3%, you may be thinking about refinancing an existing mortgage. But you better read the fine print before signing on the dotted line to avoid paying too much money. Here are some common mistakes homeowners make when refinancing their mortgage.
- Not shopping around. When looking to refinance a mortgage, many homeowners simply check a couple advertised rates and pick the lowest one. But there are many factors affecting the total cost of refinancing, so it pays to carefully look at not just rates but also terms and fees offered by different lenders. Remember that a mortgage with a lower rate and higher closing costs from one lender can ultimately cost more overall than a mortgage with a higher rate but lower closing costs from another lender.
- Saying yes to current mortgage loan forbearance. Loan forbearance occurs when your current lender allows you to delay making a payment or allows you to lower your payments. This is a common offer during the current pandemic. If you are considering refinancing in the future, think twice before taking advantage of this offer. Accepting a bank’s offer to skip a couple payments, even during a pandemic, may signal cash flow problems that could negatively affect your mortgage refinancing options.
- Not improving your credit score. The willingness of banks to lend you money at favorable rates is often contingent on your credit score. You must therefore know your current score and actively work to improve it. So don’t take out a new loan or credit card in the months leading up to refinancing. Also pay your bills on time and never use more than 15% to 20% of your available credit line on credit cards. By doing this you can vastly improve your interest rates and related closing fees.
- Not looking over the good faith estimate. Origination fees, points, credit reports and other fees are all included with closing costs when refinancing a mortgage. These fees aren’t finalized until you receive a good faith estimate (GFE). Any changes you notice to fees on the GFE compared to what you were originally told is a red flag. Compare the final refinancing document you’re about to sign with the rates and fees originally presented to you. Challenge any increases.
By being aware of refinancing pitfalls, you can actively eliminate any surprises and create a situation where multiple lenders are fighting for the right to lend you funds.
High School Students! Here’s How You Can Make College More Affordable.
Students can earn college credits while still in high school
With the cost of college rising rapidly, it can be overwhelming to think about how to pay your way through school for either yourself or your kids. Fortunately, saving hundreds, even thousands, is possible. Teenagers can help keep down the cost of their future college tuition by taking the following classes and exams while in high school:
- Advanced Placement (AP) classes and exams provide the opportunity for high school students to take college-level classes at their high school and an exam at the end of the school year. Many colleges will accept AP credits as placement and/or college credit. Most will accept a passing grade of 3, but some universities may require a score of 4 or 5 to earn college credit. (AP exam scores range from 1-5.)
- College Level Examination Program (CLEP) tests also offer the opportunity to earn college credit by passing an exam. However, instead of taking a class, you must study on your own and schedule an exam at a testing center when you’re ready. CLEP exams receive a score between 20 and 80. A score of 50 is typically the passing score to obtain college credit, but each university sets its own requirement. It is important to note that while many colleges accept CLEP credits, some top schools do not accept CLEP credits.
- Dual enrollment classes allow high school students to take college courses at a local college or university and earn both high school and college credit. You must be a high school junior or senior to qualify for the program. Dual enrollment credits are widely transferable.
Cost of Exams and Potential Savings
AP exams cost $94, CLEP tests cost $85 plus an additional administrative fee while dual enrollment programs pay for tuition, fees and books. According to the College Board, the average cost of a 3-credit class at a four-year college ranges from $942 to $3,243, meaning for each 3-credit class you test out of, you save hundreds—potentially thousands–of dollars!
Additionally, earning college credit in high school can enable you to finish college in less than four years. Just make sure that when you’re choosing a college, you pay attention to whether or not the schools accept AP and/or CLEP exam scores as credit.
How to Eliminate a Tax Surprise
What is normally a reliable estimate of your taxes – the amount of money withheld from your paychecks by your employer – may be an unreliable estimate this year thanks to the current pandemic. Even worse, using the safety net of paying in what you did last year may not be practical if your financial situation changed due to the coronavirus.
Many taxpayers wrote a large check to the IRS this year for the very first time to pay a portion of their taxes as the 1st and 2nd quarter estimated tax payments for 2020 were both due on July 15. Because of this it may be beneficial to review whether you need to make a 3rd quarter or 4th quarter estimated tax payment in the coming months.
Here’s how to ensure you are not faced with an unpleasant tax surprise – because either not enough money was withheld from your paychecks for income tax purposes or your estimated tax payments were too small – when you file your 2020 tax return next April.
- Step 1: Estimate your 2020 income. Add up your anticipated income for 2020 – W-2 paychecks, unemployment compensation, business income, interest and dividend income and any other form of income.
- Step 2: Estimate your 2020 deductions. Add up your anticipated deductions for 2020, including retirement and health savings account contributions, student loan interest you paid and itemized deductions. If you’re not sure, take a look at last year’s tax return and use that figure.
- Step 3: Calculate your tax. Subtract your deductions from your income to calculate your taxable income. Then calculate the tax you owe based on your taxable income using the IRS tax tables. Use last year’s table until the new one is published later this year. Here is a link to the IRS publication: IRS tax table
- Step 4: Calculate your remaining estimated tax payments. Take the tax calculated in Step 3 and subtract any 1st and/or 2nd quarter estimated tax payments you made, and any paycheck withholdings so far this year. If you owe more than you have paid in or have had withheld so far this year, you have two more quarters to make up the difference through estimated tax payments.
- Step 5: Mail your payment to the IRS. The due date to make a 3rd quarter estimated tax payment is September 15, 2020. The 4th quarter deadline is January 15, 2021.
Sound complicated? It definitely can be. If you get stuck trying to figure out if you should make estimated tax payments or have any other questions, please call. Remember, it is better to plan now than to face the unpleasant surprise of an unwanted tax bill on April 15th.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
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