January Newsletter

Happy New Year! With the transition in the White House, 2017 could be a very eventful tax year. One thing we’ve all learned from the uncertainty of the past few tax years is to not make plans based on what may happen. Instead, make plans using current law while remaining flexible to possible changes.

Included in this month’s edition are some audit risk factors to consider, determining whether a Roth IRA makes sense for you, and some New Year’s resolutions for 2017. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Know Your Audit Risk

Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared.

Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book.

Areas that get attention

Bullet Point Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS.Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more.
Bullet Point Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.
Audit Risk
Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented.
Bullet Point Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially “noncash” donations of property with unclear value.Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction.
Bullet Point Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony.Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you.
Bullet Point Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies.Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

When Converting to a Roth Makes Sense

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.
Roth Basics

Major benefits of a Roth IRA:

Thumbs Up Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement.
Thumbs Up Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½.
Thumbs Up Unlike Traditional IRAs, there are no minimum required distribution rules.

Downsides of a Roth IRA:

Roth Basics
Thumbs Down Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds.
Thumbs Down If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty.

Things to consider

Prior to making the decision to convert funds into a Roth IRA, consider the following:

Arrow You should have enough money outside of your retirement account to pay the tax on the conversion.
Arrow A Roth makes the most sense if you think you will face higher tax rates when you retire.
Arrow A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren’t careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits.
Arrow A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense.

It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

An Early Roth IRA Conversion Tip

It’s best to take action early in the tax year if you want to roll funds into a Roth IRA. That’s because an early move into a Roth typically gives you the option to re-convert your funds through October 15th of the following tax year. The IRS calls this process recharacterization.

Example: Sam converts $50,000 from a Traditional IRA to a Roth in January. By October, the Roth is worth only $40,000 because Sam’s investments lost value. If Sam does nothing he will still pay taxes on $50,000 converted from his Traditional IRA in January. Instead Sam can recharacterize some or all of the funds back into a Traditional IRA and pay no taxes on the conversion.

Here are some things to consider with an early rollover to a Roth IRA.

Point Full year of earnings growth. After your conversion, you will have a full year to build after-tax earnings (or accumulate losses) in your new Roth, giving you time to see if a recharacterization makes sense.
Point You have a full year to plan for the tax. Remember, you will want to pay the tax on rollovers with after-tax funds. This allows you to maximize the amount converted.
Roth Conversion Tips
Point Separate the account. Keep the funds you convert in a separate account from other Roth investments. This will keep the account clean should you need to undo your conversion.

Each person’s situation is unique. Carefully review your options prior to taking action.

Seven Tips for a Better 2017

New Year’s resolutions are notoriously easy to make, but hard to follow. With that in mind, here are a few ideas worth trying this year:
Bullet Point Pay yourself first. This time-honored personal finance tip simply means setting aside a portion of every paycheck for your personal savings before you pay your bills or spend money on the pleasures of life. Make a habit in 2017 of depositing a consistent percent of your pay into a savings account and you’ll have started down the road toward financial independence.
Bullet Point Chart your financial course. Sit down with a 2017 calendar and mark each month with all the major expenses you can predict for the coming year, such as rent, mortgage, car payments, insurance premiums, tuition, and vacations. Think of it as your map through 2017, with the expenses as your major landmarks. Making a physical document to visualize your financial path is a good first step toward creating a solid budget for the year.
Bullet Point Become time-aware. The first step toward using your time better is to be aware of how you are using it now. Use a digital calendar to chart out your ideal week for the coming year, accounting for every minute, including the time used to sleep, eat, work and commute. Now spend a week tracking how you actually use your time in a notebook, and compare it to your digital calendar.
Bullet Point Carve out time to exercise. Speaking of time management, it’s worth carving out three to four exercise sessions every week. Moderate exercise will help make you healthier, feel more alert and sleep better. You may find the time you invest in exercise every week will add both extra years and quality to your life.
Bullet Point Plan to learn. Resolve to become proficient in one new activity this year. Consider learning a foreign language, picking up a new sport, playing a musical instrument, or improving a professional activity such as public speaking or bookkeeping. Learning something new will keep your mind sharp, add variety to your life, and expand your social network.
Bullet Point Reward yourself. Adopting new habits and learning new things is hard work. It’s easier if you reward yourself regularly. One famous study on motivation tasked participants with working out difficult puzzles. One group was given chocolate chip cookies as a reward and the second was given… radishes! Not surprisingly, the first group was able to do a better job solving puzzles, and for a longer time.*
Bullet Point Take the long view. Most New Year’s resolutions fail because we are set in established habits and too impatient to change them. Allow yourself to pause, forgive yourself if you fail, and resume your effort when you feel stronger. As Mark Twain said, “Habit is habit, and not to be flung out of the window … but coaxed downstairs one step at a time.”

*[ Baumeister study, American Psychological Association. ]

2017 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2017. The business mileage rate decreases by 0.5 cents while medical and moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.
2017 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 53.5¢
Medical/Moving 17.0¢
Charitable Work 14.0¢
Mileage Rates

Here are the 2016 rates for your reference as well.

2016 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 54.0¢
Medical/Moving 19.0¢
Charitable Work 14.0¢
Mileage Rates

Remember to properly document your mileage to receive full credit for your miles driven.

As always, should you have any questions or concerns regarding your situation please feel free to call.

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