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.

The post How Can I Prepare For Tax Season? appeared first on AWM.

This makes August a stellar time to work on your finances. My advice? Don’t put it off until December.

Here are a few year-end planning items to check off your list:

1. Get Ready for Upcoming Education Costs

For students: this is a great time to start looking at college scholarships. Find 3 or 4 you would like to win and start working to make yourself the perfect candidate and apply early.

For the parents: take a look at some college calculators to get a sense of how much your expected family contribution (EFC) will be and the best tax-efficient way to pay for it.

Even if college is a few years out, planning now can help keep costs down later. Make sure everyone is on the same page and only look at schools that you can afford.

2. Do You Need to Rebalance Your Investments?

Consider the market. Is your current asset allocation up-to-date and working for you? This is a good time to review your portfolio with your financial planner.

Also, consider the tax consequences of reallocating your investments. This might be a good time for a tax planning session.

3. Revisit Your Budget and Goals

Do you have dreams of buying a home, paying for college expenses, or ramping up your retirement savings?

Take a look at your budget. How are you doing? It might be time to trim down some costs by eating out less and ditching subscriptions you no longer use.

Write down your goals and how you plan to reach them. This is the first step in making those dreams a reality.

4. (Bonus!) Plan for Your Next Tax Bill

August is usually a slow month for accountants and other tax experts. This means it’s a good time for tax planning.

Don’t wait until December. Estimate your upcoming take bill, and start preparing for it.

If you don’t already have a team of professionals ready to help you through this planning season, consider talking to a certified financial planner who offers hourly consulting—and keep the conversation limited to tax strategies.

A 2-hour planning session could help you keep more of your hard-earned money.

The post Don’t Wait to Start Your Year-End Financial Planning 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.

How? Let us take a look.

Why the real income you make comes after taxes come out

Taxes are a major, if not the largest expense for most people. They can take a bite out of any income you generate, in some states they run close to 50%.

Yields, the amount of pretax income generated per dollar of a given investment, are often presented as independent of taxes. Yet, yield in and of itself does not really tell you how much money you will receive. 

Taxes are a real expense for your wallet. The true income you earn comes after the tax man takes his “fair share”, not before. 

The good news is that awareness and prudent management around the different tax categories of income can help you. You can have significant influence over maximizing income after tax. Whether it’s investments that pay income, which could be friendly to your wallet or end up costing you some hefty taxes.

How we help others: a case study

Let us examine situations of how we have helped other people navigate through these complex issues. We cannot give you specific names, but the example below is fairly typical.

Hypothetical Martha and Fred are a family who seek additional income. The family pays meaningful taxes even without investment income. They own both taxable and qualified accounts. 

They might want to house sources of ordinary income in their tax-deferred/qualified accounts. The ordinary income generated would not count against their other taxable income. Additionally, they would not pay tax on income generated for that year. (However, a tax-deferred account would mean they eventually pay tax once they begin to take Required Minimum Distributions. Alternatively, if they were to take money out before age 70.5, they would also owe tax.)

Fred and Martha could place investments that generate qualified dividends in their taxable accounts.  Such income in a taxable account would not count against their AGI. Additionally, they would pay a lower tax rate under long-term capital gains rate rather than ordinary income tax.

Let us help you deal with the issues

Are you ready to deal with income and taxes? If you feel a little overwhelmed, we are here to help. 

Come schedule a free consultation so we can help you figure out the best ways to generate income after taxes.

Do not go broke by stretching for income! Read our white paper to learn the 3 common potholes you need to steer clear of.

Start the Conversation

The post Not All Investment Income Is Created Equal Because of Taxes: Case Studies appeared first on AWM.

That is not true about income coming from investments. Many of your neighbors forget this fact to their detriment.

One of the major problems people often do not understand is taxes. You can reduce different types of income with different levels of taxation.

Be informed.

What are the issues?

Income comes in many forms. Wages and bonuses you earn, sales or income from hard assets, Social Security, and sudden wealth are examples.

For many people, especially those in or approaching retirement, income from their investments is a major way to fund their lifestyles.

Some people lump income into one big category. For those of us who pay taxes (hint: most people pay taxes!), this would be a mistake. The IRS and state tax authorities view income under several categories.

The table below illustrates the different categories of income from a tax perspective and typical sources of such income:

Introducing Different Tax Categories of Income

The table below sheds light on how tax laws might apply for each category of income. This includes both taxable and qualified accounts (typically IRA’s or other retirement accounts).

Different Tax Treatment for Sources of Income in Taxable and Qualified Accounts

Here is some additional color on the specific tax treatment of each of these categories:

1. Ordinary income

   1. Taxable accounts
      1. Income other than long-term capital gains. Wages, salaries, and dividends are examples.
      2. Ordinary income is taxed under the marginal tax bracket as defined by the IRS.
      3. A range of itemized deductions might be able to offset a portion of ordinary income.
   2. Taxes on ordinary income are not relevant when held in retirement accounts.

2. Qualified Dividends

   1. 1. Taxable accounts
         1. Taxed at the long-term capital gains tax rate (used for gains on the sale of investments held for greater than 1 year).
         2. No cost basis, but also favorable tax treatment due to (typically) lower long-term capital gains tax rate.
      2. Only offset on income tax returns is capital losses (selling assets below purchase price and writing off all or a portion of the difference).
      3. Taxes on qualified dividends are not relevant when held in retirement accounts.

3. K-1 Income Pass-through Income

   1. Tax considerations for taxable accounts

      1. Partnerships like LP’s and Master Limited Partnerships (MLP’s), both public and private, pay income that the IRS treats differently from ordinary income.

      2. Investors at the end of each year receive a form K-1. A good portion of your income should be tax-deferred. However, there are complexities:

         • Most income qualifies as “return of capital”, which is recorded for tax purposes not as income, but rather as a reduction of the cost basis of the shares the investor purchased.
         • If and when the investor sells the shares of the partnership, the investor will pay capital gains tax on the difference between the share price and the cost basis. Hence, the return of capital is considered “tax-deferred” into the future, not “tax-free”.
         • Unrelated business taxable income (UBTI) is “income regularly generated by a tax-exempt entity by means of taxable activities.” Not only is this income taxed, but it has the potential to bump up the investor’s marginal tax bracket if it causes the investor’s total income to exceed certain thresholds.
         • Taxable income from MLP’s might offer potential offset in the form of depreciation and other deductions. List these items on your K-1.

      3. You might have to file income tax forms in states where you do not live but where the MLP might do business.

         • According to the MLP Association: “Because of the pass-through structure of MLPs, unitholders in multistate MLPs may owe tax in each state in which the MLP earns income. The K-1 package provided to you by the MLP each year includes information on how much income has been allocated to you in each state.”
         • Apart from a couple of states, most states have low thresholds as to how much income triggers a state income tax filing.
         • You might want to discuss with your professional the need for additional state income tax filings, payments, and whether you want to put up with the burden going forward.
   2. Taxes could still be quite relevant even if held in retirement accounts (such as IRA’s).
      1. Retirement accounts (IRA’s) – if total UBTI on all your investments in an IRA exceeds $1,000 in a year, you must file a special form and pay tax on it.
      2. In addition, you will need to file a special form with your 1040 (Form 990-T).

    

One additional consideration specific to income generated from investments with a foreign domicile is withholding tax.

Some countries have tax treaties with the US and do not withhold additional tax from dividends. However, others do not. The situation varies by country.

The UK poses an interesting example for foreign investors. Sometimes, certain structures (such as UK corporations) are exempt from dividend withholding tax. Yet, other structures in the same country (such as UK REITs) are subject to dividend withholding tax.

How we can help you deal with the issues

We would be happy to schedule a free consultation so we can help you figure out the best ways to generate income after taxes.

Do not go broke by stretching for income! Read our white paper to learn the 3 common potholes you need to steer clear of.

Schedule Appointment

The post Not All Income Is Equal Because of Taxes: 3 Types of Income appeared first on AWM.

Charitable giving potentially offers a key component toward managing one’s nest egg.  (Check out the IRS’s Tax Exempt Organization Search tool to make sure your charity is qualified to give you a tax deduction on your donation.)

You have the opportunity to donate toward causes in which you believe.  You also can save some money from the tax man.

This is true even with the Trump tax reform.

The Tax Cuts and Jobs Act (“TCJA”) made only very minor changes to charitable giving, particularly for high-income taxpayers.  While tax rates for many tax brackets were lowered, it also results in slightly less tax benefit from giving to charity.  Nonetheless, the potential benefits from charitable giving are still tangible.

Here are 3 ways you can take advantage of charitable giving through gifting strategies:

1. Cash Donations

   Straight cash donations to the charity of your choice are the simplest to make.  You can give via check, credit card, or payroll deduction. You will want to retain some proof that your donations went to charity for the IRS.  If your gift is less than $250, either a canceled check, credit card receipt or written letter from the charity will suffice.  If you gave more than $250, then you will need to get a written receipt from the charity for your records.

   The new tax law puts a cap on tax-deductible cash donations to specific charities at 60% of your Adjusted Gross Income (“AGI”), which is an increase from 50% prior to the TCJA.

   If you were to donate cash to a nonoperating private foundation, the IRS only allows you to deduct it up to a maximum of 30% of your AGI.

   You can carry excess contributions forward for up to 5 years.

2. Stock Donations

   One of the best charitable gifts you could donate might be appreciated stock or other publicly-traded securities.

   • You can deduct the current fair market value of the securities you gift to charity on your income taxes.
   • Additionally, you do not have to pay capital gains tax on the price appreciation in those securities.

   However, appreciated stock is subject to stricter deduction limits.  Unlike cash donations, appreciated stock donations to charities are deductible only up to 30% of your AGI.  If a stock donation is made to a nonoperating private foundation, the maximum donation deductible would only be up to 20% of your AGI.

   If you want to give stock that is below your cost basis, don’t do it.  It is best to sell the stock at a loss, give the cash proceeds to the charity, and write off the realized loss on your taxes.

3. RMD’s from Your IRA as Charitable Donations

   If you are age 70.5 years or more, you have a third option for donating to charity.  You can make direct contributions to charity from your IRA up to $100,000 each tax year.  While you cannot claim a deduction from your taxes, you can benefit in another way.  Any such donations you make from an IRA qualify toward satisfying your Required Minimum Distribution (“RMD”) mandated by the IRS.  Additionally, you would not need to pay any tax on such distributions.

These ways of charitable donation might apply for people who already know to which charities they wish to donate and are ready to do it right away.

But what if your situation is different?  Read how trusts and other strategies might give you more flexibility if your situation is unusual.

Come schedule a free listening session to figure out if we can help you to live a meaningful life while saving on taxes.

Start the Conversation

The post Gifting Might Be a Viable Strategy to Limit Taxes appeared first on AWM.

Precisely where people have the greatest need is also when they are most vulnerable to misunderstanding. Making mistakes with income risks lowering your future standard of living.

We continuously run into clients who seek income, but who have misunderstood what they will actually receive.

• Oftentimes, we find people who mistake yield for total return (and forget that they need to earn at least their principal back with some positive return).
• In other situations, investors fail to consider taxes into their overall equation.
• Sometimes, people lock up their money in hopes of a greater coupon. Yet, they leave a lot of money on the table because they fail to understand the intricacies of illiquid investments.
• One of the greatest pitfalls we see is people who buy into the promise of durable, high-income payment. Because they forget about risk, the investment might not live up to its promise. Thus, investors suffer losses, including reduced income.

Get my free guide

The post 3 Ways Reaching for Income Can Make You Broke appeared first on AWM.