December Income – 2020 Is Your Year!

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Which Tax Year Should End-of-Year Employee Paychecks Be In?

You pay employees on January 4, 2020, for work done in the last week of December 2020 because that’s your normal payday. Are these paycheck amounts taxable in the year of the work or the year of the paycheck? The tax year for a paycheck is important because it affects the taxable income for employees, as shown in employee gross pay on the W-2 forms for each year.

The paycheck date rules, even if the work was done and the pay was earned in a different year (but read the exception below). That’s because the paycheck was available to the employees in January, but not in December.

The gross pay is taxable in 2020, not 2020. If you pay employees on the last day of December for this work, the paycheck date of December 31, 2020, and this would mean the pay is taxable income in 2020.

Why Is the Year of an Employee’s Paycheck Important?

The year the paycheck is taxed affects the taxable income of the employee. If an employee had a big end-of-year bonus, for example, it could affect the employee’s tax rate. In some years, there is an extra pay period, which can cause employees to receive what appears to be an “extra” paycheck.

Give employees to change their W-4 form for bonuses or that extra end-of-year paycheck. For example, the employee can change withholding for the bonus check and change back to regular withholding for the next regular payroll.

The issue comes up when a pay period doesn’t end on the last day of the year. If the pay period ends before the end of the year, there are few days in the first year that will be paid in the next year. If the pay period ends after the end of the year, there are a few extra days in the next year’s pay.

Direct Deposits

If you make paychecks available to employees before the end of the year—through direct deposit, for example—the pay must be considered to be received (and taxable) in that year, even if the direct deposit check includes income for the following year.

The IRS says that income is constructively received when it’s credited to an account or made available without restriction. Constructive receipt is an accounting term that refers to when income is considered to be in the possession of someone and when it is available to be spent. Employees must report income in the year it was received or made available without restriction. 

Post-Dated Checks and Constructive Receipt

In general, when a person receives a payment by mail, it could be considered that the person has constructive receipt of the funds. But that’s not always true. A check might be post-dated.

A post-dated check is a check that has a future date on it. If you receive a check in 2020 that is dated 2021, you can’t cash it until the next year. Just because you have the check in your hand, because it’s dated in the next year—and not cashable until then—the check would be included in the next year’s taxes.

How Does This Rule Affect Employee W-2 Forms?

W-2 forms are the forms you give employees in January to provide information on their pay and amounts withheld for federal income taxes and FICA taxes (social security and Medicare).

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The last paycheck dated in December is included in that year’s W-2 earnings. The first paycheck in January is included in the new year’s W-2 earnings.

After you prepare those W-2 forms, they must be distributed to employees and filed with the Social Security Administration. Here are the dates to remember: W-2 forms must be given to employees by the end of January, for the prior year’s wages. You must also file W-2 forms with the Social Security Administration by January 31 (not February 28, as in previous years. If you are using payroll accounting software, the software should take care of the tax issue for the employee W-2s.

Investment income – January, 2020

I always love reading blogs about other investors’ investment income. Watching other people’s investment income rise is my second favorite thing (the only thing better is watching MY investment income rise!)

Here is our investment income for January, 2020. This report includes income from dividends, interest, mutual funds, and rental properties.

Overview

Another year has started and I’m very excited to see what 2020 has in store for us. Christmas and New Year’s Eve are behind us and it’s time to get back to our normal life.

The first month of each quarter always has the lowest dividends, so I’m never too excited to run the numbers, but this month was a surprising exception.

It looks like the additional properties we purchased last year plus the combination of new investments and organic growth of our existing investments has resulted in some exciting year-over-year (YOY) growth.

Without further ado, here’s what our investment income looked like for the month:

Dividend & Interest Income

Total dividend income for the month was $3,637.60. This is up 106% from last January’s total of $1,761.75.

Whew! That’s a big jump in one year. Looking at my statement from January, 2020, I see that the big jumps are due to additional investments we made in Disney, Altria, and Philip Morris.

We obviously aren’t going to have our dividends up by 103% for the whole year, but this is a pretty good start to 2020.

Overall, an awesome month.

Rental income

This category includes net income from the 6 rental properties that my wife and I own, plus 50% of the income from 4 rental properties that we own with my mom. This number does not include appreciation of the properties or the decrease in the mortgage balance (those numbers show up in the net worth report).

However, this income is net of all mortgage, tax, and insurance payments. That is, this is a true cash flow report for our rental properties.

January was an ok month for our rental income. Total rental income for the month was $2,714.93. This is up 48% from last January’s income of $1,829.89.

Our average rental income for the last 12 months is $1,973.00, which is the highest trailing 12-month rental income we’ve ever had.

As with the dividend income, this is a solid start to the month.

Total investment income this month

Total (dividend + rental) income = $6,352.53

Although our total investment income was unimpressive, this still represented a big milestone for us – our trailing 12-month income just exceeded $100k! More exactly, our trailing 12-month income was $102,025.80

Looking at our trailing 12-month total income, you can see that our passive income has been doing exactly what we want it to do – it’s been trending up and to the right.

This is a good start to the year and our goal to hit $115,000 in passive income.

Changes

No changes to our portfolio this month. We are still holding $300,000+ in cash, waiting for an interesting investment at a reasonable valuation.

Recap

January was a great month. We finally crossed $100k for our trailing 12-month income.

How did everybody else do with their investment income this month?

Are there any investments out there trading at reasonable valuations that I should be looking at?

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5 thoughts on “ Investment income – January, 2020 ”

We might have talked about this before but what is the significance of $120,000 in annual passive income? What happens when you hit that number?

For us, $120,000 represents our annual spending average for the last five years, which is why I have a similar goal.

We now have $92,000 per year in recurring residual commissions from software sales in my business, but I share 25% of that with my business partner – so $69,000. Then we have about $30,000 in other recurring income.

That puts us neck and neck at $99,000 vs. your $102,000.

Great question. The $120,000 target was originally selected because it represents our approximately level of ongoing spending. However, there’s a BIG caveat – that level of spending assumes that our house is paid off, we aren’t paying for child care for our kids, and the kids’ 529 accounts are fully funded.

So the reality is that the $120,000 target isn’t a feasible retirement income target today. It’s more of a feasible target in maybe 5-7 years. If we wanted to retire TODAY we’d need something closer to $200,000 in annual income.

We’ll hit the child care goal first, as we have one more year of preschool for our son, and that will cost approximately $14k.

I suspect we’ll hit the 529 goal second. We are funding each child’s account to the tune fo $500/each/month, or $6,000/kid/year. The current balance are $34,000 each, which translates to roughly $100k at age 18. I suspect we’ll want roughly $150,000 for each kid, as that would fully fund a public school education (assuming in-state tuition).

The mortgage goal is further away. We have a current balance of

$529,113, and although we could pay about $350,000 of that off with the cash we are holding, I think we’ll be better off long-term by holding the cash and swooping up bargains when the market corrects.

So, when we finally hit the goal of $120,000 of passive income PLUS the other three milestones, then we’d be financially independent and would no longer need to work to maintain our current lifestyle. That doesn’t mean I’d necessarily retire, but I can definitely see myself making the full-time change to being a financial planner/wealth manager.

Your business is going to catapult your passive income past us in pretty soon. At your growth rate I suspect that your passive income will pass ours in Q2 of this year!

My passive/dividend income is $193,358.89 a year (100% reinvested). Still teaching 3 days a week (working income around $42K a year). Based on your response to the last poster – $120K seems like you will need to up that to have a buffer. I am single with no children.

My top 5 holdings – 3 don’t pay a dividend – GOOG, AMZN, BRK and the other 2 V, MA have dividend yields below .50%. Out of the next 5 – 3 (DIS, FOX, AXP) have yields of below 1.25% and 2 (FB, MNST) have no dividends. So as a dividend investor my top 10 really sucks. High net worth – low passive income – I keep working because I will get creamed in a bear market.

I started out using the Boglehead method “dividends are evil”. Just switched over to the dividend income a couple years ago – that really set me back.

You’ve clearly done a lot of things right if you’re generating that much passive income, especially if your top 5 investments generate little to no dividends.

Could you share how you’ve managed to create such a high net worth? What’s your secret?

Income tax calendar for the year 2020

The income tax department, via its Twitter handle and emails, has been informing taxpayers about the important tax dates for the year 2020. Being mindful of these dates can help taxpayers avoid penal consequences.

If you are a tax payer, you might have received an email from the income tax department with a calendar containing important income tax-related dates. It would bode well for you if you create an alert for these dates or mark them on your personal calendar. Doing so may help you avoid penal consequences of late filing of income tax returns (ITR) or tax deducted at source (TDS) returns and also help remind you to collect your TDS or tax collected at source (TCS) certificates. For instance, TCS is applicable when you purchase a car worth more than Rs 10 lakh.

This #NewYear, Income Tax Department brings to you, the #ITDCalendar2020 highlighting important dates of tax releva… https://t.co/00ywMqmr29

What is more, from September 1, 2020, individuals have to deduct tax on the payments made to professionals, contractors and so on. Further, those paying monthly rent of Rs 50,000 or more are required to deduct tax, as per income tax laws. These dates will also help you keep a check on whether the TDS that has been cut from your income (salary or interest etc.) has been deposited against your PAN with the government. The deductor has to issue a TDS certificate within the specified time period, as per current income tax laws.

Abhishek Soni, Founder and CEO, Tax2win.in, a tax-filing website says, “Apart from salary, if any other payment received by an individual is subject to TDS, then he/she should get a quarterly TDS certificate for the same. For instance, if your bank has deducted tax on interest paid to you, say in the month of September, then the bank is required to issue TDS certificate within 15 days of deadline for filing TDS returns for that quarter, i.e., November 15.”

According to the income tax department’s calendar, here are the major tax-related dates in all the months you should be mindful of in 2020.

January

  • January 15: Is the deadline to file quarterly statement of TCS for the third quarter of FY 2020-20.
  • January 30: Is the deadline to issue TCS certificate to the person from whom tax has been collected.
  • January 31: Is the deadline of filing TDS returns for the tax deposited with the government in the quarter ending December 31, 2020.

February

  • February 15: Quarterly TDS certificate has to issued with respect to tax deducted on income other than salaries for the quarter ending December 31, 2020.

Important tax dates in the year 2020

Jan-15 Quarterly statement of TCS deposited for quarter ending December 31, 2020
Jan-30 Issue of Quarterly TCS certificate in respect of tax collected for the quarter ending December 31, 2020
Jan-31 Quarterly statement of TDS deposited for the quarter ending December 31, 2020
Feb-15 Issue of Quarterly TDS certificate for payments other than salaries for quarter ending December 31, 2020
Mar-15 Fourth instalment of advance tax for FY 2020-20
Mar-31 Last date of filing belated/revised ITR for FY 2020-19
May-15 Quarterly filing of statement of TCS deposited for quarter ending March 31, 2020
May-31 Quarterly filing of TDS return for TDS deposits made for quarter ending March 31, 2020
Jun-15 First instalment of advance tax for FY 2020-21
Jun-15 Date for issuing of Form 16 to employees by the employer. Quarterly TDS certificates from income other than salaries (Form 16A)
Jul-15 Quarterly TCS statement filing for quarter ending June 30,2020
Jul-30 Issue of quarterly TCS certificate in respect of tax collection for quarter ending June 30, 2020
Jul-31 Filing quarterly statement of TDS deposited for quarter ending June 30, 2020
Jul-31 ITR filing deadline for individuals, HUFs and other assessees whose account books are not required to be audited
Aug-15 Issue of quarterly TDS certificate for incomes other than salaries.
Sep-15 Payment of second instalment of advance tax for FY 2020-21
Sep-30 ITR filing by those assessees whose account books are required to be audited
Oct-15 Filing quarterly statement of TCS deposited for quarter ending September 30, 2020
Oct-30 Issue of quarterly TCS certificate in respect of tax collected
Oct-31 Filing quarterly statement of TDS deposited for quarter ending September 30, 2020
Nov-15 TDS certificate to be issued for incomes other than salaries
Nov-30 ITR filing for assessees with audited books and international transactions
Dec-15 Third advance tax instalment for FY 2020-21

March
March is an important month. Not only does the financial year end in March, but you will also have to complete your tax-saving exercise and file your belated/revised income tax return (ITR) by March 31.

  • March 15: You have to deposit the fourth instalment of advance tax (if you are liable to pay any) for FY 2020-20. It is also the due date for making payment of advance tax by those individuals who are covered under the presumptive taxation scheme under sections 44AD and 44ADA.
  • March 31: Is the last date of filing belated or revised return for FY 2020-19. Remember, if this deadline is missed, you will not be able to file ITR for FY2020-19.

April
It is the start of the new financial year.

May

  • May 15: Is the due date of filing quarterly statement of TCS deposited for the quarter ending March 31, 2020.
  • May 31: Is the due date of filing quarterly statement of TDS deposited for the quarter ending March 31, 2020. It is also the due date for furnishing statement of financial transactions under section 285BA by financial institutions for FY 2020-20.

June
The month of June is important for ITR filers.

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