Should I borrow from my 401(k) plan? The Basics

According to a study by the Employee Benefits Research Institute (EBRI), nearly 20% of all 401(k) participants had plan loans outstanding. This statistic has held true since the early 2000s.  These loans can be appropriate in some situations.  However, borrowing from a 401(k) plan exacts a big opportunity cost.  Let’s first look at what borrowing from a 401(k) plan means and how it works.

Technically, 401(k) loans are more accurately described as the ability to access a portion of retirement plan money on a tax-free basis. A borrower then must repay the money accessed to restore the 401(k) plan to its original state.

Borrowers specify the investment account(s) from which to borrow money. Those investments are liquidated for the duration of the loan.

As loan repayments are made to the 401(k) account, they usually are allocated back into the investments originally chosen. The account is repaid more than what was borrowed from it, and the difference is called interest.

Any interest charged on the outstanding loan balance is repaid by the participant into the participant’s own 401(k) account, so technically this is a transfer from one pocket to another, not a borrowing cost.

Regulations specify a five-year amortizing repayment schedule.  Repayment plan statements show credits to the loan account and remaining principal balance, just like a regular bank loan statement.

If a 401(k) is invested in stocks, the impact of the loan on retirement progress depends on the market environment.

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Ever-Changing Tax Law

There were about 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day.

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Charitable Donations of Services

Americans have used charitable donations to lower their taxable income since World War I when the federal government introduced the charitable tax deduction.

Not all nonprofit organizations qualify as beneficiaries for tax-lowering gifts, nor do all gifts to eligible charities qualify. Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction offers.

Charitable Donations of services:

If you donate your services to a 501(c)(3) organization, you have no deduction whatsoever. Doesn’t seem fair, does it? Unfortunately the IRS places no value on your time or expertise. While you are not allowed to deduct the value of your time at the rate you would normally charge, you can still deduct mileage to and from the charitable organization and the cost of all supplies and materials used in the performance of the service.

By the same token, if you donate your services to an individual who needs help, you are not be able to write off the donation. This is because the IRS does not allow the deduction of gifts to individuals.

Posted in Deductions

Charitable Donations of Money or Goods

Americans have used charitable donations to lower their taxable income since World War I when the federal government introduced the charitable tax deduction.

Not all nonprofit organizations qualify as beneficiaries for tax-lowering gifts, nor do all gifts to eligible charities qualify. Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction offers.

Charitable Donations of money or goods:

Businesses in general are not allowed to deduct charitable contributions; however, payments to a charitable organization may be deducted as an expense to the business.

For example: If the business received ad space or marketing for the payment, it may be deducted as an advertising business expense.   Another example: The business paid $20 to a church for an ad in a program for a concert it is sponsoring. The payment is not a charitable contribution but rather a business advertising expense.  A third example:  The business made a $100,000 donation to a committee organized by the Chamber of Commerce to bring a convention to your city, intended to increase business activity.  The payment is not a charitable contribution but rather a business expense.

If an S-corp makes a charitable contribution, the contribution is not deductible on the S-corp tax return but is instead taken as a deduction by the corporation’s shareholder(s).

For example, you are the sole shareholder of his S-corporation. The corporation’s gross income was $100,000 with deductible expenses totaling $60,000. The corporation also mad $1,000 contribution to a 501(c)(3) charity during the year. That $1,000 contribution is not included in the $60,000 of expenses. Instead, it’s shown on the K-1 you receive from the corporation.  On your personal return, you will claim $40,000 of pass-through income from the corporation ($100,000 income minus $60,000 of expenses). The $1,000 of charitable contributions will be taken as an itemized deduction on your personal return if you itemize.

Why is it like this?

Charitable contributions in an S-corp don’t reduce a shareholder’s AGI; instead the contributions are taken as an itemized deduction. If the shareholder takes the standard deduction instead of itemizing, they receive no tax benefit at all from the charitable contribution.

Posted in Deductions

Teaching Kids About Taxes

“If you are truly serious about preparing your child for the future, don’t teach him to subtract – teach him to deduct.”  Fran Lebowitz

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Teaching Kids About Taxes

“The best way to teach your kids about taxes is by eating 30 percent of their ice cream.” Actor and comedian Bill Murray

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Leadership

“Leadership is the art of getting someone else to do something you want done because he wants to do it.”  Dwight D. Eisenhower

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2018 Tax Filing Season

The IRS will begin accepting tax returns on Jan. 29.  The tax deadline will be April 17 this year – so taxpayers will have two additional days to file beyond April 15.

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Tax Preparers

When it comes to deciding who should prepare your taxes, the different designations can sometimes be confusing.  The major 3 options are Enrolled Agent, Tax Attorney and CPA.

  •  An Enrolled Agent is usually a full-time tax advisor and tax preparer licensed to practice before the IRS. They earn the designation by either passing an IRS exam or having at least five years’ experience working for the IRS.
  • Tax attorneys are lawyers who various types of tax related work. Look for a tax attorney with either a special tax law degree or certification as a tax law specialist from a state bar association.  If a great deal of money is at stake, the IRS is accusing you of committing fraud, or you’re headed to court, call a tax attorney.
  • CPA’s are licensed and regulated in all states.  They do sophisticated accounting and internal audit work, and prepare tax return.  To become a CPA, an accountant must have a college degree, experience with a CPA firm, and must pass a rigorous examination.  Some CPAs have a great deal of IRS experience, but some don’t ever deal with the IRS.
Posted in IRS

2018 Standard Mileage Rates

The standard mileage rates for business use of a vehicle will increase slightly in 2018.

For business use of a car, van, pickup truck, or panel truck, the rate for 2018 will be 54.5 cents per mile, up from 53.5 cents per mile in 2017. Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

The rate for medical or moving purposes is 18 cents per mile, which is one cent higher than for 2017.

The rate for service to a charitable organization is unchanged at 14 cents per mile.

The portion of the business standard mileage rate that is treated as depreciation will be 25 cents per mile for 2018, unchanged from 2017.

Posted in Deductions