Author Archives: Jeramiah Young

Avoid IRS Penalty For Underpayment Of Taxes

With nearly 10 million U.S. taxpayers facing a penalty for underpayment of estimated tax last year, the Internal Revenue Service urges taxpayers to plan ahead, understand their options and avoid the penalty when they file in early 2019.
To help taxpayers avoid this common situation, the IRS is focusing four news releases this week on key areas to help taxpayers pay the right amount of tax and avoid an estimated tax penalty. The IRS is highlighting a variety of resources and tools – including the online Withholding Calculator – to help taxpayers determine if they need to make an additional tax payment to avoid an unwelcome surprise at tax time.
This is part of the wider Paycheck Checkup campaign to encourage people to check their tax situation, including withholding and estimated tax payments.
Those who are self-employed or have other income, such as interest, dividends, self-employment, capital gains, prizes and awards or have too little tax withheld from wages may need to make estimated or additional tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
Pay As You Go…..
The U.S. tax system is essentially “pay-as-you-go.” Taxes must be paid as income is earned or received during the year. For people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits, tax can be withheld.
Taxpayers can adjust withholding on their paychecks or the amount of their estimated tax payments to help prevent penalties. This is especially important for people in the sharing economy, those with more than one job and those with major changes in their life, like a recent marriage, divorce or a new child.
Some income is not subject to withholding. This includes some income from the sharing economy and income from self-employment or rental activities. Individuals, including sole proprietors, partners and S corporation shareholders, may need to make estimated tax payments unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions).
Perform A ‘Paycheck Checkup’…..
The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. Because of the far-reaching tax changes taking effect this year, the IRS urges all employees, including those with other sources of income, to perform a Paycheck Checkup now. Doing so now will help avoid an unexpected year-end tax bill and possibly a penalty. The easiest way to do this is to use the Withholding Calculatoravailable on IRS.gov.
To use the Withholding Calculator most effectively, users should have a copy of last year’s tax return and recent paystubs. After filling out the Withholding Calculator, the tool will recommend the number of allowances the employee should claim on their Form W-4. Though primarily designed for employees who receive wages, the Withholding Calculator can also be helpful to some recipients of pension and annuity income. Recipients of pensions and annuities can make a change by filling out Form W-4P and giving it to their payer.
Form 1040-ES, Estimated Tax for Individuals, available on IRS.gov, is designed to help taxpayers figure these payments simply and accurately. The estimated tax package includes a quick rundown of key tax changes, income tax rate schedules for 2018 and a useful worksheet for figuring the right amount to pay. The IRS also mailed 1 million Form 1040-ES vouchers with instructions in late March to taxpayers who used this form last year.
Employees who expect to receive long-term capital gains or qualified dividends, or employees who owe self-employment tax, alternative minimum tax or tax on unearned income of minors should use the instructions in Publication 505 to check whether they should change their withholding or pay estimated tax.
When And How To Pay Estimated Tax…..

Taxpayers normally make four estimated tax payments a year. Remaining payments for 2018 are due Sept. 17, 2018, and Jan. 15, 2019. Those who make estimated payments may be charged a penalty if those payments are late.
Taxpayers have a variety of ways to pay estimated tax: online, by phone or from their mobile device. Direct Pay is a secure online service to pay a tax bill or pay estimated tax directly from a checking or savings account at no cost. Visit IRS.gov/payments for easy and secure ways to pay taxes. If a taxpayer pays estimated tax by mail, they should use the payment vouchers that
come with Form 1040-ES.
Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules. Taxpayers in presidentially declared disaster areas may have more time to make these payments without penalty. Visit the Tax Relief in Disaster Situations page on IRS.gov for details.

What are the new rules for 401(k) hardship withdrawals?

The Bipartisan Budget Act passed in early 2018 relaxed some of the rules governing hardship withdrawals from 401(k)s and similar plans. Not all plans offer hardship withdrawals, but the ones that do will be required to comply for plan years beginning in 2019.
In order to take a hardship withdrawal from a 401(k) or similar plan, a plan participant must demonstrate an “immediate and heavy financial need,” as defined by the IRS. (For details, visit the IRS website and search for Retirement Topics – Hardship Distributions.) The amount of the withdrawal cannot exceed the amount necessary to satisfy the need, including any taxes due.1

Current (pre-2019) rules

To determine if a hardship withdrawal is qualified, an employer may rely on an employee’s written statement that the need cannot be met using other financial resources (e.g., insurance, liquidation of other assets, commercial loans). In many cases, an employee may also be required to take a plan loan first.
Withdrawal proceeds can generally come only from the participant’s own elective deferrals, as well as nonelective (i.e., profit-sharing) contributions, regular matching contributions, and possibly certain pre-1989 amounts.
Finally, individuals who take a hardship withdrawal are prohibited from making contributions to the plan — and therefore receiving any related matching contributions — for six months.

New rules

For plan years beginning after December 31, 2018, the following changes will take effect:
1. Participants will no longer be required to exhaust plan loan options first.
2. Withdrawal amounts can also come from earnings on participant deferrals, as well as qualified nonelective and matching contributions and earnings.
3. Participants will no longer be barred from contributing to the plan for six months.
1 Hardship withdrawals are subject to regular income tax and a possible 10% early-distribution penalty tax.

Want a Solid Financial Plan for Retirement? Take Social Security Out of the Equation

Millions of seniors depend on Social Security to provide a large amount of their retirement income. As such, it’s natural to bank on those benefits when planning for your own retirement.
The problem with estimating your benefits, though, is that there are several variables that will determine your ultimate monthly payout. First, there’s the age at which you initially file. If you’re forced to claim benefits prior to full retirement age, which might happen if you get laid off later on in your career, your monthly payments will be reduced automatically. Then there’s a little matter of Social Security being on shaky financial ground to think about.
That’s why you might want to take a new approach to retirement planning: Remove Social Security from the picture and pretend those benefits don’t exist in the first place. If you can learn to get by without Social Security, whatever money you do end up collecting will be a welcome supplement to the income you’ve already secured for yourself.

Social Security’s iffy future

Let’s be clear about one thing: Despite the rumors that may be floating around, Social Security is by no means in danger of going bankrupt. That’s because the program’s primary funding source is payroll taxes, so as long as we have a workforce, Social Security can continue paying out benefits. But because more workers are leaving the workforce than entering it, the program will soon have no choice but to start tapping its trust funds to keep up with its obligations in the face of insufficient tax revenue. And once those those trust funds run out, recipients could see as much as a 21% cut in their benefits.
Here’s some even more bad news: According to the Social Security Trustees, those funds are set to run dry as early as 2034, which means major cuts aren’t so far away, assuming they indeed come to pass (remember, there’s always the possibility of Congress stepping in with a fix). And that’s something that could mess up your retirement numbers if you’re including Social Security as a major income source.
But let’s also not forget the fact that Social Security isn’t designed to sustain retirees by itself. In a best-case scenario — meaning, no future cuts in benefits — it will replace roughly 40% of the average worker’s pre-retirement income. Most seniors, though, need double that amount to keep up with their expenses, which is why relying too heavily on Social Security is a bad idea to begin with.

A safer approach to retirement planning

If you really want to ensure that you have enough money to support yourself in retirement, don’t bank too heavily on Social Security, especially given the various unknowns involved. Instead, take steps to save aggressively to build your own nest egg so you don’t have to worry about what Social Security has in store for you.
Currently, workers under 50 can contribute up to $18,500 a year to a 401(k) and $5,500 a year to an IRA. Those 50 and over get a catch-up provision that raises these limits to $24,500 and $6,500, respectively. But even if you aren’t able to max out either account type year after year, saving a respectable amount each month over time will leave you with a pretty solid level of savings by the time retirement rolls around. If you are in you are a high income earner and want to shelter more money from current income taxes, we can set up a Defined Benefit Plan where you can take a $200,000 deposit to deferred tax .  With this plan, you can also use qualified money to purchase life insurance.

IRS Penalty Abatement And Reasonable Cause

Being assessed a penalty by the Internal Revenue Service can be an overwhelming situation. Faced with potentially massive penalties a taxpayer’s financial future may seem bleak. Fortunately, there may be relief available. The IRS offers qualified taxpayers something called “penalty abatement.” But, what is and how is it determined? To provide you with some knowledge of the process, here is our guide to understanding IRS penalty abatement and reasonable cause.

What Is IRS Penalty Abatement?
When the IRS slaps taxpayers with a penalty for failing to file or failing to pay their federal taxes, there are certain steps the penalized party can take to resolve their issues. One of these is penalty abatement. The IRS is willing to consider any sound reason why a taxpayer failed to file a tax return, make a deposit or even pay any past-due taxes. Simply having a lack of funds is inadequate for claiming an abatement. The reasons behind the lack of funds, however, may be considered.

These circumstances are called “reasonable cause” and include:

  • Fire, casualty or natural disasters
  • Inability to obtain records
  • Death, serious illness, incapacitation, or unavoidable absence by the taxpayer or an immediate family member
  • Any other reason which illustrates using all ordinary care and prudence to meet tax burdens

If taxpayers meet these requirements, they may be able to claim a first-time abatement waiver.

First-Time Abatement Waiver
The Internal Revenue Service introduced the first-time abatement waver (FTA) in 2001to help taxpayers deal with federal tax problems. The FTA can be obtained by qualified taxpayers for failure-to-file, failure-to-pay or failure0to-deposit penalties. In order to qualify for an FTA waiver, a taxpayer must not have been assessed any penalties of a significant amount on the same type tax return within the previous three years. Further, they must comply with all federal filing and payment requirements. Taxpayers may only claim an FTA waiver for a single tax period only.

How To Establish Reasonable Cause
The Internal Revenue Service has certain facts which must be established to determine if a taxpayer meets the requirements forreasonable cause. These are:

  • What happened and when?
  • What circumstances prevented the taxpayer from filing or paying taxes for the period in question?
  • How did the circumstances affect their ability to file or pay?

Once these facts are established, what steps did they take to file or pay their taxes?

In the case of Corporation, Estate or Trust, did the affected person or an immediate family member have sole authority to execute the return or make payment?
To prove the above facts, certain documentation may be required. These may include, court records, hospital records or a physician’s letter to establish incapacitation or illness. Other relevant documents may be any documentation of events or natural disasters which could have prevented compliance with a taxpayer’s [CS1] [CS2] liabilities.

Have a tax defense question? Contact us 330-220-6372

The History of Recessions in the U.S.

Since 1850, the U.S. has experienced a recession in every decade.

That illustrates two points:

(1) The current economic expansion has been extraordinary. It recently turned nine years old, making it the second-longest in history and just a year short of the all-time record.

(2) Historically, expansions don’t last forever.

The last recession ended in 2009. So is a recession inevitable between now and 2020? If so, what will happen to the stock market? Let’s attempt to answer those questions, first by taking a look at …

The History of Recessions in the U.S.

It’s commonly believed that a recession is defined as two consecutive quarters of declining gross domestic product (GDP). Although that’s definitely a sign of trouble, it’s not how a recession is designated. A recession has occurred only when the folks at the National Bureau of Economic Research (NBER) say so.

A private, nonprofit research organization made up of more than 1,400 business and economics professors, the NBER officially designates when recessions begin and end.

Here’s its definition of a recession: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”

The group maintains information on past U.S. recessions, starting with the one that began in 1857.

The U.S. has experienced 33 recessions over this time period. On average, a recession occurs every 4.9 years and lasts 17.5 months. And … there’s been at least one recession in every decade.

Here are some of the more recent:

Peak Month  Trough Month    Duration in Months
January 1980  July 1980    6
July 1981  November 1982    16
July 1990  March 1991    8
March 2001  November 2001    8
December 2007  June 2009    18

Source: NBER

Will This Decade Be Different?

There’s a saying among economists: Expansions don’t die of old age. In other words, time alone doesn’t cause an economy to contract. A 2016 publication from the Federal Reserve of San Francisco seemed to confirm the adage. It found that, unlike humans — whose chances of dying increase with each year of living — the odds of a recession do not increase with each year of an expansion.

Do you know when Australia’s last recession ended? In 1991. If it can avoid a recession for almost three decades, why can’t the U.S.?

We might be tempted to predict when the next recession will occur or to pay heed to folks who are presumably able to do such things. A recent survey of economists by The Wall Street Journal found a “rough consensus” that we’re safe until 2020.

Unfortunately, history shows that even the experts aren’t successful at forecasting recessions. A study from the International Monetary Fund found that economists failed to predict 148 out of 153 recessions that occurred across the globe.

Some might say that the economy is humming along just fine, especially given the recent announcement that the economy grew 4.1% in the second quarter. Add to that the current (and very low) unemployment rate, and it certainly doesn’t feel like things are slowing down.

However, it’s important to remember that NBER’s definition of a recession includes that part about beginning “just after the economy reaches a peak of activity.” Good economic numbers are often the exuberance before the storm, especially if they’re lagging indicators. Take unemployment as an example; it’s often lowest right before an expansion stumbles. A recent Bloomberg article cited an analysis that found that of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.

The bottom line: Age alone doesn’t mean a recession is imminent, but sanguine economic news doesn’t necessarily mean a slowdown is far off. We just don’t know when a recession will occur.

Slowdowns and Stocks

If and when the next recession occurs, what can you expect for your portfolio? History suggests that it won’t be pretty.

The following table comes from Doug Short at Advisor Perspectives, and it ranks all the recessions since 1929 according to the stock market’s valuation (to the degree it is above or below the long-term average valuation) in the month before the slowdown.

Recession Start Number of Months Market’s Average Valuation in the Month Before Recession, Deviation From Mean Market Price, Peak to Trough Change in GDP
March 2001 8                      106% -49.1% -0.3%
August 1929 43                       74% -86.1% -26.7%
December 2007 18                       64% -56.8% -26.7%
May 1937 13                       32% -56.8% -4.3%
December 1969 11                       22% -36.1% -0.6%
April 1960 10                       9% -13.6% -1.6%
November 1973 16                       7% -48.2% -3.2%
August 1957 8                       2% -20.7% -3.7%
July 1990 8                       1% -19.9% -1.4%
February 1945 8                       -32% Gain -12.7%
July 1953 10                       -37% -14.8% -2.6%
July 1981 16                       -40% -27.1% -2.7%
January 1980 6                       -43% -17.1% -2.2%
November 1948 11                       -43% -20.6% -1.7%

Source: Advisor Perspectives

Generally speaking, the more overvalued the market, the more it declines during the recession. As Short wrote: “Of the nine market declines associated with recessions that started with valuations above the mean, the average decline was -42.8%. Of the four declines that began with valuations below the mean, the average was -19.9% (and that doesn’t factor in the 1945 outlier recession associated with a market gain).”

So where are we now?

According to the most recent numbers, the market is 103% above its mean valuation … just a bit below the most overvalued market in modern history.

The Bottom Line

History suggests that a recession is coming sooner rather than later and that when it does come, the stock market could get cut in half. But as Warren Buffett once said, “If past history was all that is needed to play the game of money, the richest people would be librarians.”

Could you wait out a 40% to 50% drop in your portfolio? If not, then it’s perfectly reasonable to seek out investments that are not correlated with the stock market.  There are, also, investments that lock in gains and can never be lost. But otherwise, resist the temptation to make significant changes to your portfolio based on what might happen. Because there’s one bit of history that all should believe in, it’s that regardless of what happens to the economy, the stock market eventually recovers and reaches even higher values. 

If you are young enough to wait out a recession and recover your losses well before retirement age, you should be OK.  If you are close to retiring or already retired, you can’t chance a 40 to 50% drop in your investment values.  If that’s you, call for an appointment to meet and review your options.