Taxes | Live a Life By Design

Time is Running Out

Posted on December 6, 2019December 6, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return.

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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It’s All Taxable, Unless…

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

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

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

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

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

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

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

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Five Last-Minute Tax Savings Ideas for 2018

Posted on March 23, 2019March 28, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

If you are like many people, you are procrastinating the filing of your 2018 individual income tax returns. Don’t worry, you still have time to reduce your 2018 income tax burden. Below are five ideas to reduce your taxes for last year:

Contribute to an Individual Retirement Account (IRA). If you qualify, you may contribute $5,500 (or $6,500 if age 50 or older) to an IRA prior to April 15, 2019, and claim the deduction on your 2018 individual income tax return. This is a wonderful deduction in which you gain a benefit and continue to control your money.
Contribute to a Health Savings Account (HSA). Many families have increased the amount of their health insurance deductible to offset the increase in policy premiums in recent years. If your policy qualifies as a “High-Deductible Plan”, you may open and contribute up to $3,450 for a single person, or $6,900 for family coverage, to a Health Savings Account. Similar to an IRA, this is an effective method of lowering your tax burden while you continue to control your funds. Remember, these accounts can only be used to pay for qualified medical expenditures. Your contribution must be performed prior to April 15, 2019.
Establish and fund a Simplified Employee Pension (SEP) Plan. One of the most generous tax deductions, a SEP Plan is similar to a 401(k) plan in that it allows larger contributions annually than an IRA. This type of plan is available to individuals, corporations and partnerships with self-employment income. If you qualify, you may contribute a maximum of $55,000 to an SEP Plan prior to the filing of your income tax return and take the deduction in 2018. This is a unique opportunity for those individuals who can’t file their returns by April 15, 2019. You may contribute to this plan up to the extended due date for filing your return. Although a little more complicated than an IRA, the larger contribution limit allows significant tax savings and, more importantly, greater opportunity to grow your retirement savings.
Contribute to the Oklahoma 529 Colleges Savings Plan. If you wish to benefit your children, and yourself, consider contributing to their college needs before April 15, 2019. You may contribute up to $10,000 per year filing as an individual or $20,000 per filing as a married couple. Based on Oklahoma’s current tax rate, this contribution may save you $500 to $1,000 of Oklahoma income tax for 2018. Another positive attribute about these plans is the right to transfer the funds among family members and utilize the growth of the account without taxation as long as the funds are spent on qualified educational expenses.
Immediate Expensing of Qualified Business Assets. For many self-employed individuals, this section of the Internal Revenue Code is utilized to control their income tax liability in a significant way. For example, if you are self-employed and bought tangible personal property (an IRS term that simply means, “not land or buildings”), you may be availed a tremendous deduction against your income. The limit for this deduction for 2018 is $1,000,000. For most small businesses, this is an opportunity to invest in your business and take a tax deduction for doing so. Certain types of property must be purchased and limitations apply.

Don’t take chances with your income taxes. Consult a CPA or Certified Financial Planner practitioner to determine if you qualify for the above deductions. Remember, every dollar you save in taxes can be used by your family for something of your choice.