Tuesday, October 3, 2017

What’s better done in fall than spring? Often, the answer is taxes

Fall is upon us and it’s a good idea to start thinking about your 2017 tax return now.
While most people wait until March or April to file, there can be advantages to filing early. Some deductions may be lost if you don’t act by Dec. 31.
It’s wise to engage your CPA in these planning strategies now and early in 2018 when they typically have more time to assist.
Congress is currently considering tax legislation. Some parts of the bill could be “retroactive,” meaning they will go in effect for the 2017 tax year. We should monitor this situation and its potential effect on this year’s tax return.

Year-end tax considerations

It’s a good idea to estimate what your capital gains distributions will be for the year. Most mutual fund companies will tell shareholders ahead of time what they plan to distribute to shareholders and when.
It’s possible for an investor to avoid these gains in some circumstances. It’s also a good idea to determine if any capital gains losses are available and if so, if it would be wise to sell before the end of the year to “harvest” these losses and reduce capital gains taxes for 2017.
To lower taxable income, be sure to maximize contributions to 401K and other retirement accounts.
While 2017 IRA and Roth IRA contributions can be made until April of 2018, employer sponsored retirement plans typically have a contribution deadline of the end of the calendar year.
Determine if there is money left in your Flexible Spending Account.
Will it be lost at the end of the year? Deposits to Health Savings Accounts and 529 Savings Plans can be valuable ways to save for health care and education expenses while reducing current income, but their contribution deadlines are Dec. 31.
Be sure to make any charitable contributions by the end of the calendar year and don’t forget to save receipts for “non-cash” contributions to organization like the Goodwill and Salvation Army.

Estimate income for this year and next

Understand your probable income before the end of the year. Will your income be significantly higher or lower this year or next?
If your income is higher than normal this year, consider paying certain 2018 deductible expenses — like property taxes, business expenses, or mortgage payments — early so you can deduct them in 2017. But remember you won’t be able to take these deductions again in 2018.
It’s possible you may have less income this year than you would expect in 2018. If that’s the case, you can delay certain payments until January so they are deductible in 2018 when the benefit of the deduction is greater.
You may also consider selling investment positions now and generating capital gains in 2017 or converting a traditional IRA to a Roth IRA if you are in a lower tax bracket this year as opposed to next year.

Consider filing early

After you have a good tax planning strategy in place, get organized and file early in 2018. While many 1099s are not required to be sent to you until mid-February, you can gather receipts and other tax filing documents while you are waiting.
The Equifax data breach may have exposed your Social Security number to hackers who sell your information. Filing early is a good way to thwart thieves who file fake tax returns using your Social Security number.
Above all, be sure to file your tax return and pay your taxes. Because tax prison is still prison!

Sunday, October 1, 2017

Year-End Tax Planning Strategies


The fourth quarter of the year, when individuals are typically planning for the holidays, is also a great time for financial advisors to revisit the plans they’ve created for their clients. Year-end is a time when advisors must confirm if their clients satisfied their required minimum distributions and maxed out their retirement contributions, as well as rebalance portfolios and consider tax strategies. Below we look at the different tax strategies, investment vehicles and top managers that provide tax efficiencies.

One doesn’t have to search long for a reason why investors want to reduce their tax liabilities as much as possible, when you consider the tax ramifications of investing. Investment returns could be reduced by as much as 40 percent in any given year when factoring in federal income and capital gains, state and local taxes, and the alternative minimum tax. Helping reduce your clients’ tax liability is instrumental to growing their assets and helping them achieve their financial goals.

Tax Strategies to Consider

It’s important to understand what type of investment is most appropriate for each specific type of account. For example, due to their high taxable yields, high-yield bonds are more appropriate to be in tax-deferred or tax-exempt accounts versus taxable accounts. Conversely, equity securities that are intended to be held for a long time period are more suitable for taxable accounts, as their gains are taxed at long-term capital gains rates.

Tax-loss harvesting is a great strategy to help reduce your client’s taxable gains. Tax-loss harvesting allows your clients to offset their investment gains with their realized investment losses. We are currently in the midst of the second longest bull market in history, so it may be difficult to locate investment losses, but if your clients do have any, the timing might be right to sell them to offset the recent gains. An investor can use any remaining losses to offset up to $3,000 of ordinary income each year.


Rebalancing your client’s portfolio is vital to keeping the allocations in line with your client’s risk tolerance, however, rebalancing a portfolio can also cause taxable capital gains. There are different thoughts on how often one should rebalance a portfolio, typically, annual rebalancing provides greater potential long-term performance, less trading fees and more tax efficiencies.

Investment Vehicles to Consider

Mutual funds are required to distribute at least 90 percent of net investment income and 98 percent of net capital gains every year, which can be a tax liability for investors. Due to their low trading activity and minimal annual distributions, passive investments such as Index funds and ETFs have gained in popularity for the tax-conscious investor.

Separately managed accounts (SMA) should be considered by financial advisors when looking for a tax-efficient investment. One of the baked-in benefits of investing in an SMA is that the investor is the registered owner of the individual underlying securities, which provides additional flexibility for investors and their ability to participate in additional tax strategies. For example, harvesting losses can be easier when the investor holds the individual securities versus a pooled mutual fund.

Below are some of the top strategies listed in the PSN Global Manager Neighborhood database that might help financial advisors construct a tax-efficient portfolio for their clients.

When looking for tax-efficient investments, municipal bonds are first to come to mind. Municipal bonds typically provide income that is exempt from federal taxes; additionally, if your client holds municipals specific to their state of residence, these bonds provide state tax-exempt income. Municipals provide a lower yield compared to most taxable fixed income products, so it’s important to look at the taxable-equivalent yield when comparing yields. Below are some of the top municipal bond strategies found within the PSN Global Manager Neighborhood database.


A strategy’s turnover ratio is a good indicator if the strategy is tax efficient due to its reduced trading of the underlying securities, which reduces the potential for taxable distributions. Below are some of the strategies in the PSN Global Manager Neighborhood who stand out with low turnover.

Some managed products’ investment objectives are to be tax efficient, while being actively managed. These products are managed in ways to reduce their taxable distributions. Some of the strategies these managers employ include reducing turnover, investing in non-dividend paying stocks, and selling less attractive stocks at a loss. These strategies provide additional options for financial advisors when constructing a well-diversified, tax-efficient portfolio. Below are some tax-managed strategies listed in the PSN Global Manager Neighborhood database.

Selling an investment for tax considerations is important, but one must balance the tax benefits of selling to the market opportunity of potentially selling low. When implementing tax strategies to help reduce your client’s tax liabilities, it is important to keep your client’s investment objectives in mind, and prepare a plan that best fits the needs of your client.

Monday, February 27, 2017

5 Retirement Income Mistakes to Avoid

Congratulations! You feel you are in a position to retire. But then you feel a chill and the hair on the back of your neck rises up as the reality of producing a monthly "paycheck" from your various investment accounts starts to scare you. How in the world can you make this happen?
Most of us will retire with various accounts...retirement accounts like 401(k)s and IRAs, non-qualified accounts (which are accounts that are simply owned in your name or you and a partner). If retiring, your goal is, in its simplest form, to create a recurring deposit into your checking account from your pile of investments. This seems like a daunting task and in reality it is not easy. Which account do you tap first? Should you convert all of your investments into an income stream? What about tax considerations? All of these questions are important.
Allow me to share the five most common retirement income mistakes that I have seen.
1. Making things too complicated. If you are an engineer this one may hurt a little. Spreadsheets with multiple tabs, year by year analysis and projections, tax rate variables, expense variables, Presidential cycle assumptions, and more can be overkill. As a financial professional, we actually do an in depth analysis of our client's retirement period for many good reasons. However, setting up an income stream usually boils down to a very simple strategy. Noting that every situation is different, in many cases simply taking a proportionate amount of income from each type of account that you own is a good way to create income. For example, let's say that 60% of your wealth is in IRAs and 40% is in an individual/joint account. If you are old enough to not have to worry about premature distribution penalties, consider simply setting up a distribution that is about 60/40 that satisfies your monthly income need. Yes, it could be that simple.
2. Making things too simple. Many people have the urge to cash in all of their investments and convert the balance to a monthly income stream. You may also call this the "annuity" strategy. Once again, every situation is different, however, in most cases there are valid reasons to not follow this approach. I won't get into the reasons that I don't like this strategy today, just understand that this is most likely not the path that you need to take.
3. Create your income by tapping only your non-IRA assets (also called non-qualified). If you ask your CPA, they will most likely advise you to create all of your retirement income by taking money out of your non-qualified assets. Why? This will most likely produce the lowest tax bill thus allowing you to keep more of your assets intact. Sounds good, right? To start it will be. I have two issues with this strategy. First, it may put you in a position down the road, when you have reduced the balance of your non IRA assets, where are forced to turn to your IRA for any expense need that you may have. Once you use up all of your non-qualified assets you may limit your tax options by forcing all distributions to come out of the IRA. Second, it could set you up for a bad tax surprise at age 70 ½ (see mistake number 4).
4. Forget to plan for your Required Minimum Distributions. The IRS likes for you to pay taxes and in that light they have a rule that most call Required Minimum Distributions or RMD for short. In summary, when one turns 70 ½ the IRS will require you to pull out a set amount of money from your IRA each year. The amount is calculated using the account value, your age, assumed growth rate and your life expectancy. Basically, they want you to withdraw all of the money over your projected lifetime and of course pay the tax on those distributions. Let's say you follow your gut and spend years taking money out of your non IRA assets (like mistake number 3) while your IRA balance just keeps getting bigger and bigger. A larger IRA balance can mean a larger required distribution when you hit 70 ½. I once saw someone who did not plan for this that ended up having to withdraw about $600,000 per year when they only needed about $200,000 to live on. In my book they ended up having to pay income taxes on $400,000 of income that they did not need. Poor tax planning indeed.
5. Failing to think about your ultimate beneficiaries. I am talking about your kids or grandkids that will eventually get the remainder of your wealth. Most of you reading this will still have money at the end of your life. Where do you want this to go? Yes, your family. Why not think about which assets will pass with the least tax consequence to those deserving...or undeserving...kids? Some assets, like a Roth IRA, may be able to pass to your children or grandchildren with no tax consequence. In other words, they get 100% of the money. Other assets, like your IRA, most likely will be treated as taxable income when your family withdraws the money at whatever tax bracket they may be in at the time of withdrawal. They may not get all of the money that you so kindly gifted to them.
The bottom line is that income planning may actually be a little complicated but with careful planning and some thoughtful foresight about what may happen 15 to 20 years down the road, you can not only set up a good income stream for you but also think about those that you benefit from the legacy that you leave.

Friday, February 24, 2017

Business Tax Planning: 4 Moves For The Coming Year

Yeah, I know. You’re probably just trying to get through the current tax season.
However, one of the best things you can do for your business is to plan ahead for the new year. You should be engaged in tax planning year-round, not just at the beginning of the year as you frantically try to figure out what you can deduct.
Instead, you should be thinking ahead and making sure that you are
Business tax planning can help you save money in the long run. Here are four moves to consider for the coming year:

1. Buy Equipment

Have you been looking to buy equipment? If you need something, plan to buy it this coming year. You can claim a tax deduction when you purchase equipment specifically for use with your business.
If you have been making do with sub-par equipment, or if you’re trying to expand your business and you need more supplies, now might be the time.
It’s a simple thing, but my office chair has finally broken down. I’m ready for a new one, and part of my tax planning for this year is buying a new chair.
Whether it’s getting a new computer or whether you need to get new stations for your employees, buying new equipment can be a solid tax planning move. Just make sure you keep good records and save the receipts.

2. Donate to Charity

Are you in a position where you want to give back? Donating to charity can be a great way to do good for a cause you believe in and build your reputation in the community. Plus, you can also receive a tax break.
Make sure that the charity is a 501(3)(c) organization and tax-deductible. You can donate to other organizations, but you might not get the tax deduction. It can still be worth it to give to a cause that isn’t tax-deductible, but it won’t be part of your business tax planning.

3. Retirement

Don’t forget about retirement contributions. This is not just about good business tax planning now; it can also make a big difference in your long-term financial security. You don’t want to neglect your retirement. Make contributions, and you can get a tax deduction.
That also include when you set up a benefits program for your employees. Your company’s contributions come with a tax break. Talk with a professional who can help you figure out how to offer benefits to your employees for a tax break.
This is a great way to invest in your business because you are more likely to attract high-quality people when you offer benefits.

4. Grow Your Business

Finally, put some money into activities that will help grow your business. Put money into advertising and marketing. Consider outsourcing some of your mundane tasks.
Think about some of the things you do that could be done by someone else or that will ultimately help you get more eyeballs in front of your business.
When you spend money on business activities, you can take a tax deduction. Plus, your return on investment can be very high when you grow your business this way. You spend a little money to make a lot more later.
Look at different ways you can grow your business with a little infusion of cash. You’ll reap big rewards in the future and get a jump on your business tax planning now.

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Thursday, February 23, 2017

You or an accountant? Prepping for tax time

FROM http://www.nj.com

Q. How can I decide if I need someone else to do my tax returns?


A. As you start to gather all your documents to prepare your tax returns, this is the perfect time to ask.

It all has to do with your personal situation and how comfortable you are with the tax law, its quirks

If your tax returns are not too complex, then you may be able to do your tax returns on your own, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence.

"If you have a W-2 and not too many other sources of income or deductions, then it is possible," Daquila said. "However, there are many complexities in the income tax law may benefit you to have a tax professional prepare your returns."

Daquila said there are several factors that you should consider.

The first factor is your knowledge of the current tax law?

A tax professional such as a Certified Public Accountant (CPA) is licensed and certified by the state, Daquila said. CPAs must have a college degree and pass a national exam.

In addition, they need to complete continuing professional education (CPE) to keep their license active, she said. Specifically in New Jersey, a CPA has to complete 120 hours of CPE every three years to renew their license.

"A CPA who specializes in tax preparation is experienced and should know the current tax laws," she said. "A CPA can prepare your returns accurately and take advantage of deductions and credits of which you may not be aware."

The second factor is time.

Do you have the time to not only gather all of your tax information, but then assemble it, prepare your tax returns, and review them?

The third factor is technology. Are you knowledgeable about using a computer?

"There are many computer software programs that are on the market to aid in the preparation of your tax return," she said. "However, you would need to know how to install the program and input the information."

You would also need to review your tax returns after they are completed, Daquila said, noting that most tax professionals now electronically transmit their tax returns to the IRS, resulting in quicker refunds of overpayments.

The fourth factor is the cost. Do you have the money to pay a professional to prepare your tax return?

"The cost can vary based on the professional that you hire," she said. "It is always recommended to ask for an estimate before engaging a professional."

In the end, Daquila said, ask yourself this question: "If you had a pipe break in your home, would you fix the pipe yourself or would you hire a professional plumber?"

A tax professional is trained, experienced and licensed in the area of taxation, she said.

Wednesday, February 22, 2017

Preparing For Tax Time - 5 Frequently Asked Questions

Question: Should I use tax software or a CPA to prepare my income tax return?

Answer: Deciding on self-preparing or having a CPA prepare your income tax return can be critical.  Make an informed decision.   There are certain factors you should consider:

1.    Complexity of your tax return- You don't know what you don't know!  Tax professionals or CPA's can help you navigate through complex tax law and ensure you are claiming all the deductions you are eligible for.  Tax software interviews can sometimes be difficult to understand and may not have adequate guidance for complex situations.  Taxpayers often lack the expertise to interpret and answer the questions posed within the interview within the tax software.


2.    Cost- Preparing your taxes on your own may result in lower tax preparation costs in the short run.  But working with a trusted tax professional or CPA can help you get your entire refund.  According to everydollar.com, research shows that a tax professional gets you on average approximately $800 more in refund from the IRS.   The average refund for taxpayers who used tax software was $1,824.  While, the average refund for taxpayers who used a paid tax professional was $2,615.

3.    Time- Self-Preparing may result in many hours of preparation time, confusion, and stress depending upon your tax situation.  After preparation, you still may be uncertain if you have prepared the income tax return accurately.  Working with a reputable experienced tax professional or CPA can ease your anxiety with knowing your return has been properly prepared and can address all of your tax concerns and issues.  You will also spend a fraction of the time working with a tax professional.

Question: How do I reduce my income tax liability?

Answer:  Starting a side business might help reduce your tax liability.  If you have a talent that you want to actively turn into a money making venture, starting a business might be an option for you.  Say for instance your business does not make a profit, this might be counterintuitive to the reason you started the business, but is typically the case with most startups.  The IRS will allow you to deduct the loss incurred in your business from the other salary and income you earned.  This results in you paying less in taxes.


You should be aware that you must establish the business with the intention of making a profit.  The IRS is clear on the specific activities that determine if your business is engaged for profit or simply a hobby.  The general rule is that if you have not made a profit in the last three out of five years, the IRS will classify your business as a hobby.  This may be extended to profit made in the last two out of seven years for horse trading, breeding or racing.

If the IRS classifies your business as a hobby, you won’t be permitted to deduct losses.  However, in certain situations you may be able to use hobby expenses to reduce your taxes.

For instance, personal expenses such as home mortgage deduction, which could also be claimed as hobby loss expenses, are deducted in full.  Other expenses such as depreciation or amortization, wages, advertising, and insurance premiums may be permitted.  However, you must have hobby income in order to deduct those expenses.

Question: How many years of tax returns should I retain?

Answer: The IRS has guidelines on tax return record retention.  You can visit irs.gov for further details.  To be on the safe side you should "Keep your records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.

Keep records for 6 years if you do not report income that you should report, and it is more than 25 percent of the gross income shown on your return.  Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.”

Question: Can I deduct mileage for a second job?

Answer: You may deduct the expenses associated with traveling between the jobs only on the days you work both jobs.  The travel from your house to the first job and from your second job to your house in addition to the travel to and from work on the days you work one job only are considered commuting.  Commuting expenses are not deductible.

Question: Can I claim head of household although I am married?

Answer: As a married individual, there are typically two filing statuses you can choose and that is Married Filing Jointly or Married Filing Separately.

You may be able to file as head of household if you meet all of the following criteria:

1.    Your spouse did not live in your home during the last 6 months of the tax year.

2.    You provided more than 50 percent of the cost of taking care of a home for the year.

3.    A qualifying person lived with you for more than half the year.  A qualifying person is a child, relative, or parent.  Parents do not have to live with you to be considered a qualifying person.

Monday, February 20, 2017

New bucket list: create wise tax strategies

FROM https://www.abqjournal.com

“Don’t let the tax tail wag the investment dog” is a quirky saying that has been a mainstay for financial advisers for many years. It means to not let tax issues override smart investment decisions. However, smart tax planning is essential for smart investing.

The key with tax planning is to be proactive, and a good place to start is with a tax diversification strategy. I recommend that my clients have three tax buckets for their investments. This strategy can lead to tax savings now or in the future, and it also provides flexibility when taking withdrawals during retirement.

Bucket 1 is for tax-deferred assets, such as retirement accounts like traditional IRAs, 401(k)s, or 403(b)s. Typically, the money you invest in a traditional retirement account is deducted from your income in the year of the contribution. Taxes are not due until the money is withdrawn, and whatever amount is withdrawn (after age 59½ to avoid a penalty) is considered taxable income. IRAs have been available since 1974, and are a common way to save for retirement.

Having all of your invest-ments in Bucket 1 is a wise strategy if you expect your tax rate to be significantly lower in retirement. However, many people find this is not the case. Income from pensions and Social Security, combined with the income taxes triggered by withdrawals from Bucket 1, can keep the tax rate high.



Bucket 2 is for taxable accounts. Many people do not realize that saving and investing in a taxable account is always wise. The gains on the investments are not tax-deferred, but they are taxed at a preferential tax rate on capital gains and qualified dividends. This tax rate is often 15 percent, but it can be as low as 0 (for people in the 10 percent or 15 percent marginal tax bracket) or as high as 23.8 percent for people with very high incomes.

Bucket 3 is the newest tax bucket, and it contains tax-free accounts, such as Roth IRAs and Roth 401(k)s. Roth IRAs only became available in 1998, and many employers began offering Roth 401(k)s and Roth 401(b)s. Investors often do not have a Bucket 3. Money invested in these accounts is not deducted from income in the year of the contribution, so there are no tax benefits on the front end. However, the beauty of Roth IRAs and Roth 401(k)s is that they provide tax-free growth for the future.

In my view, tax-free growth surpasses tax-deferred growth (in traditional IRAs and 401(k)s), and I encourage you to open a Roth IRA or a Roth 401(k) and start funding it. Studies have shown that millennials are opening Roth IRAs more than any other age group.

The benefits

Why am I encouraging everyone to have three tax buckets for their investments? The benefits are significant.

You can choose where to withdraw money during retirement. Many investors have most of their money in tax-deferred IRAs (Bucket 1). Every time they need to take a withdrawal during retirement, it triggers income taxes. This is not tax-efficient. The higher taxes from IRA withdrawals can also cause Social Security benefits to be taxed at a higher rate, and Medicare Part B (which is withheld from Social Security benefits) to cost more each month. Drawing from Bucket 2 will trigger capital gains taxes (only on the gains/not the entire amount withdrawn), but they are typically less than income taxes. And drawing from Bucket 3 can be tax-free.

Three tax buckets can allow you to delay drawing Social Security benefits. By starting later, Social Security benefits accrue and increase. Taxes will be managed (and reduced) by having the variety of tax buckets, rather than only Bucket 1. Delaying Social Security can also open a window of opportunity to convert a portion of a traditional IRA to a Roth IRA during the years after retirement but before starting Social Security. These years often have a low tax rate, making them attractive for Roth conversions.

Converting a significant amount of a traditional IRA to a Roth IRA can reduce required withdrawals from the traditional IRA that must begin at age 70½. Roth IRAs do not have required minimum distributions, so the money can remain invested in the Roth IRA, growing tax-free for many years.


Roth IRAs are excellent investment accounts for teenagers and young adults. Although the gains have limitations as to when you can access them (which encourages investors to leave them for retirement), the contributions are always accessible with no penalty or taxes. This makes the Roth IRA a great option for funding the purchase of a first home or for college expenses.

Roth IRAs provide estate planning benefits. When a person inherits a Roth IRA, annual withdrawals are required, but the withdrawals are tax-free. When a person inherits a traditional IRA, annual withdrawals are required, but the beneficiary pays income taxes on the withdrawal.