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Financial Symmetry: Balancing Today with Retirement

When considering retirement, do you wonder what financial opportunities you may be missing? Busy lives take over and years pass without taking advantage. In this retirement podcast, Chad Smith and Mike Eklund unveil financial opportunities, to help you balance enjoying today so you are ready to retire later. By day, they are fiduciary fee-only financial advisors who answer questions about tax savings, investment decisions, and how to save more. If you’ve been putting off your financial to-do list or are just not sure what you’ve been missing, subscribe to the show and learn more at www.financialsymmetry.com. Financial Symmetry is a Raleigh Financial Advisor. Proudly serving clients in the Triangle of North Carolina for over 20 years.
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Now displaying: Category: Tax Planning
Jun 17, 2019

Nobody likes to talk about the 2 certainties of life: death and taxes. So much so that we delay important decisions on how to deal with our assets for our heirs. On this episode, Cameron Hendricks and Grayson Blazek join in to discuss specifics on how to handle accounts and property, filing taxes and how to better prepare for passing on your estate to your loved ones. Find out how to handle all of this now to save your loved ones added stress during a difficult time.

Ensure that your loved ones are prepared to understand your financial life

To ensure that others are prepared for your own passing, make sure that your loved ones understand your financial life as a whole. This will make your passing a much smoother process. It is important to ensure your will is readily available and is up to date. Another way to be prepared is to have your assets properly titled. It's also important to periodically check all of your accounts’ beneficiaries to ensure that you have the right beneficiaries named and that you don’t have too many. The more information that you provide up front will really help along the way.

How to help your loved ones prepare for your passing

Taxes can be confusing enough, but doing the taxes of for the deceased is even more challenging. This is why it is so important to ensure that your loved ones have all the information that they need to prepare your final tax return during this time. Before making someone an executor of your estate it is important to talk to them and give them all of the information that they may need. This will make sure that everything transitions as smoothly as possible. If you are the executor of the estate make sure that you know where all of these income sources are. The more information that you provide up front will really help along the way.

How to prepare taxes for the deceased

Preparing taxes for the deceased isn’t as complicated as you may think. A person that has passed is called the decedent. Whether you are the surviving spouse or the child of a parent that has recently passed someone will need to work through a couple of tax returns for the decedent. You will have to fill out the final 1040. It is similar to every other tax return that you have filled out. You can continue to file as married filing jointly if you don’t remarry within the year and you will include any income received. The second form you may encounter is the estate income tax return. The last tax form you may need is the gift tax return. Listen to this episode to hear Cameron Hendricks and Grayson Blazek provide their expertise on preparing taxes for the deceased.

What are some common financial questions people ask about death?

There is a myth that people think everything is going to be taxed upon death, but that is untrue. Life insurance is not taxed and 401K’s and IRA’s will not be taxed in the way you think. When passing wealth to your heirs think about whether they are ready to be heirs. You can set up a testamentary trust and create rules around the trust to prepare your heirs for receiving an inheritance. You want to make sure to have an estate plan. The default estate plan will certainly not be what you actually want. Remember, you won’t be around to clarify your wishes so make sure you clearly state your intentions.

Outline of This Episode

  • [2:47] Ensure that your loved ones are prepared to understand your financial life
  • [7:17] What kind of income tax return will you need?
  • [18:28] The estate income tax return
  • [21:48] How to handle the 709
  • [26:58] What are the common questions people ask?

Resources & People Mentioned

Connect with Grayson Blazek

Connect with Cameron Hendricks

Connect With Chad and Mike

Subscribe To This Podcast

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Jun 3, 2019

You may have seen more news stories mentioning Opportunity Zones of late, but there are still plenty of questions surrounding this part of the latest tax reform. Today we're discussing the ins and outs of investing in Opportunity Zones to help you understand how, in the right circumstances, they could help you save thousands on your taxes. We’ll discuss what opportunity zones are, why they were created, what the tax benefits are and how to spot the risks involved when investing in opportunity zones.

What are opportunity zones under the new tax law?

The new tax law was created to spur economic investment in low-income areas throughout the U.S. by providing individual investors with tax incentives for investing in impoverished communities. The low-income areas are called opportunity zones and are identified by governors of each state. Although it was rolled out in 2017 it wasn’t until recently that the IRS updated investors on how the program is actually going to work. This program is geared toward long-term private investors with a high net worth. There are 3 benefits to the tax side of this law: tax deferral, tax reduction, and tax elimination for an investment held for more than 10 years. The primary purpose of the reform is to help economically distressed communities and in turn, it can help you save thousands in taxes. Find out how by listening to this episode of Financial Symmetry.

What are the benefits of the new tax reform law?

Under the new tax reform law, you can defer capital gain tax from the sale of real estate, a business, or stock. You can also reduce your taxes on something you recently sold and even completely eliminate taxes by reinvesting.

Here’s an example:

You sell something and earn a million in capital gain. Normally you would pay $240,000 in taxes on that capital gain. Now with the opportunity zones if you reinvest your capital gains into a qualified opportunity zone fund within 180 days you get to defer the capital gain tax on the million dollar sale. So instead of paying those $240,000 in taxes in 2019, you won’t have to pay that until 2026. Then in 2026 if you continue to hold that investment in the opportunity zone then you only pay tax on $850,000 of the million dollar original capital gain. So you’ll save about $36,000 there. But the biggest benefit overall for the program is that if you put that money into a new investment for 10 years or more you’ll pay no capital gains tax on the original investment.

What can you do to do to take advantage of the new tax reform?

To invest in opportunity zones and save on capital gains taxes you can invest in a qualified opportunity fund. A qualified opportunity fund is a corporation or partnership that is created for the purpose of investing in qualified opportunity zone property and holds at least 90% of its assets in qualified opportunity zones. The typical investment options are real estate, such as multi-unit apartment buildings, or a business located in a qualified opportunity zone.

You have to spend 100% of the purchase price in the first 30 months. So if you purchase a property for $800,000 then you have to spend another $800,000 within 30 months. The idea is that you are substantially improving the property for the amount that it is valued at. If you buy a business the same rules apply. You have to improve it somehow for that purchase amount. Remember, this is not an investment in the stock market, there is a higher degree of research involved.

What are the different risks involved?

There are different risks involved in taking advantage of the new tax reform law. As with all investing situations, attention to detail is key. Here are some of the risks with this type of investment.

  • What happens if there is a political change? If Congress changes its course over the next few years they could overturn this law.
  • You are invested in a limited partnership so you have to pay fees to the managers of the funds. They may charge 2% or you may pay a percentage of the profit. The fees involved may eliminate the tax benefits completely.
  • The money isn’t liquid. You have to hold it in the investment for at least 10 years and you won’t receive the benefits if you pull out early.
  • You’ll have to be an accredited investor.
  • You must not only buy but improve the property.
  • The 180-day rule may spur some people to rush into an investment rather than do their research into the options.

Many people don’t take advantage of things because they don’t know about it. We’re here to give you ideas and strategies that you may not be aware of. The overall goal of the new tax law is a great cause but the investment options are still pretty new. This was just an overview of rules and regulations, so do your own research. Don’t let taxes decide your investment decisions. Remember a bad investment is still a bad investment no matter what the tax benefits are.

Outline of This Episode

  • [4:07] How should the tax strategy be implemented
  • [9:19] What do you need to do to take advantage of the new tax reform?
  • [12:03] There are 3 benefits to the tax side
  • [13:45] What are the risks involved?
  • [20:27] What are other alternatives for capital gains?

Connect With Chad and Mike

Subscribe To This Podcast

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Nov 19, 2018

As the holidays near, visions of new tax savings dance in our heads.  But knowing how to spot them is what really matters. With all the new tax law changes, Will Holt joins us again to guide you through seven tax opportunities you can take advantage of before year-end. Some of these tips can save you thousands of dollars, so listen in to see how you they may benefit your personal situation.

7 Tax Opportunities to Take Advantage Of

1. Tax Harvesting (Loss or Gain) – This hasn’t changed with the new tax law, but depending on your tax bracket, that percentage of tax you pay may have. If you’re facing a significant amount of capital gains or expect large capital gain distributions, with the rough October performance, you may want to consider tax loss harvesting. This allows you to offset some of those gains and even go a step further, by using $3,000 of net losses against your income. It may seem counterintuitive to sell at a loss, but it could be an opportunity to offset high taxes. If you are in the new 12% federal tax bracket and lower, realizing more gains could be an opportunity instead, as these could be realized at 0%. But knowing your tax rate and all expected income is required. Discuss with a professional to know for sure.

2. Max Retirement Contributions – Understanding how close you are to the max of your retirement accounts, could present extra tax-advantaged savings at the end of the year. Maxing your 401K contribution is the first place to check. If you get a big year-end bonus, this could be a good trigger. Don’t forget your HSA, as this account provides a triple threat of tax savings (tax deduction, tax deferral, tax-free withdrawals).

3. Convert a Roth IRA? – Doing a Roth conversion can help you stay in your tax bracket by moving an IRA into a Roth. With the new lower tax rates, this could be an opportunity to lower the inevitable tax you were going to pay on this savings. Additionally, you will be taking money out of a tax-deferred account and moving it into a tax-free account. This is a good option for early retirees with large taxable accounts. But you’ll need to be more precise going forward, as the opportunity to recharacterize if you overshoot is gone.

4. Bunching Charitable Contributions – The new tax law has increased the standard deduction for individuals to $12,000 and for married couples from $12,000 to $24,000. This means around 90% of people will now be taking the standard deduction according to the Tax Policy Center. If you forecast your itemized deductions could be higher than the standard amount, consider bunching your charitable contributions into 2-year bundles. One way to do that is by using a bunching tool called a donor-advised fund.  The donor-advised fund allows for more flexibility in taking the deduction now, but still allowing for spreading contributions throughout the year. For more information about donor-advised funds, refer to episode 59 for more details.

5. Look at a Qualified Charitable Distribution Early in the Year – One of the opportunities, that hasn’t changed but is getting more attention, is the QCD or qualified charitable distribution. To enjoy this opportunity you are required to be age 70.5 and older as you can designate a portion of your required annual distribution directly to a charity. This takes some precision and should be targeted for earlier in the year when the RMD still needs to be taken as it must come directly out of an IRA and go directly to the charity of your choice.

6. 20% Deduction for Qualified Business Income – If you are a small business owner or entrepreneur the qualified business income deduction will be of interest. What’s come to be called the QBI deduction, or 199A deduction, is used for any business that is not a C corporation. If you have self-employed income or are an S Corporation, you can receive a deduction of 20% on your profit. However, there are income limitations. After you listen to this tip you’ll want to sit down with your tax professional and plan your taxes. We wrote a more detailed article on potential savings with QBI here.

7. Watch the Tax Torpedos – To truly understand your own tax planning, you have to watch specific income thresholds. We refer to these as tax torpedos. For example, if receiving a premium tax credit for health insurance, you could lose your entire subsidy if you surpass the income limitations by even $1. These are set according to the amount of family members (up to 4). A great example of why tax planning matters throughout the year as well. We discuss other important income thresholds dealing with the medicare premium surcharges, child tax credit cutoffs, and roth IRA limits.

As you prepare for the holiday season, make sure you take a second look at your tax planning. By watching out for these financial opportunities, you could end up saving yourself thousands of dollars in taxes. It’s important to have a multi-year tax strategy and always consider the big picture, not just what is happening now.  Being financially smart means considering all aspects of your financial life.  This time of  year, that begins with looking for ways take advantage of new tax laws for your personal situation.

Outline of This Episode

  • [2:47] Tax loss harvesting
  • [6:51] Retirement accounts tax savings
  • [9:00] The Roth conversion
  • [12:09] The new tax law increased the standard deduction
  • [15:36] Qualified charitable distribution
  • [19:43] The qualified business income deduction
  • [22:37] Specific thresholds to look out for

Resources & People Mentioned

Connect with Will Holt

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Podcasts <> Stitcher <> Google Play

Oct 8, 2018

If you're a mid-career professional, life is full of demands. You've worked incredibly hard to get here. You're sandwiched between young kids and aging parents. Your job is challenging and life is busy. Be it a technology company, medical practice or your own small business, stress comes with the territory during this season of life. This is fertile ground for growing a financial mid-life crisis. With all that's going on, it’s hard to know if you are making the right financial choices, because you don't have time to stop and focus on the financial considerations of the moment. Understanding this, we've compiled a list of the 8 most important wealth builders for all of you hard-working mid-career professionals.

Saving vs. Enjoying Life?

As income increases to it's highest point in life so far, higher spending follows suit during these years. Deciding how much to save brings new challenges as bigger questions come in to focus. Things like when you really want to retire, changing careers, buying a bigger home for kids, or just remodeling your current home. When entertaining life-changing transitions, taking inventory is the first step. Where have you saved to this point? How will a major life change impact the long-term picture. Weighing alternative lifestyles are ripe with complexity that only becomes clear when comparing planning customized scenarios.

What Are Your Tax Options?

Everyone loves finding more tax savings. The best way to ensure you don’t have unwelcome surprises come tax day is to dissect your tax planning at the end of each year. Many tax saving opportunities are left on the table when other priorities dominate your time. Longer work hours, traveling, and shuttling kids to events take all our attention in our 40s. Without proper attention, you never know when potential tax savings are missed.

How Are You Invested?

When starting out, how much you are saving matters much more than the returns you can earn on those savings. But upon reaching mid-career higher earnings, your investment returns could become larger than the actual annual savings. At this point, your asset allocation moves front and center. Choosing how to divide your investments could pay off if busy lives don’t get in the way. Even an increase of 1.5%/year has a huge impact over time. As with many other things in personal finance, building wealth should be boring with little things adding up in a surprising way over time.

What kind of plans do you have in place for your estate?

When the mid-career attention is divided, important items get ignored. Several of these include life, disability and health insurance for your family. We all know insurance can be expensive, but not having the right kind of insurance when you need it can be detrimental. Many people set up their beneficiaries when they first set up their accounts and then forget to ever update it. Part of your estate planning is choosing a guardian for your children and ensuring that the right people are the beneficiaries of your estate. Working with a professional can assure your estate is in order regardless of any eventuality.

Outline of This Episode

  • [4:27] How much should you be saving vs. enjoying life?
  • [8:55] Should you buy a new home?
  • [11:01] Are you saving enough?
  • [13:09] What are your tax options?
  • [14:35] What is your investing process?
  • [19:15] Life insurance
  • [21:02] Health insurance
  • [22:03] Estate planning

Resources Mentioned

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Jan 4, 2018

As we approach year end, we now have the first major tax overhaul in over 30 years, which became effective January 1, 2018. As financial planners, we are focusing a great deal of our attention on the changes that are coming and how they are going to affect each of our clients in the coming years. The reform creates new opportunities for some, and closes the door on others. So, what are the major changes that are coming and how do they affect you? Join us in this episode as we discuss the biggest likely impacts that will influence your personal situation.

Some of the biggest changes are in these areas:

  • Tax Cuts for Most
  • Increased Standard Deduction
  • Key Itemized Deductions Changes and Limitations
  • IRA Recharacterizations
  • Child Tax Credit Expansion
  • 529 Plan Usage Expanded
  • Home Office Deduction Elimination
  • AMT Changes

Read more detail in the show notes here: https://wp.me/p6NrVS-2UU

 

Dec 13, 2016

You likely would rather think about ANYTHING other than their taxes. And even though you want more tax savings, you rarely follow through with proper tax planning. Most people don’t realize the large amount of tax savings they could have by making a few simple tweaks. Instead they operate under the “penny wise, pound foolish” mantra. Missing substantial savings to save the cost of a professional. By performing professional tax planning towards the end of the year, there is often thousands in tax savings available. You can read more about our 10 tips to help you save more when filing your taxes this year.

Mar 15, 2016

I’m not sure about you, but we haven’t met many people that wouldn’t love to lower their tax payments.

As we move in to the heart of tax season, do you find yourself wondering every year around this time, what other opportunities you may be missing?

Millions of people who file their tax return themselves overlook tax opportunities each year that could save them extra money in April but they hesitate to pay to have a professional prepare them.  The hidden secret is that tax planning should be done year round.  So we put together a list of a few things we see most often missed on tax returns.

 

Maxing Tax-Deferred Savings

One of the easier ways of avoiding tax now, is to save the maximum amount in all your tax-deferred accounts (401k/403b).  Many have a tough time reaching the maximum savings limit ($18k per person in 2016).  This often brings the focus back to your cash flow as overspending keeps many from hitting the maximum amount.  Those over age 50 have an extra benefit where they can save $6,000 more each year until they stop working.

 

Not Funding HSA accounts

This is an excellent retirement account that offers a triple tax saving opportunity.  Problem is many aren’t taking advantage of it. If you have a high-deductible health insurance plan, you have an opportunity to sock away savings tax-free, that can grow tax-free and then be withdrawn tax-free.

 

Non-deductible IRA contributions & Roth conversions

High income earners still have a way to make Roth contributions. It just takes a few extra steps and involves some monitoring to do it successfully.  If you already have nondeductible IRA contributions, this is a great opportunity to get these contributions in to a Roth IRA, assuming you don’t have a larger deductible portion already built up (consider the pro rata rule in this case).  Don’t forget to fill out form 8606 to keep an accurate record of your nondeductible IRA contributions.

 

Charitable Deduction Opportunities

If you have large capital gains from appreciated stock, it may benefit you to donate these shares instead of making cash charitable contributions. Another opportunity for those who are over age 70 ½, is to make a Qualified IRA Charitable Distribution which also qualifies as Required Minimum Distribution.  This benefits you by not increasing Adjusted Gross Income on your tax return which in turn helps with medical expense deductions, social security taxation and Medicare rates to name a few.

 

Missing Any Deductions?

Some of the more common we see left off of Schedule A are car taxes, investment fees, and charitable donations. Go through your potential itemized deductions.  Look at the prior year return for some guidance.  Also, if you made a 2014 estimated payment to the state in January of this year and/or owed when you filed your 2014 state tax return then you can add those payments as a federal tax deduction on this year’s return.

If in a low bracket, you may want to delay deductions and accelerate income instead.  When your AGI ends up in the 15% tax bracket, capital gains are taxed at 0%.  So realizing gains could be beneficial here.

High tax bracket earners have an opposite focus as they are looking to reduce income. Word of warning: watch the Medicare Surcharge (3.8%) on income over $200k for individuals and $250k for joint filers. If you find yourself in this area, you may want to look for ways to delay income depending on the control you have in your income.

 

AGI thresholds You Don’t Want to Miss

  • Child tax credit (begins phasing out at $110k).  Can you make a deductible traditional IRA contribution? This could actually reduce your tax bracket from a boosted higher rate as you are not only reducing the ordinary income tax but getting an extra benefit due to the credit.
  • Itemized deduction limitations over $309k (single $258,250) – especially if restricted stock or stock options are vesting and you are selling in that tax year.
  • American Opportunity Tax Credit phases out at $160k AGI ($80k single).  If you pay for the first $4k of college expenses, you can use this credit (mentioned below).

 

ACA subsidy tax bubble

Many retirees who no longer have an employer continued health plan and haven’t yet reached 65 now have a new option – buying medical insurance through the health insurance marketplace.  Depending on the tax diversification in your investment accounts, some early retirees are receiving premium tax credits.  But be careful, if receiving the credit and your income rises above 400% of the Federal Poverty Level for the number of people in your household, you could lose all the credit.

In this situation, managing tax brackets become vital.  But to do so, you need to have saved in accounts with tax flexibility.  Tara Signal Benard summarized a breakdown of this strategy in a New York Times article titled, “Devising a Tax Strategy After the Paycheck Is No More.”

 

Don’t Forget About Other Credits

  • Pay for first $4k of tuition first to get AOTC – 3 million people missed this credit in 2014.
  • Residential energy credit for any HVAC replacement or energy efficient upgrade to house
  • Foreign Tax Credit – you lose this credit with foreign stock in IRA accounts. This is why asset location is important. Vanguard found this can add up to 0.75% per year in performance.  $7,500 for a $1 million portfolio.
  • Dependent care credit – If both spouses are working, don’t forget to include summer camp costs as this is very likely a deduction.

 

Feeling Like you Missed Something?

If you feel a bit lost after reading these examples then look to hire a professional.  Tax return for families can range from $300 to $500 depending on your situation.  Could be money well spent if they find tax savings you overlooked.

When digging in to the numbers CNBC found the more you make the more interesting IRS auditors find you.  The IRS begins to get more interested in those earning more than $200k.  According to turbotax – only 1 percent earning less than that are audited.  If you are over the $200k threshold, then 4% of your group will be audited.  It’s not until you begin earning more than a million, to where 12.5% get an audit notification letter.

If you feel like you would like a second look, we’d encourage you to find a fee-only financial planner who has knowledge in the tax planning area.  It’s very likely it could be worth it.

Other Links Mentioned During the Show

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