Tax

Staying Organized and Financial Planning Are Keys to Success

11 tactics to make this your best year ever

Key Takeaways:

·         The beginning of a new year is a particularly good time for you and your family to review finances and to update financial plans.

·         Staying organized and planning finances are lifelong processes, and the keys to reaching and maintaining financial success.

·         Sensible financial management is more than budgeting and saving for retirement. It’s about being ready to handle a lifetime of financial challenges, needs and changes.

Happy New Year to you and your family!

The beginning of a new year is a good time to review your finances and update financial strategies and plans. This year is especially important as financially challenging times continue for many individuals and businesses, rich and poor, big and small.

Even if the 2017 Tax Cut and Jobs Act (TCJA) had not been passed, most would say that managing their personal finances is more complicated and more important than ever before. We’re living longer, but saving proportionately less. Many of us feel less secure in our jobs and homes than we did in the past. We see our money being drained by the high cost of housing, taxes, education and health care. We worry about the future, or unfortunately, in too many cases, we simply try not to think about it.

More than simply budgeting and saving

Sensible financial management means much more than budgeting and putting money away for retirement. It means being equipped to handle a lifetime of financial challenges, needs and changes; figuring out how to build assets and staying ahead of inflation; taking advantage of deflation; and choosing wisely from a constantly widening field of savings, investment and insurance options. When it comes to finances, you are faced with more pressures and more possibilities than ever before.

The good news is that as complex as today’s financial world is, there’s no real mystery to sound personal money management. What you need is a solid foundation of organization and decision-making, plus the willingness to put those two things into action. I’ll talk about those core principles in just a minute.

Effective financial management involves certain procedures that you don’t usually learn from your parents or friends—and unfortunately they aren’t currently taught in our schools. It’s more than just a matter of gathering enough information and then making a logical decision. In fact, for many people, the constant barrage of economic news, fragmented financial information and investment product advertisements is part of the problem. Information overload can be a major obstacle to sorting out choices and making wise decisions.

The Financial Awareness Foundation, a California-based not-for-profit organization developed a simple personal financial management system that’s designed to help you save time and money, while providing a systematic approach to help you better manage finances. The key is to stay organized, remain aware of money issues, and make deliberate choices about ways to spend, save, insure and invest your assets. That’s so much smarter than simply following your emotions or “going with the flow.”

Getting organized

1. Paperwork. Everyone has primary financial documents—birth certificates, marriage certificates, current year net-worth statement, retirement plan beneficiary statements, deeds of trust, certificates of vehicle title, last three tax returns, gift tax returns, insurance policies, wills, trusts, powers of attorney, passwords, digital paperwork, etc. Organize this information and keep it in a safe central location that ties into your paper and digital filing systems.

2. Net Worth. Know where you stand by inventorying what you own and what you owe. The beginning of a new year is an excellent time to do this, but you can do it any time. Just be sure to do this personal inventory at least once a year.

3. Cash Flow. Gain control of cash flow by spending according to a plan, not spending impulsively.

4. Employment Benefits. Make sure you fully understand employee benefits (the “hidden paycheck”) at your company. Maximize any dollar amounts that your employer contributes toward health insurance, life insurance, retirement plans and other benefits.

Financial planning

5. Goal Setting. Before you begin the financial planning process, ask yourself what’s really important to you financially and personally. These are key elements of planning for your future; they affect your options, strategies and implementation decisions.

6. Financial Independence and Retirement Planning. A comfortable retirement, perhaps at an early age, is one of the most common reasons people become interested in financial planning. Determine how much money is a reasonable nest egg to reach and maintain your financial independence. Then work with your advisors to determine the right strategy to make that goal a reality.

7. Major Expenditures Planning. A home, a car, and a child’s or grandchild’s college education—these are all big-ticket items that are best planned for in advance. Develop sound financial strategies early on for effectively achieving the funding you need for those big bills down the road.

8. Investments Planning. For most of us, wise investing is the key to achieving and maintaining our financial independence as well as our other financial goals. Establish and refresh investment goals, risk tolerance and asset allocation models that best fit your situation.

9. Tax Planning. Your financial planning should include tax considerations, regardless of your level of wealth. Proactively take advantage of opportunities for minimizing tax obligations.

10. Insurance Planning. Decide what to self-insure and which risks to pass off to insurance companies—and at what price you’re willing to do so.

11. Estate Planning. Develop or update your estate plan. If you get sick or die without an up-to-date estate plan, the management and distribution of assets can become a time-consuming and costly financial challenge for loved ones and survivors.

It is estimated that over 120 million Americans do not have up-to-date estate plans to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. Estate and financial planning is not just for the wealthy; it is an important process for everyone. With advance planning, issues such as guardianship of children, management of bill-paying and assets—including businesses and practices—care of a child with special needs or a parent, long-term care needs, wealth preservation, and distribution of retirement assets can all be handled with sensitivity and care and at a reasonable cost.

Conclusion

Staying organized and planning wisely are the keys to financial success. Short of winning the lottery or inheriting millions, few people can attain and maintain financial security without some forethought, strategy and ongoing management. The beginning of a new year is an excellent time for you and your family to review finances and update financial plans.


Let’s have a great 2019!

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Optimizing Your Capital Gain Treatment Part 2

It’s a new world. When it comes to carried interest, real estate and collectibles, carefully document your purpose for holding these assets

Key Takeaways:

  • Long-term capital gains associated with assets held over one year are generally taxed at a maximum federal rate of 20 percent — not the top ordinary rate of 37 percent.

  • Just be careful if you are planning to sell collectibles, gold futures or foreign currency. The tax rate is generally higher.

  • The more you can document your purpose for holding your assets (at the time of purchase and disposition), the better your chances of a favorable tax result.

  • The deductibility of net capital losses in excess of $3,000 is generally deferred to future years.

There’s no shortage of confusion about the current tax landscape—both short-term and long term—but here are some steps you can take to protect yourself from paying a higher tax rate than necessary as we march into a new normal world.

 

Carried Interest

The Tax Cuts and Jobs Act lengthens the long-term holding period with respect to partnership interests received in connection with the performance of services. Profit interests held for three years or less at the time of disposition will generate short-term capital gain, taxed at ordinary income rates, regardless of whether or not a section 83(b) election was made. Prior law required a holding period greater than one-year to secure the beneficial maximum (20%) federal long-term capital gain tax rate.

Real estate

Real estate case law is too technical for the purposes of this article. Let’s just say the courts look at the following factors when trying to determine a personal real-estate owner’s intent:

  • Number and frequency of sales.

  • Extent of improvements.

  • Sales efforts, including through an agent.

  • Purpose for acquiring, holding and selling.

  • Manner in which property is acquired.

  • Length of holding period.

  • Investment of taxpayer’s time and effort, compared to time and effort devoted to other activities.

Unfortunately, the cases do not lay out a consistent weighting of these general factors. Always check with your legal and tax advisors before engaging in any type of real-estate transaction.


Collectibles

Works of art, rare vehicles, antiques, gems, stamps, coins, etc., may be purchased for personal enjoyment, but gains or losses from their sale are generally taxed as capital gains and losses. But, here’s the rub: Collectibles are a special class of capital asset to which a capital gain rate of 28 percent (not 20%) applies if the collectible items are sold after being held for more than one year (i.e. long-term).

Note that recently popular investments in gold and silver, whether in the form of coins, bullion or held through an exchange-traded fund, are generally treated as “collectibles” subject to the higher 28 percent rate. However, gold mining stocks are subject to the general capital gains rate applicable to other securities. Gold futures, foreign currency and other commodities are generally subject to a blended rate of capital gains tax (60 percent long-term, 40 percent short-term).

Bitcoin and other cryptocurrencies are treated as “property” rather than currency and will trigger long-term or short-term capital gains when the funds are sold, traded or spent. Cryptocurrencies are NOT classified as collectibles.

The difficulties arise if you get to the point that you are considered a dealer rather than a collector, or if you are a legitimate dealer but start selling items from your personal collection. In most cases, the following factors in determining whether sales of collectibles result in capital gain or ordinary income:

  • Extent of time and effort devoted to enhancing the collectible items

  • Extent of advertising, versus unsolicited offers

  • Holding period and frequency of sales from personal collection

  • Sales of collectibles as sole or primary source of taxpayer’s income

The Tax Cuts and Jobs Act, will end any further discussion about whether gain on the sale of collectibles can be deferred through the use of a like-kind exchange. The tax bill limits the application of section 1031 to real property disposed of after December 31, 2017.

Recommended steps to preserve capital gain treatment:

  • Clearly identify assets held for investment in books and records, segregating them from assets held for sale or development.

  • In the case of collectibles, physically segregate and document the personal collection from inventory held for sale.

  • Memorialize the reason(s) for a change in intent for holding: e.g., death or divorce of principals, legal entanglements, economic changes or new alternate opportunities presented.

  • If a property acquired with the intent to rent is sold prematurely, then retain documentation that supports the decision to sell: e.g., unsuccessful marketing and advertising, failed leases, news clippings of an adverse event or sluggish rental market.

  • If a property is rented out after making substantial improvements, then document all efforts to rent, and list or advertise it for sale only after a reasonable period of rental.

  • Consider selling appreciated/unimproved property to a separate entity before undertaking development. This would necessitate early gain recognition, but may preserve the capital gain treatment on the appreciation that’s realized during the predevelopment period.

  • Consider the application of Section 1237, a limited safe harbor, permitting certain non-C Corporation investors to divide unimproved land into parcels or lots before sale, without resulting in a conversion to dealer status.

Conclusion

Characterizing an asset as ordinary or capital can result in a significant tax rate differential. It can also affect your ability to net gains and losses against other taxable activities. So you must spend the time and effort needed to document the intent of the acquisition of an asset, as well as any facts that might change the character of the asset, during the holding period.

Sure, we’re all busy. But, in today’s new regulatory and tax landscape, don’t you think it’s worth taking the time to do so in order to potentially cut your future tax rate in half?

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Withdrawal Strategies: Tax-Efficient Withdrawal Sequence

Key Takeaways:

  • Retirees’ portfolios may last longer if they incur the least amount of income tax possible over their retirement period.

  • Retirees should focus on minimizing the government’s share of their tax-deferred accounts.

  • Make sure your advisor is helping you select the appropriate dollar amount and the appropriate assets to liquidate in order to fund your retirement lifestyle.

Asset Placement Decision

A winning investment strategy is about much more than choosing the asset allocation that will provide the greatest chance of achieving one’s financial goals. It also involves what is called the asset location decision. Academic literature on asset location commonly suggests that investors should place their highly taxed assets, such as bonds and REITs, in tax-deferred accounts and place their tax-preferred assets, such as stocks, in taxable accounts.

In general, your most tax-efficient equities should be held in taxable accounts whenever possible. Holding them in tax-deferred accounts can result in the following disadvantages:

  • The potential for favorable capital gains treatment is lost.

  • The possibility of a step-up in basis at death for income tax purposes is lost.

  • For foreign equities, foreign tax credit is lost.

  • The potential to perform tax-loss harvesting is lost.

  • The potential to donate appreciated shares to charities and avoid taxation is lost.

Asset location decisions can benefit both your asset accumulation phase and retirement withdrawal phase. During the withdrawal phase, the decision about where to remove assets in order to fund your lifestyle should be combined with a plan to avoid income-tax-bracket creeping. This will ensure that your financial portfolio can last as long as possible.

Tax-Efficient Withdrawal Sequence

Baylor University Professor, William Reichenstein, PhD, CFA wrote a landmark paper in 2008 that’s still highly relevant today. It’s called: Tax-Efficient Sequencing of Accounts to Tap in Retirement. It’s fairly technical, but it provides some answers about the most income-tax-efficient withdrawal sequence to fund retirement that are still valid today. According to Reichenstein, “Returns on funds held in Roth IRAs and traditional IRAs grow effectively tax exempt, while funds held in taxable accounts are usually taxed at a positive effective tax rate.”

Reichenstein also noted that only part of a traditional IRA’s principal belongs to the investor. The IRS “owns” the remaining portion, so the goal is to minimize the government’s share, he argued.

Tax-Efficient Withdrawal Sequence Checklist

In our experience, retirees should combine the goal of preventing income-tax-bracket creeping over their retirement years with the goal of minimizing the government’s share of tax-deferred accounts.

To achieve this goal, the dollar amount of non-portfolio sources of income that are required to be reported in the retiree’s income tax return must be understood. These income sources can include defined-benefit plan proceeds, employee deferred income, rental income, business income and required minimum distribution from tax-deferred accounts. Reporting this income, less income tax deductions, is the starting point of the retiree’s income tax bracket before withdrawal-strategy planning.

The balance of the retiree’s lifestyle should be funded from his or her portfolio assets by managing tax-bracket creeping and by lowering the government ownership of the tax-deferred accounts. The following checklist can assist the retiree in achieving this goal:

  1. Avoid future bracket creeping by filling up the lower (10% and 12%) income tax brackets by adding income from the retiree’s tax-deferred accounts.

  2. If the retiree has sufficient cash flow to fund lifestyle expenses but needs additional income, convert traditional IRAs into Roth IRAs to avoid tax-bracket creeping in the future. This will also allow heirs to avoid income taxes on the inherited account balance.

  3. Locate bonds in traditional IRAs rather than in taxable accounts. This will reduce the annual reporting of taxable interest income on the tax return.

  4. Manage the income taxation of Social Security benefits by understanding the amount of reportable income based on the retiree’s adjusted gross income level.

  5. Liquidate high-basis securities rather than low-basis securities to fund the lifestyle for a retiree who needs cash but is sensitive to additional taxable income.

  6. Aggressively create capital losses when the opportunity occurs to carry forward to future years to offset future capital gains.

  7. Allow the compounding of tax-free growth in Roth IRAs by deferring distributions from these accounts.

  8. Consider a distribution from a Roth for a year in which cash is needed but the retiree is in a high income tax bracket.

  9. Consider funding charitable gifts by transferring assets from a traditional IRA directly to the charity. This avoids the ordinary income on the IRA growth.

  10. Consider funding charitable gifts by selecting low-basis securities out of the taxable accounts in lieu of cash. This avoids capital gains on the growth.

  11. Manage capital gains in taxable accounts by avoiding short-term gains.

Conclusion

You and your advisor should work together closely to make prudent, tax-efficient withdrawal decisions to ensure your money lasts throughout your retirement years. Contact us any time if you have questions about your retirement funding plans or important changes in your life circumstances.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Qualified Opportunity Funds

Impact investing—using wealth to create positive change in the world while also benefiting financially—has become increasingly popular, as the idea of “doing well by doing good” has gained traction among investors.

Now there’s a new type of impact investment—called Qualified Opportunity Funds—that is worth checking out if you’re looking to build wealth, reduce a capital gains tax, and improve communities across the country. For investors with these goals, the funds can potentially be a powerful part of an overall wealth plan.

Sparking economic growth

Qualified Opportunity Funds invest in properties in economically distressed communities categorized as Qualified Opportunity Zones, which have been targeted for economic development.

These funds, which are generally formed as partnerships or corporations, can own a broad range of properties—from apartment buildings to start-up businesses—that exist in Qualified Opportunity Zones. By investing in these funds, you can help give communities a much-needed economic boost.

The full article can be read here: Qualified Opportunity Funds

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Diversified Asset Management, Inc. - 2019 1st Quarter Newsletter

New Year's Resolution: Review Your Estate Plan

Before you ring in another New Year, you may want to take time out of your busy schedule to observe another annual ritual: a review of your estate plan. If you're like most people, you probably stuck your will and other documents in a drawer or a safe deposit box as soon as you had them drawn up-and have rarely thought about them since. But changes in your personal circumstances or other events could mean it's time for an update.

Good Riddance To The Alternative Minimum Tax

Perhaps the most despised federal levy is the alternative minimum tax, which Congress passed in 1969 to prevent the loophole- savvy ultra-wealthy from shortchanging Uncle Sam.

Over the years, AMT's reach expanded to include households with more than $200,000 in AGI (adjusted gross income) annually and two- earner couples with children in high- tax states.

Reduce Your Widow’s Tax Bill Materially Annually

This is a good time to consider converting a traditional individual retirement account into a Roth IRA. Tax rates are low but unlikely to stay that way. Here's a long- term strategy that takes advantage of the current tax policy and economic fundamentals - a tax-efficient retirement investment and avoids a new twist in the Tax Cut And Jobs Act that penalizes widows.

Giving More to Loved Ones- Tax Free

While it may be better to give than to receive, as the adage contends, both givers and receivers should be happy with the new tax law. The annual amount you can give someone tax-free has been raised to $15,000, from $14,000 in 2017.

Protect Yourself Against Spearphishing

The Russian conspiracy to meddle in the 2016 presidential campaign relied on a common scam called "spearphishing." While the history-making scam may sound sophisticated, this form of digital fraud is running rampant. Anyone using email is likely to be attacked these days. Here are some tips to protect yourself.

Sidestepping New Limits on Charitable Donations

If you think you're no longer allowed to deduct items like charitable donations on your income tax return, think again.

The new tax law doubled the standard deduction, slashing the number of Americans eligible to itemize deductions from 37 million to 16 million.

To read the full newsletter click here.

 

Optimize Your Capital Gain Treatment

Carefully document the purpose for holding your assets


Key Takeaways:

  • Long-term capital gains associated with assets held over one year are generally taxed at a maximum federal rate of 20 percent — not the top ordinary rate of 39.6 percent.

  • Just be careful if you are planning to sell collectibles, gold futures or foreign currency. The tax rate is generally higher.

  • The more you can document your purpose for holding your assets (at the time of purchase and disposition), the better your chances of a favorable tax result.

  • The deductibility of net capital losses in excess of $3,000 is generally deferred to future years.

 

There’s no shortage of confusion about the current tax landscape—both short-term and long term—but here are some steps you can take to protect yourself from paying a higher tax rate than necessary as we march into a new normal world.

Capital assets vs. ordinary income assets

The IRS oddly defines a capital asset by describing what it is not, rather than describing what it is. For instance, the following “ordinary income” assets are not considered capital assets: Inventory, property held for sale to customers, artistic compositions created by the taxpayer’s personal efforts, and accounts or notes receivable acquired or originating in the ordinary course of a trade or business. With the 2017 Tax Cuts and Jobs Act signed into law, self-created patents and other intellectual property will be added to this list.

Assets used in a trade or business that qualify for depreciation, also known as “Section 1231 Assets,” are not capital assets. However, a disposition of such property that results in a gain may enjoy, at least partially, capital gain treatment.

Most other noncash assets are considered capital assets. However, the tax consequences upon disposition are further dependent on whether these assets are held for investment or personal use.

Personal assets

Assets acquired primarily for personal use are generally not purchased with the primary intent of anticipating future appreciation. Nevertheless, if such an asset does appreciate, the gain from its sale is taxed as a capital gain. In the case of a gain on the sale of a personal residence, the capital gain is first reduced by a generous exclusion, in most cases up to $500,000 for joint filers. Losses on sales of personal assets, however, are rarely deductible.

Investment assets

In addition to creating wealth through appreciation, investment assets may also produce a current income stream in the form of interest, dividends, royalties or rents. The most common investments are:

  • Real property

  • Securities

  • Collectibles

Dealer vs. investor vs. trader

In the case of the three asset categories above, whether a holding is considered an “ordinary income asset” or a “capital asset” depends primarily on what you intend to do with those assets. Intent is most important at the time of disposition (i.e. sale), but asset re-characterization during the holding period may be more closely scrutinized in an audit.

In general, a “dealer” acts as a merchant or middleman, purchasing assets at one price and selling them to customers at a higher price to reflect compensation (“markup”) for risk, handling costs and other services. An “investor” holds property to benefit from the appreciation upon a later disposition. Difficulties arise when you, the taxpayer, act as a dealer in some transactions and as an investor in others—or if you acquire an asset with the intent to resell it, and then decide later to retain it as an investment.

Conclusion

Characterizing an asset as ordinary or capital can result in a significant tax rate differential. It can also affect your ability to net gains and losses against other taxable activities. So you must spend the time and effort needed to document the intent of the acquisition of an asset, as well as any facts that might change the character of the asset, during the holding period.

Sure, we’re all busy. But, in today’s unpredictable regulatory and tax landscape, don’t you think it’s worth taking the time to do so in order to potentially cut your future tax rate in half?’

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Year End Tax Loss Harvesting

A gift you can accept any time of year

Robert J. Pyle, CFP®, CFA, AEP®


Now is the time of year that thoughts turn to Holiday spirit, snow covered landscapes and cozy fireplaces. It’s also a great time to consider some tax-loss harvesting—maybe not what you expected in your Holiday stocking, but often a more valuable gift, courtesy of Uncle Sam. Even better, loss harvesting is a gift that you can give yourself all year round. Just make sure to ask your advisor for assistance. This is not an area in which you want to be a do-it-yourselfer.

The term “loss harvesting” can have unpleasant connotations, but a well-diversified portfolio will periodically have positions at a loss. Harvesting those losing positions helps mitigate their impact on your overall portfolio by providing a tangible tax benefit. Losses from positions sold below their cost basis can be used to offset gains from elsewhere in your portfolio—plus an additional $3,000 of remaining losses each year can be carried over to reduce your taxable income. Losses can be carried forward into future years. So, having a large chunk of losses stored up can allow for tax-free realization of subsequent gains such as when you rebalance your portfolio, sell a highly appreciated position, or want to make a gift to a child, grandchild or favorite cause.

Despite all the recent gyrations in the market, the year 2018 has been pretty flat overall for U.S. stocks. So, no tax loss harvesting opportunities this year, right? Not so fast. Chances are you have some international holdings in your portfolio that you purchased in the last year. Based on what’s happened to global markets recently, those holdings are probably down for the year. That’s going to be your first place to look for losses.

Why it’s so hard to let go

Behavioral finance studies show that people feel the pain of a loss much more than they enjoy the thrill of a gain. Investors will keep holding on to a losing position hoping the stock will eventually get back to the price at which they purchased it. Behavioral finance experts call that “anchoring.” If it’s the stock of a company they used to work for, investors will wait months, even years, to get back to breakeven (i.e. “gamblers fallacy”), because they think they know the company better than outside investors and “it’s only a matter of time” before the stock rebounds.

Don’t let your emotions and personal biases get in the way of sound decision-making. That’s why we recommend that most clients hold diversified mutual funds rather than individual stocks. You’ll get much less emotionally attached to funds than to equities, which makes it easier psychologically to sell losing positions--individual stocks are just too volatile.

Tax lot accounting

If you periodically invest in a fund, say after a biweekly paycheck, then you will have many, many positions at various cost bases. Following a market correction, your overall holding may still be showing a gain, but some of the positions are at a loss. It all depends on when you bought them. Designating the highest-cost basis lots for sales can increase the amount of loss harvesting you and your advisor can do. We have a powerful computer program that helps us scan all the different lots of the investments you purchased over the years. Then we use the HIFO cost basis (highest in first out), to sell the ones lots with the highest cost basis in order to minimize your taxes.


Wash rule

Just make sure you and your advisor are adhering to the “wash rule,” which disallows the recognition of a loss if the same, or substantially similar, security is purchased within 30 days of the sale (before or after). Through our partners at Dimensional Fund Advisors, we can offer you both tax-managed and non-tax managed funds that are similar, but which serve different purposes for tax planning.

For example, if you’re taking a loss on the tax managed fund, we can buy the non-tax managed fund and your overall asset allocation won’t change at all. Again, your overall allocation will be nearly identical, but the funds are essentially different and so the wash rule doesn’t come into play.

Your greater goals

When harvesting a loss, make sure you remain true to your existing investment plan. To prevent a tax-loss harvest from knocking your carefully structured portfolio out of balance, we reinvest the proceeds of any tax-loss harvest sale into a similar position (but not one that is “substantially identical,” as defined by the IRS). We also do this on the same day so your proceeds are not sitting in cash and you are out of the market for a day. Typically, we return the proceeds to your original position no sooner than 31 days later (after the IRS’s “wash sale rule” period has passed).


Conclusion

Loss harvesting is especially valuable when markets are highly volatile and peppered with steep drops. More often than not, we can find a position you can sell at a loss. With the left over proceeds, we can help you find a buying opportunity elsewhere that meets your investment plan and retirement goals—just not in the same fund.

Now that’s a gift that keeps on giving!

Robert J. Pyle, CFP®, CFA, AEP® is president of Diversified Asset Management, Inc. Contact Robert at 303-440-2906 | info@diversifiedassetmanagement.com.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Diversified Asset Management, Inc. - 2018 3rd Quarter Newsletter

New Ways To Influence The Next Generation

The Tax Cuts And Jobs Act of 2018 (TCJA) gives you more good reasons to help you children, grandchildren, great nieces and nephews. Any amount you give to a 529 account that's used to pay for qualified expenses for college as well as private or religious schooling before college is deductible. With tax reform eliminating all or a large chunk of state income-tax deductions for many individuals in 2018, giving to a 529 lightens your state income-tax load while perhaps changing a life of a family member or friend and influencing their values.

Are You “Rich” Or Not? New Survey Hits The High Points

Do you consider yourself rich? If you own a couple of mansions, a fleet of luxury cars, and financial accounts reaching high into the millions, it may be easy to answer that question. But other well-to-do people might struggle with the issue of whether they are "rich" or not. 

New Deduction Rules For Business Owners

If you are a small business owner, Washington, D.C. has changed tax rules to lower your burden but the new rules are fairly complex. Many small businesses, and some that aren't so small, are "pass-through companies," tax-jargon that means the entity's net income isn't taxed at the corporate level but flows straight to their owners' personal returns. That income is taxed at personal income tax rates, as opposed to corporate rates that are generally lower.

Five Retirement Questions To Answer

How much money do you need to save to live comfortably in retirement? Some experts base estimates on multiple of your current salary or income, while others focus on a flat amount such as a million dollars. Either way, the task can be daunting.

A Guide To The New Rules On Tax Deductions In 2018

Uncle Sam giveth, and Uncle Sam taketh away. New federal tax code, which went into effect in 2018 and affects the return you'll file in spring 2019, lowers taxes by expanding some deductions, but restricts or outright eliminates others.

Giving More To Loved Ones – Tax-Free

While it may be better to give than to receive, as the adage contends, both givers and receivers should be happy with the new tax law. The annual amount you can give someone tax-free has been raised to $15,000, from $14,000 in 2017.

To read the newsletter click on the link below:

Diversified Asset Management, Inc. - 2018 3rd Quarter Newsletter

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

17 Red Flags for IRS Auditors

Here is a nice article provided by Joy Taylor of Kiplinger:

 

By Joy Taylor, Assistant Editor | March 2017

 

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.70% of all individual tax returns in 2016. So the odds are pretty low that your return will be singled out for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

 

That said, your chances of being audited or otherwise hearing from the IRS escalate depending on various factors, including your income level, the types of deductions or losses you claim, the business you're engaged in, and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, these 17 red flags could increase your chances of unwanted attention from the IRS.

 

1. Making a Lot of Money

Although the overall individual audit rate is only about one in 143 returns, the odds increase dramatically as your income goes up. IRS statistics for 2016 show that people with an income of $200,000 or higher had an audit rate of 1.70%, or one out of every 59 returns. Report $1 million or more of income? There's a one-in-17 chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 0.65% (one out of 154) of such returns were audited during 2016, and the vast majority of these exams were conducted by mail.

We're not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

2. Failing to Report All Taxable Income

The IRS gets copies of all of the 1099s and W-2s you receive, so be sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3. Taking Higher-than-Average Deductions

If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

4. Running a Small Business

Schedule C is a treasure trove of tax deductions for self-employed people. But it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all of their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones.

Special scrutiny is also given to cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) as well as to small business owners who report a substantial net loss on Schedule C.

Other small businesses also face extra audit heat, as the IRS shifts its focus away from auditing regular corporations. The agency thinks it can get more bang for its audit buck by examining S corporations, partnerships and limited liability companies. So it’s spending more resources on training examiners about issues commonly encountered with pass-through firms.

5. Taking Large Charitable Deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or façade easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all of your supporting documents, including receipts for cash and property contributions made during the year.

6. Claiming Rental Losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS actively scrutinizes rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. It’s pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real estate Schedule C businesses show lots of income. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business. The IRS started its real estate professional audit project several years ago, and this successful program continues to bear fruit.

7. Taking an Alimony Deduction

Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. The document can’t say the payment isn’t alimony. And the payer’s liability for the payments must end when the former spouse dies. You’d be surprised how many divorce decrees run afoul of this rule.

Alimony doesn’t include child support or noncash property settlements. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.

8. Writing Off a Loss for a Hobby

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. Be sure to keep supporting documents for all expenses.

9. Deducting Business Meals, Travel and Entertainment

Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees.

A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, place, people attending, business purpose, and nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast

10. Failing to Report a Foreign Bank Account

The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Form 114 by April 15 to report foreign accounts that combined total more than $10,000 at any time during the previous year. And taxpayers with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.

11. Claiming 100% Business Use of a Vehicle

When you depreciate a car, you have to list on Form 4562 the percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That’s because these vehicles are eligible for favorable depreciation and expensing write-offs. Be sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

As a reminder, if you use the IRS's standard mileage rate, you can't also claim actual expenses for maintenance, insurance and the like. The IRS has seen such shenanigans and is on the lookout for more.

12. Taking an Early Payout from an IRA or 401(k) Account

The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals scrutinized made errors on their income tax returns with respect to retirement payouts, with most of the mistakes coming from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. So the IRS will be looking at this issue closely.

The IRS has a chart listing withdrawals taken before the age of 59½ that escape the 10% penalty, such as payouts made to cover very large medical costs, total and permanent disability of the account owner, or a series of substantially equal payments that run for five years or until age 59½, whichever is later.

13. Claiming Day-Trading Losses on Schedule C

People who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and are reported on Schedule C (investors report their expenses as a miscellaneous itemized deduction on Schedule A, subject to an offset of 2% of adjusted gross income), and traders’ profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and are treated as ordinary losses that aren’t subject to the $3,000 cap on capital losses. And there are other tax benefits.

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous. This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. So it’s pulling returns and checking to see that the taxpayer meets all of the rules to qualify as a bona fide trader.

14. Failing to Report Gambling Winnings or Claiming Big Gambling Losses

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). But the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. The IRS is looking at returns of filers who report large miscellaneous deductions on Schedule A Line 28 from recreational gambling, but aren’t including the winnings in income. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get extra scrutiny from IRS examiners, who want to make sure these folks really are gaming for a living.

15. Claiming the Home Office Deduction

The IRS is drawn to returns that claim home office write-offs because it has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages. If you qualify for these savings, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal.

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

16. Engaging in Currency Transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as a person depositing $9,500 in cash one day and an additional $9,500 in cash two days later).

17. Claiming the Foreign Earned Income Exclusion

U.S. citizens who work overseas can exclude on 2016 returns up to $101,300 of their income earned abroad if they were bona fide residents of another country for the entire year or they were outside of the U.S. for at least 330 complete days in a 12-month span. Additionally, the taxpayer must have a tax home in the foreign country. The tax break doesn’t apply to amounts paid by the U.S. or one of its agencies to its employees who work abroad.

IRS agents actively sniff out people who are erroneously taking this break, and the issue keeps coming up in disputes before the Tax Court. Among the areas of IRS focus: filers with minimal ties to the foreign country they work in and who keep an abode in the U.S.; flight attendants and pilots; and employees of U.S. government agencies who mistakenly claim the exclusion when they are working overseas.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

10 Worst States To Live In For Taxes

Here is a nice article provided by Sandra Block of Kiplinger:

 

By Sandra Block, Senior Associate Editor | October 2016

 

Lots of people fret about how much they have to pay Uncle Sam, but he’s not the only tax man you have to worry about: Your state can squeeze you for plenty of taxes, too.

 

State income taxes or property taxes could cost you thousands of dollars every year. High sales taxes or gas taxes could slowly drain your funds every time you pull out your wallet.

 

Updated for 2016, here is our list of the 10 least tax-friendly states in the U.S., where you’ll pay above-average taxes on income, property, gas and almost everything you buy. The same states occupy the five “top” spots on our list as they did in 2015; Minnesota is the biggest mover on the list, now the No. 6 least-friendly state for taxes, in part due to a new top tax rate on the state’s highest earners. In many cases, taxes may rise even higher in the years ahead. Our review of states’ fiscal health reveals crippling deficits and pension liabilities that could lead to future tax hikes, service cuts or both.

 

Take a look. It’s not pretty.

 

Our calculation of each state’s effective tax rate is based on hypothetical individual and joint taxpayers with a variety of income sources. See last slide for a full explanation of our methodology.

 

1. California

State income tax: 1% (on income of up to $7,850/individual, $15,700/joint) - 13.3% (on income more than $1 million/individual, $1,052,886/joint)

Effective income tax rate: 3.2%/individual, 5.2%/joint

Average state and local sales tax: 8.48%

Gas taxes and fees: 38 cents per gallon (national average is 30 cents)

California tops our least-friendly list, thanks to a combination of high income taxes and hefty taxes on purchases and gas. California’s top income tax rate of 13.3% (the highest in the U.S.) doesn’t kick in until income exceeds $1 million; still, a married couple with earned income of $150,000 would pay about $7,500 a year in state income taxes.

California also has the highest statewide sales tax, at 7.5%. The average state and local combined rate is 8.48%; in some cities, the combined rate is as high as 10%, according to the Tax Foundation. Food and prescription drugs are exempt.

California’s gas taxes are down from a year ago, but they’re still the fifth-highest in the country. California also hits car owners with an annual vehicle license fee (VLF) of 0.65% of the purchase price of the vehicle (or the value when it was acquired) that’s reduced each year for the first 11 years of car ownership. For example, the VLF on a two-year-old vehicle purchased for $25,000 would be $147.

Californians pay lower property taxes than residents of other high-tax states, but in a state with some of the highest real estate prices in the U.S., they’re no bargain. The property tax on the state’s median home value of $412,700 is $3,160.

 

2. Hawaii

State income tax: 1.4% (on income of up to $2,400/individual, $4,800/joint) - 8.25% (on income of more than $48,000/individual, $96,000/joint)

Effective income tax rate: 6.5%/individual, 7.1%/joint

Average state and local sales tax: 4.35%

Gas taxes and fees: 44 cents per gallon (varies by county)

Hawaii has the highest effective income tax rate of all 50 states (only Washington, D.C., has a higher rate). A married couple with taxable income of $150,000 a year, two children, $5,000 in dividend income and mortgage interest of $10,000 would pay more than $9,300 a year in state income taxes. A single resident with $45,000 in earned income would pay more than $2,700.

Hawaii’s average combined state and local sales tax rate is 4.35%, among the lowest in the U.S. However, that’s misleading because few purchases, other than prescription drugs, are exempt from tax. Vehicles are subject to a 4% sales tax (technically an excise tax levied on businesses), even if they’re purchased on the mainland.

While property values are high, property taxes as a percentage of home value are the lowest in the U.S. The property tax on the state's median home value of $528,000 is $1,401, according to the Tax Foundation.

 

3. Connecticut

State income tax: 3% (on income of up to $10,000/individual, $20,000/joint) - 6.99% (on income of more than $500,000/individual, $1 million/joint)

Effective tax rate: 4.1%/individual, 5.2%/joint

State sales tax: 6.35%

Gas taxes and fees: 38 cents per gallon

The Constitution State is an expensive place to live. Connecticut’s property taxes are the fourth-highest in the U.S. The median property tax on the state’s median home value of $267,200 is $5,369.

There are no local sales taxes in Connecticut, so you’ll pay only the statewide rate of 6.35% on most of your purchases. Luxury items, such as cars valued at $50,000 or more or jewelry worth more than $5,000, are taxed at 7.75%, which means a $6,000 engagement ring would cost you $6,465. And if those baubles are a gift, keep in mind that Connecticut is the only state with a gift tax (the other is Minnesota), which applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents.

Connecticut faces serious financial pressures that could force it to raise taxes even more. The state has more than $83 billion in unfunded pensions, and total liabilities exceed its assets by 34%, according to the Mercatus Center at George Mason University, which ranks Connecticut 50th in its analysis of states’ fiscal health.

 

4. New York

State income tax: 4.0% (on income of up to $8,450/individual, $17,050/joint) - 8.82% (on income of more than $1,070,350/individual, $2,140,900/joint). New York allows localities to impose their own income tax; the average levy is 2.11%, according to the Tax Foundation.

Effective income tax rate: 5.5%/individual, 6.4%/joint

Average state and local sales tax: 8.49%

Gas taxes and fees: 43 cents per gallon (varies by county)

The Empire State has a hefty effective income tax rate, and its average sales tax rate is the ninth-highest in the country, according to the Tax Foundation. Food and prescription and nonprescription drugs are exempt from taxes, as are greens fees, health club memberships, and most arts and entertainment tickets.

The property tax on the state's median home value of $279,100 is $4,703, the 10th-highest in the U.S.

The tax on cigarettes is $4.35 per pack, the highest in the U.S. New York City tacks on an additional $1.50 per pack.

 

5. New Jersey

State income tax: 1.4% (on income of up to $20,000) - 8.97% (on income of more than $500,000). New Jersey allows localities to impose their own income tax; the average levy is 0.5%, according to the Tax Foundation.

Effective income tax rate: 2.1% individual, 3.7%/joint

Average state and local sales tax: 6.97%

Gas taxes and fees: 38 cents per gallon

The effective tax rate for Garden State residents is relatively low compared with some other tax-unfriendly states. But while New Jersey gives residents a break on income taxes, it brings the hammer down when they buy a home. New Jersey’s property taxes are the highest in the U.S.; the property tax on the state’s median home value of $313,200 is $7,452.

Food, prescription and nonprescription drugs, clothing and footwear are exempt from the 7% state sales tax. Because some designated Urban Enterprise Zones, such as Newark, charge a reduced 3.5% sales tax on certain sales, New Jersey’s average state and local combined sales tax rate is actually 6.97%, according to the Tax Foundation.

Plus, with more than $188 billion in unfunded pension liabilities, the state’s long-term financial prospects are grim. A report by J.P. Morgan estimates that, in order to cover its massive debts, New Jersey would need to raise taxes by 26%, cut spending by 24% or increase pension plan participants’ contributions by 471%.

 

6. Minnesota

State income tax: 5.35% (on income of up to $25,180/individual, $36,820/joint) - 9.85% (on income of more than $155,650/individual, $259,420/joint)

Effective income tax rate: 5.8%/individual, 6.6%/joint

Average state and local sales tax: 7.27%

Gas taxes and fees: 29 cents per gallon

The North Star State added a new top income tax rate of 9.85% for high earners in 2015. But what makes Minnesota really stand out is its relatively high income tax rate of 5.35% even for the state’s lowest earners.

Food, clothing, and prescription and nonprescription drugs are exempt from the state sales tax of 6.875%. A few cities and counties add their own local sales tax. The average combined state and local sales tax rate is 7.27%, according to the Tax Foundation. The sales tax for vehicles is 6.5%, slightly lower than the overall state sales tax, and vehicles are not subject to local sales taxes.

The property tax on Minnesota's median home value of $188,300 is $2,148, the 20th-highest in the U.S.

Minnesota offers some property-tax relief for qualified homeowners. Homeowners whose property taxes are high relative to their incomes are eligible for a property tax refund.

 

7. Maine

State income tax: 5.8% (on income of up to $21,050/individual, $42,100/joint) - 7.15% (on income of more than $37,500/individual, $75,000/joint)

Effective income tax rate: 6.1%/individual, 6.6%/joint

State sales tax: 5.5%

Gas taxes and fees: 30 cents per gallon

Maine has been working to lower its income tax bite: In 2016, the top rate fell from 7.95% to 7.15%. However, the state’s “low” rate is 5.8% — higher than some other states’ top rate.

Maine is one of only a few states that prohibit local jurisdictions from imposing their own sales tax, so you won’t pay more than 5.5%, no matter where you live or shop. Food for home consumption and prescription drugs are exempt from sales taxes, but prepared foods in restaurants are taxed at 7%.

Maine imposes an annual excise tax on vehicles that’s based on the car’s age and value. The owner of a three-year-old car with a manufacturer’s suggested retail price of $19,500 would pay $263.25.

The property tax on Maine's median home value of $174,800 is $2,335, the 16th-highest in the country.

 

8. Vermont

State income tax: 3.55% (on income of up to $39,900/individual, $69,900/joint) - 8.95% (on income of more than $415,600/individual, $421,900/joint)

Effective income tax rate: 3.5%/individual, 5.2%/joint

Average state and local sales tax: 6.17%

Gas taxes and fees: 31 cents per gallon

Vermont’s effective tax rates are lower than those imposed in nearby New York, but it’s a pricey place to live if you’re wealthy. Vermont limits deductions to $15,500 for single residents and $31,000 for married couples — costing millionaires about $5,000 in additional state taxes every year.

The Green Mountain State is also an expensive place to own a home. The property tax on the state's median home value of $214,600 is $3,797, the eighth-highest in the U.S.

The average state and local combined sales tax rate is 6.17%, according to the Tax Foundation. Food, clothing, and prescription and nonprescription drugs are exempt from sales tax. Under a law that took effect in 2015, soft drinks aren’t exempt from sales tax. Restaurant meals are taxed at 9%; the tax on alcoholic beverages served in restaurants is 10%.

 

9. Illinois

State income tax: 3.75%

Average state and local sales tax: 8.64%

Gas taxes and fees: 34 cents per gallon

The Prairie State’s income tax dropped to a flat rate of 3.75% from 5% on Jan. 1, 2015.

The bad news is that taxes on just about everything else in Illinois are high and could go higher as lawmakers grapple with the largest state budget deficit in the U.S. And the low flat tax may not last: With total liabilities exceeding assets by 48%, the state needs to raise taxes by 17%, cut services by 16% or increase worker pension contributions by 400%, according to a report by J.P. Morgan.

Property taxes in Illinois are the second-highest in the nation. The property tax on the state’s median home value of $171,900 is $3,952.

And the combined average state and local sales tax is 8.64%, the 7th-highest rate in the U.S, according to the Tax Foundation. In some municipalities, combined state and local sales taxes are as high as 10%. Qualifying food and prescription and nonprescription drugs are taxed at 1%.

 

10. Rhode Island

State income tax: 3.75% (on income of up to $60,850) - 5.99% (on income of more than $138,300)

Effective income tax rate: 3.8%/individual, 4.3%/joint

State sales tax: 7%

Gas taxes and fees: 34 cents per gallon

The Ocean State’s 7% state sales tax rate is the second-highest in the U.S., but the state has no local sales taxes to add to it. Groceries, most clothing and footwear, and prescription drugs are exempt. Over-the-counter drugs, such as aspirin, are taxed unless you have a prescription. The tax also applies to the portion of any individual sale of clothing and footwear that exceeds $250. The sales tax on vehicles is 7%.

Rhode Island is expensive for homeowners. The property tax on the state’s median home value of $236,000 is $3,855, the 11th-highest in the U.S.

 

About our methodology

To create our rankings, we evaluated data and state tax-policy details from a wide range of sources. These include:

Income Taxes - We looked at each state's tax agency, plus this helpful document from the Tax Foundation. To help us rank the most- and least-friendly states, The Tax Institute at H&R Block prepared an analysis that determined the effective tax rate for two income scenarios: One for a single filer making $45,000 a year taking the standard deduction, and one for a more complex tax profile: a married couple filing jointly, with two dependent children, an earned income of $150,000, qualified dividends of $5,000, and $10,000 of mortgage interest to deduct.

Property Tax - Median income tax paid and median home values come from U.S. Census' American Community Survey and are 2014 data.

Sales Taxes - We also cite the Tax Foundation's figure for average sales tax, which is a a population-weighted average of local sales taxes. In states that let municipalities add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.

Fuel Tax - The American Petroleum Institute

Sin Taxes - Each state's tax agency as well at the Tax Foundation

Inheritance & Gift Taxes - Each state's tax agency.

Wireless Taxes - The Tax Foundation

Travel Taxes - Each state's tax agency, plus a lodging tax study published in 2015 by HVS Convention Sports and Entertainment Consulting.

Fiscal Stability - Each state's balance sheet gives an indication of what its tax future might look like. We drew on the study Ranking the States by Fiscal Condition by the Mercatus Center at George Mason University.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

5 States Where Taxes Are Going Up in 2017

Here is a nice article provided by Sandra Block of Kiplinger:

 

By Sandra Block, Senior Associate Editor | January 2017

 

Although President-elect Donald Trump has pledged to cut federal taxes, state taxes are rising across the U.S. as financially strapped states search for funds to repair deteriorating infrastructure and close widening budget shortfalls. In their search for revenue, states have targeted everything from e-cigarettes to lottery winnings.

 

Even Alaska, long a low-tax haven and one of our 10 most tax-friendly states, is feeling the heat. Alaska currently has no income or state sales tax. But to offset a sharp decline in oil revenues, Gov. Bill Walker has proposed a 3% statewide sales tax, which he says is needed to close the state’s $3.2 billion budget deficit.

 

Raising existing state taxes or imposing new ones could backfire if they lead to fewer taxpayers. Technology has made it easier for individuals and businesses to move to states—or countries—with lower tax rates, says Joe Henchman, vice president of legal and state projects for the Tax Foundation, a policy research organization based in Washington, D.C. “Everybody is under the gun to be more competitive, whether it’s government or the private sector,” he says.

 

Here are five states—including three already on our list of the 10 Least Tax-Friendly States in the U.S.—where residents will pay higher taxes in 2017. Take a look.

 

1. Maine

Kiplinger’s tax rating: One of the 10 least tax-friendly states in the U.S.

Income tax: 5.8% (on taxable income of less than $21,050 for single filers; less than $42,100 for joint filers) - 10.15% (on taxable income of $37,500 or more for single filers; $75,000 or more for joint filers)

State sales tax: 5.5%

What’s changing in 2017: Higher income taxes on top earners

In November, Maine residents narrowly approved a 3% income tax surcharge on residents with income of more than $200,000. The tax hike, which will be used to fund public education, raises Maine’s top tax rate in 2017 to 10.15%, the second-highest in the U.S. (California’s top tax rate of 13.3% is the highest.) The surcharge will raise an estimated $142 million in the first year, according to the state’s Office of Fiscal and Program Review.

 

2. California

Kiplinger’s tax rating: One of the 10 least tax-friendly states in the U.S.

Income tax: 1% (on taxable income of less than $7,850 for single filers; less than $15,700 for joint filers) - 13.3% (on taxable income of $1 million or more for single filers; $1,052,886 or more for joint filers)

State sales tax: 7.25% (as of Jan. 1, 2017)

What’s changing in 2017: Higher taxes for smokers

Californians voted in November to increase the state tax on cigarettes from 87 cents to $2.87 a pack, effective April 1, 2017. The tax will also apply to e-cigarettes. The first year, the tax will raise an estimated $1.4 billion, which is expected to be used for health care and smoking-cessation programs.

Californians also approved a measure to extend higher income tax rates for the state’s top earners through 2030. The three highest tax rates, which start at 10.3% and top out at 13.3%, were originally scheduled to expire in 2018.

 

3. New Jersey

Kiplinger’s tax rating: One of the 10 least tax-friendly states in the U.S.

Income tax: 1.4% (on taxable income of less than $20,000) - 8.97% (on taxable income of $500,000 or more)

State sales tax: 7%

What’s changing in 2017: Higher gas taxes

In October, Gov. Chris Christie signed legislation that raised New Jersey’s gas tax from 14.5 cents to 37.5 cents a gallon. Overnight, the state’s gas tax jumped from the second-lowest in the country to the seventh-highest. Funds from the tax hike will be used to shore up the state’s deteriorating roads and bridges.

Although the state’s budget deal will increase the cost of gassing up in the Garden State, it also includes some generous tax reductions. The state will gradually increase the amount of retirement income that’s sheltered from tax through 2020, when a married couple will be able to exclude as much as $100,000. In addition, the amount of assets excluded from the state’s estate tax will rise from $675,000 to $2 million on January 1, and the tax will disappear in 2018.

 

4. Pennsylvania

Kiplinger’s tax rating: Mixed tax picture

Income tax: 3.07%

State sales tax: 6%

What’s changing in 2017: New taxes on digital content, higher taxes on smokers

The 2016-17 budget bill approved by Pennsylvania lawmakers in August extended the state’s 6% sales tax to digital streaming services and downloads. The tax package also hiked taxes on cigarettes by $1, for a total tax of $2.60 per pack, and extended the tax to e-cigarettes and smokeless tobacco.

The budget package also took a bite out of residents’ lottery winnings. Previously, Pennsylvania was one of only two states (California was the other one) that exempted lottery winnings from state taxes. The budget package scrapped that exemption, retroactive to Jan. 1, 2016.

 

5. Louisiana

Kiplinger’s tax rating: One of the 10 most tax-friendly states in the U.S.

Income tax: 2% (on taxable income of less than $12,500 for single filers; less than $25,000 for joint filers) - 6% (on taxable income of $50,000 or more for single filers; $100,000 or more for joint filers)

State sales tax: 5%

What’s changing in 2017: Higher sales taxes

In April, Louisiana increased its state sales tax by one percentage point, to 5% from 4%. The change boosted the average state and local sales tax rate to 9.99%, the highest in the U.S. The increase is scheduled to expire on June 30, 2018. Lawmakers also voted to extend the sales tax to a number of items that had been exempt, including Mardi Gras beads.

Smokers in the Big Easy will pay more, too. The April tax package hiked the tax on a pack of cigarettes to $1.08 from 86 cents.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail  info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Alternative Minimum Tax -- Not Just for the Wealthy

When first introduced, the alternative minimum tax (AMT) was widely acknowledged to be a rich person's 's tax -- a fallback tax for those wily taxpayers with big incomes and numerous deductions. However, as finances evolved and incomes grew, more and more people found themselves subject to the AMT, even after the introduction of automatic inflation adjustments in 2013. That's why a general understanding of how the tax works can help you avoid it and even use it to your advantage.

The Other Federal Tax

The AMT truly functions as an alternative tax system. It has its own set of rates and rules for deductions, and they are more restrictive than the regular system. Taxpayers who meet certain tests essentially have to calculate their net tax liabilities under both sets of rules, and then file using whichever calculation yields the greater tax assessment.

The AMT can be triggered by a number of different variable s. Although those with higher incomes are more susceptible to the tax, factors such as the amount of your exemptions or deductions can also prompt it. Even commonplace items such as a deduction for state income tax or interest on a second mortgage can set off the AMT. To find out if you are subject to the AMT, fill out the worksheets provided with the instructions to Form 1040 or complete Form 6251, Alternative Minimum Tax -- Individuals.

AMT rates start at 26%, rising to 28% at higher income levels. This compares with regular federal tax rates, which start at 10% and step up to 39.6%. Although the AMT rates may appear to cap out at a lower rate than regular taxes, the AMT calculation allows significantly fewer deductions, making for a potentially bigger bottom-line tax bite. Unlike regular taxes, you cannot claim exemptions for yourself or other dependents, nor may you claim the standard deductio n. You also cannot deduct state and local tax, property tax, and a number of other itemized deductions, including your home-equity loan interest, if the loan proceeds are not used for home improvements. Accordingly, the more exemptions and deductions you normally claim, the more likely it is that you'll have an AMT liability.

There's also an AMT credit that allows you to claim a credit on your tax return in future years for some of the extra taxes you paid under the AMT. However, you can only use the AMT credit in a year when you're not paying the AMT. To apply for the credit, you'll need to fill in yet another form, Form 8801, to see if you are eligible.

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Averting Triggers for the AMT

< br>Because large one-time gains and big deductions that trigger the AMT are sometimes controllable, you may be able to avoid or minimize the impact of the AMT by planning ahead. Here are some practical suggestions.

Time your capital gains. You may be able to delay an asset sale until after the end of the year, or spread a gain over a number of years by using an installment sale. If you're looking to liquidate an investment with a long-term gain, you should review your AMT consequences and determine what impact such a sale might have.

Time your deductible expenses. When possible, time payments of state and local taxes, home-equity loan interest (if the loan proceeds are not used for home improvements), and other miscellaneous itemized deductions to fall in years when you won't face the AMT. Since they are not AMT deductible, they will go unused in a year when you pay the AMT. The same holds true for medical deductions, which fac e stricter deduction rules for the AMT.

Look before you exercise. Exercising ISOs is a red flag for triggering the AMT. The AMT on ISO proceeds can be significant. Because ISO tax issues are complex, you should consult with your tax advisor before exercising ISOs.

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© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constit ute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The 23 Most-Overlooked Tax Deductions

Here is a nice article provided by Kevin McCormally of Kiplinger:

 

Years ago, the fellow running the IRS told Kiplinger's Personal Finance magazine that he figured millions of taxpayers overpaid their taxes every year by overlooking just one of the money-saving tax breaks listed here.

We’ve updated all the key details in this popular guide to the common tax deductions many filers miss to ensure that your 2016 return is a money-saving masterpiece. Cut your tax bill to the bone by claiming all the tax write-offs you deserve.

1.  State Sales Taxes

After years of uncertainty, in 2015 Congress finally made this break “permanent.” This is particularly important to you if you live in a state that does not impose a state income tax. Congress offers itemizers the choice between deducting the state income taxes or state sales taxes they paid. You choose whichever saves you the most money. So if your state doesn't have an income tax, the sales tax write-off is clearly the way to go.

In some cases, even filers who pay state income taxes can come out ahead with the sales tax choice. And, you don’t need a wheelbarrow full of receipts. The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you may add the sales tax you paid on that big-ticket item to the amount shown in the IRS table for your state. The IRS even has a calculator that shows how much residents of various states can deduct, based on their income and state and local sales tax rates.

We put those quotations marks around permanent above because, as Congress takes up tax reform in 2017, one possibility is the elimination of both the sales tax and the state income tax deductions. But you’re still sure to have the choice for your 2016 return.

2.  Reinvested Dividends

This isn't a tax deduction, but it is an important subtraction that can save you a bundle. And this is the one that former IRS commissioner Fred Goldberg told Kiplinger millions of taxpayers miss . . . costing them millions in overpaid taxes.

If, like most investors, you have mutual fund dividends automatically reinvested to buy extra shares, remember that each new purchase increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once in the year when they were paid out and immediately reinvested and later when they're included in the proceeds of the sale.

Don't make that costly mistake.

If you're not sure what your basis is, ask the fund for help. Funds often report to investors the tax basis of shares redeemed during the year. I n fact, for the sale of shares purchased in 2012 and later years, funds must report the basis to investors and to the IRS.

3.  Out-of-Pocket Charitable Deductions

It's hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).

But little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. For example, ingredients for casseroles you prepare for a nonprofit organization's soup kitchen and stamps you buy for a school's fund-raising mailing count as charitable contributions. Keep your receipts. If your contribution totals more than $250, you'll also need an acknowledgement from the charity documenting the support you provided. If you drove your car for charity in 2016, remember to deduct 14 cents per mile, plus parking and tolls paid, in your philanthropic journeys.

4.  Student-Loan Interest Paid by Mom and Dad

Gen erally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child's student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest paid by Mom and Dad each year. And he or she doesn't have to itemize to use this money-saver. (Mom and Dad can't claim the interest deduction even though they actually foot the bill because they are not liable for the debt.)

5.  Job-Hunting Costs

If you're among the millions of unemployed Americans who were looking for a job in 2016, we hope you were successful . . . and that you kept track of your job-search expenses or can reconstruct them. If you were looking for a position in the same line of work as your current or most recent job, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Qu alifying expenses can be written off even if you didn't land a new job. But such expenses can be deducted only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. (Job-hunting expenses incurred while looking for your first job don't qualify.) Deductible costs include, but aren't limited to:

Transportation expenses incurred as part of the job search, including 54 cents a mile for driving your own car plus parking and tolls. (The rate falls to 53.5 cents a mile for driving in 2017.)

Food and lodging expenses if your search takes you away from home overnight

Cab fares

Employment agency fees

Costs of printing resumes, business cards, postage, and advertising.

6.  Moving Expenses to Take Your First Job

Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are. And you get this write-off even if you don't itemize. To qualify for the deduction, your first job must be at least 50 miles away from your old home. If you qualify, you can deduct the cost of getting yourself and your household goods to the new area. If you drove your own car on a 2016 move, deduct 19 cents a mile, plus what you paid for parking and tolls. (The rate falls to 17 cents a mile for 2017 moves.) For a full list of deductible moving expenses, check out IRS Publication 521.

7.  Military Reservists' Travel Expenses

Members of the National Guard or military reserve may write off the cost of travel to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills.

For 2016 travel, the rate is 54 cents a mile, plus what you paid for parking fees and tolls. You may claim this deduction even if you use the sta ndard deduction rather than itemizing. (The rate falls to 53.5 cents a mile for 2017 travel.)

8.  Deduction of Medicare Premiums for the Self-Employed

Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.

This deduction is available whether or not you itemize and is not subject to the 7.5% of AGI test that applies to itemized medical expenses for those age 65 and older. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have a job as well as your business) or your spouse's employer (if he or she has a job that offers family medical coverage).

9.  Child-Care Credit

A credit is so much better than a deduction; it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that's subject to tax. In the 25% bracket, each dollar of deductions is worth a quarter; each dollar of credits is worth a greenback.

You can qualify for a tax credit worth between 20% and 35% of what you pay for child care while you work. But if your boss offers a child care reimbursement account—which allows you to pay for the child care with pretax dollars—that’s likely to be an even better deal. If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go. Not only does money run through a reimbursement account avoid federal income taxes, it also is protected from the 7.65% Social Security tax. (In any case, only amounts paid for the care of children younger than age 13 count.)

You can't double dip. Expenses paid through a plan can't also be used to generate the tax credit. Bu t get this: Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. That would cut your tax bill by at least $200.

10.  Estate Tax on Income in Respect of a Decedent

This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax.

Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $40,000 to the estate-tax bill. You get to deduct that $40,000 on your tax returns as you withdraw the money from the IRA. If y ou withdraw $50,000 in one year, for example, you get to claim a $20,000 itemized deduction on Schedule A. That would save you $5,600 in the 28% bracket.

11.  State Tax Paid Last Spring

Did you owe tax when you filed your 2015 state income tax return in the spring of 2016? Then, for goodness' sake, remember to include that amount in your state-tax deduction on your 2016 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during the year.

12.  Refinancing Points

When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. That means you can deduct 1/30th of the points a year if it's a 30-year mortgage. That's $33 a year for each $1,000 of points you paid—not much, maybe, but don't throw it away.

Even more important, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all as-yet-undeducted points. There's one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing, then deduct that amount gradually over the life of the new loan. A pain? Yes, but at least you'll be compensated for the hassle.

13.  Jury Pay Paid to Employer

Many employers continue to pay employees' full salary while they serve on jury duty, and some impose a quid pro quo: The employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. To even things out, you get to deduct the amount you give to your employer.

But how do you do it? There's no line on the Form 1040 labeled “jury fees.” Instead, the write-off goes on line 36, which purports to be f or simply totaling up deductions that get their own lines. Include your jury fees with your other write-offs and write "jury pay" on the dotted line.

14.  American Opportunity Credit

Unlike the Hope Credit that this one replaced, the American Opportunity Credit is good for all four years of college, not just the first two. Don't shortchange yourself by missing this critical difference. This tax credit is based on 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000 ... for a maximum annual credit per student of $2,500. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit is phased out for taxpayers with incomes above those levels.

If the credit exceeds your tax liability, it can trigger a refund. (Most credits are “nonrefundable,” meaning they can reduce your tax to $0, but not get you a chec k from the IRS.)

15.  A College Credit for Those Long Out of College

College credits aren’t just for youngsters, nor are they limited to just the first four years of college. The Lifetime Learning credit can be claimed for any number of years and can be used to offset the cost of higher education for yourself or your spouse . . . not just for your children.

The credit is worth up to $2,000 a year, based on 20% of up to $10,000 you spend for post-high-school courses that lead to new or improved job skills. Classes you take even in retirement at a vocational school or community college can count. If you brushed up on skills in 2016, this credit can help pay the bills. The right to claim this tax-saver phases out as income rises from $55,000 to $65,000 on an individual return and from $110,000 to $130,000 for couples filing jointly.

16.  Those Blasted Baggage Fees

Airlines seem to revel in driving travelers batty with extra fees fo r baggage, online booking and for changing travel plans. Such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you're self-employed and traveling on business, be sure to add those costs to your deductible travel expenses.

17.  Credits for Energy-Saving Home Improvements

Your 2016 return is the last chance to claim a tax credit for installing energy-efficient windows or making similar energy-saving home improvements. You can claim up to $500 in total tax credits for eligible improvements, based on 10% of the purchase cost (not installation) of certain insulation, windows, doors and skylights. The credit is subject to a lifetime cap, so if you’ve already pocketed the max, you’re out of luck. But there’s no such limit on the much more powerful incentive for those who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbi nes in 2016. Your credit can be 30% of the total cost (including labor) of such systems.

18.  Bonus Depreciation ... And Beefed-Up Expensing

Business owners—including those who run businesses out of their homes—have to stay on their toes to capture tax breaks for buying new equipment. The rules seem to be constantly shifting as Congress writes incentives into the law and then allows them to expire or to be cut back to save money. Take “bonus depreciation” as an example. Back in 2011, rather than write off the cost of new equipment over many years, a business could use 100% bonus depreciation to deduct the full cost in the year the equipment was put into service. For 2013, the bonus depreciation rate was 50%. The break expired at the end of 2013 and stayed expired until the end of 2014 . . . when Congress reinstated it retroactively to cover 2014 purchases. Then, the provision expired again . . . but near the end of 2015, Congress revived the break. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019.

Perhaps even more valuable, though, is another break: supercharged "expensing," which basically lets you write off the full cost of qualifying assets in the year you put them into service. This break, too, has a habit of coming and going. But as part of the 2015 tax law, Congress made the expansion of expensing permanent. For 2016 and future years, businesses can expense up to $500,000 worth of assets. The half-million-dollar cap phases out dollar for dollar for firms that put more than $2 million worth of assets into service in a single year.

19.  Social Security Taxes You Pay

This doesn’t work for employees. You can’t deduct the 7.65% of pay that’s siphoned off for Social Security and Medicare. But if you’re self-employed and have to pay the full 15.3% tax yourself (instead of splitting it 50-50 with an employer), you do get to write off half of what you pay. That deduction comes on the face of Form 1040, so you don’t have to itemize to take advantage of it.

20.  Waiver of Penalty for the Newly Retired

This isn’t a deduction, but it can save you money if it protects you from a penalty. Because our tax system operates on a pay-as-you earn basis, taxpayers typically must pay 90% of what they owe during the year via withholding or estimated tax payments. If you don’t, and you owe more than $1,000 when you file your return, you can be hit with a penalty for underpayment of taxes. The penalty works like interest on a loan—as though you borrowed from the IRS the money you didn’t pay. The current rate is 3%.

There are several exceptions to the penalty, including a little-known one that can protect taxpayers age 62 and older in the year they retire and the following year. You can request a waiver of the penalty—using Form 2210—if you have reasonable cause, such a s not realizing you had to shift to estimated tax payments after a lifetime of meeting your obligation via withholding from your paychecks.

21.  Amortizing Bond Premiums

If you purchased a taxable bond for more than its face value—as you might have to capture a yield higher than current market rates deliver—Uncle Sam will effectively help you pay that premium. That’s only fair, since the IRS is also going to get to tax the extra interest that the higher yield produces.

You have two choices about how to handle the premium.

You can amortize it over the life of the bond by taking each year’s share of the premium and subtracting it from the amount of taxable interest from the bond you report on your tax return. Each year you also reduce your tax basis for the bond by the amount of that year’s amortization.

Or, you can ignore the premium until you sell or redeem the bond. At that time, the full premium will be included in your tax basis so it will reduce the taxable gain or increase the taxable loss dollar for dollar.

The amortization route can be a pain, since it’s up to you to both figure how each year’s share and keep track of the declining basis. But it could be more valuable, since the interest you don’t report will avoid being taxed in your top tax bracket for the year—as high as 43.4%, while the capital gain you reduce by waiting until you sell or redeem the bond would only be taxed at 0%, 15% or 20%.

If you buy a tax-free municipal bond at a premium, you must use the amortization method and reduce your basis each year . . . but you don’t get to deduct the amount amortized. After all, the IRS doesn’t get to tax the interest.

22.  Legal Fees Paid to Secure Alimony

Although legal fees and court costs involved in a divorce are generally nondeductible personal expenses, you may be able to deduct the part of your attorney’s bill.

Since alimony i s taxable income, you can deduct the part of the lawyer’s fee that is attributable to setting the amount. You can also deduct the portion of the fee that is attributable to tax advice. You must itemize to get any tax savings here, and these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Still, be sure your attorney provides a detailed statement that breaks down his fee so you can tell how much of it may qualify for a tax-saving deduction.

23.  Don’t Unnecessarily Report a State Income Tax Refund

There’s a line on the tax form for reporting a state income tax refund, but most people who get refunds can simply ignore it even though the state sent the IRS a copy of the 1099-G you got reporting the refund. If, like most taxpayers, you didn’t itemize deductions on your previous federal return, the state tax refund is tax-free.

Even if you did i temize, part of it might be tax-free. It’s taxable only to the extent that your deduction of state income taxes the previous year actually saved you money. If you would have itemized (rather than taking the standard deduction) even without your state tax deduction, then 100% of your refund is taxable—since 100% of your write-off reduced your taxable income. But, if part of the state tax write-off is what pushed you over the standard deduction threshold, then part of the refund is tax-free. Don’t report any more than you have to.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up o r individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

9 IRS Audit Red Flags for Retirees

Here is a nice article provided by Joy Taylor of Kiplinger: 


In 2015, the Internal Revenue Service audited only 0.84% of all individual tax returns. So the odds are generally pretty low that your return will be picked for review.

That said, your chances of being audited or otherwise hearing from the IRS escalate depending on various factors. Math errors may draw an IRS inquiry, but they’ll rarely lead to a full-blown exam. Whether you're filing your 2015 return in October after getting an extension or looking ahead to filing your 2016 return early next year, check out these red flags that could increase the chances that the IRS will give the return of a retired taxpayer special, and probably unwelcome, attention.

1.  Making a Lot of Money

Although the overall individual audit rate is only about one in 119, the odds increase dramatically as your income goes up, as it might if you sell a valuable piece of property or get a big payout from a retirement plan.

IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 2.61%, or one out of every 38 returns. Report $1 million or more of income? There's a one-in-13 chance your return will be audited. The audit rate drops significantly for filers reporting less than $200,000: Only 0.76% (one out of 132) of such returns were audited, and the vast majority of these exams were conducted by mail.

We're not saying you should try to make less money—everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

2.  Failing to Report All Taxable Income

The IRS gets copies of all 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs) and 1099-SSA (reporting Social Security benefits).

Make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a tax form showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3.  Taking Higher-Than-Average Deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. A large medical expense could send up a red flag, for example. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

4.  Claiming Large Charitable Deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for non-cash donations over $500, you become an even bigger audit target. And if you've donated a conservation or facade easement to a charity, chances are good that you'll hear from the IRS.


Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.

5.  Not Taking Required Minimum Distributions

The IRS wants to be sure that owners of IRAs and participants in 401(k)s and other workplace retirement plans are properly taking and reporting required minimum distributions. The agency knows that some folks age 70½ and older aren’t taking their annual RMDs, and it’s looking at this closely.

Those who fail to take the proper amount can be hit with a penalty equal to 50% of the shortfall. Also on the IRS’s radar are early retirees or others who take payouts before reaching age 59½ and who don’t qualify for an exception to the 10% penalty on these early distributions.

Individuals age 70½ and older must take RMDs from their retirement accounts by the end of each year. However, there’s a grace period for the year in which you turn 70½: You can delay the payout until April 1 of the following year. A special rule applies to those still employed at age 70½ or older: You can delay taking RMDs from your current employer’s 401(k) until after you retire (this rule doesn’t apply to IRAs). The amount you have to take each year is based on the balance in each of your accounts as of December 31 of a prior year and a life-expectancy factor found in IRS Publication 590-B.

6.  Claiming Rental Losses

Claiming a large rental loss can command the IRS’s attention. Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out at higher income levels. A second exception applies to real estate professionals who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS is actively scrutinizing rental real estate losses. If you’re managing properties in your retirement, you may qualify under the second exception. Or, if you sell a rental property that produced suspended passive losses, the sale opens the door for you to deduct the losses. Just be ready to explain things if a big rental loss prompts questions from the IRS.

7.  Failing to Report Gambling Winnings or Claiming Big Losses

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially because the casino or other venue likely reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings. And the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. Writing off gambling losses but not reporting gambling income is sure to invite scrutiny. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get an extra look from IRS examiners, who want to make sure that these folks really are gaming for a living.

8.  Writing Off a Loss for a Hobby

Your chances of "winning" the audit lottery increase if you file a Schedule C with large losses from an activity that might be a hobby—dog breeding, jewelry making, coin and stamp collecting, and the like. Agents are specially trained to sniff out those who improperly deduct hobby losses. So be careful if your retirement pursuits include trying to convert a hobby into a moneymaking venture.

You must report any income from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. If you're audited, the IRS is going to make you prove you have a legitimate business and not a hobby. Be sure to keep supporting documents for all expenses.

9.  Neglecting to Report a Foreign Bank Account

Just because you may be traveling more in retirement, be careful about sending your money abroad. The IRS is intensely interested in people with money stashed outside the U.S., and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean—in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks that they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Saver's Credit: Don't Leave This Tax Break on the Table

You probably know about the benefits of tax-deferred investment accounts. But did you know that there is a special IRS provision that potentially allows you to save money just for being a retirement saver? The so-called "saver's credit," formally known as the Retirement Savings Contributions Credit, permits certain low- to middle-income workers to claim a tax credit for making eligible contributions to an IRA or most qualified workplace retirement plans.

But this tax break is currently going largely untapped. According to a study by the nonprofit Transamerica Center for Retirement Studies, only about a third of U.S. workers are aware of the saver's credit.1

The IRS Says …2

Here is a rundown on the basic rules governing the credit.

In order to claim the credit, the IRS requires that you:

•  Are at least 18 years old;
•  Are not a full-time student; AND
•  Cannot be claimed as a dependent on another person's tax return.

Retirement plans eligible for the credit include:

•  Traditional or Roth IRAs
•  401(k)s and 403(b)s
•  SIMPLE IRAs
•  SARSEPs
•  501(c)(18) or governmental 457(b) plans
•  Voluntary after-tax employee contributions to qualified retirement and 403(b) plans.

The Amount You Can Claim

According to the IRS, "The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A)."

Here's a breakdown for tax year 2016:

tax break.png

*Single, married filing separately, or qualifying widow(er).
 
To learn more about the saver's credit visit the IRS website. For help shaping up your retirement planning and/or tax planning strategy contact your financial advisor.

 
Source(s):

1.  Transamerica Center for Retirement Studies, "Retirement Throughout the Ages: Expectations and Preparations of American Workers," May 2015.

2.  IRS, "Retirement Savings Contributions Credit," updated February 22, 2016.



Required Attribution
Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mailinfo@diversifiedassetmanagement.com.



The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.
 

What Are the Tax Issues Associated With a Gain or Loss on a Primary Residence?

For U.S. federal income tax purposes, you may be able to exclude from income any gain up to $250,000 for a single taxpayer and $500,000 for a married couple filing a joint return. Generally, to exclude the gain, you must have owned and lived in the property as your main home for two of the five years prior to the date of the sale. If you lose money on a sale, the loss is not tax deductible.

 

Your Adjusted Basis

A dollar amount known as your adjusted basis determines whether you experience a gain or a loss. If you purchased or built your home, your initial cost basis typically is the cost to you at the time of purchase. If you inherit a home, the cost basis is the fair market value on the date of the decedent's death or on a later valuation date selected by a representative of the estate.

 

The formula for determining your gain or loss is as follows:

Selling price - Selling expenses = Amount realized

Amount realized - Adjusted basis = Gain or loss

 

The cost basis may be adjusted over time due to the following conditions:

•  Additions and other improvements that have a useful life of more than one year and that add to the value of your home. These may include a garage, decks, landscaping, a swimming pool, storm windows and doors, heating and air conditioning systems, plumbing, interior improvements and insulation. Note that repairs that keep your house in good condition but do not significantly enhance value, such as fixing gutters, repainting, or plastering, do not affect the basis.

•  Special assessments paid for local improvements.

•  Amounts spent to restore damaged property.

•  Payments for granting an easement or right-or-way.

•  Depreciation if the home was used for business or rental purposes.

•  Others as determined by the Internal Revenue Service (See Publication 523 Selling Your Home).

The definition of a "main home," according to the Internal Revenue Service, includes a private residence, condominium, cooperative apartment, mobile home or houseboat. It is to your advantage to maintain records of a home's purchase price, purchase expenses, improvements, additions, and other issues that may affect the adjusted basis.

 

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

© 2015 Wealth Management Systems Inc. All rights reserved.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Same Sex Marriage Ruling Raises New Tax Issues

In a move that reinforces the rapid shift in public sentiment regarding same-sex unions, the Supreme Court ruled earlier this year that all marriages -- and "the constellation of benefits" that are linked to marriage -- must be recognized and enforced in all 50 states.1

While the law brings happiness and relief to those affected, it also introduces new legal, tax, and financial issues that must be navigated. On the matter of income taxes alone, there is much that needs to be reviewed and acted upon. Here is a quick summary of some of the major tax planning issues to consider.

 

Factoring Taxes

For those who intend to tie the knot, marriage generally tends to lower many couples' income tax burden, especially if one spouse earns a lot more than the other. However, couples who earn about the same -- especially high-earning professionals -- may face a marriage penalty. For instance, if both parties earn $300,000 a year individually, they could each be in the 33% tax bracket. When their income is combined, $300,000 becomes $600,000 and they could be bumped into the 39.6% bracket.

For previously married couples living in states that did not recognize same-sex unions prior to the Court ruling, there are myriad income tax issues to review. Financial Planning recommends that couples work with their advisors and/or CPAs to assess:2

 

•  Prior-year federal and state income tax returns. While all married couples were required to file joint or married-but-separate federal returns from 2013 onward, many states still required some couples to file state tax returns as if they were single. Filing amended state returns for prior years now might reduce past state taxes retroactively. But the amended filings could also effectively increase prior-year federal tax liabilities. Consult your tax advisor to determine whether the potential costs of amended filings might outweigh the desired benefits. You might also consider whether retroactive filing changes could alter the amounts used to figure eligibility for various tax deductions and credits you might have claimed in those years.

•  Current-year federal and state income tax planning opportunities. Consider revising 2015 Form W-4 to decrease the number of personal allowances to mitigate withholding penalties, if applicable.

•  Roth conversion strategies, financial aid assistance for children going to college, health savings account (HSA) contributions, and other employee benefits. Determine the most tax-efficient strategies going forward.

•  The ability to file both federal and state taxes jointly as a couple, and to take advantage of any state-level tax breaks offered to married couples.

 

If you need help making sense of the new ruling and what it means for you and your spouse's tax situation, contact your financial and/or tax professional.

 

Source(s):

1.  Supreme Court of the United States, Syllabus Obergefell. v. Hodges, Director, Ohio Department of Health et al. (Full text of Justice Anthony Kennedy's decision), June 26, 2015.

2.  Financial Planning, "Smart Tax and Estate Planning Tips for LGBT Couples," July 1, 2015.

 

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

© 2015 Wealth Management Systems Inc. All rights reserved.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

I Received an Inheritance. How Is This Money Taxed?

How your inheritance is taxed will depend on your relationship to the deceased and other factors.

 

The amount of federal estate tax typically is determined by the amount of assets within the estate and your relationship to the deceased.

 

Spouses typically may inherit an unlimited amount of assets free of federal estate taxes. Estates bequeathed to non-spouses, in contrast, may be subject to federal estate taxes and state inheritance taxes depending on the level of assets within the estate.

 

For non-spousal heirs, in 2014, the federal estate tax is levied at a maximum rate of 40% after a $5.34 million exclusion. For estate tax purposes, heirs typically value assets at the fair market value on the date of the deceased's death.

 

Note that many states impose inheritance tax thresholds and tax rates that differ from those at the federal level. An estate planning attorney can advise you on taxation issues in your area.

 

In most instances, spouses who inherit IRAs may treat the IRA as their own and must begin required minimum distributions (RMDs) after age 70½. RMDs, which are taken annually, are taxed as ordinary income.

 

Non-spouses, in contrast, may not delay RMDs until they reach age 70½. Non-spouses may transfer the IRA assets into an inherited IRA titled specifically for an heir. When taking distributions, which are taxed as ordinary income, a non-spouse has two options. As one option, the non-spouse may empty the account over a five-year period. A second option available to a non-spouse is to take annual distributions, with the amount determined by the account balance and the heir's life expectancy (or the life expectancy of the plan owner if longer and if RMDs have already begun). The latter strategy may permit a larger portion of the account to remain invested and subsequently grow tax-deferred.

 

Similar rules apply to employer-sponsored retirement plans, such as 401(k) plans or 403(b) plans. If you inherit assets that are within an employer-sponsored plan, you may want to contact the sponsoring employer to determine rules affecting beneficiaries.

 

Inheritance taxes are a complicated issue. When determining how they apply to your situation, an experienced estate planning lawyer could be your most valuable asset. 

 

Required Attribution

 

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. 

 

© 2014 Wealth Management Systems Inc. All rights reserved.

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

  

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Tax Day for 2012 is over – but the work starts now for 2013!

With the April 15th deadline behind us, many of us want to forget about Tax Day until next April. This would be a disservice to you. Take the time now to do some planning for the 2013 tax year to capture any potential benefits – or miss out on potential harms to your tax situation.

Of course, if you took advantage of an extension for your 2012 returns, the sooner you file your return, the better so you can start planning for your 2013 tax year.

Here are some things you should be thinking about now – before next April:

1)      Make Your Estimated Tax Payments.
If you are self-employed, have a job that does not withhold tax from your paycheck, or have income from other sources (such as certain investments) then you likely have a need to make estimated tax payments. If you anticipate a shortfall in your tax withholding for the year, you need to be making estimated tax payments. One quick check to avoid the underpayment penalty is to ensure by the end of 2013, the smaller of: 90% of the tax you owe for the current year or 100% of the tax shown on the return for last year (2012) is being withheld. If you don’t anticipate this amount to be withheld, then you probably need to make estimated tax payments.  Check with your accountant to see if they recommended making estimated payments for the 2013 tax year. Estimated tax payments are due quarterly: April 15, June 15, September 15, and January 15.

2)     Fund Your IRA or Roth IRA Account.
Consider making current year (2013) contributions to your retirement accounts now instead of waiting until the filing deadline to contribute. The contribution limits for 2013 are $5,500 to an IRA or Roth IRA and $6,500 if you are over 50. There are certain income limits for contributions that you need to be aware of. Consult with your accountant or other financial professional to see what if an IRA or Roth IRA contribution is appropriate for your 2013 tax situation.

3)     Establish Business Retirement Accounts.
If you are self-employed, own your own business, or generate income from consulting, consider establishing retirement accounts for the work you do there. There are several options depending on your situation, including but not limited to: Individual 401(k), SEP IRA, SIMPLE IRA, and Defined Benefit Plans. Ask your accountant or financial professional if you are eligible to establish a retirement account and which one would be prudent for you.

4)     Keep Supporting Documents Used For Taxes Organized
If you start gathering paperwork now, you will save lots of time when you are preparing information for your taxes. Get a folder or box to toss receipts, donation records and other tax related documents into throughout the year. Then they are all in one place when it comes time to do your taxes.

5)     Create Deductions Before December 31st
Whether you are making deductions for your personal or business, do some planning now versus waiting until December 31st to make donations or generate expenses. If you own your own business or are self-employed, do some business planning now to lay out income and expenses for the year. Same with personal – make cash or non-cash charitable contributions now and throughout the year, instead of rushing to get them down at the end of the year.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

  

Still Time to contribute to an IRA or Roth IRA for 2012…If You Qualify

Can You Make an IRA Contribution?

As long as you have income, you can contribute to an IRA; even if you are participating in an employer retirement plan. The only question is whether or not your IRA contribution is deductible from your taxes.

Even if your contribution is not deductible, the money in the IRA will still grow tax free until you take it out (after age 59½) at which point you only pay tax on the gains. If your spouse is not working, you can contribute to an IRA on their behalf as well, provided you have earned income.

Check with your accountant on the deductibility of an IRA contribution for your situation.

Can You Make a Roth IRA Contribution?

A better alternative is a Roth IRA, where you contribute after tax money and the money grows tax free for the rest of your life. The Roth IRA does have income limits. The limits are as follows:

Tax Filing Status

Income MAGI

Single

$110,001-$125,000

Married- Filing Jointly

$173,001-$183,000

If your MAGI (Modified Adjusted Gross Income) is above the limits, you can’t contribute to a Roth IRA. If you are eligible, then the Roth IRA is a better alternative (provided that tax rates don’t decrease substantially).

Unlike a Traditional IRA, regardless of your age, as long as you have income and your income does not exceed the limits above, you can make a 2012 Roth IRA contriubtion.

2012 Contribution Deadline

The deadline to make your 2012 contribution to your IRA or Roth IRA is April 15, 2013! The contribution limits for 2012 is $5,000 -- $6,000 if you are over age 50.

Please note that you had to have your IRA or Roth IRA account opened prior to December 31, 2012 in order to make a 2012 contribution.

 

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.