Shinault Baker & Company

A letter of instruction is an informal document providing your loved ones with vital information about personal and financial matters to be addressed after your death. Bear in mind that the letter, unlike a valid will or trust, isn’t legally binding. But the informal nature allows you to easily revise it whenever you see fit. Consider including in your letter of instruction the location of your will and other important documents, as well as digital assets. Also explain your wishes for funeral and burial arrangements and the distribution of personal items that may have little or no monetary value, but plenty of sentimental value.

WHAT TAX RECORDS CAN YOU THROW AWAY? Oct. 15 is the deadline for individual taxpayers who extended their 2019 tax returns. If you’re finally done filing last year’s return, you might wonder: Which tax records can you toss once you’re done? Now is a good time to go through old tax records and see what you can discard. A common rule of thumb is to keep tax records for at least six years from filing, after which the IRS generally no longer can audit your return or assess additional taxes, even if your income was understated. But hang on to certain records longer including the tax returns themselves, W-2 forms and records related to real estate, investments and retirement accounts.

THE EASIEST WAY TO SURVIVE AN IRS AUDIT IS TO GET READY IN ADVANCE IRS audit rates are historically low, according to the latest data, but that’s little consolation if your return is selected. But with proper preparation and planning, you should fare well. But it helps to know what might catch the attention of the IRS. For example, some audit red flags are unusually high deductions, major inconsistencies between previous years’ tax returns and the current one, profit margins and expenses markedly different from those of similar businesses. The IRS normally has three years within which to conduct an audit.

TAX IMPLICATIONS OF WORKING FROM HOME AND COLLECTING UNEMPLOYMENT COVID-19 has resulted in many changes in our lives, and some of them have tax implications. For example, many employers have required employees to work from home. Unfortunately, employee business expense deductions (including expenses to maintain a home office) are disallowed from 2018 through 2025. However, if you’re self-employed and work from a home office, you can be eligible to claim home office deductions for your related expenses if you satisfy the strict rules. Another tax-related situation involves people who are laid off and collecting unemployment benefits. Be aware that these benefits are taxable and must be reported on federal income tax returns for the tax year received.

BACK-TO-SCHOOL TAX BREAKS Despite the COVID-19 pandemic, students are going back to school this fall, either remotely, in-person or a combination. In any event, parents may be eligible for certain tax breaks to help defray the cost of education. For example, with the American Opportunity Tax Credit (AOTC), you can save a maximum of $2,500 for each full-time college or grad school student. This applies to qualified expenses including tuition, room and board, books and computer equipment and other supplies. But the credit is phased out for moderate-to-upper income taxpayers. This is only one of the tax breaks available for education.

In a world that’s increasingly paperless, you’re likely becoming accustomed to conducting a variety of transactions digitally. But when it comes to your will, only an original, signed document will do. Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will

WILL YOU HAVE TO PAY TAX ON YOUR SOCIAL SECURITY BENEFITS? If you’re getting close to retirement, you may wonder: Will my Social Security benefits be taxed? It depends on your other income. If you’re taxed, up to 85% of your payments could be hit with federal income tax. If you file a joint tax return and your provisional income, plus half your Social Security benefits, isn’t above $32,000 ($25,000 if unmarried), none of your benefits will be taxed. If it falls above those amounts, you must report a certain percentage of your benefits as income. If you know your Social Security benefits will be taxed, you can arrange to have the tax withheld from the payments. Otherwise, you may have to make estimated tax payments

WHAT HAPPENS IF AN INDIVIDUAL CAN'T PAY TAXES While you probably don’t have a problem paying your tax bills, you may wonder: What happens if you (or someone you know) can’t pay taxes on time? It’s important to file a properly prepared return even if full payment can’t be made. Include as large a partial payment as you can. You may be able to get an installment agreement with the IRS or borrow the money to make the payment. In some cases, a payment extension may be available if you can show payment would cause undue hardship. Not filing and paying could lead to escalating penalties and having liens assessed against your assets and income. It could also result in seizure and sale of your property.

5 GOOD REASONS TO TURN DOWN AN INHERITANCE You may use a qualified disclaimer to refuse a bequest from a loved one. Doing so will cause an asset to bypass your estate and go to the next beneficiary in line. Often cited as the main incentive for using a qualified disclaimer is gift and estate tax savings. Despite lofty gift and estate tax exemption amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, you ensure that the exemption won’t be further eroded by the inherited amount.

BECAUSE OF COVID-19, COLLEGE-AGED CHILDREN NEED A BASIC ESTATE PLAN If your child is heading to college in the next few weeks, besides assembling the essentials, consider having him or her pack a few estate planning documents. Needless to say, having all the necessary financial and medical documents may be more important than ever because of the COVID-19 pandemic. First up is a health care power of attorney. Your child appoints someone, such as you, to make health care decisions on his or her behalf. Next is a HIPAA authorization, which gives health care providers the ability to share information about your child’s medical condition with you. A financial power of attorney and a will are also good ideas.

THE TAX IMPLICATIONS OF EMPLOYER-PROVIDED LIFE INSURANCE Does your employer provide you with group term life insurance? If so, and depending on the amount of coverage, this employee benefit may create undesirable income tax consequences for you. The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 even though you never actually receive it.

ARE SCHOLARSHIPS TAX-FREE OR TAXABLE? If your child has been awarded a scholarship, congratulations! But be aware that there may be tax implications. Scholarships and fellowships are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the student or reduces tuition. However, certain conditions must be met. A scholarship is tax-free if it’s used to pay for: Tuition and fees required to attend the school, and fees, books, supplies and equipment required of students. Room and board, travel, research and clerical help don’t qualify.

TAKE ADVANTAGE OF A STEPPED-UP BASIS WHEN YOU INHERIT PROPERTY If you’re planning your estate, or you’ve inherited assets, you may be unsure of the cost (or basis) for tax purposes. Under the fair market value basis rules (also known as the step-up and step-down rules), an heir receives a basis in inherited property equal to its date-of-death value. For example, if your grandfather bought stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs and all of that gain escapes federal income tax forever. A step-down occurs if someone dies owning property that has declined in value. Contact us for tax assistance when estate planning or after inheriting assets.

AFTER YOU FILE YOUR TAX RETURN: 3 ISSUES TO CONSIDER After filing a 2019 tax return, there may still be three issues to bear in mind. 1) You can check up on your refund. Go to irs.gov and click on Get Your Refund Status to find out. 2) Some tax records can now be thrown out. You should generally save statements, receipts, etc. for three years after filing (although keep the actual returns indefinitely). But there are exceptions to this general rule. 3) If you forgot something, you can generally file an amended tax return. File Form 1040X to claim a refund within three years after the date you filed the original return or two years of the date you paid the tax, whichever is later.