Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Oct 13

    As we transition from our income earning years to our retirement years we begin to realize that each period has a different set of tax pitfalls. Here are 5 of the most common. Each of which can be avoided with a little planning.

    Missing the tax impact on Social Security
    A portion of your Social Security benefits may be taxable. The formulas are complicated (see example later), but in general terms, if your “Modified Adjusted Gross Income” (MAGI) exceeds $25,000 ($32,000 for joint filers) then it’s likely 15% of your Social Security benefits will be taxable at your ordinary income rates. If your “provisional income” exceeds $34,000 ($44,000 for joint filers) then up to 85% of your benefits could be taxable. Receiving income such as retirement benefits or IRA distributions which cause your income to jump from one level to the next can have a severe impact. You’ll pay income tax on the distribution, plus you’ll increase the portion of Social Security benefits which are taxable, sometimes doubling the tax burden.

    Missing the difference between growth, income, and cash flow
    Growth is what you need your portfolio to do in order to have enough money to last your entire retirement. Income is what you will have to pay taxes on, and cash flow is the after tax cash you have to spend on your needs and desires. The goal is to have sufficient cash flow to live your life like you want while paying the least amount of tax possible, and, at the same time, leaving enough in your portfolio for it to continue to grow at a rate that keeps up with, or exceeds, inflation.

    Missing a required minimum distribution
    Failure to take a required minimum distribution could subject you to penalties as high as 50 percent of the missed distribution. You must take required minimum distributions from any qualified plan or traditional IRA once you reach age 70 ½, and every year thereafter. Don’t rely on your bank, or broker, or anybody else to remind you about this. They will not pay the penalty for you! Roth IRAs are exempt from this requirement.

    Missing beneficiaries on qualified accounts
    Without a named beneficiary, the money in a qualified account reverts to your estate. The name, or names, listed on the account supersedes anything named in your will or trust, so it’s also a good idea to name a successor beneficiary.

    Missing the right beneficiaries
    It is generally best to name individuals as beneficiaries instead of your estate or a trust. You also want to avoid multiple beneficiaries with wide age differences. The minimum distribution will be determined using the “life span” of the oldest beneficiary. To avoid this pitfall, consider dividing your IRAs into separate accounts, each with a different beneficiary.

    For those two of you who are interested, here’s the example I promised:
    John and Jane Smith have an adjusted gross income of $44,000 for 2016. John receives Social Security benefits of $7,200 per year and together they receive $6,000 a year in interest from tax-exempt municipal bonds. On their joint return, the couple would make the following calculations:

  • Sep 15

    In his book: How Rich People Think, Steve Siebold (http://www.amazon.com/Rich-People-Think-Steve-Siebold/dp/1608102793), explores the thoughts, habits, and philosophies among the rich, as opposed to the middle class, when it comes to wealth:

    • Rich people focus on earning, not saving;
    • They understand that leverage creates wealth, not hard work;
    • See that they are in control of their wealth, not luck or fate;
    • Know that money is earned from focused thought, not hard labor;
    • Don’t see money with emotion, but with logic;
    • Are Action-Takers (as opposed to having a lottery mindset).

    So why do I emphasize that last one? Simple — I’m suggesting you take an action now, which could make a big difference on your 2017 bottom line...

    You know how good coaches are usually famous for making adjustments during the halftime of big games? Well, here I am — acting as your financial coach in matters tax-related, and we’ve hit the halftime mark for 2017.

    You have six months of financial info to use for some quick math about your year as a whole, and to prepare for a pleasant upcoming tax season.

    To begin, all you have to do is take your cash flow for the first half of the year, and multiply by two. Add up your wages, dividends, interest, and any other income, and then–if this represents approximately what you’re expecting for the second half of the year — double the sum.

    Once you have your estimated 2017 income, you can give us a call: 251-633-4070 (or send me an email), and we’ll help you determine the appropriate tax rate and deductions to apply. Because once you’re armed with this info, we can help you determine the amount of taxes you might expect to owe for 2017.

    By then comparing this against your projected withholding, you can adjust the withholding on your paycheck in advance as needed, and ensure a happy visit to our office in the winter.

    This can also be a good time to organize your financial papers and/or get started with some financial software. Getting organized now can make gathering a report of all those deductions a breeze, come tax time.

    We’ve been promised tax changes by the Trump administration. That makes it all the more important to review Uncle Sam’s highest-impact tax breaks, such as donations of appreciated assets, tax-free exchanges and capital-loss harvesting.

    Unlike obvious moves, such as contributing to an Individual Retirement Account or a 401(k) plan, these strategies require a higher degree of awareness and active planning.

    Not all high-impact breaks are for the wealthy. Any homeowner can benefit from a provision allowing taxpayers to pocket tax-free income from renting a residence for as long as two weeks, and low-bracket taxpayers can pay zero tax on long-term capital gains.

    Other important moves can help minimize estate, gift, and inheritance taxes. Really, there are a variety of moves we can make to help you with your planning for the year … but you have to let us help you. It is, after all, why we are here.

    “My favorite things in life don’t cost any money. It’s really clear that the most precious resource we all have is time.” – Steve Jobs

  • Aug 18

    It took more than a year following his death for a judge to confirm that Prince’s six siblings were his rightful heirs. Reportedly, more than 45 people came forward claiming to be his wife, children, siblings, or other relatives.

    Last year, the legendary artist passed away at age 57 leaving behind not only a treasure trove of music and dance, but a $250 million fortune, as well. What he didn’t leave behind was a will or estate plan.

    You may not have people clamoring after your money, but it’s still important to consider hiring an expert to sort through the complicated process of estate planning. We’ve all seen the ads for DIY legal documents, including wills and trusts. And the law does not require you to hire an attorney to prepare your will. But, even the highest ranking jurist of his time, Supreme Court Chief Justice Warren E. Burger, should have relied on estate planning experts to prepare his estate plan. Apparently, Chief Justice Burger typed his own will. The will only contained 176 words but several typographical errors and, more importantly, the will failed to address several issues that a well-drafted one would typically cover. His family paid over $450,000 in taxes and had to seek the probate court’s permission to complete administration tasks like selling real estate.

    To be better prepared than Prince or Chief Justice Burger, seek out the assistance of an attorney and a CPA. Together they can guide you through the unknown of estate planning and will preparation so that your heirs receive what you expect.

  • Jul 21

    Many Americans appear to be living one big expense away from disaster. A 2014 Federal Reserve poll discovered the startling fact that almost half of all U.S. households could not come up with $400 to cover an emergency expense. They would need to sell something, or borrow cash, to do so.

    If you find yourself belonging to that category, then I have some ideas (11 of them, in fact) I think will help. In my experience, if you want to get out of a hole, you study the behavior of those who have already made it out. And you do everything you can to copy that behavior.

    Yes, some people have been fortunate enough to inherit wealth, etc. But many, MANY more of those who have wealth came about it in a different way.

    Now, so that YOU do not find yourself in the unfortunate place of not being able to scrape up $400 in an emergency … read this now.

    Becoming a household that will be able to ride through instability and uncertainty is only going to become MORE important in future years, not less. So, that being the case, here is a portrait of those who are able to achieve this status.

    You’ll notice that these are just as significantly about your mindset as you relate to your finances, as about your behaviors.

    Here’s what the Financially Secure look like …

    1) He always spends less than he earns. In fact, his mantra is that over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

    2) She knows that patience is truth. The odds are you won’t become a millionaire overnight. If you’re like her, your security will be accumulated gradually by diligently saving your money over multiple decades.

    3) He pays off his credit cards in full every month. He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

    4) She realized early on that money does not buy happiness. If you’re looking for financial joy, you need to focus on attaining financial freedom.

    5) He understands that money is like a toddler; it is incapable of managing itself. After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

    6) She’s a big believer in paying yourself first. It’s an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

    7) She also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck. It’s not enough to simply “declare” to the universe that you want to be financially free. This is not a “Secret”.

    8) When it came time to set his savings goals, he wasn’t afraid to think big. Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

    9) He realizes that stuff happens, and that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner, and can be triggered from multiple sources: the death of the family’s key breadwinner, divorce, or disability that leads to a loss of work.

    10) She understands that time is an ally of the young. She was fortunate (and smart) enough to begin saving in her twenties, so she could take maximum advantage of the power of compounding interest on her nest egg.

    11) He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four. Little about external “signals” of wealth actually matter to him.

    And a little bonus, if you will: She doesn’t pay taxes which could have been avoided with a simple phone call to her tax professional. She plans ahead, before tax time.

    “You cannot control what happens to you, but you can control your attitude toward what happens to you, and in that, you will be mastering change rather than allowing it to master you.” – Brian Tracy

  • Jul 7

    How to Write Off Katie’s Soccer Camp

    Yes, it is quite do-able. But, like many things in the tax code, the devil is in the details. Let’s see if I can cut through the Tax Mumbo Jumbo for you.

    If Katie (or Bruce) is younger than 13 and goes to a DAY camp (overnight doesn’t work), and you are both working (or “looking for work”) then,…

    Cha-ching.

    You can then choose to pay for the camp using a Flexible Spending Account (FSA) or you can take the child care credit. Remember credits are better than deductions. With both the FSA and the child care credit, other eligible expenses include the cost of day care or preschool, before or after school care, and a nanny or other babysitter while you work.

    The size of the credit depends on your income and the number of children you have who are younger than 13. You can count up to $3,000 in child care expenses for one child, or up to $6,000 for two or more children.

    There are some limitations. The credit is only good for families of a certain income range and the percentage of eligible costs varies with income.

    All told, it’s a good deal which you should take advantage of, if you qualify.

    Bonus… If you have two or more children and child care costs exceed $5,000 for the year, you can benefit from both accounts. You can set aside up to $5,000 in pretax money in your FSA for child care costs, then claim the child care credit for up to $1,000 in additional expenses.

     

    Other strange, but true deductions

    You can pay your significant other (pay attention now) to do legitimate work for you and take a deduction.

    Bruce hired his live-in girlfriend to manage his rental properties. Her duties included finding furniture, overseeing repairs, and running his personal household. He went to Tax Court and fought the IRS which had disallowed the entire deduction. He won a deduction for the portion of his payments which could legitimately be tied to her business work.

    A married couple owned a junk yard and put out cat food to attract wild cats. Why, you might ask? The feral cats they were trying to attract dealt with snakes and rats on the property. That made for a safer junkyard for customers.

    And that made cat food a business deduction. The IRS first thought this was ridiculous, but before the case reached the Tax Court the IRS agreed!

    The details are always important, so be careful and ask us for advice first.

  • Apr 14

    When was the last time you reviewed your will? People generally make wills to guarantee the proper disposition of their money and property, which is why it’s a good idea to consult your CPA when it’s time to create or update your will.

    We recommend that you revisit your will every time you experience a major life event, such as marriage, the birth of a child, retirement, or other significant milestones. Even if there is no meaningful change in your life, it’s smart to review the document every couple of years to ensure it still addresses all your estate concerns and reflects your wishes. Changes in the value of your investments – such as stock portfolio or real estate – may also require adjustments in your estate plan.

    Reviewing your will may raise questions about various areas of your financial life, including your retirement or estate planning, college savings, or other financial concerns. Be sure to turn to us for the perspective and advice you need to make the best choices.♦

  • Jan 6

    A thoughtful estate plan can make your heirs lives easier. But it is your parents’ estate planning that will make your life easier.

    Not every family has fostered the ability to speak openly in love. But if you have begun that process, here is an outline of what grown children need to know about their parents’ business. In fact, adults of any age should update their estate plan every year.

    And, as a parent, if you are willing to share some of this information with your children—especially if one of them is also the executor of the estate— they’ll appreciate having the facts and be more prepared emotionally when the time comes. They will know your wishes ultimately anyway, and good communication will lessen any surprises ahead of time. They will benefit from knowing the answers to the following questions:

    Do you have enough saved for a comfortable retirement? Many financial planners use a safe withdrawal rate by age to make sure the clients will still have enough money toward the end of their retirement. But, this isn’t always the case, and is worth looking into. If your spending is under this withdrawal rate, you have more than enough and probably can leave a legacy to your heirs. But, if you are over this rate, you may run out of money and have to compromise your standard of living abruptly. It may be uncomfortable, even embarrassing, for parents to share their finances with their children, but grown children often want to know how their parents are doing.

    Where are the important documents? The five documents your children should be able to retrieve quickly are: a will; a living will; a power of attorney; a directory of basic information; and the latest end-of-year financial statements.

    The directory of information should list the assets of your estate, along with the account or policy numbers and contact phone numbers. It also helps to indicate your intentions for the distribution of each asset, which will help confirm you have the correct titling and beneficiary designations on every portion of your estate.

    You may have structured your will to divide your estate equally among your children. But, if you have tried to make it easy for one child to access your bank accounts by adding his or her name, you have overridden your estate plan and left that child joint tenancy with complete rights of survivorship. This can be a problem.

    Titling and beneficiary designations are legal estate planning actions. It’s best to review them with your legal advisor. Various types of assets are best designated differently in the estate plan. This is not the occasion for do-it-yourself thrift. It is a rare family that has compiled and reviewed a complete list of estate assets: bank accounts, investment accounts, retirement accounts, real estate holding, life insurance, health savings accounts, and so on.

    Are there any special bequeaths? Any promises you have made should be documented. Your good intentions won’t matter if you aren’t around to implement them. If you have promised money to a charity, and want that obligation kept, document it. If you have promised to loan a child money, document it. If you have promised to help fund your grandchildren’s college education, document it. Without documentation, none of these promises can be kept if you aren’t around to make the decisions.

    Are there plans to remarry? If parents have remarried, intergenerational estate planning is even more critical. Prenuptial agreements and careful estate planning are required in the case of second marriages, to avoid disinherited children or grandchildren from the first marriage. The default is rarely a good option.

    Do you have any prepaid funeral arrangements? Do you want to be buried or cremated? Do you have any preferences for a memorial service? Although it may seem macabre to plan your own funeral, a memorial service takes time and thought. It will be that much more special and comforting to your family when it is filled with your favorite music and readings. Encourage your children’s interest in your estate planning. Most of the time, their intentions are honorable. They may simply want to understand your values and therefore your wishes.

  • Oct 14

    Q. My husband and I sold our home on Fowl River that we purchased in 1973 for $459,000, and reinvested the profits in a smaller condo in town. Will we be required to pay the new 3.8% Medicare surtax (now referred to as the net investment income tax) on the gain? I understand it applies when your income is above $250,000.

    A. The 3.8% net investment income tax applies to the lesser of the net investment income for the year, or the excess of modified adjusted gross income over the $250,000 threshold. However, it does not apply to items, such as the gain on the sale of your personal residence, which do not have to be reported on your tax return.

    Do you have a question for the Taxpert that you’d like to see answered in a future Taxing Times? Or perhaps just an issue you’d like the Taxpert to address? Send the Taxpert a note to Taxing Times, 1050 Hillcrest Rd., Ste A, Mobile, AL 36695 or an email to taxpert@CPAMobileAL.com.

  • Aug 19

    Don’t you just love Congressional tricks?

    One of my personal “favorites” is when they cram a bunch of unrelated business into their bills.

    Which is just what happened about a year ago, and it could affect you…

    H.R. 3236, popularly known as “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (yes, that’s how these things are named) brought some tax-law-related changes.

    Individual tax returns are still due on April 15th — and a six month extension period is still available. But …

    * Partnership tax returns are due March 15, NOT April 15 as in the past. If your partnership isn’t on a calendar year, the return is due on the 15th day of the third month following the close of your tax year.

    * C corporation tax returns are due April 15, NOT March 15. For non-calendar years, it is due on the 15th day of the fourth month following the close of the tax year.

    * S corporation tax returns remain unchanged–they are still due March 15, or the third month following the close of the taxable year.

    On TOP of that, another doozy: audits can get you for six years now, instead of three. Without going into all of the details, essentially if you withhold reporting of 25% or more of your income, the IRS has six years to figure it out. They’ve always had unlimited time for fraud or criminality … but there was some wiggle room for underreporting in the past. No longer.

    All this (and MORE!) in one measly highway bill.

    So, it pays even more to work with a pro, yes?

    These sort of issues are what we specialize in worrying all about — so you don’t have to. Because YOU have to keep your head in a bigger picture.

    Entrepreneurs know that hard work and a great idea don’t guarantee success. Fortunately, most of them also know that failure isn’t final — almost every successful business owner client of mine has crashed and burned at least once in his/her career.

    One of the best ways to pick yourself, or your business, back up off the ground is to take a fresh look at things that you “thought” were set in stone. Here are some strategies I compiled for you to possibly give your business a fresh lease on life, come fall, or into 2017…

    Re-target your market. In the heat of start-up passion, entrepreneurs frequently try to interest too broad a market: “Everyone will want to buy this!” The result: getting lost in the crowd. The more closely you define your market, the more success you will experience.

    Re-examine your price. Price is obviously supremely important. See how you can lower your overhead or cut production costs. Perhaps there’s a new way to package your products, so that your average transaction value can go up?

    Identify and push your best product. Focus on what works. If your hot product is coffee cups, look for ways to highlight and expand that niche instead of veering into new territory. How about different colors and holders for those cups?

    Make your marketing materials more memorable. Emphasize the benefits — SPECIFICALLY how features of your product or service will improve business or the quality of life for your customer. And scrutinize your advertising. Using big media is not always the answer, especially when you have narrowed your market. Don’t overlook narrowly-targeted marketing efforts or joint promotions.

    Keep promoting! Make sure your message sinks in. Find affordable ways to reach your target market, and use these avenues as often as you can. Try social advertising!

    These ideas are to get you started. There may be longer conversations to be had. If so, that’s what we’re here for.

  • May 12

    “Success is simple. Do what’s right, the right way, at the right time.” – Arnold Glasgow

    Now’s the best time to get rid of unnecessary paperwork, as well as to ensure that you caught everything for your 2015 tax return.

    But before I get to what to do if you find something pertinent to your recently-filed tax return, here’s a guide for how long to keep your records…

    Taxes: Seven years
    Richard’s Reasons Why:
    There are three, actually:
    1) The IRS has three years from your filing date to audit your return if it suspects good-faith errors.
    2) The three-year deadline also applies if you’d like to make some sort of amendment because you discover a mistake in your return and can claim a refund.
    3) The IRS has six years to challenge your return if it thinks you underreported your gross income.
    All this adds up to keeping that info for seven years. Beyond that, there’s no reason — except for posterity.

    IRA contribution records: Permanently
    Richard’s Reason Why:
    You’ll need to be able to prove that you already paid tax on this money when the time comes to withdraw.

    Bank records: Usually just one year
    Richard’s Reason Why:
    Those related to your taxes, business expenses, home improvements and mortgage payments will obviously need to be included for next year’s taxes. But, unless there is some sort of emotional or posterity reason, get rid of everything after one year.
    Brokerage statements: Until you sell
    Richard’s Reason Why:
    To prove whether or not you have a capital gain or loss for tax purposes; after this point, shred it.

    Household bills: From one year to permanently
    Richard’s Reason Why:
    When the canceled check from a paid bill has been returned, you can shred the bill with a clear conscience. However, bills for big purchases — such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. — should be kept in an insurance file for proof of their value in the event of loss or damage.

    Credit card receipts and statements: 45 days/Seven years
    Richard’s Reasons Why:
    Some families don’t even bother to match up their statements, but if you do so, shred the receipts once you’ve verified everything. There’s no reason to keep everyday receipts – unless they support a deduction — beyond this point. For tax-related purchases, you need only keep the statements (and receipts supporting tax deductions) for seven years — after that, shred it, baby!

    Paycheck stubs: One year
    Richard’s Reason Why:
    This is to verify that when you receive your annual W-2 form from your employer, the information from your stubs match. If so, shred all of the stubs … if not, request a corrected form, known as a W-2c. After that’s been handled — shred.

    House/condominium records: Six years/permanently
    Richard’s Reasons Why:
    You’ll want to keep all records documenting the purchase price and the cost of permanent improvements — such as remodeling, additions and installations, as well as records of expenses incurred in selling and buying the property, such as legal fees and your real estate agent’s commission, for six years after you sell your home.

    Holding on to these records is important because any improvements you make on your house, as well as expenses in selling it, are added to the original purchase price or cost basis. Therefore, you lower your capital gains tax when you sell your house.
    Now, in this cleansing process, sometimes you’ll find a receipt or documentation which really would have changed your prior year tax return. That’s when you might have us file an “Amended Return”. However, this decision should be balanced against the cost of doing so, as well as the expected benefit — often these items can be dealt with the following year.
    But here are some other, common reasons to amend…

    * You neglected to report some income earned.
    * You claimed deductions or credits you should not have claimed.
    * You did not claim deductions or credits you could have claimed.
    * You filed under one filing status, but you should have filed under another.

    If you find something like this, let us help you.

    Regardless, let this be a cleansing process for you, and sleep easy knowing you’ve handled this stuff properly.

    Oh, and make sure you use a good shredder!