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Savant Capital Management by Donald Duncan, Mba, Cfp®, Cfa®, Cpa.. - 1w ago

With the 2018 tax year closed, most taxpayers saw a decrease in their refunds, and some even owed taxes when they usually receive refunds.  This was due to the adjusted withholding tables that came into effect in February 2018, lowering the amount of taxes taken out of taxpayers’ paychecks.  Since less tax was paid throughout the year, many saw a tax bill larger than they anticipated when filing their tax returns.

In order to avoid under-withholding penalties, the IRS requires you to have paid (through withholding or estimated taxes) the lesser of:

  • 90% of your current tax liability
  • 100% of last year’s tax liability (if your adjusted gross income is under $150,000 Married Filing Jointly / $75,000 Single)
  • 110% of last year’s tax liability (if your adjusted gross income is over $150,000 Married Filing Jointly / $75,000 Single)

If you haven’t passed any of the above “safe harbor” tests, you will need to make estimated tax payments throughout the year to potentially avoid an underpayment tax penalty. Because the IRS requires these payments to be made in a timely fashion throughout the year, making the necessary payments by the due dates may reduce your penalty rather than eliminate it all together.  Those due dates are: April 15th, June 15th, September 15th, and January 15th.

Who Might be Subject to an IRS Underpayment Penalty? Business Owners

Due to not having taxes withheld on business income, business owners are highly susceptible to paying under-withholding penalties.

Retirees

Retirees, especially first-year retirees, are susceptible to under-withholding penalties due to the majority of their income being investment income. Unless a sufficient amount of tax is withheld from IRA distributions, pensions, and Social Security, retirees may be subject to underpayment tax penalties.

Having an “Off” Year

The IRS safe harbor rules are designed to protect wage earners from paying penalties in years that earned income increases dramatically. However, if your earned income decreases dramatically, so will your withholding and you will likely not have either 100% or 110% of last year’s tax withheld from your pay. It is especially important to estimate your taxes when you are having an off year to avoid getting hit by under-withholding penalties.

Source: irs.gov

Meet the Author: Don Duncan

This is intended for informational purposes only and should not be construed as personalized investment, tax, or financial advice. Please consult your investment, tax, and financial professionals regarding your unique situation.

The post How to Avoid Underpayment Penalties from the IRS appeared first on Savant Capital Blog.

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What is Non-Qualified Deferred Compensation or NQDC?

Non-Qualified Deferred Compensation, or NQDC, is compensation that has been earned by an employee but has not yet been transferred from the employer to the employee. Because the employer still has ownership of the compensation, it is not included in the employee’s earned income and therefore is not considered taxable income. This allows an employee to postpone or defer compensation and receive it sometime in the future, usually for purposes of retirement income.

NQDC Pros
  • Unlike a 401(k), there is no cap on the amount of compensation that is deferred under an NQDC plan, unless your employer imposes a cap that is normally a percentage of your compensation.
  • There is no minimum distribution required at age 70½; however, plan rules may exist.
  • You are able to set the distribution date to fund your retirement or another goal, such as your child’s college education.
  • You don’t pay income tax on the compensation you defer until you actually receive it in the future.
  • These are great tools for income tax arbitrage (forgo income at a 35%+ tax rate, and realize this income at a 25% or lower tax rate in the future).
  • From the employer’s standpoint, NQDC plans are attractive because they come with great flexibility, aren’t subject to Employee Retirement Income Security Act (ERISA) regulations, and are usually inexpensive to establish, being that there is minimal reporting and filing required.
NQDC Cons
  • The deferred compensation account is subject to creditors of the business.
  • You may not access your deferred compensation until the distribution date, meaning you can’t take out a loan or take distributions before that date under any circumstances.
  • Your employer will most likely impose limitations on your choice of how and when you begin taking distributions.
  • Rolling deferred compensation into an IRA, 401(k), or another non-qualified plan isn’t an option.
  • Since you didn’t pay income tax on deferred compensation on the front end, once you start receiving your distribution, you must not only pay income tax but FICA taxes as well.
  • Employees who don’t complete their tenure with the business generally forfeit their benefits, which is often called the “Golden Handcuff” provision.

If you have the option of participating in an NQDC plan, it is important to understand what you’re getting into, especially the inherent risks and tax consequences. Speaking with a fee-only CERTIFIED FINANCIAL PLANNER™ professional about your retirement plan and goals can help you pursue your lifetime goals and maximize after-tax wealth.

Meet the Author: Adam Glassberg

This is intended for informational purposes only and should not be construed as personalized investment, tax, or financial advice. Please consult your investment, tax, and financial professionals regarding your unique situation.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

The post Pros and Cons of Non-Qualified Deferred Compensation (NQDC) Plans appeared first on Savant Capital Blog.

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Over time, as your individual and family circumstances change, you may find that you own an annuity or cash value life insurance policy that no longer suits your needs.

If you have such holdings within your portfolio, there are attractive ways to repurpose such assets where they again can play a role in your overall financial plan such as for long-term care insurance protection.

1035 Exchange

One way to accomplish the repurposing of such an asset is through a Section 1035 exchange. Section 1035 of the Tax Code allows for the replacement of an annuity or life insurance policy for a new one without incurring any tax consequence for the exchange. To qualify, the old policy and the new policy must be of the same type (i.e. annuity to an annuity, life insurance to life insurance, or life insurance to annuity), have the same owner, and have the same insured person.

Repurposing into Long-Term Care Insurance

Specifically, one popular way individuals can repurpose an annuity or cash value life policy that no longer plays a role in their portfolio is by completing a 1035 exchange directly into an “asset-based” insurance or annuity policy with a long-term care rider. This, in effect, will convert an “outdated-like” asset in your portfolio into an asset that is again playing a very valuable and important role in your overall financial plan in the form of long-term care insurance.

It should be cautioned that Section 1035 exchanges may not make sense in all situations and the protection and coverage provided by the current contract should be carefully weighed and considered prior to making any changes. In addition, a 1035 exchange involves a complex set of tax rules and regulations that also need to be considered.

If you feel that you may be able to take advantage of a 1035 exchange to improve your situation, please reach out to your financial advisor to answer any of your questions and help you determine if this strategy makes sense for your situation.

Meet the Author: Don Duncan

This is intended for informational purposes only and should not be construed as personalized investment, tax, or financial advice. Please consult your investment, tax, and financial professionals regarding your unique situation.

The post Do You Own Life Insurance Policies and Annuities That You No Longer Need? appeared first on Savant Capital Blog.

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One of the major aspects of a business sale is whether the business will be sold as an asset or as stock. An owner might be thinking, “Does it really matter as long as I get the highest sales price?” Well, as you’ll see below, there are plenty of circumstances that can make a lower sales price more attractive.

To highlight some of the key differences between an asset and stock sale, let’s review some important tax, business liability, and complexity considerations.

Tax Rates

In a stock sale, the seller can realize the gain on his/her business at preferred capital gains tax rates.

Alternatively, an asset sale exposes proceeds to the seller’s ordinary income tax rates on certain assets, and if the company is sold as an asset through a C-Corp, the proceeds are exposed to double taxation (corporate tax and individual tax rates). The buyer, on the other hand, prefers an asset purchase from a tax perspective because he will have a “stepped up” basis, which allows for additional depreciation and/or limits the potential gain when the business will be sold again in the future.

Business Liabilities

Buying a business as an asset not only has tax benefits, but it reduces the buyer’s liability exposure as well. To protect himself from a future lawsuit due to the previous owner’s negligence, for example, a buyer will prefer an asset sale. The opposite, then, is true for the seller; he can still be held responsible for liabilities even after the business is sold, if it is sold as an asset.

In a stock sale, the buyer retains most of the business’ liabilities, even if they are unknown. There are, of course, exceptions as to what liabilities are separated from the buyer, but generally speaking, an asset sale will limit the buyer’s exposure to business liabilities.

Complexity and Expenses

An asset sale is more complex and costlier. In an asset sale, the specific assets and liabilities transferring are stated, and the gain/loss is calculated on each asset. This complexity adds fees for appraisals, legal titling, and accounting. Additionally, some assets (e.g., patents) are not transferable in an asset sale, which adds to the complexity.

Summary

You can see now how receiving a lower sales price might be more attractive if you are able to recognize proceeds at a lower capital gains tax rate, while limiting your exposure to business liabilities and saving fees and complications by structuring the business sale as a stock sale.

Key differences between a stock and an asset sale
Stock sale Asset Sale
Consideration Seller Buyer Seller Buyer
Tax Proceeds are taxed at lower capital gains rates No step up in basis; recapture tax on pre-sale depreciation Proceeds on certain assets are exposed to ordinary income tax rates; if sold as a C-corp, there is double taxation Stepped up basis; larger depreciation potential; recapture tax on depreciations is paid by seller
Business Liabilities (e.g. future lawsuits due to past violations or negligence; employee benefit plan liabilities) Retaining less exposure to liabilities from the business Inheriting additional exposure to future liabilities Retaining some liability exposure of the business Inheriting less exposure to future liabilities
Complexity Less complex; no need to calculate gain/loss by each asset Less complex; transaction costs are less More complex; gains/losses are calculated on each asset of the business More complex; some assets are nontransferable (e.g. patents); costlier (each asset transferred needs a new title and there are additional accounting, legal, and appraisal fees)

Meet the Author: Brett Spencer

This is intended for informational purposes only and should not be construed as personalized investment, tax, or financial advice. Please consult your investment, tax, and financial professionals regarding your unique situation

The post Asset Sale vs. Stock Sale of a Business – What’s the Difference? appeared first on Savant Capital Blog.

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According to a recent study done by Fidelity, the average total costs of healthcare for a retired couple, aged 65 and living until ages 85/87, will be $285,000!¹ When people think about their retirement goals, they often overlook the expenses associated with keeping up their health. Being aware of your options and how you can fund this goal in retirement can help mitigate the possibility of having to give up your current lifestyle.

1) Know your Health Insurance Options

What are your options for health care in retirement?

There is one obvious answer, and that is Medicare. But what exactly do you get when you sign up for ‘Medicare’? There are four parts to Medicare – Parts A, B, C and D.

  • Part A (Original Medicare) covers hospital care, most skilled nursing facilities, and hospice/home health services. If you previously paid more than 40 quarters of Medicare payroll tax while working, Part A is premium-free.
  • Part B (Original Medicare) covers doctor visits, clinical lab services, outpatient and preventive care, screenings, surgical fees/supplies, and physical and occupational therapy. The premiums for Part B are based on your Modified Adjusted Gross Income (MAGI) reported on your tax return from two years ago.
  • Part C (Medicare Advantage) combines parts A and B and can also include Prescription Drug coverage. The premiums are based on the type of plan you choose and what is covered by the plan.
  • Part D (Prescription Drug Plan) covers your prescriptions. These premiums are also based on your MAGI as reported on your tax return from two years ago.

You may need other types of insurance during retirement besides Medicare to help cover the costs of unexpected events. A previous employer or union may offer retirees a health insurance plan that supplements Medicare coverage.

Another option to consider is a Medicare Supplement Insurance policy, also known as “Medigap.” This type of health insurance is purchased through a private company and can help to pay for any out-of-pocket costs not covered by the Medicare plans above (such as copayments, coinsurance, and deductibles).

Be aware though! There is a six-month open enrollment period in which you can apply for a Medicare policy. If you miss this deadline, there is no guarantee your application for insurance will be accepted, and your premiums may also be higher.

2) Calculate the Costs of Health Care

As mentioned above, your Medicare premiums for Parts B and D are based on your MAGI as reported on your tax return from two years ago. The various brackets can be found here for Part B and here for Part D. Proactively planning for these brackets can help to mitigate the costs of Medicare premiums paid in the future.

When determining the costs of other, supplemental insurance plans, be sure to review what the policies cover (and do not cover) to accurately figure your total health care expenses. The cost of a Medigap (supplemental) policy depends on your age and location you reside. Typically, the range is approximately $1,800 – $2,500 in annual premiums.

Other costs usually overlooked are the out-of-pocket expenses associated with co-pays, dentistry, and eye care. If these are not covered or reimbursed by your health insurance, they can add up quickly and dip into your spending budget!

3) Plan Ahead for the Long Term

Ensuring you have enough saved for your retirement, along with planning for long-term health costs, can seem burdensome at first. Fortunately, there are multiple savings and planning alternatives to help when it comes to your health care. One option is a Health Savings Account (HSA), which can be funded with pre-tax dollars. If used for qualified medical expenses, it can be withdrawn tax-free as well! When estimating your retirement spending, remember to include health care costs, so as not to underestimate how much you will need to save for your ideal future. Other items to consider may be whether you have enough saved up for a potential nursing home stay, and if a long-term care insurance plan is needed.

How to Plan for Health Care Costs in Retirement: Conclusion

With the right set of health care tools in the toolbox for your ideal future, you should not have to give up your other retirement goals. Every individual’s situation is different, and meeting health care costs in retirement can be done in a variety of ways. Be sure to discuss all of your goals with your financial advisor and how the different options available can help you reach them.

¹ Fidelity’s 2019 Survey is based on an average life expectancy of 85 for males and 87 for females.

Sources:
https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
https://www.medicareinteractive.org/get-answers/medicare-basics/medicare-coverage-overview/original-medicare
https://www.medicare.gov/find-a-plan/staticpages/learn/how-insurance-companies-price-policies.aspx
https://www.medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-glance.html

This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.

Meet the Author: Kelli Peterson

The post How to Plan for Health Care Costs in Retirement appeared first on Savant Capital Blog.

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As more women work “side hustles” outside of their regular employment (e.g., Uber, Postmates, Task Rabbit, etc.), there is an opportunity for them to establish their own Solo 401(k) plan, defer taxable income, and save for retirement.

A Solo 401(k) plan consists of an employer contribution and an employee contribution. This type of retirement savings plan enables a self-employed person to take advantage of tax deductible contributions as the employer, pre-tax and/or Roth contributions as the employee, and tax-deferred growth potential on contributions.

If a person is already making the maximum 401(k) contributions to her regular employer’s plan, she will be limited to contributing only the “employer’s portion” of the Solo 401(k) plan, up to 20% of the net profits. However, we believe this is still valuable and worth doing because collectively she is amplifying her retirement savings.

To be eligible, a person needs to be self-employed (i.e., reporting income on Form 1040 Schedule C) without full-time employees (other than a spouse or a business partner). A Solo 401(k) plan must be established prior to December 31st and funded by April 15th or October 15th if on extension.

For guidance in choosing and designing the right retirement plan to fit your goals, allocating the underlying investments, and determining the appropriate amount to save, consult with your financial advisor.

This is intended for educational purposes only and should not be construed as personalized tax or financial advice. Please consult your tax and financial professionals regarding your specific circumstances.

Meet the Author: Allison Alexander
This blog is brought to you by Savant’s Women’s Wealth Initiative

The post Use Your Side Hustle Now to Provide Financial Security Later appeared first on Savant Capital Blog.

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Savant Capital Management by Cal Brown, Cfp®, Mst - 1M ago

The yield curve inverted. So what?

What does it mean, and what should you do?

A yield curve is a plot of interest rates on bonds (typically U.S. Treasury bonds) of various maturity lengths. Some bonds mature in thirty days, some in three months, one year, two years, five years, ten years, on up to 30 years. The yield—or interest rate—for each bond is on the vertical axis, and the maturity is on the horizontal axis. When you connect the dots, a curve is displayed.

Usually, the curve slopes upward because most of the time, longer maturity bonds pay higher interest rates. As you probably know, longer term Certificates of Deposit (“CDs”) usually pay higher interest than short-term CDs. This is because a longer wait to get your principal back entails higher risk. Part of this risk is inflation. Who knows what inflation might be ten, 20, or 30 years from now?

The chart below illustrates the current yield curve’s flatness (gold line) relative to the steeper curve five years ago (blue line).

There have been several periods throughout history when short-term yields were higher than long-term yields. This results in an inverted yield curve. The curve actually slopes downward.

On Friday, March 22, 2019, the yield on 10-year Treasuries dropped below the yield for three-month Treasuries. It reversed course in April, but inverted again on May 23. This was the first time that had happened since August 1, 2006.¹

How does this happen? Three words: Federal Reserve tightening.

When the Federal Reserve (“Fed”) raises interest rates, tightening credit as it has since December 2015, this only affects very short-term interest rates. Longer term interest rates are attributable to inflation expectations and are generally unaffected by Fed moves. Over the past few years, longer term interest rates have held steady and have even come down recently. Thus, short-term yields have been going up, long-term rates have been coming down, and voila’, we experienced an inverted yield curve between the ten-year and the three-month Treasury bonds. This difference in interest rates is also called the “spread.”

It is interesting to note that the spread between 10-year and two-year bonds has not inverted, although it has come very close. But the spread between 10-year and five-year bonds has inverted.

So what?

Yield curve inversions have been a fairly good indicator in the past of coming recessions. And we know that recessions are bad news for businesses, and thus for stock prices. This is why the yield curve inversion has garnered so much press this year.

The chart below shows the 1-year/three month inversion points (orange dots) since 1967 and the subsequent recessions (shaded blue areas). Stock market performance (green line) shows a decline during most of those recessions.

However, it is worth noting that while the yield curve did invert this March, it only did so to the point where the three-month Treasury was yielding 0.05% more than the 10-year Treasury for a few days, rather than a deeper, longer-lasting inversion. But since May 23, the yield curve has inverted and this time is a little deeper.²

There was a 10-year/three-month inversion prior to the 2008 financial crisis; the yield curve inverted in January 2006. But the economy did not immediately go into recession, and the stock market did not immediately go down. For 18 months after February 2006, the S&P 500 Index posted a positive return of 18.4% and still had a 17% return 24 months later.³  The recession did not begin until later in 2008, due to factors such as the sub-prime mortgage fiasco. Stocks started going down about 30 months after the inversion.

Prior to that inversion, the Fed had been raising short-term interest rates from 1% in January of 2003 all the way up to 5.25% in 2006. This caused the inversion.

What should you do?

First, do not worry in the short term. The stock market does not immediately go down after an inversion. According to Credit Suisse, stocks rose about 15% on average in the 18 months following inversions. And they didn’t start heading down until about 24 months after the yield curve inverted. “Yield curve inversion won’t signal doom…the lead time is extremely inconsistent, with a recession following anywhere from 14 to 34 months after the curve goes upside down,” according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse. They produced this chart:

Second, understand that we are dealing with a relatively small sample size. There have only been seven previous inversions since 1967 (10-year vs. three-month bonds). While an inverted yield curve has preceded each of these recessions, it has also inverted a few times and no recession followed. The 10-year/two-year bond inversions of 1966 and 1998 are good examples of “false positives;” that is, yield curve inversions followed by a few years of robust economic growth.⁴  There is no actual causal relationship; i.e., an inversion does not actually cause a recession. What we observe is an interesting series of coincidences.

Third, do not make investment decisions based on one economic indicator alone. Many factors go into an economy slowing to the point of recession. For example, the Conference Board publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle. Rather than focusing on one indicator in the yield curve, investors are better served with a comprehensive set of indicators. Sets of lagging, coincident, and leading indicators can position investors to confirm trends in past data, reaffirm that these trends are continuing, and determine if they should be expected to continue into the future.

Fourth, remember the definition of a recession: two consecutive quarters of negative GDP (Gross Domestic Product) growth. Over the past few years, GDP has actually been going up, at a higher positive rate than during the previous ten years. Fidelity International is among those anticipating a pick-up in growth later this year. Goldman Sachs strategists wrote that “recession risk remains somewhat low…” They added, “Equity and risky assets in general can have positive performance with a flat yield curve.”

Finally, the inversion must persist for several months. Just because the yield curve inverts briefly, this does not portend gloom and doom in the short term. The recent inversions of March and May have not persisted, yet. And on June 4, 2019, Federal Reserve Chairman, Jerome Powell, indicated that the Fed would be open to reducing short term interest rates.⁵

All of that said, we should not ignore the yield curve. We should be cognizant of it but also be vigilant in understanding GDP growth trends, as well as other leading economic indicators.

It is important to control what you can control. Your asset allocation is the most important investment decision. And this should be driven by your goals and objectives. Another major factor in changing goals and objectives is time horizon. In culmination, these factors allow you and your advisor to assess the level of risk you are comfortable with and design your portfolio accordingly. If any of those factors have changed, you should discuss with your advisor and consider re-assessing the level of risk you are comfortable taking.

If you have evaluated your investment portfolio, confirmed your risk tolerance, and re-balanced your asset mix, there is little else you need to do. Staying disciplined allows you to ride out downturns better than those who throw discipline to the wind. Panic is never an effective investment strategy.

¹ Schwab. “Market Perspective: Market Madness.” 3-20-19
² Yahoo Finance. “Yield Curve Inverted Again. Will Gold Shine Now?” Arkadiusz Sieron 6-5-19
³ CNBC.com. “Bonds are flashing a huge recessions signal—here’s what happened to stocks last time it happened.” Yun Li 3-22-19
⁴ Bob Veres. “Time to Panic?” 1-28-16
⁵ New York Times. “Stocks Jump as Fed’s Powell Suggests Rates Could Come Down.” 6-4-19

Meet the Author: Cal Brown, CFP®, MST

This is intended for informational purposes only and should not be construed as personalized investment advice. Please consult your investment professional regarding your unique circumstances.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

The post Inversion Aversion appeared first on Savant Capital Blog.

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If you are eligible to claim an education credit on your tax return, it could reduce the amount of tax that you owe by up to $2,500 per tax return. The two education credits that are available are the American Opportunity Credit and the Lifetime Learning Credit.

When you help a student pay for qualified education expenses, there is a lot of confusion regarding who is eligible to claim the education credit. Although the IRS rules can be complicated, the answer is relatively straightforward as long as you follow these two rules:

  • The IRS only allows you to claim the education credit if the student is being claimed as a dependent on your tax return. Therefore, if the student is being claimed as a dependent on the parent’s tax return, then the parents are the only ones eligible for the education credit. This is true regardless of who actually paid the expenses.
  • If the student is not being claimed as a dependent on someone else’s tax return, then the student is the only one eligible for the education credit. This is true regardless of who actually paid the expenses.

If a relative or friend pays for the student’s qualified education expenses, the only time the relative or friend would be eligible to claim the education credit on his or her own tax return is if the relative or friend is claiming the student as a dependent.

Who Gets the Education Tax Credit? Examples Example 1: Grandparents paid the student’s education expenses, and the student is being claimed as a dependent on the parent’s tax return.

The parents are the only ones eligible for the education credit. Even if the grandparents paid the student’s expenses directly to the school, the IRS treats the grandparents as making a gift to the parents and then the parents paying the tuition.

  • The grandparents are not eligible to claim the education credit because they are not claiming the student as a dependent on their tax return.
  • The student is not eligible to claim the education credit because the student is being claimed as a dependent on someone else’s tax return.
Example 2: Parents paid the student’s college tuition, and the student is not being claimed as a dependent on anyone’s tax return. 

The student is eligible for the education credit on his or her tax return (as if the student paid his or her own tuition). The parents are not eligible to claim the education credit because they are not claiming the student as a dependent on their tax return.

Education Tax Credit Resources

To learn more about the American Opportunity Credit and Lifetime Learning Credit, please visit irs.gov or consult a tax professional.

Meet the Author: Don Duncan

This is intended for informational purposes only and should not be construed as personalized investment, tax, or financial advice. Please consult your investment, tax, and financial professionals regarding your unique situation.

The post Who Gets the Education Tax Credit: Parent, Student, or Relative? appeared first on Savant Capital Blog.

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If you’re serious about saving on taxes, you should get some seriously good tax software. You must understand the convoluted capital gains rate calculation (it’s based on your overall taxable income, including the capital gains). The idea is to max out the tax bracket you are in, but not go up to the next one.

  • 0% capital gains rate if taxable income below $78,750 (married-joint) or $39,375 (single)
  • 15% capital gains rate if taxable income below $488,850 (married-joint) or $434,550 (single)
  • 20% capital gains rate if taxable income is above those levels

You must also be very clear on the difference between taxable income, adjusted gross income (AGI) and modified adjusted gross income (MAGI).

In addition, try to avoid the 3.8% tax on Net Investment Income, which kicks in at MAGI of $250K (married-joint) or $200K (single).

There is also the issue of IRMAA and Medicare premiums…many seniors are painfully aware of this. If MAGI exceeds $170K (married-joint) or $85K (single), the Part B premium increases to $189.60/month plus an additional $12.40/month for Part D. There are more increases at $214K and $107K; $267K and $133.5K; $320K and $160K; and $750K and $500K.

You’ve got to start with basic, ongoing and mandatory income, such as Required Minimum Distributions from IRAs, Social Security, pensions, and rental income. That is your floor, and capital gains pile on top of that.

A prudent withdrawal strategy takes from low- or no-tax categories first. If you have a large cash or bond allocation in an after-tax (non-IRA) account, withdrawing from that will generate very little, if any, capital gains or ordinary income.

Roth IRA distributions are, of course, tax-free. But you need to balance that with your legacy desires for your heirs.

Municipal bonds only make sense if you are in a very high marginal tax bracket for ordinary income. That is, you should be in the 35% or 37% bracket for there to be a benefit. But, for those taxpayers, they do provide a benefit.

The next favorable categories are Qualified Dividends and Long-Term Capital Gains. Certain equity sub-asset classes generate less dividends than others, and are thus potentially more favorable tax-wise, but may be more aggressive. It’s a balancing act. It is certainly better to pay tax on dividends and capital gains than on ordinary income. Usually, capital gains rates are about half of ordinary income rates.

The old-fashioned “income strategy” (dividends and interest alone for retirement income) should be banished, unless you have uber-significant wealth. Interest rates and dividend yields are simply too low these days to generate any meaningful amount of income. Plus, companies can and do reduce or even eliminate their dividend. Recent examples of this are General Electric and Kraft-Heinz. Of course, when they slash the dividend, the stock price takes a tumble.

Rather, the more professional “total return strategy” should be employed. Total return is the sum of interest, dividends and capital gains. In a properly allocated portfolio, you simply sell from the asset classes that have gone up the most. In some years, that will be bonds or cash; in other years, it will be from certain categories of stock or alternative asset classes (real estate, commodities, etc.). This also forces you to “sell high” rather than emotionally selling something that has gone down recently. Also, you reinvest the dividends. It is a much better strategy—it is balanced and tax-efficient.

When selling equities, you should use the “selected lots” method and first sell positions with highest cost basis; this will result in the lowest capital gain. If you don’t pay attention to the cost basis, you could end up paying higher capital gains taxes.

In conjunction with that, during bad stock market periods (such as late 2018), capital loss harvesting should be done. Even though you can only deduct $3,000 of capital losses in any one tax year, you can carry forward an unlimited amount of losses into the future. These losses can be used to offset any future capital gains you realize for withdrawals. Plus, you can continue to deduct $3,000 per year against other income as long as the losses continue to be carried forward.

If there are any unusual situations that arise, such as the sale of rental property which results in a tax loss, you could sell some stocks or withdraw extra from your IRA—or do a Roth conversion, to “soak up” that loss, but get your capital gains or IRA withdrawals out tax-free.

It doesn’t make much sense to “bunch” capital gains into one year for two years’ worth of withdrawals. You would either be in the same capital gains rate—say 15%–each year, and thus you’d just pre-pay the tax (why do that?). Or, you might push yourself into a 20% capital gains rate, which doesn’t make sense either—especially if that causes higher Net Investment Income tax and Medicare premiums.

Depending on your level of assets and retirement security, as well as legacy priorities, you could donate appreciated stocks or mutual funds to a charity. You both avoid the capital gain and get a charitable deduction (assuming you can itemize deductions).

Going back to Required Minimum Distributions, if you want to try to get to a lower overall taxable income for a lower capital gains rate, you could do a Qualified Charitable Distribution—this goes directly from your IRA to a specified charity, and thus reduces your reportable taxable income from the IRA distribution.

Meet the Author: Cal Brown

This is intended for informational purposes only and should not be construed as personalized tax or investment advice. Please consult your tax and investment professional(s) regarding your unique situation.

The post Tax-Smart Retirement Income Strategies appeared first on Savant Capital Blog.

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Since childhood, many of us have set financial goals. Perhaps it was saving for our first bike or an ice cream treat, or simply enjoying our first taste of wealth as it accumulated in the piggy bank. Whether these actions were influenced by our parents attempting to teach responsibility or it turned out to be an innate personality trait, the process of establishing a goal and seeing the fruits of that accomplishment is as important as ever. Lewis Carroll said it best, “If you don’t know where you are going, any road can take you there.” We at Savant agree, and your financial advisor can help you discern how your personal values and priorities can influence your goals to provide you with a clearer path for your ideal financial future.

Why are my values important?

The strongest foundation for financial plans is one deeply rooted in your personal values. We believe it is essential to engage you in thoughtful questions to help you identify and clarify what is truly most important. The right questions will give you sharper focus to prioritize your goals and develop a vision for the future that is both compelling and motivating. Additionally, a well thought-out vision can help make financial and life decisions easier, as these decisions will support the longer-term future you wish to attain.

How does Savant approach this topic?

Where is your “You Are Here” point?

At the beginning of each relationship, we complete an in-depth analysis of the ten key planning areas with our Ideal Futures Financial Health Assessment™. The first step is our roadmap meeting. Like planning a road trip, we address each client’s “you are here” point by creating a robust net worth statement. After taking an inventory of assets and liabilities, we use various tools and conversation to identify your personal values, highlight your priorities, and set goals for the future. By documenting and tracking this information for you, we help to remind you of these values and goals when you make decisions with your financial resources. We believe that an accountability partner to give direction for your unique plan is key to making progress.

Whether you have already built a financial plan or are just getting started, understand that setting a destination is not enough. Financial advice is not simply building an investment portfolio and monitoring planning strategies. You first need to know where you are, account for your personal values and priorities, and understand the paths you can take that lead to different outcomes. Goal-setting can be hard; add in a spouse or family member and it’s even more difficult. But you don’t have to face this challenge on your own. Your financial advisor stands ready to partner with you in this important process.

Meet the Author: Jakob Loescher

Savant Capital Management is a Registered Investment Advisor. Past performance may not be indicative of future results. Savant’s marketing material should not be construed by any existing or prospective client as a guarantee that they will experience a certain level of results if they engage the advisor’s services. Please Note: “Ideal” is not intended to give assurance as to achieving successful results. Different types of investments involve varying degrees of risk.

The post How Your Personal Values Can Help Shape Your Financial Future appeared first on Savant Capital Blog.

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