In this Issue:
- Ace the FAFSA
- Review Your ITIN Now
- Dos and Don'ts of Business Expensing
- Fix Youre Overfunded Account
- October 1st: SIMPLE IRA plan establishment due
- October 15th: Extended tax return filing deadline
- October 31st: Halloween
Tax reform is under discussion in Congress as we enter the fall months, and students are back in school. While we wait to see what comes out of Washington DC, here are some suggestions for students and parents to get an A+ on their next FAFSA student loan application.
Also included are articles on the requirement to renew your taxpayer identification number, as well as a checklist of "dos" and "don'ts" for anyone taking business expenses for things like travel, meals and entertainment. Since the end of the year is typically when we run into overfunding problems with retirement accounts, there's also an article with tips to fix any issues while there's still time.
As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.
Ace the FAFSA
The Free Application for Federal Student Aid (FAFSA) is a tool students use to apply for more than $120 billion in federal funds. Unfortunately, each year many students miss out. A report from NerdWallet estimates that $1,861 per eligible high school graduate of free federal grant money went unused during 2014 because they did not complete a FAFSA.
Even if you don't think you or your child qualify for federal aid, filling out a FAFSA is important because it could be used to determine eligibility for nonfederal aid and private funds.
FAFSA available Oct. 1.
Previously, the FAFSA was not available until January. A recent change now makes the application available Oct. 1. This is because the 2018-19 FAFSA can be completed with your 2016 tax information.
Avoid FAFSA mistakes
Don't forgo federal student aid by making one of the following common filing mistakes:
Remember, students need to complete a FAFSA each year because eligibility does not carry over and can vary based on circumstances. Students can use the FAFSA Web Worksheet now to gather and organize the data needed for their application, available at www.fafsa.gov.
Renew Your ITIN Now
If you have an Individual Taxpayer Identification Number (ITIN) rather than a Social Security number (SSN) you may need to take action now or you'll be unable to file a tax return for 2017. Here is what you need to know.
What to know about ITINs
ITINs are identification numbers issued by the U.S. government for individuals who do not qualify to receive a SSN. An ITIN can be used to file tax returns and is also a form of identification often required by banks, insurance companies and other institutions. Unfortunately, ITINs are also a source of identity fraud. To combat this, the 2015 PATH Act made substantial changes to the program. Now a number of ITINs will expire if not renewed by Dec. 31.
Renew your ITIN
Don't wait until the last minute to discover your tax return has been rejected and your refund delayed because of an expired ITIN. To renew, fill out Form W-7 with the required support documents. To learn more, visit the ITIN information page on the IRS website, Individual Taxpayer Identification Number.
Dos and Don'ts of Business Expensing
Knowing whether you can or can't expense a purchase for business purposes can be complicated. However, there are a few hard-and-fast rules to help you.
According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are common and accepted in your business, as well as helpful and appropriate. You'll need to maintain records (such as statements and ledgers) and supporting documents (receipts and invoices) to substantiate your deductions. Certain expenses are subject to extra requirements, as described below.
Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.
|Do:||+||Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.|
|+||Deduct travel-related meal costs, but only up to the 50 percent limit allowed by the IRS.|
|Don't:||–||Rely on estimates to determine the business vs. personal components of your expenses.|
|–||Deduct any of your travel expenses if your trip is primarily for personal purposes.|
|–||Deduct any of your meal costs if they could be considered unreasonably extravagant.|
Entertainment expenses need to be either directly related to or associated with the conduct of your business. That means that business is the main purpose of the activities and it's highly likely you'll get income or future business benefits. Expenses from entertainment that isn't considered directly related may still be deductible if they are associated with your business and happen right before or after an important business discussion.
|Do:||+||Keep records of entertainment expenses, including who was present and clear descriptions of the nature, dates and times of the pertinent business discussions.|
|+||Deduct up to 50 percent of entertainment expenses, as allowed by the IRS.|
|Don't:||–||Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges) that are not related to business activity.|
Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).
|Do:||+||Log odometer readings for each business trip and record your business purpose.|
|+||Claim actual business deductions by applying the ratio of your business-miles-to-total mileage.|
|Don't:||–||Claim mileage or expenses pertaining to commuting to and from work.|
If you have any questions about how to handle your business expenses, reach out for further guidance.
Fix Your Overfunded Accounts
Is socking away large sums in a tax-deferred retirement account ever a bad idea? It is when you exceed the annual IRS limits. Whether intentional or not, the penalties can be painful. Here's how overfunding occurs and what steps to take to fix the problem.
How overfunding happens
Overfunding retirement accounts happens more than you may realize. It can be the result of a job change that causes you to participate in two different employer retirement plans. Sometimes people forget they made IRA contributions early in the year and do it again later. Others forget that the IRA limit is the total of all accounts, not per account. The rules are complicated. Traditional IRAs can't be contributed to after age 70½, while Roth IRA contributions are subject to income limits. Plus all contributions are predicated on having earned income.
The annual Roth and Traditional IRA contribution limit is $5,500 ($6,500 if age 50 or older). If you surpass this amount, you pay a 6 percent penalty on the overpayment every year until it's corrected, plus a potential 10 percent penalty on the investment income attributed to the overfunded amount.
The fix: If the overfunding is discovered before the filing deadline (plus extensions), you can withdraw the excess and any income earned on the contribution to avoid the 6 percent penalty. You will potentially owe a 10 percent penalty in addition to ordinary income tax on the earnings of the excess contributions if you're under age 59½. Often you can apply the contribution to the next year. If your issue is due to age (70½ or older for a Traditional IRA) or income limit (for a Roth IRA), consider recharacterizing your contribution from one IRA type to another.
The rules for correcting an overfunded 401(k) are a little more rigid. You have until April 15 to return the funds, period. The nature of the penalty is also different. The excess amount is taxable in the year of the overfunding, plus taxable again when withdrawn. So, you could pay the penalty multiple times on the same amount. And, in certain cases, overfunding a 401(k) could cause it to lose its qualified status.
The fix: If you suspect an overpayment situation, contact your employer as soon as possible. Adjust your contribution amount before the end of the year and try to get the problem resolved that way.
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