planning Archives - Financial 1 Tax

Proactive Year-end Tax Planning for 2022 and Beyond

F1Tax — Wed, 23 Nov 2022 07:35:38 +0000

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293 (MD) | 954-892-6020 (FL)

One of our main goals as holistic financial professionals is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component to help our clients benefit from potential tax reduction strategies.

Other than some IRS inflation adjustments, calendar year 2022 has brought limited changes in tax laws for individuals. Many of the provisions that were passed in bills like, The Inflation Reduction Act of 2022, affected corporations, such as the corporate minimum tax of 15% for corporations with adjusted federal income over $1 billion dollars. While President Biden has offered some personal income tax and estate planning tax changes in his proposed 2022 budget and tax plans, many experts feel that it is very unlikely that any changes, if approved, will take affect this calendar year. This report focuses on information that could be helpful for individuals in conjunction with tax planning for calendar year 2022. It also has a section that shares some key details from President Biden’s suggested American Families Plan and some noteworthy proposals included in the budget and green book from Biden’s recent 2022 Budget Plan.

Remember, the Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. The Tax Cuts and Jobs Act included many provisions for individuals that took effect in 2018 but are currently set to expire after 2025. One big uncertainty for all taxpayers is what will happen to the tax code after 2025.

As financial professionals, we try to be proactive when it makes sense. The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2022

For 2022 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Under current law this seven-rate structure will phase out on January 1, 2026.

Tax Rate	Single	Married/Joint & Widow(er)	Married/Separate	Head of Household
10%	$0 to $10,275	$0 to $20,550	$0 to $10,275	$0 to $14,650
12%	$10,276 to $41,175	$20,551 to $83,550	$10,276 to $41,775	$14,651 to $55,900
22%	$41,176 to $89,075	$83,551 to $178,150	$41,776 - $89,075	$55,901 to $89,050
24%	$89,076 to $170,050	$178,151 to $340,100	$89,076 to $170,050	$89,051 to $170,9050
32%	$170,051 to $215,950	$340,101 to $431,900	$170,051 to $215,950	$170,051 to $215,950
35%	$215,951 to $539,900	$431,901 to $647,850	$215,951 to $323,925	$215,951 to $539,900
37%	$539,901 or more	$647,851 or more	$323,926 or more	$539,901 or more

Year-end Tax Planning for 2022

One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique but it is wise for every taxpayer to begin their final year-end planning now! Choosing the appropriate tactics will depend on your income as well as a number of other personal circumstances. As you read through this report it could be helpful to note those strategies that you feel may apply to your situation so you can discuss them with your tax preparer.

Some items to consider include:

Evaluate the use of itemized deductions versus the standard deduction.

For 2022 tax returns, the standard deduction amounts will increase to $12,950 for individuals and married couples filing separately, $19,400 for heads of household, and $25,900 for married couples filing jointly and surviving spouses.

As a reminder, the Tax Cuts and Jobs Act roughly doubled the standard deduction. Its goal was to decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions.

The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is still currently capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.

Consider bunching charitable contributions or using a donor-advised fund.

For those taxpayers who are charitably inclined it makes sense to think about a plan. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation. If you are charitably inclined and need some guidance, please call us and we can assist you.

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017 (i.e., enters into a binding contract by that date), mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt incurred to acquire or improve a qualified residence. The TCJA lowered the threshold to $750,000 or $375,000 (married filing separately) for homes purchased after December 15, 2017, but before January 1, 2026. All interest paid on any mortgage taken out before October 13, 1987, is fully deductible regardless of your mortgage amount (“grandfathered debt”). Many mortgage holders refinanced for lower rates or to cash out in the last few years, so remember, to the extent debt increases the interest might not be deductible.

Interest on home equity lines of credit (HELOCs) and cash-out refinancings may be deductible as well if the funds were used to improve the home that secures the loan (or if the proceeds were invested). Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit cards or other personal debts, the interest isn’t deductible, but that may change when the TCJA sunsets at the end of 2025.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state. Some states even offer a state tax credit or deduction up to a certain amount.

Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $16,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($12.06 million in 2022).

There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $80,000 lump sum contribution to a 529 plan can be applied as though it were $16,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. If you want to explore setting up a 529 plan, call us and we would be happy to assist you.

Maximize your qualified business income deduction (if applicable).

One of the most talked about changes from the Tax Cuts and Jobs Act enacted in 2017 is the qualified business income deduction under Section 199A. Current proposals want to change this deduction, but for 2022, taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of the tax code is complicated and would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2022

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2022 and start thinking about your strategy for 2023. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $20,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains the same at $6,500 ($27,000 total). As a reminder, these contributions must be made in 2022.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) remains at $6,000 for 2022. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2022 can be made all the way up to the April 17, 2023, filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $68,000 and $78,000 for 2022. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $109,000 to $129,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2022 as the couple’s income reaches $204,000 and completely at $214,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains at $0 to $10,000 for 2022. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $204,000 – $214,000 for married couples filing jointly in 2022. For singles and heads of household, the income phase-out range is $129,000 – $144,000. For a married individual filing a separate return, the phase-out range remains at $0 to $10,000. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $68,000 for married couples filing jointly in 2022, $51,000 for heads of household and $34,000 for all other filers.

Be careful of the IRA one rollover rule.Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any 1-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on IRAs, please call us.

Roth IRA Conversions

In 2022, some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the current laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale. However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Always double-check brokerage firm reports. If you sold a security in 2022, the brokerage firm reports the basis on an IRS Form 1099-B in early 2023. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Long-term Capital Gains Tax Rates

Tax rates on long-term capital gains and qualified dividends changed for 2022. You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2022. In 2022, the 0% rate applies for individual taxpayers with taxable income up to $41,675 on single returns, $55,800 for head-of-household filers and $83,350 for joint returns. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

The 3.8% surtax on net investment income stays the same for 2022. It starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

2022 Long-term Capital Gains Rate	Single Taxpayers	Married Filing Jointly	Head of Household
10%	Up to $41,675	Up to $83,350	Up to $55,800
15%	$41,676 – $459,750	$83,351 - $517,200	$55,801 - $488,500
20%	Over $459,750	Over $517,200	Over $488,500

NOTE: The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and those are taxed at ordinary income tax rates.

Some Notable and Continuing Tax Changes for 2022

Some previous itemized deductions are still affected in 2022 under the tax laws. They include:

The floor for deductible medical expenses is still at 7.5%. The 2022 threshold for deducting medical expenses on Schedule A is 7.5% of your 2022 adjusted gross income (AGI). The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Alimony deductions. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse.

Education Planning

Education benefits. The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit are all still available in 2022. 529 plan funds can be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can now be withdrawn from 529 plans to pay off student loans.

The 2022 lifetime learning credit, allows you to claim 20% of your out-of-pocket costs for tuition, fees and books, for a total of $2,000 as a tax credit. It phases out for couples from $118,00 to $138,00 and from $59,000 to $69,000 for singles.

Charitable Giving

This is a great time of year to clean your garage or house and give your items to charity. Please remember that you can only write off donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill.

Send cash donations to your favorite charity by December 31, 2022. Be sure to hold on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Do not donate investments that have lost value. It is best to sell the asset with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss. Also remember, if you give appreciated property to charity, the unrealized gain must be long-term capital gains in order for the entire fair market value to be deductible. (The amount of the charitable deduction must be reduced by any unrealized ordinary income, depreciation recapture and/or short-term gain.)

The law allowing taxpayers age 70½ and older to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, including all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by December 31, 2022. Please call us if this is a strategy you are interested in considering.

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $16,000 tax-free to each donee in 2022. These “annual exclusion gifts” do not reduce your $12.06 million lifetime gift tax exemption. This annual exclusion gift is doubled to $32,000 per donee for gifts made by married couples of jointly held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 on the IRS website.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($16,000 in 2022) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes are another issue that proposals are trying to change. For 2022 the limits are at $12.06 million ($24.12 million for married couples) and the income tax basis step up/down to fair market value at death is in place. Any amount over that is subject to 40% Federal taxes. This high amount provides high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, in 2026, the estate tax exclusion is due to revert to pre-2018 levels (adjusted for inflation, which we project will be $6-7 million under current law).

In 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. Claiming the portable exemption will remain an important discussion topic for descendants with large estates. For those who have large estates, please call us to discuss your situation.

Tax Law Proposals

On March 28, 2022, the Biden Administration released the Fiscal Year 2023 Budget, and the “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals,” which is commonly referred to as the “Green Book.” The Green Book summarizes the Administration’s tax proposals contained in the Budget. The Green Book is not a proposed legislation and each of the proposals will have to be introduced and passed by Congress.

Some of the Green Book’s Significant Proposed Changes to Current Law:

Business taxation

Increase the corporate income tax rate from 21% to 28%

Individual taxation

Impose a 20% minimum tax on individuals who have more than $100 million in assets – A taxpayer subject to the minimum tax would make two calculations: Their “normal” tax liability under our current realization system, and the “minimum” tax under the proposal. Tax would be paid on the greater of the two.
Treat death as a realization event

Taxation of investments in real property

Restrict deferral of gain for like-kind exchanges under section 1031
Treat 100% of depreciation recapture on the sale of section 1250 property as ordinary income

Cryptocurrency taxation

Apply securities loan rules to digital assets
Apply the mark-to-market rules to digital asset dealers and traders
Require information reporting for digital asset transactions

Passing legislation takes time and even if any legislation is passed, it’s very likely that all proposed changes will not take effect for 2022. Retroactive tax increases are very rare and unusual. However, it’s wise to be informed of potential changes. Also as mentioned earlier in this report, many tax laws are set to sunset on December 31, 2025, and change for 2026, even if no legislation is passed.

Our goal is to keep clients updated when tax laws change so that they can proactively plan. If you would like to discuss any of these potential tax law changes with us, please feel free to contact us and we’d be happy to assess your unique financial situation.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you. We will try to monitor impactful changes and as always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

Please share this information with others!

Have a friend, family member, or colleague that would benefit from this financial advice? Please share this report or give our office a call at our Florida office (954) 892-6020 or Maryland office (410) 908-9293.

Find us:

150 S. Pine Island Road, Suite 360, Plantation, FL 33324
8850 Columbia 100 Parkway, Suite 403, Columbia, MD 21045

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Past performance is no guarantee of future results.

Note: The views stated in this letter are not necessarily the opinion of Tatyana Bunich (CEP) (RFC) or Financial 1 and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Death of the contributor prior to the end of the five-year period may result in a portion of the contribution to be included in the contributor’s estate. Please consult a qualified tax professional to discuss tax matters. Source: irs.gov. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2022.

The post Proactive Year-end Tax Planning for 2022 and Beyond appeared first on Financial 1 Tax.

Join Us for Our Financial Strategy Workshop March 2022

F1Tax — Sun, 27 Feb 2022 20:08:40 +0000

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

Your current financial strategy could be destroying your retirement income… and taxes are likely the culprit. Discover tax reduction strategies and protect your money from Uncle Sam now! We are hosting four FREE workshops in Florida, March 1st and 3rd. RSVP by phone at 954-892-6020. Get details and the full flyer below!

Concerns that keep most Americans up at night that we will discuss:

Tax Planning
Retirement Income
Mitigating Risk
Estate Planning

VIEW EVENT INVITATION (PDF)

Attend One Of Our Free Workshops!

Tuesday, 3/1/22:

10AM – 12PM
2PM – 4PM

Holiday Inn 1701 N University Dr., Plantation, FL.

Thursday, 3/3/22:

10AM – 12PM
2PM – 4PM

Marriott Courtyard Weston 2000 N Commerce Pkwy, Weston, FL.

Call now, seating is limited! 954-892-6020

The post Join Us for Our Financial Strategy Workshop March 2022 appeared first on Financial 1 Tax.

Proactive Year-end Tax Planning for 2021 and Beyond

F1Tax — Sat, 15 Jan 2022 14:00:06 +0000

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

2021 has been an unusual year and there is still major legislation being discussed that could have an effect on your taxes. It is the first year of a new administration, so investors should consider taking into consideration the impact of possible future tax strategies. This report includes information on possible tax law changes and some notable changes proposed in the Build Back Better Act that you should be aware of. The main focus of this report is on what individual taxpayers can do to potentially save money on their 2021 taxes.

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. The Tax Cuts and Jobs Act included many provisions for individuals that took effect in 2018 but are currently set to expire after 2025. One big uncertainty for all taxpayers is what will happen to the tax code after 2025.

Income Tax Rates for 2021

For 2021 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Under current law this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2021

One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Some items to consider include:

Evaluate the use of itemized deductions versus the standard deduction.

For 2021 tax returns, the standard deduction amounts will increase to $12,550 for individuals and married couples filing separately, $18,800 for heads of household, and $25,100 for married couples filing jointly and surviving spouses.

Consider bunching charitable contributions or using a donor-advised fund.

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017 (i.e. enters into a binding contract by that date), mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt. The threshold has been lowered to the first $750,000 or $375,000 (married filing separately) on homes purchased after December 15, 2017. All interest paid on any mortgage taken out before October 13, 1987 is fully deductible regardless of your mortgage amount (called “grandfathered debt”). This change under the TCJA law applies to all tax years between 2018 and 2025. Many mortgage holders refinanced for lower rates in the last few years so remember for larger mortgages, that could change your situation.

Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount.

Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2021 up to $15,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $15,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($11.7 million in 2021).

There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $75,000 lump sum contribution to a 529 plan can be applied as though it were $15,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. If you want to explore setting up a 529 plan, call us and we would be happy to assist you.

Maximize your qualified business income deduction (if applicable).

One of the most talked about changes from the Tax Cuts and Jobs Act enacted in 2017 is the qualified business income deduction under Section 199A. Current proposals want to change this deduction, but for 2021, taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of tax legislation is complicated and would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2021

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2021 and start thinking about your strategy for 2022. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits unchanged. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases also to an additional $6,500 ($26,000 total). As a reminder, these contributions must be made in 2021.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) which was increased in 2019, remains at $6,000 for 2021. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2021 can be made all the way up to the April 15, 2022, filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $66,000 and $76,000 for 2021. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $105,000 to $125,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2021 as the couple’s income reaches $198,000 and completely at $208,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains at $0 to $10,000 for 2021. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $198,000 – $208,000 for married couples filing jointly in 2021. For singles and heads of household, the income phase-out range is $125,000 – $140,000. For a married individual filing a separate return, the phase-out range remains at $0 to $10,000. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly in 2021, $49,500 for heads of household and $33,000 for all other filers.

Be careful of the IRA one rollover rule. Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any 1-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on IRAs, please call us.

Roth IRA Conversions

There are some rule change proposals that are discussed later in this report for Roth IRA conversions, but in 2021, some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the current laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Always double-check brokerage firm reports. If you sold a security in 2021, the brokerage firm reports the basis on an IRS Form 1099-B in early 2022. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Long-term Capital Gains Tax Rates

Tax rates on long-term capital gains and qualified dividends did not change for 2021. You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2021. In 2021, the 0% rate applies for individual taxpayers with taxable income up to $40,400 on single returns, $54,100 for head-of-household filers and $80,800 for joint returns. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

The 3.8% surtax on net investment income stays the same for 2021. It starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

Some Notable and Continuing Tax Changes for 2021

Some previous itemized deductions are still affected in 2021 under the tax laws. They include:

The floor for deductible medical expenses is still at 7.5%. The 2021 threshold for deducting medical expenses on Schedule A is 7.5% of your 2021 adjusted gross income (AGI). The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Education Planning

Education benefits. The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit are all still available in 2021. 529 plan funds can be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can now be withdrawn from 529 plans to pay off student loans.

The 2020 lifetime learning credit, which allows you to claim 20% of your out-of-pocket costs for tuition, fees and books, for a total of $2,500, phases out for couples at $160,001 and $180,000. The AGI range for singles is $80,001 and $90,000.

Charitable Giving

Send cash donations to your favorite charity by December 31, 2021 and be sure to hold on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

The law allowing taxpayers age 70½ and older to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, including all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by December 31, 2021. Please call us if this is a strategy you are interested in considering.

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $15,000 tax-free to each donee in 2021. These “annual exclusion gifts” do not reduce your $11,700,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($15,000 in 2021) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes are another issue that proposals are trying to change. For 2021 the limits are at $11.7 million ($23.4 million for married couples), up from $11.58 million in 2020 and the income tax basis step up/down to fair market value at death is in place. Any amount over that is subject to 40% Federal taxes. This high amount provides high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, in 2026, the estate tax exclusion is due to revert to pre- 2018 levels of $5 million (adjusted for inflation).

On November 26, 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. Claiming the portable exemption will remain an important discussion topic for descendants with large estates. For those who have large estates, please call us to discuss your situation.

Tax Law Proposals

As of the early November writing of this report, tax law changes were still not finalized. Some of the noteworthy proposals as they were proposed by either President Biden or the House Ways and Means Committee in September are currently no longer being discussed. These include the restoration of the 39.6% top tax bracket and a retroactive increase of the 20% capital gains rate to 25% for individuals earning over $400,000 and married filing jointly taxpayers earning more than $450,000.

Other proposals that are currently not being pursued include changes to RothIRA conversion rules and the termination of the temporary increase in the Unified Credit (replacing the current $11.7 million estate and gift tax exemption with an exemption of approximately $6 million per person starting in 2022).

As of November 3, several proposals were still being considered starting in 2022. They include:

Expansion of 3.8% Net Investment Income Tax (NIIT): The proposal calls for the expansion of the 3.8% tax to apply to net income derived in the ordinary course of trade or business for taxpayers with a taxable income of more than $500,000 for joint filers and $400,000 for single filers.
A new surtax on high income earners: The current proposal calls for a new additional tax on individuals with a modified adjusted gross income of over $10,000,000 that increases for those with AGI’s over $25,000,000. Please note this does not include state taxes.

Another noteworthy item being discussed is the possible changing of the SALT tax limitations starting as early as 2021. Please remember it is uncertain as of early November writing of which tax changes, if any, will be passed into law. We only include this section in an attempt to make clients aware of any potential key proposals for tax planning purposes.

Our goal is to keep clients updated when tax laws change so that they can proactively plan. If you would like to discuss any of these potential tax law changes with us, please feel free to contact us and we’d be happy to assess your unique financial situation.

Conclusion

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), registered investment advisor. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Sources: Forbes, Fortune, MarketWatch, Wall Street Journal, Oppenheimer Funds, Investopedia, Barron’s.

Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, LLC (IFG) and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Please consult a qualified tax professional to discuss tax matters. Source: irs.gov. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2021.

The post Proactive Year-end Tax Planning for 2021 and Beyond appeared first on Financial 1 Tax.

Join Us for Our Financial Strategy Workshop

F1Tax — Thu, 15 Apr 2021 06:42:25 +0000

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

Your current financial strategy could be destroying your retirement income… and taxes are likely the culprit. Discover tax-smart retirement planning and protect your money from Uncle Sam now! We are hosting four FREE workshops in Florida, April 20th and 22nd. RSVP by phone at 954-892-6020. Get details and the full flyer below!

Concerns that keep most Americans up at night that we will discuss:

Tax Planning
Retirement Income
Mitigating Risk
Estate Planning

VIEW EVENT INVITATION (PDF)

Attend One Of Our Free Workshops!

Tuesday, 4/20/21:

10AM – 12PM
2PM – 4PM

Sheraton Suites Fort Lauderdale Plantation, FL 311 N University Dr., Plantation, FL.

Thursday, 4/22/21:

10AM – 12PM
2PM – 4PM

Double Tree by Hilton Sunrise-Sawgrass Mills 13400 W Sunrise Blvd, Sunrise, FL.

Call now, seating is limited! 954-892-6020

The post Join Us for Our Financial Strategy Workshop appeared first on Financial 1 Tax.

Proactive Year-end Tax Planning for 2020 and Beyond

F1Tax — Fri, 25 Sep 2020 03:20:51 +0000

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

2020 was an unusual year that had several major legislative bills passed that could have an impact on your taxes. It is also a presidential election year, so investors might want to think about potential future tax strategies. Although it will take more than a change in president to enact tax laws changes, it is always wise to educate yourself in advance. This report includes sections on possible tax law changes if there is a change in administration (based on the current proposals) and notable CARES Act and SECURE Act changes that you should be aware of. The main focus of this report is on what individual taxpayers can do to potentially save money on their 2020 taxes.

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. One big uncertainty for all taxpayers is what will happen to the Tax Code after 2025. The way the Tax Cuts and Jobs Act is set up, the changes to the corporate side of the tax code are permanent while many provisions for individuals that took effect in 2018 are currently set to expire after 2025.

The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2020

For 2020 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Under current law this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2020

2020 is the third year for the new tax laws and new tax forms that were created by the 2017 Tax Cuts and Jobs Act (TCJA). One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Some items to consider include:

Evaluate the use of itemized deductions versus the standard deduction.

For 2020, the standard deduction amounts will increase to $12,400 for individuals and married couples filing separately, $18,650 for heads of household, and $24,800 for married couples filing jointly and surviving spouses.

As a reminder, in 2018, the Tax Cuts and Jobs Act roughly doubled the standard deduction. It’s reported that this helped decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions.

The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.

Consider bunching charitable contributions or using a donor-advised fund.

For many taxpayers, the larger standard deduction and changes to key itemized deductions resulted in them no longer itemizing. It was estimated that about 15 million filers used the charitable contribution write-off in 2018, a sharp decline from the 36 million who utilized it in 2017. For those taxpayers who are charitably inclined it makes sense to think about a plan. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount. (wsj.com 2/15/2019)

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017, mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt. The threshold has been lowered to the first $750,000 or $375,000 (married filing separately) on homes purchased after December 15, 2017. All interest paid on any mortgage taken out before October 13, 1987 is fully deductible regardless of your mortgage amount (called “grandfathered debt”). This change under the TCJA law applies to all tax years between 2018 and 2025. Many mortgage holders refinanced for lower rates in the last few years so remember for larger mortgages, that could change your situation.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount.

Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2020 up to $15,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $15,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($11.58 million in 2020).

Maximize your qualified business income deduction (if applicable).

One of the most talked about changes from the Tax Cuts and Jobs Act is still the qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2020

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2020 and start thinking about your strategy for 2021. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500, up from $19,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases also to an additional $6,500 ($26,000 total). As a reminder, these contributions must be made in 2020.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) which was increased in 2019, remains at $6,000 for 2020. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2020 can be made all the way up to the April 15, 2021 filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $65,000 and $75,000 for 2020. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $104,000 to $124,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2020 as the couple’s income reaches $196,000 and completely at $206,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains at $0 to $10,000 for 2020. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $196,000 – $206,000 for married couples filing jointly in 2020. For singles and heads of household, the income phase-out range is $124,000 – $139,000. For a married individual filing a separate return, the phase-out range remains at $0 to $10,000. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly in 2020, $48,700 for heads of household and $32,500 for all other filers.

Be careful of the IRA one rollover rule. Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any 1-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. The CARES Act allowed you to not take your Required Minimum Distributions (RMDs) in 2020. If you took an RMD in 2020, you had till August 31, 2020 to roll that distribution back into your IRA and this roll back was not subject to the 60 day or one per year rule. If you are rolling over an IRA or have any questions on IRAs, please call us.

Roth IRA Conversions

Some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the new laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Always double-check brokerage firm reports. If you sold a security in 2020, the brokerage firm reports the basis on an IRS Form 1099-B in early 2021. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Long-term Capital Gains Tax Rates

Tax rates on long-term capital gains and qualified dividends did not change for 2020, but the income thresholds to qualify for the various rates did go up. You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2020. In 2020, the 0% rate applies for individual taxpayers with taxable income up to $40,000 on single returns, $53,600 for head-of-household filers and $80,000 for joint returns. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

The 3.8% surtax on net investment income stays the same for 2020. It starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

Some Notable and Continuing Tax Changes for 2020

Some previous itemized deductions are still affected in 2020 under the tax laws. They include:

The floor for deductible medical expenses is still at 7.5%. The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI. The adjusted-gross-income threshold was slated to jump from 7.5% to 10% after 2018, but the 2019 government funding law revived the 7.5% figure for 2019 and 2020. The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Alimony deductions. Under prior law, alimony and separate maintenance payments were deductible by the payor and includible in income by the payee. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse.

Education Planning

Education benefits. The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit are all still available in 2020. Also, starting in 2020, 529 plan funds can now be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can now be withdrawn from 529 plans to pay off student loans.

The 2020 lifetime learning credit, which allows you can claim 20% of your out-of-pocket costs for tuition, fees and books, up to $10,000, for a total of $2,000 phases out for couple at $118,000 to $138,000. The AGI range for singles is $59,000 to $69,000.

Charitable Giving

This is a great time of year to clean out your garage and give your items to charity. Please remember that you can only write off these donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill.

Send cash donations to your favorite charity by December 31, 2020 and be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $15,000 tax-free to each donee in 2020. These “annual exclusion gifts” do not reduce your $11,580,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($15,000 in 2020) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes for 2020 is $11.58 million, up from $11.4 million in 2019 ($23.16 million for married couples), and the income tax basis step up/down to fair market value at death continues. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, in 2026, the estate tax exclusion will return to $5 million (adjusted for inflation). On November 26, 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. Claiming the portable exemption will remain an important discussion topic for decedents with large estates.

Some Notable Coronavirus Aid, Relief, and Economic Security (CARES) Act & SECURE Act Changes

The CARES Act and the SECURE Act (passed in December 2019) had provisions that could affect you in 2020. This section reviews some of the changes for informational purposes only. You should discuss your impact with a qualified tax professional.

Recovery Rebates

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, many Americans received direct economic recovery rebate payments of $1,200 ($2,400 for couples filing jointly), plus $500 more for each child under age 17. The payments started to phase out for joint filers with adjusted gross incomes above $150,000, head-of-household filers with adjusted gross incomes (AGIs) above $112,500, and single filers with AGIs above $75,000. Technically, the rebate is an advance payment of a special 2020 tax credit. You’ll reconcile your rebate on your 2020 return. If you received a rebate please alert your tax preparer!

Retirement Plan Changes

There were several changes for retirement plans in 2020 from the SECURE Act, which was signed into law late in 2019. The CARES Act also included a few stipulations that affected retirement accounts. Both acts significantly impact required minimum distributions (RMDs). One notable change is that under the SECURE Act, the beginning age for taking RMDs changes from 70½ to 72. (This change only applies to account owners who turn 70½ after 2019.) Reminder: The CARES Act allowed you to not take your RMDs in 2020. If you took an RMD in 2020, you had till August 31, 2020 to roll that distribution back into your IRA and this roll back was not subject to the 60 day or one per year rule.

The SECURE Act also provided that:

People with earned income can make contributions to Traditional IRAs past the age of 70½ starting in 2020.
Anyone having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% fine for pre-age-59½ withdrawals.
Beginning in 2020, fellowships, stipends or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions.

Perhaps one of the biggest changes from the SECURE ACT was that the rules for withdrawing money from inherited IRAs and workplace retirement accounts were tightened and now most inherited retirement accounts need to be fully distributed within 10 years of the death of the IRA owner or 401(k) participant. This new rule is somewhat complex and requires some planning. Also, there are some exceptions, so please call us or see a tax professional for details. (Please note: Inherited IRAs from individuals who died before 2020 aren’t affected by this change.)

In addition to the RMD suspension mentioned above, the CARES Act includes a few other key retirement-related tax breaks for 2020 including:

Waiving the 10% penalty on pre-age-59½ payouts from retirement accounts for up to $100,000 of coronavirus-related payouts. A coronavirus-related distribution can also be included in income in equal installments over a three-year period, and you have three years to put the money back into your retirement account and undo the tax consequences of the distribution.
Allowing eligible individuals to borrow more from workplace plans such as 401(k)s—up to the lesser of $100,000 or 100% of the account balance—until September 23, 2020. Repayments on retirement plan loans due in 2020 are also delayed for one year.

NEW Charitable Deduction Changes for 2020

The CARES Act created a new charitable deduction available to taxpayers who do not itemize their deductions in 2020. This new benefit known as a universal deduction, allows for an above the line charitable deduction of up to $300 per individual ($600 for married filing jointly). To qualify, the charitable gift must cash (or cash equivalent) be made to a qualified charity (501(c)(3)). This contribution must be made on or before 12/31/2020.

For those who are itemizing, in 2020, the CARES Act allow you to take deductions up to 100% of your 2020 AGI (up from 60%) for cash contributions to qualified charities.

Possible Tax Changes if Joe Biden Wins

While the election has not been decided, Democratic Party nominee Joe Biden has released some possible law changes he would like to make if he unseats incumbent Republican Donald Trump for the presidency come November. While these would be future changes and have to be approved by Congress, to help you think about planning your future strategies here are some of the proposed changes to be aware of:

Increase Corporate Tax Rates. Under the TCJA, the peak marginal corporate tax rate was reduced from 35% to 21%. Under the Biden tax plan, the corporate tax rate would be increased to 28%.

Increase the marginal tax rate for top earners. Biden’s tax plan would raise the top marginal income-tax bracket from 37% to 39.6% (please note that the TCJA lowered the top marginal bracket from 39.6% to 37% in 2018).

Raise the capital gains tax on filers with incomes above $1 million. Biden’s tax proposal calls for filers with over $1 million in income to pay ordinary tax rates on their gains, no matter how long they’ve held an asset. This would imply 39.6%, plus the Net Investment Income Tax (NIIT), for a total tax rate of over 43%.

Limit itemized deductions. Biden’s tax plan includes a cap on itemized deductions of 28%. This means for each dollar of itemized tax deductions, including charitable contributions, a taxpayer or couple filing jointly would only receive a maximum benefit of $0.28. This 28% limit would hold true even if a filer is paying a higher marginal tax rate.

Phase out small business income deductions over $400,000. Biden’s tax plan aims to keep Qualified Business Income (QBI) QBI deductions in place for those with less than $400,000 in earnings but phasing out pass-through deductions for those with over $400,000 in earnings.

Eliminate step-up in basis. Biden’s tax plan wants to put an end to the step-up in basis. A step-up in basis refers to the cost basis of assets or property transferrable to an heir upon death. If, as an example, an individual purchased a home for $300,000, but it was worth $600,000 at the time of their death, their heir would pay capital gains on anything over $600,000 if the home were ever sold. If Biden’s tax proposal were to become law, heirs would not “inherit” a stepped-up cost basis.

Reduce Estate Tax exemption. Biden’s tax plan wants to reduce estate tax exemptions back down to $3.5 million immediately. This means estates over that value would be taxed.

PROACTIVE TAX PLANNING — A “Proactive” approach to your tax planning instead of a “Reactive” approach could produce better results!

Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, LLC (IFG). Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Please consult a qualified tax professional to discuss tax matters. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2020.

The post Proactive Year-end Tax Planning for 2020 and Beyond appeared first on Financial 1 Tax.

Year-end Tax Moves for 2019

Financial 1 — Sat, 23 Nov 2019 14:00:02 +0000

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

One of our main goals as holistic financial advisors is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component necessary to help our clients benefit from potential tax reduction strategies.

This report focuses on what individual taxpayers can potentially do to save money on their 2019 taxes. The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. One big uncertainty is what will happen to the Tax Code after 2025. The way the Tax Cuts and Jobs Act is set up, the changes to the corporate side of the tax code are permanent, but the individual tax changes are mostly set to expire after the 2025 tax year. Unless indicated otherwise, TCJA provisions discussed here took effect in 2018 and are currently set to expire after 2025.

Income Tax Rates for 2019

For 2019 there are seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Under current laws this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2019

Last year ushered in many new tax laws and new tax forms stemming from the 2017 Tax Cuts and Jobs Act (TCJA). One of our primary goals is to help our clients optimize their tax positions. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique, but it is wise for every taxpayer to begin their final year-end planning now!

Choosing the appropriate strategies will depend on your income as well as a number of other personal circumstances. As you read through this report you it could be helpful to note those strategies that you feel may apply to your situation, so you can discuss them with your tax preparer.

Some items to consider include:

— Evaluate the use of itemized deductions versus the standard deduction

For 2019, the standard deductions are $12,200 for singles and $24,400 for married filing jointly. This is up $200 and $400 respectively from 2018.

As a reminder, in 2018, the Tax Cuts and Jobs Act roughly doubled the standard deduction. It’s reported that this helped decrease many taxpayers bills in 2018 who typically claim this standard deduction. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take standard deductions. Depending on your results, you may even need to adjust your estimated quarterly tax payments or think about turning in a new Form W-4 to your employer.

The TCJA also eliminated or limited many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately. Additionally, the Tax Cuts and Jobs Act temporarily eliminates miscellaneous itemized deductions subject to the 2% floor (like tax preparation fees and employee business expenses) and limits the home mortgage interest deduction to home acquisition debt of up to $750,000, or $375,000 for a married taxpayer filing separately.

— Consider bunching charitable contributions or using a donor-advised fund

For many taxpayers, the doubling of the standard deduction and changes to key itemized deductions resulted in them not itemizing in 2018. It was estimated that about 15 million filers used the charitable contribution write-off in 2018, a sharp decline from the 36 million who utilized it in 2017. (wsj.com 2/15/2019)

One way to still be able to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.

Actions to Consider

— Review your home equity debt interest

Homeowners can deduct mortgage-related interest on up to $750,000 worth of qualified loans (married filing jointly) or $375,000 (single filers) on homes purchased after December 15, 2017.

The changes under the TCJA law apply to all tax years between 2018 and 2025. Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible, even if the payoff occurred prior to 2019.

— Revisit the use of qualified tuition plans

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying for college. Earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. However, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount. If you are paying tuition for children or grandchildren to attend elementary or secondary schools, it might be advantageous to set up or revisit a 529 plan. This is also a strategy that can reduce your estate. If you want to explore setting up a 529 plan, call us.

— Maximize your qualified business income deduction (if applicable)

One of the most talked about changes from the Tax Cuts and Jobs Act was the new qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful, because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2019

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2019 and start thinking about your strategy for 2020. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,000, up from $18,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at an additional $6,000 ($24,500 total). As a reminder, these contributions must be made in 2019.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) is $6,000, up from $5,500. This is the first adjustment to IRA contribution limits since 2013. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2019 can be made all the way up to the April 15, 2020 filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $64,000 and $74,000 for 2019. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $103,000 to $123,000 for 2019. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2019 as the couple’s income reaches $193,000 and completely at $203,000 for 2019. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is $0 to $10,000 for 2019. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $193,000 – $203,000 for married couples filing jointly (up from $189,000 to $199,000 in 2018). For singles and heads of household, the income phase-out range is $122,000 – $137,000 (up from $120,000 to $135,000 in 2018). For a married individual filing a separate return, the phase-out range is $0 to $10,000 for 2019. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly in 2019, $48,000 for heads of household and $32,000 for all other filers.

Be careful of the IRA one rollover rule. Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any one-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on this, please call us.

Roth IRA Conversions

Some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the new laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Sell worthless investments. If you own an investment that you believe is worthless, ask your tax preparer if you can sell it to someone other than a related party for a minimal amount, say $1, to show that it is, in fact, worthless. The IRS often disallows a loss of 100% because they will usually argue that the investment has to have at least some value.

Always double-check brokerage firm reports. If you sold a security in 2019, the brokerage firm reports the basis on an IRS Form 1099-B in early 2020. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Zero Percent Tax on Long-term Capital Gains

You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2019. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

Some Notable Tax Changes for 2019

Some itemized deductions are affected in 2019 under the new tax laws. They include:

The floor for deductible medical expenses is increased to 10%. The Tax Cuts and Jobs Act lowered the threshold for medical expense deductions to 7.5% of AGI from the prior threshold of 10%, however, this change only was made for the 2017 and 2018 tax years. As of October 2019, the threshold is set to increase to 10% again unless Congress acts to extend it. The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

No more Obamacare penalties, starting in 2019. While Congress have thus far been unsuccessful in repealing the Affordable Care Act, the Tax Cuts and Jobs Act did eliminate the individual insurance mandate — aka the “Obamacare penalty.” This is the penalty you pay for not having health insurance. This penalty was repealed starting in tax years 2019 and beyond.

Some Notable Tax Changes That Continue in 2019

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

Although existing mortgages are grandfathered in subject to the prior $1 million cap, interest expense on acquisition indebtedness for up to two homes is capped at $750,000 total for loans incurred after December 15, 2017 through 2025. Interest on home equity loans is not deductible after 2017 through 2025.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Miscellaneous itemized deductions disallowed after 2017 include: tax preparation fees, investment expenses, and unreimbursed employee expenses. Individuals with significant unreimbursed employee expenses, including mileage, internet/phone charges, and education costs should consider setting up an excludable working condition fringe benefit arrangement or accountable plan from their employers.

Alimony deduction changes. Under prior law, alimony and separate maintenance payments were deductible by the payor and includible in income by the payee. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse. These changes will profoundly affect the structure of divorce settlements.

Alternative Minimum Tax (AMT) Changes

The AMT exemption amount for 2019 is $71,700 for singles and $111,700 for married couples filing jointly. The 28% AMT rate applies to excess AMTI of $194,800 for all taxpayers ($97,400 for married couples filing separate returns).

The AMT calculation can be complicated and you should discuss your situation with your tax professional, but here are some basic facts. AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. For 2019, the exemption will start phasing out at $510,300 in AMTI for single filers and $1,020,600 for married taxpayers filing jointly.

Other Family and Education Planning Changes

Child and family credit. The Child Tax Credit is $2,000 per qualifying child, with $1,400 of this amount being refundable. The TCJA of 2018 also adds a $500 nonrefundable credit for qualifying dependents other than children. More importantly, the act increases the phaseout for the child tax credit to $400,000 from $110,000 for married taxpayers filing a joint return and to $200,000 from $75,000 for other taxpayers.

ABLE accounts. Contributions to ABLE accounts are now eligible for the retirement saver’s credit and a child’s 529 account can be rolled over to an ABLE account for the child.

Charitable Giving

Send cash donations to your favorite charity by December 31, 2019 and be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

The law allowing taxpayers age 70½ and older to make a qualified charitable distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, satisfying all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by your RMD deadline (i.e. December 31, 2019).

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $15,000 tax-free to each donee in 2019. These “annual exclusion gifts” do not reduce your $11,400,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly-held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Contribute to a Qualified Tuition Plan (529 Plan) on behalf of a beneficiary. The effective annual contribution limit to 529 Plans for 2019 is $15,000. Transfers to 529 Plans count as annual exclusion gifts. Withdrawals (including earnings) used for qualified education expenses (tuition, fees, books and other related expenses) are income tax free. The tax law even allows you to give the equivalent of five years’ worth of contributions up front ($15,000 x 5 = $75,000) with no gift tax consequences. Earnings on non-qualifying distributions are subject to income tax and a 10% penalty. Overall contribution limits vary by state. Many states also provide contribution incentives such as tax deductions, tax credits or matching grants. If you’d like to learn more about what your state’s parameters are for 529 plans, please call us and we can assist you.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($15,000 in 2019) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

RMDs for those over 70 ½. One thing to watch closely by year-end is the RMD requirement. Most retirement arrangements (other than Roth IRAs) require that participants begin to take annual payments of benefits in the year they turn age 70½. While distributions generally must be made at the end of the calendar year, distributions for the first year can be delayed until April 1 of the succeeding year. If you have questions about your RMD, please call us.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes for 2019 is $11.4 million, up from $11.18 million in 2018 ($22.8 million for couples), and the income tax basis step up/down to fair market value at death continues. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, the exemption amounts will revert in 2026 to 2017 levels (although the exemption amount has never decreased before), claiming the portable exemption will remain an important discussion topic for decedents with more than $3 million in assets.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you. Also, there are some pending legislative proposals like the SECURE ACT which could change your tax planning direction. We will try to monitor impactful changes and as always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

We are here for you!

Our advice is not one-size-fits-all. Make an appointment to prepare for 2020! You can reserve your appointment online, or message us directly right here. Or, call our offices: 410-908-9293.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. The views stated in this letter are not necessarily the opinion of Independent Financial Group and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2019.

The post Year-end Tax Moves for 2019 appeared first on Financial 1 Tax.

New Tax Changes: The SECURE Act

Financial 1 — Tue, 25 Jun 2019 23:01:41 +0000

The New SECURE Act and Proactive Retirement Planning
Tatyana Bunich CEP.RFC.

The House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on May 23. The next step is to pass through the Senate and be signed by the President. With strong bipartisan support and the Senate already considering changes for retirement plans, industry expert Bob Keebler, CPA, MST of Keebler & Associates agrees with many reporters who are sharing that this is likely to happen. The act’s goal is to make it easier for small businesses to provide a retirement plan and increase the number of Americans with access to a plan.

Some of the provisions of the SECURE Act that could help Americans better save for retirement include;

Significantly increasing the tax credit for new company-wide retirement plans from the current cap of $500 to $5,000;
Allowing small employers that implement an automatic enrollment feature in their retirement plan design to become eligible for an additional $500 credit; and,
Allowing two or more unrelated employers to join a pooled employer plan, creating an economy of scale that lowers both employer and plan participant cost.

While making retirement plans more available was the driving force behind the SECURE Act, hidden in this bill are some significant changes that all retirement savers should know for planning purposes. Here are some items that are currently part of this bill.

Increasing the RMD age from 70½ to 72

This new legislation calls for an Increase in Age for Required Beginning Date for Mandatory Distributions. Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70½. The policy behind the Required Minimum Distribution (RMD) rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The age 70½ was first applied for retirement plans in the early 1960s and has never been adjusted to consider increases in today’s life expectancy. The bill increases the required minimum distribution age from 70½ to 72.

Allowing someone over 70 with earned income to still contribute to an IRA

One key change that the SECURE Act calls for is a Repeal of Maximum Age for Traditional IRA Contributions. Specifically, this legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. As Americans live longer, an increasing number continue employment beyond traditional retirement age and this allows Americans with earned income to keep contributing to retirement plans after age 70.

A provision in this bill would force the distribution of a retirement account within 10 years for most non-spouse beneficiaries.

A new provision in the SECURE Act could remove most non-spousal beneficiary’s ability to maximize tax-savings through a strategy known as the “Stretch IRA.” The Stretch IRA allows younger beneficiaries like children or grandchildren to take required minimum distributions from the inherited account based on their own much longer life expectancy. This new bill would force a distribution of the account’s value within 10 years of the original owner’s death.

Proactive Tax Planning

Keebler is suggesting that IRA owners talk with their financial professional about proactive tax planning. He feels that it will help tax deferred IRA holders to examine the values of alternative strategies. He encourages these IRA owners to consider proactively planning to minimize taxes when passing on the account to a non-spouse heir, especially if the bill eventually becomes law.

Keebler shares that, “Charitable remainder trusts allow investors to leave assets to a charitable organization and to a beneficiary. In that scenario, your beneficiary would collect a stream of income from the assets for a specified time span. At the end of that period, the charity collects whatever is left.”

Some Reasons Why you might convert a traditional IRA to a Roth IRA

For the right client, Keebler likes the benefits of a Roth conversion. “A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA. This is a strategy we think about when the IRA owner is in a lower bracket than their beneficiary”.

Some reasons why you might convert a traditional IRA to a Roth IRA

Enjoy tax-free withdrawals in retirement.
When taking withdrawals from a traditional IRA, you’d have to pay taxes on the money your investments earned—and on any contributions you originally deducted on your taxes. With a Roth IRA, as long as you meet certain requirements, all of your withdrawals are tax-free.

Watch your money grow tax-free for longer.
Traditional IRAs force you to take required minimum distributions (RMDs) every year after you reach the RMD required age, regardless of whether you actually need the money. ROTH IRA’s have no RMD requirement, so your money can stay in the account and keep growing tax-free.

Leave a tax-free inheritance to your heirs.
The non-spouses who eventually inherit your Roth IRA will have to eventually take the money out of a tax-free growth situation (if the SECURE Act passes, this could be within 10 years of your passing) but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years.

Deciding whether to convert to a Roth IRA hinges on a variety of issues including what your tax rate is now versus later, the tax bill you’ll have to pay to convert, and your future plans for your estate. Also remember, the conversion will be permanent. Once you convert to a ROTH IRA you can’t revert the money back to a traditional IRA.

Some considerations before deciding include:

Will you need the money in the first five years? ROTH IRA conversions have penalties if used in the first five years.
Will you end up in a higher or lower bracket in the future?
Where will you take the money from to pay the taxes?

This is where a financial professional can offer some help suggestions and strategies. We enjoy talking with clients about the pros and cons of both partial or full ROTH conversions.

Qualified Charitable Distributions (QCDs)

While they are not new to this law, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCD) are a proactive strategy for tax planning for anyone taking a Required Minimum Distribution (RMD). A QCD is a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity. It is only available to IRAs and individuals who have reached RMD age (Currently 70½ but may change to 72). Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This QCD lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability. It also lowers your income for purposes of seeing if your social security is taxable. By using, or preparing to use, a QCD, you can potentially meet your RMD requirements and satisfy your charitable intents, all while saving money on taxes both today and into the future.

Please note, for tax return filings, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. The responsibility is on you to inform your tax preparer that you used a QCD. If you don’t let your preparer know, they could report this transaction as fully taxable, which would negate the benefit of your smart planning. Also, the distribution must be made directly to a qualified charity.

Once again, this is a specific area where a professional can offer some help, suggestions and strategies. We enjoy talking with clients about looking into QCDs for anyone over the age of 70.

Final Thoughts on Proactive Retirement Planning

Over your life you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. You may also have Roth accounts that compound without tax consequences. When thinking about the assets you have accumulated in your retirement accounts, a key issue is tax efficiency. Accumulating assets in a tax efficient way is only one part of the strategy, the other more complex part is withdrawing those assets while making use of the most available tax advantages. The goal is to try to proactively plan the withdrawals from retirement accounts to minimize your tax liability.

The Act would provide some slight flexibility on the timing of some of your RMD strategies since the proposed RMD age will be lengthened to age 72. This could provide another 18 months of time before a mandatory distribution is required.

If the SECURE Act becomes law, in whatever version it becomes, one of our primary goals is to review it for opportunities and then share our observations with clients. We want to always try to provide proactive tax planning ideas when possible.

Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them.

If you would like to discuss your retirement plan and withdrawal strategy, please call us. Our goal is to understand our clients’ needs and to monitor their wealth. Our primary objective is to take the emotions out of decisions for our clients. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

Proactive Tax Planning

A “Proactive” approach to your tax planning instead of a “Reactive” approach could produce better results!

Has your current financial advisor reviewed the tax consequences of your investments?
Has your current financial advisor discussed tax planning and your investments?
Would you like a COMPLIMENTARY opinion of your situation?

If you answered NO to questions 1 or 2 and/or YES to question 3, call us at 410.908.9293 to schedule a complimentary financial physical.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. Roth IRA account owners should consider the potential tax ramifications, age and contribution limits in regard to funding a Roth IRA. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. RMDs are generally subject to federal income tax and may be subject to state taxes.

The views stated in this article are not necessarily the opinion of Independent Financial Group and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing involves risk including the potential loss of principal. No investment strategy, such as rebalancing and asset allocation, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. This article provided the Academy of Preferred Financial Advisor, Inc. APFA, Inc.©

The post New Tax Changes: The SECURE Act appeared first on Financial 1 Tax.

Filing 2018 Income Taxes and Proactive Tax Planning for 2019

F1Tax — Wed, 13 Feb 2019 05:37:11 +0000

Tatyana Bunich CEP.RFC — 410-908-9293

Tax planning should always be a key focus when reviewing your personal financial situation. One of our goals as financial professionals is to point out as many tax savings opportunities and strategies as possible for our clients.

This special report reviews some of the broader tax law changes along with a wide range of tax reduction strategies. As you read this report, please take note of each tax strategy that you think could be beneficial to you. Not all ideas are appropriate for all taxpayers. We always recommend that you address any tax strategy with your tax professional to consider how one tax strategy may affect another and calculate the income tax consequences (both state and federal). Remember, tax strategies and ideas that have worked in the recent past might not even be available under today’s new tax laws. Always attempt to understand all the details before making any decisions—it is always easier to avoid a problem than it is to solve one.

Please note—your state income tax laws could be different from the federal income tax laws. Visit FindLaw for a wide range of tax information and links to tax forms for all 50 states. All examples mentioned in this report are hypothetical and meant for illustrative purposes only.

Beginning of the 2019 Tax Season

The beginning of tax season 2019 was initially in question due to the government shutdown. On January 7, the Internal Revenue Service (IRS) assured taxpayers they would indeed begin processing tax returns on January 28, 2019. The deadline to file 2018 tax returns is Monday, April 15 for most taxpayers (those who live in Maine or Massachusetts have until April 17 to file due to Patriots’ Day holiday on April 15 and Emancipation Day on April 16 for the District of Columbia).

IRS Commissioner Chuck Rettig said that, despite the government shutdown, “IRS employees have been hard at work over the past year to implement the biggest tax law changes the nation has seen in more than 30 years.” The IRS recalled furloughed employees to assist in the work required to process returns. (Source: IRS.gov)

Even after the federal shutdown, one thing you can count on is tax season. This year’s tax season brings major adjustments for the IRS, taxpayers and tax preparers alike due to the tax law changes and new 2018 Form 1040 required to adhere to the rules created by the Tax Cut and Jobs Act (TCJA).

2018 Tax Law Updates

For 2018, the form 1040 has been completely redesigned. Form 1040, which many taxpayers can file by itself, is supplemented with new Schedules 1 through 6. These additional schedules will be used as needed to complete more complex tax returns. Forms 1040A and 1040EZ are no longer available. We have time to look into tax planning ideas for your 2019 taxes, but here are some things that 2018 tax filers should review. They include:

Tax brackets have been adjusted.
The standard deduction has increased.
The Child Tax Credit has increased.
Some deductions and exemptions are gone.
There are changes to state and local tax (SALT) deductions.
There are new deduction rates for medical expenses.
Capital gains will still impact your income.
There is still a 3.8% Medicare Investment Tax.
Charitable donations are still deductible.
You might still be able to contribute to retirement plans (or take an RMD) if appropriate.

2018 Tax Tables

Click the charts to enlarge.

2018 Tax Rates and Income Brackets

There are still seven federal income tax brackets for 2018. The lowest of the seven tax rates is 10%, while the top tax rate is now 37%. The income that falls into each is scheduled to be adjusted in 2019 for inflation. For 2018, use the chart in this report to see what bracket your final income falls into.

TAX TIP: If you are not sure how best to file, ask your tax preparer or review IRS Publication 17, Your Federal Income Tax, which is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

2018 Standard Deduction Amounts

Most taxpayers claim the standard deduction. For 2018, the standard deduction has increased for all filers and has almost doubled in size. Previously set at $6,350 for single tax filers and $12,700 for joint filers, the amounts are now $12,000 for single filers and $24,000 for those filing jointly ($18,000 for head of household filers). If you are filing as a married couple, an additional $1,300 is added to the standard deduction for each person age 65 and older. If you are single and age 65 or older, an additional deduction of $1,600 can be made.

Increased Child Tax Credit

For 2018, the maximum child tax credit has doubled to $2,000 per qualifying child, of which $1,400 (up from $1,100) can be claimed for the additional child tax credit. The bill also adds a new, non-refundable credit of $500 for dependents other than children. The modified adjusted gross income threshold at which the credit begins to phase out has increased to $200,000 (previously $110,000) and $400,000 if married filing jointly.

New Tax Law Deduction Changes

Some deductions and exemptions allowed in previous years are now eliminated. In the past, those who used a standard deduction could also include a personal exemption if they were not a dependent. That personal exemption is no longer an option. Also, deductions for interest on home mortgages have been reduced and interest from home equity loans eliminated.

There are also changes to state and local tax deductions. Under the new law, a taxpayer’s state and local tax (SALT) deduction is limited to $10,000. This includes both state income and property taxes. This might most affect taxpayers who live in states with high property taxes and those who pay larger State income tax bills. Several tax articles even suggest that some retirees might find it even more beneficial to move to a more tax-friendly state with lower property taxes in an effort to reduce their tax liabilities.

Medical Expense Deduction

The Tax Cuts and Jobs Act (TCJA) retroactively made the 7.5% threshold available to any individual taxpayer regardless of age for 2017 and it stays there for 2018. The 10% threshold amount returns in 2019. The TCJA tax bill also eliminates the tax penalty for not having health insurance after December 31, 2018.

TAX TIP: For 2018, taxpayers can deduct medical expenses that are over 7.5% of their adjusted gross income as opposed to the higher 10%.

Investment Income

People with enough income to pay taxes at the 37% rate will pay 20% in 2018 on their net long-term capital gains and qualified dividends.

Long-term capital gains are taxed at more favorable rates compared to ordinary income. One tax strategy is to review your investments that have unrealized long-term capital gains and sell enough of the appreciated investments in order to generate enough long-term capital gains to push you to the top of your federal income tax bracket. This strategy could be helpful if you are in the 0% capital gains bracket and do not have to pay any federal taxes on this gain. Then, if you want, you can buy back your investment the same day, increasing your cost basis in those investments. If you sell them in the future, the increased cost basis will help reduce longterm capital gains. You do not have to wait 30 days before you buy back this investment—the 30-day rule only applies to losses, not gains.

Note: This non-taxable capital gain for federal income taxes might not apply to your state.

TAX TIP: Remember that marginal tax rates on long-term capital gains and dividends can be higher than expected. The 3.8% surtax can raise the effective rate to 18.8% for single filers with income from $38,601 to $425,800 and 23.8% for single filers with income above $479,000. It can raise the effective rate to 18.8% for married taxpayers filing jointly with income from $77,201 to $479,000 and to 23.8% for married taxpayers filing jointly with income above $479,000.

Calculating Capital Gains and Losses

With all of these different tax rates for different types of gains and losses in your marketable securities portfolio, it’s probably a good idea to familiarize yourself with some of the rules:

Short-term capital losses must first be used to offset short-term capital gains.
If there are net short-term losses, they can be used to offset net long-term capital gains.
Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
Capital losses in excess of capital gains can be used to offset up to $3,000 of ordinary income.
Any remaining unused capital losses can be carried forward and used in the same manner as described above.

TAX TIP: Please remember to look at your 2017 income tax return Schedule D (page 2) to see if you have any capital loss carryover for 2018. This is often overlooked, especially if you are changing tax preparers.

Please double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2018, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution. However, your 1099 might not show the correct cost basis or realized gain or loss for each sale. You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax

The year 2018 is the sixth year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single or head of household taxpayer, $125,000 as married taxpayers filing separately or $250,000 as married joint return filers, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower. This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

A helpful strategy has been to pay attention to timing, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Consider realizing capital gains in years when you are under these limits. The inclusion limits may penalize married couples, so realizing investment gains before you tie the knot may help in some circumstances. This tax makes the use of depreciation, installment sales, and other tax deferment strategies suddenly more attractive.

Medicare Health Insurance Tax on Wages

If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act levies a special 0.9% tax on your wages and other earned income. You’ll pay this all year as your employer withholds the additional Medicare Tax from your paycheck. If you’re self-employed, plan for this tax when you calculate your estimated taxes.

If you’re employed, there’s little you can do to reduce the bite of this tax. Requesting non-cash benefits in lieu of wages won’t help—they’re included in the taxable amount. If you’re self-employed, you may want to take special care in timing income and expenses (especially depreciation) to avoid the limit.

Charitable Gifts and Donations

When preparing your list of charitable gifts, remember to review your checkbook register so you don’t leave any out. Everyone remembers to count the monetary gifts they make to their favorite charities, but you should count non-cash donations as well. Make it a priority to always get a receipt for every gift. Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. Remember that you’ll have to itemize to claim this deduction, but when filing, the expenses incurred while doing charitable work often is not included on tax returns.

You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. You can also claim a charitable deduction for the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking your child’s Scout troop on an outing. For 2018, the IRS will let you deduct that travel at .14 cents per mile.

Child and Dependent Care Credit

Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school daycare while working. Some parents overlook claiming the tax credit for child care costs during the summer. This tax break can also apply to summer day camp costs. The key is that for deduction purposes, the camp can only be a day camp, not an overnight camp. So, If you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.

Contribute to Retirement Accounts

If you haven’t already funded your retirement account for 2018, consider doing so by April 15, 2019. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2019, you can wait until then to put 2018 contributions into those accounts. To start tax-free compounding as quickly as possible, however, try not to delay in making contributions. If eligible, a deductible contribution will help you lower your tax bill for 2018 and your contributions will compound tax-deferred.

To qualify for the full annual IRA deduction in 2018, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, there is a phaseout from $63,000 to $73,000 for singles and from $101,000 to $121,000 for married taxpayers filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $186,000. For 2018, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the calendar year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2018 is $55,000.

Although contributing to a Roth IRA instead of a traditional IRA will not reduce your 2018 tax bill (Roth contributions are not deductible), it could be the better choice because all withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $5,500 ($6,500 if you are age 50 or older by the end of 2018) to a Roth IRA, you must earn $120,000 or less a year if you are single or $189,000 if you’re married and file a joint return.

The amount you save from making a contribution will vary. If you are in the 22% tax bracket and make a deductible IRA contribution of $5,500, you will save $1,210 in taxes the first year. Over time, future contributions could save you thousands, depending on your contribution, income tax bracket and the number of years you keep the money invested. If you have any questions on retirement contributions, please call us.

RETIREMENT PLAN	2018 LIMIT
Elective deferrals to 401(k), 403(b), 457(b)(2), 457(c)(1) plans	$18,500
Contributions to defined contribution plans	$55,000
Contributions to SIMPLEs	$12,500
Contributions to traditional IRAs	$5,500
Catch-up Contributions to 401(k), 403(b), 457(b)(2), 457(c)(1) plans	$6,000
Catch-up Contributions to SIMPLEs	$3,000
Catch-up Contributions to IRAs	$1,000

Roth IRA Conversions

A Roth IRA conversion is when you convert part or all of your traditional IRA into a Roth IRA. This is a taxable event. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and withdrawals are tax-free in the future, a time when tax rates might be higher.

Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember—you do not have to convert all of your IRA to a Roth. Roth IRA conversions
are not subject to the pre-age 59½ penalty of 10%.

Many 401(k) plan participants can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Please call us to see if this makes sense for you.

Inherited IRAs

Be careful if you inherit a retirement account. In many cases, the decedent’s largest asset is a retirement account. If you inherit a retirement account, such as an IRA or other qualified plan, the money is usually taxable upon receipt. There is no step-up in basis on investments within retirement accounts and therefore most distributions are 100% taxable.

Non-spouse beneficiaries usually cannot roll over an inherited IRA to their own IRA, but the solution to this problem can be easy: establish an Inherited IRA, also known as a “stretch” IRA. Non-spouse beneficiaries of any age are allowed to start their required minimum distributions (RMDs) the year following the year the owner died and stretch them out over their own life expectancy. This will reduce your income taxes significantly compared to having all of the IRA taxed in one year. Please note that it is very important to take the RMD from an inherited IRA every year as penalties for not doing so are very severe – 50% of the amount you did not take.

These tax laws are very complicated and you must implement the requirements carefully to avoid any unnecessary income taxes and penalties. Please contact us before receiving any distributions from a retirement account you inherit. Remember—it is easier to avoid a problem than it is to solve one!

Required Minimum Distributions (RMD)

If you turned age 70½ during 2018, you still have until April 1, 2019, to take out your first RMD. This is a onetime opportunity in case you forgot the first time. The deadline for taking out your RMD in the future will be December 31 of each year. If you do not pay out your RMD by this deadline, you may be subject to a 50% penalty on the amount you were supposed to take out. If you have any questions on your Required Minimum Distributions please call us.

TAX TIP: You usually do not have to take out an RMD from your current employer’s retirement account as long as you work there and don’t own over 5% of the company. See your plan administrator if you have any questions.

Other Overlooked Tax Items and Deductions

Reinvested Dividends – This isn’t a tax deduction, but it is an important calculation that can save investors a bundle. Former IRS commissioner Fred Goldberg told Kiplinger magazine for their annual overlooked deduction article that missing this break costs millions of taxpayers a lot in overpaid taxes.

Many investors have mutual fund dividends that are automatically used to buy extra shares. Remember that each reinvestment increases your tax basis in that fund. That will, in turn, reduce the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Please keep good records. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.

Don’t make that costly mistake.

If you’re not sure what your basis is, ask the fund or us for help. Funds often report to investors the tax basis of shares redeemed during the year. Regulators currently require that for the sale of shares purchased, financial institutions must report the basis to investors and to the IRS.

Student-Loan Interest Paid by Parents – Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, the child can deduct up to $2,500 of student-loan interest paid by their parents each year. (The parents can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt).

Charitable Gift Directly made from IRA – Individuals at least 70½ years of age can still exclude from gross income qualified charitable distributions (QCD) from IRAs of up to $100,000 per year. Please remember to double check on what counts as a qualified charity and distribution before using this tax strategy.

Seven Helpful Tax Time Strategies

1.) Although many deductions have been eliminated under the new laws, it might still be helpful to write down or keep all receipts you think are even possibly tax-deductible. Sometimes, taxpayers assume that various expenses are not deductible and do not even mention them to their tax preparer. Don’t assume anything—give your tax preparer the chance to tell you whether something is or is not deductible.

2.) Be careful not to overpay Social Security taxes. If you received a paycheck from two or more employers, and earned more than $128,400 in 2018 (up from $127,200 in 2017) you may be able to file a claim on your return for the excess Social Security tax withholding.

3.) Don’t forget items carried over from prior years because you exceeded annual limits, such as capital losses, passive losses, charitable contributions and alternative minimum tax credits.

4.) Check your 2017 tax return to see if there was a refund from 2017 applied to 2018 estimated taxes.

5.) Calculate your estimated tax payments for 2019 very carefully. Many computer tax programs will automatically assume that your income tax liability for the current year is the same as the prior year. This is done to avoid paying penalties for underpayment of estimated income taxes. However, in some cases this might not be a correct assumption, especially if 2018 was an unusual income tax year due to the sale of a business, unusual capital gains, the exercise of stock options, or even winning the lottery!

6.) Remember that IRS.gov is a valuable online resource for tax information.

7.) Always double check your math where possible and remember it is always wise to consult a tax preparer before filing.

Proactive Tax Planning for 2019

With the passage of the Tax Cuts and Jobs Act (TCJA), tax brackets, thresholds, and tax rates changed for many filers in 2018. We will try to keep our clients updated during the year on potential strategies that could possibly be helpful. For now, please review the 2019 tax brackets for single filers and married taxpayers filing jointly and the planning ideas listed in this report.

2019 Tax Brackets for Single Filers

Standard Deduction: $12,200

Tax Rate	Income Bracket
10 %	$0 – $9,700
12 %	$9,701 – $39,475
22 %	$39,476 – $84,200
24 %	$84,201 – $160,725
32 %	$160,726 – $204,100
35 %	$201,101 – $510,300
37 %	$510,301 +

2019 Tax Brackets for Married Taxpayers Filing Jointly

Standard Deduction: $24,400

Tax Rate	Income Bracket
10 %	$0 – $19,400
12 %	$19,401 – $78,950
22 %	$78,951 – $168,400
24 %	$168,401 – $321,450
32 %	$321,451 – $408,200
35 %	$408,201 – $612,350
37 %	$612,351 +

Some Things Taxpayers Should Consider to Proactively Tax Plan for 2019:

Prepare a 2019 tax projection – Taxpayers already know the 2019 rates and by reviewing their 2018 situation and all 2019 expectations of income, a qualified tax preparer could be able to help you with a tax projection for 2019.

New contribution limits for retirement savings – For 2019, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000. The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The catch-up contribution limits for those 50 and over remain unchanged.

Explore if a potential Roth IRA conversion is helpful for your situation – A Roth IRA can be beneficial in your overall retirement planning. Investments in a Roth IRA have the potential to grow tax-free and they don’t have required minimum distributions during the lifetime of the original owner. Also, Roth IRA assets may pass to your heirs tax-free. Roth conversions include complex details and are not right for everyone, so please call us to see if this makes sense for you.

Take advantage of annual exclusion gifts – For 2019, the maximum amount of gift tax exemption is $15,000. This means you can give up to that amount to a family member without having to pay a gift tax. Ideas for gifting can include, contributing to a working child (or grandchild’s) IRA, or gifting to a 529 plan, which is a tax-sheltered plan for college expenses.

Consider bunching your charitable donations into a Donor Advised Fund (DAF) – Now is the time to explore if it is helpful for your tax situation to deposit cash, appreciated securities or other assets in a Donor Advised Fund, and then distributing the money to charities over time. Up to 50% of your adjusted gross income can be deductible if given as donations to typical charities.

Look into Health Savings Accounts (HSAs) – In general, to qualify to contribute to a health savings account in 2019, you must have a health insurance policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage. You can contribute up to $3,500 to an HSA if you have single coverage or up to $7,000 for family coverage in 2019, which is slightly more than the 2018 limits. If you’re 55 or older anytime in 2019, you’ll continue to be able to contribute an extra $1,000. HSA’s include complex details and are not right for everyone, so please call us to see if this makes sense for you.

Conclusion

Filing your 2018 taxes will include many changes from previous years. The new tax rates and many of the changes that were approved are set to expire after 2025. An essential part of maintaining your overall financial health is attempting to keep your tax liability to a minimum. Managing wealth involves careful planning and keeping updated and informed of any changes that affect investors. When filing your 2019 taxes, the rules and laws currently in place do not vary too much from your 2018 taxes One of our primary goals is to keep you informed of the changes that will be affecting investors like you. We believe that taking a proactive approach is better than a reactive approach—especially regarding income tax strategies!

Remember—if you ever have any questions regarding your investments, please be sure to call us first before making any decisions. We pride ourselves in our ability to help clients make decisions! Often, there is a simple solution to your question or concern. Don’t worry about things that you need not worry about.

How long should I keep my records?

According to IRS Publication 17, you must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS can assess additional tax.

This table is modeled after one from IRS Publication 17 and contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.

Period of Limitations

If you…	Period is…
1.) File a return and (2), (3), and (4) don’t apply to you.	3 years
2.) Don’t report income that you should and it’s more the gross income shown on your return.	6 years
3.) File a fraudulent return.	No limit
4.) Don’t file a return.	No limit
5.) File a claim for credit or refund after you filed your return.	The later of 3 years or 2 years after tax was paid
6.) File a claim for a loss from worthless securities or bad debt deduction.	7 years

Questions to Consider!

Has your current financial advisor reviewed the tax consequences of your investments?
Has your current financial advisor discussed tax planning and your investments?
Would you like a COMPLIMENTARY opinion of your situation?

If you answered NO to questions 1 or 2 and/or YES to question 3, call us at 410-908-9293 to we would like to offer you a complimentary, one-hour, Wealth Preservation Strategy Session with one of our professionals at absolutely no cost or obligation to you.

To schedule your financial check-up, please call us at 410.908.9293 and we’d be happy to assist you!

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The post Filing 2018 Income Taxes and Proactive Tax Planning for 2019 appeared first on Financial 1 Tax.

Workshop – Planning for 2018 Including: A Tax Law Update

F1Tax — Wed, 01 Aug 2018 21:27:29 +0000

We get a lot of questions throughout the year! We like to help educate our clients by hosting periodic workshops and seminars on topics that we know our clients are interested in. These pictures are from our July 19th workshop, titled “Planning for 2018 Including: A Tax Law Update”

Seminar * click to enlarge photos

The post Workshop – Planning for 2018 Including: A Tax Law Update appeared first on Financial 1 Tax.