Month: November 2022

Trust you enjoyed a wonderful Thanksgiving!  At publishing time for this article, I have laced up the running/walking shoes and hit the pavement to lose the excess turkey weight gained from the abundant offering of two meals last Thursday.  

Planning is the process of proactively controlling those events in life that you are capable of controlling in your best interest.  This process is confined by laws and regulations when we are talking about tax planning.  Further, you may have facts that don’t exactly align with examples of transactions in the Internal Revenue Code (IRC) but you like the outcome of the situation.  It is critical that you understand the importance of substantially complying with the tax laws of federal government as well as the various states of the union.

Inflation continues to plague the United States at a level of 7.7% for the past twelve months based on recent reports from the Bureau of Labor Statistics.  This means that many of us will be paying almost 8% more for goods and services as we plan our remaining days of 2022.  One approach to this cash flow process is to think about your daily living needs (and some wants) in a quantifiable manner.  Each day requires a certain amount of cash flow to meet your goals.  By planning in this manner, you will know, with intention, where each dollar goes.

One of the simplest methods of tax planning is to limit the amount of income you recognize in 2022 by deferring potential income from December to January, 2023.  Of course, this only gives relief for one year (2022) and adds potential income to the following year.  Remember, in tax planning, we evaluate the planning results in months and years since we do not know when new tax legislation may be introduced into the planning process by Congress.

I am predicting, with reasonable certainty, that the United States will not experience a significant federal tax bill for 2023.  The reason for such a prediction is due to the results of the recent mid-term election.  Government that is shared with more than one political party generally requires more compromise among the parties.  This “C” word has not been used in the legislative process in many years.  Yesterday, I was reflecting on my younger days (I do this often to measure my growth as a person, financially, spiritually, etc.) and recalled the early 1980’s when President Ronald Reagan faced a divided Legislative Branch.  One of the means of achieving his goals as president was to communicate his vision with all legislators, particularly Speaker of the House Tip O’Neil.  By working together, for the good of the nation and its people, a tremendous amount of progress was made for our country. But I digress.

One method of delaying potential income is to examine your capital gains and losses in your taxable portfolio.  If you wish to rebalance your portfolio (i.e., sell the positions that exceed your original allocation percentage and buy those that are below your desired allocation), it is a good time to do so.  This will not only prevent capital gains from being taxed but will also limit your risk in the portfolio to a level you desire.  Conversely, you may wish to fund IRAs and other retirement plans for your family in December instead of waiting until April, 2023.  The same tax effect is experienced by funding at either time; however, you may be buying your investments at a lower value allowing opportunity for potential growth in the future.

Most of us are calendar-year taxpayers.  This simply means we must complete our transactions by December 31 of each year to impact our tax liabilities.  Your estate planning is subject to this deadline, too.  If you wish to gift your children or grandchildren a sum of monies or property in 2022, it is critical it be performed by midnight December 31.  Remember, the annual gift exclusion amount for 2022 is $16,000.  Additional sums can be gifted in 2023 in the amount of $17,000.

Some of the most advantageous tax deductions of previous years will not be allowed in 2022.  These items such as Indian lands accelerated depreciation and Indian employment credits expired on December 31, 2021, and have not been extended, as of the date of this writing, for 2022.  Living in the middle of the Choctaw Nation, this has been an excellent motivation for many employers to expand their businesses with equipment and hiring tribal members.

Taxes can be confusing.  There is no need for you to feel overwhelmed.  Contact a CERTIFIED FINANCIAL PLANNER^™ professional to help you plan to lower your taxes and discuss how your family can retain more of its hard-earned money in the future.  Hope to see you on the jogging trail!

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As we get closer to Thanksgiving Day, it jars in my mind the opportunities we have to reduce our taxable income.  The important matter to remember is that most humans, in the United States, are calendar-year, cash-basis taxpayers.  There are many more tax planning strategies available to us prior to the close of the year than after a new year begins.  The thought of deferring income and accelerating deductions may be a good method of tax planning unless you are subject to the Alternative Minimum Tax (AMT).

This secondary system of taxing individuals and corporations arose from a period in time that very wealthy individuals and large corporations could control their tax liabilities by purchasing certain types of investments and spending cash on particular deductions.  Taxpayers with significant assets and cash flow can purchase municipal bonds, for example, that pays tax-exempt interest to them.  Some municipal bonds are exempt from federal, state and alternative minimum tax!  As you can imagine, if you were ultra-rich, you would want to remain as wealthy as possible by avoiding the highest income tax marginal rate of 37% (unless additional surtaxes apply based on your type of income).

Just when you thought you were done with your tax return calculation of liability, your CPA calculates the Alternative Minimum Tax.  You originally thought your income would be taxed at the individual rate of 15%.  However, based on the amount of interest you earned from private activity bonds, percentage depletion on royalty income from your investments in gas and oil properties as well as accelerated depreciation on your business property, your Alternative Minimum Taxable Income (AMTI) is now above the AMTI exemption exposing your income to a 26% tax rate.

Why did Congress do this to the American people?  The purpose and history of the Alternative Minimum Tax was to insure certain higher-income taxpayers paid taxes.  Our tax system is one based on income attributed to the taxpayer and certain types of income may be tax-free, tax-deferred or partially-taxed.  However, the AMT Exemption amount for 2023 is $126,500 for married filing jointly and surviving spouses and $81,300 for single individuals and heads of households which is more than the national average per worker in the United States.

Bracket “creep” has been a considerable challenge for middle class taxpayers in recent years.  Congress has not routinely addressed the exemption amounts for inflation.  When this occurs, there is little difference between the tax exemption and the Alternative Minimum Tax Exemption which causes those that can afford it least to pay the higher 26% tax rate.

While planning for your 2022 income tax liabilities, it is critical that you understand the complexities of the Internal Revenue Code.  Preparing your income tax returns yourself may save you a few hundred dollars today and cost you much more if the IRS adjusts your returns for errors.

I live with a variety of philosophies in life.  One of those philosophies is that it is not unpatriotic to pay the least amount of income tax one rightfully and lawfully owes.  Planning is an activity that gives you more control in how much tax you wish to pay each year.  It is critical that you understand the different types of income and the rates applied to the income during the tax year.  “A penny saved is a penny earned,” according to poet George Herbert.  If you had a choice to invest your heard-earned money in something that returns interest or dividends directly to you rather than paying the U.S. Government, wouldn’t you do so? Contact a CERTIFIED FINANCIAL PLANNER^™ professional to help you plan to lower your taxes for 2022 and beyond.  Wishing you and your family the most blessed of Thanksgivings!

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