Category Archives: Financial Planning Tips

New charitable deduction for taxpayers who don’t itemize


Individuals who elect to take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.

Under this change, these individuals can claim an “above-the-line” deduction of up to $300 for cash contributions made to qualifying charities during 2020. The maximum above-the-line deduction is $150 for married individuals filing separate returns.

Though cash contributions to most charitable organizations qualify, those made either to supporting organizations or to establish or maintain a donor advised fund, do not. Cash contributions carried forward from prior years do not qualify, nor do most cash contributions to charitable remainder trusts. In general, a donor-advised fund is a fund or account in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities. See Pub. 526 for more information on the types of organizations that qualify.

Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with the individual’s volunteer services to a qualifying charitable organization. Cash contributions don’t include the value of volunteer services, securities, household items or other property.


Taxpayer tries to avoid income by not cashing check from retirement plan


Here’s a situation you don’t often come across. The IRS recently issued guidance on the tax treatment of a failure to cash a distribution check from a qualified retirement plan.

Under the scenario in the revenue ruling, an employer with a qualified retirement plan is required to make a distribution from the qualified plan to an individual in 2019 who is a plan participant. The qualified plan does not include a qualified Roth contribution program, nor does the individual have an after tax investment in the qualified retirement plan. The employer makes the required distribution by withholding tax as required by IRC section 3405(d)(2) and mailing a check for the remainder to the individual. Although the individual receives the check and could cash it in 2019, she does not do so. She also does not make a rollover contribution with respect to any portion of the designated distribution, and no other exception to income inclusion under IRC section 402(a) applies. No explanation is provided for her failure to cash the check by the revenue ruling.

Under the revenue ruling, the individual’s failure to cash the distribution check received in 2019 does not permit her to exclude the amount of the distribution from gross income in 2019. It also does not alter the employer’s obligation to withhold tax as required under IRC section 3405(d)(2). And it does not alter the employer’s obligation to report the distribution to the individual and the IRS on a Form 1099-R.

For purposes of this revenue ruling, it is irrelevant whether the individual keeps the check, sends it back, destroys it, or cashes it in a subsequent year.




The Bipartisan Budget Act of 2018 (BBA) mandated changes to the 401(k) hardship distribution rules. Generally, these changes relax certain restrictions on taking a hardship distribution. For 2019, the changes are optional, but effective January 1, 2020, following issuance of final regulations, certain changes will be mandatory.

An employer may, but is not required to, provide for hardship distributions in their retirement plans. Many plans such as 401(k) plans, 403(b) plans, and 457(b) plans permit hardship distributions.

If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.

The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.  If a 457(b) plan provides for hardship distributions, it must contain specific language defining what constitutes a distribution on account of an “unforeseeable emergency.”

Effective for hardship withdrawals made on or after December 31, 2018, IRS proposed regulations eliminate the mandatory requirement that a participant obtain all loans available under the plan and all other plans maintained by the employer. Such a restriction is now an optional provision that may be adopted by the employer. The requirement that a participant must first obtain available distributions under all other plans maintained by the employer, (whether qualified or nonqualified) before receiving a hardship withdrawal remains in place.

Hardship distributions from a 401(k) plan were previously limited to the amount of the employee’s elective deferrals and generally did not include any income earned on the deferred amounts. The proposed regulations permit, but do not require, 401(k) plans to allow hardship distributions of elective contributions, QNECS, QMACS, and safe harbor contributions and earnings on these amounts regardless when contributed or earned. The change can be made as of January 1, 2019.

The proposed regulations also make it optional for 2019 to prohibit an employee from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution. Under the proposed regulations effective January 1, 2020, the 6-month suspension from making elective contributions is no longer allowed.

Prior to the issuance of the proposed regulations there were no special rules for hardship distributions on account of hurricanes or other natural disasters. The proposed regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need by adding a new type of expense to the list, relating to expenses incurred as a result of certain disasters.

Finally, the proposed regulations incorporate guidance provided under the Pension Protection Act of 2006 by providing that qualifying medical, educational, and funeral expenses relating to a participant’s primary beneficiary may qualify as expenses eligible for a hardship withdrawal.

A review of these changes would indicate that employers should not wait until 2020 to make these changes because they represent opportunities for employers to simplify plan administration in areas where administrative mistakes often occur.

Plan participants should ask their employers about the implementation and timing of these changes so they can adjust their financial plans accordingly.


Why Do Stocks Split?


Why do stocks split?  According to Wells Fargo Advisors, when a company feels its stock price is getting too expensive to appeal to individual investors, it can decide to do a stock split to lower its per-share price.  When this occurs, you now own more shares, yet the amount of equity you own in the company remains the same.

The stock split may not directly affect your portfolio. However, the lower-priced shares may eventually attract more buyers, eventually driving the stock price up over time. If that happens, you could benefit from the split and from the resulting share-price increase.  Unfortunately, stock splits are occurring less frequently than in prior years.

Here’s what you need to consider:

    • Don’t wait for a split. If you’re putting off buying stock in a particular company because you hope the stock will split and the per-share price will drop, don’t hold your breath. Buy stocks according to ongoing purchasing strategies upon which you and your Financial Advisor agree and that make sense for your portfolio.
    • Revisit your individual stock-buying strategy. It can be very satisfying to invest in certain companies you really like. However, individual stocks tend to be more volatile investments than aggregated funds such as an investment designed to track performance of the S&P 500® Index or Russell 2000 index. Be sure you have a well-diversified portfolio before and after you consider adding individual stocks.
    • Consider gifting differently to kids and grandkids. In the past, you may have enjoyed giving younger family members individual stocks — maybe in companies that made their favorite cereals or digital devices, for example. You can still do that, but with fewer splits happening over time, the per-share price could limit how many shares you can give. The 2017 annual gift tax exclusion of $14,000 will increase to $15,000 beginning in 2018.

If you have any questions regarding stock splits or gifts to family members, contact Steve Siesser at


Bad Debt-Business or Personal Deduction?


You loan someone money and they don’t pay you back.  What’s the proper tax treatment for deducting the debt?

A business bad debt is deductible on the business tax return of the taxpayer (i.e. Schedule C) as an ordinary loss and can generate a net operating loss (NOL). A non-business bad debt is deductible as a short-term capital loss (Schedule D), subject to the $3,000 per year net capital loss limitation.

The taxpayer in this case made a career out of lending money for profit, both through business entities and out of his personal funds. One of his personal loans to a commercial laundry wound up going bad. He deducted the loss as a business bad debt which in turn created NOL carrybacks and carryforwards. The IRS claimed it was a personal bad debt because the taxpayer’s private lending was not a trade or business.

According to IRC section 166, for a money lending activity to be considered a trade or business, the taxpayer must have been involved in the activity with continuity and regularity, with the primary purpose of earning income or making a profit. The courts have developed a non-exhaustive list of facts and circumstances to consider in deciding whether a taxpayer is in the business of lending money.

The IRS argued that even if the taxpayer had made enough loans over the years, his source of funds was a family limited partnership (FLP) he managed with his two sisters. Out of 89 loans made over a 14 year period, only 8 listed the taxpayer as the lender. The rest listed the FLP as the lender.

The court disagreed with the IRS based on the fact that the majority of those alleged to be FLP loans were in fact made from the taxpayer’s personal trust. The taxpayer made at least 66 loans over this period of time (either alone, or acting as trustee of his trust) to a multitude of borrowers, easily exceeding $24 million. These figures were more than sufficient to support the finding that the taxpayer’s personal lending activities were continuous and regular by themselves.  Unless motivated by some hidden whimsy or charitable purpose, the number of personal loans made and the money he tied up in them proves he spent a sufficient amount of time on them.