Skip to main content
Category

Tax Planning

Mar 01
Love0

6 Facts About Taxes

By Financial Planning, Tax Planning

Individual income tax returns for 2021 will be due April 18th, 2022. In preparation as we head into the tax season, here are some facts to consider. 

  1. Where your tax dollars go.

In 2021, the federal government spent $6.82 trillion, which equals 30% of the nation’s gross domestic product. Three significant areas of spending make up the majority of the budget. Medicare accounted for $696.5 billion, or 10%. Defense spending made up $754.8 billion, or 11% of the budget, was paid for defense and security-related international activities. Seventeen percent of the budget, or $1.1 trillion, was paid for Social Security, which provided monthly retirement benefits averaging $1,497 to 46 million retired workers.

  1. How long you should keep tax documents.

The IRS provides the following recommended timelines for retaining financial documents:

  1. You should keep your tax records for three years if #4 and #5 below do not apply to you.
  2. You should keep records for three years from the original filing date of your return or two years from the date you paid your taxes. Select whichever is the later date. This is if you claimed a credit or refund after you filed your return.
  3. You should keep your records for seven years if you claimed a loss from worthless securities or a bad debt deduction.
  4. You should keep your records for six years if you failed to report income that you should have, and the income was more than 25% of the gross income listed on your return.
  5. Keep records indefinitely if you do not file a return.
  6. You should keep employment tax records for at least four years after the due date on the taxes or after you paid the taxes. Select whichever is later.
  1. Tax brackets for 2021 individual income tax returns.

NOTE: These tax rates are scheduled to expire in 2025 unless Congress acts to make them permanent.

  1. Tax brackets for 2022.

When it comes to taxes, it’s always a good idea to plan ahead. In November 2021, The Internal Revenue Service announced that it is boosting federal tax brackets for 2022 due to faster inflation. Below is a breakdown of the new thresholds for the seven tax brackets in 2022:

10%: Single individuals earning up to $10,275 and married couples filing jointly earning up to $20,550.

12%: Single filers earning more than $10,275 and married couples filing jointly earning over $20,550.

22%: Single filers earning more than $41,775 and married couples filing jointly earning over $83,550.

24%: Single filers earning more than $89,075 and married couples filing jointly earning over $178,150.

32%: Single filers earning more than $170,050 and married couples filing jointly earning over $340,100.

35%: Single filers earning more than $215,950 and married couples filing jointly earning over $431,900.

37%: Single filers earning more than $539,900 and married couples filing jointly earning over $647,850.

  1. Standard deductions.

Here is an overview of the standard deductions since 2019, including the standard deduction for the 2021 tax season:

For 2022, the IRS is increasing standard deductions due to faster inflation:

The standard deduction for married couples filing jointly will rise 3.2 percent to $25,900 next year for the 2022 tax year, an increase of $800 from the prior year. The standard deduction for single taxpayers and married individuals filing separately rises to $12,950 for tax year 2022, up $400 from tax year 2021. For heads of households, the standard deduction will be $19,400, up $600.

  1. You can still contribute for the 2021 tax year.

If you have not already contributed fully to your individual retirement account for 2021, April 15 is your last chance to fund a traditional IRA or a Roth IRA. Please call us if you have any questions about setting up or contributing to a traditional or Roth IRA.

Sources: IRS.gov, SSA.gov

This information is for general purposes only and is not to be relied upon or considered as financial or tax advice. It is recommended that you work with your tax professional to complete your tax returns based on your unique situation.

Call us if you’d like to speak with us about your financial plan. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Sep 25
Love0

What is a Roth Conversion?

By Retirement, Tax Planning

To understand what a Roth conversion is, you must first understand some of the basics about the different types of retirement accounts, called “qualified accounts.”

  • Pensions

Also called defined-benefit plans, pensions are paid for by employers. They have largely gone away for Americans in the private sector starting with the passage of three laws during the Reagan administration, the Tax Equity and Fiscal Responsibility Act passed in 1982, The Retirement Equity Act of 1984, and The Tax Reform Act and Single Employer Pension Plan enacted in 1986.

The lack of pensions is one reason why it’s important for people to create their own retirement income plans.

  • 401(k) Accounts

Defined-contribution plans, including 401(k)s and similar plans, rely on an employee to elect to contribute a percentage of their salary in order to save for retirement. Contribution amounts are usually taken out of an employee’s check on a “pre-tax” basis, and sometimes a company will add a “matching” amount based on the percentage the employee contributes, often based on an employee’s length of service.

A 401(k) plan generally has a limited list of fund choices. The maximum an individual can contribute to a 401(k) in 2020 is $19,500 per year, or $1,625 per month, not including the employer’s matching amount.

For traditional 401(k)s, no taxes are due on 401(k) accounts until the money is withdrawn. Ordinary income taxes are due upon withdrawal at the account owner’s current tax bracket rate, and withdrawals are mandatory starting at age 72. NOTE: Roth 401(k)s are available at some companies, and contributions for those are made on an after-tax basis.

  • Traditional IRA Accounts

An IRA—Individual Retirement Account—is a type of account which acts as a shell or holder. Within the IRA, you can invest in many different types of assets. You can choose between CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available. You can open an IRA account at a bank, brokerage, mutual fund company, insurance company, or some may be opened directly online.

For 2020, you can contribute up to $6,000 to an IRA, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. Traditional IRA contributions are typically made with pre-tax dollars, which gets accounted for on your tax return in the year you choose to make the contribution. Depending on your income level, sometimes traditional IRA contributions can also be tax-deductible. Traditional IRA withdrawals are treated as ordinary income and taxed accordingly, and withdrawals are mandatory starting at age 72.

  • Roth IRA Accounts

Like a traditional IRA, a Roth IRA is a type of account which acts as a shell or holder for any number of different types of assets. The difference is that Roth IRA contributions are made with after-tax dollars.

Withdrawals are not mandatory for Roth IRAs, but you can withdraw funds tax-free as long as you follow all rules, which include having the account in place for at least five years. Those age 59-1/2 or older can withdraw any amount—including gains—at any time for any reason, and can also leave Roth IRA accounts to their heirs tax-free—beneficiaries just have to withdraw all the money within 10 years of the account holder’s death.

For people under age 59-1/2, as long as they have had their Roth IRA account in place for five years or longer, they can withdraw any amount they have invested at any time—but not the gains or earnings. If they withdraw the gains or earnings, they may have to pay ordinary income taxes plus a 10% penalty on those, with some exceptions, such as first-time homebuyer expenses up to $10,000, qualified education and hardship withdrawals, which may avoid the penalty but still require tax be paid on any amount attributed to earnings.

Roth IRAs offer the potential for tax-free retirement income as well as tax-free wealth transfer to heirs. Essentially, with a Roth IRA, your interest, dividends and capital gains which accumulate inside it are tax-free as long as you follow all Roth IRA withdrawal rules.

For 2020, you can contribute up to $6,000 depending on your income, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. However, Roth IRAs have income restrictions that may disqualify higher-income people from participating. The income restrictions on Roth IRA accounts are not always a barrier to conversions—a perfectly legal tax strategy called a “backdoor Roth IRA conversion” can be accomplished as long as all IRS rules are followed.

Roth Conversions

Because of the many Roth IRA tax advantages, some people may benefit from converting some of the money in their taxable 401(k) and/or traditional IRA accounts into tax-free Roth IRAs. Conversions are a taxable event in the year they are done, and they cannot be undone, so it is important to work with a qualified advisor to run anticipated tax savings calculations to see if they make sense. Additionally, there are complex tax rules which must be adhered to in regard to the ratio of taxable to non-taxable amounts held in IRAs.

If you have a low-income year due to a job loss or cutback, or you are five to 10 years away from retirement, you may benefit from a Roth conversion, or a series of them at today’s lower tax bracket rates, set to revert back up to 2017 levels for the 2026 tax year.

There are basically three ways to do Roth conversions according to Investopedia:

1) A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.

2) A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.

3) A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.

Whatever method you use, you will need to report the conversion to the IRS using Form 8606 when you file your income taxes for the year and follow all rules. Roth conversions are complex and you should seek expert tax guidance.

 

Let’s talk. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

This article is for informational purposes only and should not be used for financial or tax advice. Future tax law changes are always possible. Be sure to consult a tax professional before making any decisions regarding your traditional IRA or Roth IRA.

Sources:

https://protectpensions.org/2016/08/04/happened-private-sector-pensions/)

https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/.

https://www.nerdwallet.com/blog/investing/how-much-should-i-contribute-to-a-401k/.

https://www.debt.org/tax/brackets/

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp#

https://www.investopedia.com/roth-ira-conversion-rules-4770480

https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Aug 24
Love0

How Rich Do You Have to Be in Order to Retire?

By Health Care Expenses, Retirement, Tax Planning

Even though perceptions have changed during the pandemic with more Americans now saying they need less money to feel rich1, when it comes to retirement, most people are still unclear about how much they will need to have saved before they can quit their jobs.

The answer to that question is different for every person.

Here are some of the things you need to think about in order to get a realistic retirement number in mind.

 

What do you want to do during retirement? Where will you live?

Different people have different retirement goals and visions. You may not realize that you need to answer lifestyle questions before you can answer the “how much do I need” question.

Think about it this way. A single woman downsizing into a tiny home in a rural community to enjoy hiking in nature is going to need to have saved up a lot less money than a couple who wants to buy a big yacht, hire a crew and travel around the world docking at various international ports. A man who wants to spend all his time woodworking in his garage in the Midwest will need a smaller nest egg than a power couple collecting art and living in a penthouse in New York.

Most people are somewhere in the middle of these extremes. Yet answering these questions for yourself is very important both financially and emotionally for everyone entering retirement. You don’t want to end up feeling lost or bored not working—you want to feel that you are moving forward into a phase of life that is rewarding to you. And you certainly don’t want to run out of money because you miscalculated.

Take some time to get specific about your needs and desires. Will you want to spend holidays with family or friends? Start an expensive new hobby like golf? Take a big vacation every year? (The pandemic will end eventually!) Visit your grandchildren who live across the country multiple times? Go out to eat every day?

Based on your goals and objectives for your retirement lifestyle, your financial advisor will help you prepare a realistic monthly budget, adding in calculations for inflation through the years.

Once you’ve developed your monthly budget, it can be compared against your Social Security benefit to give you a good idea of how much additional monthly retirement income you will need to generate from your savings. From there, your advisor can come up with strategies to help you create income from savings, and then give you a realistic figure that you will need to have saved up before you retire.

But in addition to your retirement lifestyle, there are a couple of other things that need to be considered.

 

How is your health?

Nearly every retiree looks forward to the day they can sign up for Medicare. But Medicare is not free; the standard Part B premium for 2020 is $144.60 per month2 for each person. Your premiums for Medicare are usually deducted right from your Social Security check.

If you elect to purchase additional coverage through Medicare Advantage, Medigap and/or prescription drug plans, your premiums will cost more. And there will still be deductibles to meet and co-pays you will owe.

Some estimates for health care expenses throughout retirement are as high as $295,000 for a couple both turning 65 in 2020!3

Even worse, keep in mind that this figure does not include long-term care expenses—Medicare doesn’t cover those after 100 days.4

 

Have you planned for taxes?

It’s not how much money you have saved, it’s how much you get to keep net of taxes.

When designing your retirement plan and helping you calculate how much you need to save, your advisor will take into consideration an important piece of the puzzle—taxes. Tax planning is often different than the type of advice you get from your CPA or tax professional when you do your tax returns each year. Tax planning involves looking far into the future at what you may owe later, and finding ways to minimize your tax burden so you will have more money to spend on things you enjoy doing in retirement.

Different types of accounts are subject to different types of taxation. “After-tax” money that you invest in the stock market can be subject to short- or long-term capital gains taxes. Gains accrued on “after-tax” money that you have invested in a Roth IRA account are not taxed due to their favorable tax rules. Interest paid on “after-tax” money in savings, CDs or money market accounts is taxed as ordinary income, although this usually doesn’t amount to much especially with today’s low interest rates.

What your financial advisor will be most concerned about is your “before-tax” money held in accounts like traditional IRAs or 401(k)s which are subject to ordinary income taxes when you take the money out, which you have to do each year starting at age 72 per the IRS. (These mandatory withdrawals are called required minimum distributions.)

If “before-tax” money like 401(k)s are where the bulk of your savings is held, you will want to run projections to calculate how much of a bite income taxes will take out of your retirement, especially since tax brackets will go back up to 2017 levels5 beginning in January of 2026. There may be steps you can take now to help you lower your taxes in the future.

 

Please contact us if you have any questions about your retirement. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

 

Sources:

1 https://www.financial-planning.com/articles/americans-now-say-they-need-less-money-to-feel-rich

2 https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance#

3 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

4 https://longtermcare.acl.gov/medicare-medicaid-more/medicare.html

5 https://taxfoundation.org/2017-tax-brackets/

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Feb 24
Love0
RMDs and retirement

Clearing Up Confusion About RMDs

By Retirement, Tax Planning

Last month, we posted information about how the SECURE Act has increased the age for required minimum distributions (RMDs) from 70-1/2 to 72 starting this year, 2020.

If you turned age 70-1/2 in 2019, your RMDs were required for the 2019 tax year, and WILL BE required for 2020, 2021 and every year from now on.

For everyone turning 70-1/2 in 2020, your RMDs will not be required until the year you turn 72, even if you have received notification from your custodian to the contrary.

Because the law was passed and became effective within two weeks of passage, automated computer notifications and settings have not been changed yet. Call us if you have any questions!

 

LET’S MEET ABOUT YOUR ESTATE PLAN

Remember that inherited “stretch IRAs” have been shortened to 10 years in many circumstances due to the passage of the SECURE Act.

Let’s get together and discuss how this may affect your current estate plan, what burdens your heirs may face, and what we need to do now in conjunction with your estate attorney.

 

SECURE ACT CHANGES FOR EMPLOYEES AND EMPLOYERS

  1. PART-TIME EMPLOYMENT ELIGIBILITY

Unless there is a collectively-bargained plan in place (such as a union agreement), you may be eligible for your employer’s 401(k) or similar retirement benefit plan even if you work part time. If you have worked for your employer for one year consecutively for at least 1,000 hours, or for three consecutive years for at least 500 hours (roughly 25 work-weeks of 20 hours per week), you will be eligible.

  1. ANNUITY OPTIONS IN 401(k) PLANS

Even though employers were already allowed to offer annuities in their 401(k) plans, only about 9% of them did. The SECURE Act shifts the burden of legal liability away from employers who offer annuities in their plans; you will need to be diligent about examining them before choosing. (We can help you with this.) The DOL will require standardized monthly retirement income projections to help you compare; they are expected to issue guideline regulations about this in the coming months.

  1. ANNUITY PORTABILITY

Within a retirement plan, an annuity portability requirement has been added by the SECURE Act. If an annuity offering is removed from a 401(k) plan menu, you will be able to roll that annuity investment over into your own IRA with no penalty.

  1. FOR EMPLOYERS

The SECURE Act raised the tax credit for employers to $15,000 to set up, administer and educate employees about retirement plan changes over a three-year period. (NOTE: Employer contributions to 401(k) plans have been and still are tax deductible.) There is a new tax credit of $500 per year for automatic enrollment of employees into a company’s 401(k) plan—and the cap for auto enrollment has been raised from 10% to 15% of wages.

 

If you have any questions about this information, please don’t hesitate to call our office!

Contact Drew Financial Private Capital in Lutz, Florida at (813) 820-0069 to find out more.

 

 

Sources:

https://www.plansponsor.com/in-depth/getting-secure-acts-lifetime-income-provisions-right/

https://humaninterest.com/blog/part-time-employees-secure-act/

https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743

https://www.cnbc.com/2019/07/03/if-annuities-come-to-your-401k-savings-plan-heres-what-to-know.html

 

The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.

Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Jan 22
Love0

5 Things You Need to Know About the SECURE Act

By Retirement, Tax Planning

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) became effective Jan. 1, 2020, and many people have questions about it.  Here are the top five things consumers should know.

 

  1. 72 is the new 70½

The SECURE Act raises the age at which retirees must begin taking Required Minimum Distributions from the awkward age of 70-1/2 to an even age 72, allowing for a couple more years of growth before RMDs kick in. NOTE: Anyone who reached age 70-1/2 in 2019 or before is subject to the old rules.

 

  1. You can keep making contributions to traditional IRAs

The act repeals the age limitation for making contributions to traditional IRAs, as long as you have earned income. Previously, the maximum age for traditional IRA contributions was set at 70-1/2 (this was the only type of retirement account which had an age limitation). Now, those working into their 70s and beyond can continue contributing to their traditional IRAs, even if they’re simultaneously required to begin drawing them down.

 

  1. The stretch IRA is dead

While existing “stretch IRAs” are grandfathered in and still follow the old tax rules, stretch IRAs are unlikely to be used by financial and estate planners in the future because their tax advantages have been drastically reduced.

Prior to the new law, stretch IRAs were primarily used for estate planning because they allowed a family to extend distributions over future generations—while the IRA itself continued to grow tax free. The person inheriting an IRA was required to take RMDs based on their life expectancy, which meant that a very young beneficiary could stretch out their distributions potentially over their lifetime.

Now beneficiaries must draw down the entire account within 10 years of inheriting it, possibly throwing them into a higher tax bracket. (They can take the money out in any year or years they like, as long as the account is empty by 10 years of the date of death of the original account owner.)

The new 10-year rule also applies to inherited Roth IRAs.

You may want to review your plan if you have stretch IRAs set up for your family, because any IRA inherited as of January 1, 2020 is subject to the new rules. Trusts you may have put in place to take advantage of stretch IRA rules probably won’t ameliorate taxes anymore either.

Keep in mind that the act does provide for a whole class of exceptions who aren’t subject to this 10-year rule; for them, the old distribution rules still apply. These beneficiaries (referred to as “Eligible Designated Beneficiaries”) are:

  • Spouses
  • Disabled beneficiaries
  • Chronically ill beneficiaries
  • Individuals who are not more than 10 years younger than the decedent
  • Certain minor children (of the original retirement account owner), but only until they reach the age of majority. NOTE: At this time, minor children would appear to be ineligible for similar treatment if a retirement account is inherited from a non-parent, such as a grandparent.

 

This new law is clearly designed to raise taxes. According to the Congressional Research Service, the lid put on the Stretch IRA strategy by the new law has the potential to generate about $15.7 billion in tax revenue over the next 10 years!

 

  1. The Roth got more attractive

Because contributions to Roth IRAs are made on an after-tax basis, a Roth account owner is not subject to Required Minimum Distributions at any age. An owner can leave their Roth to grow until their death, leave it to their spouse, who can then allow it to grow until they die. The second spouse can leave it to their children, who can then allow it to continue to accumulate tax-free for another 10 years, although they will now have to empty the account by the 10-year mark.

In terms of estate planning, Roth IRAs typically do not cause a taxable event when distributions are taken by a beneficiary.

Low individual tax rates by historical standards and a pending reversion in 2026 to the higher income tax brackets/rates that preceded the Tax Cuts and Jobs Act (TCJA) of 2017 can make this an opportune time for Roth conversions for those over age 59-1/2. These can benefit you, your spouse and heirs by strategically moving taxable retirement funds into tax-free Roth retirement accounts. The most common strategy for Roth conversions is ‘bracket-topping,’ where you convert enough to go to the edge of your tax bracket.

Keep in mind that these conversions need to be planned and done carefully, as they can no longer be reversed.

Remember, any account can be set up as a Roth – including CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available.

 

  1. Other non-retirement related provision highlights:
  • You can use $5,000 of qualified money for childbirth or adoptions
  • 529 plan-approved “Qualified Higher Education Expenses” now include expenses for Apprenticeship Programs—including fees, books, supplies and required equipment—provided the program is registered with the Department of Labor
  • 529 plans can also be used for “Qualified Education Loan Repayments” to pay the principal and/or interest of qualified education loans limited to a lifetime amount of $10,000, retroactive to the beginning of 2019
  • The Kiddie Tax rules changed by the Tax Cuts and Jobs Act (TCJA) of 2017 have been reversed, (and can be reversed for the 2018 tax year as well)
  • The AGI (Adjusted Gross Income) “hurdle rate” to deduct qualified medical expenses remains lower at 7.5% of AGI for 2019 and 2020.
  • The following tax benefits for individuals are reinstated retroactively to 2018, and made effective onlythrough 2020 at this time:
    • The exclusion from gross income for the discharge of certain qualified principal residence indebtedness
    • Mortgage insurance premium deduction
    • Deduction for qualified tuition and related expenses

 

There are even more provisions of the SECURE Act designed to make it easier for small business owners to offer retirement plans to employees, as well as add annuities to their plans.

 

Contact Drew Financial Private Capital in Lutz, Florida at (813) 820-0069 to find out more.

 

 

 

The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.

Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.

Sources:

https://www.wealthmanagement.com/retirement-planning/what-advisors-need-know-about-secure-act  

https://www.marketwatch.com/story/economists-like-annuities-consumers-dont-heres-the-disconnect-2019-12-23

https://www.investopedia.com/articles/retirement/04/031704.asp

https://www.kiplinger.com/article/retirement/T064-C032-S014-pros-cons-and-possible-disasters-after-secure-act.html

https://www.forbes.com/sites/leonlabrecque/2019/12/23/the-new-secure-act-will-make-roth-strategies-much-more-appealing-here-are-five-ways-to-use-a-roth/#3c239df6381d

https://www.marketwatch.com/story/secure-act-includes-one-critical-tax-change-that-will-send-estate-planners-reeling-2019-12-30

https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/

 

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Apr 18
Love0
Social Security

Are your Social Security benefits taxable?

By Tax Planning

The answer is: Yes, sometimes.

If you don’t have significant income in retirement besides Social Security benefits, then you probably won’t owe taxes on your benefits. But if you have large amounts saved up in tax-deferred vehicles like 401(k)s, you could be in for a surprise later.

AGI (Adjusted Gross Income) versus Combined Income.

You are probably familiar with what AGI, or adjusted gross income, means. To find it, you take your gross income from wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts and other taxable income, like unearned income, that must be reported on tax returns.

(Unearned, taxable income can include canceled debts, alimony payments, child support, government benefits such as unemployment benefits and disability payments, strike benefits, lottery payments, and earnings generated from appreciated assets that have been sold or capitalized during the year.)

From your gross income amount, you make adjustments, subtracting amounts such as qualified student loan interest paid, charitable contributions, or any other allowable deduction. That leaves you with your adjusted gross income, which is used to determine limitations on a number of tax issues, including Social Security.

Combined Income is a formula used after you file for your Social Security benefits.

Whether or not your Social Security benefits are taxable depends on your combined income each year, which is defined as your adjusted gross income (AGI) plus your tax-exempt interest income (like municipal bonds) plus one-half of your Social Security benefits.

The IRS provides a worksheet for this. (See the worksheet here: https://www.irs.gov/pub/irs-pdf/p915.pdf#page=16)

If your combined income exceeds the limit, then up to 85% of your benefit may be taxable. But in accordance with Internal Revenue Service (IRS) rules, you won’t pay federal income tax on any more than 85% of your Social Security benefits.

What are the combined income limits?

Social Security benefits are only taxable when your overall combined income exceeds $25,000 for single filers or $32,000 for couples filing joint tax returns.

If you file a federal tax return as an “individual” and your combined income is:

  • Between $25,000 and $34,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $34,000 – up to 85% of your benefits may be taxable.

If you file a “joint” return, and you and your spouse have a combined income that is:

  • Between $32,000 and $44,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $44,000 – up to 85% of your benefits may be taxable.

RMDs (Required Minimum Distributions) can be an unwelcome surprise.

Starting at age 70-1/2, you are required to start taking money out of your tax-deferred accounts, whether you need the income or not. These accounts include:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • Rollover IRAs
  • Most 401(k) and 403(b) plans
  • Most small business retirement accounts

There are precise formulas for calculating how much you have to withdraw each year based on the IRS Uniform Lifetime Table. If you miscalculate, or if you or your plan administrator fail to move the money by December 31, you could face a 50% tax penalty; there is no grace period to April 15.

NOTE: The table goes up to age 115 and beyond. You can find the IRS life expectancy table as well as an IRS worksheet for calculating RMDs here: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Simplified RMD example for illustrative purposes only:*

Let’s say you are single, age 72, and you have one qualified account—$400,000 was the value of your 401(k) plan as of December 31 last year. You divide $400,000 by your life expectancy factor of 25.6 which give you $15,625.

This is the amount that you have to take out of your 401(k), which will count as part of your AGI.

Simplified Combined Income example for illustrative purposes only:*

To continue with our simplified example, let’s say you, our 72-year-old single person above, receives $2,800 per month in Social Security ($33,600 per year) and you don’t have any other source of income besides the RMD taken from your 401(k) account as illustrated above.

Based on the combined income formula:

AGI = $15,625

+ Non-taxable interest = $0

+ Half of Social Security = $16,800

—————

Your total combined income is = $32,425   

Because you are over the combined income limit of $25,000 for an individual, but less than the $34,000 which would require 85%, you would pay taxes on 50% of your Social Security benefit.

###

At Drew Financial Private Capital, we provide retirement planning and Social Security benefit optimization, and we work in conjunction with your CPA or tax professional to help you consider taxes and how to minimize them as part of your overall retirement plan. Call us at (813) 820-0069.

* This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or penalties. The information in this article is provided for general education purposes only. Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.

Sources:

https://www.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp

https://www.investopedia.com/terms/t/taxableincome.asp

https://smartasset.com/retirement/how-to-calculate-rmd

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf


References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Mar 29
Love0

It’s Tax Season for Your 2018 Returns – Will You Owe More?

By Tax Planning

This year, the deadline to file your income tax returns is April 15, 2019.

As of early February of 2019, Time Magazine1 reported that many Americans who had already filed their 2018 taxes were shocked by their lower refunds this year likely stemming from the “Tax Cuts and Jobs Act” law that passed in December 2017, which significantly overhauled the tax code in the U.S.

“The initial batch of tax refunds in the first two weeks of the season declined an average of 8.7% from last year as of Feb. 8, according to a report from the Internal Revenue Service. 1

“Because so many pieces of the tax code shifted, it’s difficult to tell why certain people are affected differently than others, according to tax specialists and financial experts. 1

“Those most at risk for receiving less money in their tax refunds are taxpayers who itemize their deductions and have no dependents, homeowners in high tax states and employees who have unreimbursed business expenses.” 1

Retirees in lower tax brackets who don’t itemize and who live in states with low taxes will probably not be affected, or may even pay less because of the higher standard deduction, which nearly doubled.

“The rise in the standard deduction might mean that retirees can achieve roughly the same overall deductible by taking the standard amount as they could by itemizing.”2

But there is much uncertainty as people approach this tax season with trepidation about their own situation.

Healthcare rule changes when it comes to taxes.

There are a couple things you should know about healthcare expenses this tax season.

  1. You may be able to deduct more for unreimbursed allowable medical care expenses. 2

For the 2018 tax year, the IRS allows you to itemize and deduct healthcare expenses if they totaled more than 7.5% of your AGI (adjusted gross income).

As an example, if your AGI is $45,000, you can itemize and deduct healthcare expenses from the 7.5% mark, or $3,375, up to your amount spent. In this scenario, if you spent $5,375 on allowable unreimbursed healthcare expenses, you will be able to deduct $2,000 of them.

For the 2019 tax year, this percentage will revert back to 10%, so the allowable deduction will be lower going forward.

  1. The ACA is still in effect.

For retirees who don’t have health insurance or Medicare yet, know that the ACA mandate and penalty for not having health insurance is still in effect for the 2018 tax year.

The federal penalty will disappear in 2019 per the new tax code. However, some states—like New Jersey, Massachusetts and the District of Columbia—will still charge penalties. And lawmakers in Vermont and Rhode Island and other states intend to impose new state penalties in the future.3

Regardless of the law changes, many retirees are shocked to find that they owe income taxes in retirement.

For retirees who have saved up a lot of money in tax-deferred accounts like traditional IRAs or 401(k) plans, when RMDs (required minimum distributions) begin at age 70-1/2, the tax ramifications can hit hard.

  1. Many people even have to pay taxes on their Social Security income.5

RMDs are taxable as income. For individuals, if your combined income* is between $25-$34,000 (or between $32-44,000 per year for couples), you may have to pay income tax on up to 50% of your Social Security benefits. More than that, and up to 85% of your benefits may be taxable.

*The IRS defines combined income as your adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits.6

  1. When you start RMDs makes a difference.4

As you approach 70 1/2, you can choose to take your first minimum withdrawal during the year you turn 70 1/2, or you can take it by April 1 of the year after you turn 70 1/2. Your choice can have significant tax implications, because if you don’t take your initial minimum withdrawal during the year you turn 70 1/2, you must take two—and pay the resulting double dip of taxes—in the following year.

  1. Calculations for withdrawals are tricky—and doing it wrong can be costly.4

For each year, you must take at least the required minimum withdrawal by Dec. 31 of that year or owe the tax plus a 50% penalty. There is no grace period to April 15.

The calculations for withdrawals require you to take your Dec. 31 prior year tax-deferred account balances and divide by your life-expectancy figure (from Table III in Appendix B of IRS Publication 590-B) based on your age as of the end of the tax year. You may be able to aggregate balances if you have multiple accounts and take the RMD from only one account, or you may not be able to, depending on IRS rules.

  1. You may be able to delay 401(k) distributions if you are still working after age 70 1/2.4
  2. You may be able to donate an IRA required distribution directly to a qualifying charity and satisfy the taxes which would have been due.4
  3. Roth IRA accounts don’t have distribution requirements in retirement.5

However, Roth 401(k) accounts do require withdrawals starting at age 70 ½. Income tax is generally not due on a Roth 401(k) distribution, except for any untaxed portion matched by an employer.

 

 

Don’t try to do this alone, we’re here to help.

As a service to our clients, we provide retirement tax planning in conjunction with your tax professional or CPA. Let’s talk about how we can create a plan now to pay the proper amount of tax later in retirement. Call Drew Financial Private Capital in Sarasota, Florida at (813) 820-0069.

 

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or tax penalties. Please consult your tax professional, CPA, personal attorney and/or advisor regarding any legal or tax matters.

Sources:
1 “Many Americans Are Shocked by Their Tax Returns in 2019. Here’s What You Should Know.” Time.com. http://time.com/5530766/tax-season-2019-changes/ (accessed March 11, 2019).
2 “How Will the New Tax Law Affect Retirees?” Fool.com. https://www.fool.com/retirement/2019/01/07/how-will-the-new-tax-law-affect-retirees.aspx (accessed March 11, 2019).
3 “Changes to Obamacare in 2019 and the Effect on the Premium Tax Credit.” TheBalance.com. https://www.thebalance.com/changes-to-obamacare-and-insurance-4582310 (accessed March 11, 2019).
4 “Understanding the IRA mandatory withdrawal rules.” MarketWatch.com. https://www.marketwatch.com/story/understanding-the-ira-mandatory-withdrawal-rules-2015-03-09 (accessed March 11, 2019).
5 “7 New Taxes Retirees Face.” Money.usnews.com. https://money.usnews.com/money/retirement/iras/slideshows/new-taxes-retirees-face (accessed March 11, 2019).
6 “Avoid Paying Taxes on Social Security Income.” Investopedia.com. https://www.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp (accessed March 12, 2019).

 

References to J.W. Cole Advisors, Inc. (JWCA) are from prior registrations with that company. J.W. JWCA and Advisory Services Network, LLC are not affiliated entities.

Close Menu
Contact Us
Client Login
Drew Capital Group
MAIN OFFICE:
15316 N Florida Ave.
Tampa, FL 33613
Toll free: 1.833.DREWCAP
WP Popup