What to Know Before Cashing Out your 401k

Too many people cash out their 401k plan without fully understanding the consequences. This can be an expensive mistake. Here’s what you need to know before you cash out.

First, Are You Eligible to Cash Out of Your 401k Plan?

If you are still employed by the company that sponsors your 401k plan then you will not be eligible to cash out of the plan. Instead, you can see if your plan offers either a 401k plan loan, or a 401k plan hardship withdrawal (not all 401k plans allow hardship withdrawals so you need to ask your plan administrator if your plan has this feature.)

If you are no longer employed by the company that sponsors your 401k plan, then you are eligible to get your money out of your 401k plan. You can cash out of the plan, or rollover your 401k plan balance to an IRA. If you choose to rollover your 401k plan instead of cashing out, then you will not have to pay taxes or penalty taxes: rollovers to IRAs are not taxable transactions if you do them the right way.

The One Reason Why You May Not Want to Cash Out of Your 401k Plan – Creditor Protection

Money in a 401k plan is creditor protected, and it is protected from bankruptcy. It is foolish to cash out a 401k plan to pay down debt if it is likely you may end up filing bankruptcy. The bankruptcy court cannot touch your 401k plan and creditors cannot attach the assets in your 401k plan.

Taxes on Cashing Out of Your 401k Plan

If you must cash out of your 401k plan and you have not yet reached age 59 ½ then the dollar amount you cash out will be subject to ordinary income taxes and a 10% penalty tax.

If you are not yet age 59 ½ it is usually required that 20% in taxes is withheld from any balance that you cash in, so for every $1,000 you cash in, you would receive about $800. The other $200 would be sent to the IRS. At the end of the year the 401k plan will send you a tax form called a 1099R that shows the amount of taxes withheld on your behalf.

When you file your tax return, you will include the amount of the 401k plan that is cashed in as income, along with other sources of income. It flows into your tax return on the first page, and based on your total income and deductions you will either owe additional tax or get a refund.

Check on 401k Retirement Age Rules Before You Cash Out

If you are between age 55 and 59 ½ you may be able to avoid the 10% penalty tax if you terminated employment no earlier than the year you turned 55.

If you are over age 59 ½ any amounts you withdraw from your 401k plan will be subject to income taxes, but not penalty taxes.

How to Cash Out of a 401k Plan

The first step to cash out of a 401k plan is to call the phone number that appears on your 401k plan statement and ask them to send you the paperwork to cash out of your plan. In some cases you may be able to do this online or over the phone, but most of the time you must fill out paperwork.

Sometimes a signature from a HR person or plan administrator at the firm that sponsored your 401k plan will be required. If you worked for a smaller company you may have to take this paperwork to them, or contact them yourself to get this done. If you worked for a large company this is often handled by the investment company that manages the 401k plan.

For more information about filing, taxes and your 401k plan  contact one of our offices:                  Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,                           Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

Preparing for Next Tax Year

Keep these tax tips in mind throughout the year. You’ll be better prepared for next tax season, and you’ll also make better financial decisions.

Consult your tax professional before taking any major financial steps. Right before the 2014 tax-filing deadline, several people come to our offices with questions after they made major financial decisions, so it was too late to help them.

Some of them cashed out their IRAs, some of them sold a property in a short sale, others earned thousands of dollars from their online website without filing as a business—the list goes on and on. Call our office for help throughout the year and not just right before tax time.

Talk to your tax pro before you get married. Consider having the unromantic yet necessary tax and money talk with your fiancée before marriage, and get our tax pro involved. This can help ensure that you both start the marriage with open eyes and are able to deal head on with any tax, financial, or credit problems.

If you’re contemplating a divorce, include a tax professional in the discussion. Divorce attorneys may know a lot about family law, but they appear to know nothing about tax law. You should consult our office on issues such as who gets the tax benefits for the children each year and who gets which assets.

You may think you’re evenly splitting the money and assets, but some assets—such as stock, retirement accounts, IRAs and real estate—have heavy taxes associated with them when you sell them or cash them out. It’s important to understand the implications.

Have a business? Start your bookkeeping right away. The sooner you log your sales, mileage, travel, meals, and other expenses, the sooner you’ll know if you have to make changes to the way you do business. Are you undercharging clients or overpaying vendors? Is that why you’re always broke at the end of the year?

Also, be sure to set aside money for your estimated taxes so you don’t fall short when it’s time to pay.

For more information about tax planning contact one of our offices:                                   Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,                           Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

 

Checking and Adjusting your Withholding

It’s easy to sidestep withholding problems if you stay on top of what comes out of your paycheck and adjust it as necessary. Your goal is to claim all of the W-4 allowances you are entitled to so that your withholding will come as close as possible to your actual tax liability.

Check early, check often

You can change your withholding at any time, so check early and check often to make sure you are withholding the correct amount. When you get your first paycheck of the year, you can see what amount was taken out and multiply it by the number of pay periods to get an idea of what your final withholding will total.

Now that you have filed your taxes for last year, you’ll get a better picture of how precise your withholding calculations were. If they were on the mark, and your circumstances haven’t changed substantially, then you’re OK. But if you owed a lot or got a big refund, you need to adjust your withholding. Likewise, if you got married, divorced, had a child, your spouse stopped or started working, or you bought a house, you need to refigure the amount you had withheld.

Common reasons to adjust withholding:

  1. Got married or divorced
  2. Had a baby
  3. Bought a house
  4. Spouse stopped or started working
  5. Added second job
  6. Nonwage income (interest, dividends, inheritance, etc.)

Throughout the year, you also need to be aware of any income you get from sources where there is no withholding. This includes nonwage income, such as interest, dividends, capital gains or retirement plan distributions. If this increases dramatically, you need to increase your withholding amount or make estimated tax payments.

For more information about taxes and withholding contact one of our offices:                  Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,                           Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

 

 

Use Installment Agreement to Pay Back Taxes

ax season is over. At this point, any unpaid taxes for 2014 will be treated as back taxes. If you do owe taxes for 2014 or for any year before that, you can pay them in monthly installments. Even those who filed for an extension, but could not pay their entire tax bill, an Installment Agreement can be requested.

There are different types of Installment Agreements, each plan based on the amount of tax debt owed. The less you owe in back taxes, the easier it is to qualify for an installment agreement. You can apply for an online Installment Agreement if you owe $50,000 or less in back taxes.

Some of the important points to consider before applying for an Installment Agreement are the associated penalties and interest, as well as the rules of the agreement. With an Installment Agreement, you get more time to pay your back taxes, but you will pay more because of penalties and interest.

The penalty for a late payment is charged at 0.5% each month on the amount of back taxes that remain to be paid.

Interest is charged at the federal short-term rate plus 3% for a year. It is compounded every day.

To reduce your penalties and interest, you can pay more initially so that your total back tax amount is lower. Also, if you can, pay the back taxes in as few months as possible.

Once you have reached an agreement with the IRS, you will be required to cover the minimum payments each month. Any tax refunds will be offset, or taken, to pay your tax debt.

If you fail to make a payment for any month, the IRS is likely to terminate your agreement. If you cannot make the minimum payment for a particular month, contact the IRS and inform them of your situation.

For more information about filing and paying taxes contact one of our offices:                  Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,                           Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

Can’t Pay Your Tax Due?

The Internal Revenue Service recognizes that many people may be having difficult times financially. There can be a tax consequence to events, such as job loss, health care coverage, debt forgiveness or tapping a retirement fund. The IRS can help you meet your tax obligations.

File your tax return and pay what you can on time

If you cannot pay the full amount of taxes you owe, don’t panic. Even though penalties and interest accrue if you don’t file and pay on time, you can avoid or limit these charges by filing on time, by April 15. Pay as much as you can by the April 15 deadline, because the IRS charges failure-to-pay penalties and interest on any unpaid balance, which increases the amount you owe.

Taxpayers who owe, but can’t pay in full have several options for meeting their tax obligations. They can use the Online Payment Agreement application on IRS.gov if you owe $50,000 or less in combined tax, penalties and interest to request an installment agreement and receive an immediate notification, if they approve the request. An installment agreement allows you to make payments over time rather than paying in one lump sum. If you owe more than $50,000 you may still qualify for an installment agreement, but you will need to complete a Collection Information Statement, Form 433F. Otherwise, contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief, such as a short-term extension to pay, an installment agreement or an offer-in-compromise. Additionally, taxpayers who can’t meet the filing deadline can request an extension of time to file. However, an extension of time to file is not an extension of time to pay.

Keep in mind, if you experience a change in marital, parental or financial status in 2014, you may now be eligible for certain tax credits, such as the Earned Income Tax Credit. If you earned less than $52,427 in 2014, check to see if you qualify for the Earned Income Tax Credit, some workers could receive as much as $6,143. Eligibility for EITC depends on your earned income and family size, among other tests. However, single people and childless workers are also eligible. If you qualify, you must file and claim the credit to get it. The online EITC Assistant can help you calculate your eligibility with ease and accuracy.

Electronic Payment Options

IRS offers various electronic payment options to make it as easy as possible to make a full or partial payment with your tax return. You can make payments online, by phone using a credit or debit card or through the Electronic Federal Tax Payment System. Taxpayers who e-file their return may use the electronic funds withdrawal option for submitting an electronic payment. And, you can e-file before April 15, but schedule your payment for withdrawal on April 15.

For more information about filing and paying taxes contact one of our offices:                  Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,                           Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

Does the Government Owe You Money?

 

What Is Unclaimed Money?

If the government owes you money and you do not collect it, then it’s unclaimed. This can also happen with banks, credit unions, pensions, and other sources.

Beware of unclaimed money scams. There are people who pretend to be the government and offer to send you unclaimed money for a fee. Government agencies will not call you about unclaimed money or assets. Learn how to spot these types of scams.

Currently, the government does not have one website for finding unclaimed money by name, Social Security number, or state. To find it, you’ll need to visit each site separately and perform a search.

States’ Unclaimed Money

  • Search by State  – Search your state’s listing of unclaimed funds and property.

Retirement

Taxes

Mortgages

  • FHA-Insurance Refunds  – If you had an FHA-insured mortgage, you may be eligible for a refund from the Department of Housing and Urban Development (HUD).

Savings Bonds

For tax help or more information contact one of our offices:                                                       Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,                           Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

 

Ways to Avoid Common Errors for Millions of Taxpayers Meeting the April 15 Deadline

For the millions of taxpayers who will file in the next two weeks, the IRS offers the following reminders:

File electronically. Filing electronically, whether through e-file or IRS Free File, vastly reduces tax return errors, as the tax software does the calculations, flags common errors and prompts taxpayers for missing information. And best of all, there is a free option for everyone.

Mail a paper return to the right address. Paper filers should check IRS.gov or their form instructions for the appropriate address where to file to avoid processing delays.

Take a close look at the tax tables. When figuring tax using the tax tables, taxpayers should be sure to use the correct column for the filing status claimed.

Fill in all requested information clearly. When entering information on the tax return, including Social Security numbers, take the time to be sure it is correct and easy to read. Also, check only one filing status and the appropriate exemption boxes.

Review all figures. While software catches and prevents many errors on e-file returns, math errors remain common on paper returns.

Get the right routing and account numbers. Requesting direct deposit of a federal refund into one, two or even three accounts is convenient and allows the taxpayer access to his or her money faster. Make sure the financial institution routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or deposited into the wrong account.

Sign and date the return. If filing a joint return, both spouses must sign and date the return. E-filers can sign using a self-selected personal identification number (PIN). Attach all required forms. Paper filers need to attach W-2s and other forms that reflect tax withholding, to the front of their returns. If requesting a payment agreement with the IRS, also attach Form 9465 to the front of the return. Attach all other necessary schedules and forms in the sequence number order shown in the upper right-hand corner. Keep a copy of the return. Once ready to be filed, taxpayers should make a copy of their signed return and all schedules for their records.

Request a Filing Extension. For taxpayers who cannot meet the April 15 deadline, requesting a filing extension is easy and will prevent late filing penalties. Either use Free File (link again) or Form 4868. But keep in mind that while an extension grants additional time to file, tax payments are still due April 15.

Owe tax? If so, a number of e-payment options are available. Or send a check or money order payable to the “United States Treasury.

For tax help or more information contact one of our offices:
  Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,
Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

Easy E-Pay and Payment Agreement Options Available to People Who Owe Income Tax

The Internal Revenue Service today reminded taxpayers that it’s easier than ever to pay their taxes electronically, and for those who can’t pay on time, quick and easy solutions are available.
This is the tenth and final in a series of 10 daily IRS tips called the Tax Time Guide. These tips are designed to help taxpayers navigate common tax issues as the April 15 deadline approaches.
Taxpayers who owe taxes can now choose among several quick and easy e-pay options, including the newest and easiest, IRS Direct Pay. Available options include:
Direct Pay. Available at IRS.gov/directpay, this free online tool allows individuals to securely pay their income tax directly from checking or savings accounts without any fees or pre-registration. No need to write a check, buy a stamp or find a mailbox. Payments can even be scheduled up to 30 days in advance, and the tool is available round the clock. Any taxpayer who uses the tool receives instant confirmation that their payment was submitted.
Electronic Federal Tax Payment System. This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
Electronic funds withdrawal. E-file and e-pay in a single step.
Credit or debit card. Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do.
Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury.” Also, print on the front of the check or money order: “2014 Form 1040”; name; address; daytime phone number; and Social Security number.
To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.
The IRS advises taxpayers to file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline to avoid stiff late-filing penalties.

For tax help or more information contact one of our offices:
  Plymouth 734.454.4100,    Allen Park 313.388.7180,    Grayling 989.348.4055,
Royal Oak 248.399.7331,    Saginaw 989.782.1985,    St. Clair Shores 313.371.6600

IRS May Drop Jackpot Reporting Thresholds

The IRS is suggesting a change in gambling tax laws. A new proposal requires gamblers to report winnings on slot machines, video poker, keno and bingo for jackpots of $600 or more. That’s quite a cut compared to today’s thresholds of $1,200 for slot and video poker players and $1,500 for keno players. The IRS has set a 90-day period for the casino industry to respond to the suggested changes.

If you’ve ever hit a $1,200 jackpot on a slot or video poker machine, you’ve probably had to sit around and wait for a casino employee to pay you and to sign off on your tax forms. Depending on the time of day and casino, this process could take anywhere from five to 30 minutes.

If the IRS threshold is lowered to $600, casinos would need more staff to fill out tax forms to meet the increased number of jackpots that would need to be reported. Additionally, more machines will be offline while that’s taking place. Obviously, casino operators and their lobbying group, the American Gaming Association, aren’t happy about this.

The current $1,200 and $1,500 thresholds were established in 1977 and haven’t been adjusted for inflation. If anything, I would think the jackpot threshold should increase, not decrease.

We should hear more on the matter some time in June. Until then, you can see the full IRS proposal here and the American Gaming Association’s commentary here.

 

Standard Mileage Rates

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 57.5 cents per mile for business miles driven, up from 56 cents in 2014
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
  • 14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in Revenue Procedure 2010-51, the instructions to Form 1040 and various online IRS publications including Publication-17, Your Federal Income Tax.

Besides the standard mileage rates, Notice 2014-79, posted on IRS.gov, also includes the basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan.