More Year-End Tax Tips

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If you’ve had a change in your tax scenario for this year (change in marital status, income, or home ownership, for instance) or if you just weren’t happy with last year’s tax outcome, now is a good time to review your year-end tax strategies. Here are some suggestions for grabbing some year-end deductions:

Pay for spring semester: If you’re paying your own college tuition or paying for your child’s tuition, paying for spring semester during the “old” tax year could help your bottom line by lowering your overall tax liability.

By paying spring tuition now, you could be eligible for the Lifetime Learning Credit, or the American Opportunity Tax Credit, depending on your individual financial circumstances.

For example, the American Opportunity Tax Credit is worth up to $2500. Up to 40 percent of the new of the credit is refundable. This credit is designed to make the Hope Scholarship Tax Credit available to a larger range of taxpayers, including those who owe no taxes.

Donate to charity: If you’ve been dragging your feet on cleaning out your closets, a tax deduction for charitable contributions might be just the incentive you need to get started. Qualified charitable organizations typically accept:

  • Cash
  • Gently used household goods, toys, and clothing
  • Vehicles (always check ahead of time. Not all organizations accept vehicle donations)
  • Stocks, bonds, and mutual funds

If you donate any portfolio assets (stocks, mutual funds, bonds) to a 501 (c) (3) charitable organization, you won’t be hit with capital gains taxes.

As with any deduction, be sure to get a receipt or statement from the organization to verify that you did in fact make the donation.

Make adjustments to your health care coverage: Love it or hate it, the Affordable Care Act will be part of the tax landscape for the foreseeable future. If you’ve been skimping on your insurance coverage or skipping out altogether, you could get hit with a penalty under the ACA. 

Now is a good time to either purchase coverage or upgrade your existing coverage to avoid the ACA penalty. Keep in mind you may be eligible for exemptions from this requirement, so it’s a good idea to do some research, especially if you find yourself unable to pay for coverage due to your financial circumstances.

Open a new IRA: If you had a sizable jump in income that leaves you with money left over each month, now might be the time to open a new IRA. Just like your 401K at work, IRA contributions will not be considered income, so you won’t take a tax hit for making contributions. 

Each of these deductions will need to be itemized on your return, so if this will be your first year itemizing your deductions, get all of your receipts organized ahead of time so you’ll be ready when it comes time to file your tax return.

The end of the year is a great time to review your tax strategy for the year and to make some last-minute contributions or adjustments. If you’re unsure about your specific tax circumstances, check in with a qualified tax pro for guidance. A CPA or other financial professional with a tax background will be able to assist you in claiming the right deductions for your individual circumstances.

 

Can The IRS Seize My 401K?

 

Photo: cohdra/morguefile
Photo: cohdra/morguefile

 

For many people, their 401(k) represents their hard-earned savings toward eventual retirement. You may be fortunate enough to have an employer that will match your monthly 401K contributions, allowing your retirement funds to accrue even faster.

What will happen to your nest egg if you’re facing IRS asset seizure or levy for unpaid taxes? The IRS can seize the following in order to satisfy an unpaid tax debt:

  • Checking and savings accounts
  • Wages, commissions, and other employment-based earnings
  • Investments such as CDs, stocks, bonds, IRAs and 401ks.

If the IRS moves to garnish your wages, they don’t need to abide by the same requirements as any other creditor; the IRS doesn’t need to obtain a court order, for example,  in order to garnish your wages and commissions.

In most cases, there is a 10 percent penalty for an early 401(k) withdrawal. However, the rules change when the IRS levies the account themselves in order to satisfy an outstanding tax debt.

  • You will not be liable for the 10 percent early withdrawal penalty; the IRS will levy the account and instruct your 401(k) plan administrator to transfer the funds directly to the IRS. Generally, the funds will be placed on hold for 21 days to resolve any disputes.
  • You will need to fill out Form 5329 to claim exemption from the 10 percent early withdrawal penalty. Each reason for withdrawal is assigned a numerical code. In this case, you will place a “10” in the space provided to indicate the early withdrawal was due to an IRS levy.

However, if you are younger than 59 1/2 and you withdrew the funds yourself to satisfy the levy, you will be subject to the 10 percent early withdrawal penalty, plus any state and federal taxes on the dollar amount withdrawn, since it is considered income.

If you are 59 1/2 or older, you can take a 401(k) distribution without penalty.

Hardship Distribution

In some cases, you can request a “hardship distribution” from your 401(k) administrator. Suppose the IRS will be levying other assets you want to protect. You can request a full or partial distribution from your 401(k) plan to pay off the levy. The hardship distribution option allows you to state the reason for early distribution or withdrawal and “immediate and heavy financial need” according to the IRS.

By understanding the rules governing a 401(k) levy, you’ll be in a better position to assess whether or not you’ll need a tax pro to guide you through the process of determining your best options and understanding your rights.

If you’re facing an IRS levy or other tough tax matter, we have qualified tax pros on staff to help you. Get started today by clicking the white “Start Chat” button at the top of any of our webpages, or give us a call at (888) 224-3004.