When clients should, and should not, borrow from 401(k)s: Tax Strategy Scan

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Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

When, and when not, to borrow from your 401(k)
Taking a loan against a 401(k) plan is an easy way for cash-strapped clients to raise money, as it will require no credit check, trigger less paperwork and charge lower interest rates compared with credit cards and other financial loans, according to this MarketWatch article. However, a 401(k) loan should be a last-resort option, as it would result in an opportunity cost that can offset the interest that they will pay on the loan. Those who fail to repay the loan on time will face income taxes and possibly an early withdrawal penalty, as the unpaid loan will be treated as a taxable distribution.

Qualifying for home office deductions may be trickier this year
Fewer taxpayers are expected to claim the home office deduction on their 2018 tax returns, thanks to the changes under the Tax Cuts and Jobs Act, according to this article from The Cincinnati Enquirer. That's because employees can no longer claim the tax break for miscellaneous itemized expenses, including the cost of using a portion of their home for work that exceeded 2% of their adjusted gross income. Self-employed clients may still qualify for the deduction, but should meet certain requirements to claim the tax break.

The law now creates a different method of caring for relatives while preserving the family’s financial plan, a John Hancock associate counsel writes.
January 15
3 Min Read
Community property rules, how to divide 401(k)s and the nuances of QRDOs are just some of the specifics advisors should know.
January 10
7 Min Read
For example, taxpayers should not panic about the new cap on state and local tax deductions.
December 31
1 Min Read

Don’t retire until you know these 4 facts about RMDs
There are certain things that seniors need to know about required minimum distributions before leaving the labor force for good, according to this article on Motley Fool. For instance, retirees can take a lump sum withdrawal or take the RMD in increment throughout the year, while those who fail to take the mandatory distributions for the year will face a penalty equivalent to 50% of the RMD amount on top of taxes. The distributions are also treated as taxable income and can be reinvested if they have no need for the money.

6 of the biggest questions clients have about 529 plans
A 529 plan is the best place to save for clients who want to prepare financially for their children’s education expenses because of the tax benefits the account offers, according to this article from The Wall Street Journal. The account offers tax-free withdrawals for qualified expenses, including tuition, room and board and computer costs. Moreover, clients can contribute to their 529s on a pretax basis and may qualify for state tax deductions and credits for their 529 contributions. “[M]ost plans have very low minimum-contribution limits, and most accounts are protected from creditors’ claims in bankruptcy, making them attractive to families regardless of income level,” an expert says.

The most outrageous tax deductions of 2018
What some clients tried to claim on their tax returns shows they often don't know much about accounting.

Everything clients need to know about claiming mileage tax deductions
Self-employed taxpayers should take advantage of the mileage tax deduction, as the tax break provides a 54.4% deduction per business mile with very few restrictions, according to this U.S. News & World Report article. Clients can also claim the mileage tax deduction on the use of vehicle for medical care and charity work. Those who consider claiming the tax break should have recorded the travel time, as the IRS may want to see a log during an audit. "Truly, a log is supposed to record the starting and ending odometer mileage," an expert says.

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401(k) loans Tax strategies Tax deductions RMDs Retirement planning 529 plans Trump tax plan