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The Child Tax Credit After Tax Reform

6 December 2018 at 20:09

The 2019 tax filling season is just around the corner, and there are many changes and amendments to consider. Among them is the child tax credit; it may offset the exemption you won’t get due to the reform. The exemption amount before the tax reform for 2018 was calculated to be $4,150.

Great news, the child tax credit is double the amount from last year. The credit is more effective than the exemption deduction, it can reduce taxes dollar for dollar. Many people claim the child tax credit to help offset the cost of raising children. Tax reform legislation effective after December 31, 2017, made changes to the child tax credit. Here are some important things to know about the changes to the credit.

β€’ Credit amount – The new law increases the child tax credit from $1,000 to $2,000. Eligibility for the credit has not changed. As in past years, the credit applies if all of these apply:

o the child is younger than 17 at the end of the tax year, December 31, 2018
o the taxpayer claims the child as a dependent
o the child lives with the taxpayer for at least six months of the year.

β€’Credit refunds – The credit is refundable, now up to $1,400. If a taxpayer doesn’t owe any tax before claiming the credit, they will receive up to $1,400 as part of their refund.

β€’ Earned income threshold – The income threshold to claim the credit has been lowered to $2,500 per family. This means a family must earn a minimum of $2,500 to claim the credit.

β€’ Phaseout – The income threshold at which the child tax credit begins to phase out is increased to $200,000, or $400,000 if married filing jointly. This means that more families with children younger than 17 qualify for the larger credit.

Dependents who can’t be claimed for the child tax credit may still qualify the taxpayer for the credit for other dependents. This is a non-refundable credit of up to $500 per qualifying person. These dependents may also be dependent children who are age 17 or older at the end of 2018. It also includes parents or other qualifying relatives supported by the taxpayer.


Does Your Pay Check Need an Adjustment? IRS Has A Calculator

2 March 2018 at 13:40


The new Tax Cuts and Job Act will impact millions of Americans in 2018. The changes to the tax code may leave you vulnerable to a surprise tax bill at the end of the year or missed opportunities throughout the year. To help ensure the accuracy of your tax withholding, you should use the IRS calculator to complete a paycheck review.
The tax code changes passed on December 22, 2017, lowered the tax rate for millions of individuals, doubled the standard deduction, repealed exemptions, doubled child tax credit, capped mortgage interest deduction, and limited state and local taxes. But the truth is, you don’t know how much your tax liability will be with the new codeβ€”one size will not fit all. Acting IRS Commissioner, David Kautter said 90% of taxpayers will have β€œsome adjustment, one way or the other” to their withholdings.
If after your check-up with the new calculator, you find that you could bring home more money or that you need to withhold more to avoid a tax bill, submit a new W-4 to your employer as soon as possible.



Hurricane Harvey and Casualty Losses

9 September 2017 at 22:07

Hurricane Harvey, reported as one of the worst disasters in Texas History, also the first hurricane to hit Texas since Hurricane Ike in 2008. The Federal Emergency Management Agency (FEMA) director expects recovery to take many years, with estimated economic losses over $170 billion. FEMA was created on April 1, 1979 when President Jimmy Carter signed the executive order. As of August 29, 2017, FEMA has declared 74 disasters, which includes Houston and surrounding areas.

To alleviate the hardship from this disasters, survivors can access retirement funds from qualified employee plans after August 23, 2017 and before February 1, 2018. The procedures for loans and hardship distributions are streamlined and more liberal, considering this may be the only savings individuals may have set aside.

If you suffer damage to your home or personal property, you may be able to deduct the loss incurred on your federal income tax return. If the area receives a federal disaster designation, you may be able to claim the loss sooner.

A casualty, for tax purposes is the result of a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism. Ordinarily, a deduction is available only if the loss is major and not fully covered by insurance or other reimbursement.

Tips for deducting casualty losses:

  • Covered by insurance. If property is insured, you must file a timely claim for reimbursement of losses, if not, you can’t deduct the loss as a casualty. You’ll need to reduce the loss by the amount of the reimbursement received or expected to receive.
  • When to deduct. As a general rule, deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster, you may have a choice of when to deduct the loss. You can choose to deduct it on your return for the year the loss occurred or on an original or amended return for the immediately preceding tax year. This means that if a disaster loss occurs in 2017, you don’t need to wait until the end of the year to claim the loss, instead choose to claim it on your 2016 return. Claiming a disaster loss on the prior year’s return may result in a lower tax for that year, often producing a refund.

Figure the amount of loss.

  • Determine the adjusted basis in the property before the casualty. For property you bought, the basis is usually its cost. For property acquired in other ways, such as inheriting it or a gift, the basis is determined differently. For more information, see Publication 551, Basis of Assets.
  • Determine the decrease in fair market value (FMV), of the property resulting from the casualty. FMV is the price for which you could sell your property to a willing buyer. The decrease in FMV is the difference between the property’s FMV immediately before and immediately after the casualty.
  • Subtract any insurance or other reimbursement received or expected to receive from the smaller of those two amounts to arrive at the casualty loss amount.
    $100 rule. After figuring the casualty loss on personal-use property, reduce that loss by $100. This reduction applies to each casualty-loss event during the year.
    10 percent rule. Reduce the total of all casualty losses on personal-use property for the year by 10 percent of your adjusted gross income.
  • Form 4684. Complete Form 4684, Casualties and Thefts, to report the casualty loss on a federal tax return. Claim the deductible amount on Schedule A, Itemized Deductions.

    Business or income property. Some of the casualty loss rules for business or income property are different from the rules for property held for personal use.
    Call the IRS disaster hotline at 866-562-5227 for special help with disaster-related tax issues. For more on this topic and the special rules for federally declared disaster-area losses see Publication 547, Casualties, Disasters and Thefts. Get it and other IRS tax forms on at any time.


Do You Have a Hobby or Business?

1 August 2017 at 19:55


Many of us have income generating activities that we call a business, but is it. The key objective of operating a business is making a profit. In contrast, hobbies are engaged in for sport or recreation, not necessarily with a goal of making a profit.
The Internal Revenue Service (IRS) may determine that your business is really a hobby based on nine factors.

1. Manner in which you carry on the activity,
2. Your expertise of or the use of advisors,
3. The time and effort expended in carrying on the activity,
4. Expectation that assets used in activity may appreciate,
5. The success in carrying on other similar or dissimilar activities,
6. History of income or losses with respect to the activity,
7. The amount of occasional profits, if any,
8. Your financial status,
9. Elements of personal pleasure or recreation.

No one factor is a determinant, all nine are considered when determining the category of your activity. An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If your activity is in fact a hobby and not a business, you are limited to certain deductions.

β€’ Within certain limits, ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

β€’ Generally, hobby expenses are allowed up to the amount of hobby income. If hobby expenses are more than its income, you can’t deducted it from other income.

All hobby income is includable and deductions are itemized on the Schedule A. Deductions are categorized into three categories, and special rules apply to each type. See IRS Publication 535 for details.



How To Analyze Your Next Stock Purchase.

23 July 2017 at 20:28


So, you want to buy stock but you don’t know how to pick a winner. When looking for a company to invest in, most investors embrace the strategy of selecting a company with huge future growth potential. Growing companies have the potential to appreciate your investment; growth translates to profits.

Not a fool proof method, but a great tool to value a stock is to analyze the Price-to-earnings ratio (P/E), calculated by dividing the stock price by the company’s Earnings per share (EPS). The price is set by the market based on supply and demand, as more investors buy these stocks, the price goes up. Earnings per share is data from the company, earnings could be based on past earnings or expected earnings. Always consider that stellar profits in the past years doesn’t guarantee the same results in future years, and estimated future earnings can be wrong.

The P/E ratio indicates the dollar amount you can expect to invest in a company to receive one dollar of the company’s earnings. A high P/E can indicate that the company is expecting higher growth or it could be overvalued. A low P/E could mean either it’s undervalued or stableβ€” good for a long-term investment. The average P/E is 20-30. If a P/E is N/A the company has no earnings or is posting losses. Analyzing one P/E ratio may not show the full picture, review the median P/E over several years as a benchmark in your decision to buy and compare it to others in the same sector.

Let’s consider the company Amazon for purchase. Although it has only been in operation for 23 years, it has a market capitalization of $492B, making it the fourth largest publicly traded company. In the last 52 weeks, it has traded as low as $710 and a high of $1,035.

Amazon has a P/E of 193.73, and doesn’t pay a dividend, the company reinvests its profits. Amazon apparently has a substantial amount of cash on hand, using over half of its $21.5B to buy the giant Whole Foods for $13.7B. A bold move for Amazon, Whole Foods has over 400 stores located in high traffic upper income areas, their image is healthy eating aligning perfectly with millennials and Gen X consumers whose focus is health, wellness and fitness. As an added bonus, the acquisition will effectively compete with Wal-Mart’s grocery pick-up service; they have the technology and ability to crush Wal-Mart in this genre too. Its web services account for 75 percent of profits. Previous acquisitions include Zappo’s and Twitch. Does all of this mean it’s a worthwhile investment? I think so, the outlook is promising.

Two things to remember, first, giants can fall. Not so long ago in 2002 the tech crash happened, resulting in the Nasdaq losing over 80% of its value. Second, every stock has a cycle, which mean you need to know when to buy and when to sell. Follow the adage, buy low and sell high.

There isn’t a single metric for valuing a stock, you should consider many factors, including cash flow, financial statements, financial conditions and prospects, general business conditions, demand, interest rates, political events, new laws and regulations, etc. In other words, look at the whole picture.




If We fail to Learn from History Are We Doomed to Repeat It?

28 April 2017 at 19:41


Do you remember the mortgage crisis, a time when the housing market was riddled with interest-only, subprime, and negative amortization loans? The foreclosure rates between 2006 and 2007 were at an all-time high. Americans could not afford the payments on their risky loan obligations. The domino effect led to the credit crisis, the gateway to the Great Recession, which lasted from 2007 to 2009. It began after the stock market crash in the early 2000s when the Federal Reserve tried to stimulate the economy by lowering interest rates. Big investors were not happy with the low unattractive interest rates, so Wall Street offered an alternative solution, which led to a path of devastation for unsuspecting consumers.

Everyone closed their eyes to the onerous Wall Street solutionβ€”consumers were sold homes they couldn’t afford. Meanwhile, the mortgage companies leveraged their risk by offering subprime loans and carried default insurance. After all, some borrowers were actually unemployed.

The factor that created the mortgage crisis is parallel to the payday loan debacle today. When borrowers seek short-term financing to make ends meet until their next payday, the payday establishment doesn’t consider whether the borrower can afford the loan, they leverage risk by offering subprime loans that borrowers can never sustain and hold access to borrowers’ bank accounts or automobiles for collateral.

There were no regulations prior to the credit crisis, Wall Street was left to their own devices, allowed to regulate themselves. Our current administration doesn’tΒ favor payday loan regulations and can’t wait to roll-back Wall Street regulations. You may have heard the president’s vow to do a β€œbig number” on financial regulations and doesn’t believe that Dodd-Frank is working.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was created in 2010, the law created the Consumer Financial Protection Bureau (CFPB), a consumer watch dog. Among other things it requires lenders to verify that borrowers can repay their loan obligations, which requires verification of employment, credit score rating, and debt-to-income ratios.

The CFPB extended its reach to Payday loans by proposing new regulations requiring payday lenders to determine if some borrowers can afford the loan and place restrictions on loan rollovers that become long-term debt equating to interest rates of over 300%.

Although the CFPB is currently independent and can’t be controlled by Congress, that may change, if the administration is successful in removing the CFPB director and replacing him with a panel controlled by Congress.Β The agency has been successful in their actionsΒ to create regulations to protect consumers from financial abuse. In September 2016, the agency busted Wells Fargo, one of few big banks unaffected by the mortgage crisis, for opening 2 million phony bank accounts, assessing unwitting consumers millions of dollars in fees. The watch dog agency stopped PayPal from signing up consumers for credit lines they didn’t ask for. Corinthian College had to pump their breaks after investigations found that they were charging high interest rates on private loans to low-income students who were destine to default. Let’s not forget Bank of America and FIA card services, their credit ring was put on hold after charging 1.9 million consumers for services they never asked for. You would think that your representatives would want to protect you from these predatory instruments, right?

Lenders justify payday loan practices under the ruse that it gives consumers more options. They say that they fill a critical hole in the economy, allowing people who have poor credit, no savings, living paycheck to paycheck the ability to borrow money to help them in a crisis.

This is true despite the fact that they saddle the borrower with seemingly never ending debt and sometimes leave borrowers carless. You can’t depend on government to protect you, equip yourself to survive in our capitalistic system by following the practices in my book, Financial Freedom, A Guide For Personal Finances, to help improve your credit score, get out of debt, save for emergencies avoiding a payday loan, and spotting scams.




2 January 2017 at 21:36


Christmas is over and the new year is here! Time to ring out the old and ring in the new, but wait, that might be hard to do if you have lingering holiday debt.

The merchants wooed us with clever promotional one-day sales, fifty-percent off, and must haves, that we really didn’t need, playing the old marketing game making their bottom-line merry and bright. On the other hand, we are left carrying over holiday debt. Β Your credit cards have taken a beating, perhaps contributing to the reported record high Black Friday online sales of $3.34 billion and $3.45 billion on Cyber Monday.Β 

Now it’s time to give thanks that your credit score is either very high or excellent. These ratings can qualify you for one or all of the premium cards offering zero percent interest for a substantial period of time allowing you to get out of debt faster. The longest advertised interest free period I have seen is touted by the CITI Simplistic Card, a whopping 21 months. Another highly favorable card is offered by Chase Slate with a 15-month interest free period; there is one caveat for both cardsβ€”you must have very good to excellent credit.

NextAdvisor defines very good and excellent credit below:

Over 750β€”excellent – eligible for any credit card at the best rate

720-750β€”very good to excellent – eligible for almost any card and get the best rate.

You may be thinking that it’s best to use the longest interest free card, CITI Simplicity Cardβ€”your excellent credit has earned you the privilege to qualify for either. Although CITI Simplistic offers the longest interest free period, it has a 3% transfer fee, which charges you $75 on a $2,500 debt right out the gate, Chase Slate Card does not.

Let’s say your damage is $2,500 and you can pay $120 per month toward this debt with no new spending.

CITI Simplicity Card
Monthly Payments $120
Pay off Period 22 Months
Transfer Fee $75
Interest rate after the free period 13.24%
Total Paid $2,576
Chase Slate Card
Monthly Payments $120
Pay off Period 22 Months
Transfer Fee $0
Interest rate after the free period 13.49%
Total Paid $2,528

With both cards, you can pay the debt off in 22 months, however, with the CITI Simplistic Card, you pay more once you factor in the $75 up-front fee. After 15 months, the Chase Slate card begins to charge interest, but it’s only $28, making it the cheapest card for this balance transfer example.

If you want to improve your credit score to very good or excellent, qualifying you for these premium cards, I recommend reading Financial Freedom, A Guide for Personal Finances. It provides an easy to follow guide for improving your credit score along with other great personal finance guidance.



What do the Feds Say about Gambling Income?

14 November 2016 at 11:01

Are you a casual gambler pressing your luck despite your odds? If you are, there are some tax rules you should become familiar with. First, gambling income is taxable and includes lotteries, raffles, horse races, and casinos, but is not limited to these activities. If you win, based on the amount and type of winnings, the payer may give you a Form W-2G Certain Gambling Winnings. The payer also sends a copy of the W-2G to the IRS. Even if you don’t receive a W-2G, you are required to report your winnings.

Gambling winnings are considered β€œother income” on your Federal Tax form and can be itemized. For additional guidance see Publication 529.Β  You can only deduct the expenses that you can verify, limited to the amount of gambling income you report on your tax return.

The mistake the infamous Chicago gangster Al Capone made in 1931, in defense of his tax evasion case, was epic. Al Capone was on trial for failing to file tax returns from the year 1924 through 1929. The Treasury Department was able to prove that the gangster had to have a substantial amount of income to live his bejeweled life style. In his defense, Capone’s lawyer argued that he lost as much money gambling as he earned, with six bookies testifying that he lost over $327,000 over a six year period.

The individual income tax system, created after the ratification of the 16th amendment in 1913, was in its infancy stage at the time. So perhaps his lawyer wasn’t abreast of the newfangled tax law which only allows you to deduct losses against winnings from the same year. Capone was sentenced for 11 years on charges of tax evasion; his gambling loss defense was not effective.

If you don’t have your bookie available to testify to your gambling losses, here are a few tips you can use to off-set the tax on your winnings.

  • Keep a gambling log or diary, receipts, statements or tickets.
  • Maintain specific information in your log or diary
    • The date and type of your specific wage or wagering activities
    • The name and address or locations of the gambling establishment
    • The name of other persons present with you at the gambling establishment
    • The amount(s) you won or lost.



Tax Season is Over, But Where is Your Tax Return?

7 August 2016 at 20:17

download (1)Well, tax time is long gone, and the refund, if you were lucky enough to get one, is gone too.Β  But what about your federal tax form? Many can’t wait to file their 1040 in order to get the refund as soon as possible, but are you keeping up with the most important partβ€”the actual tax return?Β  One may be hard pressed to put their hands on their Federal Form 1040, 1040A or 1040EZ. A good financial practice is to keep copies of your tax return and supporting records; you’ll need copies for several reasons. Your prior returns can help you prepare future tax returns or an amended return. If you’re thinking about applying for a loan to buy your first home or a new home, you’ll need copies. Applying for a student loan will also require information from your filed return. Keeping at least three years of tax returns is a good idea because the statute of limitations period for IRS adjustments, including audits, is generally three years from the time you file your tax return. Returns filed earlier than the due date are considered filed by the due date, and a late filed return extends the statute. The three year statute applies to most, however when you file a fraudulent return or don’t file at all, there is no statue. If you happen to under report your income by twenty-five percent or more, the three year statute doubles.

Getting a Copy of your Tax Return

If you find that you need a copy, because you can’t find your tax return, you can get one from the Internal Revenue Service (IRS) for a whopping fee of $50, payable with the form 4506. But don’t fret there are other alternatives.

  • Tax Return Transcript – Free summary of tax information that you filed, including attached forms and schedules. However it doesn’t reflect any changes you or the IRS may have made after the original return was filed.
  • Tax Account Transcript – Free information which includes your marital status, the type of return you filed, adjusted gross income and taxable income. It also does not include any adjustments after the original filing.
  • Record of Account Transcript – A combination of the tax return transcript and the tax account transcript all rolled in to one.

In case you have inadvertently misplaced your earnings statement for example, your W-2 or 1099, you can get free transcript data of that information by requesting a Wage and Income Transcript. Other useful information you can request for free is a Verification of Non-filing Letter.Β  Potential college students may need this information for their Free Application for Federal Student Aid (FAFSA) to show that they have not filed a return for the specified year.

You can get a copy quickly of these transcripts using the Get Transcript application or Get Transcript by Mail. IRS2Go is another option when using a smartphone. Or if you aren’t computer savvy, you can call 800-908-9946.

We often think of taxes as a seasonal obligation, but actually taxes should be on your mind all year. There are triggers brought on by certain actions or inactions throughout the year that may affect your taxes. If you get married or divorced during the year, your filing status will change, and you should file a new Form W-4 with your employer to adjust your withholding; your tax bracket will likely change. Some other personal and financial situations that you may need to make tax adjustments for include having a baby, a new job or second job. Other major impacts include early withdrawals from retirement plans and becoming self-employed. No one wants to have a large tax liability with the IRS; if you aren’t prepared to pay, expect additional interest and penalties.

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