Who needs an estate plan? You do!

Estate Plan

Despite what you might think, estate planning isn’t limited to only the rich and famous. In fact, your family is likely to benefit from a comprehensive plan that divides your wealth, protects your well-being and provides a compass for your family’s future.

Dividing your wealth

Estate planning is often associated with the division of your assets, and this is certainly a key component. It’s typically accomplished, for the most part, by drafting a will, which is the foundation of an estate plan.
With a valid will, you determine who gets what. It can cover everything from the securities in your portfolio to personal property, such as cars, artwork or other family heirlooms.

In contrast, if you die without a will — referred to as dying “intestate” — state law will control the disposition of your assets. This may result in unintended consequences. For example, children from a prior marriage may be excluded if state law dictates that all assets are to go to a surviving spouse.

In addition, you’ll need to name the executor of your estate. He or she will be responsible for carrying out your wishes according to your will. Your executor may be a professional, a family member or a friend. Also, designate a successor in case your first choice is unable to handle the duties.

Understanding probate

If your estate plan includes only a will, your estate will most likely have to go through probate. Probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly and timely transfer of assets. The complexity and duration of probate depends on the size of your estate and state law.

If you transfer assets to a living trust, those assets are exempt from the probate process. Thus, a living trust may supplement a will, giving heirs fast access to funds.

Protecting your well-being

An estate plan can help ensure that your long-term health care is handled in the way that you wish. Notably, you can create a health care power of attorney. It grants another person — for example, a family member or a friend — the right to act on your behalf in the event you’re incapacitated. A power of attorney may be coordinated with a living will specifying your wishes in end-of-life situations, along with other health care directives.

Providing a compass

Finally, an estate plan can accomplish a variety of other objectives, depending on your preferences and circumstances. If you have minor children, you can name a guardian in your will in the event of your premature death. Without such a provision, the courts will appoint a guardian, regardless of your intent.

Your estate plan can also protect against creditors, primarily through trusts designed for these purposes. Accordingly, while trusts were often seen mainly as tax-saving devices in the past, they can fulfill a multitude of other roles.

Let the planning begin

Now that the need for an estate plan is clear, don’t delay any longer. Contact us to begin the process or if you have any questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Uncle Sam may provide relief from college costs on your tax return

tax credits for higher education costs

We all know the cost of college is expensive. The latest figures from the College Board show that the average annual cost of tuition and fees was $10,230 for in-state students at public four-year universities — and $35,830 for students at private not-for-profit four-year institutions. These amounts don’t include room and board, books, supplies, transportation and other expenses that a student may incur.

Two tax credits

Fortunately, the federal government offers two sizable tax credits for higher education costs that you may be able to claim:

1. The American Opportunity credit.

This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of postsecondary education and is available only to students who attend at least half time.

Basically, tuition, course materials and fees qualify for this credit. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

  • Between $80,000 and $90,000 for unmarried individuals, and
  • Between $160,000 and $180,000 for married joint filers.

2. The Lifetime Learning credit.

This credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.

The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. It applies to tuition, fees and materials.

It’s also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are:

  • Between $58,000 and $68,000 for unmarried individuals, and
  • Between $116,000 and $136,000 for married joint filers.

Note: You can’t claim either the American Opportunity Credit or the Lifetime Learning Credit for the same student or for the same expense in the same year.

Credit for what you’ve paid

So which higher education tax credit is right for you? A number of factors need to be reviewed before determining the answer to that question. Contact us for more information about how to take advantage of tax-favored ways to save or pay for college.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

“Innocent spouses” may get relief from tax liability

joint tax return

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

Innocent spouses

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.

To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.

In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.

Election to limit liability

If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

An “injured” spouse

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

The tax implications of being a winner

tax implications of being a winner

If you’re lucky enough to be a winner at gambling or the lottery, congratulations! After you celebrate, be ready to deal with the tax consequences of your good fortune.

Winning at gambling

Whether you win at the casino, a bingo hall, or elsewhere, you must report 100 percent of your winnings as taxable income. They’re reported on the “Other income” line on Schedule 1 of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. So you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Winning the lottery

The chances of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.

Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37 percent. You may also be subject to state income tax.

You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24 percent must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.

Since your federal tax rate can be up to 37 percent, which is well above the 24 percent withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

We can help

If you’re fortunate enough to hit a sizable jackpot, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

The “nanny tax” must be paid for more than just nannies

nanny tax

You may have heard of the “nanny tax.” But even if you don’t employ a nanny, it may apply to you. Hiring a housekeeper, gardener or other household employee (who isn’t an independent contractor) may make you liable for federal income and other taxes. You may also have state tax obligations.

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you may choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

FICA and FUTA tax

In 2019, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,100 or more (excluding the value of food and lodging). If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time babysitter who is a student, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for both the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Reporting and paying

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As a household worker employer, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, you include your employer identification number (not the same as your Social Security number). You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) that you file for your business. And you use your sole proprietorship EIN to report the taxes.

Keep careful records

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, dates and amount of wages paid and taxes withheld, and copies of forms filed.

Contact us for assistance or questions about how to comply with these employment tax requirements.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.