Month: December 2019

On Dec. 5, the IRS released the long-awaited final version of the 2020 Form W-4, retitled Employee’s Withholding Certificate, with major revisions designed to make accurate income tax withholding easier for employees starting next year.

All new employees hired as of Jan. 1, 2020, must complete the new form. Current employees are not required to complete a new form but can choose to adjust their withholding based on the new form.

Any adjustments made after Jan. 1, 2020, must be made using the new form. Employers can still compute withholding based on information from employees’ most recently submitted Form W-4 if employees choose not to adjust their withholding using the revised form.

Employers may ask employees hired before 2020 to use the new form, but [employees] are not required to do so. Employers should, however, explain that withholding will continue based on the form they previously submitted and may not be as accurate as using the new W-4. If a new employee doesn’t submit a W-4 after 2019, companies must treat them as a single filer with no other adjustments.

What’s Changed

Form W-4 is presented on a single, full page, followed by instructions, worksheets and tables. In place of withholding allowances, the new W-4 includes a process with five possible steps for declaring additional income, so employees can adjust their withholding with varying levels of accuracy, privacy and ease of use.

The five steps are:

1. Enter personal information.

2. Indicate multiple jobs or if spouse works (if applicable).

3. Claim dependents (if applicable).

4. Make other adjustments (for income not from jobs, deductions claimed and extra withholding per pay period if applicable).

5. Sign the form.

An Updated IRS Tax Estimator

Employees can use the IRS Tax Withholding Estimator to help them complete the new Form W‑4.  

https://www.irs.gov/individuals/tax-withholding-estimator

The calculator, updated in August with several new functions, is designed to help employees estimate any additional withholding.

Sample Letter Explaining the 2020 Form W-4 to Employees

To: (all employees or individually named employees) CC: From: (your name here) Date: (fill in as appropriate) Re: 2020 Form W-4   The 2020 Form W-4, Employee’s Withholding Certificate, is very different from previous versions. This is due to the federal tax law changes that took place in 2018. The Internal Revenue Service (IRS) is not requiring all employees to complete the revised form and has designed the withholding tables so that they will work with both the new and prior year forms. However, certain employees will be required to use the new form: those hired in 2020 and anyone who makes withholding changes during 2020.   Even though the IRS does not require all employees to complete the revised form and even if your tax situation has not changed, we recommend you perform a “paycheck checkup” to see if you need to make adjustments to your current withholding. To conduct the checkup, you can use the IRS Tax Withholding Estimator (www.irs.gov/W4App). To effectively use the estimator, it is helpful to have a copy of your most recent pay stub and tax return. It is likely that the estimator will be updated to account for the 2020 tax tables in early January. Please note: if you do not submit a new form, withholding will continue based on your previously submitted form.   Before completing the 2020 Form W-4, please read the instructions that are included with the form. You must complete Steps 1 and 5. Steps 2, 3, and 4 are optional, but completing them will help ensure that your federal income tax withholding will more accurately match your tax liability. Step 1 is for your personal information; Step 2 is for households with multiple jobs; Step 3 is used to claim tax credits for dependents; Step 4 is for other adjustments (additional income such as interest and dividends, itemized deductions that exceed the standard deduction, and extra tax you want withheld); and Step 5 is where you sign the form.   The IRS takes your privacy seriously and suggests that, if you are worried about reporting income from multiple jobs in Step 2 or other income in Step 4(a), you check the box in Step 2(c) or enter an additional withholding amount in Step 4(c). To determine the additional withholding amount, you can use the withholding estimator.   The IRS has also published Frequently Asked Questions that you may find helpful as you complete the form (https://www.irs.gov/newsroom/faqs-on-the-draft-2020-form-w-4).

WASHINGTON — The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF), posted today on IRS.gov. This guidance provides cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.

ITEM	2020	2019	2018
401(k), 403(b), 457 Elective Deferral Limit	$19,500	$19,000	$18,500
Catch-Up Contribution Limit (age 50 or older)	$6,500	$6,000	$6,000
Annual Compensation Limit	$285,000	$280,000	$275,000
Defined Contribution Limit	$57,000	$56,000	$55,000
Defined Benefit Limit	$230,000	$225,000	$220,000
Definition of Highly Compensated Employee	$130,000	$125,000	$120,000
Key Employee	$185,000	$180,000	$175,000
IRA Contribution Limit	$6,000	$6,000	$5,500
IRA Catch-Up Contributions (age 50 and older)	$1,000	$1,000	$1,000

HIGHLIGHTS OF CHANGES FOR 2020

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2020.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $$122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.

KEY LIMIT REMAINS UNCHANGED

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Details on these and other retirement-related cost-of-living adjustments for 2020 are in Notice 2019-59 (PDF), available on IRS.gov.

As the end of the year draws near, many families think they have a sound “financial plan” because they own investments or have established a saving strategy for retirement. This is a good start but it’s incomplete. There are many components to ensuring your financial future and getting your “house in order” is the first step. What do I mean by that? I’d like to share 5 ways you can accomplish this. Let me explain… 

Resolution number 1…. Don’t go to the hospital unprepared!1) Do you remember the story about Terri Schiavo? At 26, Terri had a massive coronary, was resuscitated but experienced irreversible brain damage that left her in a coma. Fifteen years later, the Supreme Court made the final decision to remove the feeding tube. This long-term ordeal would not have happened if a simple healthcare directive and a living will had been in place. A misconception we frequently encounter is that healthcare directives are only for older adults. We’ve seen clients experience unexpected, life changing circumstances at all ages and believe that healthcare directives should be a priority for everyone. Please don’t let this happen to you or a loved one. Please get your house in order. 

Resolution number 2…. Sign a healthcare directive and living will.2) What do Steve McNair, Abraham Lincoln, Pablo Picasso and the musician Prince have in common? They all died without a will. Steve McNair’s mother was removed from the house he had given her because there was no will to prove he had given it to her- I’m pretty sure that was not his intent. Having this document is essential to ensuring your wishes are carried out but it is one of the most frequently postponed documents to be put in writing. Your will protects you and ensures that your future wishes for your estate are carried out. According to the Virtual Attorney, 32% of Americans would rather do their taxes, get a root canal, or give up sex for a month than create or update their will! Even though we are not attorneys, we can help you facilitate this- let us help you get your house in order.  

Resolution number 3…. Create or update your will.3) In 2005, Anne Friedman, a former school principal, died suddenly of a massive heart attack. She had accumulated over $900,000 in her Teachers’ Retirement Fund but never named anyone as her designated beneficiary. By law, her surviving spouse would have been entitled to the money. However, in 1978, in a previous job, before she was married, she had filled out a designated beneficiary form naming her mother, her uncle and her sister as her designated beneficiaries. Her mother and uncle had since passed away, but her sister was still living. By law, the sister was entitled to the money, which she received, and didn’t share a dime with the now destitute husband. Proceeds from life insurance, 401(k) plans, and IRAs are being left to the wrong beneficiaries because the owners never thought to update them. Your financial documents must be regularly reviewed and evaluated as your life evolves, particularly when it comes to your beneficiaries. Marriages, divorces, births, deaths and other major life events can all warrant changes. These documents are too important to leave unattended. Let us review these for you. 

Resolution number 4…. Review and update beneficiary designations with life changes.4) Do you own a business? How about a real estate investment? Better yet, do you have children driving a car? Do you have proper insurance? Have you fully limited your liability? Are your investments titled properly to limit liability? If you have trust documents, titling of property, insurance coverage(s) and other liability documents, these also need to be regularly reviewed. We can help you do this. 

Resolution Number 5…. Regularly review legal/liability documents:5) Frederick Vanderbilt, J.D. Rockefeller, JP Morgan, Franklin Roosevelt, and Elvis Presley all died without an estate plan. Please re-read that list. Some of the most successful, intelligent, and powerful people in America did so much for so many- they failed, however, to protect all of the wealth they had created. Although we can’t predict the future, it’s important to have a comprehensive plan in place for how your money and other assets should be distributed when needed. Your life stage will determine the needs of your estate plan. 

If you’re young and single, your plan may only include a few items, such as a will, beneficiary designations and medical and financial powers of attorney. If you have substantial wealth, you may need one or more trusts to control how your assets are taxed, managed and distributed. 

Resolution Number 6…. Establish an estate plan.It’s critical to remember that financial planning is not solely based on investment planning or picking the right investments. While this must be done properly, there are many other vital areas that get overlooked or forgotten. Keep your financial house in order by regularly reviewing your plan and ensuring that you have the fundamentals in place. By this time next year, you’ll be glad you did.