Category: Newsletters

Question

My company is facing a retirement plan audit. How do I best prepare?

Answer

First, understand that besides talking to your tax professional, there are few similarities between an overall company audit (see accompanying article) and a retirement plan audit. You may want to consult a plan consultant to gather necessary documents and begin a series of tests. This includes doing compliance testing to ensure your highly compensated employees don’t contribute more than allowed to your company plan. You’ll also want to check that all eligible employees know they can contribute, you follow IRS and other government rules when offering automatic plan tools, and the plan is fulfilling other fiduciary responsibilities.

Question

I’m a self-employed delivery driver who volunteers to deliver meals to seniors and the disadvantaged. Can I deduct the cost of my time?

Answer

No, you can’t deduct your time, but you can deduct your mileage. In 2020, the IRS allows taxpayers to deduct the standard mileage rate of 14 cents per each mile their vehicles were used for eligible charitable work. Incidentally, the business standard mileage rate is 57.5 cents and the mileage rate for driving to and from medical care is 17 cents in 2020. Talk to your tax professional for more information, including whether you’ll need to itemize on your return to get these tax breaks.

Employer Costs

Compensation costs for private industry workers increased 2.7% in 2019 compared to an increase of 3% the year before, according to the Department of Labor. Wages and salaries increased 3% in 2019, a tick under the 3.1% rise in 2018. Benefit costs rose 1.9%, with health insurance benefits rising 2.2%. That was also lower than 2018, when benefit costs increased 2.6%.

Boomers Unprepared

The Insured Retirement Institute (IRI) reports that about 45% of Baby Boomers have saved nothing for retirement. So it’s not surprising one-third of baby boomers plan to retire at age 70 or older or not at all, and another third of employed boomers ages 67 to 72 postponed retirement, according to IRI.

Job Happy

Looking for your first job or to advance your career? Follow the jobs. According to the Bureau of Labor Statistics, Texas, California and Florida created more than 800,000 new jobs from December 2018 to December 2019. Texas registered the highest number of new jobs at 342,800, but 25 other states also saw an increase in jobs. Utah, Idaho and Arizona led the way in percentage increases.

Income Up

The median weekly income of fulltime workers rose a healthy 4.0% in 2019, increasing from $900 in 2018 to $936 last year. Women saw their weekly median earnings rise to $843, which was 82.5% of the $1,022 median for men. While men saw their income rise 2.9%, women had a 6.2% increase last year, making up a little lost ground. Inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U) over the same period, rose just 2.0%.

The last thing most taxpayers want to think about so soon after the tax-filing deadline is filing another tax return. Yet, that’s something you’ll have to do if you made an error and a task you’ll want to perform if you shorted yourself. Here’s what you need to know if you have to file an amended return due to a mistake on your tax return.

What to Do

First, contact your tax preparer if you had that person’s help to prepare and file forms. Next, whether the error was in the IRS’s favor or yours, file Form 1040-X, Amended U.S. Individual Income Tax Return to report the error. Include copies of forms and schedules with the errors or forms that you didn’t include with your original return.

Generally, for a credit or refund, you must file Form 1040-X within three years of the date you filed your original return or two years after the date you paid the tax, whichever is later. Don’t forget to include a check for any amount underpaid, plus potential penalties and interest.

Henry’s mother died of pancreatic cancer, and he is looking into starting a foundation named in her honor to fight this terrible disease. He hopes that compliance and tax filing won’t become a burden. Is there a simpler solution?

What a wonderful gesture on Henry’s part. First, he should consult an attorney and a tax professional. Both should be experienced working with not-for-profit groups. They can help him set up the foundation, file for tax-exempt status and complete the paperwork necessary to become an IRS non-profit entity.

If he wants to start on his own, he could apply online for Section 501(c)(3) tax-exempt status with the IRS’s revised Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This year is the first year he can apply online, which the IRS says will help with application processing time. He may also enjoy a newly reduced excise tax, depending on the setup.

If Henry qualifies, he could fill out Form 1023-EZ to save time. Ultimately, the size and scope of Henry’s foundation will determine the level of compliance needed.

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

MORTGAGE INSURANCE

If you qualify by income, you may be able to deduct mortgage insurance premiums for your principal residence on your tax return.

DEBT TREATMENT

Homeowners who met eligibility requirements were allowed to exclude mortgage debt cancellation from income on their tax returns from 2007-2017, and Congress now allows this type of debt cancellation to remain tax-free from 2018 through 2020.

HEALTH COSTS

Scheduled to rise from 7.5% of adjusted gross income to 10% in 2020, Congress moved to keep the itemized medical expense deduction threshold at the lower percentage for costs that were not reimbursed. Most medical costs that are not cosmetic, including prescription drugs, dental work and vision, qualify for the deduction.

DISASTER RELIEF

Congress gave some taxpayers who experienced federally declared disasters as far back as 2018 the ability to take penalty-free withdrawals from their retirement plans. Employers who continue paying employees during a disaster will also receive favored tax treatment on the amount of wages paid during this period.

COLLEGE DEDUCTION

Remember when Congress ditched the tax deduction for qualified college expenses? Never mind, it’s back at least through tax year 2020, with the repeal retroactive to 2018. To qualify, your adjusted gross income needs to fall under certain thresholds.

FOR THE ENVIRONMENT

Energy-efficient taxpayers are winners with a handful of extensions giving them continued favorable tax treatment. Alternative fuel refueling equipment, fuel cell vehicles and electric motorcycles will have their tax credits extended through 2020, retroactive to 2018 for some of them. Also, take a tax credit up to $500 for making energy-saving improvements to a principal residence through 2020, retroactive to 2018.