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tax planning

Year-End Tax Planning

By | 2020, Money Moxie, Newsletter | No Comments

Harvest losses now to help your next tax return
If you have investments that have gained money this year and others that have lost, you can sell some of both in order to reduce the tax liability when you do your taxes next year. This is known as tax-loss harvesting. You can consult with Smedley Financial and/or your accountant to see how to best maximize your tax situation.

Qualified Charitable Distributions
If you are over age 70 ½ and are charitably inclined, then you still have time to do a Qualified Charitable Distribution or QCD. This year you don’t have to take a Required Minimum Distribution (RMD), so many people are considering not doing their QCD as well. However, we are still concerned the tax rates may go up in the future, so we would like to get as much money out of IRAs as possible tax-free. If you are going to make charitable donations anyway, a QCD is still a great option.

Convert your IRA to a Roth IRA
You can reduce future tax liabilities and take advantage of the current favorable tax environment by converting all or a portion of your tax-deferred retirement account to a Roth IRA. The conversion must be completed before December 31st. You can also use this strategy to maximize a low tax-bracket. For example, if you are married filing jointly, and your taxable income is $30,000, you can increase your taxable income to $40,125 and remain in the 12% tax-bracket. To get the full value of the conversion, plan to pay the taxes on the conversion from another account, such as a savings account.

Donate appreciated stock
If you have appreciated stock in your portfolio, you can donate the stock to a charity and avoid paying tax on the gain. Even better, if you itemize your taxes, you can receive a deduction for the value of the stock on the day the donation is made. One catch: you must have owned the stock for over one year before making the donation. Then you can invest the cash you would have donated to make a future donation.

Bunching deductions
The number of tax filers using the standard deduction has increased over the last couple of years. This is because the standard deduction was increased to a level that exceeds most filers’ tax deductions. However, if you are close to the standard deduction, you might consider bunching deductible items into one tax year. For example, you can make charitable donations for two years at a time or push medical expenses into one year. Then you can itemize every other year.

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A Neglected Tax-Saving Strategy: Qualified Charitable Distributions

By | 2020, Money Moxie, Newsletter | No Comments

There are two types of people who complain about paying taxes, men and women. We all recognize the importance of taxes, but Gerald Barzan said it best, “Taxation with representation ain’t so hot either.” Yes, tax evasion is illegal, but tax avoidance…that’s wisdom. Tax avoidance should also be a financial advisor’s specialty. This is precisely why I’m so surprised by the number of financial and tax professionals who are unfamiliar with, or do not utilize, the Qualified Charitable Distribution.

The Qualified Charitable Distribution, or QCD, is a powerful tax savings strategy available to individuals age 70.5 and older who donate to 501(c)(3) organizations. Examples of 501(c)(3) organizations include religious, educational, and scientific organizations, public charities, and private foundations.

When you take a distribution from a tax-deferred retirement account, the distribution will be taxed at your marginal tax rate. However, if the distribution is from an Individual Retirement Account (IRA) and is sent directly to a 501(c)(3) organization, it qualifies as a QCD and becomes tax-free.

For example, Elliott has a required minimum distribution from her IRA of $3,000. Her tax rate is 20% federal and 5% state. Elliott plans to donate $3,000 to a 501(c)(3) organization this year. If Elliott takes the $3,000 distribution and pays the tax, she’ll receive $2,250 from her IRA. When she makes her $3,000 donation, she will be $750 short.

However, Elliott has a wise financial advisor who tells her about the QCD. So, she sends her $3,000 IRA distribution directly to the charity, and Elliott doesn’t pay tax on the distribution at all. Elliott’s required minimum distribution is satisfied for the year, she donates the desired $3,000 to charity, and her wise financial advisor saved her $750 in taxes.

Every year, we educate financial and tax professionals regarding the QCD and how to report it on the form 1040. Too often, we see it reported incorrectly. If you make a QCD and do not report it accurately, you won’t receive the benefit. If Elliott or her CPA doesn’t understand how to report her $3,000 QCD, she’ll pay an extra $750 to the IRS, and the QCD won’t save her anything.

On tax form 1040, line 4a asks for “IRA distributions,” and line 4b asks for the “taxable amount” as shown below.

Elliott took a $3,000 distribution from her IRA and will write $3,000 on line 4a. She will then subtract her QCD amount from 4a and write the balance on line 4b. In Elliott’s case, she will write $0 on line 4b, and no tax will be due from her IRA distribution. A tax penny saved is a tax-free penny earned.

Please help us get the word out regarding the Qualified Charitable Distribution. If you, your CPA, or your friends have questions about QCDs or other tax-saving strategies, please contact us. Tax planning is our specialty, and tax avoidance is the goal.

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Year-End Tax Strategies

By | 2019, Money Moxie, Newsletter | No Comments

We are closing in on the holiday season. Before you slip into the holiday mode, let’s talk about a few ways you can wrap up the year!

1. The market has had an incredible run. This is an excellent time to look at your non-retirement accounts to see if you can take advantage of tax harvesting.

If you have an investment that has gained $10,000 and another that has lost $10,000, you can sell both investments and avoid paying tax on the capital gains. This matching of gains and losses is known as tax harvesting.

The gains and losses do not have to match exactly, but your gain and loss have to both be long term or short term. If you have held an investment for more than a year, it is considered a long-term capital gain and would be taxed at capital gains rates. If you have held the investment for less than one year, it is considered a short-term gain and would be taxed at the higher ordinary income tax rates. Either way, the resulting tax savings can be significant.

2. Here’s a win-win strategy. If you don’t have losses to offset your gains, you can still get tax relief by donating to a cause about which you are passionate or your favorite charity: church, school, food bank, hospital, etc. Consider this – donating an appreciated investment directly to your charity of choice will avoid taxes.

To qualify, you must have held the investment for more than one year, and it must have appreciated in value. You avoid paying taxes, and the charity receives the full value of your donation tax-free. The money you would have donated can be used to purchase another investment to start the process over again.

3. Current tax rates are at historic lows. Consider converting money from a traditional IRA to a Roth IRA. You can choose how much to convert. For example, if you have room for another $10,000 of income before you hit the next marginal tax-bracket, make it count.

Before the year ends, convert $10,000 from your traditional IRA to a Roth IRA. If you are under 59 1/2 years old, you will have to pay tax on the conversion with other money – say from a savings account. If you are over 59 1/2, you can have taxes withheld from the distribution.

The benefits of Roth IRAs are tremendous. Roth IRAs grow tax-free, meaning you never pay taxes on the earnings, there are no required distributions at any age, and if you do not use the money during your lifetime, your beneficiaries receive the money tax-free!*

4. If you are over 70 1/2 years old and you have an IRA, you can donate part or all of your Required Minimum Distribution (RMD) to your favorite charity and pay no taxes. This distribution is called a Qualified Charitable Distribution (QCD). The distribution still satisfies your RMD. This cannot be done from a 401(k). If you have a 401(k) and want to take advantage of this next year, you need to roll out your 401(k) before the end of the year.

*Tax-free withdrawals if certain conditions are met: a five-year account aging requirement and attaining age 59½, becoming disabled, using up to $10,000 to buy a first home, or upon death. SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.

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Tax Law Changes

By | 2019, Money Moxie, Newsletter | No Comments

The first significant tax reform in over three decades was put into action for 2018. Now we get to see the real impact of the Tax Cuts and Jobs Act as people start to file their 2018 tax return.

Whether you are filing your tax return or you want to make sure you give your accountant the best information possible, here are the major changes to which you should pay attention.

Form 1040 significantly shortened and simplified
One of the major goals for this tax reform was to “simplify” taxes. The immediate impact is that the old Form 1040 will be shrunken down to a half page on front and back. Now there will only be 23 lines compared to the daunting 79 lines on the old 1040. There will no longer be a form 1040A or 1040EZ as those were just an attempt to simplify an overly complex 1040. The new 1040 will be accompanied by 6 schedules.

If this shortened version makes you feel like attempting to do your taxes for the first time in a while, you should probably still take them to your accountant as there are so many tax changes that you really need an expert that knows how all of the changes will impact you. If you have been filing your own taxes, they should be easier this year (should being the keyword).

Tax brackets
Tax brackets have been reduced, which should benefit almost all people. Tax brackets are based on your total amount of taxable income, not adjusted gross income.

For example, if a couple’s joint taxable income was $75,000 in 2017, they were in the 15-percent bracket and in 2018 will be in the 12-percent bracket. The 25-percent bracket has been reduced to 22 percent.

Changes to the standard deduction and exemptions
The most significant changes for individuals happened to the standard and itemized deductions. With the changes, it is estimated that 80-90 percent of people will now take the standard deduction. However, don’t throw out your box of medical receipts yet. You still need to make sure itemizing is no longer a benefit for you.

The standard deduction limit has been raised from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filers. They also did away with personal exemptions that were $4,050 per person, but offset that loss for families with children by increasing the child tax credit from $1,000 to $2,000 per child. There is also an extra deduction of $1,600 for single filers and $2,600 for married filers if you are over age 65. (For a more complete list, please visit:
smedleyfinancial.com/financial/2019-key-numbers.php.)

Specific changes to itemized deductions
State and local tax deduction has been limited to $10,000. You can still deduct medical expenses that exceed 7.5 percent of your adjusted gross income, and that limit will be going up to 10 percent in 2019.

Mortgage interest can be deducted up to a principal value of $750,000 if the loan originated in 2017 or later. Older loans will be grandfathered in and interest is deductible up to a principal limit of $1,000,000. Mortgage equity loans will only be deductible if the proceeds were used for home improvement. (Say goodbye to consolidating debt into a home equity loan and deducting it.)

This major overhaul to the tax system should simplify taxes and should make it so most people take the standard deduction. Most people should also end up paying a little less in taxes, which is always nice.

Let’s look at an example
In 2017, Jay and Mary filed a joint tax return. They are both age 55 and they don’t have any dependents. They had $18,000 in itemized deductions. Add to this their personal exemption of $4,050 each, totaling $26,100 in deductions. In 2018, they will only get the standard deduction of $24,000 with no personal exemptions and may owe more in taxes. The saving grace for Jay and Mary is that their tax bracket was reduced and may make up for the reduction in deductions.

SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.

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Important Tax Information for 2016

By | 2016, Newsletter | No Comments

Qualified Charitable Distributions (QCDs):
On December 18, 2015, the President signed a law which includes a permanent extension of QCDs. This is great news for clients who wish to have their Required Minimum Distribution go directly to a qualifying charitable organization. Contact us at 801-355-8888 for more information and specific guidelines.

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9 Ways to Reduce Taxable Income This Year

By | 2014, Money Moxie | No Comments

It is hard to believe 2014 is swiftly drawing to a close. At this point, what can you do to better manage your taxes? Here are several ideas you can consider:

9 Ways to Reduce Taxable Income

Maximize retirement contributions.
All contributions to your traditional 401(k) or other tax deferred retirement accounts are made before taxes are calculated. This means that if you make a maximum $17,500 contribution to a 401(k) your taxable income is reduced by $17,500. So, why not pay yourself rather than Uncle Sam? Generally speaking, you can modify your contributions at any time during the year, but check with your benefits office to be sure of your plan’s rules.

Harvest tax losses.
After several years of market growth you may want to lock in some of your investment gains. The downside is you will also trigger a tax on any growth over your initial investment. Consider dumping some of your portfolio losers. This will allow you to offset your taxable gains with losses resulting in a zero tax bill if the numbers are the same. Keep in mind you can only offset long-term gains with long-term losses. The same applies to short-term gains and losses. We can help you identify any tax harvesting opportunities in your portfolio.

Defer income.
If you have control over when you will receive income, consider deferring some of your income until next year. This generally applies to those earning commissions, bonuses, consulting fees, or self-employment income. A quick exercise to determine where you are tax-wise and how much income should be deferred to prevent you from hitting the next marginal tax bracket is recommended. This can be done by consulting with your tax professional. Some programs such as Turbo Tax allow you to run a pro-forma tax filing to get an idea of where you stand.

Make up tax shortfalls.
If you have not paid enough withholding or estimated tax throughout the year, there is still time make up the difference before the year ends. Increasing your tax withholding or making an estimated tax payment will help avoid any underpayment penalties.

Bunch itemized deductions.
Retirement brings with it some unexpected tax situations. For many there are not enough deductions each year to itemize on Schedule A of the tax return, in effect minimizing any tax advantages. By bunching deductions every other year, you can itemize one year and take the standard deduction the next year. This could be applied by prepaying state taxes every other year, making charitable donations every other year, moving up or pushing back a non-urgent medical procedure, and much more. Your tax professional can share ideas that fit your specific situation.

Make stock donations.
If you have held taxable investments for more than a year and they have increased in value, you can donate the stock directly to a qualifying charity. This avoids any capital gains you may owe on the growth of your investment. Nevertheless, you can still itemize the full value of the donation. Even better, the receiving charity pays no tax on the gift. You are then free to invest the cash you would have donated, creating the opportunity for future stock donations.

Be generous to charities.
Gifting cash to a qualified charitable organization also has tax perks. You can deduct the cash donation on Schedule A when you file your return. (Be sure to keep receipts for all cash donations.) You also get the benefit of helping others, while this may be a completely intangible outcome; the good feeling of making a difference in the world goes well beyond any tax advantages.

Maximize gift tax exclusions.
If your estate is growing considerably, you may want to gift something to your children and grandchildren while you can watch them enjoy the gift. You can give $14,000 annually to as many people as you wish. Neither you nor the happy recipients will pay gift taxes or estate taxes. If you are married your spouse can gift the same amount. Get double tax benefits by gifting appreciated stock and avoiding the capital gains taxes. The capital gains basis will transfer to the recipient, who is most likely in a lower tax bracket.

Schedule a financial checkup.
Throughout the year there may have been changes to your personal situation. This is a good time to review beneficiary designations, retirement plan contributions, estate planning options, and investment strategies. Your advisor can make you aware of and help you take full advantage of a wide range of planning opportunities.

For more information and ideas on how to maximize year-end planning opportunities, contact one of our wealth management consultants or your tax professional. Don’t wait too long; there is a deadline for getting everything finalized and some of our suggestions take time.

*Securities America and its representatives do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.
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