With 2019 Taxes delayed filing to mid year this year 2020, it seems like tax season was a constant over the last 4-6 quarters. Add to that, there was a COLA (Cost of Living Adjustment) from 2019 to 2020 but not very many changes from this year, 2020 and next tax year 2021 and it seems like a puzzle.
Not to worry, here are the few changes from 2020 to 2021, again the most popular (bolded) by a long shot had very little adjustments
Note, there are limitations on certain deductions from above as well as income oriented phase outs, please check with your tax professional for your specific sitiation.
Final of FIVE Tax Savings Ideas you can do NOW for LAST Year’s (2017) Taxes
We completed the five part series … Three were let out of the box last month …. Let’s quickly review them and then the two final parts from this month!
HSA or Health Savings Account
Our post here, speaks of the terrific opportunity to set aside Pre-Tax dollars to use now or later for medical expenses.
SEP – Simplified Employee Pension
As mentioned in our Post Here, there are very high limits of contribution, and the SEP can be done during mandated RMD’s, as well as in tangent with a 401k program, as long as the upper limits collectively of contribution are not violated.
Pre-Tax Deductible IRA
As the one of the original retirement vehicles and so vintage many forget (We Don’t!) we want to remind here in our post about the IRA – Individual Retirement Account.
Tax Savings reach back reminders from THIS month/March
Maximizing the Sales Tax Deduction
Here in our post this month, we remind everyone to be sure and maximize your Sales Tax Deduction.
From the post …
Here are a few items that may make your standard sales tax deduction drastically inaccurate and woefully low- thereby costing you tax dollars:
Bought a large Asset – Think Car or other similar item
Had more then normal personal taxed expenses – for whatever reason
Large Taxable Asset of any kind purchased
Major expense where you paid sales tax – Think Wedding, Large Party
Be sure to maximize this deduction as it looks like the new tax rules will greatly mitigate it’s use moving forward.
Medical Expense Deduction
We all some type of medical expenses each year. What is a challenge if determining what is and is not deductible.
The IRS does a terrific job with their Publication 502 of reminding and outlining what may be a deduction. In our post here, we remind of a few favorites that we find are frequently missed …
Capital Expenses for home improvements
Transportation Cost
Television
Telephone
Are possible (check to make sure) deductions we find interesting and easily forgotten.
Capital Market Comments
Finding our Footing After Getting Ahead of Ourselves
Another month and our thoughts are the exact same…so much we did not even have to change the title of this part of the review from last month… the chart is updated … looks about the same…
We think patience is needed as this will take time to digest and again find our footing.
Patience will be needed!
Here is where we are now —
For those wondering …. for now, it looks like the 200 Day Moving Average (line below our trend line) is the lower level of support … It may break, which is fine, but for now, looks like someone wants it to hold.
We will keep watch and keep you updated!
Have a Great Day! Talk to you at the end of April!
Three Tax Savings Ideas you can do NOW for LAST Year’s (2017) Taxes
With the official kick off of Tax Season occurring some time in February … we are not sure what the “Official” start to Tax Season is, but we know it is sometime in February if not earlier .. haha
In an yet to be completed series – we still have two more parts, the first Three were let out of the box this month …. Let’s quickly review!
HSA or Health Savings Account
Our post here, speaks of the terrific opportunity to set aside Pre-Tax dollars to use now or later for medical expenses. In true Reach Back Tax Savings form, this contribution can be made now for last years taxes.
Be Careful though, you must make the contribution by the regular filing deadline i.e. No extensions to get the benefit applied to last year.
As mentioned above this account does not have to be used completely and can be delayed for highly likely future medical needs.
A handy trick we have used over the years when an employer makes some type of a contribution is to remind participants that in most cases you can make up the difference and get a tax savings.
Check with your Health Insurance Carrier to see if you qualify for an HSA contribution. If you do, we highly recommend you make the contribution.
SEP – Simplified Employee Pension
This beefed up IRA is another super Reach Back Tax Saver and the contribution can be made as late as your extended filing deadline.
The SEP offsets income that make come to you as non W-2. Think consulting, temporary work, as side business that generates income to you directly or any non W-2 regular pay.
As mentioned in our Post Here, there are very high limits of contribution, and the SEP can be done during mandated RMD’s, as well as in tangent with a 401k program, as long as the upper limits collectively of contribution are not violated.
Pre-Tax Deductible IRA
As the one of the original retirement vehicles and so vintage many forget (We Don’t!) we want to remind here in our post about the IRA – Individual Retirement Account.
Notice our careful heading of Pre-Tax Deductible IRA – We are not fans of the after tax IRA (contributing and not getting a write off) and in most case recommend you pass if you cannot deduct the contribution.
There are more limits to a Pre-Tax Deductible IRA under current tax laws, again be sure to see our post for limits and restrictions, but if you qualify, it is worth the savings as this is another “Reach Back Tax” saving idea.
Like the HSA, contributions must be made by the regular filing date- extensions do not help you. So do not wait until the last minute.
Capital Market Comments
Finding our Footing After Getting Ahead of Ourselves
In a coincidental oddity, we had been putting the finishing touches on a post prior to the ugly 10% FAST FAST correction that occurred in late January and February.
In our post here, we spoke on where we may get back on trend- No one knows, of course, but simple logic of an unsustainable path was our analysis.
We think patience is needed as this will take time to digest and again find our footing.
Patience will be needed!
Here is where we are now — Our Trend line is looking pretty good – So Far.
We will keep watch and keep you updated!
Have a Great Day! Talk to you at the end of March!
The IRA or Individual Retirement Account is such a stalwart that many pass it by. While it is more difficult to qualify with today’s tax laws, frequently it is still a very good plan.
While you may make a Non-Deductible contribution (no tax write off) to an IRA, we generally only recommend a Pre-Tax Deductible IRA for easier distribution at retirement. If you cannot deduct your IRA contribution, other plans are likely better.
Individual Retirement Account – IRA
Here are the important facts:
Maximum Contribution amount of $5500 and $6500 for those age 50 or greater for 2017.
Watch out – Contributions MUST be made by the regular filing date no matter if you file an extension.
An IRA has numerous upper income limits if you are covered by another Qualified plan or if your spouse is qualified by a Qualified plan- make sure you are under these limits before contributing.
If you or your spouse are NOT covered by a Qualified plan you are free to contribute to a Pre-Tax Deductible IRA regardless of your income level.
IRA’s can accept all types of contributions from other sources such as 401k Rollovers, 501c3, SEP funds just to name a few.
IRA’s have terrific death tax stretching techniques frequently not found in institutional plans such as the 401k.
Investments within the IRA are extremely flexible allowing for terrific growth and diversification opportunity.
The most common scenario for a Pre-Tax Qualified IRA contribution is a W-2 employee with no retirement plan. If that is you this may be just the perfect vehicle to reach back and save money on last year’s tax, now!
Every penny we save is great. On a daily basis we are bombarded with buy now pay later, so while it may sound contradicting, there are less complicated ways to save and more difficult ways in the end to save.
Perils of After Tax Dollars in an IRA
After tax dollars as opposed to PRE-TAX (deductible from your income taxes) funds in and IRA are not your friend.
Upon eventual distribution you must calculate a distribution basis which will be different from your actual distribution – Easy for the IRS to confuse
You must carry the basis on your tax return- forever- IRS Form 8606 must be filed to keep up with your basis
Your heirs may also have to deal with this basis upon your death
From a really high level, it is confusing
How Do After Tax Funds get into an IRA?
There are two basis ways after tax funds enter or get added to an IRA:
After-Tax – Non-Deductible IRA contribution: (Very popular about 15 years ago)- Please save the money, but look for a better way to save it and avoid this method
401k or other Corporate Pre-Tax retirement plan is rolled into an IRA along with the after tax funds- Easy fix- Look to take the after tax distribution directly thereby separating the PRE and AFTER tax funds-
Watch rollovers that contain a Roth contributions as these are after tax and may be directed to their own separate account, once again simplifying the process
It’s not the end of the world if you have after tax funds in your IRA, great work for saving the funds … But if you have the choice, avoiding comingling after and pre-tax funds in your IRA or other similar retirement account may save complications later!
Recently we have received several questions about the Roth IRA. While many studies show only about 1 in 4 would benefit from a Roth, there are times when a Roth is the best choice. There are distinct differences in Roth’s versus other pre-tax plans which make appropiate tax planning very important when implementing a Roth contribution.
Roth Versus 401k or other Pre-tax Plans
The most important factor in determining to contribute to a Roth or not is understanding one key component:
A Roth is a bet your tax rate will be higher at retirement or in the future rather than currently!
Due to the tax benefits, all other items being equal, a Roth is most beneficial when one expects to be in a higher tax rate later or at retirement. Under normal circustances most families are in a LOWER tax bracket at retirement than during their working years, making a pre-tax plan more appropriate.
As a refresher, a Roth is an after tax contribution that grows tax deferred until used. No tax deduction up front makes for less immediate tax benefits but greater benefits during retirement or later in life when draws are taken on a tax free basis, under current tax laws.
Roth plans have less stringent RMD (Required Minimum Distribution) requirements than many other IRA/401k type plans. Pre-tax plans have mandatory distribution requirements due to their “never taxed” status. Since the contributions to funds and growth in pre-tax plans are without taxes, the IRS wants to get their taxes. 70.5 is the latest age one can defer the distributions of a pre-tax plan in most cases. Contrasting that to a Roth; Since taxes were originally paid on the contributions, distributions are not mandatory in most cases as the IRS receives no benefit under current law and thereby deems no mandatory distributions unless a Roth has been received as a beneficiary in which is it subject to similar mandatory distributions of pre-tax plans.
When a Roth is correct?
Since a Roth is a bet taxes will be higher in retirement or later in an earning career, lower income periods of employment/careers tend to be the most beneficial for making contributions. Think early in a career or on off years of regular work for most tax beneficial Roth contribution times.
In a year of negative or low income the conversion of IRA to Roth may be an optimal strategy. Under certain situations a regular IRA may be converted to a Roth showing the income from the IRA. This would essentially pull forward the taxes from the IRA to the current year, which may be beneficial during very low or even better during a negative earning year. There are very few limitations on converting a IRA to a Roth as the IRS is benefiting early from the pull forward to taxes. These conversions, done correctly are without the normal early IRA 10% penalty.
Since a Roth is after tax and growth is tax deferred, the earlier the better for maximizing a Roth’s full potential. Tax deferred growth over longer periods of time will have greater benefits than short periods of time. In fact, VERY short periods of tax deferred growth in a Roth make it MUCH less appealing, if even appropriate at all!
Roth contribution limits
Single filers cannot make a Roth contribution once their income is greater than $133k in 2017 and married filing joint cannot make a contributions with incomes greater than $196k.
Roth contribution limits in total are $5500 regular plus $1000 catch up for those greater than age 50. Some employers offer Roth 401k plans which allow higher contribution amounts similar to the $18k and $6k catch up of regular 401k plans, however mandatory RMD distributions do come with these types of plans.
Conversion from IRA as mentioned above has no limits on income or earnings to qualify. Since the IRS is receiving tax dollar early, all other things considered, the rules are much more flexible for converting an IRA and creating a tax liability earlier than may otherwise have occurred (as mentioned above, carefully timed conversions may lead to very little tax liability if other outside factors have lowered the tax exposure.)
In closing, we agree with the studies that most do not need a Roth and many may never have the option for a Roth at all. This being the case, there are always certain circumstances that may make a Roth or a Roth conversion an ideal tax planning tool to offset unique income years as mentioned above.
Knee deep in the middle of tax season we are reminded of the puzzling Roth. First rolled out as the best thing since sliced bread, after careful review … maybe not!
The Main Reason to fund a Roth
If you believe your taxes will be higher in retirement than now, you are a strong candidate for a Roth. Our experiences, and the vast studies show lower effective tax rates after retirement than while working. See below, but all other items being equal, deductions now are better.
Roth V Deductible IRA
A Roth is the opposite of a regular deducible IRA. A Roth is funded with after tax dollar and grows tax deferred. Distributions are made at retirement without taxes. An IRA is funded with pre-tax dollars, grows tax deferred and is taxable upon distribution.
We will spare you the calculations, but if your tax rates are exactly the same in pre and post retirement, a Roth and an IRA have exactly the same end result!
In closing, if you can do both, certainly do so, but if it is either or, in most cases a deductible IRA is better.
Lastly be sure you qualify for any of these as the rules have changed and continue, via income and other plan participation.
Just when you thought it was safe to put your tax stuff down, lick the wounds, and forget about it for another nine months, a pesky form may be headed your way.
Form 5498 Mailed End Of May
Form 5498 reports all contributions and rollovers to all IRA’s and SEPS. If you fall into one of these situations … it’s in the mail.
DO NOT WORRY ! This form is for reconciliation on a delayed year basis. Toss it into your tax files and you are done.
In our continuing three part series on RMD (Required Minimum Distributions) started last week here, this week we discuss a few more complicated techniques and items.
RMD Distribution Technique
While the IRS mandates our RMD amount each year (click here for RMD Calculator) they do allow us the option of lumping our various accounts together and only taking a distribution from one account if desired.
Withdraw from your most liquid and keep your best earning IRA while avoiding any withdrawal penalties may be a possibility by directing your TOTAL distribution from just one IRA. Do not forget to add them all together as that number is what the IRS wants to see us take our distributions based upon.
Keep Up With After Tax Contributions
If you have any after tax contributions in any of your qualified/IRA/RMD accounts be sure to keep up with the basis. Withdrawals from a taxable RMD account are taxed pro-rata and will not be taxed on your after tax basis. Check with your tax professional, but this basis should also be showing up on form 8606 EVERY YEAR in your tax return.
Taking Your Frist RMD Early
Uncle Sam gives us first time RMD ‘ers a break and allows that you take your first RMD as late as April of the following year. Ahhh ….. but there is a catch, if you wait/defer your first RMD, you will be faced with TWO RMD’s in this tax year. Every situation is different, so choose carefully, but be aware if you delay the max you will double up!
These are not recommendations as there are many moving parts when it comes to RMD’s. No matter what, do not forget your obligation to take your RMD and know there are multiple items you may want to consider when taking.
For many, once we reach the age of 70.5 IRA and other Qualified plans mandate a distribution so Uncle Sam can get his fair share of taxes. For some, RMD’s or Required Minimum Distributions occur even sooner.
What is an RMD ?
A Required Minimum Distribution (RMD) occurs most frequently for those turning age 70.5 with IRA or other Qualified (fancy word for never taxed $$) funds. In certain instances, as an example, if a stretch IRA has been commenced, in order to avoid taxes, any age person may be required to complete a RMD.
Why an RMD ?
Taxes, taxes, taxes… In almost all cases the underlying reason for the mandatory distribution is to pay Uncle Sam his due. Before getting too upset, remember, these funds most likely have been deferred without taxes, grown/compounded tax deferred, and are just now becoming taxable. Taxes are ONLY on the funds withdrawn … Not a Bad deal!!
Required means Required … DO NOT FORGET
Uncle Sam has the right to charge a 100% tax on funds not distributed that were in need. While there are certain workarounds if you forget, be safe, keep good records, and make sure you are taking those RMD’s in a timely fashion.
Next week, more neat techniques, time-saving ideas, and special circumstance options with our RMD series !
We as a firm are beginning the distributions now for clients, most often just moving funds from a tax deferred/qualified account to a taxable account and withholding taxes … More on this technique later.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
Background
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.
March 2018 Podcast Video, Financial Planning and Capital Market Update – By John Kvale
Hello and Welcome to our March 2018 Financial Planning and Capital Market Update!
If you are too busy to read, feel free to listen as we describe our post and thoughts in friendly podcast format.
March 2018 Video
Financial Planning Tip (s) –
Final of FIVE Tax Savings Ideas you can do NOW for LAST Year’s (2017) Taxes
We completed the five part series … Three were let out of the box last month …. Let’s quickly review them and then the two final parts from this month!
HSA or Health Savings Account
Our post here, speaks of the terrific opportunity to set aside Pre-Tax dollars to use now or later for medical expenses.
SEP – Simplified Employee Pension
As mentioned in our Post Here, there are very high limits of contribution, and the SEP can be done during mandated RMD’s, as well as in tangent with a 401k program, as long as the upper limits collectively of contribution are not violated.
Pre-Tax Deductible IRA
As the one of the original retirement vehicles and so vintage many forget (We Don’t!) we want to remind here in our post about the IRA – Individual Retirement Account.
Tax Savings reach back reminders from THIS month/March
Maximizing the Sales Tax Deduction
Here in our post this month, we remind everyone to be sure and maximize your Sales Tax Deduction.
From the post …
Here are a few items that may make your standard sales tax deduction drastically inaccurate and woefully low- thereby costing you tax dollars:
Be sure to maximize this deduction as it looks like the new tax rules will greatly mitigate it’s use moving forward.
Medical Expense Deduction
We all some type of medical expenses each year. What is a challenge if determining what is and is not deductible.
The IRS does a terrific job with their Publication 502 of reminding and outlining what may be a deduction. In our post here, we remind of a few favorites that we find are frequently missed …
Are possible (check to make sure) deductions we find interesting and easily forgotten.
Capital Market Comments
Finding our Footing After Getting Ahead of Ourselves
Another month and our thoughts are the exact same…so much we did not even have to change the title of this part of the review from last month… the chart is updated … looks about the same…
We think patience is needed as this will take time to digest and again find our footing.
Here is where we are now —
For those wondering …. for now, it looks like the 200 Day Moving Average (line below our trend line) is the lower level of support … It may break, which is fine, but for now, looks like someone wants it to hold.
We will keep watch and keep you updated!
Have a Great Day! Talk to you at the end of April!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com
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Posted in General Financial Planning, Investing/Financial Planning, Market Comments, Monthly Review, Podcast, Tax Related, Video
Tagged HSA, IRA, Market, S & P 500, SEP, Trendline