Stephen Merritt, CPA, PC  |  Certified Public Accountants  |  (757) 420-5778
233 Business Park Drive, Suite 104, Virginia Beach, VA 23462

Your monthly news & updates

Oxford needs his daily nap session

What’s Inside

• Yes! You Owe Tax On That
• Moves to Improve Your Credit Score
• Avoid a Penalty and Tax Surprise when Withdrawing from Retirement Accounts
• February Days
• Office Hours

Yes! You Owe Tax On That!

6 Surprising Taxable Items

If something of value changes hands, you can bet the IRS considers a way to tax it. Here are six taxable items that might surprise you:

Surprise #1: Hidden treasure. In 1964, a married couple discovered $4,467 in a used piano they purchased seven years prior for $15. After reporting this hidden treasure on their 1964 tax return, the couple filed an amended return that removed the $4,467 from their gross income and requested a refund. The couple filed a lawsuit against the IRS when the refund claim was denied. The Tax Court ruled that the hidden treasure should be reported as gross income on the couple’s 1964 tax return, the year when the hidden treasure was found.

Surprise #2: Some scholarships and financial aid. Scholarships and financial aid are top priorities for parents of college-bound children, but be careful — if part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, or aid received in exchange for work (e.g., tutoring or research).

Surprise 3: Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.

Surprise 4: Unemployment compensation. The IRS confused many by making this compensation tax-free during the COVID-19 pandemic. Unemployment compensation income has since gone back to being taxable.

Surprise 5: Crowdfunding. A popular method to raise money is crowdfunding through websites. Whether or not the funds are taxable depends on two things: your intent for the funds and what the giver receives in return. Generally, funds used for a business purpose are taxable and funds raised to cover a life event are a gift and not taxable to the recipient.

Surprise 6: Cryptocurrency transactions. Cryptocurrencies like Bitcoin are considered property by the IRS. So if you use cryptocurrency, you must keep track of the original cost of the coin and its value when you use it. This information is needed so the tax on your gain or loss can be properly calculated.

When in doubt, it’s a good idea to keep accurate records so your tax liability can be correctly calculated and you don’t get stuck paying more than what’s required. Please call if you have any questions regarding your unique situation.

Moves to Improve Your Credit Score

While your credit score is a three-digit number that’s automatically assigned to you, this is one area of your financial life where you have quite a bit of control. The moves you make or don’t make with your credit can help determine where this score falls at any time, and the impact can be dramatic.

Where good credit, a score of 670 or higher, can mean having access to financing with the best rates and terms, a low credit score can mean paying higher interest rates and more loan fees — or even being denied financing altogether. Bad credit can also mean having trouble getting an apartment or a job if your employer asks to see your credit report for hiring purposes.

The following steps can help you improve your credit this year and beyond:

Set up bills for automatic payments. Because your payment history is the most important factor used to determine credit scores, make every effort to pay bills on time. Set up your bills for automatic payments so they’re paid no matter what, and you can avoid unnecessary credit score damage.

Pay down existing debt. How much you owe in relation to your credit limits is the second most important factor used for credit scores. This means avoiding carrying a balance on your credit cards and never using more than 25% of your credit line or your credit score could be impacted.

Look over your credit reports for errors. Check your credit reports from all three credit bureaus — Experian, Equifax and TransUnion. You can do this once a year for free at AnnualCreditReport.com. If you find any errors or information you don’t recognize, take steps to dispute this information with the credit bureaus.

Build credit with new financial products. If you need to build credit from scratch or repair credit after mistakes made in the past, look for new credit products that are easy to obtain. Your best options are secured credit cards that require a cash deposit as collateral and credit-builder loans.

Use a free app to build credit. You can use a free app like Experian Boost to get credit for payments you’re already making like utility bills, subscription services and even your rent. All you have to do is connect your accounts to this app to have your payments reported to the credit bureaus.

You don’t have to live with a low credit score for another year, especially since so many things can help you improve it. By never missing a payment, paying down debt, checking over your credit reports and getting creative when it comes to building new credit, you can end 2024 in much better shape.

How can we say no to this face!

Avoid a Penalty and Tax Surprise when Withdrawing from Retirement Accounts

Retirement accounts that provide tax breaks have very specific rules that must be followed if you want to enjoy the financial rewards of those tax breaks.

One of these rules defines WHEN you’re allowed to pull money from your retirement accounts. If you pull money too soon, you’re at risk of being levied with a penalty by the IRS. There are several exceptions to this rule, such as paying for qualified higher education expenses or paying for expenses if you become permanently disabled. In general, though, if you withdraw retirement funds before you reach age 59½, you’ll be hit with a 10% penalty in addition to regular income taxes. In the April 2023 court case Magdy A. Ghaly and Laila Ryad v. Commissioner, the taxpayers learned this rule the hard way.

The Facts

In 2018, Mr. Ghaly took two distributions from his retirement account.

Distribution #1: Withdrawal

Mr. Ghaly was laid off from his job, and in 2018, he withdrew money from his retirement account to provide for his family. He requested and received a withdrawal of $71,147 from his retirement account. His retirement company provided him with a Form 1099-R indicating the withdrawal was taxable.

Distribution #2: Deemed Distribution

In 2015, Mr. Ghaly took a loan from his retirement account. Because the loan followed certain IRS-approved guidelines, it was not considered a taxable distribution from his account that year. However, when Mr. Ghaly failed to repay that loan when it came due in 2018, it became a taxable distribution. His retirement company provided him with a 1099-R tax form for the deemed distribution.

Mr. Ghaly had not yet reached age 59½ before either amount was distributed.

The Findings

In an attempt to restore those distributions to his account to avoid both the tax on the distributions and the early withdrawal penalty, he opened two retirement accounts in 2020 and made the maximum contributions allowed for each account.

The Tax Court ruled against the taxpayers, stating that the contributions Mr. Ghaly made in 2020 were irrelevant when determining if his 2018 distributions were taxable. Mr. Ghaly was required to pay income taxes on the amounts withdrawn (to the extent those distributions were taxable) and was assessed an additional 10% early withdrawal penalty.

The Lesson

If you are planning an early withdrawal from a retirement account, understand before making the withdrawal whether the 10% penalty applies to you. In Mr. Ghaly’s case, he could have explored the substantially equal periodic payment exception or withdrawn money penalty free if used as hardship to pay for his health insurance while unemployed. The lesson: please call if you have questions about an early withdrawal you may be planning before you make it!

Oxford Part 3

The universe gives you what you need when you need it.

Using the wrenches, Steve removed the battery from my car and installed the new battery from the homeowner. It fit perfectly and was fully charged! Voila, the car is brought back to life.

The auto parts store is still another 4 miles or so down the road. It is now 9:35 pm and we are running close to the 10 pm closing time for the auto parts store.

So, I begin driving again, however, the car is not running optimally. The dashboard is flickering again, the headlights are dim and there is no real oomph to the car. We are hopeful that the car will make it to the auto store.

Well, again, the car begins to abruptly shut off and on about 3 miles down the road. I again maneuver to the side of the road. The car stops cold and will not restart. Steve gets out and begins the walk to the auto store in the pitch black of the night. I could see him jogging a little. It was freezing cold outside. At some points he was walking quickly. I lost sight of him after awhile and called him on his cell phone. He answered and said he could see the store and quickly hung up. Cell phone reception was not the best.

At 9:52 he walked in the auto store and purchased a battery. He asked the store employees, there were 3 males, if any one of them could give him a lift back to the car, that it was parked just a mile down the road. They refused. One employee looked away, said nothing, and walked into the back. The other 2 employees stated it was against company policy. Steve also asked them if the town had a hotel or if they knew of one nearby. They thought there were 2 hotels but were not sure. It was 10 pm and they closed the store and drove off.

So, Steve began his walk back to the car, with a nearly 50 pound battery on his shoulder. It had gotten colder and darker outside. He kept shifting the battery from one shoulder to the other, it was getting heavy. The walk back was a little slower going. Steve stopped once to call me and tell me he was okay. He said walking with the battery was going to take him awhile to get to the car and not to worry.

As he is walking, a pick-up truck pulls up beside him. The driver is an older lady. She asked if he needed help and Steve began to explain the car saga and that our car is parked off to the side of the road down a way. She said she had noticed the car and thought it was odd place to park. The lady told him to get in the truck and she would take him to his car.

To be continued……….

February Days

Here are some Days to Remember in February!

February 3rd – National The Day The Music Died

This day remembers the unfortunate death of singers Buddy Holly, Ritchie Valens, and J.P. Richardson which inspired the song American Pie by Don McLean released in 1971.

February 9- National Pizza Day

This celebrates on of America’s all-time favorite foods. Whether it is thin crust, Chicago-style, deep dish, or anything in between, pizza is an American favorite.

February 13 – Galentines Day

Galentines day brings women together to celebrate each other every year the day before Valentines day.

February 14th – Valentines Day

The day of love! Grab the flowers, chocolate or a card and surprise the special someone in your life

February 19th – Presidents Day

On the Third Monday in February, the United States celebrates the federal holiday known as Presidents Day.

February 29th – National Leap Day

February 29 (leap day) is only celebrated every 4 years!

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