SEP-IRAs and SIMPLE IRAs are now allowed to include Roth accounts. Employers that have established either a SEP-IRA or SIMPLE IRA plan are now allowed to fund the retirement contributions into a Roth version of these accounts for themselves and their employees. The Roth funding also includes the employer matching and nonelective contributions for those employees that choose to designate the employer portion of the retirement contribution be contributed into a Roth account. Please note that employer contributions into a Roth account will be treated as taxable income to the employee. Expect to receive a Form 1099-R from your employer to report that taxable income.
The Rule of 72. Do you have adolescent or young adult children that you think would benefit from some easy-to-understand financial guidance? Is so, teach them about the Rule of 72, which is a simple financial calculation to determine how many years an investment takes to double in value by dividing 72 by the estimated rate of return on that investment. For example, an investment with an annual rate of return of 7.2% would double in value in 10 years (72/7.2).
Good financial and saving habits start early and explaining to your kids the basics of the Rule of 72 can help your kids to achieve long-term financial goals. While seeking to obtain an annual rate of return of 7.2% within an investment portfolio, investing $5,000 today would result in that portfolio doubling in value to $10,000 in 10 years, doubling again to $20,000 in 20 years, then to $40,000 in 30 years, and doubling one more time to $80,000 in 40 years. Similarly, if you are looking to retire in 10 years and your retirement portfolio has a current market value of $1.5M; by choosing the right mix of investments to achieve an average annual return of 7.2%, your portfolio could potentially increase in value to $3.0M by the time of you retire in 10 years. Please note that amount is prior to accounting for any additional contributions that you and your employer would be making to your retirement plan over the next 10 years while you continue to work. And assuming that you are age 50 or older and funding the maximum allowed salary deferral per year ($30,500 for 2024), then your $1.5M retirement portfolio could have the potential to grow to $3.5M over this 10-year time horizon.
Unusual and encouraging tax news for pet owners may be on the horizon. Frequently each tax season, a client will jokingly ask me if they can claim their pet as a dependent on their tax return. Unfortunately, the answer is always “no”. However, a recently proposed congressional bill provides some hopeful news for many pet owners. With the goal being to provide financial assistance toward the increasing costs related to pet ownership, a new bill has been introduced in Congress, the People and Animals Well-Being (PAW) Act of 2024. This bill proposes that health savings accounts (HSA) and flexible spending accounts (FSA) offered by employers could be used to pay up to $1,000 of pet veterinary care and up to $1,000 for pet insurance premiums annually. And for service animals, any amount (unlimited costs) paid for pet veterinary care and pet health insurance premiums would qualify to be paid from HSAs and FSAs. With so many of our clients being pet owners, stay tuned as we learn more about the outcome of this unique bill.
If you had gambling winnings this year, consider it a “Fair Bet” that the income won should be reported on your tax return. The past several years have seen an explosion of gambling opportunities for taxpayers. Local casinos have sprung up throughout the USA. A current count reports 44 states offering legalized casinos, either commercial or tribal run. On-line sports betting sites such as FanDuel and DraftKings Sportsbook, among others, have become popular sites for people to wager on sporting events. And don’t forget about the lottery, such as Mega Millions and Powerball, as well as Keno and scratch tickets all which can be purchased at your local convenience stores plus numerous other sites as well.
Winning a big payout is certainly exciting but remember that gambling winnings are fully taxable. Such gambling payouts will generally be reported on a Form W-2G – Certain Gambling Winnings. The W-2G will either be given to the taxpayer at the time of the gambling win or by January 31 of the following year. And for reporting purposes, as noted on the back of the Form W-2G:
The payer must furnish a Form W-2G to you if you receive:
- $1,200 or more in gambling winnings from bingo or slot machines;
- $1,500 or more in winnings (reduced by the wager) from Keno;
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament;
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager; or
- Any other gambling winnings subject to federal income tax withholding.
And if a taxpayer’s cash payout winnings exceed the wager by $5,000 or more, then the gambling establishment is required to withhold 24% of the payout for federal taxes.
Regarding gambling winnings from casino tables such as roulette, blackjack or craps generally being the most popular among other forms of table betting; taxpayers should report their winnings based upon the “honor system”. Casinos are not required to issue a W-2G for these winnings because casinos have no way of knowing the amount of money a gambler started with when a gambler initially sat down at a table to play. Thus, the casino does not know the actual amount won (payout less dollar amount started with) for this type of gambling.
And for taxpayers who itemize their tax returns the IRS allows taxpayers to claim gambling losses on their tax return. From the IRS website: “You may deduct gambling losses only if you itemize your deductions on. And believe it or not, not only does the cost of the wager count as a deductible gambling expense, but travel expenses to and from the casino will qualify to be included in your gambling losses, according to IRS Publication 529.