Thanksgiving Family Money Letter – 2014

Thank you for your business this year!  You’ve been a big part in helping a Main Street business succeed. We’ve been working with the Franklin County Community Development Corp to add more services – and more jobs – to Tea & Taxes Company. We appreciate your continued support – and your feedback!

Please enjoy this newsletter and the sections below, and pass them along if you wish. Think of the Financial Wellness Checklist as a handy way to make sure your financial life is in order. If you have questions about it, contact us. The 2014 Tax Update is a summary of new tax changes, including information for everyone related to health insurance under the Affordable Care Act, working “under the table,” changes for landlords, expiring tax deductions, identity theft, and year-end tax planning.

We’ve developed a short, anonymous survey to gather your feedback. We will use this to improve the services we offer and the environment of our firm.  There’s a code at the end: tell us the code phrase and you’ll get a thank you gift for doing the survey.  We won’t what you answered, though! Here’s the link:https://www.surveymonkey.com/s/TeaTaxesClientSurvey2014

We offer tax preparation, bookkeeping, payroll, and fee-only fiduciary planning. In mid-2015, we hope to start offering fee-only fiduciary financial advising.

Tea & Taxes is hiring! We are looking for one more full-time year-round hire and a season tax assistant. The ideal candidate for the year-round position would be someone who likes doing taxes AND wants to manage investments. We can train a new grad, too, if they’re inclined in those directions AND want to stay in Franklin County. Know someone? Send them my way!

With expanded hours during tax season, we need someone to assist Kaylee, our year-round administrative person, with scanning papers and covering the doors and phones. We’re hiring now for that seasonal position. No actual accounting or tax skills are needed, but they must be honest and kind, and must be willing to work some evenings and week-ends. Heavy preference will be given to people who are likely to be available every tax season and can get to Greenfield in the snow. Send them to Craigslist to look for the Tax Season Assistant ad.

Building Improvements. We replaced the roof and the siding this Fall.  Based on prior requests, we are improving driveway visibility, and are getting an accessible ramp installed. Any other suggestions? Please put them in that survey!

We invest in our staff! Jessica Washer has been learning elbow-to-elbow with me for two years now and is doing amazingly well. She’s testing this month for her Enrolled Agent credential and is work with me is counting towards her eventual CPA certificate as well. Kaylee is learning as fast as we can teach her: she’s already picked up Quickbooks and is starting to scan tax documents and learn basic tax prep keypunching. She’s busy covering the phones and managing building renovations, too. Kaylee schedules me for face-to-face meetings as well as phone calls, so talk with her if you want to see me!  (You can also reach her at info@TeaAndTaxes.com.)

Tax Organizers. Organizers will be sent in mid-January. The packet will include an engagement letter, and an estimate of your tax prep fee (assuming you didn’t have any significant changes).  We’ll start scheduling as soon as the organizers are in the mail.  Please either call or send back your engagement letter in January so we can hold a place for you.

Retainer Option. We’re offering the retainer option again this year. People who chose this option get same-day responses in most cases to emails, tax notices, and phone calls. We often get more questions in a day than we can respond to, and while we respond to all contacts in time, we prioritize responding to people on retainer.

2014 Tax Update

The other big change is how the premium subsidies work. Under RomneyCare we would determine the subsidies you were eligible for by looking at your previous year’s tax return. So, your 2012 income determined the subsidies you were entitled to in 2013. Under the Affordable Care Act, they (were supposed to) ask you to estimate your 2014 income and give you an ADVANCE on the tax credit you expect to get, paid directly to your health insurance company. Then, at tax time, you get a Form 1099-H from your insurance company reporting  exactly how much subsidy they received on your account, and you do the new Form 8885 to true it up: figure how much subsidy you were actually entitled to now that you know your 2014 “household income.”

“Household Income” is a new concept, too. If you get a subsidy for your health insurance premiums, we will have to combine the modified adjusted gross incomes of everyone who is claimed on your 1099-H, and anyone who is claimed as a dependent on your tax return and/or is covered under your health insurance policy. We’ll want to do those tax returns together so we can fill in the Form 8885 for the insurance holder.

Premium tax credits are available on up to 400% of Federal Poverty Level, about $46,000 for a single person. If your combined modified adjusted gross income is under 400% of poverty level, there is a cap to the amount you have to repay if you got too much of an advance on your premium subsidy. See the dollar threshholds here: [Federal Poverty Guidelines]

If you estimate your income to be under 250% of poverty level (see link above), you are also eligible for copay subsidies. It looks like they don’t have to be repaid if you turn out to earn 251% of poverty level (although your premium tax credit will need adjusting.)

So, my advice is to estimate your income high for 2015, but stay under 250% of the poverty level if you’re close to that threshhold, and when you do tax planning near the end of the year make sure you keep your income under 400% of the poverty level if you’re close to that threshhold. We do these sorts of planning engagement here, but if you want to do it yourself, here are websites with more information about calculating modified adjusted gross income and on the premium tax credits: [Berkeley Labor Center Website] [IRS Website]

Working Under the Table is a Thing of the Past
Because there is so much incentive to stay under these income thresholds to receive subsidized care, they are practically forcing everyone to issue 1099-MISC to subcontractors. (The Contractor might tell you they are paying you under the table, but when they go to do their own taxes and discover they have to pay $650 in fines for paying someone $1000 without issuing a 1099, they will change their minds and send the 1099-MISC late.)  The Department of Labor was just given a huge budget increase to go out searching for unreported labor. In MA the Department of Unemployment Insurance is the database used to determine your income for the estimate of your subsidy eligibility, and they want to make sure everyone is reported in that system. Worker’s Comp is after 1099 workers, too, because they get more insurance premiums if they include those. When someone says “we never did 1099s before” I have to explain that it’s written right into those 402 pages of the Affordable Care Act.

I can get 1099 forms for free. Let me know if you want some. I can either do the forms for you or give you the blank forms to do yourself. Basically, the rule is, if you want to deduct what you paid someone, you need to send them a 1099 if they are a sole proprietor, LLC, partnership, or an attorney, and  paid them over $600 during the year. The best thing to do is to give them a W9 (get one here:http://www.irs.gov/pub/irs-pdf/fw9.pdf) and ask them to fill it out. It gets you the information you need in January to do the 1099 and it gives them a heads up that you’re declaring it.

Big Changes for Landlords
There is a complex change in the way buildings are viewed for depreciation schedules. It mostly affects landlords. My old rule of thumb was “if there was a dumpster involved, capitalize it. If there wasn’t, call it repairs.” Sadly, Congress did not choose my method. Landlords, I am putting together an article for next month’s Landlords Business Association newsletter. There’s some good as well as bad mixed in. Let me know if you’d like to receive the article.

Expiring Tax Deductions
There are a number of tax deductions that expired at 12/31/2013. Most people think that Congress will extend them, but they haven’t yet so we can’t be sure they will. These include popular deductions like the $250 in school supplies deduction for teachers, and the ability to make charitable contributions right from your IRA instead of taking an RMD. Watch the news – and my Facebook page – for more information as it develops.

Identity Theft and Tax Returns
Fraudulent tax returns using stolen identities have become a massive issue, over-running all other fraud and endangering the very concept of getting a quick refund. I’ve been talking about this for years, but this year it really blew up. A new thing that has shown up on the scene: fraudulent preparers!  Last year I heard there was a guy offering to pay people to do their returns for them. He was changing it after they filed to get a larger refund, but redirecting the excess (fraudulent) part to his own bank account. Not legal – I am not allowed to siphon off your refund to pay the tax prep bill –but it is technically possible.

Because of all this, MA now require random taxpayers to go online and confirm their identity using credit bureau information before they will issue a refund. Since they’re using Experian for the MA Health Connector my guess is that they’ll use it for this, too. It’s probably a good idea to go check your Experian credit report (see Financial Wellness Checklist, below).

Year End Tax Planning:
Tax planning issues vary substantially from person to person and situation to situation.

The AMT patch has been made permanent, so AMT issues are a matter of timing now. The 0% rate on capital gains and dividends is still in place for people in the 15% bracket or lower. The biggest traps, though, pertain to people who are near the 400% of the Federal Poverty Level ($94,200 for a family of four). If you get subsidized health insurance you want to try very, very hard to make sure you keep your adjusted gross incomeunder that line.

For people who don’t normally file tax returns: if you have so little income that you’re going to have no taxes, this is a good year to stop deferring the taxes on “tax-deferred income” like IRAs and 401(k)s and either move them to a taxable account or convert them to a Roth IRA. I’d rather see someone take $10,000/year out of their Trad. IRA than take nothing out for 10 years and then need $100,000 out all at once. Lump sums of retirement income cause all sorts of havoc and many a taxpayer has discovered that they deferred the taxes so long that they ended up paying them at the highest tax bracket of their lives.

If you have a child in college there are advantages to paying at least $4,000 towards tuition in this calendar year, even if the bill isn’t due until 2015. (You can prepay some.)

Make sure family members who are over 65 and paying real estate taxes or rent check out whether they are eligible for the MA Circuit Breaker Credit. It’s over $1,000 for people who are paying a significant portion of their income towards housing costs. It’s getting harder to find places to do their tax returns for free because of all the preparer fraud out there. We do them, though!

Financial Wellness Checklist

Legal Documents

• Make sure you have a will, health care proxy and perhaps a durable power of attorney.
• Give out signed HIPAA releases to anyone who you would want to be able to check on you if you were in the hospital, do one for local hospital and doctor, scan it and send it by email to people who ought to have it, they can call the PDF up on their email in an emergency.  Here’s a link to one: [Mass Legal Services Website]

Retirement and Estate Planning
Confirm your beneficiaries are still who you mean them to be on retirement accounts and life insurance.  These don’t pass under a will, they pass according to who you named as beneficiary.

Do some estate planning:

• If you think you are going to die with more than a million dollars in MA
• If you have a disabled heir
• If you own real property in more than one state

Firearms: Plan what to do with firearms when the permit-holder dies. MA allows six months to get this job done. [Inheriting Guns Guidelines]
Bullion: In the same vein, if you hold bullion make sure your heirs know where it is.
Retirement plans with former employers: If you have retirement plans with old employers meet with a fee-only fiduciary planner (not a broker/representative) to roll them into your own low-fee Traditional IRA.
Social Security: If you are thinking of starting Social Security, please take a moment to discuss this with a financial planner (call me!) because we may be able to save you from some very expensive mistakes.

Emergency Cash, Rainy Day Money, and Catastrophe Money
Have some emergency money in the house, enough to pay for necessary groceries and medication if the banking system went down and you had to pay cash. You can also think of it as “refugee money.” If you needed to evacuate NOW, how much cash would you want for travel costs to far away family? Gas, hotels, meals on the road? Have that much in small bills and rolled coins.  (We like rolls of dollar coins for this.)

Rainy Day Money is an escrow account for all the stuff that doesn’t happen regularly, but DOES happen. Car repairs, summer camp, winter heating bills, household appliances. Over a year what would you expect to spend? Put this in your savings account. You will be using something from it each month, but you won’t find yourself being stunned that Christmas came again. A few minutes of thinking about intermittent bills can be a big help to your budget.

Catastrophe Money is six month’s of living expenses. If no  catastrophe hits, this becomes retirement money. A Roth IRA is a fantastic place for this, but an HSA may be a good choice if you are eligible for one (read more below).

Saving for Your Next Car
Do you have a paid-off car? Start a savings account for its replacement, and fund it each month with the amount you think you would budget for a car payment. Your car just used up one month of its life. If you don’t put money aside to replacement then you are saying “the future is so bright that it can afford to pay for past consumption – plus interest”. Maybe true if you are twenty-five. Probably not true if you are fifty-five.

Credit Report
it’s a good idea to get a free credit report at least once a year. You can get one each from each of the credit reporting agencies, but since they are largely duplicates of each other I’d say to just get it from one credit agency to start. I’m not talking about the credit score; I’m talking about the report itself. It shows your actual activity, and your goal is to scan it to see if something simply makes no sense. If you forgot you opened up a Home Depot credit card to save $20 that time, that’s fine. But if you discover that someone else is opening up credit cards in your name then it’s time to take action. Start here for the free report: [AnnualCreditReport.com]

IRS PIN
Keep your PIN if IRS sends you one.  This is related to the fraudulent returns being filed used stolen identities – see 2014 Tax Update article, above

Health Insurance
Medicare open enrollment is going on now. Make sure  elders in your life have prescription drug coverage that suits them. Think of it this way: you get A for free, you buy part B for about $105/month, and you either buy Part D (maybe along with a medigap plan) or you get part C (a medicare advantage plan) that replaces part A, B, D and the medigap plan.

Open enrollment just started on the brand new MA Health Connector site. See my 2014 Tax Updates message for information about how affects your tax return. Here’s a general planning tip related to health insurance. If you enroll in an “HSA eligible High Deductible Health Insurance Plan” – which is what most Bronze plans are – you may open up a Health Savings Account. They differ from the Flexible Spending Accounts that have been around for a long time. They are YOUR accounts, you keep them. You may deduct when you put money into the account, it grows untaxed, and then if you take a distribution in a year when you had unreimbursed medical expenses you don’t have to pay taxes on the money. Basically, you can deduct a couple thousand dollars and take it out tax-free anytime you’re having a medical catastrophe, or tax-free in retirement. Tax free going in, growing, and coming out. I love HSAs. The trick is that you may only have one if you choose a health insurance plan with a high deductible. Typically the premiums are lower, but they are really only appropriate to people who have emergency savings – and don’t expect to need much medical care – otherwise the advantages disappear.

If you want a really good explanation of the way you interact with your insurance plan under the Affordable Care Act, take a look at the following: [Explanatory Video] [Frequently Asked Questions]

Other Insurance Needs
Ask for review of your home and car insurance with your property insurance agent. Homeowner’s insurance, in particular, might need adjustment. Your current agent can do this. Should you havedisability insurance if you are unable to work, term life insurance to ease catastrophes, and long-term care insurance? Your car insurance agent may not be the right person to help with this, you need one qualified in life and annuities.  (Let me know if you have one you love!)

Investments
Rebalance your portfolio. Sell your winners, buy your losers, reset to your preferred asset allocation strategy. (I can help with this if you don’t have one already.)

Donations
Free up space by cleaning out things to bring to charity! Keep track of the value and get a receipt for tax time.

Don’t assume organizations that solicit you are the best at doing their work. Instead, clarify your values and find charities that are doing a great job of what you want done. You may have never heard of them because they have a lousy marketing budget. Two good resources for finding information about charitable organizations are Charity Navigatorand GuideStar. For example: I think providing clean water to developing nations has the best bang for the buck in terms of alleviating abject misery in the world. Searching for that on Charity Navigator I found a top-rated charity, Water for People. [Water for People Charity Navigator Profile]