Category: Taxes

Beyond Tax Prep: Elevating Your Wealth Through Strategic Tax Planning with Max Pollack, CPA

Posted on by Brian Colvert

When it comes to managing your finances, taxes are often viewed as a chore—a once-a-year task that revolves around gathering documents, filling out forms, and submitting them to the IRS. However, as Max Pollock, CPA, points out in his recent interview on The Field Guide podcast, there’s a significant difference between tax preparation and strategic tax planning. Understanding this distinction could save you money, reduce stress, and help you achieve your financial goals.

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The Difference Between Tax Prep and Tax Planning

According to Max, tax preparation is largely a reactive process. It involves compiling your financial information and ensuring compliance with filing requirements. In contrast, tax planning is proactive. It’s about looking ahead, understanding your financial landscape, and strategizing to minimize your tax liability while maximizing your wealth.

For instance, if you’re considering a Roth Conversion—moving money from a traditional IRA to a Roth IRA—the timing and execution of that decision can have significant tax implications. Tax planning helps you navigate these scenarios, ensuring you make informed choices that align with your long-term goals.

Proactive and strategic tax planning also includes evaluating potential life changes, such as starting a business, purchasing real estate, or preparing for retirement. Each of these scenarios has unique tax implications that can be optimized through strategic planning.

Common Missteps and How to Avoid Them

One of the most common misconceptions Max encounters involves passive income versus active income. Many investors purchase rental properties, expecting substantial tax benefits through depreciation. However, income thresholds and phase-outs can limit these benefits, particularly for high earners. Understanding these nuances is critical to creating a successful tax strategy.

Another often-overlooked opportunity is the home office deduction. Post-COVID, more individuals work from home than ever before, yet many fail to take advantage of this legitimate tax break. By properly allocating expenses such as utilities and property taxes, you can optimize your deductions within the boundaries of the law.

Max also emphasizes the importance of knowing your eligibility for certain deductions and credits. For example, income phase-outs can limit your ability to take advantage of tax breaks, such as contributing to a Roth IRA or qualifying for certain child tax credits. Awareness of these thresholds allows you to plan accordingly and avoid surprises when filing your return.

Strategies for High-Net-Worth Individuals

For high-income families or those heavily invested in equities, planning becomes even more essential. Max highlights the importance of strategies like:

  • Trust Planning: Ensure your trust is properly funded and updated regularly to avoid wasted effort and costs. Many individuals spend significant resources creating trusts but fail to transfer assets into them, rendering the trusts ineffective.
  • Alternative Investments: Alternative investments like equity, real estate, and oil and gas ventures offer tax advantages, but due diligence is critical to mitigate risks. These investments often come with large upfront deductions, such as depreciation, but require careful consideration of long-term benefits and risks.
  • Charitable Giving: Leveraging tools like donor-advised funds or direct IRA contributions can maximize the impact of your donations while providing substantial tax benefits. Max suggests bundling charitable contributions into a single year to surpass the standard deduction and achieve meaningful tax savings.

Preparing for a Changing Tax Landscape

With new tax legislation on the horizon, it’s essential to stay informed and adaptable. Max advises keeping an eye on potential changes to income brackets, deduction limits, and other key provisions. For example, the sunset of the Tax Cuts and Jobs Act could lead to higher tax rates for many taxpayers unless Congress acts to extend these provisions. Check out the current year’s limits, tax brackets and more here.

In times of uncertainty, it’s crucial to work with a qualified tax professional who can help you navigate the evolving landscape. They can provide insights into proposed changes, evaluate their potential impact on your finances, and recommend strategies to minimize your tax liability.

Key Tax Planning Strategies for Families and Business Owners

Max shares several practical and strategic tax planning ideas that families and business owners can implement to optimize their tax situation:

  1. Leverage Retirement Accounts: Maximize contributions to tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs). These accounts not only reduce your taxable income but also allow your investments to grow tax-deferred or tax-free.
  2. Plan for Capital Gains: If you’ve accumulated significant gains in your investment portfolio, consider strategies like tax-loss harvesting or gifting appreciated securities to charity. These tactics can help offset your gains and reduce your tax burden.
  3. Utilize Depreciation: For real estate investors, cost segregation studies can accelerate depreciation deductions, providing substantial tax savings in the early years of ownership.
  4. Optimize Business Deductions: Business owners should take full advantage of deductions for expenses like equipment purchases, employee benefits, and travel. The Qualified Business Income (QBI) deduction also offers significant savings for eligible pass-through entities.
  5. Consider Family Foundations: Creating a family foundation allows you to make a large charitable contribution in one year, achieving immediate tax benefits while distributing funds to charitable causes over time.
  6. Bundle Deductions: Another effective strategy is to bundle deductions into a single year. For example, paying property taxes for two years within a single tax year can help surpass the standard deduction and maximize itemized deductions.

Navigating Audits and IRS Scrutiny

With the IRS increasing scrutiny on high-net-worth individuals, it’s more important than ever to maintain accurate records and work with a qualified CPA. Max advises taxpayers to:

  • Document Everything: Keep detailed records of income, expenses, and supporting documentation for deductions and credits.
  • Engage a CPA: Having a professional prepare and sign your tax return provides additional assurance and support in case of an audit.
  • Respond Promptly: If the IRS contacts you for additional information, respond quickly and professionally to avoid complications. A CPA can help you navigate this process and ensure compliance.

Max also highlights the importance of understanding red flags that might trigger audits, such as unusually large deductions or discrepancies in income reporting. By proactively addressing these issues, you can minimize the likelihood of IRS scrutiny.

Tax Planning for the Future

Looking ahead, Max advises staying informed about potential tax changes and incorporating flexibility into your financial plan. He also emphasizes the importance of long-term strategies, such as estate planning, to ensure your wealth is preserved for future generations.

For example, step-up in basis rules can significantly reduce capital gains taxes when assets are passed to heirs. By incorporating these strategies into your overall tax plan, you can create a more secure financial future for your family.

Final Thoughts

The smartest financial decisions stem from curiosity and preparation. As Max eloquently states, “The smartest person in the room is the one asking the questions.” By proactively engaging in tax planning, you can turn what feels like a daunting obligation into an opportunity to build and preserve wealth.

Whether you’re starting from scratch or refining your strategy, remember that tax planning is not just about compliance—it’s about setting yourself up for financial success. To hear more expert advice from Max Pollock, tune in to the full episode of The Field Guide podcast.

Tax planning is not a static process but a dynamic one that evolves with your financial goals and life changes. Embrace it as a tool to secure your financial future and unlock opportunities you may not have considered before.

If you’re ready to take your tax strategy to the next level or have questions about how strategic tax planning can benefit you, don’t hesitate to reach out to Max Pollock, CPA. With his expertise and personalized approach, Max can help you optimize your finances and achieve your long-term goals. Schedule a call with him today! 

Decoding Bitcoin with Gerry Signorelli

Posted on by Brian Colvert

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Decoding Bitcoin with Gerry Signorelli

We often get asked what is Bitcoin all about by our clients, and for good reason. The landscape of cryptocurrency is riddled with terms like “blockchain,” “mining,” “nodes,” and “wallets,” which can be confusing and create a steep learning curve. The underlying technology, though revolutionary, is not always straightforward, leading to questions about how it operates, its value proposition, and its role in the financial ecosystem. 

Gerry Signorelli has immersed himself into the world of Bitcoin, having built and operated a significant Bitcoin mine and integrated the digital currency into his daily life for various purposes, from savings to international transactions.

We were grateful to have Gerry on the most recent episode of The Field Guide Podcast to break down what is Bitcoin. He shares his extensive experience with the cryptocurrency, provides insights on its advantages over other cryptocurrencies, and discusses the essential role of nodes in maintaining the network’s decentralization. Gerry also addresses common concerns about Bitcoin’s security and its future potential, offering a comprehensive view of how Bitcoin operates.

A Journey from Stable Coins to Mining

Gerry’s foray into the financial world began with a quest for a saving mechanism, leading him from the realm of stablecoins to the discovery of Bitcoin. Despite experimenting with other cryptocurrencies, Gerry found his home with the currency, drawn by its fundamental differences, use cases, and the depth of its structure compared to the fleeting allure of ‘shitcoins.’

Why Bitcoin Stands Out

Bitcoin’s appeal lies in its foundational principles – scarcity, decentralization, and the prevention of censorship. Unlike other cryptocurrencies, Bitcoin’s limited supply, coupled with its robust and decentralized verification process, establishes it as a more stable and reliable digital asset. Gerry articulates the journey of money throughout human history, positioning Bitcoin as the latest evolution in this continuum, offering a digital solution to age-old problems of currency debasement and lack of control over personal wealth.

The Intricacies of  Mining

Mining is not just a business for Gerry; it’s a crucial component of Bitcoin’s infrastructure. He delves into the complexities of Bitcoin mining, explaining how it serves as a mechanism for distribution and validation within the network. The process, while energy and capital-intensive, is vital for the creation of new Bitcoins and securing the network against potential attacks.

Understanding Bitcoin Transactions

Transactions in Bitcoin are more than mere financial exchanges; they signify the transfer of control over the digital asset. Gerry discusses how these transactions occur on the blockchain, ensuring transparency and security without the need for intermediary validation.

The Role of Nodes in Decentralization

Brian and Gerry dive into the importance of nodes in the ecosystem. These nodes, which any individual can run, are the backbone of Bitcoin’s decentralization, ensuring that the network remains secure and operates without centralized control. They allow for a democratic verification process that aligns with the ethos of Bitcoin – providing a system where everyone has a say in its operation.

Bitcoin’s Safety and Accessibility

Addressing concerns about Bitcoin’s safety, Gerry outlines the spectrum of ways one can own Bitcoin, from ETFs to cold wallets, each offering different levels of security and convenience. The decentralized nature of Bitcoin, coupled with the ability for individuals to run nodes, ensures that the system remains robust against potential threats.

The Future Outlook

Gerry envisions a bright future for Bitcoin, predicting a significant increase in its value as more people, institutions, and governments recognize its potential. He foresees a world where Bitcoin facilitates freedom of transaction, protects against inflation, and offers a new standard of financial autonomy.

In summary, Gerry Signorelli’s insights into Bitcoin present a compelling narrative of its potential to revolutionize our financial landscape. From its role in savings and transactions to its fundamental principles of scarcity and decentralization, it stands as a beacon of financial innovation in the digital age. As we navigate the complexities of our global economy, Bitcoin offers a promising alternative, challenging traditional financial systems and offering a new paradigm for money in our increasingly digital world.

We hope you enjoyed this episode! Have more questions about Bitcoin or digital currencies? Feel free to reach out to us with any questions!  Be sure to like, review, and subscribe wherever you listen!

Taxes in Retirement: Planning Ahead

Posted on by Brian Colvert

SMART TAX PLANNING IN RETIREMENT

Effective planning for taxes in retirement is paramount for retirees looking to maximize their financial security. Understanding the complexities of how different income sources are taxed can empower you to make informed decisions. This guide delves into strategies that can help reduce your tax liability and enhance your retirement income.

 

Understanding Retirement Tax Basics

Understanding the basics of taxes in retirement is crucial for effective financial planning. It can help ensure that you keep more of your hard-earned money during your golden years. As you transition from earning a salary to relying on various income sources in retirement, the way your income is taxed changes significantly. Retirement income can come from various sources, each with its own tax considerations. Familiarizing yourself with the tax treatment of 401ks, IRAs, pensions, and Social Security benefits is the first step toward efficient tax planning.

 

Types of Retirement Income

Retirement income can be categorized into three main types: taxable, tax-deferred, and tax-free. Each type has different tax implications that can affect your overall tax liability in retirement.

  • Taxable Income: This includes income from traditional investment accounts, rental properties, and part-time employment. It’s taxed at ordinary income tax rates, which range depending on your total taxable income for the year.
  • Tax-Deferred Income: Comes from accounts like traditional IRAs, 401ks, and other employer-sponsored retirement plans. Taxes on these accounts are deferred until you make withdrawals, which are then taxed as ordinary income. This can be advantageous because many people find themselves in a lower tax bracket in retirement compared to their working years.
  • Tax-Free Income: Roth IRAs and Roth 401(k)s provide tax-free income in retirement, provided certain conditions are met. Contributions to these accounts are made with after-tax dollars, meaning you don’t receive a tax deduction when you contribute. However, both the contributions and the earnings can be withdrawn tax-free in retirement.

 

How to Reduce Taxes on Retirement Income

Strategic withdrawals from tax-deferred and tax-free accounts can significantly lower your tax bill. This section outlines how timing and the order of withdrawals can impact your overall tax situation.

Managing Social Security Taxation

Managing the taxation on Social Security benefits is a pivotal aspect of optimizing your retirement income. The tax liability on these benefits hinges on your “combined income.” This encompasses your adjusted gross income, nontaxable interest, and half of your Social Security benefits. The intricacies of this taxation mean that up to 85% of your benefits could be taxable if your income surpasses certain thresholds. Navigating these waters requires a nuanced understanding of how different income streams interact and impact the taxation of your benefits, making it essential to strategize effectively to minimize the tax bite.

Strategic measures, such as timing the withdrawal of funds from retirement accounts and potentially delaying the onset of Social Security benefits, can significantly influence your tax situation. Drawing on Roth IRA savings, which offer tax-free withdrawals, can be a smart move to manage your combined income levels. Thereby reducing the taxable portion of your Social Security benefits. These strategies underscore the importance of a well-thought-out plan that considers the timing and source of your retirement income, aiming to secure a more tax-efficient stream of income in your retirement years.

Need help understanding your Social Security Benefits? Download our updated Free Social Security Guide!

The Role of Investment Income

The role of investment income in retirement planning is pivotal. It not only supplements your primary income sources like Social Security and pensions but also carries specific tax considerations that can significantly impact your overall tax liability and financial stability in retirement. By strategically managing capital gains, dividends, and interest from investments, retirees can optimize their tax situation, potentially benefiting from lower tax rates on long-term capital gains and qualified dividends, thus enhancing their income streams while minimizing tax expenses.

Navigating Required Minimum Distributions

Navigating Required Minimum Distributions (RMDs) is an essential aspect of retirement planning, particularly for those with tax-deferred retirement accounts like traditional IRAs and 401(k)s. Once you reach the age of 73, the IRS mandates that you begin taking these distributions, which are then taxed as ordinary income. The amount of the RMD is calculated based on the account balance and life expectancy, creating a potential tax impact by increasing your taxable income in retirement.

Properly managing RMDs involves strategic planning to minimize their effect on your tax bracket, such as considering Roth conversions before reaching RMD age to reduce future taxable income or employing strategies like Qualified Charitable Distributions (QCDs) to meet RMD requirements tax-free by directly transferring funds to a qualified charity. This careful approach to RMDs can help maintain a more favorable tax position and preserve retirement savings.

Utilizing Roth Accounts for Tax-Free Income

Utilizing Roth accounts for tax-free income is a strategic approach that can greatly benefit retirees. They offer a source of income that does not increase their tax burden. Contributions to Roth IRAs and Roth 401(k)s are made with after-tax dollars, meaning that while there are no tax deductions at the time of contribution, the withdrawals, including earnings, are tax-free in retirement as long as certain conditions are met.

This feature is particularly advantageous as it allows retirees to manage their taxable income more effectively. It can keep them potentially in a lower tax bracket and reduce or even eliminate taxes on Social Security benefits. Moreover, Roth accounts do not have Required Minimum Distributions (RMDs) during the account owner’s lifetime, providing further flexibility in planning and extending the tax advantages over a longer period. This makes Roth accounts a powerful tool in retirement income planning, offering tax diversification and the potential to optimize overall tax liability.

Estate and Gift Tax Planning for Retirement

Estate and Gift Tax Planning for Retirement is a critical strategy for managing how your assets will be distributed to your heirs while minimizing the tax impact on both your estate and the beneficiaries. This aspect of retirement planning involves understanding and navigating the complex rules surrounding estate and gift taxes, which can significantly affect the value of the assets transferred.

By leveraging annual gift exclusions, taking advantage of the lifetime estate and gift tax exemption, and setting up trusts or other estate planning tools, retirees can efficiently transfer wealth to their heirs or favorite charities, potentially reducing or eliminating estate taxes. Such planning ensures that more of your assets go to your intended recipients rather than to tax payments, preserving the financial legacy you wish to leave behind.

State-Specific Retirement Tax Considerations

State taxes can significantly affect your retirement finances. Each state has its own set of rules regarding income. Sales, property, and estate taxes can affect the overall tax burden on retirees. Some states offer favorable tax treatments, such as no state income tax, exemptions on Social Security income, or deductions for pension and retirement account withdrawals, making them attractive destinations for retirees. Understanding these differences is crucial for making informed decisions about where to live in retirement or how to allocate assets. Taking into account state-specific tax considerations can lead to substantial savings, enhancing the ability to maintain a desired lifestyle in retirement.

Healthcare Costs and Their Tax Implications

Healthcare Costs and their tax implications are a significant concern for retirees, given that healthcare expenses often increase with age. Navigating these costs requires an understanding of how they can affect your tax situation. For instance, certain healthcare expenses, including Medicare premiums and out-of-pocket costs for prescriptions, doctor’s visits, and medical procedures, can be deductible if they exceed a specific percentage of your adjusted gross income (AGI).

Leveraging a Health Savings Account (HSA), if eligible before enrolling in Medicare, offers a tax-advantaged way to save for and pay these expenses, with contributions being tax-deductible, growth tax-free, and withdrawals for qualified medical expenses also tax-free. Effectively managing healthcare costs and understanding their tax implications can significantly reduce your taxable income and lower your overall tax liability, providing more financial flexibility in retirement.

The Importance of Tax Diversification

Diversifying your retirement accounts can provide tax flexibility in retirement. It offers a strategic way to manage, and potentially minimize taxes on retirement income. Tax diversification involves spreading your investments across various account types. They could be taxable, tax-deferred, and tax-free—to create flexibility in how you can access funds in a tax-efficient manner. This strategy allows retirees to navigate the tax landscape more effectively. By choosing from different income sources in a way that keeps their taxable income in a lower bracket, they can reduce overall tax liability.

By having a mix of Roth IRAs, traditional retirement accounts, and taxable investment accounts, retirees can decide which accounts to draw from each year based on their current tax situation and future income predictions. This flexibility is crucial for managing taxes in response to changing tax laws and personal circumstances, ultimately leading to a more financially secure retirement.

HOW TAX LAWS IMPACT RETIREMENT PLANNING

How Tax Laws Impact Retirement Planning

Tax laws are continually changing. Staying informed and flexible in your planning is crucial for adapting to new laws and maximizing your retirement savings. These laws can affect how different types of retirement income are taxed.  For instance, alterations in tax rates, adjustments to the rules governing retirement account contributions and distributions, and changes to estate tax exemptions can necessitate adjustments in how individuals save for retirement, when and how they withdraw from their accounts, and how they plan to pass on their assets.

Moreover, tax legislation can introduce new opportunities or challenges for retirees. Recent examples include adjustments to the age for RMDs and changes to the tax treatment of certain income sources. All of which can influence retirement timing decisions and income strategies. Therefore, staying informed about current and proposed tax laws is essential for effective retirement planning. It enables individuals to make proactive adjustments to their financial strategies. Thus, helping to ensure they can maximize their retirement savings’ growth and minimize their tax liabilities, thereby securing a more comfortable and financially stable retirement. Regular consultation with tax professionals and financial advisors can provide valuable guidance in navigating these changes, helping retirees to adapt their plans to benefit from favorable tax treatments or mitigate the impact of less favorable ones.

 

FAQs on Navigating Taxes in Retirement

 

How can I minimize taxes on my retirement income?

Minimizing taxes on retirement income involves several strategies, such as understanding the tax implications of various income sources, making strategic withdrawals from retirement accounts, and considering Roth conversions. It’s essential to balance withdrawals from taxable, tax-deferred, and tax-free accounts to manage your tax bracket effectively. Additionally, timing your Social Security benefits can also impact your tax situation. The same goes for managing investment income to take advantage of lower tax rates on long-term capital gains.

How can I reduce the taxes on my Social Security benefits?

To reduce taxes on Social Security benefits, you can manage your combined income. This includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Keeping this combined income below certain thresholds will reduce or eliminate taxes on your benefits. Strategies include delaying Social Security benefits while withdrawing from tax-deferred accounts earlier, investing in Roth IRAs for tax-free income, and being mindful of how much and when you withdraw from taxable accounts.

What is the most tax-efficient way to handle my investment income?

The most tax-efficient way to handle investment income is to take advantage of tax-favorable investments and strategies. Holding investments for more than a year before selling can qualify you for long-term capital gains tax rates. Thiese are ower than ordinary income tax rates. Consider investing in tax-exempt bonds or funds, particularly if you are in a high tax bracket. Utilizing tax-loss harvesting can also offset any capital gains you might have, further reducing your tax liability.

How do Required Minimum Distributions (RMDs) affect my taxes?

RMDs from tax-deferred retirement accounts such as traditional IRAs and 401(k)s must start at a certain age and are taxable as ordinary income. These mandatory withdrawals can push you into a higher tax bracket, increasing your tax liability. Planning for RMDs involves considering strategies like starting withdrawals earlier to spread out the tax impact, converting to Roth accounts where RMDs are not required, or using RMDs for charitable contributions (Qualified Charitable Distributions) which can exclude the amount donated from taxable income.

What should I consider for tax planning if I’m moving to another state?

When moving to another state for retirement, consider the overall tax environment of the new state. This includes:

  • Income tax rates
  • Exemptions for retirement income
  • Sales tax
  • Property tax rates
  • Any other local taxes.

Some states do not tax Social Security benefits or offer significant deductions on retirement income, making them more favorable for retirees. Additionally, evaluate the cost of living, healthcare facilities, and quality of life, as these factors also play a critical role in retirement planning.

How can I deduct healthcare expenses in retirement?

You can deduct healthcare expenses in retirement if you itemize deductions on your tax return and your medical expenses exceed a certain percentage of your adjusted gross income (AGI). This includes a wide range of out-of-pocket expenses. This includes:

  • Premiums for Medicare and long-term care insurance
  • Prescription drugs
  • Costs associated with medical and dental care.

Using a Health Savings Account (HSA) for qualifying medical expenses can also provide tax-free money for healthcare costs, provided you have an HSA-compatible health plan before enrolling in Medicare.

 

Conclusion: Mastering Taxes for Retirement

Proactive tax planning is essential for securing your financial future in retirement. It requires a blend of knowledge, strategy, and the right support to navigate the complexities of tax planning. By taking control of your tax situation today, you’re not just helping to ensure a more prosperous retirement for yourself but also laying the groundwork for a lasting financial legacy. With the right approach and resources, you can minimize your tax liabilities, maximize your retirement income, and enjoy the peace of mind that comes with financial security.

However, mastering taxes doesn’t mean going at it alone. Leveraging the expertise of CERTIFIED FINANCIAL PLANNER™ and tax professionals can provide you the guidance and insight needed to navigate complex tax issues. These resources can help tailor a tax strategy that fits your unique situation, taking into account your income needs, tax bracket, and long-term financial goals.

 

Next Steps

Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals. This initial consultation is an excellent opportunity to ask questions, address concerns, and get a sense of how we can help you achieve your retirement goals. Don’t miss out on this chance to lay a solid foundation for a secure and prosperous retirement. Take the next step today and schedule your free consultation call —it could be the most important call you make for your retirement future.

 

CFP Colorado Springs

Navigating Taxes with Henry Ip, CPA

Posted on by Brian Colvert

Bonfire Financial has a Podcast! 

We are excited to announce that we are launching The Field Guide Podcast! Hosted by the CEO of Bonfire Financial, Brian Colvert, CFP®, each episode will bring you ideas to simplify, navigate, and elevate your financial life. We really hope you enjoy it! Listen anywhere you stream Podcasts!

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Episode 1: Navigating Taxes with Henry Ip, CPA

We are kicking off our first episode of the Field Guide Podcast, with Henry Ip, CPA.

Henry Ip is a seasoned tax professional with a wealth of experience spanning over 17 years in the dynamic field of Tax Advisory and Compliance. Currently serving as a tax partner at Biggskofford PC in the Colorado Springs office, Henry specializes in providing strategic tax compliance and planning services to a diverse clientele, including small public and middle-market private companies and their owners.

Henry shared invaluable insights on tax planning, financial strategies, and considerations for diverse situations. This blog post aims to navigate through the key points of the discussion, shedding light on Henry’s recommendations for navigating taxes in various aspects of financial planning.

Planning for Taxes: Looking Beyond the Present

The conversation began with the crucial importance of planning for taxes. Henry stressed the need to look beyond the current year, emphasizing that tax planning involves not just minimizing taxes for the present but also preparing for future tax implications.

Roth Conversions and Qualified Charitable Distributions: Navigating Retirement Accounts

Turning to retirement accounts such as 401(k)s, the discussion explored Roth conversions and Qualified Charitable Distributions (QCDs). Henry suggested a strategy for retirees comfortable with their financial situation: using Required Minimum Distributions (RMDs) for tax-free donations to charities, meeting RMD requirements while contributing to qualified causes.

Managing Rental Properties: LLCs for Liability Protection

For individuals with Airbnb properties or rental units, Henry stressed the importance of managing personal liability by setting up Limited Liability Companies (LLCs). While not directly impacting income tax, an LLC provides essential liability protection.

LLCs and Tax Implications: Balancing Liability and Tax Benefits

Addressing the common question about the impact of LLCs on income taxes, Henry clarified that, primarily, setting up an LLC benefits individuals in terms of liability protection. However, he emphasized the significance of proper setup and ownership structure.

Selling a Business and Tax Implications: Early Planning is Key

The conversation delved into selling businesses and the associated tax consequences, emphasizing the importance of early planning. Henry recommended considering tax strategies two to five years before selling, including converting ordinary income to capital gains and exploring options for deferring income recognition.

The Importance of Early Planning: Restructuring for Tax Efficiency

Henry highlighted that early planning is essential for restructuring a business to make it more tax-efficient. This proactive approach can significantly impact the tax burden and provide sellers with various options to optimize their financial outcomes.

Filing Extensions and Audit Risks: Dispelling Myths

On the topic of filing extensions and audit risks, Henry dispelled the myth that filing an extension increases the chances of an audit. Extensions provide legal time extensions for filing, reducing stress and allowing accurate information gathering for returns.

Identity Protection PINs: Safeguarding Against Fraud

Touching on identity theft and the IRS’s Identity Protection PIN (IP PIN) program, Henry recommended applying for an IP PIN annually to prevent fraudulent tax filings, providing an additional layer of security against identity theft.

Gifting Strategies: Leveraging Exclusions for Tax-Free Gifts

Discussing client inquiries about gifting money to children, Henry suggested leveraging the annual exclusion amount for tax-free gifts. He emphasized understanding exclusion limits and considering options like 529 plans or trusts based on individual circumstances.

Maximizing Annual Exclusions: Coordinating Gifts for Maximum Benefit

Henry clarified that individuals can maximize the annual exclusion by coordinating gifts between spouses and recommending trusts for beneficiaries who may need additional financial management.

529 Plans and Tax Implications: Exploring Options for Unused Funds

The discussion on 529 plans addressed scenarios where the beneficiary doesn’t use the funds for qualified education expenses. Henry explained options such as changing beneficiaries, using funds for personal education, or exploring exceptions like disability or death.

Tax Implications of 529 Plans: Minimizing Taxes through Strategic Decisions

Henry clarified that taxes and penalties are applied only to the income portion of 529 plan withdrawals for non-qualified expenses. He provided insights into avoiding taxes by changing beneficiaries or leveraging exceptions.

Remote Work and Tax Deductions: Navigating Changes Introduced by TCJA

The conversation concluded with a focus on remote work and tax deductions, highlighting changes introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. W-2 employees working from home can no longer deduct home office expenses, necessitating strategic approaches for tax optimization.

Strategies for S-Corp Owners: Navigating Tax Compliance

For S-Corp owners, Henry recommended a reimbursement approach through an accountable plan to cover business-related expenses, ensuring compliance with tax laws and optimizing deductions for business owners.

Conclusion: Navigating the Tax Landscape

Henry Ip’s expertise provided a comprehensive overview of tax planning strategies for various financial scenarios. From retirement accounts to rental properties, selling businesses, and gifting strategies, the conversation covered a wide range of topics. As individuals navigate the complexities of the tax landscape, early planning and strategic decision-making emerge as key factors in optimizing financial outcomes.

Whether you’re a business owner, retiree, or someone looking to enhance your financial literacy, the insights from Henry offer valuable guidance for making informed financial decisions. Navigating taxes is a journey, and with the right knowledge, you can confidently chart a course to better understand taxes. 

We hope you enjoyed this episode.  Be sure to like, review, and subscribe wherever you listen!

Want to continue the conversation? Book a call with us today!

10 ACTIONABLE WAYS TO CUT TAXES NOW AND IN THE FUTURE

Posted on by Brian Colvert

HOW TO CUT TAXES NOW AND IN THE FUTURE

 

If you just wrote a big check to the IRS, you may be wondering how you can prepare now to cut your taxes next April. We’ve got you covered. Luckily, there are several legal ways to reduce the amount of tax you pay each year that don’t just include adjusting your withholding.  Here are 10, practical and actionable, ways to help you cut your next tax bill and those in the future.

1. UTILIZE YOUR RMD FOR YOUR CHARITABLE GIVING

If you are 73 or older, donating your Required Minim Distribution (RMD) to a qualified charity is a great way to reduce your tax burden. These donations are considered a qualified charitable distribution (QCD) and will not be taxed up to $100,000 per account owner.

A qualified charitable distribution can satisfy all or part of the amount of your RMD from your IRA. For example, if your required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution, you would only have to withdraw another $5,000 to satisfy your required minimum distribution.

The more you donate in this way, the more you can exclude and cut from your taxable income This is extremely helpful since RMDs are ordinary taxable income that will often push retirees into a higher tax bracket. 

Qualified charitable donations are a great way to use up your RMD if you are planning to give to charity. However, keep in mind that it must be a check sent directly from an IRA to the charity.

Schwab allows you to have a checkbook on your IRA that allows you to write such checks directly from your IRA. Be aware, that all donations need to be sent/cashed by 12/31 of the tax filing year. 

QCDs can offer big tax savings, as tax rates on regular income are usually the highest. Regardless of the tax benefits, designating this income for charity is a great way to begin or expand your giving and support the causes you care most about. 

2. TAKE ADVANTAGE OF TAX LOST HARVESTING

There is always a silver lining, right? For market downturns, that silver lining is tax-loss harvesting. With tax-loss harvesting, you can use your loss to cut your tax liability and better position your portfolio going forward.

Here is how it works, in its simplest form:

  • First, sell an investment that is losing money and underperforming. 
  • Next, use that loss to reduce your taxable capital gains. This can potentially offset up to $3,000 of your ordinary income for the tax year. (Any amount over $3,000 can be carried forward to future tax years to offset income down the road).
  • Last, reinvest the money from the sale into a different investment that better meets your investment needs and asset-allocation strategy.

This allows you to free up cash for new investments and mitigate a tax consequence.  

As with anything tax-related, there are limitations. Please note that tax loss harvesting isn’t useful in retirement accounts because you can’t deduct the losses in a tax-deferred account. Additionally,  there are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain. Then, a short-term loss would be applied to a short-term gain. You also must be careful not to violate the IRS rule against buying a “substantially identical” investment within 30 days.

The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy. We always recommend talking to a professional about your specific situation. 

3.  FUND HSA OR FSA 

Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow pre-tax dollars to be set aside for medical, vision, and dental expenses, thus reducing your overall taxable income. Each has its own benefits.

An HSA is triple tax-advantaged, which means:

  • Contributions are made with pre-tax dollars 
  • It grows tax-free (you can invest your contributions and earn interest) 
  • Can be used tax-free for eligible expenses (

Another great thing about an HSA is that you can keep it forever. Funds roll over and never expire. On the other hand, an FSA is a “use or lose it” type of account. However, an FSA is still a good option because it is funded before tax and comes out tax-free. FSA are employer-sponsored so there is often less involved with enrolling and setting up the plan. As such self-employed filers are ineligible to open able to open an FSA. 

Both HSAs and FSAs are good options to help cut and reduce your taxable income.  

CONTRIBUTE TO A PRE-TAX RETIREMENT ACCOUNT TO CUT TAXES NOW

Contributing to a retirement plan may be one of the simplest ways to slash what you own to the IRS. Whether a 401k or an IRA, (learn the differences here), both offer tax savings.

4. MAX OUT  YOUR 401K

If your employer offers a 401(k), maximizing your contributions is an excellent way to save for retirement while reducing your tax burden. To realize benefits on your next tax bill, contribute to a Traditional 401k rather than a Roth 401k.

A Traditional 401(k) allows you to contribute pre-tax dollars, which lowers your taxable income and can significantly decrease your overall tax liability. This type of account provides immediate tax savings, making it a strong choice if your goal is to minimize your current tax bill. While Roth 401(k) contributions grow tax-free, they are made with after-tax dollars and don’t offer the same upfront benefits. Additionally, contributing enough to receive any employer match ensures you’re fully leveraging this valuable opportunity to grow your retirement savings.

5. CONTRIBUTE TO A TRADITIONAL IRA

Additionally, if you are below the income limits, you can also contribute to a Traditional IRA. They are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. Contributions to a Traditional IRA are often tax-deductible. However, if you do have a 401k or any other employer-sponsored plan, your income will determine how much of your contribution you can deduct.

6. CONSIDER A CASH BALANCE PLAN

If you are a business owner or solopreneur and have a high income, consider a cash balance plan. A Cash Balance plan is a type of retirement plan that allows for a large amount of money to go in tax-deferred and grows tax-deferred. It is a great option for owners looking for larger tax deductions and accelerated retirement savings.

Cash Balance contributions are age-dependent. The older the participant is,  the higher the contribution can be. It can be an extra $60k to over $300k (based on age and income ) on top of combined 401k/ profit-sharing contributions. 

An attractive feature of a cash balance plan is that the company offering the benefit can take an above-the-line tax deduction on contributions. Above-the-line deductions are great for tax savings because they reduce income dollar for dollar.

CONTRIBUTE TO AN AFTER-TAX RETIREMENT ACCOUNT TO CUT TAXES IN THE FUTURE

While a 401k, Traditional IRA, and Cash Balance Plan can help curb taxes in the near term, we also recommend planning for future tax implications to help you cut your tax bill for years to come. Roth IRAs are retirement accounts that are made up of your AFTER-tax contributions. However, they offer tax-free growth and tax-free withdrawals. 

7. GROW TAX-FREE WITH A ROTH IRA 

Again, Roth IRA contributions are after-tax, so you can not deduct your contributions. Nevertheless, your distribution will be tax-free and penalty-free at age 59 ½  Something your future self will thank you for! Another benefit is that a Roth IRA isn’t subject to RMD requirements either. 

Your Roth IRA contribution limits are based on your filing status and income.

There are definitely some potential tax savings here, especially for those just starting out. It makes sense to pay taxes on the money you contribute now, rather than later, when your tax rate may be higher.

8. CONSIDER A  BACKDOOR ROTH

A Backdoor Roth allows people with high incomes to fund a Roth, despite IRS income limits, and reap its tax benefits. Could it be right for you?

In short, you open a traditional IRA, make non-deductible (taxable) contributions to it, then move that Traditional IRA into a Roth IRA and enjoy the tax-free growth. 

It is important to note that you can not have any money currently in an IRA, SIMPLE IRA, or SEP-IRA to make this work properly.  There are more complexities involved in setting this up, and we recommend talking with a CERTIFIED FINANCIAL PLANNER™.

9. ROTH CONVERSION

A Roth Conversion involves the transfer of existing retirement assets from a traditional, SEP, or SIMPLE IRA, or from a defined-contribution plan such as a 401k, into a Roth IRA.

You’ll have to pay income tax on the money you convert now (at your current tax rate), but you’ll be able to take tax-free withdrawals from the Roth account in the years to come

You can also use market downturns as an opportunity to do a Roth Conversion. If your IRA goes down in value because of market fluctuations, you could convert the account to a Roth. This will allow you to pay a smaller amount of taxes because the account is down in value. Then you’ll have the money in a Roth when the market recovers, which would then be tax-free.

While there is no predicting what the tax brackets and tax rates will be in the future, if taxes go up by the time you retire, converting a traditional IRA and taking the tax hit now rather than later could make sense in the long run.

10. PAY ATTENTION TO THE CALENDAR

Lastly, from a tax perspective, there is a big difference between December 31 and January 1st. While some things, such as IRA contributions can be made up until the filing deadline, many must be done during the tax year, like qualified charitable distribution.

It is important to plan as far in advance as possible to help minimize your taxes. We recommend meeting with a tax professional and your financial advisor throughout the year.

>> Check here for the most current contribution limits, dates, deadlines and more! <<

The key to lowering your tax bill is to plan ahead and cut your tax liability in a way that makes sense for you.  It’s impossible to know what regulations, changes, and updates will go into effect during any given tax season, but rest assured that we’ll be here to help you plan. Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals today! 

Until then, take these tips to heart and remember that reducing your taxes isn’t an impossible task.

HOW TO PREPARE FOR BIDEN’S NEW TAX LAWS

Posted on by Brian Colvert

President Joe Biden hasn’t hidden his desire to raise taxes on corporations and the wealthy. It is his way to fund a multi-trillion infrastructure package and new social programs. Details are likely to change as the legislation makes its way through Congress, yet many are already wondering how to prepare for Biden’s new tax laws. 

While history reveals that the stock market does well during periods of higher taxes (as higher taxes often come with stronger economic growth), it doesn’t mean you should sit idly by and not do anything with your money amidst increased taxation. In fact, higher taxes will require an investor to be more adaptive and diligent.

 

Here are some ways you can prepare for Biden’s new tax laws:

 

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Long-Term Capital Gains and Qualified Dividends

Proposed change: 

The proposed Biden tax plan includes nearly doubling the long-term capital gains (gains on assets held for over a year) for those making more than $1 million. This is up from a 20% maximum rate (plus 3.8% net investment income tax) to 39.6% (plus 3.8% net investment income tax). This results in a top marginal rate of 43.4 percent. 

How to prepare: 

We are firm believers that long-term goals, not taxes, should be the primary driver of decisions. However, preparing for Biden’s new tax laws surrounding capital gains could compel some high-income investors to consider selling off assets before the tax hike takes effect. Others will look into alternative strategies to lower their taxes.

Gauging the impact of capital gains requires careful analysis. It is important to look at projections of future income and tax brackets. Capital gains taxes, unlike income taxes, are discretionary. This means that investors have greater flexibility on when to sell their investments. As such can determine how much tax they will have to pay in a specific tax year.  For example, there may be years in the future when someone’s income falls below the proposed $1 million threshold, resulting in a lower rate.

As a rule of thumb, realize capital gains when necessary to fund goals and manage risk. Consider realizing capital gains at today’s low rates (pre-Biden’s changes) if needed to fund shorter-term goals. For longer-term goals, investors may choose to retain the investments in the event future tax reform lowers the capital gains tax rate.

Also, consider utilizing an asset location strategy by placing inefficient tax assets in tax-deferred or nontaxable accounts. Interest income, dividend income, and realized capital gains do not get taxed in IRAs. We also recommend considering installment sales to regulate annual income levels, keeping income under $1 million as much as possible.

Basis Step-Up at Death

“In this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin

Proposed change: 

Biden’s new tax plan is proposing to end the longstanding tax exemption for investment appreciation when a taxpayer dies. This tax break is the step-up in basis. Changing it could raise taxes at death significantly for top-earning Americans.

Currently, if you inherit an asset that increased in value when the person who died owned it, the asset’s basis is increased to the property’s fair market value at the date of the previous owner’s death. This adjustment is called a “step-up” basis. The increase in basis also means that the person who inherits the property can sell it immediately without paying any capital gains tax because there is technically no gain at that point to tax.

The current step-up saves taxpayers more than $40 billion a year, according to the congressional Joint Committee on Taxation. The new proposal would take back some of that to help pay for social programs. It would be a profound change to a provision that has been in the tax code for 100 years.

Under the proposal, the un-taxed gains on investments held at death, such as stocks, land, or a home, would likely be taxed at a top rate of 39.6%, above an exemption of $1 million per individual, plus $250,000 more for a primary home. For married couples, the total exemption would be doubled, to up to $2.5 million of gains.

How to prepare: 

Potential strategies that could help with this rule change include the use of flexible grantor trusts, which allow swapping assets, borrowing, loaning;  Irrevocable trusts which permit gifting to charity to avoid a deemed sale and capital gains); consider prioritizing low-basis assets for charitable giving. If this proposal goes into effect, we suggest discussing options with your advisor and tax professionals.

Estate and Gift Tax Changes

Proposed change: 

Under Biden’s new tax laws he is proposing to reduce the estate and gift tax exemption amount to $3.5 million. Maybe lower. The current exemption amount is $11.7 million. A reduction in this amount will result in more tax for many families at death. For example, an estate of $5 million (currently under the $11.7 million limit) would be taxable for amounts over $3.5 million.

How to prepare: 

Consider using and funding a GRAT (grantor retained annuity trust) to transfer excess growth of appreciating assets while minimizing gift and estate taxes. Today’s GRAT rates are historically low, so this is an ideal time to create a GRAT. Consider funding trusts now.  Particularly those that are expected to need cash to meet future expenses, such as life insurance premiums, in case annual exclusions are capped. We recommend discussing such strategies with your lawyer and/or CPA. 

Further, you can still implement annual gifting. Current limits allow for gifts up to $15,000 per donee per year. A solid strategy used to pass wealth while staying within IRS limits. A  married donee may gift $15,000 to a spouse, as well. 

Individual Income Tax

Proposed change: 

Biden is also proposing to increase the top individual ordinary income tax rate to 39.6% for families making more than $400,000 ($200,000 for individuals). The current tax law is 37% top individual ordinary income tax rate. The proposed income tax increase is relatively small.  It would return it to 2013-2017 levels, however, there are still some tax mitigation opportunities. 

How to prepare: 

First, make sure you are fully funding your 401k and IRAs, further convert traditional IRAs into a Roth IRA, i.e. a Backdoor Roth. Revisit elections on deferred compensation plans. 

Other Proposed Tax Laws

Biden’s proposed new tax laws include much more than listed here. These are the biggest changes, to read more about all the proposed changes reference The American Jobs Plan and The American Family Plan.

Although definitive tax policy changes have not yet been enacted, it is highly likely we will see changes to the tax landscape late in 2021 or early 2022. Biden’s new tax laws could have a significant impact on your finances and taxes, with specific changes on investment income. Bonfire Financial can help you create a financial plan and optimize your tax strategy based on your needs and goals.

If you have questions on how to prepare for Biden’s new tax laws or are interested in scheduling a financial planning audit, please reach out to our CFP® professionals at 719-394-3900.

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