Monthly Archives

October 2020

Managing Your 401(k) When Changing Jobs

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With unemployment at historicly high levels, a lot of people find themselves changing jobs. If you are one of them, be sure to think about any 401(k) that you might be leaving behind at your old employer.

The money in your 401(k) is your money, not your employer, and you are entitled to it, even after you leave your employer. When leaving your job, you four options for your 401(k):

  • Leave the money in your previous employer’s pension plan.
  • Roll over the money to your new employer’s pension plan.
  • Roll over the money into an IRA.
  • Withdraw the money in your 401(k).

When deciding which option to choose, here are some things to think about:

Borrowing from your 401(k). If you want to borrow money from your employer-sponsored 401(k) account in the future, consider rolling the money into your new employer’s 401(k) plan. While you can borrow money out of your 401(k), that option is not allowed with an IRA. And if you leave your 401(k) at a former employer, they often will not let you borrow funds if you are not currently employed.

Withdrawing the money. This year may be a good time to make a withdrawal from a retirement account. In a normal year, when you make an early withdrawal from a retirement account, you owe income taxes on the amount of the distribution plus a 10% early withdrawal penalty. In 2020, this 10% penalty has been suspended. So while you’ll still pay taxes on the distribution, you may be able to avoid the early withdrawal penalty.

Invest the money. While it might be tempting to borrow or take an early distribution from your retirement account, you’ll also be depleting future earnings intended for your retirement years. So consider whether you truly need the money now to pay for an emergency or if you’re ok leaving it in your 401(k).

Whatever you decide, it is always best to transfer the funds directly from one retirement account to another. This direct transfer eliminates the possibility of your fund movement being characterized as a distribution subject to income tax. If in doubt, ask for help.

What to Know About the Home Office Deduction

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Amid this global pandemic, a lot of people find themselves working from home, rather than traveling to an office. Because of this, there is more interest than usual in the home office deduction. Here’s what you need to know.

The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended this deduction from 2018 through 2025 for employees. In other words, employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if you are currently working from home.

Qualifying for a deduction

There are two basic requirements to qualify for the deduction. You must (1) use a portion of the home exclusively for conducting business on a regular basis, and (2) the home must be the taxpayer’s principal place of business.

To claim the deduction, you must use part of your home for one of the following:

  • Exclusively and regularly as you principal place of business
  • Exclusively and regularly as a place where patients, clients or customers are met in the normal course of conducting your business
  • As a separate structure that’s not attached to your home that is used exclusively and regularly in connection with your business
  • On a regular basis for storage of inventory or product samples used in your business to sell products at retail or wholesale
  • For rental use
  • As a daycare facility

The term “home” for purposes of this deduction:

  • Includes a house, apartment, condominium, mobile home, boat or similar property
  • Includes structures on the property, like an unattached garage, studio, barn or greenhouse
  • Doesn’t include any part of your property used exclusively as a hotel, motel, inn or similar business

Qualified expenses

Deductible expenses for the business use of a home normally includes the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. In general, you may not deduct expenses for the parts of your home not used for business; for example, expenses for lawn care or painting a room not used for business.

Claiming the deduction

If you qualify to take the home office deduction, you can use either the regular or simplified method to figure the amount you can deduct:

  • Using the regular method, calculate the deduction by dividing expenses of operating the home between personal and business use.
  • Using the Simplified Option, you can use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet).

Daycare facilities

If you use your home to provide daycare services on a regular basis, you may be able to claim a deduction for part of the home even if that space is used for nonbusiness purposes. To qualify, both of the following requirements must be met:

  1. Your business must provide daycare for children, people age 65 or older, or people who are physically or mentally unable to care for themselves.
  2. Your business must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.

For help understanding if you might qualify to take the home office deduction, or in calculating the amount of your deduction, please contact our office so that we can help you.

Be Cautious of Temporary Payroll Tax Holiday

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A payroll tax holiday effective September 1 was recently signed via a presidential executive order. Payroll tax holidays typically provide forgiveness of Social Security and Medicare taxes that are normally withheld from your paycheck.

This year’s tax holiday, however, is not necessarily a forgiveness of Social Security and Medicare taxes, because the order is not yet supported by an underlying legislative action. So even if your employer removes your Social Security and Medicare tax from recent paychecks, there is a possibility you will need to pay it back at a later date. That could mean a pretty large tax bill for you in early 2021.

What you need to do

  • Compare paychecks. Get your last paycheck from August and your first paycheck from September. Compare the amount of Social Security and Medicare taxes withheld from your August paycheck to your September paycheck. If the amounts are the same, then your Social Security and Medicare taxes are still being withheld.

    If you notice that the amounts are different, or that no Social Security or Medicare taxes are withheld from your September paycheck, then that’s a signal you may have a tax repayment bill in early 2021.

  • Remember to keep checking each paycheck. Companies are struggling to figure out if they are required to comply with the presidential executive order, payroll providers are trying to figure out how to comply, and everyone is wondering whether the tax obligation will be permanently forgiven.

  • Be prepared to pay it back. If no Social Security or Medicare taxes have been withheld from your paycheck through the end of 2020, be prepared to write Uncle Sam a check to pay these taxes in early 2021. If possible, open a savings account to set aside the Social Security and Medicare taxes that were not withheld from your paychecks. When it comes time to pay your taxes, the money will be ready to go.

  • Watch for updates. There’s a chance Congress might pass a law that forgives the Social Security and Medicare taxes not withheld from your paychecks. If this happens, you will have a nice start on an emergency savings fund should you need it.

If you have any questions about how this payroll tax executive order affects you, please contact our office.