Is the Interest from my Bank Taxable?

We often overlook some of our sources of income, especially if they seem insignificant compared to other sources, such as a primary job or business.

One source of income we often overlook is interest from our bank accounts or brokerage accounts held at various financial institutions.

Robert asks, “Hey Mike, hope you’re able to answer this for me. I didn’t receive any statements for the interest I received from my bank account in 2018. Is that because I don’t have to report it? This got me wondering if interest is even taxable at all. Thanks in advance.”

Robert, you likely did not receive an interest statement from your bank because it was less than $10. If you receive less than $10 in interest in a year from a single account at a financial institution, the financial institution is not required to report the interest to you in a tax statement.

The tax statement you would be looking for is called a 1099-INT. Again, in this case you would not receive one. However, just because the bank does not have to report the interest to you does not mean you do not have to report it on your tax return.

Unless the interest is from a tax-exempt source (e.g. municipal bond interest or tax-deferred or tax-free interest in an IRA), you must report and pay tax on the interest on your tax return.

It is taxable as ordinary income at ordinary income tax rates. 

If you did not receive a tax statement for your interest and would still like to stay compliant, the best way to make sure your interest is accurate is to compile all monthly statements from each bank account and add them up separately for each account. 

Round to the nearest dollar each account and report the interest on your tax return. If your combined interest is greater than $1,500 you must report it on Schedule B of Form 1040. If less than $1,500, you may report it on the applicable line of Form 1040 alone and not on Schedule B. 

I hope this overview was helpful, Robert, and thank you for writing in.

 

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This article is not to be considered tax, financial, or legal advice. For help regarding your specific situation, please consult your local advisor.

What are the IRA Contribution Limits for 2019 and 2020?

There are some stark differences between Roth IRAs, Traditional IRA, and other retirement plans, like workplace 401(k)s. Some of those differences come about through contribution limits, ages where you must draw RMDs (Required Minimum Distributions), and the age you are no longer allowed to make contributions to your account. 

Ronald asks, “Mike, hope you’re doing well. I had a quick question about my Traditional IRA and what age I can no longer make contributions to it and how much I can currently contribute to it. I’m trying to make up for lost time because I just recently got a good job and I never really made contributions before.

I’m currently 53 years old and I plan on retiring between ages 62-65. Thanks for any answers you can give me.”

Ronald, thank you for writing. Some background for anyone wondering; a Traditional IRA allows pre-tax contributions (you get a tax deduction for contributing to one).

Because of this, Congress and the IRS put limitations on how much you can contribute, how much can be deducted from your other income for tax purposes, and other restrictions. 

For starters, your Traditional IRA has a contribution limit of $6,000 for tax years 2019 and 2020. However, anyone age 50 and older is allowed a “catch-up” contribution of $1,000, meaning you have a contribution limit allowed of $7,000.

It should be noted that Roth IRAs have the same contribution limits as Traditional IRAs, however they grow tax-free instead of the contributions being deductible.

Make sure you sit down with an advisor, Ronald, and discuss your retirement options. You should look at how much you need to save into your Traditional IRA, 401(k), and any other non-qualified accounts to reach your retirement goals. 

You need to see tax consequences for different scenarios, especially if you plan on starting to draw Social Security at age 62 as opposed to putting it off longer.

 

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Can I Still Deduct My Union Dues for Taxes?

Unions are a part of the work infrastructure in America, so naturally they had to be weaved into the tax code somehow. 

Mark asks, “Hey Mike, hoping you could answer my question about my union dues. I work for one of the Big 3 in Michigan, so we pay quite a bit of money to the union. 

I always gave my union dues information to my CPA. I was reading that they aren’t deductible anymore. Could you help explain that to me? Thanks.”

Thanks for writing, Mark. Yes, you have always been able to deduct your dues in the past. However, because of the passing of the Tax Cuts and Jobs Act, union dues are no longer. 

The deduction for dues, as well as all other unreimbursed employee business expenses, have been suspended until 2025. 

These dues and other expenses were subject to what is known as a 2% floor, meaning that combined they had to be over 2% of your AGI (gross income) in order to be deductible. Anything over that threshold would be deductible. 

Now, just because they are suspended for 2018-2025 does not mean that you cannot deduct them in earlier years that they apply to if you have either not filed earlier year returns or are filing an amended return.

 

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This article is not intended to be financial, tax, or legal advice. For help regarding your specific situation, please consult a local advisor.

“Should I Put off Paying My Student Loans so they can be Forgiven?”

Almost every corner you turn, someone you see will have a student loan and with those come massive student loan payments. We constantly think about how to get rid of the things, knowing they’re holding us back from buying a house, from starting to invest, from starting our lives. 

And with these thoughts come a lot of talk in the news lately about how to forgive our student loans. We’re going to attempt to address this problem now.

Vanessa writes in: “Hello Mike, thank you for everything you do here. I was hoping you could answer my question about mine and my husband’s student loans. We have combined student loans of $205,000. We’re both teachers and we’re making the minimum payments because any more than that seems unreasonable.

We were following the news stories and we know a lot of politicians are putting plans up to forgive student loans immediately. And also, because we’re teachers, if we make the required payments for 10 years, our loans will be forgiven in full. Curious to know what you think about trying to pay these off. Thanks!”

Thanks for writing, Vanessa. I’m going to try not to be blunt here. Putting off payments on your student loans will possibly be your biggest setback of your life. I know it sucks and I know it’s hard. It’s supposed to be.

Anytime the government comes up with these plans to help, run! They’re trying to get your vote; it doesn’t mean they care, it doesn’t mean anything will pass. And more importantly, it doesn’t mean it should pass. We are responsible for our own debts, regardless of how absurd the amount seems. 

The student loan forgiveness program for teachers could end at anytime, and it also comes with a lot of stipulations that if you do one thing wrong at any time during the ten-year period, which they like to make a moving target, you’re back to square one.

I never tell people to put off paying down debt because of a loan forgiveness program, especially one run by the government. You don’t want to be in debt for that long. Ten years is too much time to have this looming over you and destroying your life. 

Sallie Mae needs to die and a well-sharpened budget is your greatest weapon. Sorry if that sounds too brutal, but it needs to be said. Thanks for writing, Vanessa.

 

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“Can I Deduct Mileage as an Employee on my Taxes?”

A lot of employees that normally have to drive a lot for work will track their mileage and then claim the mileage as a deduction on their tax return, much like a self-employed taxpayer would. 

That being said, this last tax season saw a lot of changes being implemented by the Tax Cuts and Jobs Act, and a big change impacted how we record mileage for employees.

Brian writes: “Hi Mike, I work for a construction company and have to drive a lot for work. I use my own car and pick up supplies and go to different sites. I always give my CPA my mileage at the end of the year. Not sure what he did with it but he said he won’t need it this year. 

Does he know what he’s doing? I’ve been tracking it all year and I kind of want to use it if I can.”

Thanks for writing, Brian. Your CPA is right, he will not need your mileage this year. Unfortunately, one of the big changes from the Tax Cuts and Jobs Act was the suspension of writing off any deductions that were subject to the 2% of AGI floor. All that means is that any deductions that an employee would normally deduct are now suspended, including mileage.

Now, this does not mean that all hope is lost for employees that have to use their own car for work. But it may take some negotiating skills.

Your best bet is to talk to your employer about an accountable plan. These are very powerful tools for employers to use and are tax-advantaged. An accountable plan allows an employee to turn in an expense report to his or her employer with details of the expenses and then the employer can reimburse the employee, tax-free. 

Accountable plans are non-taxable fringe benefits when used appropriately. For 2019, the IRS business mileage rate is 58 cents, meaning your employer can reimburse you 58 cents a mile, completely tax-free.

Now comes the negotiating part. Just because the benefit is tax-free does not mean your employer will want to implement it. If you have other co-workers that are affected by this, talk to them about it and approach your employer together. Perhaps bring an accountant with you to explain the benefits. 

Hope this helps, Brian, and thank you for taking your time to write in.

 

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This article is not intended to legal, financial, or tax advice. For help regarding your specific situation, please consult a local advisor and thank you for reading.

“What Are the New Rules for IRAs in 2019?”

You know the routine; you make money, you save money. And so many of us are using tax-advantaged vehicles like Traditional IRAs and Roth IRAs in addition to your workplace retirement plans. 

It’s great that there’s vehicles that incentivize retirement savings, but just know what the government gives with one hand, they take with the other, as we’ll be diving in and exploring here.

Brett writes in: “Hi Mike, thank you for what you do. I’m sure you’ve been reading the news about the IRA rules and I was wondering if you could explain to me what is happening and if this will affect the money I have in my Roth IRA. Thanks!”

Great question, Brett. Nothing has been put into place yet, although these new bills regarding Traditional IRAs seem likely to pass. As it is, if anyone other than a spouse inherits a Traditional IRA, they must take distributions from it, but they can stretch the payments over their lifetime using the IRS’ actuary tables. This is termed a ‘stretch IRA.’

Under the proposed rules, if this same event were to happen, the beneficiary would be forced to liquidate the IRA over a period of 10 years instead of their lifetime, greatly increasing the tax burden of every payment and possibly pushing the beneficiary into a higher tax bracket until the IRA is liquidated.

Another proposal is to increase the RMD age (the age where you are required to take Required Minimum Distributions) from 70 ½ to 72. This proposal is actually more beneficial to the taxpayer than the current rules. Again, where the government gives with one hand, they take with the other. 

Now, Brett, this information is important to people with Traditional IRAs. You, however, have a Roth IRA and have already paid taxes on it when you put money into it, so the government is less concerned with regulations on the back-end. 

Required Minimum Distributions do not apply to Roth IRAs, however, beneficiaries are required to take a minimum amount every year, so the new rules regarding stretch IRAs may apply to Roth IRAs as well. We will just have to wait and see for that.

I hope that clears that up a little bit and thank you for writing in, Brett.

 

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“What is the First Step to Getting Out of Debt?”

Every one of us that has struggled to do something has had that moment where we say, “That’s it, I’m sick of this. I’m finally going to do it.” And that applies even more so when we’re talking about a person that has finally hit their breaking point and is ready to get out of debt.

Janice writes in: “Mike, thank you so much for what you do here. I’ve been following the blog and I need to know your thoughts on how to get out of debt. My husband passed a few years ago and I was left with a lot of medical debt from that.

I’ve tried a lot of different options, but I just need to know what the first step is. What can I do to make myself feel like I’m making progress instead of going backwards?”

Janice, I’m so sorry about your husband passing and I’m sure that wasn’t easy. The first step we take when we want to accomplish anything is to secure ourselves to brace for the journey. 

When you’re getting ready to go rock climbing you harness yourself in for safety. When you’re about to go for a road trip, you check the car has everything it needs and fasten your seat belt.

When we’re trying to get out of debt, we have to secure ourselves with a starter emergency fund. The amount of this will be different per household, but we usually recommend anywhere from $1,000 – $5,000.

Without a starter emergency fund in place, any setbacks you have will just slide you right back into debt instead of using the cash and you’ll have a different mindset about utilizing debt.

Now, of course before getting the emergency fund together, we have to make the budget and make sure there’s enough coming in and staying in after all minimum expenses are met so that we can even put together an emergency fund.

If it’s an income problem, there’s no easy way to say it; you either need a better job or a second (or third) job. When we’re deep in debt, we need to be intentional and focused.

I’m not saying you have to keep a second job forever or work a ton of overtime the rest of your life, but it is important that we get done what we need to.

Janice, I hope this helped. Let’s power through this and if you have any more questions, please feel free to write in.

 

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This article is not intended to be legal, financial, or tax advice. For help regarding your specific situation, please consult a local advisor.

“Are My Social Security Benefits Taxable?”

We all look forward to that age when we finally start collecting our social security benefits. That’s when it finally pays off to have paid in for all the years before. We often get questions about social security, specifically how to handle tax when it comes to social security benefits.

Joanne writes in: “Hi, I had a quick question about my social security payments and if I have to pay tax on them. I get about $1,300 a month. Does the amount I receive affect how much I pay in taxes, if I have to pay taxes at all? I just started receiving payments. Thank you.”

Joanne, great question. Social security is taxable, but we have to put a huge asterisk on that. And the reason we have to do that is because the amount that is taxable depends. Depends on what, you ask?

The amount of social security payments that are taxable depends on the amount of your other income, including tax-exempt interest (muni bonds).

The taxable portion of total social security payments is based on a formula, and the variables in that formula are based on other variables, like your filing status for tax purposes.

In 2019, if your filing status is Married Filing Jointly, then the formula goes like this (Taxable portion of your social security payments = (Gross Income (not including social security payments) + half of your total social security benefits (including both spouses’)) – $32,000). For all other filing statuses, replace the number $32,000 with $25,000, unless you are Married Filing Separately and lived with your spouse at any point during the year, then replace $32,000 with $0.

However, social security benefits are never more than 85% taxable. So if the number above is more than 85% of total benefits, then only 85% of your benefits are taxable.

So another example, Joanne, is if you receive $1,300 a month ($15,600/year), and have wages of $45,000 and file as Single, then your formula would look like this:

($45,000 + $7,800) – $25,000 = $27,800

Note that $27,800 is more than 85% of your total annual social security benefits, so the alternative formula would be:

$15,600 * 85% = $13,260

In this scenario, 85% of your social security benefits are taxable.

I hope reviewing this helped, Joanne.

 

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This article is not intended to be legal, tax, or financial advice. For help regarding your specific situation, please consult a local advisor.

“Should I Loan Money to My Sister?”

Families can be difficult, and money can be even more difficult. But when you put the difficulties of both of these things together, the results can be catastrophic if not handled appropriately.

Mike writes in: “Hey there, I’m a new follower. I have a question about how to handle my sister and finances. She’s been asking me for money a lot lately and I’ve been giving her quite a bit of money. She’s never been great at handling her finances and I’ve always been a bit more of a saver. I feel like I have to help her out, but it’s getting to the point that I don’t know if I can keep helping her out.

My problem is that now her car broke down and it’s beyond repair. She has to buy a new one but she can’t get financing. She told me that if I loan her the money, she’ll never ask for money again. This sounds reasonable and I was hoping I could get your opinion on it.”

Thank you for writing, Mike. It’s great that you want to help your family and it’s a blessing that you can afford to. But I want you to take a step back for a second, Mike, and think about what you’ve been doing and if this is really helping your sister, or is it just encouraging bad behavior?

When you give her money, does she spend it wisely or does she come back to you the following week, in more debt, having more “problems,” and you’re there to help her out? Most of the time in these situations, it’s going to be the latter. 

Now, giving money to family members and loaning them money are very different things. When you give them money, you’re okay with them having it, no strings attached, and you won’t get mad at how they spend it, because it was a gift. 

When you loan them money, and you expect repayment, you get mad or frustrated when you see them enjoying themselves with money instead of repaying you with it.

Do you feel comfortable that giving your sister the money will result in her paying you back? When a family member gives a loan to another family member, it is generally a recipe for disaster. It can lead to broken relationships and hurt feelings. 

Any time you see them spend money while they’re still indebted to you, you’ll wonder in the back of your mind, “Don’t they know that they owe me money and that is my money they’re spending?” It will cause what seems like at first a minor strain on the relationship, but it will get worse.

If you ever loan money to family or a friend, know in advance whether the money is worth more or less than the relationship. If they cannot repay you, how will you handle it? Will you cut off ties or will you forgive the debt? You may be faced with that decision so prepare well in advance.

In case I did not make it clear enough, we here at Foxx are against loaning money to family members. We are against most forms of debt altogether, but when family members are in the mix, it only gets worse. 

Hope that shed some light on that, Mike. Thank you for writing in.

 

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This article is not intended to be financial, legal, or tax advice. For help regarding your specific situation, please consult a local advisor.

“What is a Fixed-Index Annuity?”

Planning for retirement can be a minefield, especially when so many different financial professionals are giving different advice. And it may be that each one is giving valid advice, but you still want to know who is giving the best advice. And where we come in is not as advice, but as information so that you can make the best choice knowing all of your options and how each option works.

Ed writes in: “Hi, I’ve been following the blog for a while and I’ve recently been meeting with a financial advisor. She’s been talking to me about something called a fixed index annuity. She tells me there’s guarantees and the product cannot lose value, but it will still grow because it’s tied to the performance of the market. Curious to know your opinion. Thanks for the help.”

Thanks for writing in, Ed. She’s not wrong. A fixed-index annuity generally won’t lose value and some even guarantee a minimum return (maybe 0-3%) even when the market goes down. They’re relatively conservative vehicles for retirement. That being said, their performance is tied to the stock market, as their name suggests, a market index.

In return for guaranteeing a minimum return on your money, the insurance company will generally cap the returns of the annuity so the annual growth will not go above a certain amount (maybe 3-4%). 

The insurance company does not mind giving you guarantees in this because when the market goes up (which is does more often than it goes down, historically), the insurance company keeps the growth on your money beyond the cap. Over a medium to long time horizon, the insurance company wins by a landslide. 

That being said, they’re not the worst products and generally they don’t carry any fees (the implicit “fee” is the insurance company keeping your excess gains). If you are overly conservative by nature, have a mild heart attack when any of your investments take a small dip, or have a short time horizon from the time that you purchase the annuity, this may be a great option for you.

Make sure to explore other options also, though, such as fixed and variable annuities and see if these are more suited to you. Review prospectuses carefully and with a professional.

We hope this helped explain this option a little better and thank you for taking the time to write, Ed. 

 

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This article does not constitute legal, financial, or tax advice. For help regarding your situation, please consult your local tax advisor.