October, 2019 | Live a Life By Design

It’s All Taxable, Unless…

Posted on October 21, 2019November 8, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

All of your income is taxable! This is the premise of the United States Government. However, provisions are addressed through tax legislation that allows certain types of income to be partially taxable or fully exempt from taxation. How do you know which income is tax-free? Is it unpatriotic to pay the least amount of income taxes you lawfully owe?

Well, lets get one thought out of your mind. Judge Learned Hand, U.S. Court of Appeals in the early 20^th century, is credited with stating “nobody owes any public duty to pay more [taxes] than the law demands.” What is fair in our system? The U.S. tax system is based on the honor of its citizens and their willingness to remit taxes timely for the efficient function of the government.

The Internal Revenue Code of 1986, as amended, provides us guidance in the treatment of assets and monies received during the course of the year. For those of us employed, the compensation received from our employers is taxable. However, what about the gift received from Aunt Sally? Is there a limit to what she can give you? Good news! As a beneficiary, or donee, of a gift, of any size, you owe no federal or state income taxes. That means, you could receive a gift of $10,000,000 and owe no income tax. Wow! If that is true, why do we pay tax on other income that is not “earned” during employment?

Section 61 of the Internal Revenue Code states, “… gross income means all income from whatever source derived…” For an item of income to be exempt from taxation, the item must meet specific criteria within the Internal Revenue Code. How does anyone make sense of all of this legal speak? It is critical to understand your tax situation since this expenditure is one of the largest allocations of most individual’s annual budget.

Does this mean your Social Security Benefits are taxable? The answer is maybe. If your income from sources, other than the Social Security Administration, exceeds $25,000 as a single filer or $32,000 as a joint filer, you may have to pay tax on a portion of your benefits. To illustrate the changes in tax laws, the process used by Congress to create revenue for the federal government, in tax years prior to 1987, individuals were not taxed on their Social Security Benefits. Tax laws change, literally, daily.

The solution to this income tax conundrum is to seek a tax adviser that not only understands the tax laws but specializes in planning. Our role as wealth advisors, for our clients, is to provide guidance on the critical areas of their finances that may impair the clients’ abilities to live a life by design. Don’t simply sign your returns each year and send them off hoping for the best. To gain more confidence in your tax responsibilities, seek out a CPA and Certified Financial Planner practitioner that understands the interaction between your planning for the future and the impact of taxation on your investments and income. You can truly take control of your taxes. In the words of Nike, JUST DO IT!

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Be Confident In Your Retirement Years

Posted on October 7, 2019October 3, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

For most investors, including retirees, it is critical that they understand the philosophy of investing. If you utilize the services of a professional to assist with the implementation of your retirement goals, the logical approach to reaching your goals should be understood by all parties. One of the greatest causes of worry and concern, during retirement, is the lack of clearly communicating the needs, risk tolerance and definition of success between the client and advisor.

Recently, we discovered several individuals that had cash flow needs but had placed all of their retirement funds in a long-term investment that would penalize them to withdraw money from the investment. Many of these investments have a period of time that you are required to keep your money invested within the product and you are paid a “bonus” of interest for doing so. This type of product may have a surrender period of 12 to 20 years before you can withdraw all of your money for your preferential use.

Balance in investing is similar to balance in life. It is often a tragic turn of events when someone places all of their investment assets within a non-liquid investment for the promise of greater returns. These products may have their place in the portfolio but are often erroneously sold by insurance brokers as a superior investment to other options that allow liquidity and control to be retained by the investor.

To alleviate this concern during retirement, carefully review your cash flow needs. There may arise a need that is unexpected and will cause greater concern if you are strained for lack of funding. We believe it is critical to maintain sufficient cash flow, at all times, by creating a 90-day reserve for potential disruptions in life. Times will arise, they often do, when you will be faced with an incident that you will be proud you reserved plenty of funds to meet the need.

Always challenge the costs of any investment. There are no “free” investments. If the insurance salesman is being paid a commission to sell you a long-term product, the higher his commission, the longer the penalty period for withdrawing your money out of the product. Control is the name of the game. When you ask questions, you should be receiving clear, concise answers instead of confusing statements.

Lastly, be alert to any investment approach that does not allow you the opportunity to understand the underlying investment strategy. Many people have been harmed by failing to truly ask the hard questions of the insurance salesman. Don’t be a victim, take control of your finances and your future. If you have questions pertaining to your current investments, seek out a Certified Financial Planner practitioner to receive a “second opinion”. We provide this service as a courtesy to individuals within 5 years of retirement or already retired. You can expect honesty, transparency and integrity in the process. Your retirement is not an infomercial on TV. You can’t set it and forget it!