Medicaid waiver payments are a type of payment from a state to an individual to take care of another individual who would otherwise be institutionalized, saving the government the cost of the more expensive institutional care.

As bad as it has been financially for many individuals, 2020 does provide some unique tax opportunities for those who have traditional IRA accounts.

Some refer to it as “creative accounting” or just “a little fudging here and there,” but if your tax return is missing some income that should have been reported or includes overstated deductions, regardless of whether you prepared your own return or had it prepared, you are the one who is ultimately responsible.

The Treasury Department and the IRS released updated state-by-state figures for Economic Impact Payments (EIPs) on May 22, reflecting the opening weeks of the program.

When you start planning for retirement, the hope is that you will set aside money and it will grow until you leave the working world to spend your time on things other than working at a job. 

However, life happens. There are going to be times when you will need money to pay for things that pop up. It is at times like these that you will want to pull money out of your IRA.

However, you do need to be careful.  If you pull money out before you reach age 59-and-a-half, you will face a 10% penalty for early withdraw.  This would apply if you were pulling money out of either a Roth or Traditional IRAs.

However, it only applies to the amount of the distribution that is included in gross income.  Therefore, it does not apply to the part of your distribution that is a return of your contributions.

However, this is not a hard and fast rule.  There are certain instances where you will not be subject to the 59 and-a-half rule.  When you receive your 1099-R that shows the amount you received, Box 7 will have a code in it that will signify what type of distribution it is. 

Let’s take a look at these codes and what they mean.

If you see Code 1 in box seven, you have had a separation of service. 

• This means you received the distribution in the year you turned 55 or 50 if you are a qualified public safety employee. 
• A public safety employee is someone from any level of government (federal, state or local) who is a police officer, firefighter, customs official, border patrol agent, air traffic controller, or provides emergency medical services. 
• Keep in mind that this code does not apply to IRAs.

Code 2 in box seven means that you have received a distribution that is part of a series of substantially equal periodic payments. 

• Unless the payment schedule is modified before you reach age 59 and-a-half.

If you have a total and permanent disability, you should see a three in box seven, indicating that the payments you receive are due to a disability.

Code 4 in box seven means that you are receiving the payment as a beneficiary of the participant in the plan, who has died.

If you have received a distribution from the retirement plan to pay for unreimbursed medical costs, box seven will have a five in it.  

If you underwent a divorce, and as part of qualified domestic relations order fund were distributed from a retirement plan (other than an IRA), box seven with having a six written in it.

If you have left a job and have been receiving unemployment compensation for 12 consecutive weeks, you can receive money from a retirement plan to pay for unemployment health insurance. 

• If that is the case, you should see a seven in Box 7 of your 1099-R.

You can make withdraws from an IRA to pay for education costs, including tuition, supplies, books, and room and board for someone who is a half-time student. 

• This withdrawal would be indicated by an eight in Box 7.

First-time homebuyers are allowed to withdraw up to $10,000 from an IRA to purchase a home. 

• The $10,000 is a lifetime limit, and you must not have owned a home for at least two years. If you are married, both you and your spouse are entitled to a $10,000 lifetime withdraw. 
• The number nine will show in Box 7 if you have made this type of withdrawal.

Code 10 in Box 7 indicates that a distribution was made from a retirement plan to pay an IRS levy.

If you are a reservist called to active duty for a period of 180 days or more, or for an indefinite period, if number 11 appears in in Box 7 indicates that you have received a qualified reservist deferral.

Need some help with understanding your options when it comes to early retirement distributions? 

Drop me a line at [email protected] and we can discuss your situation and how best to take advantage of the deductions and credits available to you.

In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. 

If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.

Potomac Local News: Today we’re going to talk about hiring your children. This is something that business owners can take advantage of, and, “hiring” is not such a dirty word when it comes to your children, correct?

You can actually hire your kids and set them up for success in the future. What is this all about?

Chris Peden: Well, first of all, people see that and they say, “wow, you know, I can pay them and deduct them for doing chores.”

Well, no, actually, they work they do has to do with your business. So if you have a payroll set up with a payroll company, you can actually put them on payroll and have to do taxes.

• As long as the work related to your business, has a business purpose, and they’re capable of actually doing those tasks, you pay them like you regularly would or you’d make a payment to, say, a Roth I.R.A., or to an educational fund to fund your college education or the retirement fund.

What can my child do for my business? 

Potomac Local News: I imagine that this type of thing would work for for for certain businesses, like office locations, and home-based businesses. Can you give us an example of some of the tasks that a business owner may have their child do?

Chris Peden: Yes. Well, I actually have a friend out in California. I work a lot with him about dealing with tax plans and tax savings, and he puts together a little binder. And what he does, he has a son sit down and put the pages in the binder to organize it.

• Or you may have a child in high school who’s into graphic art or graphic arts and likes working with their computer to create images for marketing brochures for your business.
• These tasks are examples of what you can pay your child to do for rather than sending that work out-of-house. Maybe your children have a great knowledge of social media and can help your business in that respect.
• With this approach, you can have a little more control because it’s your child sitting there and you can help them. And this teaches them to learn to work in a business and then feeds their passion for what they’re doing.

Potomac Local News: A few of the questions that could lead to fear is, when it when I get my kid in the business, what about all of the paperwork involved?. Is the IRS going to look down on me for hiring my child? On paper, does it make me look like I am forcing them to do something they don’t want to do?

Walk us through the set-up process? What’s the paperwork? And then what’s the legality of it all?

The paperwork is easy

Chris Peden: The paperwork is basically setting up an employee on your program, on your payroll. I would recommend working with a great payroll company such as Paychex, which will walk you through the legal ramifications.

• When it comes to the amount of pay, make sure that the work you’re paying them a market rate for it. Ask yourself, “What would I pay a normal if someone outside my family to do this work?”
• And you want to pay them a market rate, be sure they do the work. Is the job you’ve hired them for at their skill level? Are you only going to pay someone to do quantum mechanics unless they’re really, really smart, like young Sheldon Cooper?

Potomac Local News: And finally, once you have your kids working in your business, is the work you’re paying them to do “busy” work designed to keep them entertained and out of your hair? Or, are you actually helping to set them up for success and giving them real-world experience?

Chris Peden: Absolutely. If they’re coming, they’re working for you, they’ve worked for you as an employee in your company.

• They can list that experience on a LinkedIn profile. They can put on a resume that they’ve actually done this work and they have experience.
• And if they do things as we’ve mentioned, graphic arts, social media posts, they have samples that have actually been used in a business that could lead them to find a job somewhere else or starting their own company.
• It helps them build a portfolio that they can go out and be working for other outlets for someone else or get clients on their own.

Chris Peden is the principal owner of Peden Accounting Services in Manassas. Contact him today for all of your business accounting needs by calling 703-967-1948.

Strike up up a conversation today with Peden Accounting Services by going to their website, or by calling 703-967-1948. They’re your local tax and accounting firm.

When you start a business, you end up dealing with a lot more paperwork.

When you were an employee, you had someone else at your company who would take care of all the paperwork and tax forms that need to be filed to stay in compliance with all the rules set forth by the federal and state governments.

Now you are responsible for all aspects of your business, which means you will need to complete the paperwork and deal with any correspondence that comes your way.

One type of form you will need to deal with start with “1099”. These would be referred to as series 1099 forms, and are used to report various types of income you would receive. Let’s take a look at a few of them that you may receive as a business owner.

1099-A: Acquisition or Abandonment of Secured Property –If you borrowed money from a bank or other lender to purchase property, and you either abandon or have the property foreclosed, you may have to treat the property as being sold. The lender will have to send you Form 1099-A with all the relevant information needed to report the “sale” on your return. If you had purchased an office for your business, and you abandon it or it gets foreclosed, you should expect this form from the lender.

1099-B: Proceeds from Broker and Barter Exchange Transactions – One way to save on cash is to barter with another business for services. If you did that, you would receive this form if you engaged in bartering with someone else, or took part in a bartering exchange.

1099-C: Cancellation of Debt – Here is something that may seem a little strange: If you borrow money, and the lender cancels the remaining debt at some time in the future, you have to recognize the amount forgiven as income. If you think about it, it does make sense. You actually gain from not having to pay back the money. If your loan is forgiven, you will get a 1099-C from the lender showing how much you of the forgiven loan you need to record as income.

1099-K: Merchant Card and Third Party Network Payments –Do you accept credit cards in your business. Then you will be receiving this form if you received money from any online sales you made during the year that were paid for with a credit card. You want to make sure the amounts on these forms match with your records. If not, contact the sender to determine what is causing the variance.

1099-MISC: Miscellaneous Income – This is the one on this list that you will probably most likely receive during the year, and possibly more than one if you have more than one customer. Basically, this form shows the amounts your customer has paid you for the work you did for them, or if you rent a property to them. You will want to review this form to make sure the amounts match your records.

1099-S: Proceeds from Real Estate Transactions – Although most of the time you won’t receive this form unless you sell your home, you may have a property that you own for your business. You would receive this form if you sell:

1. Land, whether improved or unimproved,
2. Residential, commercial, or industrial building
3. A condominium unit
4. A cooperative housing corporation’s stock

While most entrepreneurs do not have to deal with the sale of real estate, you should be aware of this form so that when your business grows to the point of needing a headquarters, you will be ready for the form when it arrives.

Having to deal with all these new forms may be intimidating, but don’t let that stop you from starting and growing a business. Additionally, don’t let the forms be so intimidating that you don’t ask an accountant what they are about and what should be done.

I always enjoy helping my clients understand their tax situation, and I would rather have you ask what something means than have you make a decision based on information about which you are confused. If you have questions, drop me a line and I would be happy to answer them.

It’s tax season and that means you’re running around the home office looking for documents, receipts, and other pieces of paper that may have fallen behind your desk over the past year.

While it’s not ideal, trust us, tax time doesn’t have to be a hassle. We talked with Potomac Local Supporting Partner Chris Peden, of Peden Accounting Services about how to best prepare for tax season.

Get a five-divider folder

Well, first thing is to gather your documents together. And what I said in the post was you go down to Walmart or Target or store and get a five divider or folder and you just start throwing the documents in there. You have got to have a section there for your income. Another one for any kind of a government document you’re going to get or from the bank.

Say you’re going to get refunds, you’re going to get your mortgage statement, you’re going to get an IRA statement: throw this in there. And then you also want to use the other buckets for, say, things like charitable contributions, because a lot of people are going to need to have documents for those in order to be able to deduct those.

If you own a business

And then if you run a business, you’re going to have your expenses, and you’ll want receipts for those just that when he handed off the account, they can look through it and understand what they’re looking at and how they can deduct it.

Also, if you do have a business, a PNL or a profit loss statement is very helpful to help make sure that everything gets reported and reported correctly. So those are what you’re going to need to get started on your taxes for the year.

For my clients, I have an organizer that I send people so they can just go through and just do a checklist while watching some of the bowl games or a basketball game.

Afterward, we have a conversation, find out about what’s happened to you during the year. Any kind of events that may have triggered something. You sell a house, sell some stocks, you have a kid. Those all things can be lead to other questions that we can have a discussion about and see what else we can do and really be ready just to talk and just have a nice chat with somebody who wants to help you out.

Hey, can we talk?

After the documents are together, we have a conversation and find out about what’s happened to you during the year. Any kind of events that may have triggered something. Did you sell a house? Did you sell some stocks? Did you have a kid? Those all things can be lead to other questions that we can have a discussion about and see what else we can do and really be ready just to talk and just have a nice chat with somebody who wants to help you out.

What should I ask?

I generally start out with this outlook: there’s no such thing as a stupid question. I would rather have you ask me something just out of pure honesty and curiosity, asking something like. “Hey, I don’t know about…” And just ask me about it and I’ll give you the best answer I can.

And sometimes the what’s considered dumb questions are actually very insightful. And those conversations could lead to new findings, like decisions you didn’t know you could make.

Now is a good time

It’s also a good idea to make a simple phone call a call to your CPA and saying, “Hey, can we talk for a little bit before you go absolutely crazy.” And have a nice civil conversation about what needs to happen, and maybe do a little tax planning while we’re there because it’s early in a year.

The sooner you can put plans in place, the less you have to worry about it down the road. It’s best to do this now, while there are still weeks and months before the tax deadline looms.

Strike up up a conversation today with Peden Accounting Services by going to their website, or by calling 703-967-1948. They’re your local tax and accounting firm.