The Best Tax Advice When Your Greatest Asset is Time

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The Best Tax Advice When Your Greatest Asset is Time

This post is targeted to you the millennial generation!

You have either just entered the workforce, or have been in it for a few years. Hopefully you’re not already planning to retire…if that’s the case maybe it’s time to look into other career alternatives. All joking aside, one of the best things you can do for your future is to max out your retirement plan contributions.  As many people know, the amount that you contribute now makes a BIG difference over time thanks to the time value of money (i.e., interest)! You might not be making the six-figure salary you dreamed of…yet, but regardless of how much money you are making it is in your best interest to contribute as much as you can towards retirement because you have so much time ahead of you!

Traditional Retirement accounts

Contributions to a 401(k), 403(b), and traditional IRA accounts are tax deductible because you pay taxes when you actually withdraw the funds in retirement.  In other words, you will be paying less in taxes today and allows a larger portion of your income to grow during that time.  The maximum you can contribute is $18,000 for 2015. Whatever your tax rate is today, you are essentially saving that % of money! 

Roth IRAs

I do have some young clients that are concerned about what could happen with taxes in the future, so they hedge their risk with a Roth IRA account. Roth IRA accounts are not tax deductible, but your money grows tax free meaning you end up with more tax-free money in the long run.  

Getting to the Max

Most people I know are starting families, buying homes, etc., so contributing the maximum is not realistic. If you’re in that situation, I would recommend gradually increase your contributions in increments over time. For example, you can automatically set up your 401(k) contributions to increase by 1% of your salary each year. This may not seem like much, but over time, as your salary hopefully increases your contributions will to without putting additional strain on your monthly budgets.

The only way that you can get to the maximum retirement contribution is by making it a priority for you/your family. Saving for retirement isn’t as fun as using those funds for something in the short-term, but I can promise you that will definitely thank yourself later! 

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Conquering Your Budget Woes

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Conquering Your Budget Woes

Many of our clients fall within the "sandwich" generation. For those of you that may not know what that is...you may be within it! This is a generation of people, typically in their thirties or forties, which are having to care for their aging parents while supporting their own children. Many times individuals or families in this situation are often overwhelmed by competing obligations, financial and emotional, by having to care for both kids and aging parents.

The best tool I tell our clients to use in order to create a spending plan is with BUDGETS.  I know everyone hates hearing the word BUDGET, but it ensures that you will always have enough money for the things you need as well as the things that are important for you. Technology has really helped make all your financial information available to you at your fingertips, so you need to know about a website/app that can help you create/maintain your budgeting goals.  

Mint.com 

This website/app serves as a dashboard for all your financial information by pulling together all your financial information into one place. Whether you set it up through the website, or the app, you add accounts, credit cards, bills, investments, etc. and can see what you owe, track your upcoming bills, and spending patterns. Mint automatically updates and categorizes your spending in real time so you can always know how you are doing on your budgets.

If you are considering creating budgets, or want to get your children to understand budgeting, I encourage you to give the mint a look! 

https://www.mint.com/

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Saving on health-care - the benefits of an HSA

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Saving on health-care - the benefits of an HSA

Anyone that has been to the doctor recently knows just how out of control the costs of medical expenses have become. Meanwhile, it is becoming increasingly more popular for employers to offer high-deductible health insurance (HDHI). This is a combination that may lead to a situation where you are stuck owing a considerable amount…enter the health savings account (HSA).  

HSAs can be used to pay for qualifying out-of-pocket medical expenses using tax-free dollars. This includes:  

  • Deductibles

  • Copays

  • Coinsurance, etc.

As more employers have started to offer HDHI, HSAs are becoming more and more popular. HSAs offer a variety of tax advantages depending on your age, income and whether you have individual or family coverage. In order to qualify for an HSA, you must be covered under HDHI plan, as defined by the Internal Revenue Service.

HSA Tax Advantages                     

Contributions made to a HSA are tax-deductible, and contributions made by an employer are tax-free! Interest accrued in the HSA is also tax-free, and the accounts are “portable,” meaning they stay with you even if you change jobs or leave the workforce.

Individuals can withdraw money from a HSA without paying taxes to cover the cost of qualified medical expenses, but if the money goes toward nonmedical purposes, the amount is subject to income tax and an additional 20 percent tax.

Most importantly, unspent funds can remain in a HSA from year to year, unlike flexible spending accounts and health reimbursement accounts that require consumers to spend or lose the money that was set aside each year, meaning there is no pressure to “use it, or lose it”.

Lastly, health savings accounts convert to typical individual retirement accounts once you reach retirement age. So if you use your HSA funds only for qualified medical expenses, you can net a triple tax break:

  1. You get the pre-tax benefits of an IRA;
  2. The tax-free withdrawal benefits of a Roth; and,
  3. The tax-free growth benefits of both. 

Otherwise, after age 65 you can spend the money on anything, but that money would be taxed, similar to IRA withdrawals.

If your health plan’s deductible (for 2015) is at least $1,300 ($2,600 for a family), you can open an HSA and contribute up to $3,350 per year for an individual, or $6,650 per family per year. As with an IRA, there’s also a “catch-up provision” that allows you to stash an extra $1,000 a year if you’re 55 or older, and these contributions are 100% tax deductible from your gross income.

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Backdoor Roth IRA Conversion...could it be tax free?

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Backdoor Roth IRA Conversion...could it be tax free?

Planning for retirement can be a bit tricky, especially for individuals just starting out. The most well-know IRA accounts are 'Traditional' or 'Roth' IRAs. Traditional IRAs allow you to defer paying taxes on money you save for retirement until you withdraw the funds from the account. Roth IRAs are designed so  you pay the income tax now, and distributions that are made after age 59½ from accounts that are at least five years old are tax-free!!

Roth IRAs provide many advantages for lower- and middle-income retirement savers, and individuals that have a longer period of time to grow the income in the retirement account. The downside is that individuals with modified adjusted gross incomes (MAGI) above a certain amount are subject to a contribution phase-out, which eventually disallows direct contributions. In 2015, the schedule for married taxpayers filing jointly is $183,000-193,000; for Single and Head of Household filers, it's $116,000-131,000. Individuals with incomes above the top number in each category cannot contribute to a Roth.

However, for those that are lucky enough to exceed the threshold, don’t worry! The IRS removed the $100,000 MAGI limit for Roth conversions in 2010 creating a loophole in the tax code that allows you to legally funnel money into Roth accounts using a “back door IRA” strategy.

Here's how to use this "back door" strategy: 

  1. Open a traditional IRA with your IRA custodian of choice. (It is usually easiest, but not necessary, to use the same custodian that holds your Roth conversion IRA – or where you plan to open your Roth.)
  2. Make a fully nondeductible contribution to your traditional IRA. The contribution limits in 2015 are $5,500 for those under age 50, plus an additional $1,000 catch-up contribution for those aged 50 and above.
  3. Next, you need to convert the traditional IRA balance into a Roth IRA. Because, as detailed above, the MAGI threshold for contributions does not apply to conversions, the income limitation is effectively thwarted.

Converting your traditional IRA balance to your Roth IRA needs to be done in a close amount of time because you will have to pay taxes on any income you accumulate between the date you contribute and the date you convert. If there is only a few days between the conversion, the gains are minimal. 

Back-door IRA conversions are a great strategy to utilize depending on your investment goals. I would definitely encourage you to discuss this strategy with your tax advisor. 

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Paying ZERO Tax on Your Capital Gains

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Paying ZERO Tax on Your Capital Gains

As accountants we love numbers, and the number we love the most is zero…well, when it comes to tax liability. Congress recently extended the American Taxpayer Relief Act (ATRA) which allows certain taxpayers to qualify for a 0% tax rate on some or all of their long-term capital gains realized in 2015.

 

The 0% rate only applies to taxpayers that end up in the 10 – 15% regular income tax brackets. I’ve seen an example of this for the 2014 tax year where a self-employed taxpayer in the 33% tax bracket had self-employed income of $60,000. The taxpayer was able to reduce their taxable income further to $20,000 with retirement contributions and itemized deductions such as, mortgage interest, property taxes, and gifts to charity.

 

In addition this taxpayer had $50,000 in capital gains for 2014. As this taxpayer’s total taxable income of $70,000 ($20,000 + $50,000) was less than the threshold $74,900, (for 2015, the threshold is $37,450 for single filers and $74,900 for joint filers), the entire long-term gain was tax-free!

 

What this can mean for you in 2015

 If you are anticipating your taxable income to be below the threshold, it may be time to recognize the appreciation on some of those long-term assets. Just note that the 0% capital gains rate only applies to assets held longer than one year. Short-term gains are taxed at ordinary income rates.  

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