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.

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.

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.