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Reed Tax Letter

Dear Friends and Clients,                                                                                                                                      

REED & DAILEY ASSOCIATES’ ANNUAL INCOME TAX UPDATE

January 2020

Welcome Back!  Congress brought back some expired tax benefits and An Amended Tax Return may benefit you if you see yourself in any of these situations shown below.  Here’s a quick rundown.

  1. The Tuition Deduction had expired, but now is reinstated, retroactive to 2018.
  2. Section 529 Educational Plans:  New Payout Rules now allow payments to apprenticeship programs, a        $ 5,000-lifetime usage for repayments of Student Loans, and Sec. 529’s now offer more liberal “re-directing” of benefits to siblings of intended students- without formal changing of beneficiaries.
  3. It’s Back! Mortgage Insurance Premiums as an Itemized Deduction for 2018-2020 (principal residence).
  4. 10% Energy Credits re-allowed, retroactively for 2018 tax returns and for 2019-2020! Lifetime limits apply.
  5. Finally!  Tax Relief from high “Kiddie Tax” Rates, retroactive to 2018 tax returns, saves high taxes on minors’ interest/ dividend/capital gains income.  Previously, certain dependents paid higher taxes.
  6. Medical Expense Deduction:  7.5% of AGI threshold for 2019-2020.  It was to be 10% of AGI in 2019.
  7. Retirement: BIG NEWS!   (A)  The 70 ½ year age limit for CONTRIBUTING to an IRA Account has been repealed.  For seniors still working, there is no Age Limit for contributing to an IRA.   (B)  The age limit for Required IRA DISTRIBUTIONS (“Required Minimum Distributions, or RMD”) has been increased to age 72.  If you turned 70 ½ prior to 01/01/2020 this provision  (B)  does not apply to you.
  8. NEW: UP TO $5,000 PENALTY-FREE WITHDRAWALS from Retirement Plans for Birth or Adoption of a Child!
  9. It’s Back:  The Exclusion from Gross Income for Discharge of Indebtedness on a Principal Residence.  This had expired after 2017 but now it is back, retroactive to 2018.    

What Happened?  2019 started out by:   (1)  IRS bringing in the rest of the provisions of the 2017 Tax Cut Jobs Act (TCJA), then  (2)  the IRS offered “clarifications” of the TCJA during the year,  then  (3)  Congress made another new tax law called the Further Consolidated Appropriations Act, 2020 (“the Act”). The Act was signed into law Dec. 20, 2019 and it brought back several tax benefits that had expired already or were set to expire.

Did last year’s Tax Cut Jobs Act (TCJA) help you, or hurt you? As predicted here most of our clients saved an average of $1,600 to $1,800 in taxes compared to prior years SO WHY WERE REFUNDS SMALLER FOR SO MANY? Because the IRS changed Tax Withholding Tables-  many workers had far less taxes taken out during the year than they expected.  This led to many owing money for their first time instead of getting a refund.

TAX PENALTIES, COMPLIANCE ISSUES, AND MORE IRS ENFORCEMENT are the rage for 2020. LOOK OUT!  TAX COMPLIANCE IS BACK as a “Point of Emphasis” for the new IRS Commissioner.  Due to political reasons,   IRS funding had decreased for many years.  An aging IRS workforce, obsolete equipment, and understaffing also led to a decline in Enforcement.  But there’s a new sheriff in town as the new IRS Commissioner is quickly addressing these issues.  BE PREPARED FOR MORE PENALTIES AND STRICTER ENFORCEMENT OF RECORDKEEPING RULES.

Coming Soon: New! Form 1040SR offers LARGER PRINT and shows Standard Deduction amounts commonly used by Senior Taxpayers. Common sense comes to an IRS Tax Form?  Not bad, not bad…

CRYPTOCURRENCY?  BITCOIN?  Beware the IRS!  A New Question on Schedule 1 asks if you held any cryptocurrency, AT ANY TIME, during 2019.  Failure to answer, or answer correctly could result in PENALTIES and likely, IRS AUDITS!!

Business Losses: Is your Business really a Hobby?  If Yes- you’re in Very Bad Luck.  You have to claim all the Hobby Income,  but you do not get to deduct any expenses  (UNLESS YOU CLAIM THEM AS ITEMIZED DEDUCTIONS).  Most people don’t qualify for Itemized Deductions, so Hobby Income can be taxed from Dollar #1.  You can show a Loss if it is a Business, but not if it is a Hobby.  Here are a few Tips to show Business Intent when there are true Business Losses. (1) Have a written and realistic Business Plan, especially if you are new to this activity. (2) Maintain a separate Checking Account for the activity. This is vital.  (3) Act like a business!  Use accounting software or a good spreadsheet to record expenses and income.  Advertise.  Get stationery and business cards.     Business Losses: Continued… (4) Prepare and review Financial Statements for the business each year and record changes that are needed to achieve profitability, or hire a Business Consultant. The IRS takes a dim view of continued losses.  How to be assumed to be a Business:  Profits must be shown in 4 out of 7-year periods.

Do you have any FOREIGN ACCOUNTS?  IRS PENALTIES  COULD BANKRUPT  YOU- INSTANTLY!  If you had any financial interest or “Signature Authority” in any bank account, brokerage account, mutual fund, etc.  located in any foreign country then special reporting is MANDATORY by April 15th each year.  The overall limit is $10,000 or more VALUE AT ANY TIME DURING THE YEAR OF ALL FOREIGN ACCOUNTS COMBINED to require special IRS reporting.  Read on if you dare….

WHAT’S THE PENALTY FOR NOT REPORTING FOREIGN ACCOUNTS?   The PENALTY IS 50% of the average values,  for EACH AND EVERY account,  PER YEAR,  up to 8 YEARS BACK!  No exceptions.  No excuses.  No “I didn’t know the rule” relief. Nothing works to avoid this penalty.  It is the most unfair and brutal penalty ever in existence.  District Court cases have failed to negate it.  Tax Court cases have failed.  Congressmen and Senators have failed to intervene.  Get it?                                                                                                                                                                                             

 Example:  Your uncle has $100,000 in a bank account in Italy with your name on the account as co-owner, or you simply had signature authority.  This Penalty is $50,000 (50%) EACH YEAR THAT YOU HAD ACCESS TO THE ACCOUNT.   If this went on for five years the PENALTY WOULD BE $250,000 (for an account worth only $100,000)!   The IRS would Levy any assets you own to collect the Penalty or attach your wages, pensions, and even your Social Security.  “Resistance is Futile”.  Enough on that gloomy subject…

DEPENDENTS: HOW MUCH CAN THEY EARN? where you still get the Child Tax Credit or Dependent Credit:  It depends.  If age 16 or under,  or 17-23 and Full-Time Student,  then there is no firm $$ amount but you must provide OVER  ½  of their support.  If over age 16, NOT a full-time student five months in the year, then $4,200 is the Income Limit to get Credits.

Please don’t let Dependents file their own tax returns, or let their “Smart College Friend” do it for them! Why? Because they always make the same mistake and  they do not indicate that they can be claimed as your dependent. This causes YOU the loss of THOUSANDS OF DOLLARS of Dependent and College Credits, Sec. 529 exclusions, and it requires the additional cost of AMENDED RETURNS and waiting several more months for refunds.  We do most low-income students for $25-$35.

CHARITABLE GIVING STRATEGIES:  Are you a person who donates each year to charity but falls short of realizing tax benefits for your donations?  Here are a few Tax Strategies for Charitable Givers.                                       (A.)  “Bunch-up” your deductions to every-other-year to help you get “over the hump” of the Standard Deduction ($12,200 Single/ $24,400 Married-Joint).  This helps if you are continually close to the Standard Deduction.  (B.)  Use Donor Advised Funds, which allow you to start a Fund with unlimited amounts of money that you can deduct in Year #1.  The Donor Advised Fund then “spreads out” disbursing the money to your charities of choice over a period of time of your choosing.    (C.)  Contribute appreciated Stock/Mutual Funds (if not held in an IRA) directly to a charity.  You will pay 0% tax on the entire long-term Capital Gain AND you may claim a Charitable Deduction for the actual Fair Market Value- as of the date of the contribution.  The charity can keep the stock, or they can sell it and then use the proceeds as they wish!  (D.)  If you are over 70 ½:  Have your IRA distribute money directly to a charity!  You pay $-0- Income Tax on the IRA distribution AND it can satisfy the RMD requirement for the year without you paying tax on the distribution.  The only drawback:  You do not get to claim a Tax Deduction for the non-taxable IRA Distributions-to-charity.  (E.)  Combine “Strategy B” with “Strategy C”.  Fund your Donor Advised Fund with appreciated Stocks/Mutual Funds to get the best of both worlds!  You avoid all tax on Long-Term Capital Gains, control the distribution of monies to your charities of choice, AND YOU COULD GET A CHARITABLE TAX DEDUCTION for the Fair Market Value of Stock/Mutual Funds contributed!

Please sort your Mortgage Interest Statements (Form 1098) and identify which Mortgage Interest is for buying, building, or adding on to your Residence or Second Home.   Home Equity Interest not used for the above is no longer tax deductible.  This may be an inconvenience, but IRS laws require you to be able to “trace the loan proceeds”.  You may still claim Home Equity Interest if used for Rentals or Business if you make an election.

“The More You Know”: Real Estate Taxes are still tax deductible and not subject to the $10,000 Schedule A (Itemized Deductions) Limits for:  Rental Property, Business Property, or for any other Real Estate “Held as an investment”.  Personal use Real Estate taxes (Residence, Second Homes) come under the Schedule A limits.

WHEN A FAMILY MEMBER IS DECEASED:  Reed & Dailey Associates can file Estate Income Tax Returns (Form 1041) for the Estate of Deceased Persons.  *Please note that we cannot file PA Inheritance Tax Returns unless at the direction of an attorney.

TAX TIDBITS: (1) Send 1099’s to Non-employees and for Rents paid $600 or more for the year by Jan. 31st.           (2) The IRS does not allow “estimates” of Mileage, Travel, and Meals. Keep actual mileage and hotel receipts at the time incurred.         (3)  Standard Mileage Rates 2019/2020:   Business use $.58/$.575    Medical $.20/$.17 Charitable $.14/$.14        (4)  Always seek tax advice before you act, not after the fact.    (5)  IRA Required Minimum Distributions (RMD) can be taken from one IRA account or from several IRA accounts in a year. It is your choice.   (6)  Rollover mistakes cost taxpayers THOUSANDS OF DOLLARS each year.  Call us first to avoid penalties and unnecessary taxes with proper planning.   (7)  We offer FREE INCOME TAX SERVICE to COMBAT ZONE military families.  Please remember to support our Veterans in any way that you can.

DO YOU NEED HELP WITH YOUR INVESTMENTS: IRA’S, 401k ROLLOVERS, COLLEGE SAVINGS, ANNUITIES, TERM LIFE INSURANCE, OR LUMP SUMS OF MONEY?  Donald Reed, Jr. and Matthew J. Dailey are Financial Advisers with Cetera Financial Specialists, LLC.  If you need help with your financial and retirement planning  and are a resident of PA, OH, or MD please call anytime.  (These services are not affiliated with Reed & Dailey Associates, Inc.; Securities offered by Cetera Financial Specialists, LLC, member FINRA/SIPC; Branch Office 475 S. Buhl Farm Drive, Hermitage, PA 16148. Advisory services offered through Cetera Investment Advisers, LLC. Cetera is under separate ownership from any other named entity).

APPOINTMENTS:  Please call us ASAP for appointments.  Should you wish to DROP-OFF your information, please  don’t call ahead of time to DROP-OFF.  Jot down questions- we will call you back.  Your REFERRALS are greatly appreciated!  THANK YOU for sending great people our way.  We strive to offer you the best possible experience with our friendly staff!

MAY THE LORD BLESS YOU IN 2020 AND BEYOND

Donald G. Reed, Founder      Don Reed, Jr., CPA     Matthew J. Dailey, CPA, MBA

JoLynn DeVries, General Manager    Jill Seidel, Senior Staff Accountant

Cathy Kamovitch, Front Office Coordinator

STAFF TAX PREPARERS:

Gail Moore, LeaAnne Dumars, Bill Krochka

STAFF SUPPORT:

Jamie Dailey, Beth Luther, Cheryl Whalen, Kathy Murphy, Melody Perdian,

Michelle Parker, Stephanie Myers, Tiffany Sutton, Julee McCamey

*PLEASE FILL IN THE 2019 CLIENT INFORMATION SHEET FOUND ON THE REVERSE SIDE OF THIS FORM *

BRING IT WITH YOU, OR SEND IT IN ALONG WITH YOUR INCOME TAX INFORMATION.

PHONE: 724-981-7779           FAX: 724-981-3199

email: reed@reedtax1.com   Website: www.reedtax1.com

Tax Season Office Hours: 

  Monday-Thursday: 8:00AM- 8:00PM - Friday & Saturday: 8:00AM- 4:00PM