Category Archives: Tax and Financial News

Taxes and Tariffs: The U.S. Response to France’s Digital Tax

How it All Started

Back in July of 2019, France passed what was dubbed a “digital tax” targeting the largest tech companies. Impacting approximately 30 big companies such as Amazon, Google, Facebook and Apple, the tax applies to revenues earned from digital services of companies that earn more than $830 million in total and at least $27.86 million in France. The tax levy is a 3 percent charge on revenue from digital services.

The United States soon responded with threatening 100 percent tariffs on certain classes of French luxury goods, such as wine, champagne, cheese and makeup. These tariffs were estimated to cover more than $2.4 billion in French goods per year.

Responses on Both Sides

French President Emmanuel Macron came out to comment that the digital tax is not intended to be an anti-American move, and that big tech companies of all stripes could be covered by the tax. The criteria that determines who is subject to the digital tax, however, means that essentially only American companies are the ones being taxed.

Some in the United States claim it’s as simple as jealously over our strong technology sector, while others say that the main motivation for the French tax is a need to mitigate burgeoning budget deficits.

President Trump’s Reaction

Rarely one to back down on international trade issues, President Donald Trump criticized the digital tax for unfairly targeting American tech companies, going so far as to call out the European Union as behaving worse than China in its trading relationship with the United States. He reiterated his stance that he’s willing to fight tariffs with tariffs.

Negotiations with the EU

U.S. and European Union officials are negotiating an agreement over taxing big tech, but that didn’t stop the current treasury secretary from threatening more retaliatory tariffs. Steven Mnuchin, the treasury secretary, recently said that the United States will impose new tariffs on French automobile imports if the issue isn’t resolved to America’s satisfaction. He claimed the digital tax is purely arbitrary, hence his random call for taxing automobiles in response. Moreover, Mnuchin called the tax “discriminatory in nature” at the World Economic Forum in Davos Switzerland.

Taxes and Tariffs on Hold

For now, France is delaying the implementation of its digital tax through the end of 2020 in response to U.S. pressure on threatened luxury goods and automobile tariffs. They aim to come to a resolution before year-end with the Trump administration. French Finance Minister Bruno Le Maire is optimistic an agreement can be worked out and believes entering a trade war with the United States would be foolish.

The Future

Currently, other European countries, including Britain and Italy, are acting against big tech companies they believe don’t pay their fair share of taxes to their countries. Treasury Secretary Mnuchin said that the United States is willing to go to bat and protect its companies with retaliatory tariffs in these cases as well. For now, not much is settled – but we should see a clearer direction before the year is out.

When Should You Switch Your Side Hustle to a Business Entity Structure?

Starting a side hustle today is easier than ever. Between the numerous websites that act as marketplaces and project jobs that can be found on the internet, almost anyone can turn a skill or hobby they have into something they can make money off. Many people who do this are just looking to make a little extra money on the side, but this side hustle can turn into something bigger – and this is where the tax and legal questions come in.

Sole Proprietorship

For someone just starting or looking to make a little extra on the side, there’s nothing special you need to do when it comes to filing your federal taxes. Just complete an extra form that is called Schedule C of your personal tax return. This is referred to as doing business as a sole proprietorship.

But that is where the simplicity stops. While organizing your business, the default way as a sole proprietor takes the least effort and expense; however, there are risks associated with this path, particularly legal liability risks.

Legal Risks

The biggest problem is that the sole proprietorships form leaves personal as well as business assets exposed to the risk of being sued. Lawyers will often recommend that the moment a business has paying clients, it should be converted to an LLC or corporation to provide legal protection by separating the business and personal assets.

While this legal advice is technically true, it doesn’t consider the cost benefit of the situation. The problem is that the costs of forming and running an LLC or corporation can easily exceed the money earned from a side hustle. Combine this with the probability of getting sued at all (in each personal situation) and for most side hustles, it’s simply not worth it to form an LLC or corporation. The key question then is when is it worth it to switch from a sole proprietorship to an LLC or a corporation?

When Side Hustle Grows Up

What about the taxation issue? Generally, tax savings aren’t a good reason to convert a sole proprietorship to an LLC or corporation. Particularly, making the move from a sole proprietorship to a single member LLC will not help for tax purposes and in fact may only increase your chances of an audit. Moreover, operating as an LLC will cost more both for the initial filing as well as ongoing annual expenses. Legal liability remains the main reason to convert the entity structure.

Hidden Tax Issues

All three pass-through entity types (sole proprietor, LLC and S-Corporations) calculate your income in the exact same way under current laws. There is however a hidden tax to consider: the self-employment tax. Self-employment taxes are paid on all sole proprietor earnings, but only on the salary portion of LLC or S-Corp earnings. Any profits over and above your salary are considered dividend payments and are not subject to self-employment taxes.

Unfortunately, the income level needed to change entity structures depends on each individual situation, but you’ll need the savings to at least cover the initial and long-term compliance costs of filings, fees and tax preparation costs. Let’s look at two examples to see how this works.

Imagine a business is earning $100,000 in net profit and from this you pay yourself $40,000 as salary and take the remaining $50,000 as dividends. At the current 15.3 percent self-employment tax rate, this translates into a savings of $7,650. Now imagine a side hustle that only earns $25,000 from which you take $15,000 as salary and the remaining $10,000 as dividends. This only translates into $1,530 in tax savings.

In the first case above, you’ve not only generated enough tax savings to more than cover your tax preparation and filing costs, but you’ll end up with more money in your pocket and have stronger legal protection. In the second case, you’ll barely save enough to cover your costs – and you’ll create more work for yourself.

Conclusion

Your side hustle might be small right now, but tomorrow it could grow into the next big thing, so make sure your organizational structure makes sense now.

2020 Tax Brackets, Deductions, Plus More

Beginning on Jan. 1, 2020, the Internal Revenue Service (IRS) has new annual inflation adjustments for tax rates, brackets, deductions and retirement contribution limits. Note, the amounts below do not impact the tax filing you make in 2020 for the tax year 2019. These amounts apply to your 2020 taxes that you will file in 2021.

2020 Tax Rates and 2020 Tax Brackets

Below are the new 2020 tables for personal income tax rates. There are separate tables each for individuals, married filing jointly couples and surviving spouses, heads of household and married filing separate; all with seven tax brackets for 2020.

Tax Brackets & Rates – Individuals
Taxable Income Between Tax Due
$0 – $9,875 10%
$9,876 – $40,125 $988 plus 12% of the amount over $9,875
$40,126 – $85,525 $4,617 plus 22% of the amount over $40,125
$85,526 – $163,300 $14,605 plus 24% of the amount over $85,525
$163,301 – $207,350 $33,271 plus 32% of the amount over $163,300
$207,351 – $518,400 $47,367 plus 35% of the amount over $207,350
$518,400 and Over $156,234 plus 37% of the amount over $518,400

 

Tax Brackets & Rates – Married Filing Jointly and Surviving Spouses
Taxable Income Between Tax Due
$0 – $19,750 10%
$19,751 – $80,250 $1,975 plus 12% of the amount over $19,750
$80,251 – $171,050 $9,235 plus 22% of the amount over $80,250
$171,051 – $326,600 $29,211 plus 24% of the amount over $171,050
$326,601 – $414,700 $66,542 plus 32% of the amount over $326,600
$414,701 – $622,050 $94,734 plus 35% of the amount over $414,700
$622,050 and Over $167,306 plus 37% of the amount over $622,050

 

Tax Brackets & Rates – Heads of Households
Taxable Income Between Tax Due
$0 – $14,100 10%
$14,101 – $53,700 $1,410 plus 12% of the amount over $14,100
$53,701 – $85,500 $6,162 plus 22% of the amount over $53,700
$85,501 – $163,300 $13,158 plus 24% of the amount over $85,500
$163,301 – $207,350 $31,829 plus 32% of the amount over $163,300
$207,351 – $518,400 $45,925 plus 35% of the amount over $207,350
$518,400 and Over $154,792 plus 37% of the amount over $518,400

 

Tax Brackets & Rates – Separately
Taxable Income Between Tax Due
$0 – $9,875 10%
$9,876 – $40,125 $988 plus 12% of the amount over $9,875
$40,126 – $85,525 $4,617 plus 22% of the amount over $40,125
$85,526 – $163,300 $14,605 plus 24% of the amount over $85,525
$163,301 – $207,350 $33,271 plus 32% of the amount over $163,300
$207,351 – $311,025 $47,367 plus 35% of the amount over $207,350
$311,025 and Over $83,653 plus 37% of the amount over $311,025

 

Trusts and Estates have four brackets in 2020, each with different rates.

Tax Brackets & Rates – Trusts and Estates
Taxable Income Between Tax Due
$0 – $2,600 10%
$2,601 – $9,450 $260 plus 12% of the amount over $2,600
$9,451 – $12,950 $1,904 plus 35% of the amount over $9,450
$12,950 and Over $3,129 plus 37% of the amount over $12,950

 

Standard Deduction Amounts

Amounts for standard deductions see a slight increase from 2019 to 2020 based on indexing for inflation. Note that again as in 2019, there are no personal exemption amounts for 2020.

Standard Deductions
Filing Status Standard Deduction Amount
Single $12,400
Married Filing Jointly & Surviving Spouses $24,800
Married Filing Separately $12,400
Heads of Household $18,650

 

Alternative Minimum Tax (AMT) Exemptions

Like the above, the AMT exemption amounts are increased based on adjustments for inflation, with the 2020 exemption amounts as follows.

 

Alternative Minimum Tax (AMT) Exemptions
Filing Status Standard Deduction Amount
Individual $72,900
Married Filing Jointly & Surviving Spouses $113,400
Married Filing Separately $56,700
Trusts and Estates $25,400

 

Capital Gains Rates

Capital gains rates remain unchanged for 2020; however, the brackets for the rates are changing. Taxpayers will pay a maximum 15 percent rate unless their taxable income exceeds the 37 percent threshold (see the personal tax brackets and rates above for your individual situation). If a taxpayer hits this threshold, then their capital gains rate increases to 20 percent.

Itemized Deductions

Below are the 2020 details on the major itemized deductions many taxpayers take on Schedule A of their returns.

  • Medical Expenses – The floor remains unchanged from 2019 to 2020, so you can only deduct these expenses that exceed 10 percent of your AGI.
  • State and Local Taxes – The SALT deductions also remain unchanged at the federal level with a total limit of $10,000 ($5,000 if you are married filing separately).
  • Mortgage Deduction for Interest Expenses – The limit on mortgage interest also remains the same with the debt bearing the interest capped at $750k ($375k if you are married filing separately).

Retirement Account Contribution Limits

Finally, we look at the various retirement account contribution limits for 2020.

  • 401(k) – Annual contribution limits increase $500 to $19,500 for 2020
  • 401(k) Catch-Up – Employees age50 or older in these plans can contribute an additional $6,500 (on top of the $19,500 above for a total of $26,000) for 2020. This $500 increase in the catch-up provision is the first increase in the catch-up since 2015.
  • SEP IRAs and Solo 401(k)s – Self-employed and small business owners, can save an additional $1,000 in their SEP IRA or a solo 401(k) plan, with limits increasing from $56,000 in 2019 to $57,000 in 2020.
  • The SIMPLE – SIMPLE retirement accounts see a $500 increase in contribution limits, rising from $13,000 in 2019 to $13,500 in 2020.
  • Individual Retirement Accounts – There are no changes here for IRA contributions in 2020, with the cap at $6,000 for 2020 and the same catch-up contribution limit of $1,000.

Conclusion

There are no dramatic changes in the rates, brackets, deductions or retirement account contribution limits that the vast majority taxpayers tend to encounter for 2020 versus 2019. Most changes are simply adjustments for inflation. Enjoy the stability – as history has shown, it likely won’t last long.

How to Defer, Avoid Paying Capital Gains Tax on Stock Sales

How to Defer, Avoid Paying Capital Gains Tax on Stock SalesThe markets are hitting all-time highs, so if you are thinking of selling stocks now or in the near future, there is a good chance that you will have capital gains on the sale. If you’ve held the stocks for more than a year, then they will qualify for the more favorable long-term capital gains tax (instead of being taxed at ordinary income rates for short-term sales). But the total tax due can still be enough to warrant some tax planning. Luckily, the tax laws provide for several ways to defer or even completely avoid paying taxes on your securities sales.

1. Using Tax Losses

Utilizing losses is the least attractive of all the options in this article since you obviously had to lose money on one security in order to avoid paying taxes on another. The real play here is what is often referred to as tax-loss harvesting. This is where you purposely sell shares that are at a loss position in order to offset the gains on profitable sales and then redeploy this capital somewhere else. You’ll need to carefully weigh where to put the money from the sale of the shares sold at a loss as you can’t just buy the same stocks back. This is considered a “wash sale” and invalidates the strategy.

2. The 10 Percent to 15 Percent Tax Bracket

For taxpayers in either the 10 percent or 12 percent income tax brackets, their long-term capital gains rate is 0 percent. The income caps for qualifying for the 12 percent income tax rate is $39,375 for single filers and $78,750 for joint filers in 2019 ($40,000 and $80,000, respectively in 2020). Also, keep in mind that the stock sales themselves add to this limit – so calculate carefully.

Aside from selling appreciated securities yourself, another way to take advantage of the 0 percent bracket is to gift the stock to someone else instead of selling the securities and then giving the cash. Beware, however, as trying to do this with your kids can disqualify the 0 percent treatment because the kiddie tax is triggered on gifted stock sold to children younger than 19 or under 24 if a full-time student.

3. Donate

Donating appreciated securities is where we start to get into the more beneficial strategies. This technique only makes sense if you were already planning to make charitable contributions. Say for example you are planning to donate $10,000 to an organization and are in the 25 percent tax bracket. In order to write a donation check for $10,000, you would have had to earn $13,333 in income to sell the same amount of stock in order to have $10,000 left after taxes to make a cash donation in that amount.

If you donate appreciated stock instead, you only need to donate securities valued at $10,000 and you get to deduct $10,000 as a charitable deduction. That avoids the capital gains tax completely. Plus, it generates for you a bigger tax deduction for the full market value of donated shares held more than one year – and it results in a larger donation.

4. Qualified Opportunity Zones

This is the newest and most complicated (as well as controversial) way to defer or avoid capital gains taxes. Opportunity Zones were created via the Tax Cuts and Jobs Act to encourage investment in low-income and distressed communities. Qualified Opportunity Zones can defer or eliminate capital gains tax by utilizing three mechanisms through Opportunity Funds – the investment vehicle that invests in Opportunity Zones.

First, they offer a temporary deferral of taxes on previously earned capital gains if investors place existing assets into Opportunity Funds. These capital gains defer taxation until the end of 2026 or whenever the asset is disposed of – whichever is first.

Second, capital gains placed in Opportunity Funds for a minimum of five years receive a step-up in basis of 10 percent – and if held for at least seven years, 15 percent.

Third, they offer an opportunity to permanently avoid taxation on new capital gains. If the opportunity fund is held for at least 10 years, the investor will pay no tax on capital gains earned through the Opportunity Fund.

Again, the caveat here is that the details of Opportunity Zone investments can be extremely complicated, so it’s best not to attempt this one on your own. Consult with your tax advisor.

5. Die with Appreciated Stock

Unfortunately, while probably the least popular method for readers, this is certainly the most effective. When a person passes away, the cost basis of their securities receives a step-up in basis to the fair market value to the date of their death. As an example, if you purchased Amazon stock for $50 per share and when you pass away it is worth $1,700 per share, your heir’s basis in the inherited stock is $1,700. This means if they sell it at $1,700, they pay no tax at all.

Conclusion

None of the above methods are loopholes or tax dodges; they are all completely legitimate. However, your ability to take advantage of these techniques will depend on your income level, personal goals and even your age. As a result, it’s best to consult with your tax advisor to see what makes sense for your personal situation.

Tax Changes 2019

Tax Changes 2019With the start of the fourth quarter of 2019 underway, it’s time to see what the Internal Revenue Service (IRS) will expect of filers for their 2019 taxes. The following are a list of major changes that filers need to be aware of:

1. Removal of the Affordable Care Act’s (ACA) Individual Mandate Penalty

With the passage of the Tax Cuts and Jobs Act (TCJA), filers and households who failed to carry adequate health insurance according to the ACA’s minimum coverage requirements will no longer have to pay the penalty on their 2019 taxes. This is because the TCJA lowered the penalty to zero dollars permanently. In previous years, households not meeting ACA health insurance requirements were mandated to pay either 2.5 percent of household income or $347.50 per child and $695 per adult, up to $2,085.

2. Greater Medical Expense Deduction Requirements

2019 filers are only able to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income (AGI). The threshold was lowered to 7.5 percent for the 2017 and 2018 tax years by the TCJA, but will revert to the original 10 percent threshold in 2019.  

3. Changes to Treatment of Alimony

The TCJA removed the ability for those paying alimony to their former spouse to deduct these payments for the 2019 tax year. The IRS also removed deductibility for alimony or separate maintenance payments for divorce or separation agreements signed off after Dec. 31, 2018. If a divorce or separation agreement that provides for alimony or separate maintenance payments was agreed to before Dec. 31, 2018, and is then modified after Dec. 31, 2018, such payments lose deductibility. Former spouses receiving alimony or separate maintenance payments from an agreement created or modified after Dec. 31, 2018, are not required to report such payments on their tax return.  

4. Contribution Limits Raised for Retirement Accounts

Those with 401(k), almost all 457 plans, the federal government’s Thrift Savings Plan and 403(b) account plans can contribute $19,000 in 2019, an increase of $500 from 2018’s $18,500 limit. Taxpayers 50 and older can still contribute another $6,000 for 2019, a catch-up contribution. Taxpayers with Individual Retirement Accounts (IRAs) can contribute $6,000 in 2019, $500 more than 2018’s $5,500 limit. Those 50 years or older can add another $1,000 to their IRA accounts in 2019. The increase in IRA contribution limits is the first increase since 2013.     

5. Increased HSA Contribution Limits

Health Savings Accounts’ contribution limits for 2019 have increased, according to the IRS. For an individual or a self-only High Deductible Health Plan, 2019’s contribution limit is raised to $3,500, or $50 more than 2018’s contribution limit of $3,450. For a family high deductible health plan, 2019’s contribution limit is raised to $7,000, $100 more than 2018’s contribution limit of $6,900. The catch-up contribution is an extra $1,000 for account holders age 55 or older.

6. Increasing Standard Deduction Allowances

For those choosing not to itemize their deductions in 2019, the IRS has increased standard deduction amounts for filers. For single filers and those filing as married filing separately, the standard deduction increased by $200, to $12,200. For those filing as head of household, the standard deduction increased by $350, to $18,350. For those choosing to file married filing jointly, there’s an increased allowance of $400, to $24,400.

7. 2019 Income Brackets

With the new tax year comes higher income tax brackets. Depending on how much taxpayers made in 2019, the following are the new income level brackets:

  • 37 percent: Individual single taxpayers making more than $510,300 or married couples filing jointly making $612,350.
  • 35 percent: Individuals making more than $204,100, or $408,200 for married couples filing jointly.
  • 32 percent: Individuals making more than $160,725, or $321,450 for married couples filing jointly.
  • 24 percent: Individuals making more than $84,200, or $168,400 for married couples filing jointly.
  • 22 percent: Individuals making more than $39,475, or $78,950 for married couples filing jointly.
  • 12 percent: Individuals making more than $9,700, or $19,400 for married couples filing jointly.
  • 10 percent: Individuals making up to $9,700, or $19,400 for married couples filing jointly.

How to Get the IRS to Pre-Approve Your Taxes

IRS to Pre-Approve Your TaxesIt might seem odd, but it is possible to get the IRS to give you a straight-forward and binding answer to ambiguous tax positions in advance. How does this happen, you ask? The answer is through an IRS private letter ruling.

IRS private letter rulings provide many benefits, but they are not easy to obtain. There are costs, potential delays, and even then, you run the risk of not being granted a ruling. This dynamic might seem odd as the entire point of applying for a private letter ruling is to obtain certainty. If your position is weak from a tax law perspective, the government could refuse to rule on it. Alternatively, if the position you are seeking is obviously correct, the government might refuse to rule as well because they don’t like to issue “comfort rulings.” Essentially, the only way to get the government to rule is to make a request regarding a position that is in the middle.

If you believe the tax position in question lies somewhere in the middle, requesting a private letter ruling may make sense. If you are more likely one of the outliers, then requesting a tax opinion usually makes more sense. The problem is that tax opinion, unlike private letter rulings, doesn’t bind the IRS.

Deciding Which Path to Take

If the relative certainty of the tax position in question doesn’t provide enough guidance, how do you decide to go after a tax opinion versus a private letter ruling? To make the choice, it helps to understand more details.

First, tax opinions can cover a broader range of topics and can be written about pretty much anything; rulings cannot. In fact, the IRS has an explicit list of subjects that it will not produce private letter rulings on (they modify it occasionally, but there’s always a list). As a result, the first step is to assess the list as this might make the choice for you.

Second, don’t request a private letter ruling unless there is a good chance you think it will be granted. For one, rulings are not cheap with fees often costing upward of $25,000 to obtain a ruling. If you get a “No” ruling against your position, you can withdraw the request to take the ruling off the books, but you may or may not get the fee back. Moreover, when you withdraw a request for a ruling, the IRS sends a notice to your local IRS field office, potentially flagging your return for audit.

Third, opinions can be quick and obtained in as little as a few days or weeks. Rulings, on the other hand, often take months. Also consider that a request for a ruling must be specific and there is little room for modification after filing. Opinions have more flexibility.

Private Letter Ruling Process

Given the specificity and consequence of requesting a ruling, there are intermediate steps to help you test the water before you go all in. Nearly all ruling requests start by initiating a discussion with the IRS to get their general view on your proposed ruling. After this, the taxpayer usually submits a brief memo covering the facts and ruling they are looking to obtain. Next, there are more meetings either in person or by phone with IRS attorneys involved. At this point, if everything looks good, you can prepare and submit the actual ruling request. If you back out at this point, you avoid triggering any fees (IRS fees – not your lawyers or accountants) or audit notices.

Benefits of a Ruling Versus an Opinion

The reason taxpayers go through the time, expense and effort to obtain rulings instead of opinions is that they have several advantages. First, rulings are binding on the IRS. Second, you don’t need to consider penalty protection. Most of all, they provide certainty. Given the difficulty in obtaining a ruling, they generally make financial sense only when a taxpayer has a seriously substantial tax position in play, or at least will over time, and he wants to protect against future audits and legal challenges.

The Five Key IRS Rules of Taxation for Lawsuit Settlements

Coming out on the winning side of a lawsuit as a plaintiff can be a gratifying feeling, especially if there is a financial settlement involved. There is likely a sense of both relief and vindication. Unfortunately, far too often people are in for a shock when they realize that they must pay taxes on the award. You can even be taxed on your attorney fees! However, a little tax planning can go a long way, especially if you do it before the settlement is finalized and the award is substantial. Below are the five key rules to know so you can make the right move.

  1. The Origin of the Claim Largely Determines the Tax Consequences
    The taxation of legal settlements is based on the origin or reason of the claim. For example, if you win a wrongful termination suit against an employer, your award will be taxed as both wages and likely some other income for whatever is allocated to emotional damages. On the other hand, if you sue the contractor who built your house for damage caused by his negligence, the settlement might not be deemed income at all and you could treat it as a reduction of the purchase price of the real asset. There are many exceptions in this area, and it always depends on the facts and circumstances of the case.
  2. Physical Injuries Produce Tax-Free Awards, but Emotional Distress and Damages Are Taxable
    Damages received for suits involving a physical injury or illness are tax-free. Suits for emotional distress and defamation are taxable, including the physical symptoms of emotional distress (gastrointestinal problems, etc.). Be careful as the latter can be ambiguous, so agreeing on the nature of a physical symptom as the cause or result of emotional distress is best done with the defendant before you finalize the case.
  3. Allocating Damages
    Legal disputes typically involve several issues and courses of conduct. As a result, settlements typically have multiple types of consideration, each with potentially different tax treatments. If the plaintiff and defendant both agree on the tax treatment before finalizing the case, then you can allocate the total damages to certain categories and save taxes. Such agreements are technically non-binding on the IRS, but they are rarely challenged.
  4. Attorney Fees 
    Plaintiffs who use a contingent fee lawyer are typically taxed on receiving 100 percent of the money recovered. This means you have to pay taxes even on the portion of your settlement that the lawyers keep as their fee. This is still the case even if your contingent fees are paid directly by the defendant. In clear cases of physical injury where the entire settlement is non-taxable, there’s no issue – but if your award is taxable, you’ll need to be careful.

    Take an example where you collect a contingent fee settlement for emotional distress and receive $200,000, with your lawyer taking 30 percent or $60,000. In this case, you’ll typically be liable for taxes on the entire $200,000 and not just the $140,000 you keep. To make matters worse, aside from legal fees in employment and certain whistleblower claims, there’s no corresponding deduction for legal fees. There are potential ways to mitigate this, but tax advice early in the process is key.

  5. Punitive Damages and Interest
    Generally, punitive damages and interest are always taxable. For example, take a case where you are hurt in an automobile crash and receive $100,000 in compensatory damages and another $3 million in punitive damages. The $100,000 is tax-free, whereas the $3 million is taxable.

    Interest is treated similarly. Even if you receive a tax-free type of settlement, but it took time to finalize the settlement through the pre- or post-judgement process, the interest you receive is taxable. Therefore, it is often advantageous to settle a case instead of having it go to judgement.

Conclusion

The taxation of legal settlements and awards are nuanced and largely depend on the facts and circumstances of the case at hand. There are, however, many opportunities through proper tax planning to minimize the tax consequences, but only if you are proactive and plan early in the process.

3 Big Tax Issues to Look Out for in Your Estate Plan

Tax and Financial News August, 2019

3 Big Tax Issues to Look Out for in Your Estate Plan

3 Tax Issues Estate Plan

There are three big tax issues that can derail an otherwise well-executed estate plan. These include Family Limited Partnerships, Revocable Trust Swap Powers and Trust Situs. Below we explore the pitfalls with each issue.

Fixing FLPs

Family Limited Partnerships (FLP) are often created to hold investments or business assets in order to leverage a valuation discount, exert control and provide asset protection.

First, to understand the valuation discount, take the example in which an FLP owned a family business valued at $10 million. A straight 25 percent interest in this business would therefore be worth $2.5 million. However, due to valuation discounts for a non-controlling interest that would not be readily available for sale or able to control liquidation, the 25 percent might actually be valued at $1.7 million for estate tax purposes.

Second, FLPs also could be set up to allow the founder or parents to control operations even after a majority of their interest is given away.

Lastly, FLPs can protect assets. If an interest owner is sued, the claimant might not be able to exercise their claim, especially if they sued a minority interest holder. Instead, they could be limited to receiving a charging order. A charging order limits the claimant to only the distributions that interest holder would be entitled to and protects the other owners.

FLPs that ignore legal upkeep and technical legal formalities can jeopardize these the protection benefits by causing the FLP entity to be disregarded. Common errors include co-mingling personal and entity assets and ignoring the legal requirements to have current signed governing instruments.

On the valuation front, many FLPs were set up to provide valuation discounts at a time of significantly lower estate tax exemptions. Not only is this unnecessary, but the valuation discount can actually hinder the heirs by passing along a lower asset value when the basis is stepped up at death.

Swap Powers

Traditionally, irrevocable trusts are by definition trusts that cannot be altered (hence the name irrevocable). Uses include carving out assets from an estate to better protect the assets and provide tax savings.

Irrevocable trusts are often structured as “grantor” trusts for income tax benefit purposes. Grantor trusts allow the grantor to report the trust income on their individual 1040, effectively having the grantor pay the tax burden and bypass the trust. This strategy can reduce the grantor’s estate.

There are numerous ways to create grantor trust status. Including swap powers is the most common. Swap powers allow the swapping of personal assets for trust assets of equivalent value. The problem with swap powers is that little attention is paid to them and they aren’t exercised in the right circumstances, leading to adverse income tax consequences.

It’s best to review the value of trust assets annually or even more often if the grantor is in poor health so you know when to exercise the swap powers. It’s also a good idea to involve your estate planning attorney and CPA if you are going to exercise the swap powers. This will ensure the swap is handled according to the rules of the trust document and properly reported on your tax returns.

Trust Situs Selection

Trust situs is the state where your trust is based. It determines which state law administers and rules the trust. Frequently, the trust situs is simply set up in the same state where the trust creator is a resident.

While simple, using a home state as the trust situs is not always best. A person’s home state may not provide the best protections or state taxation. The way around this is to “rent” a different trust jurisdiction. Doing so can allow you to lower or altogether avoid state income taxes. You’ll have to factor in the costs to do so as there will be more legal fees and trustee fees since an institution will need to hold the trust to create the state nexus. Overall, you can often come out ahead.

Conclusion

The best thing you can do is to review your current or potential trust with your estate planning attorney and CPA. This way you can stay on top of both the formalities and mechanisms in place to maximize the protections and benefits of the trust.

 

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General Business News August, 2019

Understanding and Applying Accounting Reports and Ratios

Understanding Accounting Ratios

When it comes to tracking incoming sales and outgoing expenses, there are many ways businesses can keep up with their invoices and implement strategies to reduce the time they spend on unpaid sales.

Accounts Receivable Turnover Ratio

Simply defined, the accounts receivable turnover ratio is a way of showing what percent of a company’s receivables or invoices are paid by clients. 

The U.S. Small Business Administration explains this ratio is determined by “dividing average accounts receivable by sales.” Determining average accounts receivable is done by adding the beginning and ending figures — be it a month, quarter or year, then dividing by 2. Determining the sales figure is calculated by taking the total sales still on credit and deducting any allowances or returns from the gross sales figure.    

If the beginning and ending accounts receivables for a 12-month period were $20,000 and $30,000, the average accounts receivable would be $50,000/2 or $25,000. If the gross sales were $200,000 for the 12-month period and there were $20,000 in returns, it would leave $180,000/$25,000 or an accounts receivable turnover ratio of 7.2

Accounts Payable Turnover Ratio

The payable turnover ratio is determined by taking all purchases from suppliers and dividing the supplier purchase figure by the mean accounts payable figure. The average accounts payable figure is calculated by adding the starting accounts payable figure and the ending accounts payable figure, normally at the beginning and ending of a period, such as 12 months. From there, the summed up accounts payable figure is divided by 2 to get an average.  

A business made yearly purchases on credit for about $250,000 from suppliers and had returns to those suppliers for about $20,000. If at the beginning of the 12-month period accounts payable were $11,000, then at the end of the period the accounts payable balance was $26,000, the total figures would equal $37,000.

From that point, there would be $230,000 in net yearly purchases on credit for the business and an average of $18,500 for the period’s accounts payable. Dividing the $230,000 by $18,500 equals 12.43. Therefore, the business’ accounts payable turned over about 12.5 times during the period. As the SBA explains, the higher the ratio, the more dependent companies are on accounts payable to acquire inventory.   

Accounts Payable Aging Report

When it comes to defining an accounts payable aging report, businesses can use this tool to determine and organize outstanding accounts payable to vendors or suppliers and how much each is owed. While it can be broken into discreet time frames, such as net-14 or net-60 or net-90, depending on how the supplier and business decided on payment terms, commonly accepted time frames established are: up to 30 days; 31 to 60 days; and so on.

This report is used to organize which supplier invoices are due and when. One important consideration to note is if the report assumes that all invoices are due within 30 days. If there’s special arrangements or terms from important suppliers, it could need adjusting as determined by individual supplier payment terms.  

By using an accounts payable aging report, businesses will see when they need to pay their bills on time and what percentage are being paid on time (or not). It will help businesses see if they’re paying late fees by organizing invoices. Businesses can also identify if there’s a need to negotiate with suppliers for reduced payments for early payments or for extended time to pay invoices if cash flow is an issue. 

Accounts Receivable Aging Report

Similar to an accounts payable aging report, an accounts receivable aging report helps businesses track outstanding invoices owed by clients. It also contains the client name, the time when payment is due and how late, if at all, client invoices are for issued invoices.

These reports help businesses determine the likelihood of debt becoming bad, and if unpaid invoices need to be sent to collections or written off. It can also measure in short and long terms how clients have made timely payments on their invoices. This can help businesses determine if they should reduce existing credit terms to their clients or to make an offer to discount what’s owed in order to get an otherwise uncollectible invoice paid.

Whether a company owes money or expects to be paid for a product or service, with the proper accounting tools, there’s a way to keep track of all inflows and outflows.

 

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Tip of the Month August, 2019

Pass It On: Accounting Tips to Share With Kids

Accounting Tips to Share With Kids, Accounting children

It’s never too early to helps kids understand accounting – the concepts of earning and spending. Here are a few ways to teach your little ones about how money works and even have a little fun.

Play Money Games

One way to explain the principles is by playing games like Monopoly and The Game of Life. However, if you want to be more homegrown and less commercial, bake some cookies, bag and price them, and turn your kitchen into a store. You might even get a toy cash register and calculators to make the whole experience more authentic. Then record the earnings, expenses and profits. This will really give children a “taste” of accounting!

Create a Family Budget

When sharing this activity with your kids, you don’t have to include every single expense – just those that they can easily understand, such as mortgage or rent, electricity, gas, phone, groceries and so on. Then, ask them to write up a budget of their own and include their income and expenditures for an allotted amount of time, perhaps a week. This way, you can demonstrate the importance of tracking money and explain that this is a common way that businesses and families deal with their finances.

Teach Them About Checking Accounts

Even though checks are being used less and less these days, a check register is still a good way to show kids how to reconcile expenses. First, you can let them watch you write a check, then explain how to record the check in the register. Then, get some generic deposit slips from your bank and demonstrate how deposits and withdrawals work. Finally, tell them that these transactions will be sent to them each month in a statement – you might even show them one you have to help them visualize the concept.

Explain Debits and Credits

Grab a blank sheet of paper and write a large T on it. Above the left side of the bar, write “Income: Money In” and above the right side of the bar, write “Expenses: Money Out.” Point out the difference between the two sides. If your child has an allowance, a way of earning money by doing chores or if they have a summer job, then ask them to pretend that they’re going to spend some of their money on things they’d like, such as games or candy. Have them record the amounts of earned income in the left column. Then ask them to imagine spending the money on the things they want and have them record those expenses in the right column. Then subtract the expenses from the income. This is quite effective because it helps kids see the money going in and out of an account. When they get a feel for how this works, they might be a little less interested in spending every cent they earn.

There are many other tools you can use to teach your children how money works, but these are a few good ones to get you started. As many parents can attest, helping kids comprehend how to manage money is one of the best lessons you can teach them.

Why Some People Are Afraid of the Hobby Loss Rules

Tax and Financial News July

Why Some People Are Afraid of the Hobby Loss Rules

Hobby Loss Rules IRS

Many tax advisors are very cautious when it comes to claiming hobby losses – and some would argue overly so. This conservative view stems from the impression that the taxpayer usually loses when challenged by the IRS. While technically true that the odds aren’t in your favor of winning a challenge, the overall risk often works out in the taxpayer’s favor over the long run. Below we’ll look at why tax advisors should start from the assumption of taking the losses.

Always a Loser

Taxpayers usually lose hobby loss cases. Typically, the odds are around 3-to-1 in favor of the IRS. So, on the surface it seems like the smart bet is to assume you’ll lose, but there are reasons not to plan based on this fact. First, this statistic only represents cases that are decided by the court. Taxpayers are usually pretty stubborn and most cases are settled in much more favorable circumstances to the taxpayer.

Second, the “losers” are often winners in the long run.

Why Losers are Really Winners

When a taxpayer loses a hobby loss case, they usually face a deficiency and an accuracy penalty of 20 percent.  The key issue here is how long before the loss is challenged?

Let’s take a pretend case as an example. Assume we have a taxpayer with tax losses of $60,000 per year, a 35 percent tax rate and they are audited for three years and lose. This results in a $63,000 deficiency ($60,000 x 35 percent x 3 years), plus an accuracy penalty of $12,600 (20 percent of the $63k). Had they not claimed the deduction, they would have paid the $63,000 in taxes anyway, so this isn’t really a loss; only the accuracy penalty is.

This doesn’t sound so great, does it? Why would someone take 3-to-1 odds in a scenario like this? Let’s think for a minute; what if the taxpayer had been taking the losses for 10 years?  Those first seven years that were never audited allowed the taxpayer to take the deduction. In this case we have $21,000 x 7 years = $147,000 in deductions that the taxpayer would have missed if they played it conservatively. Next, our hypothetical taxpayer would still be up more than $134,000 over the long term ($147k, less the accuracy penalty).

This all of course assumes the taxpayer is sincere in his or her efforts to make money and is not playing the “audit lottery,” which is of course unethical.

Honest Motives

Tax courts look to see if a taxpayer is genuinely and honestly engaged in the activity for profit. Objective honesty is the standard, and it doesn’t matter how slight the odds of turning a profit are. The IRS isn’t looking to judge the taxpayer’s business acumen, but their objective instead. You’ll need to truly be trying to make money with the activity or you’re doomed to lose.

Conclusion

In the end, if a taxpayer has an honest objective to make a profit through a hobby, claiming the losses is typically in their interest. While they are likely to lose if challenged, they are guaranteed to lose if they don’t take the losses themselves. Finally, even if they lose certain years under audit, they are likely to come out ahead in the long run. So, if you’re truly trying to make money in a venture that could be seen as a hobby, it might not pay to be conservative.

 

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General Business News July

How to Define and Calculate a Break-Even Analysis

Break-Even Analysis

According to data from a U.S. Small Business Administration Office of Advocacy report from August 2018, businesses have varied longevity.

Nearly 80 percent (79.8 percent) of business startups in 2016 lasted until 2017. Between 2005 and 2017, the SBA mentions that 78.6 of new businesses lasted 12 months. Similarly, nearly 50 percent lasted at least five years.  

While there are many reasons why a company goes out of business – one is profitability. Knowing when the business is breaking even and will start making a profit can be accomplished with a break-even analysis.

Defining a Break-Even Analysis

As the SBA explains, a Break-Even Analysis is a useful way to measure the level of sales necessary to determine how many products or the amount of services that must be sold in order to pay for fixed and variable costs, otherwise known as “breaking even.” It refers to the time at which cost and revenue reach an equilibrium.

In order to get the Break-Even Quantity (BEQ), as the SBA uses, businesses must take their fixed costs per month and divide this figure by what’s left over after subtracting the variable cost per unit from the price per unit – or the product’s selling price.

Fixed Costs

These types of costs can include things such as rent or lease payments, property taxes, insurance, interest payments or monthly machine rental costs.

Variable Costs

In contrast to fixed costs, such as taxes or interest payments for the next month or year, business owners also must deal with variable costs. Utilities and raw material expenses are two examples of variable costs.

Looking at electricity costs, the amount and price of kilowatts used per month will vary based on the amount and length of usage of lights, climate control equipment, production runs and the rate of kilowatts from the supplier.

Looking at raw materials, such as oil or precious metals, these costs can decrease or increase frequently due to tariff or commodity fluctuations.

Sales Price Per Unit and Further Considerations

When it comes to how much an item is ultimately sold for, there are different considerations for different product sales. If a company is selling a product for $100 on the retail level, and the business’ fixed costs are $4,000 and there’s $50 in variable costs, the Break-Even Quantity can be calculated like this:

$4,000 / ($100 – $50) = $4,000 / ($50) = 80 products (to break even)

If those products are surfboards priced at $100 each, then sales of the 81st surfboard and onward would represent profits for the company. It’s also important to see how changing either fixed costs or variable costs can make a difference in the break-even point.

Reducing Fixed Costs

If a business owner refinances a loan to a lower, fixed interest rate, or reduces a salary for the next 12 months, the overall fixed costs will go down. Here’s an example with a lower fixed cost for the same scenario:

$3,500 / $50 = 70 products (to break even)

Reducing Variable Costs

If a business owner searches for another supplier, such as one that’s not subject to import tariff costs that get passed on to consumers, variable costs can be reduced for the same scenario. In this example, the variable cost is reduced to $45.

($100 – $45) = 55

$4,000 / $55 = 73 products (to break even)

While each business has its unique costs and industry conditions, a break-even analysis can help business owners determine future moves.

 

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Financial Planning News July

Financial Tips for Recent College Graduates

Financial Tips for Recent College Graduates

Members of the college graduating class of 2017 owed an average of close to $30,000 each in student loan debt. Imagine starting out adult life with that kind of debt load?

The prevalence of this type of mounting debt for a 21- or 22-year-old is unprecedented in U.S. history – and all the more reason why young adults need sound financial advice. Financial advisors might not necessarily market to this demographic; instead, waiting until they’re older and have assets worth their while. However, if today’s young adults don’t get off on the right financial footing with regard to managing debt, saving, budgeting and investing for the future, there won’t be that many in need of financial advice once they hit middle-age.

The following are a few tidbits of advice to help recent college grads develop successful money management habits.

Be Patient

Interestingly, many college graduates know they are in over their heads and welcome financial advice; in fact, they’re hungry for it. A recent survey found that the No. 1 goal for 94 percent of Millennials is to become debt free. Unfortunately, tackling thousands of dollars in debt while earning an entry-level salary is a difficult task. The first rule of thumb is to be patient.

It takes time to pay off that much debt. The best advice is not to develop expensive habits, such as buying an expensive car, one with poor gas mileage or a make that is known for expensive repairs. Don’t get into the gourmet coffee habit. Bring your lunch to work. These are common habits among young adults with little discretionary income, but the hard part might be refraining from this type of spending once they start earning a higher salary.

Any wage increases or monetary windfalls should be directed to paying off debt and establishing an emergency savings fund to cover three to six months of living expenses – just in case they get laid off or encounter a large, unexpected expense.

Be Disciplined

Just as it takes time and patience to pay off a large debt, it also takes time and patience for invested money to compound. Once debts are paid off, extra income should be devoted to a regular, automated savings plan, such as a tax-deferred retirement plan with a company match.

Here’s an example of the reward:

  • Madison starts investing $10,000 a year at age 25 for 15 years, for a grand total of $150,000. At age 40, she stops and never returns to that investment habit.
  • Aidan starts investing $10,000 a year at age 35 and continues that habit for 30 years – twice as long as Madison. His total contribution also is twice that of Madison’s, at $300,000.

By age 65, Aidan’s investment grows to $790,582. While Madison invested only half as much as Aidan, by age 65 her investment grows to $998,975 – $208,392 more than him (assuming a 6 percent average annual return). That’s what the power of compound interest can do for a new college graduate who starts saving young.

Be Diligent

Compound interest works both ways, so it’s important that young adults don’t miss or make late payments on student loans or other debt. Such bad habits lead to negative information being reported on their credit report, resulting in a low credit score that can cause them to be turned down for loans or charged higher interest rates. It can even mean losing out on a job opportunity, as some employers check out candidate credit scores.

Above all else, young college graduates need to make debt payments on time, build a credit history and protect their credit score.

Ideally, no matter how large debt payments are or how little a new college grad earns, a young adult should get in the habit of saving the same amount of money each month. Even if it’s just $20 a paycheck; it’s not the amount that matters – it’s the habit.

The best way to accomplish this is to live below your means. When you get a salary increase, increase your monthly savings amount. The easiest way to entrench a savings habit is to “keep living like you’re still a college student.”

When Saving for Retirement in Taxable Account Is a Good Idea

Tax and Financial News June 2019

When Saving for Retirement in Taxable Account Is a Good Idea

When Saving for Retirement in Taxable Account Is a Good Idea, 401k, 403b

Most people associate saving for retirement with tax deferred or non-taxable accounts: 401(k)s, 403(b)s, Traditional IRAs, Roth IRAs, etc. The tax benefits of these types of retirement accounts give individuals advantages over simply investing in a regular taxable brokerage account.  

Savings for retirement in a standard taxable account can also have its place – and the option shouldn’t be ignored. In this article, we’ll look at a handful of reasons why doing so might just be the best option.

Your employer doesn’t offer 401(k), 403(b) or similar type plan

Some employers, especially very small ones, don’t offer retirement plan options to their employees due to the cost or administrative burden. Others have restrictions on participation, such as waiting periods (sometimes up to one year) or cut out part-time employees.

In this situation, your options may be limited to opening an IRA, but contributions are limited ($6,000 or $7,000 per year, depending if under or over 50) so an IRA alone may not allow you to save enough to meet your goals. Savings in a taxable account can help bridge the gap between what the IRA allows and your target needs.

You have maxed out and still want to save more

Even if you have access to a tax advantaged savings plan, contributions are limited. For example, 401(k) plans limit contributions to $19,000 ($25,000 if age 50 or older) in 2019. Depending on your income or projected needs, this might not be enough.

Consider for example that many experts say a target savings rate of approximately 15 percent is needed to give a retiree sufficient income. Someone earning $200,000 a year should be putting away $30,000 per year using the 15 percent rule, considerably more than what a 401(k) permits.

Accessibility to your investments

Retirement accounts come with strings attached to those tax benefits. Taking money out of a 401(k), 403(b) or IRA early can trigger steep costs in terms of penalties and taxes.

If you’re someone who values options and access to long-term investment savings, a taxable account provides flexibility. You can add and remove money without limits, penalties or restrictions. You’ll also have more control in retirement as there will be no required minimum distributions later in life.

Benefits for your heirs

Passing on the balance of a 401(k), 403(b) or Traditional IRA to an heir puts him or her in a taxable situation. Typically, someone who inherits an IRA will have to pay taxes on the distributions as if they were ordinary income, just like the retiree during their lifetime. Generally speaking, someone who inherits a taxable account receives a step-up in basis (at the date of death or other depending on elections).

Let’s look at a simple example to understand this better. Assume you bought 1,000 shares of Apple for $20 ($20,000) and when you passed away it was worth $200 per share ($200,000). If you purchased this in your 401(k), then your heir would have to pay tax on the entire $200,000 as ordinary income as it’s distributed. If this investment was held in a taxable account, however, they could receive a step-up in basis. This means that while your basis was the $20,000 you originally paid, your heir’s basis would step up to the $200,000 value. This means he could sell the $200,000 worth of stock and pay zero in taxes.

Conclusion

As you can see, tax deferred and advantaged accounts offer many perks that make them excellent vehicles for saving; however, taxable accounts are often needed as well. The need to save beyond contribution limits or desire to pass on an inheritance in a tax-advantaged manner can behoove looking beyond 401(k)s and IRAs.

 

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Financial Planning June 2019

Social Security: News, Tips and Trends

Social Security: News, Tips and Trends

There are a number of threats that both retirees and pre-retirees are facing right now when it comes to drawing Social Security benefits. For example, there’s a new scam this year. Seniors are being solicited by callers who claim to be with the Social Security Administration (SSA). The caller says he regrets to inform that the elderly person’s Social Security payments have been suspended. The caller says it’s either because the beneficiary has been involved in a crime or there has been suspicious activity related to their benefit. Here’s the interesting part: the caller then requests that the senior repay a certain amount of his benefit to Social Security by gift card. The scammer is then able to use this money quickly with no paper trail.

If that sounds absurd, consider that over the span of just two months Social Security beneficiaries collectively lost upward of $6.7 million by falling prey to this a new, highly effective scam. Even if an elderly person is suspicious or knows the call is fraudulent, he may acquiesce anyway for peace of mind. Seniors who rely on Social Security as their primary source of income are of no mind to mess around when that income is threatened. If you or anyone you know is in this situation, be aware that the SSA does not make direct phone calls, does not threaten to stop paying benefits, and certainly does not ask to be refunded payments by gift card.

From a longer-term perspective, Social Security payments could be threatened by – ironically enough – the current administration’s strict immigration policy. The former chairman of the Federal Reserve, Alan Greenspan, recently noted that in 2010 alone, unauthorized foreign workers paid about $12 billion in tax revenues that went directly into Social Security’s coffers. Because many immigrants pay FICA taxes whether they are documented or not, this revenue source has been a mainstay to our Social Security, Medicare and Medicaid programs for as long as they’ve been in effect. Based on 2016 government data, even before the recent immigration policies were implemented, Pew Research reports that the number of unauthorized immigrants had dropped to its lowest level (10.7 million) since its peak (12.2 million) in 2007.

The unfortunate consequence of fewer immigrants is that payroll taxes may have to increase and/or Social Security benefits reduced in coming years. One economist projected that if we continue down this current path of highly restrictive immigration policies, Social Security benefits would need to be cut by nearly 25 percent.

To make the most of their benefits, many retirement planners recommend that retirees wait as long as possible to begin drawing Social Security income. The longer you wait, the higher the benefit. However, those in poor health or diagnosed with a terminal illness (only two to four years to live) may be better advised to begin taking benefits. However, there is a caveat to this strategy that should be considered. Delaying benefits not only ensures a higher payout for the primary beneficiary, but also for the surviving spouse. When the primary breadwinner takes Social Security before full retirement age, his monthly benefits are permanently reduced – that is, the amount his widow will be stuck with for the rest of her life. If you don’t actually need the income, it might be worth delaying benefits to increase the amount a dependent spouse receives upon your death.

Another little known fact about Social Security is that you can have a do-over. If you retire, start drawing benefits and then decide to go back to work, you can actually stop taking the payout and let it continue to accrue until you’re ready again. Of course, there are restrictions in place. First, you must be under age 70. Second, you have to alert SSA of this plan by submitting the appropriate form within 12 months of applying for benefits. And third, you must pay back all the money you’ve received to date. The good news is that you can reapply later and enjoy a higher benefit as if you were drawing it for the first time.

 

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Tip of the Month June 2019

Best Road Trips on a Budget

Best Road Trips on a Budget

Summer is here and it’s time for getting out of town. However, you don’t want to set off on the open road without a plan. While there are an endless number of places to visit across the United States, here are a few road trips that are filled with natural parks, mountains and beaches, all of which are notably affordable, if not free.

From New York City to Charleston, South Carolina

First stop, Cape May, NJ, where you can hit Cape May Beach for some sun, then walk/bird watch for free at The Meadows. Next stop, Ocean City, MD, where there’s a 3-mile-long boardwalk with lots of arcades and fast-food joints (read: kid-friendly and affordable).

After that, head toward the fabled Outer Banks of North Carolina. Lots of adorable towns and free public beaches pepper this area, but you can’t miss Cape Hatteras. Should you want a break from the sand, you can take in all the critters at the Pea Island National Wildlife Refuge, then climb to the top of the Cape Hatteras Lighthouse – both free. Last stop, iconic Charleston, where the eye-popping architecture is complimentary, as is visiting The Battery, biking the Palmetto Trail and swooning over the miraculous Angel Oak Tree.

From Chicago, IL, to Santa Monica, CA, via Route 66

Starting in Grant Park, the official beginning of Route 66, you can walk and hike across lots of gorgeous tree-filled greens, bike along Lake Michigan, snap pics by Buckingham Fountain and check out sculptures and installations, all gratis.

Head next to Carthage, MO, to the 66 Drive-In, where you can watch one movie and get the second one for free. After this, make your way to bucket list-worthy national parks, including Yosemite, Grand Canyon and Petrified Forest National Parks. While they do charge entrance fees, they’re minimal and the jaw-dropping nature is priceless. Last stop, beachy Santa Monica, where the waves, the pier, the mountains – everything is waiting to greet you.

From Houston, TX, to Portland, OR

First stop is Dallas, where you can see the JFK Memorial and the Calatrava Bridge, both without charge. Next stop, Amarillo, where a must-see is the Cadillac Ranch, rows of old Caddies nose-down in the ground. Free and a great photo op.

Head to Denver, where Rocky Mountain National Park is just a heartbeat away. Stop by Red Rocks Park in the city for awesome natural formations (no charge), followed by the Denver Museum, which is free every first Saturday of the month.

After this, head to Boise, ID, where you can hike/walk in the Boise River Green Belt, hoof it around the Idaho State Capital Building, then get yourself back into nature at the Camel’s Back Park. Last stop, Portland, where a few free things of note include visiting Mill Ends Park, the world’s smallest park. The Vacuum Museum, (yes, you read that right), where you’ll see vintage vacuums. And then, of course, what you came here for, the nature stuff: Forest Park, where you can check out the Witch’s Castle. The Urban Waterfall at Ira Keller Forecourt Fountain Park and of course, Columbia River Gorge, for crazy gorgeous waterfalls and all kinds of outdoor fun.

These three road trips are just a sliver of the many routes that offer freebies along the way. But remember: head for the great outdoors. More often than not, you’ll see some memorable sites that won’t cost an arm and a leg.