Tax Day in 2025

Changes for Tax Year 2024

We’ve gathered a few notable tax changes below for you to consider. Additionally, you can visit the IRS’s page regarding the tax changes for 2024.

Inflation Adjustment

The IRS has adjusted marginal tax brackets and the standard deduction for 2024 in response to inflation. Because of this, you might see an increase in your paychecks, depending on your withholding. Another change includes increases to the allowed contribution amounts for tax-advantaged retirement savings accounts.

Income Tax Brackets Change

With new tax brackets in 2024, some taxpayers may find that their tax bill is lower than expected. Here’s a look at the tax brackets for 2024:

Standard Deduction Increase

The standard deductions provided by the IRS are popular for their simplicity. Standard deductions are set amounts by which taxpayers can use to lower their taxable income based on their filing status.

Here’s a table that breaks down standard deduction changes between 2023 and 2024:

Capital Gains Tax Thresholds Change

For the 2024 tax year, individual tax filers will not have to pay any capital gains tax if their total taxable income is $47,025 or less. The capital gains tax rate jumps to 15% if your income is $47,026 to $518,900. If your income is higher than that, you’ll pay 20% in capital gains.

Earned Income Tax Credit Rises

This is a refundable tax credit designed for qualifying earners. It may or may not apply to your scenario. Workers who earn a low to moderate income may be able to reduce their tax liability through the earned income tax credit.

Here are the earned income tax credit requirements for 2024:

There are other rules that might qualify or disqualify you from receiving the earned income tax credit. If you’re not certain if you qualify for the credit, please contact us.

Gift Limit Goes Up

For tax year 2024, you can now give gifts up to $18,000 per person without having to filing a gift tax return. This is an annual limit to be able to exclude certain gifts. Other rules may apply, depending on the gift.

If you are planning to give gifts and want to plan in advance, please contact us.

Other Changes That May Apply to You

The IRS has made a variety of other changes that may affect your tax liability for tax year 2024.

We Are Here to Help

Please keep in mind that the rules for these options and changes can be more complicated, depending on your tax scenario. Have a question? Reach out anytime. As always, we look forward to helping you with your tax returns and helping you to plan your future.

– The Financial 1 Team

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. 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 article 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.

The post What’s New – 2025 Tax Changes (Tax Year 2024) appeared first on Financial 1 Tax.

Tax Day 2024

Seven Big Changes for Tax Year 2023

Before we skip ahead to this year, everything you need to know about tax year 2022, and filing your taxes in April is here in this blog “Proactive Year-end Tax Planning for 2022 and Beyond”.

Inflation Adjustment

Last October 2022, an inflation adjustment was announced by the IRS for tax year 2023. The increase is around 7%, which will affect your federal tax bracket and other amounts. The adjustment is a bigger jump than what we see each year, and will help some people stay in a lower bracket. That’s a helpful change.

Income Tax Brackets Change

The seven tax brackets for income tax stayed the same in 2022. For 2023, the IRS has notably changed the income thresholds. Compare the changes below for those seven tax rates.

Click your scenario below to expand and compare the rates between tax years 2022 and 2023:

Standard Deduction Increase

For the 2023 tax year, the deduction is going up at $900 to $1,800 depending on your tax scenario. If you take the standard deduction to lower the income you can taxed on, this is a nice plus. For single filers (and married filing separately), the deduction increases $900. For married couples, it’s up $1,800. For heads of households, it’s up $1,400.

For those over 65 or blind, this deduction is up $1,500. For the additional scenario of being unmarried (and not a surviving spouse), it’s $1,850 higher.

Capital Gains Tax Thresholds Change

For 2023, the income thresholds are going up for long-term gains. Short-term gains are still taxed as ordinary income. This impacts tax on the profits during the sale of an asset, like a stock transaction. This includes sales of cryptocurrency, too.

Earned Income Tax Credit Rises

This is a refundable tax credit designed for qualifying earners. It may or may not apply to your scenario, but the refundable credit is going up. Depending on your income and number of children, the earned income credit (EIC) is $560 to $6,935 for tax year 2022.

For 2023, the max is increased to $7,430. For that maximum, you must be qualify and have 3 children or more.

Side note: you may still qualify for the EIC if you do not have children, though the EIC requirements still apply. If you have questions, please contact us.

Gift Limit Goes Up

For tax year 2023, you can now give gifts up to $17,000 per person without having to filing a gift tax return. This is an annual limit to be able to exclude certain gifts. Other rules may apply, depending on the gift.

If you are planning to give gifts and want to plan in advance, please contact us.

Other Changes That May Apply to You

Quick notes on adoption, estate tax and FSAs, below:

We Are Here to Help

Please keep in mind that the rules for these options and changes can be more complicated, depending on your tax scenario. Have a question? Reach out anytime. As always, we look forward to helping you with your tax returns and helping you to plan your future.

– The Financial 1 Team

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. 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 article 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.

The post What’s New in 2024 (Tax Year 2023) appeared first on Financial 1 Tax.

After some concerns and declines during the summer, major equity markets showed advances in the month of September and finished positive for the third quarter of 2019. The S&P 500 ended the month about 1.7% higher, and up by 1.2% for the quarter. The Dow ended 1.9% and 1.2% higher for the month and quarter, respectively. (Source: Yahoo Finance 9/30/2019)

Some prominent investment themes from earlier in the year continued to surface in the third quarter producing volatile trading, but at the quarter’s end had no real impact. The U.S.-China trade conflict continued to capture investors’ attentions and fluctuated equity markets. The quarter also included the Federal Reserve’s lowering of rates in September for the second time this year. The combination of these events with slowing global economic growth and interest rates produced an inverted yield curve, which is a sign for some of economic downturns. Despite all of this, equity markets still rewarded patient investors. (Source: Morningstar.com 9/30/2019)

In a quarter ending news release, the NASDAQ stated that, “As investors prepare for U.S. corporations to report financial results next month, they could look past recent sluggish growth and find comfort as earnings look set to rebound after the third quarter.” Some strategists argue that just a small amount of economic growth should be enough to support better profit growth, which could help justify high market valuations. “People are overestimating the negative from trade and underestimating the lagged response from a lot of policy easing,” said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis. “It could affect what corporations say when they look ahead,” he said. Recent economic data has been mixed, with reports on U.S. labor and housing upbeat, but others disappointing. (Source: NASDAQ.com 9/30/2019)

Investors are still enjoying the longest bull market ever, but two camps of thought still continue to exist. One camp points to the fact that based on historical numbers, like price earnings, that equities are highly overvalued and overpriced. The other camp insists that we are still in a “TINA” market, meaning, There Is No Alternative to stocks. This group feels that until rates rise significantly, this will remain true and that means there could be significant upside in the current market. Equities are not cheap and even the savviest of investors need to have a watchful eye on risk. As financial professionals, we assist clients by providing ideas and suggestions based on their personal circumstances. Short-term interest rates and cash equivalent yields are still historically low. Our goal is to focus on each client’s timeframes and goals.

Key Points

1. Volatility continued to be elevated in Q3 and looks to remain for Q4.

2. Interest rates are still in the spotlight as Fed cuts rates twice in Q3.

3. Consumer confidence remains strong but tariffs bring caution and concern.

4. Trade war and tariffs between China and the U.S. bring market anxieties.

5. U.S. and global political uncertainty remain a key item to watch.

6. Now is the ideal time to revisit your personal objectives and the strategies to achieve them.

Interest Rates Are Still in the Spotlight

On Wednesday, September 18, the Federal Reserve lowered interest rates for the second time in the third quarter by 25 basis points down to a range of 1.75-2%. This reduction was after a similar rate cut as a result of their July session. Prior to July, the Fed had raised rates over nine times since December 2015. The reasoning for this most recent rate cut was weakening exports and low inflation. This quarter’s two rate cuts were the first time in over a decade that the Fed lowered interest rates.

Despite low unemployment rates, robust job gains and strong household spending, the central bank’s monetary policy committee stated, “…business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.” (foxbusiness.com 9.18.2019)

Fed Chairman Jerome Powell reaffirmed that the Fed will, “act as appropriate to ensure that the expansion remains on track.” It appears that the Fed made this recent rate cut as a proactive move toward ensuring the economy remains on the road to recovery.

Interest rates will continue to be on the forefront of our “watch” list.

Consumer Confidence

A notable point for the third quarter is that in September, U.S. consumer confidence fell to 125.1, down from 134.2 in August. This drop was the biggest in nine months. Lynn Franco, Senior Director of Economic Indicators at the Conference Board stated, “The escalation in trade and tariff tensions in late August appears to have rattled consumers.” He continued, “However, this pattern of uncertainty and volatility has persisted for much of the year and it appears confidence is plateauing.” Franco continued, “Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened. While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers’ confidence in the expansion.” (CNBC.com; 9/24/19; Bloomberg.com 9/24/19)

Despite the dip in consumer confidence, the trend still appears to be that the consumer will support the current U.S. expansion, although spending may be more moderate.

Media Magnification and The Inverted Yield Curve

A quick way to spook many investors is to utter these three words, “inverted yield curve.” The third quarter of 2019 experienced the demonized inverted yield curve, sparking fears of a recession.

In brief, a “normal” yield curve has an upward arc. An inverted yield curve is just that, a curve that slopes downward. This shows that interest rates on short-term bonds is higher than some longer-term bonds.

In August, for the first since 2007, the spread between the 2-year and 10-year treasury yields turned negative. The 30-year treasury bond yield dropped below 2%. Historically, this has transpired prior to every U.S. recession in the last 50 years. (foxbusiness.com 9.18.2019)

This inverted yield curve lasted briefly but the theory behind what it potentially hails has resonated in the minds of many investors. The media is doing an excellent part in keeping the fear of a recession at the forefront of many investor’s thoughts. With talks of economic slowdowns and future concerns, investors need to prepare and proceed with caution.

Global Economy and Political Concerns

The third quarter of 2019 opened with the yuan, China’s currency, falling below 7 yuan to the U.S. dollar. This was the first time since 2008. This drop was as a result of President Trump threatening to add an additional 10% tariff on over $300 billion worth of Chinese imports. This set the stock market into a fast plunge of over 950 points on August 5, the steepest drop yet in 2019. This dive also marked the sixth biggest point drop in the DJIA’s 123-year history. (nypost.com, 8/2019)

Then in September, the President excluded hundreds of items from the 25% duty imposed on Chinese imported goods. This brought a calmer response from traders. (Bloomberg.com 9/30/19)

Tariffs and trade issues could affect equities, so investors should continue to monitor them. The U.S. and China are the world’s largest economies and a disruption in their symbiotic relationship could affect economies globally.

In addition to the ongoing trade wars, the United Kingdom is set to leave the European Union (EU) on October 31. How Brexit may affect global markets is still of concern and an item that needs to be carefully watched.

Political uncertainty, including the 2020 elections, also need to be watched. As financial professionals, our primary focus is on how the political landscape affects investment markets. We will be keeping an eye on global activities and how it may affect you.

Corporate Earnings

Corporate earnings are still a key factor in stock market performance. Stock prices typically rise when quarterly earnings reports meet or exceed market expectations and conversely, tends to lower prices when reports show unrealized expectations in earnings.

Weak corporate profits could be what finally convince investors to start pulling back on stocks, especially if companies start to lower their outlooks for the fourth quarter and 2020. The ripple effect of the trade war and tariffs is seeping into U.S. corporate earnings and therefore they need to be watched carefully. (CNN Business 9/30/2019)

Market Outlook for Q4

The month of October has seen five of the stock market’s worst 10 days, including 1987’s more-than 20% single day drop. However, overall, October typically ends as an average month for the market.

What will the last quarter of 2019 bring?

As shown in the chart of monthly market volatility, which tracks the standard deviation of daily returns of the S&P 500 dating back to 1928, October has historically been the most volatile month for U.S. equity markets. November is also one of the most volatile months. Seasoned investors understand that volatility is a part of the investment experience. They also understand that more important than the volatility is an investor’s response to that volatility. Sometimes volatility is a sign of heightened risk, but at other times volatility is just a normal part of investing. Market volatility is possibly one of the most misunderstood concepts in investing. Simply put, market volatility is a statistical measure of when the equity markets rise or fall sharper than usual within a short period of time.

Once again, we are suggesting that in these confusing times it is best to proceed with caution.

Strategies for Investors During Market Volatility

With fall being a historically volatile time period, we think it could be helpful to continue our theme of sharing strategies to consider during volatile times.

Revisit your financial goals and objectives.

Always allocate your investments to match your risk tolerance.

• If possible, add money to your investments regularly and try to increase your additions during downfalls.
• It’s nearly impossible to time the market right (sell when you think the markets at its peak), so have a strategy.
• Accept that volatility is inherent to investing.
• Consider avoiding or ignoring daily financial news.
• Always try not to make any emotional decisions.
• Don’t obsessively check your investments. Much like opening the refrigerator over and over again isn’t going to change what’s inside it, checking your investments obsessively isn’t going to alter whether or not your stocks are going up or down.

During volatile times, it is always wise to have realistic time horizons and return expectations for your own personal situation and to adjust your investments accordingly.

Now is the time to make sure you are confident, comfortable and consistent with your plan.

A financial plan is only as good as your ability to consistently follow it.

We are here for you!

Our advice is not one-size-fits-all. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations. If you would like to revisit your specific holdings or risk tolerance, please call our office or bring it up at our next scheduled meeting. If you ever have any concerns or questions, please contact us!

Call 410-908-9293.

Note: 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. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is general considered representative of the U.S. Stock market. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Past performance is no guarantee of future results. CD’s are FDIC Insured and offer a fixed rate of return if held to maturity. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Sources: yahoofinance.com; Morningstar.com; Barron’s; bigcharts.com; marketwatch.com; foxbusiness.com; Bloomberg.com; cnbc.com; CNNBusiness.com. Contents provided by the Academy of Preferred Financial Advisors, 2019©

The post Quarterly Economic Update: Third Quarter 2019 appeared first on Financial 1 Tax.

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.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The act is complex and impacts numerous tax specializations, including individual, corporate, and international planning. This report focuses on what individual taxpayers can do to save money in 2018. Unless indicated otherwise, the act provisions discussed here take effect in 2018 and 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.

New Income Tax Rates for 2018

The seven new tax rates for 2018 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. They will phase out in eight years.

Tax Reform Update

As we enter into year-end tax planning, our main goal shifts to helping clients understand the impact of the Tax Cuts and Jobs Act and optimizing their tax positions. That is no small task given that there are over 130 new tax provisions. This report offers many suggestions and reviews strategies like loss and gain harvesting that have been useful even before the current round of tax law changes.

The Tax Cuts and Jobs Act created some changes with regards to tax planning opportunities for individuals in 2018.

Some things to consider include:

 — Evaluating the use of itemized deductions versus the standard deduction

The Tax Cuts and Jobs Act roughly doubles the standard deduction. For single and married filing separately filers the standard deduction is increase from $6,350 to $12,000, while married filing jointly has gone from $12,700 to $24,000. The new laws also eliminate or limit 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.

So, what should a taxpayer consider?

For those who typically claim the standard deduction, it is more than likely that their tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, could now result in less tax. According to Accounting Today, some taxpayers who itemized last year won’t itemize this year, or they may be able to itemize for state income tax purposes but not for federal. You should consider running the numbers to assess the impact on your situation before deciding. Depending on the 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.

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

The Tax Cuts and Jobs Act temporarily increases the limit on cash contributions to public charities and certain private foundations from 50 to 60 percent of adjusted gross income. For many taxpayers, the doubling of the standard deduction and changes to key itemized deductions will result in them not itemizing in 2018, therefore benefiting from this increased limit. One way to combat this is to bunch or increase your charitable contributions in alternating years. 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’s a win-win situation.

— Reviewing your home equity debt interest

Under the Tax Cuts and Jobs Act, home equity debt interest is no longer deductible. Or so it was originally proposed.  According to the IRS, interest paid on home equity loans and lines of credit is deductible if the funds were used to buy or substantially improve the home that secures the loan. In other words, it can be treated as home acquisition debt subject to the new $750,000/$375,000 limit. This is good news for homeowners, if they used the funds for the home.  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 2018.

— Revisiting 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 $520,000. 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.

— Maximizing your qualified business income deduction (if applicable)

One of the most talked about changes from the Tax Cuts and Jobs Act is 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 some planning strategies that should be considered 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 new 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 2018

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 2018 and start thinking about your strategy for 2019.  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 $18,500, up from $18,000. (On November 1, 2018, the IRS announced an increase to $19,000 for 2019.)  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 2018.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) remains unchanged at $5,500. (On November 1, 2018, the IRS announced an increase to $6,000, the first adjustment 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 $6,500). IRA contributions for 2018 can be made all the way up to the April 15, 2019 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 $63,000 and $73,000 for 2018.  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 $101,000 to $121,000 for 2018.  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 2018 as the couple’s income reaches $189,000 and completely at $199,000 for 2018. 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 2018. 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 $189,000 to $199,000 for married couples filing jointly in 2018. For singles and heads of household, the income phase-out range is $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 2018. 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 $63,000 for married couples filing jointly in 2018, $47,250 for heads of household and $31,500 for all other filers.

Be careful of the IRA one rollover rule. IRA investors were always limited to one rollover per year, per IRA. Investors are still limited to make 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

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 if married filing jointly ($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.

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 2018, the brokerage firm reports the basis on an IRS Form 1099-B in early 2019. 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 2018.  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.

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 is taxed at ordinary income tax rates.

This strategy might be helpful if in 2018 if you were temporarily unemployed, are someone whose income varies from year to year, or are under the age of 70 and may soon be transitioning into retirement or already retired.

If you’re ineligible for the 0% capital gains tax rate but you have adult children in the 0% bracket, consider gifting appreciated securities to them. Your adult children who file their own tax returns might pay less in capital gains tax than if you sold the stock yourself and gifted the cash to them.

Some Notable Tax Changes for 2018

Several itemized deductions are significantly different under the new tax laws. They include:

The floor for deductible medical expenses is reduced to 7.5 percent (from 10 percent) for 2018, and 2019. It makes sense to schedule discretionary medical procedures in 2018 and 2019 if doing so will lead to a medical expense deduction.

State and local income, sales, and real and personal property taxes (SALT) are 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 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.

The moving expense deduction is suspended, except for the in-kind moving and storage expenses for members of the Armed Forces (or their spouse or dependents) on active duty who move pursuant to a military order and incident to a permanent change of station.

Alternative Minimum Tax (AMT) Changes

When Tax Law changes were initially discussed, there were high hopes that the dreaded individual alternative minimum tax (AMT) would be repealed. Unfortunately, it still exists under the new Tax Cuts and Jobs Act. However, the AMT rules are now more taxpayer-friendly.

The AMT calculation can be complicated and you should discuss your situation with your tax professional, but here are some basic facts. In 2017, the AMT exemption amount was $54,300 for unmarried individuals ($84,500 for married individuals filing a joint return). This exemption is phased out at a 25 percent rate when alternative minimum taxable income (AMTI) exceeds $120,700 ($160,900 for married individuals filing a joint return). In 2018, the exemptions significantly increase to $70,300 for unmarried individuals ($109,400 for married individuals filing a joint return). More importantly, the phaseout thresholds are increased to $1 million for married individuals filing a joint return and $500,000 for other individual taxpayers. High-income taxpayers, particularly those in high-tax states like California, New York, and New Jersey, are going to lose significant amounts of deductions because of the $10,000 cap on state and local taxes, but they could have some relief because of the lower tax rates and changes made to the alternative minimum tax.

Although the new tax laws reduce the odds that you will owe the AMT for 2018-2025, if your AMT bill exceeds your regular tax bill, you owe the higher AMT amount. The good news could be that if you owe the AMT under the new rules for 2018-2025, you probably owe less (maybe a lot less) than under the old rules.

Other Family and Education Planning Changes

Child and family credit. The act increases the child tax credit to $2,000 per qualifying child, with $1,400 of this amount being refundable. The act 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.

The “kiddie tax.” The tax on unearned income of children is completely overhauled by the act. Parents’ income and the unearned income of siblings no longer factor into the equation. Instead, earned income of a child is taxed according to an unmarried taxpayer’s rates. Taxable income attributable to net unearned income is taxed according to the unfavorable tax rates applicable to trusts and estates.

Education benefits. Although they were in jeopardy, 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 – remain intact.

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.

Qualified Charitable Distribution

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, 2018).

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 2018. These “annual exclusion gifts” do not reduce your $11,180,000 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.

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 at www.irs.gov.

Contribute to a Qualified Tuition Plan (529 Plan) on behalf of a beneficiary. The effective annual contribution limit to 529 Plans for 2018 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.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes have almost doubled from $5.6 million to $11.18 million ($22.36 million for couples), and the income tax basis step up/down to fair market value at death continues under the act. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

Remember, 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.  As always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

Questions to Consider!

1. Has your current financial advisor reviewed the tax consequences of your investments?
2. Has your current financial advisor discussed tax planning and your investments?
3. 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!

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. Sources: Forbes, Fortune, MarketWatch, Wall Street Journal, Oppenheimer Funds, Investopedia, Barron’s.

Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits such as financial aid, scholarship funds or protection from creditors that are only available if you invest in that state’s 529 plan.

The post Year-End Tax Moves for 2018 appeared first on Financial 1 Tax.

Remember—every situation is different and not all strategies will be appropriate for you. Please discuss all tax strategies with your tax preparer prior to making any final decisions.

Year End Tax Planning For 2015

As you read through this report you will find some key aspects of the current 2015 tax laws and how they may apply to your situation. Late-breaking decisions in Washington, D.C., always make it difficult to plan ahead. This year is no different, with dozens of provisions waiting to be renewed. One tax break that remains as an open-ended question is a tax deduction for contributions to charitable organizations directly from an individual retirement account (IRA). Some retirees are holding off on taking their required minimum distributions until they know what happens with this law. Right now, some lawmakers say this and other tax breaks, like the deductibility of sales tax in some states that do not have income taxes, might be renewed. However, nothing is a sure thing until a final bill is passed.

Ten Things To Review Before Year-end

Despite this uncertainty, there are many year-end tax moves around income and expenses you can make to lessen your tax liability based on what you do know. To the extent that income or expenses can be moved between 2015 and 2016, for many investors, year-end tax planning often is about determining the best decision in which year to earn additional income or to incur more tax deductions. Now is the time to focus on how to optimize your situation between these two years.

The goal of this report is to share strategies that could be effective if discussed and implemented before year-end. Choosing the appropriate strategies will depend on your income, as well as a number of other personal circumstances. As with all tax strategies it is always in your best interest to discuss your personal situation with your tax preparer before making any moves or final decisions.

While everyone’s situation is unique, we urge you to begin your final year end planning now!

Income Tax Rates for 2015

Tax brackets have changed slightly for 2015. For example, for the 2014 tax year, the top of the 15% federal income tax bracket for married couples filing jointly was $73,800. In 2015, that figure has been increased to $75,600. Below is a table of federal income tax rates for 2015.

Consider All of Your Retirement Savings Options for 2015

If you have earned income or are working, retirement savers should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2015 and start thinking about your strategy for 2016. For many investors, retirement plans represent one of the smarter tax moves that you can make. Here are some retirement plan highlights:

• Higher 401(k) contribution limits. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,000. 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 is an additional $6,000 ($24,000 total). As a reminder, these contributions must be made in 2015.

• IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. 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. IRA contributions can be made all the way up to the April 15, 2016 filling 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 (AGI) of $61,000 and $71,000 for 2015. 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 98,000 to $118,000 for 2015. 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 2015 as the couple’s income reaches $183,000 and completely at $193,000 for 2015. 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 2015. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your income.

• Increased Roth IRA income cutoffs. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly in 2015. For singles and heads of household, the income phase-out range is $116,000 to $131,000 in 2015. For a married individual filing a separate return, the phase-out range is $0 to $10,000 for 2015. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your income.

• Larger saver’s credit threshold. The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,000 for married couples filing jointly in 2015, $45,750 for heads of household, $30,500 for married individuals filing separately, and increasing to $30,500 for singles.

• Be careful of the IRA one rollover rule. IRA investors were always limited to one rollover per year, per IRA. Beginning on January 1, 2015, investors were limited to make 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 percent early withdrawal penalty, and a 6 percent 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 are considering converting part or all of their traditional IRAs to a Roth IRA. This is never a simple and easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. It is best to run the numbers 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 and haven’t yet sold it, 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 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 have to wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. 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.

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 stock in 2015, the brokerage firm reports the basis on an IRS Form 1099-B in early 2016. 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 2015. The strategy is to figure out how much long-term capital gain you might be able to recognize to take advantage of this tax break.

The 0% long-term capital gains tax rate is for taxpayers who end up in the 10% or 15% ordinary income tax brackets, which is up to $37,450 for single filers and $74,900 for joint filers (See chart on page 1). If your taxable income goes above this threshold, then any excess long-term capital gains will be taxed at a 15% capital gains tax rate and/or 20% capital gains tax rate, depending on how high your taxable income is for the year.

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 “short-term capital gains” and is taxed at ordinary income tax rates.

If you are eligible for the 0% capital gains tax rate, it might be a good time to consider selling some appreciated investments to take advantage of it. Sell just enough so your gain pushes your income to the top of the 15% tax bracket, then buy new shares in the same company. The “wash sale” requirement to wait 30 days does not apply for gains. With “gains harvesting,” you can actually sell the stock and buy it back in the same day. Of course, there will be transaction costs such as commissions and other brokerage fees. At the end of the day you will have the same number of shares, but with a higher cost basis. Please remember, you must also review your state income tax rules to determine whether or not these gains will be tax-free at the state level.

If you’re ineligible for the 0% capital gains tax rate, but you have adult children in the 0% bracket, consider gifting appreciated stock to them. Your adult children will pay a lot less in capital gains tax than if you sold the stock yourself and gifted the cash to them.

Medicare Tax

In 2015, a 3.8% Medicare surtax on “net investment income” remains in place for wealthy taxpayers. The 3.8% Medicare surtax is on top of ordinary income and capital gains taxes, meaning long-term capital gains and qualified dividends may be subject to taxes as high as 23.8%, while short-term capital gains and other investment income (such as interest income) could be taxed as high as 43.4%!

The Medicare surtax is imposed only on “net investment income” and only to the extent that total “Modified Adjusted Gross Income” (“MAGI”) exceeds $200,000 for single individuals and $250,000 for taxpayers filing joint returns. The chart attached shows which types of income are subject to this new Medicare tax. For those of you who are subject to this new Medicare surtax, some of the strategies that we can consider will take time to implement. Now is a good time to review your situation. For example, you might:

• Consider investing in tax-advantaged vehicles such as: tax-exempt bonds, qualified retirement accounts, qualified annuities, or cash value life insurance policies (assuming that the cost of acquisition and maintenance does not exceed the tax savings).

• Convert passive real estate activities to active interests.

• Marry someone who has large capital loss carry-forwards, or currently has large net operating losses (just joking!).

Taxation of Social Security Income

Social Security income may be taxable, depending on the amount and type of other income a taxpayer receives. If a taxpayer only receives Social Security income, this income is generally not taxable (and it is possible that the taxpayer might not even need to file a federal income tax return).

If a taxpayer receives other income in addition to Social Security income, then up to 85% of the Social Security income could be taxable. There is a “floor” ($32,000 married filing jointly; $0 married filing separately; $25,000 all other taxpayers) whereby a portion of Social Security benefits become taxable and that the 85% inclusion kicks in once provisional income goes above a “ceiling” ($44,000 married filing jointly; $0 married filing separately; $34,000 all other taxpayers). For married taxpayers filing a joint return and for married persons filing separately who do not live apart from their spouses for the whole year, the “provisional income” threshold is $0. A complicated formula is necessary to determine the amount of Social Security income that is subject to income tax. (We suggest using the worksheet in IRS Publication 915 to make this determination.)

Finally, it is important to note that Social Security income is included in the calculation of “Modified Adjusted Gross Income” (“MAGI”) for purposes of calculating the 3.8% Medicare surtax on “net investment income” (as discussed earlier). Therefore, taxpayers having significant net investment income might have more reason to defer Social Security benefits.

Itemized Deductions & Exemptions

Taxpayers are entitled to take either a standard deduction or itemize their deductions on IRS Form 1040, Schedule A. Itemized deductions include, but are not limited to, mortgage interest, certain types of taxes, charitable contributions and medical expenses. Unfortunately, itemized deductions are subject to several limitations. For example, in 2015 medical expenses are deductible only to the extent that they exceed 10% of AGI this year. However, if you or your spouse are over 65, the deduction limit is still at 7.5% until December 31, 2016.

Consider “bunching” your deductions. Many taxpayers don’t have enough itemized deductions to reduce their taxes more than if they take the standard deduction. If you find you often miss the threshold by only a small amount per year, it may be best to “bunch” your deductions every other year, taking a standard deduction in the alternate years. The standard deduction for 2015 is $6,300 for singles, $6,300 for married persons filing separate returns, and $12,600 for married couples filing jointly.

Charitable Giving

This is a great time of the 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 clothing at http://turbotax.intuit.com/personal-taxes/itsdeductible/.

Send cash donations to your favorite charity by December 31, 2015, 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!

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 gain in order for the entire fair market value (FMV) 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 laws allowing taxpayers age 70½ and older to transfer up to $100,000 directly from their IRA over to a charity, satisfying all or part of the required minimum distribution (RMD), have not been renewed for 2015; in 2014 this was renewed very late in the year. We will keep you informed if this IRA-to-charity strategy is passed.

Other Year-End Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $14,000 tax-free to each person in 2015. These “annual exclusion gifts” do not reduce your lifetime gift tax exemption. (NOTE: The annual exclusion gift is doubled to $28,000 per recipient for joint gifts made by married couples or when one spouse consents to a gift 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 detail qualifications in IRS Publications 950 and the instructions for IRS Form 709, which are available for free at www.irs.gov.

Contribute to a 529 plan on behalf of a beneficiary. This qualifies for the annual gift-tax exclusion. Withdrawals (including earnings) used for qualified education expenses (tuition, books and computers) are income tax free. The tax law even allows you to give the equivalent of five years’ worth of contributions up front with no gift-tax consequences. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.

Make gifts to trusts. These gifts often qualify for the annual exclusion ($14,000 in 2015) 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.

If possible, prepare a tax projection for 2015 and 2016 to determine if you will have a change in your tax situation. Then consider the following strategies if they apply to your situation.

It is important to note that some itemized deductions (such as state income taxes, real estate taxes and miscellaneous itemized deductions) are not allowed when computing the “Alternative Minimum Tax” (“AMT”). If you are subject to the AMT, it is often best to delay payment on the disallowed deductions and push them off until 2016 or later tax years (when AMT is no longer an issue). It is always possible you might be able to use the deductions next year. Therefore, we suggest that you talk with your tax preparer about AMT prior to using any of the deduction and exemption strategies we have mentioned.

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.

In the 1980’s, one teenager was preparing his tax return. He came across a negative number that he had to put in, and there was nothing in the instructions about dealing with negative numbers, so he just left it the way it was. His tax refund amounted to roughly $30. The IRS did not accept his return because according to them he was supposed to put “0” anywhere there was a negative number, even though there was nothing written in the instructions. The IRS showed the instructions for the next year’s tax return which did specify that rule. After many years of writing back and forth, the taxpayer finally went to the local IRS and proved to the IRS agent that he was right. He finally got his refund years later after many hours wasted on explaining his situation to the IRS. (Source: efile.com)

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 all of our clients and prospects to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you.

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Financial 1 Wealth Management Group
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Columbia, MD 21044-3431

The views expressed are not necessarily the opinion of Financial 1 Tax & Wealth Management Group, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. This article is for informational purposes only. 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 financial professional. 

The post Year-End Tax Moves for 2015 appeared first on Financial 1 Tax.