Vanishing Deductions

Money-Saving Tips

Beginning with the 2019 tax season, filing income-tax returns will no longer be “business as usual.” Some people may be happy to see their 2018 tax return streamlined and receive a higher refund to boot. However, others may lament lost deductions that had previously helped reduce their tax liability.1

The good news is that the standardized deduction will nearly double. Individual filers will receive a $12,000 deduction while married couples will get $24,000. However, in exchange for the simplicity, many itemized deductions will go away. The following are some of the more common ones.2

  • Dependent exemption — Taxpayers will no longer be able to subtract $4,050 from their taxable income for each dependent they claim. The newly doubled $2,000 child credit may help offset the loss of that deduction for some, but not for those whose children are in college.
  • SALT — Deductions for state and local taxes (SALT) will be capped at $10,000. This will mostly affect those who live in areas with high property tax areas, such as in South Florida, New York and
  • Mortgage interest deduction — Deductible interest will be capped for new mortgages valued at $750,000, down from $1 million.
  • Miscellaneous itemized deductions — Expenses such as unreimbursed employee-education expenses, tax-preparation services, investment fees and professional dues, among others, are no longer deductible.
  • Moving expenses — This deduction is completely eliminated for everyone except members of the armed forces.
  • Natural disasters — In the past, expenses not reimbursed by insurance or other relief programs could be deducted on your tax return. Now this deduction is available only to taxpayers in a presidentially designated disaster zone, typically made on a county-by-county basis.
  • Alimony — These payments are no longer deductible from federal taxes for any divorce that is executed after Dec. 31, 2018. However, there is no change in the tax treatment of alimony payments for divorces finalized before 2019.3

The content provided in this newsletter is designed to provide general information on the subjects covered. Neither our firm nor its agents or representatives may give tax advice. Be sure to speak with a qualified professional about your unique situation.

1 Maryalene LaPonsie. US News & World Report. Feb. 9, 2018. “10 Tax Deductions That Will Disappear Next Year.” https://money.usnews.com/money/personal-finance/taxes/articles/2018-02-09/10-tax-deductions-that-will-disappear-next-year. Accessed May 29, 2018.

Ibid.

3 Bill Bischoff. Marketwatch. Jan. 26, 2018. “New tax law eliminates alimony deductions — but not for everybody.” https://www.marketwatch.com/story/new-tax-law-eliminates-alimony-deductions-but-not-for-everybody-2018-01-23. Accessed May 29, 2018.

Deducting Home-Loan Interest

Planning Tip

The new tax law still allows a deduction for interest on a home equity loan, line of credit or second mortgage as long as the loan is used to buy, build or substantially improve the taxpayer’s primary or second home. Specifically, the interest is deductible only if the loan meets all three of the following criteria:1

  • The debt is secured by the underlying residence
  • The total of the refinanced debt is not greater than the cost of the residence
  • The proceeds are used to improve or expand the residence

However, the applicable loan is subject to a new $750,000 debt limit ($375,000 for a married taxpayer filing a separate return). This limit applies to the combined total of loans used to buy, build or improve the taxpayer’s main home and second home. If you have an existing home equity loan that does not qualify under these three criteria, the interest may no longer be deducted.2

 The content provided in this newsletter is designed to provide general information on the subjects covered. Neither our firm nor its agents or representatives may give tax advice. Be sure to speak with a qualified professional about your unique situation.

 1 IRS. Feb. 21, 2018. “Interest on Home Equity Loans Often Still Deductible Under New Law.” https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law. Accessed May 29, 2018.

2 Ibid.  

Content prepared by Kara Stefan Communications.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Filing Your 2018 Tax Return

Next year, taxes must be filed on or before April 15, 2019. For the last few years, that iconic date was extended because it fell on a legal holiday or a weekend, but it lands on a Monday in 2019.1 While there’s been significant debate regarding how the new tax law will affect Americans across the income scale, we should then have a better idea of how we may be personally impacted by the changes.

Highlights of the new tax law include:2

  • Lower individual tax rates
  • Increased standard deduction ($12,000 single; $24,000 married filing jointly)
  • Increased child tax credit ($2,000)
  • Elimination of dependent and personal exemptions
  • Elimination of some itemized deductions
  • $10,000 cap on the combined deduction for state income taxes, sales and local taxes, and property taxes
  • 20 percent deduction for “pass-through” entities (e.g., sole proprietorship, partnership, S corps)

In light of these changes, it’s a good idea to conduct a midyear review to see if there are ways to take advantage of the new changes or discover any potentially negative situations. If you’re not sure how you might be affected, consult with a tax professional. It may be worth reviewing your 2017 return to consider what new rules may affect your unique situation.

The content provided in this newsletter is designed to provide general information on the subjects covered. Neither our firm nor its agents or representatives may give tax advice. Be sure to speak with a qualified professional about your unique situation.

1 TimeAndDate.com. April 24, 2018. “Tax Day in the United States.” https://www.timeanddate.com/holidays/us/tax-day. Accessed May 29, 2018.

2 TurboTax. April 24, 2018. “How Will Tax Reform Affect My Refund Next Year?” https://blog.turbotax.intuit.com/tax-reform/how-will-tax-reform-affect-my-refund-next-year-33055/. Accessed May 29, 2018.

 

Wealth and Income: Some Tax Implications

What do Michael Bloomberg, Arnold Schwarzenegger and Mitt Romney all have in common? When they held public office, each accepted only $1 in annual compensation. President Trump also has chosen to forgo his pay, donating his first-quarter salary – minus an amount for taxes – to the National Parks Service.1

Taxes were deducted from the donation due to IRS rules regarding donating income. According to the rules, if you accept income, you are generally responsible for the income taxes levied on it, regardless of the fact that you may then turn around and gift it. You may be able to claim the gift as a tax deduction, but the deduction is against the taxes owed on that income. President Obama worked around this rule by having the reward money for his Nobel Peace Prize paid out directly to charity so he bore no tax liability on those funds.2

Clearly, if you’re going to be generous with wages or assets, it takes considerable planning ahead to help minimize your tax liability. Indeed, the same goes for the federal estate tax on wealth valued at more than $5.49 million, to which one White House adviser allegedly remarked, “Only morons pay the estate tax.” In other words, those who are subject to the tax tend to deploy strategic plans to minimize or avoid it altogether.3

Perhaps proactive tax planning is one of the reasons revenues from the current 40 percent federal estate tax have been plummeting, dropping from $25 billion in 2008 to $17 billion in 2015.4 Then again, in 2008 the federal estate tax rate was higher (45 percent) and applied to a lower threshold ($2 million).5

As we move toward the end of 2017, tax reform is in focus for a couple of reasons. First, President Trump is working to make good on his campaign promise to cut taxes; that’s no small feat given the revenues needed to support ambitious infrastructure and military initiatives.

Second, as we approach year-end, it’s time to consider your income tax bill for 2017 and any strategies you can deploy to help minimize your taxable income. It’s a good idea to work with an experienced tax professional familiar with your unique needs and financial situation. Remember, when it comes to taxes, a strategic plan can make a significant difference. We can refer you to a tax professional; just give us a call.

Content prepared by Kara Stefan Communications.

1 Robert W. Wood. Forbes. April 4, 2017. “Trump Donates Presidential Pay, Reminding Us IRS Rules Apply to Everyone.” https://www.forbes.com/sites/robertwood/2017/04/04/trump-donates-presidential-pay-reminding-us-irs-rules-apply-to-everyone/#2400d9e02824. Accessed Aug. 30, 2017.
2 Ibid.
3 Robert W. Wood. Forbes. Aug. 30, 2017. “Estate Tax Repeal Is Not Just For Morons.” https://www.forbes.com/sites/robertwood/2017/08/30/estate-tax-repeal-is-not-just-for-morons/#2cc8df70701b. Accessed Aug. 30, 2017.
4 Robert Frank. CNBC. Aug. 29, 2017. “‘Only morons pay the estate tax,’ says White House’s Gary Cohn.” https://www.cnbc.com/2017/08/29/only-morons-pay-the-estate-tax-says-white-houses-gary-cohn.html. Accessed Aug. 30, 2017.
5 Julie Garber. The Balance. June 8, 2017. “Exemption From Federal Estate Taxes: 1997-2017.” https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630. Accessed Aug. 30, 2017.

This information is not intended to provide tax or legal advice. Be sure to speak with a qualified professional about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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IRS News to Know

As we head into the final quarter of 2017, it’s a good idea to stay cognizant of any tax issues that may affect your finances come April 2018. Now is the time to review your investments and income distribution plans to help ensure you don’t trigger additional taxes or penalties later on.

We can help retirees create income distribution strategies that provide a reliable stream of income. As some income-generating strategies could increase your tax liability in a single year, we recommend clients also consult with an experienced tax professional to understand issues regarding their specific situation. We are happy to make a recommendation from our network of professional colleagues.

One common income distribution strategy is to transfer assets from an employer-sponsored 401(k) plan to a self-directed IRA. This move can give some individuals more investment choices. The IRS encourages eligible taxpayers to consider requesting a direct trustee-to-trustee transfer, rather than doing a rollover. However, if you do not conduct a direct trustee-to-trustee transfer, it’s important to understand the rules related to personally withdrawing money from one account and depositing it to another. The IRS allows a 60-day window to do this without penalty. If an individual misses that deadline, he may qualify for a waiver to extend the deposit window. The IRS will generally allow an extension for one or more of 11 circumstances, including the death of a family member or because the taxpayer becomes seriously ill. Furthermore, a taxpayer can use a new self-certification procedure to apply for the waiver of the 60-day period to avoid possible early distribution taxes.1

Speaking of IRAs, one income distribution strategy that early retirees may be able to take advantage of is IRS Rule 72(t). Normally, someone who retires before age 59 ½ would be subject to a 10 percent penalty on early withdrawals from a retirement plan. However, Rule 72(t) waives this penalty for individuals who make a series of “substantially equal periodic payments” for five years or until the retirement account owner reaches age 59 ½ – whichever is longer. The allowable amount is based on life expectancy and must be calculated using one of the IRS approved methods.Since every situation is different, individuals are encouraged to consult with a qualified tax professional before making any decisions.

A 2011 rule from the IRS relates to the “portability deadline.” This is the rule that allows a surviving spouse to absorb any unused portion of a deceased spouse’s estate tax exemption amount. The surviving spouse must file an estate tax return on behalf of the decedent in order to qualify for the portability rule, even if the estate is under the filing threshold and typically would not be required to file an estate tax return. A new IRS guideline grants a permanent automatic extension of the time to file an estate tax return just to claim portability, extending it from nine months to up to two years after the decedent’s death.3

Also, as a reminder, 2017 is the first tax year in which taxpayers age 65 and over are subject to the same 10 percent threshold of adjusted gross income (AGI) for deducting unreimbursed medical expenses as all other taxpayers (in previous years the threshold was 7.5 percent for those 65 and over). Eligible medical and dental expenses must be over 10 percent of the taxpayer’s 2017 AGI in order to claim the deduction.4

Content prepared by Kara Stefan Communications.

1 IRS. April 19, 2017. “2016 Tax Changes.” https://www.irs.gov/newsroom/2016-tax-changes. Accessed Aug. 14, 2017.

Investopedia. 2017. “Rule 72(t).” http://www.investopedia.com/terms/r/rule72t.asp. Accessed Aug. 18, 2017.

3 Michael Kitces. Nerd’s Eye View. June 28, 2017. “IRS Extends Portability Deadline (Retroactively) Under Rev. Proc. 2017-34.” https://www.kitces.com/blog/rev-proc-2017-34-automatic-extension-deadline-form-706-portability-dsue-amount/?utm_source=FeedburnerRSS&utm_medium=feed&utm_campaign=Feed%3A+KitcesNerdsEyeView+%28kitces.com+%7C+Nerd%27s+Eye+View%29. Accessed Aug. 18, 2017.

4 IRS. Dec. 15, 2016. “Questions and Answers: Changes to the Itemized Deduction for 2016 Medical Expenses.” https://www.irs.gov/individuals/questions-and-answers-changes-to-the-itemized-deduction-for-medical-expenses. Accessed Aug. 14, 2017.

The content provided in this blog is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice.

Investing involves risk, including the potential loss of principal.  Any references to reliable income generally refer to fixed insurance products, never securities or investment products.  Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Tax-Deferred or Tax-Exempt? Potential Benefits to Having Both

Over the years, you may have heard it’s good to have different “kinds” of money as you head into retirement. A financial advisor may recommend a combination of tax-deferred and tax-exempt financial products, diversifying your money to help take advantage of the tax benefits both types of products provide.

What many people don’t understand, however, is why it’s important to take advantage of the different types of financial products available. What are the potential benefits of utilizing both tax-deferred and tax-exempt products? First, let’s take a look at the difference between the two.

A tax-deferred financial product means simply that: You owe taxes on the money, but those taxes have been deferred or pushed back. You haven’t paid any taxes on the contributions or the growth that’s occurred over the life of the product. When you take money out of it, those distributions are 100 percent taxable at ordinary income rates.1 Withdrawals taken prior to age 59 1/2 may also be subject to an additional 10 percent federal tax.

What types of financial products are tax-deferred? A 401(k), 403(b) or traditional IRA are all examples of tax-deferred investment products. Growth in some types of annuities or life insurance policies may also be tax-deferred.2

Tax-exempt means no taxes are owed on qualified distributions made from the financial product. A Roth IRA or Roth 401(k) is a good example of a tax-exempt account. Contributions to a Roth are made with money that’s already been taxed.3

So why can it be beneficial to have a mix of tax-deferred and tax-exempt financial products in your financial strategy? Mostly, it gives you flexibility in how you take distributions during your retirement. For example, you might use distributions from tax-deferred products to pay for your fixed expenses every month. If you have expenses that are outside of your “normal” spending — such as a vacation or a large purchase — you could use money from a tax-exempt product and not incur a taxable event.

While it could be tempting to go heavy in tax-exempt financial products when you’re establishing a financial strategy, using a tax-deferred product may put more money in your pocket in the long run. Many people are in a lower tax bracket during their retirement years. If that is the case, you may pay less taxes on distributions during retirement than if you were paying taxes on your contributions up front while still working.4

What’s the right mix of tax-deferred and tax-exempt financial products for you? Every situation is unique. If you’re not sure what types of financial products you should be using, give us a call. We can look at your existing financial strategy and make recommendations based on your specific circumstances. We can also help you determine if life insurance and annuities could play a part in your tax-efficient strategy. Our mission is to help you plan for the best retirement possible.

Content prepared by Amy Ragland

1 The Balance. “What is a Tax-Deferred Investment Account?” https://www.thebalance.com/tax-deferred-savings-account-and-investments-2388988. Accessed May 31, 2017.

2 Prudential. “Tax Strategies: Tax-Deferred Annuities.” http://www.prudential.com/view/page/public/12609?param=12624. Accessed June 1, 2017.

3 Teresa Mears. U.S. News & World Report. Dec. 19, 2014. “7 Retirement Savings Accounts You Should Consider.” http://money.usnews.com/money/personal-finance/articles/2014/12/19/7-retirement-savings-accounts-you-should-consider. Accessed May 31, 2017.

4 Arthur Pinkasovitch. Investopedia. “Retirement Savings: Tax-Deferred or Tax-Exempt?” Updated April 5, 2017. http://www.investopedia.com/articles/taxes/11/tax-deferred-tax-exempt.asp. Accessed May 31, 2017.

We are not permitted to offer, and no statement contained herein shall constitute, tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Taxes and Retirement Planning

The White House recently introduced what it billed the “biggest tax cut” in U.S. history. While a presidential tax proposal is not likely to get passed without significant changes, the fact that Republicans dominate both chambers of Congress suggests 2017 may well be a year in which significant tax reform is engineered.1

One thing should be perfectly clear: The U.S. tax code is highly complicated.2 There may not be anyone who understands it all off the top of their head. CPAs and tax professionals must conduct thorough due diligence to tailor strategies and complete returns for taxpayers with complex situations.

Because of this, we recommend our clients who require tax advice work directly with an experienced and qualified tax professional. However, we also believe financial and tax professionals should not work in a vacuum, and therefore are more than happy to work in concert with our clients’ tax advisors to help align their financial strategy with their tax situation.

This is particularly important when it comes to retirement planning, because you want to save as much as possible before you retire, which may include tax-deferred financial vehicles such as a 401(k) or IRA, but you don’t want to get hit with a big tax bill on untaxed earnings once you’re in retirement.3 This is a delicate balance that requires experience and collaboration from both a financial professional and a tax professional.

One tax issue each of us deals with is the federal income tax rate. Our annual earnings determine which federal tax bracket we land in, but that tax bracket isn’t the tax rate applied to our entire income. Instead, we pay every tax rate on income blocks up to our individual bracket. Like many things about filing taxes, this can be highly confusing for many people.

It may be easier to understand this through a hypothetical example. Let’s say Joe, who is single, had $92,000 of taxable income in 2016, which landed him in the 28 percent tax bracket. This is how his total tax is calculated:4

  • He pays 10% on the first $9,275 (tax of $927.50)
  • He pays 15% on the next $28,375 (tax of $4,256.25)
  • He pays 25% on the next $53,500 (tax of $13,375)
  • He pays 28% on the final $850 (tax of $238)
  • Total tax bill of $18,796.75

As you can see, Joe doesn’t pay 28 percent on the full amount of his taxable income; his taxable amount progresses through each income bracket and their respective tax rates until it reaches his total taxable income for the year. Therefore, a person who falls in the highest tax bracket is only paying that higher tax rate on a portion of his or her income.

This is an important distinction to remember as the U.S. works toward tax reform. On one hand, reducing the number of tax rates from seven to three (Trump’s proposal: 10 percent, 25 percent, 35 percent)5 looks to simplify tax filings, but for many people, this could mean paying a higher tax rate on larger blocks of income. Let’s take the hypothetical example of Joe again, using the same income brackets (to date, no tax rate income brackets have been proposed). Here’s how Joe’s scenario might break down:

  • He pays 10% on the first $9,275 (tax of $927.50)
  • He pays 25% on the next $81,875 (tax of $20,468.75)
  • He pays 35% on the final $850 (tax of $297.50)
  • Total tax bill of $21,693.75

This example simply illustrates how a progressive income tax works. Obviously, it doesn’t take into consideration credits and deductions, which vary substantially among taxpayers. Nor does it include payroll taxes.6

Federal income brackets and their respective tax rates are the most fundamental issues Americans are subject to when filing taxes. But as you can see, there’s nothing straightforward about them. This is worth remembering as tax reforms continue to be proposed and debated moving forward: Nothing concerning taxes is simple, and there are usually layers that impact us that the average layperson isn’t likely to see.

Content prepared by Kara Stefan Communications

1 Fox News. April 26, 2017. “Mnuchin vows ‘biggest tax cut’ in US history, confirms plan to slash business rate.” http://www.foxnews.com/politics/2017/04/26/mnuchin-vows-biggest-tax-cut-in-us-history-confirms-plan-to-slash-corporate-rate.html. Accessed May 5, 2017.

2 Vanessa Williamson. The Atlantic. April 18, 2017. “How the Tax-Filing Process Confuses Americans about Tax Policy.” https://www.theatlantic.com/business/archive/2017/04/paying-taxes-confusion-policy-1040/523287/. Accessed May 5, 2017.

3 Fidelity. March 1, 2017. “How to invest tax efficiently.” https://www.fidelity.com/viewpoints/investing-ideas/tax-strategy. Accessed May 5, 2017.

4 Tina Orem. Nerd Wallet. Sept. 8, 2016. “2016 Federal Income Tax Brackets.” https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/. Accessed May 5, 2017.

5 Martha C. White. NBC News. May 2, 2017. “Even Families Making $100K Won’t Be Better Off Under New Tax Plan.” http://www.nbcnews.com/business/taxes/even-families-making-100k-won-t-be-better-under-new-n753941. Accessed May 5, 2017.

6 NPR. 2017. “On Tax Day, an Economist Outlines How the Payroll Tax Works.” http://nhpr.org/post/tax-day-economist-outlines-how-payroll-tax-works#stream/0. Accessed May 5, 2017.

These hypothetical examples are for illustrative purposes only. This information is not intended to provide tax advice. Be sure to speak with qualified professionals about your unique situation.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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