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How 1099 Workers Can Prepare for Tax Season

The little things independent contractors should do before April.
  
Do you freelance or run a business on the side? You have a complicated tax situation, all stemming from one fact – when you earn a paycheck, taxes are not immediately taken out of it.

Many freelancers are caught off-guard when tax season arrives. They are stunned to realize how much tax they owe. If you would rather not be one of them, pay attention to these details.

You should have all your 1099-MISC forms in hand by early February. If you earned more than $600 working for an employer during 2017, that employer will send you a Form 1099-MISC.1,2

Frustratingly, some employers miss the January 31 deadline for issuing 1099s and send them out in the spring. No matter – whether you get a 1099 on time or not, you must report the income to the I.R.S. on Schedule C or Schedule C-EZ (and you must also report it to your state’s tax authority). Should you neglect to report any 1099 income, the I.R.S. will send you a letter noting the missing income and requesting the corresponding tax payment.1,2,3

If an employer has botched information on a 1099, tell the employer right away – it may be able to correct the error before sharing the misinformation with the I.R.S. If it turns out the I.R.S. already has the incorrect information, ask the employer to correct it on your behalf.1

As a freelancer, you can deduct many things. This also applies if you own a sideline business. Fifty percent of the Medicare and Social Security tax you pay is deductible. Hardware and software expenses as well as work-related advertising, travel, phone calls, mailing expenses, and office supply purchases may be deducted. You can deduct rent you pay to house your business, the cost of books and publications you purchase for it, and legal and professional fees you pay on behalf of it.2,3

Maybe you pay for your own health coverage. Freelancers who do so are eligible to deduct the cost of their health insurance premiums. You can even deduct Medicare premiums you pay for Part B, Part D, and the expense you pay for a Part C (Medicare Advantage) plan or a Medigap policy.2,3

If you have a sideline business, you are sure to receive Form 1099-K. This I.R.S. form reports income from debit card, credit card, and third-party network transactions. Your Form 1099-K should arrive in early February. When you get it, confirm its accuracy by checking your gross receipts, payment card records, and merchant statements. See that it reports income generated through all payment avenues (PayPal or similar services, credit cards, etc.).3

The income amount reported on your Form 1099-K does not have to be reconciled with the gross receipts you report on Form 1040. This is because adjustments to sales income (such as chargebacks) are not reported on Form 1099-K. That fact noted, keep documentation handy to support both your income and any deductions you want to claim on your 1040 and your state tax return.3,4

If your unincorporated sideline business is turning a profit, you should be making quarterly estimated tax payments, for two reasons. One, your earnings are not being withheld. Two, your net earnings are subject to self-employment tax.4

Coping with quarterly self-employment and income taxes may become a little easier if you change your withholding at your regular job. If you (or your spouse) does that, you might free up the money to cover the taxes generated by your small business.2,4

You can also lower those taxes by creating, and contributing to, a qualified retirement plan linked to your business, such as a Solo 401(k) or Simplified Employee Pension (SEP) plan. Your contributions to these plans are tax deductible, and they give you a chance to boost your retirement savings at the same time.2,3,4

If your sideline business has a loss for 2017, that loss is only deductible as a business loss if the I.R.S. characterizes your business as an activity with a profit motive instead of a hobby. So, take a look at the hobby loss rules before trying to claim such a deduction.4
   

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.
1 – forbes.com/sites/robertwood/2017/01/25/irs-forms-1099-10-things-to-know [1/25/17]
2 – kiplinger.com/article/taxes/T055-C001-S003-tax-deductions-for-independent-contractors.html [1/13/17]
3 – irs.gov/businesses/understanding-your-1099-k [8/3/17]
4 – smallbiztrends.com/2017/10/side-business-taxes.html [10/2/17]
LPL Tracking# 1-662104

The Republican Tax Reform Plan

What is in it? What could its changes mean for you, if they become law?

Major changes may be ahead for federal tax law. At the start of November, House Republicans rolled out their plan for sweeping tax reforms. Negotiations may greatly alter the content of the bill, but here are the proposed adjustments, and who may and may not benefit from them if they become law.
   
The corporate tax rate would fall from 35% to 20%. Wall Street would cheer this development, perhaps with a significant rally. Sole proprietorships, partnerships, and S corporations would also see their top tax rate drop to 25% (although W-2 wages for business owners who invest in these pass-through entities would still be taxed at the owner’s marginal tax rate).1,2

The estate tax and Alternative Minimum Tax would be eliminated. The AMT would die immediately, saving more than 5 million high-earning taxpayers from an annual bother. Death taxes would sunset within six years, and in the interim, the estate tax exemption would be doubled, leaving the individual exemption at about $11 million. This would be a boon for many highly successful people and their heirs.2

Personal exemptions would go away, but the standard deduction would nearly double. The loss of the personal income tax exemption (currently $4,050 per individual claimed) would be countered by standard deductions of $12,000 for individuals and $24,000 for married couples. This could lessen the tax burden for many middle-class households. On the downside, the larger standard deduction might reduce the incentive to donate to charity.1,2

Only four income tax brackets would exist. While the top marginal tax rate would remain at 39.6%, the other brackets would be set at 12%, 25%, and 35%. Individuals earning $45,000 or less and spouses with combined earnings of $90,000 or less would fall into the 12% bracket. Households earning less than $260,000 would be in the 25% bracket. The individual threshold for the 39.6% bracket would be moved up to $501,000 from the current $418,401; it would apply to couples who earn more than $1 million.3

Some state and local tax deductions might vanish. Taxpayers who face higher state income tax rates – such as those living in New York, California, and New Jersey – could lose a big tax break here. The reform bill’s author, House Ways & Means Committee Chair Kevin Brady (R-TX), says that a new revision to the bill would at least let homeowners deduct state and local property taxes up to a $10,000 cap.3

Speaking of caps, the mortgage interest deduction would be halved to $500,000. Real estate investors, developers, and agents are unhappy with this idea, as the current $1 million mortgage interest deduction has helped to spur home buying.1

Some key itemized credits and deductions would disappear. Among those the bill would do away with: the medical expense deduction, the moving deduction, the student loan interest deduction, the deduction on alimony payments, the electric vehicle deduction, and the tax credit drug manufacturers rely on as they undertake clinical trials. Retirees, divorcees, college grads, and pharmaceutical companies could see some financial negatives.1,2

Private college endowments would be taxed. With the aim of generating $3 billion in revenue over the next ten years, the bill would impose a 1.4% federal excise tax on private colleges and universities with 500 or more students and assets equivalent to or greater than $100,000 per full-time student.1

The Child Tax Credit would grow. Families eligible to claim the credit would see it rise to $1,600 from the current $1,000.3

Hardship withdrawals from workplace retirement plans could become larger. Currently, plan participants who take hardship withdrawals are only allowed to withdraw their contributions, not both their contributions and earnings. The new reform bill would lift that restriction. In addition, a worker with an outstanding loan from a workplace retirement plan who loses his or her job would have until April 15 of the following year to repay the loan balance, as opposed to the current 60 days.4

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.   
     
Citations.
1 – nytimes.com/2017/11/02/us/politics/republican-tax-plan-winners-losers.html [11/2/17]
2 – kiplinger.com/article/taxes/T055-C032-S014-3-game-changers-for-investors-in-house-tax-plan.html [11/3/17]
3 – businessinsider.com/trump-gop-tax-reform-plan-bill-text-details-rate-2017-10 [11/2/17]
4 – chicagotribune.com/business/ct-biz-gop-tax-bill-401k-changes-20171103-story.html [11/3/17]
LPL Tracking# 1-664182

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Your Social Security Benefits & Your Provisional Income

Earning too much may cause portions of your retirement benefits to be taxed.

You may be shocked to learn that part of your Social Security income could be taxed. If your provisional income exceeds a certain level, that will happen.

Just what is “provisional income”? The Social Security Administration defines it with a formula.
Provisional income = your modified adjusted gross income + 50% of your total annual Social Security benefits + 100% of tax-exempt interest that your investments generate.1

Income from working, pension income, withdrawals of money from IRAs and other types of retirement plans, and interest earned by certain kinds of fixed-income investment vehicles all figure into this formula.

If you fail to manage your provisional income in retirement, it may top the threshold at which Social Security benefits become taxable. This could drastically affect the amount of spending power you have, and it could force you to withdraw more money than you expect in order to cover taxes.

Where is the provisional income threshold set? The answer to that question depends on your filing status.

If you file your federal income taxes as an individual, then up to 50% of your annual Social Security benefits are subject to taxation once your provisional income surpasses $25,000. Once it exceeds $34,000, as much as 85% of your benefits are exposed to taxation.1,2

The thresholds are set higher for joint filers. If you file jointly, as much as 50% of your Social Security benefits may be taxed when your provisional income rises above $32,000. Above $44,000, up to 85% of your Social Security benefits become taxable.2

The provisional income thresholds have never been adjusted for inflation. Since Social Security needs more money flowing into its coffers rather than less, it is doubtful they will be reset anytime in the future.

When the thresholds were put into place in 1983, just 10% of Social Security recipients had their retirement benefits taxed. By 2015, that had climbed to more than 50%.2

In 2017, the Seniors Center, a nonprofit senior advocacy organization based in Washington, D.C., asked retirees how they felt about their Social Security benefits being taxed. Ninety-one percent felt the practice should end.2

How can you plan to avoid hitting the provisional income thresholds? First, be wary of potential jumps in income, such as the kind that might result from selling a lot of stock, converting a traditional IRA to a Roth IRA, or taking a large lump-sum payout from a retirement account. Second, you could plan to reduce or shelter the amount of income that your investments return. Three, you could try to accelerate income into one tax year or push it off into another tax year.

Consult with a financial professional to explore strategies that might help you reduce your provisional income. You may have more options for doing so than you think.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    
Citations.
1 – kiplinger.com/article/retirement/T051-C032-S014-can-you-cut-taxes-you-pay-on-your-social-security.html [9/13/17]
2 – fool.com/retirement/2017/03/26/91-of-seniors-believe-this-social-security-practic.aspx [3/26/17]
LPL Tracking 1-659036

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Market Watch

This time of year can seem quiet, with summer vacations and back to school behind us, but the buzz of the holiday season still a few weeks away. Although this sense of calm may be a welcomed break, there is plenty of activity in the U.S. and around the globe that could impact markets through the end of the year.

Potential policy changes in the U.S. continue to garner attention, as Republicans in Congress work toward tax reform with an aggressive goal of getting a package on the president’s desk by New Year’s. Although success is far from assured, progress has been made toward securing a 2018 budget resolution in the House and Senate in order to pave the way for tax reform via the reconciliation process, which enables passage with only 50 votes in the Senate, rather than 60.

Should Congress pass a budget resolution, several factors increase the odds of a successful tax deal. Republicans are seeking a signature win after unsuccessful attempts at healthcare reform, and there is general agreement across the party that tax reform is needed. In addition, there are a large number of elements of the tax code that present negotiation opportunities to secure the toughest votes. Markets have exhibited sensitivity to tax reform’s prospects, so we will be watching progress closely.

Third quarter earnings season is also underway and we expect solid results relative to expectations, given the strong recent manufacturing data and resilience of analysts’ estimates over the past month. Although earnings growth for S&P 500 Index companies is expected to slow in the third quarter from the double-digit pace in the second quarter, mid-single-digit earnings growth would be a good outcome considering insurers’ losses from Hurricanes Harvey and Irma and disruptions to economic activity in Houston and the Florida coast. Expectations are for particularly strong results for the energy and technology sectors.

Global central banks remain a focus for investors as well, and the calendar from late October into early November is jam packed with central bank meetings. No significant changes are expected from the Federal Reserve (Fed); however, the next Fed chair is expected to be announced on November 3, prior to the anticipated rate hike in December. Some of the candidates are more hawkish than others, suggesting that the news could easily be market moving. Regardless, further rate increases—even if gradual—and tightening labor markets are likely to put some upward pressure on inflation and interest rates in coming months and perhaps provide support for the U.S. dollar.

Along with the Fed, the European Central Bank (ECB), the Bank of Japan, and the Bank of England (BOE) will all meet over that same one-week stretch (October 26 through November 2)—putting global monetary policy front and center. We may get more guidance on the ECB’s plans to taper its bond purchases, while the BOE will likely respond to the latest pickup in inflation in the U.K. There is some risk for markets as global monetary conditions tighten and the global economy increasingly stands on its own, so this will be a key development to watch over the next several months and throughout 2018.

While it has been a relatively quiet year for markets, with no major pullbacks in the broad stock market, it remains important to monitor events around the globe that could be catalysts for change. In the midst of the fourth quarter, and with the busy holiday season approaching, let’s remain mindful of these developments without letting them distract us from our long-term goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.

Economic forecasts set forth may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

Securities offered through LPL Financial LLC. Member FINRA/SIPC.

Tracking #1-657693 (Exp. 10/18)

How to Avoid Buying a Flood-Damaged Car

How many cars and trucks were damaged by floodwaters in 2017? Perhaps as many as a million. Some estimates say as many as 500,000 vehicles were waterlogged in the wake of Hurricane Harvey alone. Were all those cars junked? No. Some are being sold.1

It is not illegal to sell a flood-damaged car. Some auto auctions routinely do, while disclosing that the cars have been soaked. Unethical sellers, however, put these cars on the market with no such admission and scam buyers in the process.1

Water damage can be masked, but not undone. When you shop for a used car, you should look for hints of its impact.

Think about the low points and crevasses where water might collect inside a car’s interior or engine. Look for rust there. (As a start, look for it beneath the gas and brake pedals, as well as beneath where the spare tire sits in the trunk.) On a test drive, watch to see if any components of the car’s circuitry or control systems have shorted out.

Sometimes you can smell mold or must in a car. Either smell can tip you off to damage. The presence of heavy deodorants and air fresheners may be a clue that mold lurks. Mismatched carpet or minor carpet repairs may be a tipoff. New upholstery, new trunk liners, or new truck bed liners may mask damage underneath.

Examine the undercarriage. Remember years ago, when used car shoppers were urged to have a mechanic assess a vehicle they were thinking about buying? This is actually a good way to protect yourself from buying an inundated car.

Looking at the underside of a car allows you a better look at its chassis, brakes and rotors, suspension, fuel pump, fuel filter, oxygen sensor, and wheels. Shady sellers know that a buyer on a lot may look underneath the hood, but never underneath the body.

You can also examine paperwork. Do a title search through CarFax or other online services to see where the car has been geographically, who has owned it, and whether the VIN on the report matches the VIN you see before you. Some crooks will buy waterlogged cars or trucks in one state and move them to another for sale, perhaps also tampering with VINs and mileage readings. They know that certain warnings noted on vehicle records in one state may not be obligated to transfer to another.

Many states have laws requiring automobile sellers to denote water damage – but not all do. Be skeptical of a deal on a used car that seems too good to be true.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
    
Citations.
1 – nbcnews.com/storyline/hurricane-harvey/how-steer-clear-buying-flood-damaged-car-n800986 [9/13/17]
LPL Tracking 1-659037