Don’t Blow Your Refund! Why You Should Consider Using an IRA

In 2017, the average refund received was just under $3,000.  Receiving a refund is exciting and many tax payers utilize the funds to pay down debt, add to a rainy day account, make a large purchase, or apply it to next year’s taxes (which is still a good idea if you pay quarterly).  Did you know there’s something else you can do with that money?  Consider using the direct deposit option and sending all or part of your refund directly to an individual retirement account (IRA) – helping your retirement savings grow!

You are able to direct all or part of your refund into a traditional IRA, a Roth IRA, or a SEP-IRA.  You cannot use a SIMPLE IRA.  For both tax year 2017 and 2018 you are a able to contribute up to $5,500 for a Roth or Traditional IRA.  If you are 50 or older you may contribute an additional $1,000 (known as a catch-up contribution) for a total of $6,500 annually.  Income limitations exist so check with your CPA about your eligibility.

You also have the option of directing your refund into a health savings account (HSA).  This is a great option for anyone, but especially those nearing retirement who haven’t built up savings in a HSA.  Why?  Many retirees take money from their 401k to pay medical expenses, but then have to pay taxes on the money they withdrew.  HSA dollars used for qualified medical expenses are not taxed.  For 2018, HSA limits for self-only coverage increased from $3,400 (2017) to $3,450.  For families, the limit is up to $6,900 ($6,750 in 2017).  There is also a catch-up contribution limited to $1,000 for those who are 55 or older (the same for 2017 and 2018).

Worried you may need the refund for an emergency?  Then consider using a Roth IRA.  This type of account will allow you to take back your original contribution without paying taxes or penalties.  If you don’t end up needing the money, it will continue to grow in the account.

You can still designate the deposit for the 2017 tax year as long as the deposit is made by April 17, but you’ll need to call the company to request the deposit count towards 2017 – otherwise it will automatically be designated for 2018.  If you plan to apply it to tax year 2017, be sure to file early!  The deadline is for the deposit, not the day of filing.

Will you owe taxes this year?  Talk to your CPA about funding a traditional IRA.  He or she can tell you how much money you need to put into an IRA to reduce your income tax liability.

An Introduction to the Tax Cuts and Jobs Act: Top 5 Changes That May Affect You

On December 21, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The Act provides for a number of significant changes to affect individuals, businesses, trusts, and estates. While implementation of the law will take some time, there are a number of changes to the law worthy of your attention.  It will benefit you to be aware of the items detailed herein, but I recommend working with your CPA when making any determination as to how the law will specifically affect you, your family, or your business.  

The following are what I believe to be the top 5 changes that will affect my clients during the coming years: 

  1. Tax Rate and Bracket Changes: Under the current tax law, individuals’ taxable income is subject to tax brackets ranging from 0% to 39.6%.  Under TCJA, individuals will be subject to tax rates ranging from 0% to 37%. In addition to the reduction of the top end tax rate, each tax bracket has increased in income limits.  Businesses, especially pass through entities like LLCs, Partnerships, and S-Corps, will experience a significant change in the way taxes are computed.  To simplify the changes, most business owners/partners will get up to a 20% reduction of income from those entities on their personal tax return. For C-Corporations, the top tax rate has been lowered from 35% down to 21%.  Look for a more thorough explanation in a future post.
  2. Standard Deduction Increases/Elimination of Personal Exemptions: Under the TCJA, the standard deductions have been increased to $24,000 for married filing jointly taxpayers, $18,000 for head of household taxpayers, and $12,000 for all others.  These deductions are significant increases from 2017 amounts of $12,700, $9,350, and $6,350, respectively.  What this means is that a higher amount of income is tax-exempt as a result of the higher standard deduction that are applicable to all taxpayers.  As a result of the higher standard deduction rates, TCJA eliminated the personal exemptions for each taxpayer, spouse, and dependent. The amount allowed for the 2017 tax season is $4,050.
  3. Alternative Minimum Tax (AMT): Unfortunately, the AMT was not excluded from TCJA for individual taxpayers, but it has been repealed for corporations. While AMT is still applicable for individual taxpayers, the thresholds for reaching and being subject to AMT have been increased. What exactly is the AMT?  Originally implemented to prevent wealthy taxpayers from using loopholes to avoid paying taxes, the AMT attempts to ensure that taxpayers who claim certain tax benefits pay a minimum amount of tax.
  4. Itemized Deductions: This topic will be covered in-depth in a future blog post, but I wanted to include a list of itemized deductions that have been altered or repealed with TCJA. That list includes:
    – Mortgage Interest deduction
    – Home equity loans
    – State and local tax deductions
    – Casualty losses
    – Gambling losses
    – Charitable contributions
    – Medical Expenses
    – Miscellaneous Itemized Deductions
  5. Child Tax Credit: Previously, the tax law provided for a credit up to $1,000 per qualifying child. The credit itself is nonrefundable, meaning that it can only reduce the amount of tax due to zero. The TCJA has increased the amount of the credit to $2,000 per qualifying child, with a refundable amount up to $1,400. The bill has also created a nonrefundable credit of $500 for qualifying dependents who are not qualifying children.  

Remember, these changes will not affect the tax return that you will be filing over the coming months.  You will see these changes reflected in your 2018 return, filed in early 2019.  However, some of these changes may affect the financial decisions you make during the year.   

If you’re concerned that an already complicated tax system has just been changed to create only more for you to learn, rest assured that we’ve been reading the law since it was passed and will continue to analyze the impacts that TCJA will have on all tax situations. Are you wondering what impact TCJA will have on you?  Call or email us and we’ll help you understand how it might affect you.   

Introducing SmartVault

Don’t have time to drop off your tax documents at our office?  Do you have concerns about emailing personal information to us?  At Levesque & Associates, we are very excited to offer  SmartVault to our clients.   

SmartVault offers bank-level security with industry standard encryption of documents, giving you peace of mind when sending and receiving important and personal documentation.   You can upload your W2s, investment statements, property tax bills, mortgage interest information, and anything else needed for your tax return to the vault from any computer with internet access.  There are even apps for iPhone and iPad!  Once uploaded to the vault, Levesque & Associates can access your information and get to work!  Completed tax returns are added to SmartVault, allowing you to print or download them.  Copies of your return will remain in SmartVault should you ever need to access them again in the future.   

If you would like to take advantage of SmartVault, get in touch with us!  You will be sent an email invitation to access your personal client portal and setup your username and password.  From there you can begin adding your documents to your portal as you receive them.  It’s that easy!