Grossbach Zaino & Associates, CPA's, PC

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Cash Windfall or Tax Trap?

Picture this: You’re leaving your current employer to start a new job or pursue other interests, and you’re about to receive a payout of the money in your retirement plan. What will you do with it? Keep the money invested and working full-time on your behalf in a tax-deferred retirement savings account? Or take the cash?

An Expensive Decision

While there may be circumstances that make taking the cash a necessity, it is generally not a smart move. First and foremost, you shortchange your financial future by cashing out and spending the money. Second, you’ll have to pay tax on the distribution, which means you may end up with less money than you had planned.*

Here’s how it works. Your distribution will be taxable to you at your ordinary income-tax rate. In fact, your employer is required to withhold 20% of your distribution as a “down payment” on your federal income-tax bill for the year. There could also be a 10% early withdrawal penalty on the distribution. (Some exceptions apply.)

If you don’t want to cash out the savings in your retirement plan when you leave, you have other options.

Let It Be

Instead of taking a distribution, you may be able to leave your money in your plan until you retire. Choosing this option lets you avoid a current tax bill and a possible penalty and it keeps your money invested tax deferred. Your plan administrator can tell you whether this option is available to you.

Roll It Over

Moving your money to an individual retirement account (IRA) or another employer’s plan that accepts rollovers is another option. In either case, it’s usually best to ask the administrator of your current plan to transfer your balance directly to the administrator of your new plan or the rollover IRA. You’ll avoid the automatic 20% withholding tax and any penalty that way. And your retirement savings can continue to grow uninterrupted.

Be smart. Keep your money working full-time for your future.

* Some plans allow participants to make after-tax Roth contributions. Distributions of Roth contributions and related earnings will not be subject to federal income tax when certain tax law requirements are met.

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Can You Deduct It?

Ready or not, tax season is here. So now’s the time to hunt for every tax deduction you can find. Here’s some information you may find useful.


Volunteering. It may seem like you should be able to deduct the value of the services you donate to a nonprofit organization, but you can’t. What you can deduct (if you itemize your deductions) are out-of-pocket costs you incur while you’re performing services, such as the unreimbursed expenses of using your car to perform services (or a flat 14 cents per mile), plus tolls and parking fees.


Donating a used car. As with other charitable contributions, you must itemize your deductions to claim a deduction for a vehicle donation. If you donate a car worth more than $500 to a qualified charity, your deduction generally is the amount the charity receives when it sells the vehicle. The only way a deduction can be based on the car’s fair market value at the time of the donation is if the charity uses the vehicle in its operations or materially improves it before selling it.


Student loan interest. Only the person obligated to pay interest on a student loan may deduct the interest (up to $2,500 annually; income and other limits apply). So, if you’re making payments on behalf of your college student, only he or she can deduct the amounts — and only if he or she is no longer your dependent for tax purposes.

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Business-Vacation Combo

How would you like Uncle Sam to pay for part of your vacation? Sound unlikely? If you combine your vacation with a business trip, you may be able to deduct some of your expenses. Pay attention to the rules, though. Expenses must meet certain requirements before they’re tax deductible.

General Guidelines

As long as your primary reason for making the trip is business, you generally can deduct the cost of your transportation to and from your destination. You’ll generally be able to deduct food (within limits) and lodging costs only for the days you actually spend on business.

Bring the Family

You can bring your family along, too. While you can’t deduct their food, lodging, or airfare, you can write off your own expenses, including the single-occupancy rate for lodging on days when you’re conducting business. If you and your family travel by car, you can also deduct the full cost of transportation. Just be sure to keep detailed records.

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Business Travel Expenses

Employers and employees who travel for business may deduct certain types of travel expenses. Following are some general guidelines.

Business Travel

Generally, the round-trip cost of traveling for business is deductible whether the taxpayer stays away from home overnight or not. However, the IRS makes an important distinction between “business transportation” — a broad label that would apply to round-trip travel during the day — and “business travel,” which includes an overnight stay. For qualifying business travel, the taxpayer is allowed to deduct the entire cost of lodging and incidental expenses (as well as 50% of meal expenses).

To qualify for business travel status, the business trip must:


  • Involve overnight travel


  • Be temporary — expected to last one year or less


  • Be away from the “tax home” — generally, the taxpayer’s principal place of business



To deduct travel expenses, employers may want to first consider implementing an “accountable plan.” Generally, an accountable plan requires that the employee adequately account for the business expense and return any unaccounted for advances within a reasonable period of time. Accountable plans benefit both the employee and the employer because expense reimbursements/advances that are properly accounted for are free of income-tax withholding and the employer’s and employee’s shares of FICA taxes.

Employees potentially may deduct unreimbursed ordinary and necessary business travel expenses. However, this deduction must be taken as an itemized deduction, and only the amount exceeding 2% of adjusted gross income will be deductible.

Employees should be careful to meet the IRS’s substantiation requirements. Generally, employees will be required to retain receipts and keep a logbook recording specific expenses related to business travel.

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Big Refund or Big Mistake?

So, the IRS is sending you a big check again this year. Bet you’re excited about it! But that money could have been in your paycheck — and your bank account — all along. Instead, you’ve allowed Uncle Sam to “borrow” your money throughout the year without paying interest on the loan.

Making Adjustments

The number of allowances you claimed when you filled out your Form W-4 dictates the amount of tax your employer withholds from your paycheck. The more allowances you claim, the less tax is withheld, and vice versa.

You can change the number of withholding allowances at any time. All you have to do is fill out a new Form W-4 and give it to your employer.

Do the Math

Your goal should be to have enough money withheld so that you won’t be subject to an underpayment penalty. Your tax advisor can help you determine the ideal number of allowances to claim.

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Back to the Drawing Board

It’s April. Your tax return has been filed. So what’s next? If you’re hoping to pay less tax in the future, your best move may be to go back to the drawing board. Using your 2015 return and what you tell us about your current financial picture as a guide, we can help you identify potential tax-reducing strategies for 2016 and beyond. Here are a few ideas to get you started.


Save for Retirement

Making pretax contributions to a 401(k) or 403(b) plan sponsored by your employer reduces the amount of your taxable wages — and the amount of income tax withheld from your paycheck. Your deferrals, along with earnings from investing the deferrals, are not taxable until the money is distributed to you.


As a 401(k), 403(b), or 457 plan participant, you may also have an opportunity to make after-tax “Roth” contributions. Making Roth contributions won’t save you taxes upfront. The advantage comes later, after a five-year period passes, beginning with the year you made your first Roth contribution. At that point, any Roth money distributed from the plan is tax free, provided you are at least age 59½ or the distribution is made on account of your disability or death. So, qualifying earnings on your Roth contributions are never taxed.


Think Capital Gains and Dividends

Turning to non-retirement account investments, two types of earnings receive favorable tax treatment: long-term capital gains and qualifying dividends. For 2016, the tax rate on both is capped at 20% (15% or 0% for those in a tax bracket below 39.6%). Because your regular tax bracket could be as high as 39.6%, there may be a substantial tax incentive to earn capital gains and dividends instead of fully taxed short-term gains and interest income. Of course, tax considerations are only one factor to consider in managing your investments.


Find Above-the-Line Deductions

On the expense side of the equation, certain expenses, often referred to as “above-the-line” expenses, are deductible in arriving at your adjusted gross income rather than as itemized deductions. Some examples include: alimony paid, student loan interest, moving expenses, and self-employed health insurance. Limits apply. An above-the-line deduction not only lowers your taxable income, it can help you qualify for various other tax breaks.


A review of your 2016 tax situation may reveal additional opportunities to save taxes. When you’re ready to think taxes, think of us. We’ll be glad to help.

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Avoid “Taxing” Moves When You Retire

Relocating after retirement may be one of your dreams, but make sure you’re wide awake when you do your planning. Not all states are created equal when it comes to taxes. Before you make a move, check out state and local tax laws to avoid unpleasant — and potentially costly — surprises.

Less Is More in Your Pocket

State income taxes can take a bite out of your retirement savings. Moving to a low- or no-tax state could save you a substantial amount of money. If you relocate to a state with an income tax, find out in advance how much you can expect to pay.

Less Is More for Your Heirs

The federal estate-tax exemption is $5.43 million for 2015. But some states also impose estate taxes, often with a much lower exemption amount than at the federal level. If estate taxes are a concern, check state laws before you move.

Look at Everything

Income and estate aren’t the only taxes you need to consider. Look at state and local sales and property taxes as well. States that are popular relocation destinations may experience rising property values, which can mean higher property taxes. Be sure to evaluate the whole tax situation, not just one aspect of it.

Some States Give You a Break

A number of states offer tax breaks to retirees, such as excluding distributions from qualified retirement plans or individual retirement accounts from state income taxes. Your tax advisor can help you research the rules.