Tax

Got Debt? Tips to Improve Your Financial Situation

If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then these steps will help you to avoid financial ruin in the future.

If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action – before the bill collectors start calling.

1. Review each debt. Make sure that the debt creditors claim you owe is actually what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

2. Contact your creditors. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble, perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.

Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed, you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.

3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel). Stick to the plan.

4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car-sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.

5. Pay down and consolidate your debts. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, there are several ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage. Keep in mind, however, that second mortgages greatly increase the risk that you may lose your home.

Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.

You can regain financial health if you act responsibly. But don’t wait until bankruptcy court is your only option. If you’re having financial troubles, help is just a phone call away.

• By Leon Clinton
• January 13, 2020

Tax Breaks for Taxpayers Who Itemize

Many taxpayers opt for the standard deduction because it is easier, but sometimes itemizing your deductions is the better choice – often resulting in a lower tax bill. Whether you bought a house, refinanced your current home, or had extensive gambling losses, you may be able to take advantage of tax breaks for taxpayers who itemize. Here’s what to keep in mind:

1. Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 – $5,000 if married filing separately. State and local taxes paid above this amount can’t be deducted.

2. Refinancing a home. The deduction for mortgage interest is limited to interest paid on a loan secured by the taxpayer’s main home or second home. Homeowners who choose to refinance must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

3. Buying a home. People who bought a new home in 2019 can only deduct mortgage interest paid on a total of $750,000 ($375,000 married filing separately) in qualifying debt for a first and second home. For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers may continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

4. Charitable donations. Donations to a qualified charity also qualify as a tax break. Taxpayers must itemize deductions to deduct charitable contributions and must have proof of all donations. The non-profit organization must be a 501(c)(3) public charity or private foundation and non-cash donations may require a qualified appraisal.

5. Deducting mileage for charity. Miles driven using a personal vehicle for charitable service activities could qualify you for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2019.

6. Reporting gambling winnings and claiming gambling losses. Taxpayers who itemize can deduct gambling losses up to the amount of gambling winnings. You may deduct gambling losses; however, the amount of losses you deduct can’t be more than the amount of gambling income you report on your return. Furthermore, you must keep a record of your winnings and losses, for example, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

Investment interest expenses. Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocated to property held for taxable investments – the interest on a loan you took out to buy stock in a brokerage account, for example. Taxable investments include interest, dividends, annuities or royalties.

Wondering whether you should itemize deductions on your 2019 tax return? Don’t hesitate to call the office and find out.

• By Leon Clinton
• January 10, 2020

What’s New for the 2020 Tax Filing Season

While the 2020 tax filing season promises to be less confusing than 2019, there are still a number of changes that taxpayers should be aware of.

New, Revised or Updated Tax Forms

Form 1040: Revised and Redesigned

The IRS released a draft Form 1040 for 2019 tax returns that has been updated from the 2018 version. Of significance is that there are now three schedules instead of the six that appeared in the 2018 Form 1040. Schedule 6 is now part of Form 1040. Schedules 2 and 4 have been combined into a single schedule as have Schedules 3 and 5. Schedule 1 remains as is. Another notable change is that the signature line is once again, at the end of the form. While the new Form 1040 for 2019 is no longer “postcard size,” it is still shorter than it was in 2018 – although slightly longer than the 2019 version.

Form 1040SR: U.S. Tax Return for Seniors

The new Form 1040SR for 2019, was created in response to the Bipartisan Budget Act of 2018 and is intended for taxpayers age 65 and older. While similar to the standard Form 1040, the font size is larger and it includes a chart of the standard deduction and additional standard deduction amounts for taxpayers over 65 years old or blind. Taxpayers with more complicated tax situations should use the regular Form 1040.

Other New Tax Forms for 2019

• Forms 8995 and 8995-A: Qualified Business Income Deduction Simplified Computation
• Form 8985: Pass-Through Statement [Pass-Through Statement — Transmittal/Partnership Adjustment Tracking Report]
• Forms 965-C, 965-D, and 965-E: Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System
• Form 8978: Partner’s Additional Reporting Year Tax
• Form 8997: Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments

Important Tax Changes

Health Insurance Mandate Penalty Eliminated.

The penalty for failing to obtain health insurance expired at the end of 2018. As such, for 2019 tax returns there is no box on Form 1040 to check off indicating you had health insurance.

Some states have their own individual health insurance mandate requiring coverage. If you live in a state with a mandate and don’t have insurance (or an exemption) you must pay a fee when you file your state taxes. Currently, Massachusetts, New Jersey, and Washington, D.C. have such mandates (effective for 2019) in addition to Vermont whose mandate is effective starting in 2020.

Alimony is No Longer Deductible.

Starting January 1, 2019, alimony is no longer deductible to the payer and is no longer taxable to the payee for separation or divorce agreements or decrees in effect on this date or later.

Medical Expense Deduction Threshold Remains at 7.5 Percent.

For tax years 2017 and 2018 the medical expense deduction threshold was rolled back to 7.5 percent of adjusted gross income (AGI). In 2019 it was scheduled to revert to 10 percent; however, the Further Consolidated Appropriations Act, 2020, extended the 7.5 percent threshold through 2020 (including tax year 2019).

Deduction for Qualified Tuition and Related Expenses Extended.

This above-the-line deduction was extended through 2020.

Questions? Help is just a phone call away.

• By Leon Clinton
• January 8, 2020