Individual Tax Articles

Individual Retirement Accounts (IRAs) are designed to help you save for retirement, and they come with a set of rules and regulations to encourage long-term savings. While it’s generally not recommended to dip into your IRA before retirement, there are certain circumstances where you can borrow from your IRA without incurring penalties or taxes. However, it’s crucial to understand the rules and potential consequences of doing so. In this article, we’ll explore the rules for borrowing from your IRA.

Types of IRAs

Before we delve into the rules for borrowing from your IRA, it’s essential to understand the two main types of IRAs: Traditional IRAs and Roth IRAs. The rules for borrowing from these accounts differ significantly.

1. Traditional IRA:

Contributions: You may make tax-deductible contributions to a Traditional IRA, which can reduce your taxable income in the year you make the contribution.

Distributions: Distributions from a Traditional IRA are generally taxed as ordinary income. You must start taking required minimum distributions (RMDs) after reaching the age of 72.

2. Roth IRA:

Contributions: Roth IRAs accept after-tax contributions. This means you don’t get a tax deduction when you contribute, but qualified distributions in retirement are tax-free.

Distributions: Contributions to a Roth IRA can be withdrawn at any time without taxes or penalties. Earnings, however, may be subject to penalties and taxes if withdrawn before age 59½.

Now, let’s look at the specific rules for borrowing from both types of IRAs.

Borrowing from a Traditional IRA

Traditional IRAs have strict rules regarding borrowing money, and taking funds from your Traditional IRA may result in taxes and penalties. Here are the key points to consider:

1. Early Withdrawal Penalty: If you withdraw funds from your Traditional IRA before you reach age 59½, you will typically face a 10% early withdrawal penalty. Additionally, the distribution is subject to income tax.

2. Exceptions: There are specific exceptions to the early withdrawal penalty, such as using the funds for qualified education expenses, first-time home purchases, certain medical expenses, or to cover substantial unreimbursed medical insurance premiums if you’re unemployed.

3. Required Minimum Distributions (RMDs): Starting at age 72, you are required to take minimum distributions from your Traditional IRA. Failing to do so can result in hefty penalties.

Borrowing from a Roth IRA

Roth IRAs have more flexibility when it comes to accessing your contributions, but the rules for earnings are stricter:

1. Contributions: You can withdraw your Roth IRA contributions at any time without incurring taxes or penalties. This is because you’ve already paid taxes on these funds.

2. Earnings: If you withdraw earnings from your Roth IRA before age 59½, the distribution may be subject to income tax and a 10% early withdrawal penalty, unless an exception applies.

3. Exceptions: Similar to Traditional IRAs, there are exceptions to the early withdrawal penalty for Roth IRAs, including qualified first-time home purchases and certain medical expenses.

It’s essential to note that borrowing from your retirement accounts should be a last resort. When you take money out of your IRA, you’re not only potentially subject to taxes and penalties, but you’re also depleting your retirement savings. It’s generally recommended to explore other financial options, such as emergency funds, low-interest loans, or budget adjustments, before considering an IRA withdrawal.

IRAs are intended for retirement savings, and there are rules in place to encourage responsible use. While there are exceptions to these rules, it’s vital to consult with a financial advisor or tax professional before making any decisions about borrowing from your IRA. Your financial future is at stake, and making informed choices is key to a comfortable retirement.

You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.

Standard Deduction or Itemizing

The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.

Home/Work Tax Breaks

If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.

Moving Expenses

Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.

Health Savings Accounts (HSAs)

HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Family Related Tax Credits

The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 18 at the end of the tax year and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.

The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.

Section 529 Plans*

These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.

A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $85,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $170,000. (These limits may be inflation adjusted.)

Other Education Tax Breaks

As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.

In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.

Keep in mind that there are income limits for these tax breaks.

Investments

To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:

• Selling securities with unrealized losses before year end to offset realized capital gains.
• Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
• Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.

You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.

Retirement

While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.

Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.

Roth alternatives — available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own — provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.

As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.

Carrying out a post-tax season review of your income tax return can be very helpful way to gain new insight into your financial situation. It’s a bit like looking at a familiar place from a different and fresh perspective — you never know what you might discover. See what a review of your federal income tax return might reveal about the following issues.

Investments — Your Winners and Losers

Look for evidence of excessive gains and losses within a compressed time frame. If you are a trader, this might be typical. However, if you are an average investor, these gains or losses may point to the fact that you are buying and selling too frequently. You should consider the fees associated with excessive trading as well as whether your portfolio is structured in a way that meets your goals and your tolerance for risk.

You may have a capital loss carryforward that represents an unused loss you are carrying over to offset future capital gains. If you intend to rebalance* your taxable account investments, see if there will be capital gains that can be offset by the loss you are carrying forward.

Another possible way to reduce taxes is to consider municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and possibly state and local income taxes. Of course, the credit ratings of municipals should be analyzed before purchase. Although bonds with lower credit ratings may offer higher yields, they typically carry a higher risk of default.

Retirement Planning

You may be able to lower your current year’s income tax liability by increasing the amount you contribute to tax-favored retirement plans (limits apply). If you are taking distributions from a retirement plan still held with a former employer, you may want to consider a rollover into one account to consolidate accounts and simplify your recordkeeping. If you have multiple individual retirement accounts (IRAs), also think about consolidating accounts.

Your Business

If you operate a business, review of your tax return may point to a wealth of tax-saving and other planning opportunities. For example, if you are self-employed as a sole proprietor and filed a Schedule C, look into whether a different business form could make sense. For example, an S corporation can limit a business owner’s personal liability and may offer tax savings. If you do not already have a retirement plan in place, consider establishing one. A retirement plan established through your business allows you to save for your future financial security and deduct your contributions. Additionally, there may be income-shifting opportunities among family members through employment in the business.

Itemized Deductions

Review your Schedule A for potential opportunities. Is it possible to get a better rate and term on your mortgage loan? Would refinancing or switching to a 15-year term make financial sense? If you make charitable donations, look into contributing appreciated stock in place of cash. When you donate appreciated stock held more than one year, you receive a deduction for the value of the gift and you avoid paying capital gains tax on the appreciation.

You could also investigate establishing a charitable remainder trust. Doing so allows you to make a gift to charity, retain an income from the donated assets for life, and claim a current tax deduction for your gift.

Other Considerations

If your filing status has changed due to a life change such as marriage or divorce, make sure that change is reflected when you file this year’s tax return. In addition, be sure to keep your beneficiary designations on your retirement accounts and insurance policies current so that they accurately reflect your present status. If you have children, you may want to consider setting money aside for their future education. There are tax-advantaged college savings opportunities that you should look into further.

A review of your tax return and your investment transaction statements can help you identify areas where you may be able to lower the taxes you’ll have to pay next year. Your financial and tax professionals will be able to assist you in that effort.

*Rebalancing a portfolio may create a taxable event if done outside of a retirement account.

Every year brings some degree of change regarding filing income taxes. While 2020 taxes are a done deal, it’s never too early to begin thinking about the next tax year. To help you be prepared for next year’s filing, here are 6 Ways Income Taxes Will Be Different for 2021.

Standard Deduction Increase

Standard deductions reduce the amount of your income that is subject to federal tax. Most taxpayers do not have enough deductions to itemize, so they take the standard deduction. Annual adjustments for inflation cause the standard deduction to increase slightly each tax year. For 2021, here are the standard deductions and the amount of the increase from the prior year.

• Married filing jointly $25,100, up $300
• Single and married filing separately $12,550, up $150
• Head of household $18,800, up $150

While itemizing is more work, if your itemized deductions exceed the standard deduction allowance for your tax filing category, itemizing makes sense.

Higher Tax Brackets

You already know the more money you earn, the more you pay in taxes. How much you earn, your income, along with your filing status, determines your tax bracket. There are seven tax brackets with the top tax rate being 37 percent for taxable income over $518,400. Brackets are adjusted annually to account for inflation. For 2021, tax bracket thresholds were increased by about 1 percent over 2020 levels.

Capital gains

When you sell an investment like real estate, stocks, or bonds, for more than you paid the net profit you make is taxed as either short- or long-term capital gains. If you held your investment for less than one year, you pay short-term capital gains. For investments held more than one year and one day, the capital gains tax on the profit you made is long-term. Short-term capital gains are taxed like regular income and up to $3,000 of short-term losses can be deducted. However, long-term capital gains are taxed different rates (0 – 20 percent) depending on taxable income and marital status.

For example, if you’re single and your income is below $40,400 in 2021, you fall into the 0 percent capital gains tax bracket. However, if you’re single and earn between $40,401 and $445,850, you move into the 15 percent bracket. Above that, it’s the 20 percent bracket for you.

The 0 percent bracket is approximately double for married couples ($80,800), but above that, brackets are close to the single filer brackets (15 percent up to $501,600 and 20 percent above that).

Individual Tax Credits

Tax credits lower your overall tax bill. There are quite a few credits to consider, but the most popular ones are the earned income tax credit, the saver’s tax credit, and the lifetime learning tax credit.

Earned income credit is for low- and middle-income taxpayers and is based on income, filing status, and number of children, although taxpayers without children can qualify. For 2021, the earned income credit ranges are up very slightly over 2020 and range from $543 to $6,728. Some criteria for the credit are having at least $1 of earned income, investment income must be $3,650 or less. Other stipulations apply, so check with your tax preparer to see if you qualify.

Saver’s credit is also designed for low- and middle-income taxpayers and is to encourage retirement contributions. Taxpayer adjusted gross income (AGI) must be less than $33,000 in 2021 (up slightly from $32,500 in 2020) to qualify for the credit for single or married filing separately. Married filing jointly AGI must be less than $66,000 in 2021 (up from $65,000 in 2020).

Lifetime learning credit is for taxpayers who incur education expenses during the year. There was little change in this credit for 2021. Married filing jointly income limits increased $1,000 (from $118,000 to $119,000 for full credit and from $138,000 to $139,000 for partial credit). Other filing statuses will see no change for 2021.

Alternative Minimum Tax

The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly. This is a change from 2020 when the exemption amount was $72,900 and $113,400 for married couples filing jointly.

Fringe Benefits, Medical Savings Accounts, and Estates

Most employee fringe benefits allowances for 2021 will continue at their 2020 levels; however, changes occur in health savings account (HSA) contributions, which increase by $50 for single and $100 for families from 2020.

The maximum out-of-pocket amounts for high-deductible health plans (HDHP) increases by $100 for single and $200 for families.

The federal estate tax targets the amount of wealth you can pass along when you die. It is no concern unless your estate is worth more than $11.7 million when you die. That figure is up from $11.58 million in 2020.

Retirement Plans

Contributions for 401(k) plans will not change from 2020 top off amount of $19,500 with a $6,500 catch-up contribution allowed for individuals 50 or older. Maximum contributions from all sources (employer and employee) rise by $1,000.

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Of course, these are an overview of changes for the 2021 tax year. To be sure you’re up to speed on all the tax changes that impact you, be sure to speak to your trusted accountant.

Tongue-in-cheek conversations love to make jokes about death and taxes as being the two only certain things in life. Well ironically, on the surface anyway, the new, colloquially termed “death tax” flies in the face of this popular “accepted truism” – well, almost.

Stripping the latest Estate Tax Law (effective January 2018) down to its nuts and bolts, we see that any single taxpayer who calculates his or her assets to be under $11.2 million can cast all worries to the wind – at least for the next 8 years. Thinking a little wider, a married couple has a clear runway if their estate is valued under $22.4 million. After that, the terrain gets decidedly more uninviting, allowing the IRS to potentially grab a flat 40% of estate value above the restated threshold.

Let’s be clear, room under the newly raised tax barrier has been improved by some 100% versus where it was in 2017 (i.e. it was $5.4 million and $10.8 million for a single-payer and married couple, respectively), which in anyone’s language is no mean concession. It was a bumper move make no mistake, and possibly a first decisive step in the Trump Administration’s determination to eradicate death taxes altogether. However, this particular tax item has been around for donkey’s years and its stubborn reluctance to leave the stage forever, and in every way, is simply not happening.

Statistically speaking there is no doubt the case can be made for the new threshold (all but) killing death taxes. Last year, and for some time before that, 2 in every 100 tax-paying families (a reliable estimate) were caught up in the estate tax net. The 2018 proclamation whittles it down to 1 in every 1000.

When paradigm shifts like this hit the ranks of the rich, especially the uber-rich, there are invariably a number of curved balls being launched in different spots. One of these effects families now facing estate valuations between the new and old yardsticks. More often than not an irrevocable trust is somewhere in the mix from years back, and this means it has built-in inflexibility. The thing is, it becomes one big head-scratcher when one tries to re-introduce assets back into the estate (to take advantage of the higher limit) extracted from a structure that’s purposely designed to be rigid.

Another one takes aim at the time-aged estate plans that have combined themselves with generation-skipping transfers and gifting options. The chances are that the new laws have moved the goalposts to a place, not all that appealing to either the surviving spouse or the children/grandchildren. This flows straight into the next bump in the road – spending money on revising an estate plan that looked good for so many years. No longer is this cost tax-deductible, but considering what’s at the stake here the $2000 – $10,000 tax accountant’s fee may be the best money you spend.

Some tax authorities are slamming the new Estate Tax as ill-planned and lacking foresight. The big fly in the ointment is the sunset clause, which taxpayers close to the new or old estate value tax limits should pay attention to. Things are touch-and-go when you consider that that there’s probably a huge assessed tax difference (in the multi-millions) between the surviving spouse dying in 2026 or just one year later. Throw in the intermingling of the estate tax with gift tax and generational skipping and it puts all these items on the proverbial chopping block. Some estate plan moderation at the very least is on the cards, and perhaps a complete renovation in cases.

If ever there was a time to make an appointment with your tax team to look at estate planning, it’s now. The variables that are pushing and shoving the comfort zone back and forth have to be addressed in the most emphatic way. Our professional experts are geared and ready to get into your corner and make any needed transition as painless as possible.

Call us now at 912-634-7722 to learn more or request your free consultation online to get started.

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Note, however, that qualifying for such deductions became harder under the Tax Cuts and Jobs Act of 2017 (TCJA). If you previously claimed a home office as a miscellaneous deduction on your individual income tax return, the TCJA eliminated that deduction for tax years 2018-2025. You must now file a Schedule C on Form 1040 to be eligible for the home office deduction.

What Space Can Qualify?

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet

Want to discuss our individual tax services in more detail? Contact M. Jeffrey Martin, CPA, LLC at 912-634-7722 to schedule your free initial consultation today.