You might not be used to thinking of your investments in terms of taxable, tax-deferred, and tax-free. Learn why you might want to.

Diversifying your investments involves spreading your risks by investing in a variety of asset classes such as stocks, bonds, commodities, and real estate. But with a changing tax landscape, you might consider three more classes: taxable, tax-deferred, and tax-free.

 
Years ago, taxpayers often worked under the assumption that their tax bracket would be lower after they retire. Therefore, a common strategy was to defer as much taxable income as possible to the golden years. Now, however, with the possibility of higher tax rates in the future, it could be more efficient to pay those taxes today while rates remain lower. Since no one knows for sure what Washington will do, it might be time to hedge your tax risk and allocate your portfolio between accounts with differing tax consequences.

 
* Taxable accounts, such as savings or brokerage accounts, result in current taxation on earnings, but they also provide maximum flexibility. You can withdraw as much as you wish whenever you wish, with no IRS penalties. Keeping some of your nest egg in this type of account will provide immediate funds for major purchases, debt reduction, or emergencies.

 
* Tax-deferred accounts, such as IRAs or 401(k)s, only postpone the payment of taxes; eventually you will have to pay Uncle Sam when you withdraw the funds. But in the meantime, you generally receive a current-year tax deduction when you contribute, and the account can grow tax-deferred until you take it out at retirement.

 
* Tax-free accounts, such as Roth IRAs, are funded with after-tax dollars. What you put in, including any investment earnings, can be later withdrawn tax-free. The downside? You generally must wait until after age 59½ (and the account has to be open for five years) to make a tax-free withdrawal.

 
Diversifying your portfolio is only the first step. The next (and trickiest) step is properly investing in each tax class. For instance, your goal for a taxable account might be to generate growth while keeping taxable earnings to a minimum. This could be done by investing in tax-exempt municipal bonds or low-dividend yielding growth stocks.
In a tax-deferred account, investment income is not taxed until withdrawn, so earnings can come from any source without immediate tax implications. However, since you must start withdrawing funds from an IRA or 401(k) at age 70½, you might want to consider this in your planning.

 
Tax-free Roth IRAs offer the longest time horizon for investing since you are not required to make a withdrawal at any age.

 
In an era of high uncertainty and low-to-moderate economic growth forecasts, tax-efficient investing has never been more important. To review the tax implications of your investments, give our office a call today.

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A tax refund for you or an interest-free loan for the IRS?

 

Millions of taxpayers receive refunds each year. Will you be among them? Most of us will happily accept our tax refund checks, because we can usually use the money. However, it’s important to understand that refunds actually cost you money. Here’s why:

 
* The government pays no interest on refunds. Kept in your hands, those dollars could have been productive. For example, you could have invested the money or used it to pay off your debt during the year. If the money had been added to a 401(k) plan, tax could have been deferred on both the investment and its earnings. Even better, your employer might have matched all or part of your investment, adding to your retirement savings.

 
* Refunded cash is not available for use until actually received. Even though most taxpayers get their refund checks promptly, circumstances or errors can delay (or stop) a refund.

 
To manage potential tax refunds, consider reducing your withholding or estimated tax payments. For most taxpayers, withholding must equal either the prior-year’s tax or 90% of the current year’s liability. If your annual income changes little, it’s relatively easy to avoid overwithholding. You should consider filing a revised Form W-4 withholding statement with your employer if you’re having too much withheld.

 
For taxpayers with fluctuating income or multiple sources of income, the problem is more complex. The IRS provides a worksheet with Form W-4, but many people find the form complicated. If you’d like assistance adjusting your withholding, contact our office.

Five resolutions for 2017

 

Do you have a financial plan that works for both you and your spouse? Here are suggestions that can help.

Organize your finances. Get a handle on your income and spending, by both of you individually and as a couple. By reviewing the overall picture of how you spend money, you can focus on potential problem areas.

 

Set goals. How much will you accumulate in bank accounts and investments over the next three years? Five years? Ten years? Have you anticipated future expenses? Say, for example, you’re dreaming of a vacation in Europe for your anniversary. You’ll want to start saving now so you won’t need to finance the trip with credit cards.

 

Build an emergency fund. How much is enough for emergencies? As a general rule, set aside three to six months of your combined gross income in easily accessible accounts, such as savings or money market accounts.

 

Save for retirement. Participate in your employer’s retirement plan and contribute at least as much as the amount your employer will match. The earlier you start saving, the more you’ll accumulate. It’s that simple.

 

Formalize an estate plan. Have an attorney draft a will and set up a financial power of attorney so your assets are distributed according to your wishes in the event of death or incapacity.

For more financial planning advice, contact us.

Are you changing jobs? Here are tax-smart options for your old retirement plan

There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:

 
1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.

 
2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.

 
3. Roll over to an IRA. If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.

 
If you choose a rollover, request a direct rollover from your old plan to your new plan or IRA. If instead the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.

 
Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), you’ll be subject to income tax — and potentially the 10% penalty — on the difference.

 
There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.

Putting your home on the market? Understand the tax consequences of a sale

As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all, in many locales, summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

 
Gains
If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

 
Losses
A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

 
Second homes
If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

 
Learn more
If you’re considering putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.

Should you make estimated tax payments?

 

If you’re required to make quarterly estimated tax payments this year, the first one is due on the same day as your federal income tax return. Failing to pay estimates, or not paying enough, may lead to penalties. Here’s what to consider.

 
Do you need to make estimates? If you operate your own business, or receive alimony, investment, or other income that’s not subject to withholding, you may have to pay the tax due in installments. Each estimated tax installment is a partial prepayment of the total amount you expect to owe for 2016. You make the payment yourself, typically four times a year.

 
How much do you need to pay? To avoid penalties, your estimated payments must equal 90% of your 2016 tax or 100% of the tax on your 2015 return (110% if your adjusted gross income was over $150,000).

 
There are exceptions to the general rule. For instance, say you anticipate the balance due on your 2016 federal individual income tax return will be less than $1,000 after subtracting withholding and credits. In this case, you can skip the estimated payments and remit the final balance with your return next April.

 
Contact us for more information about estimated tax payments.

Teach your child this vital skill

 

Financial literacy is a vital skill in today’s world. Will your children be able to handle their finances when they became adults? Here are tips to help ensure the answer is yes.

 
Shave spending. Take the weekly allowance to the next level by helping your child develop a budget. Review the results to reinforce good habits.

 
Stress savings. Even young children can grasp the power of compound interest. A simple example is asking your child to put a dollar in a piggy bank. Offer to pay five percent interest if the money is still there in a week or a month. Make the same offer at the end of the first time period, and pay “interest on the interest” as well.

 
Introduce investments. Create a portfolio, either real or paper, consisting of shares of one or more stocks or mutual funds. Make a game of charting the investment’s progress on a regular basis.

 
Cover credit. Take on the role of lender and let your child request an advance on a weekly allowance. Charge interest.

 
Talk taxes. Use word search or crossword puzzles to teach tax terminology. Consider creating a “Family Economy” game using examples from your own budget.

 

 
Lessons in financial responsibility can benefit your children now and in the future. Get them started on the right path.

 

 

 

 

3 income-tax-smart gifting strategies

If your 2015 tax liability is higher than you’d hoped and you’re ready to transfer some assets to your loved ones, now may be the time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall:

 
1. Gift appreciated or dividend-producing assets to loved ones eligible for the 0% rate. The 0% rate applies to both long-term gain and qualified dividends that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.

 
2. Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0% rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8% net investment income tax on dividends from the assets or if you sold the assets.

 
3. Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.

 
If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too.

To learn more about tax-smart gifting,contact us.

Is your budget stopping you from saving for retirement?

 

If you haven’t yet begun saving for retirement, a myRA may be a reason to start. “myRA” is an acronym for “my Retirement Account.” myRAs cost nothing to open, have no fees, and let you start saving with any amount that fits your budget. You can open a myRA even if you have other retirement accounts. Your myRA belongs entirely to you and can be moved to any new employer that offers direct deposit capability.
myRAs generally follow Roth IRA rules. That means the maximum contribution for 2015 and 2016 is $5,500 ($6,500 when you’re over age 50). Contributions to your myRA are invested in a U.S. Treasury savings bond. The balance in your account earns interest and is guaranteed to retain its value.
The Department of the Treasury recently added new ways to fund myRAs. As before, you can choose to fund your account from your paycheck by completing a direct deposit authorization form and giving it to your employer. And now you also have the option of making direct deposits from a checking or savings account or from your federal income tax refund.
To learn more about myRAs, please contact us.

 

No need to itemize to claim these deductions

 

Are you part of the approximately 68% of taxpayers who IRS statistics say claim the standard deduction instead of itemizing? If so, you can still deduct some expenses on your 2015 federal income tax return.
● Individual retirement account (IRA) contributions – For 2015, you may qualify to deduct up to $5,500 in contributions to a traditional IRA. That increases to $6,500 if you’re age 50 or older. Income limitations may apply in some cases. The same limits apply to Roth IRA contributions, which are not deductible.
● Health Savings Account (HSA) contributions – HSAs are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you withdraw the money tax-free to pay unreimbursed medical expenses. The HSA contribution limit for 2015 is $3,350 for individuals and $6,650 for families. You can contribute an additional $1,000 when you’re age 55 and older.
● Student loan interest and tuition fees – Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents. For 2015, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.
● Self-employment deductions – If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.
● Other deductions – Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Educators can deduct up to $250 for classroom supplies purchased in 2015.
Contact our office for more information on these and other deductions you may be entitled to claim on your 2015 return.