Why it is Critical to Plan for 2022 — NOW!

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 PLANNERprofessional 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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Another Type of Income Tax

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 PLANNERprofessional 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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The One Constant is Change

Remember as a younger person when you first heard the phrase, “the only constant in life is change”? At the time you, perhaps, thought the person to be either a great philosopher or speaking gibberish. As I am approaching the inspirational age of 60 years young, the aforementioned statement of change has been proven true more times than I can recall. To provide additional truth to this historic statement, the IRS does its part by changing the laws governing your annual filing of income tax returns.

The standard deduction is the allowance of a certain amount to accommodate your lifestyle needs such as food, shelter, and clothing without the need to itemize these deductions on your individual income tax return. Each year the IRS considers the inflation rate in the United States to determine if adjustments should be made to the standard deduction amount for the various filing statuses. In recent years, the IRS simplified this process by combining the original standard deduction with the exemptions a filer could claim to reduce his taxable income. 

Due to the altitudinous inflation experienced in the United States in the past two years, most recent rate provided by the U.S. Bureau of Labor Statistics to be 8.2%, the IRS recently issued the increased standard deduction amounts for the 2023 tax year (i.e., your return you will file in 2024). For those filing jointly, the standard deduction has increased $1,800 over the 2022 amount to a deduction of $27,700. If you qualify as a single filer or choose to file as married but filing separate from your spouse, the standard deduction is $13,850 which is $900 higher than the previous allowed deduction. For those individuals who are single and maintain a household for a minor or special dependent, the head of household status allows a greater deduction than a single filer. Their amount for 2023 standard deduction will be $20,800 which is $1,400 higher than in 2022.

For taxpayers that owe little or nothing for a residence, contribute smaller amounts to charities and have medical coverage for major illnesses or infirmities, the standard deduction provides a benefit. Time is a considerable savings for filers who do not meet the standard deduction limit with their itemized deductions. To simplify the process of filing your individual return each year, consider the standard deduction amount allowed and perform a quick mathematical equation to confirm your potential deductions are more than your standard deduction.

The United States Tax Code provides seven tax rates, or brackets, for purposes of calculating your annual income tax liability. From a rate as low as 10% on taxable income of $11,000 or less to a maximum rate of 37% for filers with taxable income above $578,125 for single individuals and above $693,750 for married filing joint taxpayers. To add a little complexity to the process, the Congress assesses a surtax on certain filers to assist in the funding of the Medicare and Social Security programs. 

One of the easiest methods of completing your annual tax filing obligation is to start early. Employers are required to mail Forms W-2 to employees on or before January 31, 2023. Start now by gathering your potential itemized deduction receipts and as income documents are sent you, begin the process of completing your returns. It is recommended that you file electronically to facilitate the processing of your returns and, hopefully, the electronic deposit of a refund check to your bank account.

A quote attributed to one of the greatest planners of the last one hundred years, President Dwight D. Eisenhower, as the commanding general in WWII, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” applies to tax “battles.”  The planning for targeted outcomes is critical to the realization of your goals.

Tax planning is necessary for you to prepare yourself for the best results possible in filing and paying your annual income taxes. If you need assistance achieving your retirement planning goals, one of which should be the lessened impact of taxation on your wealth, seek the assistance of a CERTIFIED FINANCIAL PLANNERprofessional to guide you through this important planning process. Go play in the Autumn breeze this weekend!

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New Tax Law, New Opportunities

One thing in life you can always count on is that tax laws will never be simple in language or applicability! President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022. Immediately, much hoopla ensued from the Biden Administration touting its effectiveness and from opponents as to its contribution to inflation instead of reducing the negative economic impact. The law is more than 300 pages in length and contains some of the most difficult language for citizens to apply to their person financial situations. However, lets review a few of the provisions of the law that applies to individuals.

 A major funding measure of the bill is to increase, or some say replace, the number of IRS agents and revenue officers employed in the areas of audits and tax collections. It is not contained within the law but many of the lawmakers are parroting the intent was that individuals earning greater than $400,000 annually would be subject to increased scrutiny by IRS audits. Realistically, if your return were to report less than the aforementioned amount while containing information that is suspect, you may be selected for audit. The IRS uses an algorithm to select returns for audit and the variables of the selection formula are not disclosed to the public. Consequently, Treasury Secretary Janet Yellen has issued a directive that the IRS should implement new compliance programs in a manner as to not increase examinations of taxpayers earning less than $400,000.

The majority of the law’s provisions pertain to green energy in the form of tax credits. One of the major areas of green energy investment that may apply to a greater number of individuals is the credit for the purchase of clean vehicles (a.k.a., electric vehicles). To claim the maximum amount of the credit of $7,500, the taxpayer must meet vehicle manufacturing criteria as well as income limitations. For example, the automobile shall be produced by a specific qualified manufacturer (i.e., defined as one that primarily utilizes union labor), its final assembly is in North America and the components must be sourced to a U.S. manufacturer or any country with which the U.S. has a free trade agreement in effect. For purposes of annual income limitations, individuals earning more than $150,000, head of household filers earning more than $225,000 and married filing joint filers earning more than $300,000 would not be availed the credit. These criteria will make it difficult for many individuals to take advantage of the credit.

Additional limitations in the law impact the purchase price of the clean vehicle. If the manufacturer’s suggested retail price exceeds $80,000 for vans, sport utility vehicles, and pickup trucks as well $55,000 for any other types of vehicles, the buyer will not be allowed to claim the credit of $7,500 for federal tax purposes. If you were hoping for a Tesla Model 3, this credit will not help you purchase the car!

Homeowners may benefit from the law by installing qualified energy efficient windows, doors and HVAC systems as well as heat pumps. The limit is applied annually for the credit of $1,200.

Coincidentally, the limitation on state and local tax deductions for individuals was not addressed in the law. Individuals may deduct, as an itemized deduction, an amount of $10,000 of state and local taxes. In states, such as California and New York, where individuals are subject to higher income tax rates than many of the other states, taxpayers are feeling a pinch because of the nondeductible portion of their state and local income taxes. Time will tell if this area of taxation is addressed in the future.

Taxes are part of living in a civilized society. Many people show tremendous disdain for paying any taxes subjected to their income. However, our wonderful country and state would not function for the purposes of society without funding. It is critical that you comply with the complex tax laws of our nation and state. If you have a question as to the applicability of a tax law or simply wish to plan for the future to reduce your tax burden, it is imperative you visit a CERTIFIED FINANCIAL PLANNER™ professional. Real tax savings may be gained by managing your income and tax burden in the proper manner. Welcome to football season!! 

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Timing is Everything

Time is the one facet we humans can’t command in life. You may attempt to manage it, schedule it or even slow it down but you can never make time work to your will and wishes. In that similar regard, the Internal Revenue Code, which is the law guiding the assessment, reporting and payment of various types of taxes in the United States, works in a similar manner when it comes to retirement contributions to Individual Retirement Accounts (IRA).

The law allows an individual with earned income, and meets other criteria, to contribute to an IRA annually. However, there is no ability by the taxpayer to stretch the period for contributions beyond the original due date of their individual income tax return. Typically, filers of Form 1040, the U.S. Individual Income Tax Return, are required to file their returns on or before April 15 of each year. This year is an exception because of Good Friday being April 15 and returns are due on April 18.

An additional three days is granted to those wishing to contribute to their IRA and claim a tax deduction for 2021. This timing of the contribution applies to Roth IRA and Health Savings Account contributors as well.

One of the greatest benefits of contributing to your retirement in this manner is that the IRS helps you make the payment by reducing your tax liability by the amount contributed. The maximum contribution amount for 2021 is $6,000 unless you are age 50 or older which grants you an additional $1,000 “catch up” contribution for a total of $7,000. Keep in mind that this is an individual contribution limit. A married couple filing a joint return may be entitled to a $14,000 tax deduction if both qualify for IRA contributions. This is significant savings for most filers.

If you are self-employed, more good news for your contribution timing to another type of IRA called a Simplified Employee Pension Individual Retirement Account (SEP-IRA). The contribution timing of this particular type of plan is allowed until the filing of your return, which may include extensions of time to file. For example, an individual may extend the time for filing, not delaying the payment of tax, of her return for 2021 until October 17, 2022. These additional months to file your return may allow the accumulation of funds to maximize your contribution, and resulting deduction, for 2021 retirement purposes.

This type of IRA allows a much greater deduction than a Traditional IRA. Based on your net self-employment income, reduced by a portion of your FICA and Medicare to be assessed on such income, you may contribute up to $58,000 for 2021 and deduct it against your income. This sounds like a circular equation but it is a very valuable deduction and may apply to those that have self-employment income.

The tax deadline is fast approaching! Seek out the advice of a CERTIFIED FINANCIAL PLANNERTM professional to help you maximize your tax savings. My philosophy has always been “it is better to pay yourself first”. By contributing to your IRA consistently over a period of years, you will gain confidence for your future success in retirement and save significant taxes along the way. Now, go smell the roses and place a smile on your face!

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Bringing Clarity to Gift Taxes

Many of us have worked extremely hard in life to accumulate a substantial amount of assets to fund our future retirement. The younger generation is buying homes, attending college, and beginning their lives in a way they had been accustomed from their parents. However, in the words of the great songwriter, Bob Dylan, “these times they are a changin’” accurately describes the economic environment for Millennials and Gen-Zs in 2022.

To ease some of the fiscal burden experienced by our children and grandchildren, gifts are often given to them. As you are aware, there are no free lunches in life – even if you paid tax on the funds when you earned them – and you wish to gift funds to your heirs. Each year the annual exclusion, an amount the IRS deems to be free from reporting as a taxable gift, is announced. In 2022, the amount a person may give another without reporting the gift is $16,000.

If your spouse and you wish to help your child’s family purchase a new home, while keeping the monthly mortgage payment at a level the child can service, many resort to gifting cash to the heir. Assume the child is purchasing a $250,000 starter home (yes, I know that is a lot of money for a starter house but re-read the Bob Dylan quote in the first paragraph of this article) and the required deposit is 20% of the purchase price. To accumulate the $50,000 down payment would require considerable time and savings for your heir. 

To reduce the timeline for saving the funds, you simply wish to gift the funds to your child and her spouse. If the structure of the transaction is performed correctly, your children will be in a house before you can say “straight amortization.” One parent may give each of the children, your daughter, and her spouse, $16,000 each or $32,000 in total. We are still short of the down payment amount but let us keep designing our gifting plan. The other parent may gift the same amounts to the daughter and spouse and – voila – we now have $64,000 available for the down payment of the new residence.

Now, the question arises, how do you report these gifts on a return to the IRS? An IRS Form 709 is required to be filed by April 15 of the year after gifts have been transferred to a donee. However, you are only required to file this form if your total gifts per donee exceed the annual exclusion amount ($16,000) in the calendar year. In our previous example, you will note that the parents gave only $16,000 to each of the donees thereby preventing the need for filing a gift tax return.

What happens when you gift a total of more than $16,000 to a donee? How much tax is owed on this transaction? Good news, again! Should you give a donee more than $16,000 in a given calendar year, a gift tax return is filed but the excess amount over the $16,000 is offset by your lifetime exclusion of $12.06 million. My point is that you have a considerable amount of gifting to be performed before taxation occurs in most cases.

Another strategy we employ with our clients is the funding of a grandchild’s education. By making a gift to fund the entire education estimated costs, the grandparent may gift five years of annual gifts in one year and elect to be prorated over the five-year period. For example, Grandpa Bob wishes to send Timmy to the University of Oklahoma in 15 years. Bob may gift a total of $80,000 to a fund that will grow and provide for Timmy’s educational needs when he reaches the age for college. Bob will file a Form 709 and pay no gift tax under the previously stated strategy.

Another misconception of gifting is that the donee believes she owes income tax on the gift. By its definition and nature, a gift is something given to another without consideration being transferred to the donor. In simple language, you can receive a million-dollar gift and pay no income tax. Is this a great country or what?!?

To avoid estate and gift taxes, as well as the reduction of income taxes, it is vital that you plan accordingly prior to transferring your gift. Certain assets contain characteristics that may require special treatment under the Internal Revenue Code. It is critical that you consider the tax implications prior to effecting the transaction. A CPA and CERTIFIED FINANCIAL PLANNERTM professional can help guide you in the gifting process in conjunction with your overall estate planning desires. Taxes may be a part of life, but they do not have to be the primary part of your life.

See you on the jogging trail!

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Why Itemize Deductions?

Remember the old days when you could gain a tax benefit for paying your property taxes in December, generously donate to qualified charities and deduct your mortgage interest? Those deductions from the good old days are still available, but you must have a significantly greater amount of them to itemize and gain a benefit on your personal income tax return. 

The standard deduction for married filing joint taxpayers for 2021 is $24,800 and $25,900 for 2022. For most families, the standard deduction threshold is far higher than they would normally have claimed as itemized deductions. One of the purposes for such a level of standard deductions is to simplify the tax filing for millions of Americans.

Within the itemized deductions additional limits exist. For example, to claim a deduction for your healthcare expenses for 2021, you are required to consider a “floor” of 7.5% or 10%, depending on your adjusted gross income. To create a deduction, consider maximizing your medical expenses by combining qualifying expenses in one year. Another, and more effective method, is to take advantage of any medical employer benefits offered to you.

Some companies offer their employees a “cafeteria” plan or IRC §125 plan that allows for pre-tax contributions to an account that the employee controls and utilizes for co-pays, deductibles, etc. By contributing to this plan in a pre-tax manner, you have avoided the limits caused by the “floor” mentioned above. This means you gain full benefit from the first dollar spent on your qualified medical care.

Income, property and other taxes are allowed as itemized deductions for individuals. The best method of taking advantage of these expenses is to maximize the deductibility of your income tax withholding. For example, let’s assume you are self-employed and the company you own is a partnership, limited liability company taxed as a partnership or an S corporation. These entities distribute the profits to the partners, members or shareholders for taxation at the individual level. Known as conduit returns, all income, losses, gains, credits, etc. will be reported by the owners on their individual returns and taxed for federal and state purposes.

However, some states have enacted legislation that allows the entity to pay the tax on behalf of the owners. By paying the state income tax at the entity level, the owners will receive full benefit of the taxes paid without concern for the $10,000 limitation otherwise required to compute their itemized deductions. Depending on the taxpayer’s income, these savings could be sizeable.

Charitable contributions are another important itemized deduction. Many people do not think about non-cash charitable deductions when preparing their returns. For example, let’s assume you donate your old living room furniture to a qualified charity in 2021. The value of the furniture, determined by IRS-approved methods, would be a deduction on your 2021 return. Proper receipts and other procedures must be followed to deduct the non-cash donation.

You can claim a greater amount of itemized deductions by reducing your adjusted gross income. One of the easiest methods of reducing your income is to contribute to your employer-provided retirement plan. Consequently, this is a great way to increase your future savings since most employers match the contributions you defer from your paycheck.

Another method of lowering your adjusted gross income is to contribute to a Health Savings Account (HSA) if your health insurance qualifies. This is another form of “have your cake and eat it, too!” By contributing to your HSA, unlike the previously mentioned cafeteria plan, you may accumulate the account for many years and utilize for other medical payments after retirement. For example, if a doctor orders rehabilitative therapy in a nursing facility, the funds in your HSA may be utilized to pay these out-of-pocket medical expenses.

The simple act of itemizing your deductions for personal income tax preparation has become more difficult but not impossible. With a little planning and thought throughout the tax year, you may save your family significant federal and state income taxes. This area of tax law is complex. Seek out the assistance of a Certified Financial PlannerTM professional to help guide you through the maze of tax laws to gain the most benefit for your family.

It is truly an honor to share with you each week. This Holiday Season, consider the true wealth you possess in your life – family, friends and faith.  

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IRA Planning for 2021

The pandemic of the past two years has brought a tremendous amount of pain to many lives but there is a positive aspect in that dark cloud of gloom. One of the best attitudes, when performing tax and financial planning for your family, is to seize opportunities that are given you. In other words, capitalize on the negatives that impact your life and make the proverbial “lemonade from lemons.”

Many businesses are suffering net operating losses during 2021. If you are an owner of the business and the operation is conducted as a sole-proprietorship, partnership or S-Corporation, you may have a valuable tax saving asset in your future. The net operating losses of these entities are claimed on the tax returns of the owners. For example, if you were a fifty percent (50%) partner in a partnership that lost $100,000 in ordinary income for 2021, you would receive the benefit of $50,000 loss to be reported on your personal return. 

With your personal return reporting a loss, or much lower income than you otherwise typically report, your Traditional IRA is holding a great value in it beyond its balance. Consider the conversion of your Traditional IRA, in whole or in part, to a Roth IRA prior to the end of 2021. A taxable event will be triggered when the conversion is performed but your tax computation is based on your taxable income which, when claiming your share of the net operating loss, may be lower than your typical year sheltering the income from the conversion from taxation.

The purpose for converting your Traditional IRA to a Roth IRA is to change the future taxability of the account. You will be taxed on distributions received from the Traditional IRA in the future. The Roth IRA does not mandate required minimum distributions to you at age 72 as a Traditional IRA. Also, you may use the benefits of the Roth IRA to accumulate tax-free income streams from a very young age.

If you believe tax rates are going down in the future, you may wish to contribute to a Traditional IRA to enjoy the current tax savings. However, if you think tax rates will be higher in the future, you may wish to forgo the tax deduction of today and contribute to a Roth IRA.

Both types of IRA may invest in many different types of investments – stocks, bonds, mutual funds, etc. The structure and taxation of the two IRA types are the distinguishing benefits each allows for a taxpayer. The IRS continues to close loopholes such as “back door” Roth IRA conversions and other planning opportunities. 

To maximize your opportunities for most challenges in life, it is always an innovative idea to allocate your investments between qualified and nonqualified accounts. Qualified accounts such as IRAs and 401(k) plans are generally taxable upon distribution of the assets to the owner. However, nonqualified accounts such as transfer on death accounts and joint accounts pay taxes during the growth of the assets. When you wish to retire, the type of account may play heavily in your financial plan design.

IRAs are tremendous tools for tax planning. Don’t assume that you simply invest in the IRA every April to save taxes. There are so many other uses of IRAs for estate planning, gifting and lifetime income planning that are often overlooked. As retirement planning experts, we have witnessed a tremendous number of people who fail to maximize the benefits of IRAs. 

Proper allocation of your assets is necessary to stage a retirement plan that will serve you well in life. Seek out the assistance of a CERTIFIED FINANCIAL PLANNERTM professional to help you plan for the future that you wish to achieve. Remember, when you fail to plan, you plan to fail. Be the exception. Take a pragmatic approach to your lifetime of income and enjoy the best of life on your terms. See you on the walking trail! 

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U.S. Proposed Tax Policy Review

No other area of life, for United States citizens, causes as much anxiety and grief as the income tax. The cost of our republic is not cheap; however, we could do a better job in developing our revenue system and dispensing the funds in a more appropriate manner according to the fiscal experts found at the coffee shops across our country. 

Recently, a proposal is being considered, for purposes of raising the revenue in our country, to tax individuals earning above a certain limit on the increase in the value of their assets (i.e., investments, real estate, etc.). This is a “value-added” tax approach that stems from European countries who, by the way, discontinued the system because it created a precipitous decline in investment, loss of overall national revenue and its citizens left the country for a better way of life. The premise is that your investment portfolio would be taxed based on the growth you have experienced in the tax year regardless of selling any assets and recognizing a gain. For example, let’s assume Charlie invested his savings of $1,000 in a stock that rose in value to $2,000. Under the proposed tax law change to tax the growth, Charlie would owe tax on the $1,000 growth but he has no cash to pay the tax. This is the dilemma created by this type of tax policy. In a nation that seeks fairness and opportunity to all citizens, this is an example of bad policy.

Another area of policy posed by Congress seeks out those that are not paying their fair share (well, according to certain members of Congress). A tax policy that seeks to segregate and apply to only certain individuals (i.e., billionaires) would be unfair, not because the billionaires can’t afford it, but rather that the Internal Revenue Code should not seek out a certain group of the population to punish but rather seek to be applied fairly to all of citizens. It would not be good policy to start building a revenue-generating tax system that punishes achievers and rewards those that lack ambition or adventure to risk it all for the sake of growth.

One last area we will explore today is the desire of the U.S. Congress to become more entangled in the lives of our citizens. Recently, a proposal was offered to require your local bank to report all transactions, of $600 or more, in your bank accounts to the IRS for examination and scrutiny. Some exceptions apply such as your SSA Benefits and U.S. Government Pension payments. The purpose of this proposal is to ferret out tax cheats and increase the amount of revenue from unreported, or underreported, income. A bigger issue is at stake in this type of proposal. What about the privacy of our citizens? Sure, I want everyone to pay their fair share of tax but what about the liberties of those that already pay their fair share? Let’s assume you receive a gift from Aunt Betty for $15,000 for graduating college or a birthday? The IRS would require your explanation, and proof, that such item was not taxable. The burden of proof would lie with the taxpayer in this case.

There are better methods of closing the tax reporting gap than to invade the personal bank accounts of our citizens, many of which are law-abiding citizens. 

Our system of taxation is one based on honor and honesty. It is important that our tax code be constructed with the same traits. I do not deny that many citizens fail to honestly pay their fair share of taxes. However, punishing all citizens for the actions of a few does not merit the loss of individual rights and freedoms. 

Taxation is a valid means for funding many of the necessary programs that support our citizens. It is truly a fact that one can rely on only two things to occur in life – death and taxation.

If you think you are paying too much in taxes, seek out assistance from a CPA or contact a CERTIFIED FINANCIAL PLANNERTM professional to help you gain control of your financial life. 

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Year-End Tax Planning Ideas

When is the best time to plan for lowering your income tax bill? Everyday! As we rapidly approach Halloween, it triggers in my mind a few activities that should be addressed by individuals who desire to pay less in income taxes for 2021. Most Americans will not itemize deductions due to the higher standard deduction allowed in the CARES Act of 2020. There remains plenty of other options for lower your bill payable to Uncle Sam.

First, the easiest method of lowering your tax bill is to pay yourself first. Before you get confused from reading the previous sentence, think about areas of tax law that benefit you such as deferring income or contributing to qualified accounts. If you are working with an organization that provides a retirement plan, review the plan documentation and determine if you can make additional contributions to the plan or at least increase your deferral for 2022.

The maximum amount of deferrals you may direct to your employer’s plan depends on the type of plan offered. For example, if your employer offers a 401(k) plan, did you contribute the maximum for your age? If you are under the age of 50, the maximum you could contribute for 2021 is $19,500. You do not have to contribute this amount, but this is the maximum allowed. However, for those of us age 50 or older, an additional $6,500 catch-up provision is allowed in 2021. This is a total of $26,000 of income removed from your taxable income for 2021. This is a valuable reduction in tax burden…for now.

Should you work for any entity that does not provide a retirement plan, consider a contribution to a traditional IRA before April 15, 2022. You may contribute up to $6,000 in a traditional IRA on or before the deadline and escape taxation on this amount income for 2021. If you are 50 years of age or older, you may contribute another $1,000 of catch-up contributions.

If you are self-employed and desire to save taxes in 2021, you may wish to consider a SEP Plan, which is a retirement plan for self-employed individuals. This plan is especially helpful in contributing larger amounts of money to grow your retirement savings. The limit for contributions in this type of plan for 2021 is $58,000 or 25% of your self-employment compensation whichever is lower. If you wish to establish this type of plan, you must form and fund the plan prior to the filing of your 2021 income tax return including extensions of time to file.

Administratively, it is important to initiate the organization of your tax documents for the year. Don’t wait until April 15, 2022, to begin this process. Your taxes are becoming more complicated each year. I know it sounds good, but every time Congress passes a “tax simplification” bill, the Internal Revenue Code gets more confusing. Oh well. There are far worse ramifications that may occur in life.

At the time of writing this article, Congress was mired in conflict as to the amount of a funding bill for improvements to the infrastructure, which is very broadly defined in the bill. Is the amount $6 trillion, $3.5 trillion or $1.5 trillion? No matter how quickly you read the prior sentence, it is a lot of money. What makes it more difficult when planning your taxes for a certain year is that the law continues to change on a rather chaotic basis. 

My approach would be for Congress to set a deadline such as October 31 of each year to pass any tax bills. This would allow for ample time to make changes to forms and IRS software to accurately process the upcoming tax returns for the year. In the past two years, primarily due to COVID-19 and the stimulation of the economy with three tax bills, the IRS has been overwhelmed with a task that is insurmountable. Hopefully, we will know the applicable tax laws for 2021 before yearend. 

It is wise to visit with your CPA or CERTIFIED FINANCIAL PLANNER™ professional to help you get a handle on your tax burden before it becomes a real challenge. See you on the jogging trail!

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