It can be an overwhelming process of gathering documents, filling out forms, and paying money to Uncle Sam.

To make things easier, here are five tips to help you prepare for filing your taxes:

1. Review your W-4 Annually.

Understand how your W-4 can impact your finances. The goal is to find the sweet spot: when you owe nothing to the IRS and they owe nothing to you.

Every time you get a big refund, you let the IRS use your money interest-free for an entire year. No thanks!

2. Self-employed? Be Vigilant.

Chances are, you probably don’t have automatic withholdings from your paychecks.

It’s important to estimate your tax liabilities and make quarterly payments. If you owe too much at the end of the year, the IRS can penalize you.

3. Extensions don’t apply to paying taxes.

If you’re not ready to file by April 15^th, you can get an extension for up to 6 months.

Be careful though, filing for an extension doesn’t mean you have an extra 6 months to cough up your tax bill.
All taxes are due by April 15^th.

4. Always be ready for an audit.

Being audited is a major headache that could cost you a lot of time and money.

Here’s what you can do to help yourself:

• If itemizing deduction, keep accurate records and receipts.
• Check your numbers, twice. A silly mistake can cost you in taxes, penalties, and interest.
• Deduct carefully. Claiming deductions can save you money, but if you do it wrong, prepare to pay.
• Value donations fairly. If you donate goods, it’s up to you to estimate their actual value and prove it to the IRS (if audited).
• Be realistic and average. When in doubt, avoid rounding up.

5. Deductions vs. Credits:

Tax deductions and credits can reduce the amount of taxes you pay. Deductions offset your taxable income, while credits give you dollar-for-dollar tax savings (if you qualify). Laws change often and it’s important to be informed.

Here are some examples of each:

• Deductions: Self-employment expenses, capital losses, charitable donations, interest on primary residence mortgage and/or student loans, etc.
• Tax Credits: Earned income tax credit, child tax credit, child and dependent care credit, premium tax credit, American opportunity tax credit, lifetime learning credit, etc.

Truth is, most of us don’t understand the tax code. That’s why working with an experienced professional is the best way to maximize deductions, focus on the right kinds of income, invest in tax-advantageous vehicles, and avoid big tax traps.

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Wills and Trusts are Estate Planning tools to help distribute your estate after you pass away.

A Will is a written document expressing your wishes and only becomes active after death. A trust, on the other hand, is active the day you create it.

What’s a Living Trust?

Like a Will, a Trust is used to transfer property after death to loved ones. It’s called a Living Trust because it is created and active while the Trustor (property owner) is still alive.

Almost anything of value can be placed in a trust. Think real estate, vehicles, accounts, fine art & jewelry, etc.

How Does a Living Trust Work?

Once established, the Trustor must transfer ownership of their assets and possessions into the trust. We call funding the trust, and I can’t explain how crucial this step is.

The Trust document will also name a Trustee. This might be a relative or a professional. Either way, their job is to oversee the instructions of the trust contract are carried out.

Trustors can add conditions like, a grandchild graduating college before receiving their inheritance.

How Is a Living Trust Different from a Will?

1. 1. Privacy: Wills become a public document as soon as you pass. On the other hand, only beneficiaries of a trust will know how the estate is distributed.
   2. Probate: Wills are subject to probate, whereas a Living Trust can help your heirs avoid this lengthy and costly process.
   3. Minors: Only a Will can appoint a guardian for your children.

Pros of a Living Trust:

1. 1. Save time and money in the probate process.
   2. Offers more protection if contested or challenged.
   3. Trusts are totally private, per the Trustor’s wishes.

Cons of a Living Trust:

1. 1. The data gathering and reviewing phase can take a lot of time.
   2. Retitle and re-deed process. The trust is no good if your assets and possessions are not titled to it.
   3. Attorney fees: most attorneys bill hourly and can add up quickly. (It’s still cheaper than probate)

Estate Planning can feel overwhelming. Just remember, you don’t have to figure this out alone.

Work with your team of trusted, fiduciary advisors to create the best plan for you and your family.

The post Let’s Talk Wills and Living Trusts: What’s the Deal? appeared first on AWM.

1. Act Now.

Did you know you can contribute for 2020 until the tax filing deadline? That means you have until April 15^th to make your last contribution.

If you’re planning to contribute, get it done sooner rather than later. Avoid any last-minute problems and let your IRA grow faster.

2. Talk to Your Advisor About a Roth IRA Conversion.

If you have a traditional IRA, you can convert part of it to your Roth IRA.

Because tax laws are constantly changing, a conversion that didn’t make sense last year might do so in 2021.

While it might not be a great option for everyone, it is worth discussing with your tax specialist.

3. Know How to Move Your Money.

I can’t stress this enough. Know how to move your IRAs.

If you’re wanting to consolidate retirement accounts, make sure to roll over them to a like-titled account.

This will also avoid the 60-day and once-per-year rollover rule.

Do not accept a check in your name. Otherwise, you will owe taxes on that account immediately.

4. Update Your Beneficiary Designation.

Make sure your hard-earned money will be left to the right people. Family and friend dynamics change often.  Be sure to keep your beneficiary designation form up-to-date.

Recent changes like the SECURE Act could also impact your current beneficiary form. Spend some time making sure your wishes are accurately documented.

5. Use QCDs and Other IRA Tax Breaks.

IRA rules can be overwhelming, but make sure that’s not keeping you from options you might benefit from.

If you’re over 70 ½ and charitably inclined, you might consider a Qualified Charitable Distribution (QCD). First-time homebuyers might be able to use a portion of their IRA to help fund their down payment.

Take some time to learn what options you have available to you.

6. Plan for the Unexpected.

Our tax laws and IRA rules are constantly changing. I think we should expect more change in 2021 than in previous years.

Remember, IRS guidance on recent rule changes and a new administration and Congress could have a big impact on your IRA.

The bottom line? Plan ahead and work closely with a fiduciary professional who will seek out the best solutions to fit your situation.

The post How Can I Ramp Up My IRA in 2021? appeared first on AWM.

You know the process—gathering paperwork, sorting through receipts, and crunching the numbers.

Thankfully, there are a few ways to make this whole process easier. Consider if hiring a professional is a better option than filing your tax return yourself.

Hiring a Pro:

The bad news? You still have to organize your paperwork. They need information only you can provide. That said, working with a professional might save you time and provide more accurate returns. Professionals keep updated on the ever-changing tax laws and can often find benefits that are hard to unearth on your own.

Tax preparers vs. CPAs:

Tax preparers are trained to help people with their income tax returns. On the other hand, certified public accountants (CPAs) have passed a certification exam with a background in accounting and finance. Extra knowledge and education have perks, like preparing financial statements for businesses and individuals.

When do you need a pro?

• You lack time or patience.
• Your tax situation is complicated.
• You plan to itemize deductions.
• You had major life changes in the last year.
• You don’t trust yourself to check all the boxes.
• You own a business or multiple real estate holdings.

Doing it Yourself:

All the work will fall on you. It will take more time and research to make sure your returns are accurate and filed properly. If you’re one of the few people well-versed in tax law, this might be a good option for you.

Tax Software vs. the IRS website:

The IRS website allows you to download and print or request forms in the mail. They also offer a free online filing portal. These options are generally recommended for household incomes under $69,000, per the IRS website.

If your household income is over $65,000, it might be best to use tax filing software. Generally speaking, a more complex situation requires a fee-based program, which can range anywhere from $25-$100+ for state and/or federal filings. You might even have to file in multiple states.

When can you do it yourself?  

• You have the time and patience.
• Your tax situation is simple and straightforward.
• You feel comfortable navigating business-related tax forms.
• You’re comfortable hitting submit and want that control over your money.

Our goal is to educate clients and guide them towards success. Tax and Financial Planning go hand in hand.

Ready? Let’s Talk

The post Should You Pay Someone to Do Your Taxes? appeared first on AWM.

Contributing to your IRA by April 15^th could lower your tax bill for 2019.

The annual contribution limits for IRAs (both traditional and Roth) for 2019 is $6,000 for any working individual under the age of 50. Those over the age of 50 can contribute up to $7,000 each year.

These contributions might lower your taxable income if you have earned an income. Here are a couple examples:

Let’s assume you are single and earn an adjusted gross income (AGI) of $60,000. If you contribute the maximum of $6,000, you will only pay taxes on $54,000 of your income.

If you’re married, filing jointly and have an AGI of $98,000, you can both contribute up to $12,000 ($6,000 each) for 2019. You will pay taxes on $86,000, assuming you make the maximum contributions allowed under the law.

Traditional IRA contributions are non-itemized deductions, which means you can claim them on your return.

However, there are limits for who can deduct their IRA contributions based on a few different factors:

1. If you make too much income, you might still be able to contribute to your IRA, but might be limited or disallowed deductions.
2. If you’re married and not covered by a retirement plan, your AGI limits are higher. It’s always good to check with your financial advisor or accountant for clarification on these limits.

For more information, you can visit irs.gov. I encourage you to speak with a fiduciary financial advisor and your tax specialist. They can help you maximize the deductions you qualify for and make the most of your tax returns for 2019.

Schedule Appointment

The post Contributing to Your IRA by April 15 Could Lower Your 2019 Tax Bill appeared first on AWM.

I could not agree more! Let’s learn from 2 of my friends (hypothetical Mike and Donna). These examples apply to people who are still working and those already enjoying retirement.

Solutions for High-Income Earners

Donna is 63 and earns a substantial income. Mike, on the other hand, is 71 and retired. Because Mike holds an IRA (with a large balance), he is required to take $100k in required minimum distributions (RMDs) each year and report that amount as taxable income.  This RMD can bump them up to a higher marginal tax bracket. Even though they don’t need the extra income, Mike must take the RMD or pay a substantial penalty.

Mike can make a Qualified Charitable Distribution (QCD)that potentially might lower their reported taxable income. As long as they stay below the IRS limits, this charitable gift satisfies Mike’s RMD and does not count as taxable income. This allows Mike and Donna to stay within their preferred lower tax brackets while doing good for their community.

If you don’t need the extra income and RMDs are pushing your income into a higher tax bracket, consider making a Qualified Charitable Distribution with all or a portion of the RMDs.

Ideas for Complex Tax Situations

Mike and Donna are high-income earners and have a complex tax situation. They are negatively impacted by new tax law changes, which limits their ability to achieve a tax reduction through itemizing their deductions.

Mike and Donna face a dilemma. They could donate to charity to balance out their tax benefits. But they are not ready to give away a large sum of money all at once.

A donor-advised fund might be a viable option. Mike and Donna can open a fund to optimize their tax deductions.  They can also direct how, when, and to whom their gift is distributed.

Keep What’s Yours

Mike is happily retired. He decided to roll his 401(k) and two IRAs into one retirement account to simplify his life. In November, Mike checked the remaining balance for RMDs on his newly consolidated account and took the distribution listed Yet he did not take enough in RMDs.

Mike just made a costly mistake, and the IRS will penalize him for it. He miscalculated his RMD’s because he neglected to add the RMD amounts listed on his other accounts.

This is a subtle but common mistake. It will cost him a 50% penalty on the remaining balance of the RMDs he didn’t take. Remember RMDs cannot be rolled over into the next year.

Would you want to pay an extra 50% penalty instead of spending it yourself?

Let Us Help You to Enjoy Your Holidays

Some of these options can be complicated and overwhelming. We would love to help you simplify your life.

The post How Can I Give More to My Loved Ones and Less to the IRS? appeared first on AWM.

Direct Transfer vs. 60-day Rollovers

• Direct Transfer – A direct transfer is sometimes called a “direct rollover”, depending on the context. The term “transfer” is used in the tax code when referring to IRAs, while “rollover” is used for other qualified plans. Either way, we’re always talking about distributions that are payable to another tax-deferred account, but never to the account holder. There are two ways to distribute your funds into another account:

1. 1. ACH/Wire Transfer – This is generally the preferred method since the account holder never touches the funds.
   2. Check Payment – In this case, the check is made payable to the recipient account and is handled through a custodian.

• 60-day Rollovers — Often referred to as an “indirect transfer,” a 60-day rollover is when a distribution is payable to an individual to be redeposited into an IRA or other retirement plans within 60 days. Partial rollovers are also allowed.

Consult with your financial advisor which is the best option for you and your situation.

Benefits of a Direct Transfer

Now that you understand the difference between the two ways of transferring assets from a retirement plan to an IRA, here are some benefits of choosing a direct transfer:

• Simplicity – You can’t really get much simpler than a direct transfer. Plus, with an ACH/wire transfer, there is less room for error.
• Once-per-year Rollover Rule – Direct transfers are exempt from this rule, which means you can make as many distributions from or to qualified retirement plans as you want.
• Withholding (in qualified plans) – Qualified plans are required to withhold 20% of distributions that are paid to the account holder. Direct transfers, however, are not subject to this 20% taxable income. This factor alone is worth considering when transferring your assets.
• Inherited IRAs – A direct transfer is the only way an account owner can transfer an inherited IRA to another institution. Any amount that is payable to the beneficiary immediately becomes taxable income. Unless the custodian makes an error, there is no way to “fix” this.
• Divorce – A direct transfer is the only way to distribute the awarded amount to an ex-spouse without tax penalties.
• Timing – While 60-day rollovers are subject to time constraints, direct transfers are not.
• IRS Relief – Unlike 60-day rollover issues, any problem that comes up with a direct transfer will automatically be exempt from taxes.

At the end of the day, if you want to transfer money from an IRA or other qualified retirement plans, a direct transfer is the best way to avoid most or all tax consequences.

Always speak with your fiduciary financial advisor for help with tax relief and the mechanics of transferring funds. This could get very complicated and you don’t want to make mistakes, especially irreversible ones.

If you don’t know where to start, I would love to help.

Schedule Appointment

The post Direct Transfers vs. 60-Day Rollovers – Which is Better? appeared first on AWM.

1. File now and fund later

   People are always asking me if an IRA contribution has to be made before their tax return is filed. What’s surprising is, the answer is no. You can claim the deduction for your IRA contribution now, and fund it later after your taxes are filed. Some people are able to fund their IRA contribution with their tax return if the timing is just right. Just a word of advice, don’t wait too long. If you claim the contribution, make sure you get it done quickly.

2. Tax credits are available

   Most people haven’t heard of the Saver’s Credit. It’s a tax credit available to lower-income workers who contribute to their IRA. This is basically a double tax break because it’s available in addition to any other deductions you may have already claimed. The maximum contribution limit is $2,000 and you can claim up to 50% credit towards that amount. You could be able to reduce your tax liability up to $1,000.

3. Spousal contributions can help stay-at-home spouses

   If you are a stay-at-home spouse, it doesn’t necessarily mean you can’t make IRA contributions. If your spouse is earning taxable income, you can make spousal contributions to your IRA based on their taxable compensation. It is more than possible to build up your retirement savings as a stay-at-home spouse.

4. No age limits for Roth IRA contributions

   You might think you’re too old to contribute to an IRA, but that might not be the case. While you’re no longer allowed to contribute to a tradition IRA once you reach age 70 ½, contributing to a Roth IRA might still be an option. There are no age limits for Roth IRA contributions, so anyone can make these contributions. This might be the perfect solution for retirees who work part-time, but don’t need the extra income. So, why not put that money towards your future?

5. No extensions for IRA contributions

   Some people can take extra time to file their taxes, but this won’t affect the IRA contribution deadline. For 2018 traditional or Roth IRA contributions, the deadline is April 15, 2019. Even a partial contribution can help to lower your tax bill, so take advantage of this additional tax break.

These 5 rules might be exciting to read about, but I would encourage you to work with your fiduciary financial advisor or tax professional before making any big decisions. They can help you optimize your returns, contributions, and make your money work for you. Our goal is to help our clients to live a purposeful life in a complex world.

If you don’t know where to start, I would love to help. Give us a call.

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The post 5 IRA Contribution Rules that Might Surprise You appeared first on AWM.

As you prepare your tax returns, it’s helpful to have a good understanding of how you are being taxed.

Income Tax Vs. Other Taxes

In addition to the federal income taxes you pay, many states charge an extra state income tax. Some municipalities and school districts will also charge a separate income tax. Here are some of the ways you might be taxed:

• Payroll taxes
  

  Also known as “employment tax,” payroll taxes are automatically pulled from your paychecks for Social Security and Medicare. For the 2018 work year, employees were required to pay 6.2% of their first $128,400 earned income to Social Security and 1.45% to Medicare. Employers are required to match both of these amounts.

• Sales taxes

  Sales taxes are paid as a percentage of when you purchase goods or services. It’s important to know that they are only collected on the state and/or local level, and each state has their own rates—if any at all. The states with no sales tax generally levy a combined local and state tax upwards of 10%. Sales taxes are considered regressive tax because lower earners end up spending a larger portion of their income on them compared to higher earners.

• Excise Taxes
  

  These are similar to sales taxes in that they are charged when you make a purchase, however, they only apply to certain goods or services. These purchases often fall under the description of “sin products” and include goods like alcohol, cigarettes, and gasoline. Gasoline is the most commonly paid excise tax and is collected by the federal government. Excise taxes are often applied on top of current sales taxes.

• Property taxes

  Property taxes are collected at the state and/or local levels and most often occur on real estate or other larger purchases like vehicles. They tend to fluctuate with the market value and support local or county services like garbage, road maintenance, and fire protection.

• Estate taxes

  These are the taxes that are collected off the assets you leave for a beneficiary after your death. It includes cash, securities, insurance, real estate, and business interests. Estate taxes don’t apply to everyone. For 2018, estates worth more than $11.18 million are subject to tax, and estates worth more than that are only taxes on the value that exceeds this limit. Depending on the state you live in, you might also be subject to estate tax on the state level.

• Gift taxes
  

  Gift taxes are similar to estate taxes but only apply to gifts you give to another person while you are still alive. This only applies to high-value gifts that reach or surpass a certain threshold. For 2018, the annual gift tax exclusion limit capped at $15,000 per recipient. Gift taxes only applies if your gift exceeds the annual exclusion.

Taxable vs. Non-Taxable Income

For the most part, any income you receive for any source is subject to taxation. This includes wages, salaries, commissions, interest, stock options and dividends, unemployment compensation, rental income, and alimony. Income tax also includes “fringe benefits” like company-paid gym memberships, company vehicles and holiday cash gifts from your employer. And it includes other forms of income such as canceled or forgiven debts or loans, money from offshore accounts, property you obtained through barter, and payments from employer-paid disability, sickness and injury plans.

There are, however, a few exemptions from federal income tax. Being aware of these exceptions could help to lower your tax bill. Here are the most common forms of non-taxable income:

• Inheritances, gifts, and bequests
  

  Most inheritances and gifts you receive are not subject to taxation. That said, you will owe taxes on estates that exceed the annual exclusion figure (see above).

• Life insurance payouts
  

  Any money you receive on a life insurance policy after someone dies is not taxable income. If you cash out the entire policy, however, that money is usually taxed.

• Qualified scholarship money
  

  While money from a qualified scholarship is not subject to taxation, any of that money that goes towards room and board is.
  

• Other non-taxable income
  

  Other types of income might include municipal bond interest, most health care benefits, child-support payments, welfare payments and cash rebates on purchases. You can take advantage of all these exemption and deductions.

Closing Thoughts:

Knowing what taxes to expect and the areas you can write-off or save on taxes will help make filing your returns easier. Talk to your fiduciary financial advisor or seek out a tax specialist to walk you through this process.  Get someone to help you optimize your returns and live life with purpose.

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The post Income Tax 101: What’s Taxable? appeared first on AWM.

Here are 10 things you should know about QCDs:

1. Under the new tax reform, you have more opportunities to maximize your deductions. Most taxpayers take a standard deduction on their tax forms. If you take a standard deduction, the option for charitable giving is eliminated. Ask your fiduciary advisor how best to make charitable distributions from your IRA(s).
2. A QCD might add to your standard deduction. Donations made directly from your IRA can help lower your adjusted gross income (AGI) by excluding all donations made from your IRA from your income. It just takes a bit of planning.
3. If you own an IRA or are a beneficiary and have reached age 70½ years old, you can make qualified charitable distributions. Check with your fiduciary financial advisor(s) before jumping into a decision.
4. Should you choose to make a QCD, it must be a direct transfer from your IRA account to your selected organization. Any distributions you take cannot be given to the charity for a deduction. That said, you can request a check, payable to the organization, mailed to you and then you can deliver it in person. It’s usually easier for our clients to just set up a direct transfer.
5. To qualify for a QCD, you cannot receive anything in return for your donation. That means no free tickets, mugs, or services in exchange for your contribution. Make sure your gift is actually a gift, not a trade. It’s also important to note that gifts to donor advised funds or private foundations do not meet the requirements for a qualified charitable distribution.
6. QCDs are limited to $100,000 per year, per individual. If you are married and your spouse also qualifies, you can each give the full $100,000 annually. Talk with your tax advisor to review your best options.
7. Any amount transferred from your IRA to a charity as a qualified charitable contribution can count towards your 2018 RMD. If you don’t need additional taxable income, this is a great way to keep your tax bracket lower.
8. Qualified charitable distributions can only be made from an IRA, Roth IRA or inactive SEP or SIMPLE IRA. Other employer plans, such as a 401(k) or 403(b), do not qualify for QCDs. Your financial advisor can help you choose the best account to make donations from. If you still have a corporate plan and want to make a QCD, talk to your fiduciary advisor to potentially transfer funds from your plan to an IRA.
9. With regards to #8, QCDs only apply to the taxable amounts in your IRA. Only the taxable amounts in a Roth IRA will qualify. This can get very complicated. Please seek out your fiduciary advisor’s recommendations.
10. Make sure you keep the communication with your accountant open and consistent during this process. Your accountant should know about any QCDs you make or plan to make for that calendar year. Otherwise, when your custodian submits your 1099-R form, there will no be information about your qualifying charitable distributions. Don’t make this mistake by making sure your accountant is aware of any IRA transactions you make, especially QCD’s.

Planning out your finances can be tricky and complicated. If you need help with tax-planning or charitable donations, consider working with a fiduciary financial advisor to guide you. Ambassador Wealth specialized in tax-planning services. We would love the opportunity to meet you.

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