By Shawna Stapleton, CPA
This is a question we have gotten many times over the last year, especially with so many of us working from our home office instead of “the office”. You also may be wondering if there are tax breaks or deductions for you. Unfortunately for most of us, there is not a means for this deduction since the passage of the Tax Cuts and Jobs Act (TCJA) of 2017. This tax law removed the deduction of employee business expenses as well as most other 2% itemized deductions, and it was there that previous home office deductions were taken, leaving us no place on our tax return to even deduct it.
There is an exception for the self-employed which also includes partnership self-employment income. Also, if you have an S-corporation you can setup an accountable plan to reimburse for home office expenses, but this reimbursement is done at the entity level.
The IRS has given the following guidelines for a home office to qualify as a deduction should you have the tax situation that allows for the deduction.
Exclusive Use: The area of your designated home office must be used exclusively for business, although it is not a requirement that this be a separate room or an area that has been partitioned off. This separate area must be identifiable to qualify.
Regular Use: This designated area must be used on a regular basis since incidental or occasional use does not qualify. It would be on the burden of the taxpayer to establish the substantiation of the regular use.
Principal Place of Business: Although is not unusual for a business to have several locations, the home office must be the principal location where business is conducted. This includes management and administrative functions, as well as meeting with clients or customers.
Separate Structure: If a home office has been constructed as a building separate from the home it is not required to be the principal place of business to qualify for the deduction.
Calculating the home office deduction can be done on a Form 8829 where a percentage of the qualifying costs are calculated. A simplified deduction is also available for a $5 per square foot deduction. It is best to run the deduction both ways to see what is most advantageous.
While there have been rumors that a home office is an invitation for an IRS audit, as with any deduction, it is important to determine that you qualify and have adequate records to support the deduction. Please let us know if you have specific questions, as we welcome them.
The material provided is for general information and education purposes only and does not constitute investment, legal, or tax advice. Individuals should seek independent tax advice from a tax professional prior to implementing a new strategy.
By Marc Giannone, CFP®, RICP®
Volatile financial markets, events in your life, and even regular investment reviews can prompt you to wonder why we rebalance your portfolio. After all, if your strongest-performing assets account for a larger portion of your holdings, why not let them ride?
It all comes down to risk.
Appropriately balancing risk and returns. When we initially drew up your investing plan together, we weighed several factors: Your income, age, and financial goals, among other things. We built your portfolio based on your unique goals and incorporated some market-return assumptions. The resulting portfolio’s allocation balances the potential returns you’ll need to reach your goals with the risk of potential losses you may incur.
In other words, the purpose of rebalancing isn’t to score the maximum returns possible. The purpose is to manage risk, so your nest egg might fluctuate less in the event of a downturn. The chart below visualizes the concept. Historically, as the percentage of equities in a portfolio has increased, so have the portfolio’s returns. But there’s a trade-off: the higher the percentage of stocks, the greater the risk of losing money.
Historically, higher-return assets have brought increased risk
Best, worst, and average returns for various stock/bond allocations, 1997–2019
One way to think of it: Imagine you’re a baseball manager looking to put together a team. You have a limited number of slots and a finite budget. You could go with a big-name slugger who hits lots of home runs—and commands a hefty contract. Alternatively, you could use that same budget amount to pick up a few less flashy players—who happen to be really consistent at hitting singles and doubles.
Your analysis shows that having a player with a higher on-base percentage in the lineup equates to more wins than having a player with a lot of homers. You could also reduce your risk by spreading out the investment over a few “quality” players rather than just one. So it makes sense for you to sign players who have the potential to get more base hits.
Similar reasoning is at work when you maintain a diverse, balanced portfolio with a disciplined commitment to an established asset allocation—for example, a portfolio made up of 60% stocks and 40% bonds. If you require relatively consistent returns (for instance, if you’re generating income from your portfolio and want that income to remain steady), bonds serve to dampen the market volatility that might otherwise disrupt steady returns.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
According to the 2019 Giving USA report, Americans gave a total of $427.71 billion to charity in 2018, with the largest source of giving coming from individuals (https://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/). While charitable giving offers a chance to make a difference in organizations you care about, there are also tax benefits if you itemize. However, the IRS has clear substantiation requirements, depending on the nature and amount of the donation. For example, if a single donation is $250 or more, you will need a written acknowledgment from the charity, as a canceled check is not sufficient. Also, all charitable documentation must be in possession when your tax return is filed, also known as a contemporaneous receipt.
General Rules for Charitable Contributions
For all cash contributions, whether made by cash or check, a bank record or written communication from the donee organization showing its name, the date, and the amount of the contribution is required, although specific requirements are following for various contribution amounts. For any non-cash contributions a receipt from the donee organization is required, showing the organization’s name, the date, and the location of the contribution, as well as a detailed description of the items donated. All acknowledgements or receipts should have a description of the value of goods and services provided, or a statement that “no goods and services have been provided”.
Although the value of services you perform for a charitable organization are not deductible, some deductions are permitted for out‐of‐pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed, when you performed them, and the organization for whom you performed the services. Keep receipts, canceled checks, and other reliable written records relating to the services and expenses. Mileage while performing charitable services are deductible on your return at a rate of $0.14 per mile. As discussed above, a written receipt is required for contributions of $250 or more. This could pose a problem for out‐of-pocket expenses incurred while providing charitable services since the charity does not know how much those expenses were. However, you can satisfy the written receipt requirement with adequate records that substantiate the amount of your expenditures including; a statement from the charity that contains a description of the services you provided, the date the services were provided, and a statement of whether the organization provided any goods or services in return.
Substantiation requirements are outlined below in a handy chart.
The Importance of Updating Beneficiary Designations
Question: What does $17 trillion represent?
Answer: The amount of money held in tax-deferred retirement account assets (i.e. IRAs, 401(k)s, etc.)
For many Americans, the bulk of their net worth is held in these retirement accounts. But many don’t understand the importance of one little form that governs the ultimate disposition of these assets—the beneficiary designation form.
There is a widespread misperception about how assets pass at death. Some assets are passed via will and are considered probate assets; but some assets are governed not by what the will dictates, but by the beneficiary designation. Some of these assets include retirement accounts and life insurance policies. Making sure beneficiary designations are complete and up to date is just as important as ensuring that you have other estate planning documents in place, such as a will, health care proxies and powers of attorney.
Here are some of the common mistakes that occur with beneficiary designation forms:
1. No beneficiary named — In the case of an IRA, not naming a beneficiary can mean that the ultimate recipient will have a shorter period of time to withdraw the funds than if a beneficiary had been named.
2. Naming the estate as beneficiary — If a beneficiary is not named or the beneficiary predeceases the IRA holder, the estate usually becomes the beneficiary. While you can name your estate as beneficiary of an IRA, it is generally not the best option. If the estate is beneficiary, the IRA becomes a probate asset and has to go through the probate process, which costs money and time. Additionally, the IRA would generally need to be paid out over a shorter period of time.
3. Lack of a contingent beneficiary — If the primary beneficiary dies before the IRA holder and no contingent beneficiary is named, the IRA will be deemed to have no beneficiary.
4. Not naming all children as beneficiaries — There have been cases where individuals have not named all their children as beneficiaries because there was not enough room on the form and because they thought that since all of the children were named in the will, it didn’t matter. Also, if you intend to leave your IRA to multiple children, make sure you define that you want it left in “equal shares.” There was a case where a mother with six children left out the words “equal shares” and as a result, the IRA custodian interpreted her intent was to leave the IRA to her first child with the other five as contingent beneficiaries.
5. Naming a minor child as a beneficiary — Since a minor lacks legal capacity, naming a minor child as beneficiary creates a set of problems. One alternative is to create a trust for the benefit of the child as beneficiary. Assuming the trust meets certain requirements, payments from the IRA could be
“stretched” over the child’s lifetime. Another alternative would be to name a custodian under the Uniform Gift to Minors Act (UGMA) for the benefit of the child. This is a less expensive option than creating a trust, but the downside is that the child will inherit the IRA outright when he/she turns 21.
6. Naming an ex-spouse — This is where things can get ugly. Even if the divorce agreement and property settlement stipulate that one spouse (the wife, let’s say) has no claim on her ex-husband’s IRA, if the beneficiary designation form isn’t updated, the ex-wife would be entitled to the IRA. There have been numerous instances where these disputes have ended up in court, and the court has unanimously upheld the validity of the beneficiary designation, regardless of what a will or divorce agreement says.
As you can see, it is important to understand the implications and importance of completing the beneficiary designation form correctly. These forms should be coordinated and consistent with your overall estate plan, and should be discussed with your advisor as well as an estate planning attorney if you have questions about the optimal designation for your unique situation. In addition, it is a worthwhile exercise to review these forms on an annual basis, or upon a change in life situation.
Loring Ward is not a legal or tax advisor. The information herein is general in nature and should not be considered legal or tax advice.
Investment advisory services provided by LWI Financial Inc. (“Loring Ward”). Securities transactions offered through its affiliate, Loring Ward Securities Inc., member FINRA/SIPC. IRN R 16-014 (1/18)
Myth 1: You have to contribute to a 529 in your home state. That statement is false with regard to 529 college-savings plans, in which money is invested in a portfolio of securities on behalf of a beneficiary. Any U.S. resident can contribute to a 529 college-savings plan in any state. Contributing to a plan offered by your home state might offer an added bonus in the form of a state income tax deduction, but that shouldn't be your sole consideration. If your state's plan is poor (with high fees and poor investment options, for example) looking at plans outside your state might be worth forgoing the tax break.
Myth 2: You have to send your child to a school in the state where his 529 plan is offered. Also false. A 529 college-savings plan is fully portable, meaning that assets can be used for college expenses in any state and at some institutions abroad regardless of which state's plan holds the account.
Myth 3: You can only get a tax deduction if you contribute to your state's plan. Usually true, but not always. In fact, residents of Arizona, Kansas, Maine, Missouri, and Pennsylvania get a state income tax break on 529 contributions made to any state's plan. Elsewhere the benefit is restricted to contributions to in-state plans, with deduction limits varying from state to state and some states offering tax credits.
Myth 4: If you save in a 529 account for your child, it will hurt his financial aid prospects. Possibly, but not as much as you might think. Yes, financial aid calculations generally do take into consideration 529 assets, but money in a 529 account owned by the parents or a dependent student counts far less than assets owned by the student outside a 529. In fact, non-529 student-owned assets carry more than 3 times more weight in financial aid calculations than do assets held in the parents' names. So no, 529 accounts aren't completely impact-free when it comes to financial aid, but the impact is relatively minor.
Myth 5: If your child doesn't go to college, you'll lose the money. Unused 529 money does not have to go to waste, or to the tax collector. It can be used to help pay another family member's college costs simply by changing beneficiaries or transferring funds to the family member's existing 529 account. And the list of potential recipients is rather long, including siblings, first cousins, parents, grandchildren, aunts and uncles, and even in-laws. If you do decide to cash out the plan, you'll have to pay federal and state income taxes on earnings, plus a 10% penalty (waived if the beneficiary dies, becomes disabled, or gets a scholarship).
Myth 6: All 529 plans are the same. This is a potentially costly mistake some investors make. Like many investment products, 529 plans may look similar from the outside, but once you get under the hood you'll find major differences that determine how effective they can be at helping you meet your college-savings goals. Fees, fund offerings, glide path (the rate at which the asset allocation switches from equities to fixed-income in age-based portfolios), and even ease of use vary from plan to plan. Fees, in particular, can have a corrosive effect on 529 assets, and can vary not only from state to state but also within the same plan.
529 plans are tax-deferred college savings vehicles. Any unqualified distribution of earnings will be subject to ordinary income tax and subject to a 10% federal penalty tax. Tax law is ever-changing and can be quite complex. It is highly recommended that you consult with a financial or tax professional with any tax-related questions or concerns. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement, and the official statement should be read carefully before investing.