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.

Many people who already know which causes they should champion can benefit from straight gifts to charities.

Yet, many other people also desire to do good, but they are unsure how and when to donate. 

Other people are willing to help a specific charity, but they are not ready yet because they still need income.

Still, other people want to donate to charity, but they also want to help their children and grandchildren.

The good news is that a variety of options exist to help those who find themselves in unusual circumstances.

This is true even with the Trump tax reform.

People in such circumstances might consider 3 potential strategies that can help their situation:

1. You Want to Donate to Charity but You Don’t Know Which Ones Yet

You might be someone who knows you want to make an impact on your world. However, you have not yet figured out which charities best reflect your values. Yet, you would like to start making large contributions now.

One option is to start your own private foundation. This can offer you significant control over where your donations ultimately go later on. 

Private foundations do have drawbacks.  One drawback is the expense, since they must satisfy a host of complex rules. A second drawback is that you can contribute a lower percentage (30%) of your Adjusted Gross Income (“AGI”) to a private foundation than if you simply contributed cash to specific charities (60% of AGI). 

One potentially cheaper option to a private foundation is a donor-advised fund (“DAF”). Larger charities and investment firms offer such vehicles.  However, in order for your DAF donation to be tax deductible, you will need to obtain a letter from the sponsor of the DAF stating that it has exclusive legal control over the assets you donated.

2. You Need Income Now but Wish to Donate Your Inheritance to Charity

Some families still need the income from their investments for living expenses, yet they wish to deed over their inheritance to a charity upon death. A Charitable Remainder Trust (“CRT”) might be a viable option. 

A family might donate their money to a charity in the form of a CRT.  In exchange, the charity pays the family an annual income, some of which is taxable, over a fixed time period.  The family receives an income tax deduction for their contribution to the CRT, but their property is removed from their estate. The charity owns the property now.

Another potential benefit of a CRT is that it might help diversify your portfolio.  Large assets that generate no income or embed large capital gains might benefit from being housed within a CRT.  The family would receive financial income.  Additionally, the family would not have to pay capital gains tax.  As the CRT is a tax-exempt entity, the charity could sell the illiquid asset at some point in the future without generating a tax event for the donating family. 

It is possible to name a beneficiary other than yourself in the event you were to die before the term of the CRT were to expire.  The beneficiary would receive the remaining income from the CRT. 

3. You Want to Donate Income to Charity but Seek to Transfer Your Inheritance to Your Children (or Grandchildren)

Charitable Lead Trusts (“CLT”) can help people who seek to help both charity and their own children (or grandchildren) at a lower tax rate.

A CLT pays an amount to one or more charities periodically over the life of the Trust. When the Trust’s life expires, then the remaining assets pass on to beneficiaries designated by the original donor. Donors who fund CLT’s benefit from tax deduction of their original gift. However, the property is removed from their estate. 

For gift tax purposes, the amount of remainder interest is calculated with the assumption that the assets grow at Section 7520 rate.  If the trust’s earnings out perform the Section 7529 rate, excess earnings are transferred to the remainder beneficiaries free of both gift and estate taxes.

However, depending on what interest rates do, the increased gift and estate tax exemption might reduce your tax benefits from CLT, depending on your specific situation. Consult with a tax expert for your specific situation. 

We would be happy to give you a free consultation in navigating the complexities of leaving a legacy for good causes and less to the tax man.

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The post Trusts Might Give You Flexibility and Lower Taxes appeared first on AWM.

It’s not all good news for taxpayers, however. The TCJA also eliminates or limits many tax breaks, and much of the tax relief provided is only temporary (unless
Congress acts to make it permanent). The combined impact of these changes will ultimately determine whether you see reduced taxes. It also will dictate which tax
strategies will make sense for you this year, such as the best way to time income and expenses.

This guide provides an overview of the most consequential changes under the TCJA and other key tax provisions you need to be aware of. It offers a variety of strategies to help higher-income taxpayers minimize their taxes in the new tax environment. It will be important to work closely with your tax advisor this year. He or she can help you identify which changes affect you and the best strategies for maximizing the new tax law’s benefits and minimizing any negative tax ramifications. Plus, more tax legislation could be signed into law this year. Your tax advisor can keep you apprised of the latest information.

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The post 2018-19 Tax Guide: Don’t Get Trumped by the Tax Reform appeared first on AWM.