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Real Mortgage Costs

Well-qualified borrowers may be able to get some very low mortgage rates on both purchases and refinance transactions. But the interest rate is only one of the factors to consider before you sign:

PRIVATE MORTGAGE INSURANCE

If your down payment is less than 20%, you may have to pay private mortgage insurance. This will add thousands of dollars to the cost of the loan.

FIXED VS. ADJUSTABLE

When interest rates go up your adjustable payment will increase accordingly. Fixed mortgage payments remain steady.

CLOSING COSTS

Fees are inevitable. In some cases, the seller may be willing to cover some or all of these costs.

INSURANCE

You’ll need to cover homeowner’s insurance. And depending on location, you may also have flood, hurricane/windstorm, or earthquake insurance premiums.

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Open Enrollment Planning

Open enrollment is an important process that usually takes place November 1 through December 15. But for employers, planning starts much earlier. Planning ahead can result in savings, a smooth enrollment process and ensure you are offering benefits that help recruit and retain the best talent. Here are some tips for success:

EVALUATE BENEFITS

Look at the menu of benefits you currently offer. Research has shown that after health insurance, many employees value low-cost options such as flex time, more paid vacation days and work-from-home options.

KEEP IT SIMPLE

Assume most employees know little about health insurance and retirement plans. Educate them on the basics.

USE OF MULTIPLE MEDIUMS OF COMMUNICATION

Consider your employees’ age, education levels, English language skills and tech savvy. Then employ a combination of methods to get the word out. Don’t rely on technology alone. Supplement it with employee meetings, email, envelope stuffers, and direct mail.

START EARLY

Get your plans, benefits and options out to employees a month before open enrollment. This gives your workers time to discuss their benefits with their families.

REMIND EMPLOYEES

Tax changes can throw withholding out of whack, so remind your staff to check how much is being withheld from their checks.

COMMUNICATE YEAR-ROUND

Communicate the value of your employee benefits and wellness packages all year round. This will help employees to appreciate that this is part of their compensation.

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September 2020 Client Profile

Allen owns a small construction business and has been self-insuring property and casualty insurance risks using a captive insurance company. Is the IRS planning to crack down on these arrangements?

Businesses are allowed to create their own captive insurance entities to help cover risks that aren’t covered by ordinary business insurance policies. These arrangements are perfectly legal — when structured properly. But some businesses have abused the privilege to avoid paying taxes. The IRS has signaled that it may audit more firms claiming deductions for payments to captive insurance entities.

Remember, the primary purpose of the captive entity must be insurance, not tax avoidance. Premium pricing should be actuarially sound and based on exprected claims. The IRS will look at deductions for premiums paid to captive insurance companies that go years without ever paying a claim. The captive should not invest its float in “loans” to related parties.

Client Profile is based on a hypothetical situation.The solutions we discuss may or may not be appropriate for you.

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2020 Tax Changes

2020 has been a big year for tax law changes. The SECURE Act is the most significant retirement reform law in at least a decade. The CARES Act provided tax breaks designed to help ease the economic burden of the Coronavirus and related shutdowns. These are just a few of the many changes affecting individuals this year:

  • The SECURE Act raised the required minimum distribution requirement (RMD) for traditional IRAs from 70½ to 72 for anyone turning 72 in 2020 or later. Then, the CARES Act suspended RMDs for 2020 without penalty.
  • Traditional IRA owners can now continue to make contributions past the age of 70½.
  • If you were impacted financially by COVID you can take higher than normal distributions from your retirement account this year — up to $100,000 — without penalties. You have three years during which you can pay the income taxes on the distribution or repay the money to the plan. Plan loan repayments are also delayed for one year.
  • Early withdrawal penalties on IRAs and 401(k) distributions of up to $5,000 are also waived for households with a new baby, including adoptions. Income tax is still due.
  • Effective in 2020, non-spousal heirs can no longer stretch IRA distributions over their lifetimes. Instead, funds must be distributed within ten years of the original owners’ death. (Some exceptions apply.)
  • The CARES Act suspended the limit on deductions for cash donations by people who itemize (gifts to donor-advised funds and private nonoperating foundations are excluded). A new “above-the-line” deduction for cash donations of up to $300 is available for nonitemizers.

As we head into the final quarter of 2020, now’s the time to schedule a year-end tax review. Some of these tax opportunities expire at year-end.

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Data Breaches

Industry studies show that data breaches cost small to medium businesses an average of $200,000.* These costs include customer notification, fines, investigation costs, defense attorney fees and the expense of providing affected individuals with a year of identity theft monitoring services after the breach.

Protect Your Business

  • Provide data security training to all employees;
  • Run automatic network virus scans and antivirus software updates;
  • Download the latest operating system and software updates and patches;
  • Purchase data breach insurance and consider cyber liability insurance and technology errors and omissions policies;
  • Purchase umbrella liability coverage as a backstop for data breach insurance and other insurance policies. Umbrella coverage kicks in when the claim is greater than your primary insurance coverage limits and is generally very affordable.

*Hiscox Cyber Readiness Report 2019.

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Is a Roth Conversion Right For You?

Roth IRAs offer many benefits, including federal income tax-free withdrawals, provided you follow the rules. You can convert a traditional IRA to a more flexible Roth IRA, but it will trigger a significant taxable event.

TAXES

Because contributions to a traditional IRA are tax deductible and earnings are tax deferred, you’ll have to pay income taxes on all the funds you transfer in the year you execute the conversion. In a perfect world, you would pay taxes out of pocket, leaving more in your Roth IRA to continue to grow—income tax-free.

SOME DIFFERENCES

Traditional IRAs have required minimum distributions (RMDs) — and paying income taxes on those RMDs — every year after you reach age 72, (age 70½ if you attained age 70½ before 2020).* You have to take RMDs and pay the taxes even if you don’t need the money.

Roth IRAs have no RMD requirement. In general, you can withdraw earnings without penalties or federal taxes as long as you’re 59½ or older and you’ve owned the account for at least five years. (Some exceptions apply.)

WHO SHOULD CONSIDER CONVERTING TO A ROTH IRA?

A Roth IRA may be right for you if:

  • You believe your tax rates will be higher in the future;
  • Your income may be lower than usual this year;
  • Your IRA account value is lower this year, due to the pandemic;
  • You don’t need the money to live on for at least five years;
  • You want to leave the money to your heirs;
  • You are concerned about estate taxes.

WHO SHOULD NOT CONVERT?

A Roth conversion may not be the best strategy if:

  • You will need the money within five years;
  • You’re in a higher tax bracket now than you expect to be in retirement.

Consult your tax and financial professionals before taking action.

*The CARES Act suspended RMDs for 2020.

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September 2020 ClientLine Newsletter

Is a Roth Conversion Right for You? – you can convert a traditional IRA to a more flexible Roth IRA, but it will trigger a significant taxable event.

Data Breaches – industry studies show that data breaches cost small to medium businesses an average of $200k.

2020 Tax Changes – 2020 has been a big year for tax law changes.

September 2020 Client Profile – is the IRS planning to crack down on captive insurance company arrangements?

Open Enrollment Planning – planning ahead can result in savings, a smooth enrollment process and ensures you are offering benefits that help recruit and retain the best talent.

Real Mortgage Costs – well-qualified borrowers may be able to get some very low mortgage rates on both purchases and refinance transactions.

Questions and Answers

Short Bits

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Short Bits

CREDIT SCORE CONCERNS

A recent WalletHub survey reveals that 87 million Americans are worried about their credit scores as a result of the COVID-19 pandemic. To help track changes, potential errors, and identity fraud, Annualcreditreport.com now offers free weekly credit reports rather than free annual reports. Consumers should also know that by reaching out to lenders for help with payment flexibility, their loans will be reported to the credit bureaus as current, according to guidance from the Consumer Financial Protection Bureau.

MILLENNIAL JOB HISTORY

According to the U.S. Bureau of Labor Statistics, Americans born in the early 1980s averaged holding 8.2 jobs over a 14-year span of adulthood. Over half (57%) of those jobs ended in less than a year. Additionally, the study found that women were more likely to obtain a bachelor’s degree than men (29% compared to 22%, respectively).

LONG-DISTANCE MOVES DROP

A recent study from the Joint Center for Housing Studies of Harvard University revealed that long-distance moves have reached an all-time low. Moves crossing state lines accounted for 3.3% of the population in 1990, but have fallen to just 1.5% today. Part of the decline is attributed to the large Millennial demographic aging out of the time of life in which they’re most likely to move. Another deterrent of more frequent moves is housing affordability.

SMALL BUSINESS OUTLOOK

Near-term outlooks for both real sales expectations and economic uncertainty were negative in the National Federation of Independent Business (NFIB) April SB survey. But the survey also revealed that the number of owners expecting better business conditions in the next six months jumped 24 points compared to the previous month.

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Questions and Answers

QUESTION:

I was an unemployed graphic designer, but now I’m working as a freelancer from home. What expenses can I deduct?

ANSWER:

Transitioning from unemployed to self-employed changes the way you file taxes. There are many deductions that could apply to your situation, from home office space, supplies and equipment to retirement contributions and health insurance premiums. It is important to consult a tax specialist and track expenses early on so that you do not overlook any deductions to which you are entitled. You can also refer to the IRS website for tips on how to deduct your small business expenses:
https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses

QUESTION:

I live in a condo and my homeowners association (HOA) is imposing a special assessment on residents to fund new roofs. Can I deduct the assessment on my 2020 taxes?

ANSWER:

No. If it is your residence, like any other homeowner, repairs are not tax deductible. However, you can use the assessment as a deduction if you rent out all or part of the property as a landlord, although rentals come with a whole set of different rules. Home improvements that substantially enhance the value or usefulness of the property are deductible, however.

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Identity Protection

With identity theft commonplace, it’s important to understand available options to help safeguard your online information.

FRAUD ALERT

This free alert requires companies to contact you to verify that you want new credit before they approve it. You only need to contact one of the three credit reporting agencies to initiate this alert.

CREDIT FREEZE

A credit freeze will prevent anyone, including you, from opening a new account. You’ll need to ask all three major reporting agencies—Equifax, Experian and TransUnion—for the freeze. Victims of identity theft receive this service for free, but each reporting agency can charge $5 or $10 each time you freeze and unfreeze your credit.

CREDIT LOCK

A credit lock is good for people who have experienced identity theft and don’t plan to open new credit in the near future. Generally, this service will cost a monthly fee charged by each agency and the lock ends when your agreement ends or when you unlock it.