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Mentor RIA Consulting

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My Blog


How Delays May Affect Your Tax Filing in 2021

Posted on January 15, 2021 at 10:48 AM Comments comments (86)
The tax season this year – 2020 taxes filed in 2021 – will be unlike recent years for many reasons. One major change is the almost certain delays you may expect in connection with the preparation and filing of your taxes. The potential for delay is based on several factors, most of which will be out of your control but which you may want to understand and allow for this year. 
First, we have the substantial backlog at the IRS for 2019 returns that have NOT yet been processed. Between individual returns and business returns, over ten million are outstanding. This could not only affect the taxpayers whose returns haven’t been addressed but also contribute to a delay for many of the rest of us. 
In a good year, many filings are delayed by late arriving K-1s and 1099s, a problem mainly attributable to the slowness of individuals, businesses and other entities to gather the information and prepare the required forms. Naturally, this is less of an issue where the forms are delivered to the taxpayer electronically but there is always a wait for them to be prepared. This year, the second factor relates directly to these required forms most of us need to prepare our returns. The factor, much more troubling than the IRS backlog, is the abject failure of the USPS to handle first class mail expeditiously, particularly in recent months. 
In the last two months, we have seen or have heard from credible sources that first class mail often has been arriving two weeks or more (and as much as five weeks) AFTER the mailing date as indicated by the cancellation of the postage. There is nothing first class about this treatment and it erodes trust in the postal service. If you , like many of us, typically receive some tax documents in the mail, be prepared to wait indefinitely for it to arrive. 
Please note, however, that some first class mail seems to be arriving within a week of its mailing and so is not nearly as problematic. The inconsistency in treatment and the lack of any meaningful explanation are reminders to stay alert and know when something should be arriving and be prepared to take action when it does not.

Sales Incentives: Who Really Pays?

Posted on October 14, 2020 at 3:33 PM Comments comments (1)
Not every product or service sells itself and those offering most products and services devote substantial effort and funding to ensure that the desired sales happen. In the financial industry, a firm’s offering of incentives to its sales employees to push particular products has (rightly) come under fire and increasing regulation to the point that many incentive programs have been terminated or at least significantly limited.
One reason for the change is that although the firm compensates those salespeople, the funds for that compensation ultimately come from the customers. Although it is true of most sales, it is further complicated in the financial industry. This is not only because customers may not understand that the product or service costs more because of the cost of the sales incentives but more importantly because the salespeople typically will not suggest, recommend or offer other available products or services which are equally useful and very often cheaper. This is a real concern where the seller – financial firm – is obligated to act in the best interests of its customers and is required to make full disclosure and not place its interests above those of its clients. Incentives often mean the customer pays more than they should and likely gets less than they should.
The underlying issue is the perverse nature of sales incentives generally since they encourage a one- dimensional approach to sales – making as many sales as possible to receive a reward, usually financial. A striking example outside the financial industry is when the government intervenes with sales incentives as it did with the food stamp program. The push on government employees to sign up as many participants as possible, without regard to the intent and requirements of the program or the actual needs of individuals, led to a huge increase in participation in the program, the cost of its administration and of course the cost of the benefits themselves. You probably know who paid for that – not the government or its employees but the taxpayers.
At bottom, relying on sales incentives always creates winners and losers and you shouldn’t be surprised that the entity offering those incentives is rarely the loser.     


Is the Pandemic Changing Your Plans?

Posted on September 14, 2020 at 2:50 PM Comments comments (3)
As the pandemic with its related restrictions and uncertainties drags along, we are seeing more clients changing their near-term plans and goals.  Initially, many of us simply deferred activities, presumably for a few months while the pandemic (hopefully) ran its course. Now, with no clear end to the pandemic nor any return to something approaching normalcy in sight, people are making significant changes to their plans. These changes are wide ranging and appear to have affected different age groups in markedly different ways.

These changes can be very significant, including changes in employment status, residence location, major purchases and the like, all driven by the impacts of the pandemic. Other types of changes, also important, focus more on our leisure time, including reduction or elimination of participation in entertainment and sporting events, vacation travel, and of course dining and other socializing. All of these factors affect our personal levels of stress and any sense of well being and that, in turn, will definitely affect our planning going forward.

If you are feeling that the pandemic has changed things enough that you should consider making significant changes in your life plans, talk with your friends and family and don’t forget to reach out to your advisers as well. For those of us who are advisers, remember that when advising clients on their planning for investment, retirement and other aspects of their lives, we need to be aware of these changes that clients may be considering (or may even have avoided considering) so that we can best advise them on how to adjust their planning to meet changing needs and expectations. 

Don't Forget to File Your Taxes

Posted on July 11, 2020 at 12:00 PM Comments comments (157)
In this rather unusual year, it is important that you do not forget to file your Federal Income Tax return this week. Many, many taxpayers took advantage of the IRS postponing the due date for the 2019 tax returns by 91 days to July 15, 2020. This step was taken in response to some of the confusion and uncertainties surrounding the pandemic and was meant to be a help to taxpayers but not an excuse from the obligation of filing and paying tax.

Of course, taxpayers may still request an extension to the filing of their returns until October 15, 2020, provided of course that the taxpayer pays the amount due by July 15, 2020. That extension is in line with the usual rules; it was the extension of the initial filing date of April 15 that was unusual. Note that a failure to file and pay now may subject a taxpayer to various penalties as well as interest which accumulates steadily on unpaid balances at a three percent annual rate.

Given the number of returns that must be processed, don’t be surprised if your tax professionals are quite busy, just as they normally would be at this point in April. Perhaps enough taxpayers have already submitted their returns that the remaining returns won’t be as burdensome as in a typical year. In any event, if you haven’t already gotten your return completed or at least organized, don’t dawdle but get your paperwork in order and an appointment scheduled with your tax professional.

If worst comes to worst, filing an extension and submitting a payment is not too difficult a process and will allow you another three months to get all your information organized to allow for filing that return. Whatever you do, though, don’t ignore the need to file and pay since an extension is not the same as an exemption!

Life Insurance Demutualization and Tax Impact

Posted on May 20, 2020 at 8:48 AM Comments comments (22)
In the last twenty or so years, several major life insurance companies, owned by their policy holders as a group, determined to change the format to become a shareholder owned business. This process is called a demutualization. Members receive either a cash payment or shares in the company in exchange for their voting and liquidation rights, while retaining their life insurance policies.  

The receipt of cash or shares will be considered taxable income to the extent the value received exceeds the former member’s cost basis in the property – rights – exchanged for the cash or shares. The receipt of cash would be income at the time received. When a member received shares, that in and of itself was not a taxable event until the member decided to sell the shares and thereby realize the income. That is all basic tax law and seems straightforward enough.  

The problem, of course, is determining the value of those rights given up by the member in return for those shares or cash. Not surprisingly, the IRS has taken the position that the member has a zero tax basis in the cash or shares received. This disregards the fact that some portion of premiums paid by a member for insurance was in return for the rights the member held and over and above the actual cost of insurance itself. Of course, the premium payments themselves were not broken out into specific aspects reflecting the cost of insurance, the amount allocated to voting and other rights and any other item. This makes it more difficult for the member, as taxpayer, to establish a cost basis.

In litigation with the IRS, the courts have taken a variety of viewpoints and results on the cost basis issue. If you, like many other folks, have been holding onto shares received in a demutualization, it may be helpful to consult not only with the insurance company itself regarding the issue but also with a tax professional who may shed light on what your courts are likely to decide. For some of us, this issue can result in either a large tax saving or a large tax bill. It is worth looking into to understand the possible outcome. 

Taxes: Extensions, Suspensions and Deferrals

Posted on April 16, 2020 at 9:19 AM Comments comments (80)
Another of the many outcomes of the pandemic has been the stream of advisories coming from the IRS regarding the relaxing of various tax requirements. The usual date of April 15 for filing and paying one’s 2019 income tax return has been extended all the way to July 15. This extension also includes the timing of IRA contributions counting towards the 2019 tax year. If you owe taxes and need time to get things in order to file and pay, this is a blessing. However, if you are expecting a refund, the extension has little, if any, value to you and you likely would not wish to delay your filing. Similar extensions apply to the filing and payment of gift tax returns, generation skipping tax returns and the like.
No special forms or filings are required to obtain the extensions. That said, these extensions DO NOT apply to obligations to file and pay state income taxes. So it would be wise to check with your state to ascertain whether any extension may be available. Also note that the IRS presently is NOT accepting paper filings so it is important to use online filing if you are concerned about getting it done anytime soon.
For older taxpayers facing required minimum distributions, the IRS has suspended that requirement for this tax year and there is no need to take such a distribution and no penalty will be assessed for the failure to do so. If a distribution has been taken, the IRS permits the taxpayer to roll the funds back into the qualified plan from which they took the withdrawal. There is an extended period beyond the usual 60 days available for the roll back as well.
Employers, including the self-employed, may take advantage of a provision deferring the deposit and payment of the employer’s share of social security taxes. To avoid penalty, the deferred amounts must be deposited on specified dates: 50% of the total deferred amount by December 31, 2021 and the remaining amount by December 31, 2022. This can be a substantial benefit to employers and the self-employed for the amount of these taxes originally due in 2020.
These are some of the most relevant adjustments applicable to individuals and there are more items you may wish to explore with your tax professional. 

Helping Your Small Business with Emergency EIDL Grants

Posted on April 8, 2020 at 1:50 PM Comments comments (98)
The coronavirus pandemic, with its accompanying shutdowns, has dramatically and negatively impacted small business (as well as large). Among the legislative enactments intended to help deal with the pandemic, the CARES Act includes provision for Emergency EIDL Grants which legislation allows qualifying small businesses to receive grants of up to $10,000. If you are a small business owner, affected by the pandemic, it may well be worth applying for a grant.
Covered businesses include those with fewer than 500 employees, sole proprietors, independent contractors and the like. The funds may be utilized for specific purposes, including: meeting payroll to retain employees; paying rent or mortgage for business property; covering paid sick leave for employees unable to work due to illness due to the pandemic; addressing increased costs due to interrupted supply chain; and repaying obligations that cannot be met due to revenue losses.
Although the grant may seem like no more than a drop in the bucket for larger businesses, many small businesses will find this a lifesaving (business saving) sum. Furthermore, the grant, though limited, is only one part of the legislation which permits much more substantial loans to the small business community of amounts up to $2,000,000. The receipt of an EIDL grant may affect an application for assistance under the related legislation for the payroll protection program. That program (PPP) carries with it the possibility of loan forgiveness but the receipt of an EIDL grant will reduce the potential amount of such forgiveness.
As you can see with this brief overview, the legislation is both complex and interrelated and so applicants should be certain to seek professional advice to make sure they make the most of the offerings. If your small business is suffering today, don’t delay obtaining advice and applying for the various forms of assistance available. 

Why You Should Be Worried

Posted on March 19, 2020 at 2:38 PM Comments comments (0)
The seemingly endless market drops that have been a feature of the so-called pandemic have many investors and some advisors in a panic. For those investors it is not a question of simply rebalancing and investing cash at the bottom of the market (since we don’t know where or when that is). Many are so fearful that they may abandon common sense and their investment plan to hope for a magic bullet that will restore their investments. This generally doesn’t work.
More importantly, though, one should be concerned about where things are going with our extremely unprepared and overleveraged governments. Government spending is, at least in part, based on expected tax revenues which in turn are premised on economic activity and our earnings. When that activity drops precipitously, surprise – sales and use tax receipts drop as well, not to mention income and the taxation thereof. This means that all those rosy projections concerning tax receipts are for naught and the governments, which almost uniformly lack the will to cut spending, will seek to increase taxes even further. A tax increase will encourage a downward spiral that will not be easy to turn around even when the market begins to recover and rebound.
Finally, what about your own job? Whether you run a business or are an employee, the general shutdown we are experiencing in many areas and business sectors is already having an impact. Even if you have an emergency reserve and don’t currently live paycheck to paycheck, the longer the restrictions and limitations are in place, the harder it will be to pay one’s regular bills. The ongoing costs of utilities, internet access, rent, food, household goods and more won’t go away entirely, and may not be reduced much at all. How long before you experience the personal pain for daily living, let along the pain of destruction of retirement savings and ultimately a future of even greater government overreach?   

The Disconnect between Cost & Service

Posted on March 10, 2020 at 11:04 AM Comments comments (0)
Most types of insurance involve an annual premium and renewal to ensure continuity of the coverage. One should review the terms of the renewal offer with care and an open mind as to whether it is preferable to take the easy course and renew or to update what coverage you may require. Although many of you won’t have experienced this, years ago insurance renewals – home, auto – were not fraught with double digit increases, non-renewal or changes in terms. In fact, in cases where the insured did not experience any claims or problems, it was not uncommon to see a decrease in premium at renewal time. This seemed to give credence to the idea that the insurance company considered the individual policy holder as well as other circumstances in determining the renewal offer terms.
Today, with the constant loud competition for customers and claims of how much one might save by choosing a particular insurance company over another, the relationship of the insured and insurer has become much more transactional and much more impersonal. Today, when renewal time comes, the insurance companies behave more like governments than service businesses. The one certainty at renewal is an increase in cost that bears no relation to any objective factor – increases always much higher than inflation, no consideration to claims history or lack thereof, no connection to the benefits or service, no explanation of why an increase is occurring and so on.
Of course, times have changed and with extravagant and extreme settlements and verdicts along with devastating wildfires, floods and hurricanes and the ever-rising costs of replacement, insurance companies have had to factor their increased risks into the equation. Even so, insureds should be aware that they will be charged not based on their particular history and situation with the insurance company but without consideration of those factors. Case in point: one client received their annual auto renewal offer – following a year without claims, tickets, or other change beyond an aging vehicle and owner – and found it included a 26% increase in annual premium without any increase in coverage or other benefit offered. How does that make sense? It is a great approach to drive customers away and my advice was to seek an insurer that actually wanted the client’s business. 

Year-End Gifts and Taxes

Posted on December 21, 2019 at 12:07 PM Comments comments (81)
As the end of the year approaches quickly, there is still time to make gifts to charities or family members and to not only enjoy the giving but to also reap income tax benefits from the transfers. For example, where deductible items other than charitable gifts are at all significant, then the charitable gifts will be likely to support further income tax deductions, making the gift a benefit to both donor and charity. There is no transfer tax for such gifts which makes the approach even more attractive.
Although gifts to family members do not support an income tax deduction, depending on how the gift is made, there may be some income tax benefit derived. A gift of cash only reduces the amount of funds in hand for the donor and that may mean no more than that the donor will derive no income from the gifted funds in the future and so have no tax related to what has been given.
However, a more substantial benefit – albeit only in terms of future taxable income – may arise when the donor makes a gift in kind rather than in cash. An in kind transfer of stock allows the donor to make a gift subject to the annual exclusion from any gift tax while having the capital gains tax deferred until the recipient of that stock sells it. At that point, the tax is assessed at the rate applicable to the recipient, which may well be a zero rate if the recipient has low enough income. Remember that the zero bracket for capital gains ends at $39,375 for single taxpayers and at $78,750 for married taxpayers filing jointly.
The downside, under current law, is that a gift in kind means that the step up in basis which occurs at the death of the owner will not apply. The current gift in the hands of the recipient, though, may well outweigh any potential future step up and will also reduce the donor’s estate when death finally does occur.