November Thinking About Taxes: Really?

autumn leaves

November thinking about taxes: In general, November is not the normal time to think about tax planning.

Tax planning is considered an annual drudgery beginning around January 15 and ending on April 15. Not something to ruin the holiday spirit.

Yet actually, there are tax-savings tasks to think about at year-end. Doing so can make the January – April slog much smoother.

Why is Planning to Save Taxes So Loathed?

But I get it – no one wants to think about taxes at the holidays, or at all. And why is that? Here are several reasons given by Roger Pine, Founder of Holistiplan, a tax analysis software for financial advisors:

1) It’s a bill for one of the biggest expenses all year (most times exceeded only by housing costs).

2) You are responsible for preparing your own bill, or hiring someone to do it for you.

3) The bill forms are a design disaster with unintelligible instructions that take years of schooling beyond a college degree to completely understand.

4) Even when the bill is done correctly, it’s difficult to see why you got charged what you did.

5) If you don’t prepare the bill, or do it wrong, there are serious legal consequences.

6) If you want a smaller bill next year, you have to know how to decipher the forms for clues. (That’s why it’s called the tax “code.”)

7) It stinks to hear afterward, “If you had only done X, you would have saved Y,” if it’s too late to do X.

As a result, how do taxes make most of us feel? Helpless and uninformed. Not the most empowering feelings from a financial standpoint.

Tax planning and preparation does not help us achieve that sense of financial wellness, or as they say in financial therapy circles, financial “self-efficacy.” 

Worth Taking the Time

In fact, November is a great time to consider a few year-end moves like:

  • Roth conversions,
  • taking capital losses or capital gains,
  • doubling up on property taxes and charitable contributions, or
  • making IRA and HSA contributions.

Sound like a lot? It could be, but it could also save hundreds or thousands on April 15. If you have a CPA and/or CFP®, all you have to do is gather a few documents and let them do the rest. Gather these:

1) Your September or October brokerage statements (the whole statement, not just screenshots);

2) Your latest paystubs, Social Security statements, or other items showing regular income; and

3) Any large one-time transactions that happened or will happen this year, like a real estate closing statement or estimate.

After reviewing these, be ready to answer more specific questions, such as any changes in your deductions. Don’t worry about exact figures – it’s ok to estimate right now.

Why is November So Important for Tax Planning?

One important goal is to make sure you don’t end up with a taxable income figure that’s just barely over some kind of threshold or bracket. This can cost a lot more than necessary.

An extreme but could-easily-happen example: A couple in their 60s with one spouse still working and one over 65 on Medicare reported $195,000 in 2021 modified adjusted gross income (MAGI). That was $1,000 over the threshold of $194,000 for the first (of 6) Medicare surcharge brackets. The additional $1,000 in income cost the couple an additional $936 in 2023 Medicare premium surcharges. That’s a marginal tax rate of 93.6%!

If it’s year-end and you determine that you’re close to the edge of a threshold, you have a few weeks to strategize. A few easy moves:

  • If you’re employed with a 401K, or you have a deductible IRA, make sure you have maxed out your contributions. If you turned 50 this year, remember you now get an extra catch-up contribution.
  • If you have a Health Savings Account, make sure you have maxed out your contributions. If you turned 55 this year, you now get an extra $1000 catchup contribution.
  • If you have a business, can you push income to January or accelerate expenses into December?
  • If you are over 70 1/2, you can make a Qualified Charitable Distribution (QCD) from your IRA. (more info here: https://www.hollydonaldsonfinancialplanner.com/keep-charitable-deduction/)
  • Instead of giving cash to charities, you can give them an asset (like stock) with a large capital gain. Depending on whether you itemize, you might get a deduction instead of showing the gain.
  • If you believe you are in a lower tax bracket now than you will be in retirement, and additional income won’t bump you up against any of the other thresholds, consider a Roth or partial Roth conversion. (But do it soon. It can take several weeks to accomplish, depending upon which company holds your accounts.)

Based upon a November estimate of your income and deductions, your professional can begin to strategize in other ways, too. (Schedule a 30-minute call with us if you’d like to talk more about tax planning or other money topics: https://bit.ly/3GWZNrc)

Being proactive on taxes can be a vaccine against stress. Imagine feeling more in control in April once you see how much you helped shrink your tax bill at year-end.

If you haven’t wanted to think about taxes in November before, it might be worth your while to think again.

Continue ReadingNovember Thinking About Taxes: Really?

Fourth Quarter Tax Tip: Check Your Fund Distributions

Fourth quarter tax tip: If you hold any mutual funds in non-retirement, taxable accounts, now is the time to begin checking on “projected capital gain distributions.”

What are projected capital gains distributions?

When mutual funds sell securities for capital gains, they don’t pay taxes on them. Their shareholders do. The funds pass the gains through to shareholders each year through reporting them on Form 1099. For many shareholders, the 1099 gains come as a surprise tax bite. The value of the fund may not have increased at all in the past year, but yet, they still have to pay tax on capital gains.

Why are these important?

Because of 2022’s roller coaster market ride, many funds are going to show larger-than-normal capital gains, regardless of what happens to their value between October and December. For the funds’ shareholders, that could mean lots of extra taxes. Even if you bought the fund mid-year, you may still get a capital gain distribution.

What To Do About Large Distributions

You can look up your fund’s projected distributions at the fund’s website, or, use this site to take you directly to your fund(s)’ relevant page: https://mutualfundobserver.com/discuss/discussion/60074/2022-year-end-capital-gains-distribution-estimates

More helpful information on the nature of capital gain distributions is provided by this article, too:

https://humbledollar.com/2019/11/the-unwanted-payday/

If you would like help in the fourth quarter – figuring out 2022 taxable income while there is still time to make adjustments before year-end, schedule a tax planning appointment with your CPA or schedule a 30-minute call to talk with us here: https://go.oncehub.com/HollyPThomas.

Continue ReadingFourth Quarter Tax Tip: Check Your Fund Distributions

Take a Second Look at Your 2020 Return

Since your 2020 taxes are fresh on your mind, what could you be doing now to minimize 2021’s bill? May is a good time to check on 4 areas:

– whether you got proper credit for your IRA contributions;

– whether you can save money by looking closely at your Schedule B dividends;

– scrutinizing business expenses if you file Schedule E; and

– using your tax return to make a rough guesstimate of your total annual spending needs.

Are your IRAs correct at the IRS?

If you have an IRA or HSA (Health Savings Account), May is the month when you will likely receive a Form 5498. What’s a Form 5498? In short, a statement from your financial institution showing what they told the IRS about your contributions this year. (See last week’s blog post on Form 5498 for more information.) Make sure that what they told the IRS is correct, especially the contribution year. You might have made a contribution in March of 2021 intended to be a contribution for 2020. Make sure the 5498 got that right.

Are your dividends ordinary or qualified?

Take a look at your Schedule B. Dividends, whether from individual stocks, preferred stocks, or mutual funds, can be either “qualified” or “ordinary.” Qualified dividends qualify for generally lower tax rates – 0%, 15%, or 20%, depending upon how much other income you have. Ordinary dividends do not qualify for lower rates – they are taxed just like your earnings, which enters the 22% bracket at $40,525 in income for singles/$81,050 for married filing jointly.

If you find that a lot of your dividends are ordinary, it might be worthwhile to examine replacing the underlying investment(s) with a similar one that generates qualified dividends.

Have you taken all your business deductions?

One example of an expense that’s often missed is a consultation fee with a personal financial planner where your business is discussed. Talk to your accountant about the deductibility of a portion of that fee. Are there other expenses you incurred on a personal basis which also helped your business? Keep an eye out for those throughout 2021.

Take a shortcut to figuring spending

Many people do not like to track their spending – that’s not unusual. However, when it comes time to figure out how much you need to maintain your lifestyle in retirement, it’s helpful to have a spending figure in mind.

One shortcut is SI – Savings + Borrowing.

First, take your “Adjusted Gross Income” (AGI) from your tax return.

Then, subtract the amount you paid in tax. (Note – it’s not the amount you owed, but the “Total Tax” you paid for the whole year.)

This gives a rough amount of SI = Spendable Income.

Next, look at your non-retirement savings and investment balances for December 31 of each year and calculate the difference. (Your retirement account contributions are already accounted for in your AGI.) This is your Savings.

If your balances went up, subtract that from your spendable income (i.e., you did not need all your income for spending). If they went down, add to it.

Finally, look at your debt balances for December 31 of each year and calculate the difference. This difference is your Borrowing.

If the balances went up, add that to your SI (i.e., you needed more than you made for your spending). If they went down, then subtract.

We’re happy to help

Some people prefer to delegate tax planning to someone else. We are glad to help. Ask us for an encrypted link where your tax return can be sent as a password-protected PDF. The next time we get together, we will take a look at these and other ways to reduce your 2021 tax bill.

For a short online course teaching what’s necessary and what’s not for retirement readiness, see our Simple Finance Retirement Readiness Course page: https://bit.ly/3p3BkXE

Continue ReadingTake a Second Look at Your 2020 Return

Fourth Quarter Tax Help – Check Your Fund Distributions

Fourth quarter tax topics. If you hold any mutual funds in non-retirement accounts, now is the time to begin checking on “projected capital gain distributions.”

What are projected capital gains distributions?

When mutual funds sell securities for capital gains, they don’t pay taxes on them. Their shareholders do. The funds pass the gains through to shareholders each year through reporting them on Form 1099. For many shareholders, the 1099 gains come as a surprise tax bite. The value of the fund may not have increased at all in the past year, but yet, they still have to pay tax on capital gains.

Why are these important for 2020?

Because of 2020’s roller coaster market ride, many funds are going to show larger-than-normal capital gains, regardless of what happens to their value between October and December. For the funds’ shareholders, that could mean lots of extra taxes. Even if you bought the fund mid-year, you will still get a capital gain distribution.

What To Do About Large Distributions

You can look up your fund’s projected distributions at the fund’s website.

More helpful information is provided by these articles:

https://www.advisorperspectives.com/commentaries/2020/09/11/open-season-capital-gains

https://humbledollar.com/2019/11/the-unwanted-payday/

If you would like help in the fourth quarter – figuring out your 2020 taxable income while you still have time to make adjustments before year-end, schedule a tax planning appointment with your CPA (but after October 15, the final extension deadline for this year) or schedule a 30-minute call to talk with us here: https://go.oncehub.com/HollyPThomas.

Continue ReadingFourth Quarter Tax Help – Check Your Fund Distributions

Autumn and Taxes – Wha….? Whyyyyy??

Autumn is not the time we normally think about taxes. Taxes are generally considered an annual drudgery that begins around February 1 and ends on April 15 (or in 2020, July). Yet actually, there are tax-savings tasks to think about year round.

But I get it – no one wants to think about taxes year round. And why is that? Here are a few reasons, as stated by Roger Pine, Founder of Holistiplan, a tax analysis software for financial advisors:

1) It’s an invoice for the biggest expense all year.

2) You are responsible for preparing your own invoice, or hiring someone to do it for you.

3) The invoice forms are a design disaster with unintelligible instructions that take years of schooling beyond a college degree to completely understand.

4) Even when the invoice is done correctly, it’s difficult to see why you got charged what you did.

5) If you don’t do the invoice, or do it wrong, there are serious legal consequences.

6) If you want a smaller invoice next year, you have to know how to decipher the invoice forms for clues. (That must be why it’s called the tax “code.”)

7) It stinks to hear afterward, “If you had only done X, you would have saved Y,” if it’s too late to do X.

How do taxes make most of us feel? Helpless and uninformed. Not the most empowering feelings from a financial standpoint. Taxes are not helping us achieve a sense of financial wellness, or as they say in financial therapy circles, financial “self-efficacy.” 

What can you do this time of year? Autumn is a great time to consider a few year-end moves like: Roth conversions, taking capital losses or capital gains, doubling up on property taxes and charitable contributions, or making IRA and HSA contributions.

Sound like a lot? It could be, but it could save you hundreds or thousands in taxes. If you have a CPA and/or CFP®, all you have to do is gather a few documents and let them do the rest. Gather these:

1) Your September or October brokerage statements (the whole statement, not just screenshots);

2) Your latest paystubs, Social Security statements, or other items showing regular income; and

3) Any large one-time transactions that happened or will happen this year, like a real estate closing statement or estimate.

After reviewing these, you should receive several questions, such as any changes in your deductions. Don’t worry about exact figures – it’s ok to estimate right now. Based upon an autumn estimate of your 2020 income and deductions, your professional can begin to strategize. With an autumn check-in, it leaves you both plenty of time to nail down exact numbers and execute any recommendations before year-end.

Being proactive on taxes can be a vaccine against stress. It can reduce financial complexity in your life. Feelings of greater control can arise once you see how to make your bill much smaller. If you haven’t thought about taxes in autumn before, it might be worth your while to think again.

Continue ReadingAutumn and Taxes – Wha….? Whyyyyy??