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10 Tips to Help You Start Saving for Retirement
It’s never too late to start, but the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year’s gains – that’s the power of compounding – and the best way to accumulate wealth. These ten tips will help you get started:
- Set Realistic Goals. Project your retirement expenses based on your needs, not rules of thumb. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income.
- A 401(k) Is One Of The Easiest And Best Ways To Save For Retirement. Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and – usually – a matching contribution from your company.
- An IRA Can Also Give Your Savings A Tax-Advantaged Boost. Like a 401(k), IRAs offer huge tax breaks. There are two types of IRAs. The first is a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals. If you qualify, your contributions may be deductible. The second is a Roth IRA. By contrast, it doesn’t allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals, but contributions are not deductible.
- Focus On Your Asset Allocation More Than On Individual Picks. How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns.
- Stocks Are Best For Long-Term Growth. Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg.
- Don’t Move Too Heavily Into Bonds, Even In Retirement. Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation can easily erode the purchasing power of bonds’ interest payments.
- Making Tax-Efficient Withdrawals Can Stretch The Life Of Your Nest Egg. Once you’re retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible.
- Working Part-Time In Retirement Can Help In More Ways Than One. Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw on an annual basis once you retire.
- Other Creative Ways To Get More Mileage Out Of Retirement Assets. You might consider relocating to an area with lower living expenses or transforming the equity in your home into income by taking out a reverse mortgage.
- Consult a Tax Professional. A tax and accounting professional will evaluate your financial situation (i.e., income and expenses), evaluate your tax situation, and help you figure out how much you can put towards your retirement savings.
What to Know About Backup Withholding
Backup withholding is a federal tax on income that otherwise typically doesn’t require tax withholding, such as 1099 and W2-G income. Taxpayers who receive this type of income may have backup withholding deducted from their payments. Here is what you should know about backup withholding:
1. Backup withholding is required on certain nonpayroll amounts when certain conditions apply.
The payer (employer) making such payments to the payee (individual taxpayer) doesn’t generally withhold taxes from certain payments. As such, the payees report and pay taxes on this income when they file their federal tax returns. There are, however, certain situations when the payer is required to withhold a percentage of tax to make sure the IRS receives the tax due on this income. The payer’s requirement to withhold taxes from payments not otherwise subject to withholding is known as backup withholding. Backup withholding can apply to most kinds of payments reported on Forms 1099 and W-2G.
2. Backup withholding rate is a percentage of a payment.
The current backup withholding tax rate is 24%.
3. Payments subject to backup withholding include:
- Interest payments
- Payment card and third-party network transactions
- Patronage dividends, but only if at least half the payment is in money
- Rents, profits or other gains
- Commissions, fees or other payments for work done as an independent contractor
- Payments by brokers
- Barter exchanges
- Payments by fishing boat operators, but only the part that is paid in actual money and that represents a share of the proceeds of the catch
- Royalty payments
- Gambling winnings, if not subject to gambling withholding
- Taxable grants
- Agriculture payments
Examples of when the payer must deduct backup withholding:
If a payee has not provided the payer a Taxpayer Identification Number (TIN):
- A TIN specifically identifies the payee.
- TINs include Social Security numbers, Employer Identification Numbers, Individual Taxpayer Identification Numbers and Adoption Taxpayer Identification Numbers.
A TIN is one of the following numbers: Social Security, employer identification, Individual taxpayer identification, or adoption taxpayer identification. If the IRS notified the payer (employer) that the payee (individual taxpayer) provided a TIN that does not match their name in IRS records, the payer does not secure the correct TIN from the payee. Payees should make sure that the payer has their correct name and TIN to avoid backup withholding.
Questions about backup withholding? Don’t hesitate to contact the office for assistance.
Six Steps to Protect Against Taxpayer ID Theft
Tax-related identity theft occurs when someone uses a taxpayer’s stolen personal information, such as a Social Security number, to file a tax return claiming a false refund. Thieves are actively working to steal taxpayer information and identities, and everyone should do everything they can to prevent identity theft.
Here are six ways to help taxpayers protect themselves against identity theft:
- Always use security software. This software should have firewall and anti-virus protections.
- Use strong, unique passwords. They should also consider using a password manager.
- Learn to recognize and avoid phishing emails, threatening calls, and texts from thieves. These scammers pose as legitimate organizations such as banks, credit card companies, and even the IRS.
- Don’t click on links in unsolicited emails or messages from unknown senders. People shouldn’t click on links or download attachments from emails that seem suspicious, even if they appear to be from senders they know.
- Protect personal information and that of any dependents. For example, people shouldn’t routinely carry around their Social Security cards. They should also make sure tax records are secure.
- Get an Identity Protection PIN. The Identity Protection PIN is a six-digit code known only to the taxpayer and the IRS that helps prevent identity thieves from filing fraudulent tax returns using a taxpayer’s personally identifiable information.
Please call the office if you have any concerns about taxpayer ID theft.
Tips for Taxpayers With Hobby Income
Hobby activities are a source of income for many taxpayers. For instance, during the pandemic many people may have started making handmade items and selling them for a profit. As a reminder, this income must be reported on tax returns.
What is considered a hobby?
A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit. When determining whether their activity is a business or hobby, taxpayers must consider the following nine factors:
- Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
- Whether the time and effort the taxpayer puts into the activity shows they intend to make it profitable.
- Whether they depend on income from the activity for their livelihood.
- Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- Whether they change methods of operation to improve profitability.
- Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
- Whether the taxpayer was successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.
Reporting hobby income
All factors, facts and circumstances with respect to the activity must be considered. And, no one factor is more important than another. If a taxpayer receives income from an activity that is carried on with no intention of making a profit, the income they receive must be reported on Schedule 1, Form 1040, line 8.
For questions about hobby income, please contact the office.
It’s Hurricane Season: Safeguarding Tax Records
With hurricane season in full swing, now is a good time to create or review emergency preparedness plans for surviving natural disasters, which include more than just hurricanes. For example, in the last year, the Federal Emergency Management Agency (FEMA) declared major disasters following hurricanes, tropical storms, tornadoes, severe storms, flooding, wildfires, and an earthquake. Individuals, organizations, and businesses should take time now to make or update their emergency plans.
Here are five steps taxpayers can take to safeguard their tax records before disaster strikes:
- Secure key documents and make copies. Taxpayers should place original documents such as tax returns, birth certificates, deeds, titles, and insurance policies inside waterproof containers in a secure space. Duplicates of these documents should be kept with a trusted person outside the area of the taxpayer. Scanning them for backup storage on electronic media such as a flash drive is another option that provides security and portability.
- Document valuables and equipment. Current photos or videos of a home or business’s contents can help support claims for insurance or tax benefits after a disaster. All property, especially expensive and high-value items, should be recorded. The IRS disaster-loss workbooks in Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook, can help individuals and businesses compile lists of belongings or business equipment.
- Employers should check fiduciary bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider. As such, employers should carefully choose a payroll service provider.
- Rebuilding documents. Reconstructing records after a disaster may be required for tax purposes, getting federal assistance, or insurance reimbursement. If you have lost some or all your records during a disaster, please call the office immediately for assistance.
After FEMA issues a disaster declaration, the IRS may postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief.
- Get assistance from a tax professional. Taxpayers who do not reside in a covered disaster area but suffered impact from a disaster may qualify for disaster tax relief and other available options. Please call if you have any questions or need more information about safeguarding your tax records.