Developing a Tax-Efficient Lifestyle

Your taxes are filed (or extended). You may feel relieved. Now one of the most important periods of the year begins. No, I am not speaking of baseball in full swing. I am referring to the planning process to reduce your 2023 income tax burden based on your knowledge gained from the past year’s tax implications.

By using a proactive planning strategy, you may find that you are more confident and comfortable with the tax filing season. It is much less stressful when you have an idea of the amount of tax owed. The reason for such trepidation during tax time is that most individuals spend no time in the planning process and simply hope for the best outcome. As we say in our business, hope is not a strategy for success.

Let us put a game plan together that will help you gain confidence that your assets are working for you and not against you. First, one of the largest assets of most families is their residence. What can be done with a home that is tax efficient? Consider the full payment of your property taxes every other year so that you can “bunch” up the deduction to increase your itemized deductions. Of course, one caveat would be the limitation placed on taxes within your Form 1040 Schedule A, but most people may find room for additional deductions in this area.

In the most recent tax law passed by Congress, an individual may make certain energy efficiency improvements to his residence and take a tax credit – not deduction – for the expenditure. Instead of bunching the improvements into one year, the tax credit may benefit you over multiple years by performing some of the improvements each year. This approach will help you manage your cash flow and obtain valuable credits against your current and future years tax liabilities.

The second largest asset of a family may be their investment portfolio. By taking advantage of contributions to an employer plan or, if a plan is not offered to you, by contributing to a self-employed plan or IRA, you may uncover significant tax savings each year. When planning your operating budget for the year, consider a line item that isolates the contributions to tax-deferred plans so that you may capture efficiency with your tax liabilities.

If you have not filed your tax return for 2022, you may have opportunities to reduce your liability after the close of the filing season. Consider a SEP (Self-Employed Pension Plan) for a strategy of tax reduction. This plan will allow a contribution of up to $61,000, or 25% of net earned income, whichever is lesser, and you have until the filing of your return or the extended due date to fund the account. This is a potential windfall for many self-employed individuals!

Another overlooked asset for most families is the investment in a qualified electric vehicle. In 2023, the IRS allows an income tax credit of $7,500 to qualified individuals who purchase a vehicle that meets the criteria for the credit. The credit for electric vehicles is quite an incentive to consider one of these automobiles.

Do not plan your entire life around the impact taxes play in our world. Rather, take opportunities to gain tax benefits in the transactions and assets you are going purchase to meet your family’s needs. It becomes a win-win scenario!

By taking a few minutes each year to set and define goals that help your family lower their tax burden, you will begin to experience greater cash flow and confidence in your abilities to control your future. If you wish to start a plan that helps you gain more net worth and lower your tax burden each year, seek out a Certified Financial Planner™ professional. Take leadership in the tax planning process and reap a tremendous benefit for your family. As Peter Drucker so eloquently stated, “Management is doing things right; leadership is doing the right things.”

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The Taxman Cometh

Only two certainties remain in life – death and taxes.  These two actions require a significant commitment from you in terms of time and money.  It is important that we each carry a portion of the costs of the freedoms we enjoy in the United States of America.  A phrase often quoted by the leaders of our government is that the “rich should pay their fair share”.  

“Fair” is such an ambiguous term. What is your definition of “fair” when it is applied to your income and assets?  Should the percentage you pay be 10%, 20% or, lets get creative and say 50%?  Based on research performed by The Tax Foundation in 2020, high-income taxpayers paid the majority of federal income taxes.  The findings were quite confirming of my thoughts in how our system of taxation is applied to the population.

Based on the findings of the research, the bottom half of taxpayers earned 10.2% of the total Adjusted Gross Income (AGI) and paid 2.3% of all federal individual income taxes. Conversely, the top 1% earned 22.2% of total AGI and paid 42.3% of all federal income taxes.  Would you determine this to be “fair”?  Surely those of us that earn more should pay more in taxes.  However, the nebulous word “fair” may be defined differently by the two aforementioned factions of taxpayers.

For 2022 income tax filings, individuals will find themselves in a marginal tax bracket from 10% to 37% (with additional surtaxes added to the top rate based on other income factors). Generally, the argument is made by the ultra-wealthy such as Bill Gates, Warren Buffett and others that they should pay more in taxes.  The challenge is the types of income experienced by the ultra-wealthy and those in the 10% bracket consist of different taxable characteristics.  For example, the rates for ordinary income range from 10% to 37%.  However, the most wealthy of us actually have a greater share of annual income derived from investments thereby describing the income as capital gains.  The maximum rate of federal tax for long-term capital gains is 20%.

A couple of years ago, Mr. Buffett was quoted as saying he paid a lower tax rate than his secretary (an archaic term in today’s world but Mr. Buffett is a member of the “Greatest Generation”). His secretary must be well paid to be taxed higher than 20% on her earnings.  These types of comments stem from the frustration in our U.S. tax system by the Oracle of Omaha. As an investor, Buffett has benefited for decades by the favorable tax treatment afforded capital gains.  The theory is that our economy will help everyone if we continue to experience robust investment in jobs and infrastructure.  I do believe this to be a true statement (with provisos and adjustments).

There are certainties in the tax code on which we can all rely. One of those certainties is the due date of the filing of your individual income tax return for 2022. The due date is normally April 15. This year the due date is April 18, 2023. I understand your confusion. Three additional days to file and pay your tax liabilities. To grasp how the tax law is written, one must understand the impact of weekends, holidays declared and holidays recognized in specificity.  This tax filing season is one of those flummoxed moments where April 15 is a Saturday, which means Sunday is the 16th and your return should be filed by Monday, April 17.  However, the District of Columbia, the special designated land in which the U.S. Capitol is located so that no state would claim to be more honored than another, will celebrate Emancipation Day on Monday.  A brief examination of history will confirm that Emancipation Day, marking the abolition of slavery in D.C., was effective on April 16, 1862 when signed by President Abraham Lincoln.  Not to sound pedantic but that date is a Sunday in 2023 and, therefore, will be celebrated on the next business day which is a Monday.

So, the good news. You have three extra days to file and pay your income taxes. However, my recommendation is that you don’t wait until the last day to file.  If you are receiving a refund, file early and take possession of your money.  If you owe money this year, file on April 18, 2023, and pay the tax in full to avoid penalties and interest being assessed.

If you wish to take a proactive approach to your tax planning, seek a complimentary consultation with a Certified Financial Planner™ professional.  By focusing on one of the largest expenses of your family’s annual budget, you will experience greater confidence by maintaining control of your finances. I often quote to my friends that “I am glad to pay taxes…”  After they cease looking at me with a shocked look on their faces, I finish the quote – “… the alternative of paying nothing means my family struggled and lacked the basic pleasures of this life.”  Hope you enjoy a great Spring Day with the extra hour we gained earlier this week!

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It’s Tax Time! Are You Ready?

The taxman cometh! Every year at this time, individuals in our great country are asked to file their income tax returns to contribute a portion of their earnings to the common good.  Some of us are immune to this exercise in honest reporting due to income levels.  Others are subject at the highest rate of taxation allowed by law.  All of us owe a duty to maintain the republic in revenue that we lawfully owe.

Due to the pandemic, many companies were subjected to slowing, or ceasing, supply lines that caused temporary, or permanent, layoffs of workers.  In the past couple of months, some of the largest employers on the planet have given notice that they will be reducing their workforce due to the current economic climate.  For example, according to a CNBC article published on January 18, 2023, more than 70,000 individuals lost their jobs in the past three months from companies such as Google, Meta, Microsoft, and many other giant technology companies.

What does one do when their means of earning a living has been eliminated?  The state in which you reside generally provides temporary unemployment benefits to assist you in transitioning to another job.  What many people don’t realize is that the benefits paid them are also taxable on their income tax return.  Does this seem fair?  From a purely theoretical tax law perspective, the taxation of these benefits is correct.  This series of payments you are receiving to substitute, although in most cases at a lower level than you earned your wages, income for purposes of living expenses does, in fact, improve your cash flow.  Many people fail to consider their marginal tax rate when receiving these payments and owe taxes on the money when their return is filed.

This year individual tax filers will receive a little extra time to file their 2022 income tax returns.  Due to a federal holiday and April 15 landing on a Saturday, your income tax return is not required to be filed until April 18, 2023.  However, it is my recommendation that you not wait until the due date to start the filing process.

Tax rates ranging from 10% to 37% are reasonable in respect to some other countries.  Congressional leaders argue as to the fairness of our tax code.  However, it has been proven that the top earners in our country, the labeled “1%”, do, in fact, pay 42.3% of the total income tax collected on earnings of 22.2% of the income according to the Tax Foundation, a non-profit think tank.  Those taxpayers at the bottom of the earnings schedule took home 10.2% of the total income of the United States and paid 2.3% of the total taxes collected.  

Our system of taxation does work, perhaps not perfectly, but functionally.  One of my mentors asked me how I felt about being able to pay my debts including my taxes.  My philosophy has been one that I truly wish to pay my family’s fair share of its debt to this great country.  To pay taxes at the highest rate of taxation is to say our family enjoyed a prosperous year.  Too many of us seek a means of reducing our tax burden by illegal means (i.e., dealing in cash, embellishing our expenses or deductions, etc.).  It is incumbent on all of us to be honest and willing participants in this self-assessing system of taxation for our country to function properly.

Regarding the 87,000 IRS agents to be hired by the agency, there are many rumors about the types of employees and their focus in the collection and enforcement process of the U.S. Treasury.  It is unfathomable to think that agents toting guns will be coming to a peaceful business to enforce collection of a tax that is voluntarily assessed and paid.  However, the focus of these new agents will be directed toward those taxpayers who flaunt the system and intentional fail to report their earnings properly.

I have used this quote many times, but it is no more appropriate than at this time of year: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Judge Learned Hand

If you wish to lower your tax burden, consider a complimentary consultation with a Certified Financial Planner™ professional.  By developing a plan to legally reduce your tax burden each year, you may save additional funds for other important matters in life.  See you on the jogging trail!

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New Retirement Changes That May Secure Your Future

One of the best attributes about my profession is the constant change in the rules for which we give advice to our clients. One of the worst attributes of our profession is the constant change in the rules for which we give advice to our clients.  This double-edge sword keeps our team of professionals motivated to learn new strategies each day.  Another aspect of constant change is the challenge of providing long-term advice to clients.

On December 29, 2022, while many of us were preparing for a New Year’s Eve Party, Congress and the President were finalizing the printing and signing of the Consolidated Appropriations Act of 2023 which contains a substantial number of changes pertaining to retirement plans. To summarize the plethora of changes, the idea was to create greater opportunities for plan participants to save for their future.  Congress attempted to simplify many of the complex rules pertaining to employer retirement plans and encouraged employees to become savers through automatic enrollment provisions within retirement plans.

To encourage smaller employers, defined as those entities with 50 employees or less, to establish retirement plans, the IRS will allow a tax credit for 100% of the start-up costs for a plan.  This is an increase from the previously allowed 50% credit.  To take advantage of this credit the plan must be started after January 1, 2023.  Many smaller companies may find that a retirement plan serves as a wonderful retention tool to maintain their workforce.

For individuals reaching a certain age in which distributions from their Individual Retirement Account (IRA) are required, good news is included in the new law.  Prior to 2023, required minimum distributions (RMD) were mandated by the IRS at age 72.  If the individual failed to meet the minimum distribution amount in distributions, a penalty of 50% of the value required to be reported in income as was assessed on the appropriate income tax return.  Starting in 2023, the age for required distributions from an IRA is 73.  The law also provided for greater longevity of life in the United States in that RMDs will not start until age 75 beginning on January 1, 2033.  

Some employers have desired to provide incentives to certain classes of employers to participate in retirement plans.  The new law provides for employers to offer de minimis financial incentives, not paid with plan assets, such as low-dollar gift cards, to boost participation in workplace retirement plans.

One of the reasons for employees to deny participation in workplace retirement plans is that the money is required to be invested for a considerable period of time and access to the funds for an emergency is penalized unless certain criteria are met.  Under the new law, employers may rely on the employee certifying that deemed hardship provisions are met.  This will allow a short-term distribution of assets or a permanent distribution based on the needs of the participant.

Smaller employers generally establish SIMPLE (Savings Incentive Match Plan for Employees) IRA Plans or SEP (Simplified Employee Pension) Plans due to the lowered threshold of reporting and minimal administrative costs associated with such plans.  Certain criteria must be met by the employer in the number and types of employees but overall these plans are effective in saving for the future while capturing current tax deductions for the employer.  In 2023, SIMPLE IRA’s are allowed to accept Roth contributions (which are post-tax).  Also, SEP contributions by the employer (employees do not contribute to these types of retirement plans if not an owner) may be treated as Roth contributions.  This, my friends, is a big deal for younger workers who may wish to take advantage of a lower income tax burden early in their career.

One of the more tenuous debates in Washington, DC has been the student loan forgiveness ordered by President Biden.  Many students have worked multiple jobs to pay their way through college while others applied for loans.  Some of the animus results from the students who chose to attend college while working and now seem to be offended by the exclusion of their efforts from the forgiveness order.  Further, some allege individuals who attended very expensive private universities would be favored since they chose to attend a university requiring significantly higher tuition than the student who attended a state-sponsored university.  

The reason for opening the debate door on student loans is that employers are allowed to make matching contributions to allowed retirement plans with respect to “qualified student loan payments” beginning in 2024.  This will allow the employee to continue to reduce student loan debt while not forgoing savings for their future.

Emergencies do occur in life and many are caught without liquid funds to address the problem.  In 2024, plan participants will be allowed a $1,000 early withdrawal without penalty to address emergency expenses.  The participant has the option of repaying the withdrawal to the plan within three years.

Retirement does not have to be a complicated process. By planning accordingly with a Certified Financial Planner™ professional, you will feel more confident and comfortable about the future you choose.  As I often inform clients, “You retire for the first time only once.  It is better for your future that you do it right.”  Go make your world a little brighter, smile at everyone you meet!  

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Tax Credits for Homeowners

Home ownership avails tax deductions such mortgage interest and ad valorem taxes for those individuals that itemize on their personal income tax return. Deductions are good since they reduce your taxable income; however, tax credits are much better since they reduce the tax itself dollar-for-dollar. One of my mantras when helping our clients with tax planning is “deduction is good, but credits are great!”

Recent legislation passed by Congress and signed into law by President Biden is the Inflation Reduction Act. There has been significant debate as to the title of the law as being misleading. Let us leave the politics to the politicians and we will focus on the important matter of the impact this law has on your 2023 federal income tax return. 

Claiming credits against your federal income tax takes a little work to understand and navigate the maze of qualifications to claim the credit. In claiming the Energy Efficient Home Improvement Credit, a taxpayer must provide certain manufacturer certifications and an inspector’s report as to the sufficiency of the improvement to meet the criteria in the law. Further, if you built your home after December 31, 2022, and before January 1, 2033, you may claim a credit against your federal income tax of 30% of the costs paid for such improvements as exterior windows and skylights, exterior doors, and other qualifying energy property.

Overall, the annual limit for such tax credits is $3,200 with no lifetime limit. In that regard, you may make improvements that qualify for the credit on an annual basis as you convert your residence to a more energy efficient dwelling.

Other limitations apply when claiming tax credits. Some credits are refundable and others are nonrefundable. The difference in the credits’ refund status is critical. Refundable credits allow for the refund to be paid the taxpayer even if it exceeds your total tax liability. For example, let us assume your total federal income tax on your 2023 return is $2,500 and you could claim a refundable credit of $4,000. The IRS would send you a check for $1,500. Sounds good, right?

Assume the same tax liability of $2,500 and you claimed a $4,000 nonrefundable credit. The IRS would allow you use $2,500 of the credit to offset your tax and carryover to tax year 2024 the remaining $1,500 to considered in the following year’s calculation of tax.

An additional residential credit provided for in the Inflation Reduction Act is the Residential Clean Energy Credit. Like the previously mentioned credit, the qualified energy property improvements must be installed on a taxpayer’s residence before January 1, 2035. The credit is equal to 30% of the cost of eligible property placed in service in 2022 through 2032; 26% for tax year 2033; and 22% for 2034. Limitations are placed on the credit by kilowatt capacity of the installed property. For example, the credit is $500 for each 0.5 kilowatt of capacity of qualified fuel cell property expenditures for each tax year.

To qualify for the Residential Clean Energy Credit, you may install solar water heating systems, solar electric systems, fuel cell property, small wind energy property, geothermal heat pump property and, for years beginning in 2022, battery storage technology. Each of the eligible property improvements requires certain criteria be met through certifications provided by manufacturers of the products.

Tax laws are complicated. To properly take advantage of opportunities to lower your family’s income tax burden, seek a complimentary consultation from a CERTIFIED FINANCIAL PLANNER™ professional. Judge Learned Hand said it best, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

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Is it Income or Isn’t It

One of the most confusing questions asked by many people: Is it taxable as income?  To help provide greater clarity around this question, let’s refer to the law utilized for the determination of individual income tax computations.  The Internal Revenue Code of 1986, as amended, provides guidance for such quandaries. By reviewing the sections of the IRC, one will quickly surmise that everything is income unless specifically exempted by the “Code”.  

Does that clear it up a bit?  Clearly, your wages earned from a job are taxable but what about reimbursements from your Health Savings Account for medical care paid out of pocket?  This is the type of question that many taxpayers struggle with understanding.  

Tax-exempt interest is not taxable if derived from investing in certain types of debt securities.  Some of the securities may be exempt from both federal and state income taxes.  Sounding pretty good, right?  The issue is understanding what you are investing in and how it is structured.  Placing your money in an interest-bearing bank account will pay you a return.  The earnings on the account are taxable.  However, investing money in a municipal bond may generate non-taxable income for federal purposes but be taxable for state purposes.  Or you may wish to invest in U.S. Government bonds.  Interest earned on these types of bonds are taxable on your federal return but not on your state return.  Confused yet?

Many taxpayers wish to save a few dollars by preparing their own income tax returns.  The IRS website provides a link called “Free File” for individuals to utilize a platform that electronically files their return to the IRS.  However, and I mean this in the most compassionate manner of speaking, if the wrong amount or type of income is placed in the wrong field on the return, you will have trouble by receiving a letter from the IRS informing you of such error.

What if you bought a piece of equipment such as a lawnmower?  You used this mower to keep your personal lawn looking great.  After a few years, you decide to sell the mower to buy a larger model.  Is the $150 you received from the sale of your $400 mower taxable to you?  Of course not.  You have a basis in the mower of $400, the original purchase price.  When you sell the mower for $150, you suffer a $250 capital loss.  Therefore, you wouldn’t include the $150 in your income.

Another example of this mistake was made by a client of ours that purchased a pickup for work in his sole-proprietorship.  He depreciated (i.e., wrote off the basis of his truck over time as a deduction against his income from the business) the vehicle for five years.  His basis was very little after the depreciation claimed on his previous tax returns.  The vehicle originally cost him $60,000 and he had depreciated $52,000 over the period of time he owned the vehicle.  When he sold the truck for $21,000, he told me he didn’t “make any money” on the sale.  I looked at him with a big grin on my face and corrected his statement.  “You actually incurred an ordinary gain on the sale of the truck in the amount of $13,000,” I explained.  His smile was reduced to a frown.

Income and expenses are allowed only as stipulated in the Internal Revenue Code or your state statutes.  It is critical that you understand the ramifications of failing to report income or claiming deductions that you cannot substantiate.  Failing to report income is called tax evasion.  If you omit a substantial amount of income from your tax returns, you may be prosecuted in federal court and ordered to pay a large fine and possibly imprisonment.  

Understanding tax law is difficult.  Planning and filing your income tax return does not have to be. Contact a CERTIFIED FINANCIAL PLANNERprofessional to guide you in the proper manner of filing and paying your income taxes.  Life is more enjoyable when you don’t worry about it.  Go ahead.  Live a life by design and allow someone else to worry for you.  Tell Santa I said “hi”!

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Clearing Up Confusion About Cars and Taxes

As the year of 2022 winds down to its last days, our thoughts of family gatherings, gift sharing and taxes dance in our heads.  Well, maybe not the tax thoughts but it is a good time to review a few planning ideas to help you feel more confident about your tax filing strategies for 2022.

Your automobile may be a shelter for tax deductions you haven’t considered in the past.  As a utility for us to rapidly move from one location to another, automobiles are subject to a considerable number of tax laws and regulations that guide in their usage for tax purposes.  For example, your personal automobile, when used for purposes of discharging your duties for your employer, is a tax-deductible asset.  A few documentation steps are required to take advantage of this deduction such as a mileage log.  By properly maintaining a mileage log that reports your daily travel, the location to which you traveled, the business purpose for the travel and any related expenses such as tolls and parking, you may help achieve your goal of deducting an activity that you performed anyway.

If you own a smartphone, such as an iPhone or Android, there are many apps that are free to help you track your mileage and provide documentation for your activities.  The app I utilize for this purpose is found in the Apple App Store named “Mileage Expense Log & Tracker” by ChuChu Train (“yes”, this is the real name and “no” I did not simply make this up because its sounds cool!).  Using the app is very easy.  Every morning when I start my car, I open the app to record the mileage on the odometer as the ending mileage for the previous day noting where I had traveled and who I had seen.  The app carries the ending mileage to the next day as the beginning mileage.  This routine consumes about 1 minute from my day and meets the IRS standard for documentation of business use of my automobile.

Tracking mileage and expenses is only a piece of the benefit of using your automobile in a business.  Annually the IRS publishes the allowed rates for business, medical and charitable purposes.  In 2022, due to the significant increases in gasoline, the IRS changed the rates with a mid-year order that increased the rates for the second half of the year.  For the period of January 1 through June 30, 2022, the rates are:  business – $0.585 cents per mile, medical – $0.18 cents per mile and charitable – $0.14 cents per mile.  For the period of July 1 through December 31, 2022, the rates are:  business – $0.625; medical – $0.22; and charitable – $0.14.

Documentation is critical that you maintain corroborating evidence of your trips each day such as meal receipts if you met with a client for lunch or parking receipts if you traveled to a city requiring such charges.  

Many of our clients ask questions such as: Can I depreciate my vehicle instead of claiming the standard mileage rates?  Of course!  However, it is a best practice to keep the mileage log to determine if you would benefit more from mileage rather than actual expenses.  One caveat to remember is that electing the actual expense approach to deducting your automobile for tax purposes, you may not change in later years.

Medical mileage is that number of miles you travel from your residence to your medical provider.  Documentation is rather simple in this instance since you will be receiving an invoice from your provider which discloses your name, date, city of the doctor’s office and other pertinent information.  

Charitable mileage may be documented by obtaining any papers reflecting the activities of the charitable event such as a flyer, agenda, minutes of meeting, etc.  As with everything in tax planning the success of the deduction being sustained under examination is directly related to the quality of the documentation you provide the IRS or other taxing agency.

You may use a simple piece of paper or a manual mileage log for your documentation purposes.  No matter the type of system used, it is only as effective as you are diligent in its use.  By documenting your automobile usage in great detail, you may just convince the tax examiner that you are detailed in other areas of reporting on your returns.

Make documentation of your automobile usage for business, medical or charity a goal for 2023.  It is not too late to recreate your log for 2022. Contact a CERTIFIED FINANCIAL PLANNERprofessional to help you plan for your future in a tax-effective manner.  The more you keep of your own money, the better life will be for your family.  Hurry up, Santa, I am ready for a great Christmas!

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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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