Don’t let the ‘wash sale’ rule ruin your tax planning

As the end of another year approaches, you’re looking for ways to reduce your tax bill. You have a handful of stocks in loss positions. You like the stocks and expect the prices to rebound. Should you sell now at a loss to offset other capital gains, then buy the shares right back again?

Not so fast. A federal tax rule is designed to prevent such “wash sales.” Here’s what you need to know.

What is the wash sale rule? When you sell a security at a loss and buy a substantially identical security within 30 days before or after the day of sale, the loss is disallowed for current federal income tax purposes. Instead, you add the loss to the cost basis of the replacement stock.

The wash sales rule is not confined to calendar years. When you make December or January sales, you need to look forward or backward between tax years to determine if the wash sale rule applies.

What if you buy and sell securities from separate accounts? The wash sale rule applies per investor, not per account. Selling shares from one account and buying them in another is not a work-around. Brokers track and report wash sales within the same account and include the sales in the gain and loss report to the IRS. However, if the trades are in different accounts, you are responsible for tracking wash sales.

What if you repurchase the securities in your IRA? The loss on the sale is disallowed, and your basis in the IRA is not increased by the disallowed loss.

The bottom line? Avoiding and reporting wash sales can be complex. Contact us for assistance and planning advice that includes harvesting capital losses in a way that will keep you from getting hung out to dry by the wash sale rule.

Year End Tax Planning for Capital Gains and Losses

FROM FORBES.COM

We are at the time of year when many investors are considering year-end tax planning for capital gains and losses.  With the election of Donald Trump and Republican majorities in both houses of Congress, the likelihood of tax law changes in 2017 has significantly increased. If any of these proposals are enacted, this will most likely result in lower capital gains taxes in 2017. Thus, the general rule would be to recognize your capital losses this year and postpone your capital gains until 2017. However, there are some exceptions to this general rule.

Tax Proposals

There have been a number of Republican Congressmen who have made tax proposals over the last several years. The two that seem to have the most traction are the ones introduced in 2014 by former House Ways and Means Committee Chairman David Camp and the Tax Reform Blueprint issued in 2016 by Speaker of the House, Paul Ryan. Both proposals would revert to the old scheme of a tax deduction for a portion of the long-term capital gains, rather than a specified rate for long-term capital gains. Both proposals envision three rates for ordinary income which would apply to short-term capital gains. The Ryan plan would have 33%, 25% and 12% brackets, with the highest bracket applying to income over $231,450 for joint returns. The long-term capital gain deduction would be 50%, making 16.5% the highest effective rate on long-term capital gains. With the deduction for long-term capital gains, the Camp plan would have a 21% highest effective rate.

A deduction for a portion of the long-term capital gains may benefit taxpayers more than an equivalent lower fixed rate on long-term capital gains since it reduces Adjusted Gross Income (AGI) and Taxable Income (TI). This would potentially reduce state income taxes unless states whose income is based on AGI or TI amended their laws to ignore the new capital gains deduction. While the long-term capital gains deduction works out better for higher income taxpayers, it would result in a tax increase for the lowest bracket taxpayers from 0% to 6%, and a slight increase for some middle bracket taxpayers from 15% to 16.5%.

President-Elect Trump’s tax proposal has the same three tax brackets applying at similar levels of ordinary income. He would keep the current law on long-term capital gains (explained below).

All three proposals would eliminate the Alternative Minimum Tax (AMT) and eliminate the 3.8% Affordable Care Act tax on Net Investment Income. Thus the highest long-term capital gains rate under any of the proposals (20%), is lower than the 23.8% current rate.

Even with a Republican President, House, and Senate, there is no guarantee that a tax bill will be enacted next year or at all. There is, however, a reasonable chance that tax rates will go down next year and virtually no chance that they will go up.

FAQs

Q. Should I recognize all of the unrealized capital losses I have now, before the end of 2016? 

A. Absent unusual circumstances, you should recognize capital losses to the extent of your capital gains, plus $3,000.  Why not more?  Any losses in excess of this amount will result in no current income tax benefit.

Q. I have unrealized capital losses far in excess of my capital gains. Why shouldn’t I recognize all the losses I can? 

A. There is hardly any tax advantage (or disadvantage) to creating a capital loss carryforward, as will be discussed more fully below.  However, if you recognize capital losses, there are likely to be undesirable nontax consequences:

First, there may be trading costs, both commissions and/or bid/ask spreads.

Second, in order to recognize the losses, you must not acquire the same or a substantially identical security within 31 days before or after your sale.  The sale of part or all of your stock portfolio changes your asset allocation.   You could buy similar, but not identical securities and sell them after thirty days.  However, you may not do as well with your “second choice” investments as with your first choice.

Third, there could be a time lapse between selling one portfolio and acquiring another.  While the time lapse could work in your favor, it is one more variable to consider before taking losses that provide no current tax benefit.

Finally, in the event that your new investments skyrocket in value (in excess of your capital losses), you will have to wait a year to sell or be stuck with higher-taxed short-term capital gains next year. (You should be so lucky!).

If your unrealized capital losses are in no-load mutual funds, the first and third points above would not apply (unless you are subject to a redemption fee).

Q. If I don’t realize the unrealized losses now, they will go away in the future as the investments increase in value. Why should I give up the opportunity to use these losses in the future? 

A. As to any particular investment, you are not giving up the loss by not realizing it currently.  When you recognize capital losses and repurchase securities in 31 days, you now have a lower tax basis in your investment. This will cause a larger gain when the investment is sold, offset by the capital loss previously recognized.  If instead of selling this year and recognizing the capital loss, you retain the investment; then you will retain the high tax basis of the original investment to use at the time of sale.  In either case, you will recognize the same net gain or loss upon ultimate sale.  The only difference in the total gain or loss between holding the investment and selling it this year is any change in the value of the asset that occurs between this year’s sale and the subsequent repurchase.

Q. Why not stockpile capital losses to use against future capital gains? 

A. There is generally not much benefit to stockpiling losses now.  If you have a high portfolio turnover, you will likely recognize the losses or have smaller gains by selling the securities in the normal course.  For example, if your entire portfolio turns over before the end of 2017, stockpiling losses will have the same tax result as is otherwise achieved by not selling this year.

In a low turnover portfolio, it may be several years before capital gains are generated.  In this case, it may be possible to find other losses in the future to deal with whatever gains may occur.

But there’s always an exception:  In some situations, stockpiling might be a useful strategy.  Take for example a situation in where all three of the following expectations exist:

1. There is a likelihood that a substantial capital gain will be recognized in 2017;
2. The current losses in securities will be eroded in 2017 due to price increases; and
3. The proceeds from the sale of the loss securities that are sold in 2016 are used to repurchase securities that are not sold at gains in 2017.

If all of these factors exist, the “sell now” strategy would result in the acceleration of the use of the capital losses.  However, unless all of these factors exist, there is unlikely to be much benefit from stockpiling capital losses.

Q. I have long-term capital gains this year that will be taxed at 20%, but my only losses are short-term capital losses, which could offset short-term capital gains next year that would be taxed at 39.6%.  Should I recognize the short-term losses this year? 

A. This is another question that is heavily dependent on individual circumstances.  If you expect to have short-term capital gains next year and do not expect to have enough short-term capital losses and net long-term capital losses available to offset those gains, you should defer taking the short-term losses this year.  Hedge funds, for example, have historically generated large amounts of short-term capital gains.  You may wish to postpone capital losses to January 2017 to the extent that:

• you expect your hedge funds will have short-term capital gains in 2017; and
• you do not expect to have sufficient losses in 2017 to offset the expected short-term capital gains.

In most other circumstances it should still be beneficial to offset short-term losses against long-term gains.  Remember that unrealized short-term gains and losses will become long-term after the one year holding period is achieved.  So you can often avoid ending up with net short-term capital gains.

Q. What are some of the other situations in which it may not be desirable to recognize capital losses to offset long-term capital gains? 

A. Taxpayers who are in the 15% tax bracket pay no federal income tax on their capital gains to the extent that their taxable income does not exceed $75,300 on a joint return, $37,650 on a single return or $50,400 filing as a head of household in 2016.  There may be state income tax due on the capital gain.  Taxpayers in the 15% bracket who pay no income tax on their recognized long-term capital gains would be well advised to hold off recognizing losses in 2016 since the capital losses would be offsetting nontaxable income (except to the extent of state tax benefit or the $3,000 which can be applied against ordinary income). Furthermore, taxpayers in this situation would be well-advised to recognize additional long-term capital gains to use up their allowance of tax-free capital gains.

Some taxpayers have long-term capital gains that exceed their taxable income due to ordinary losses or itemized deductions. Careful analysis will be required to maximize the benefit of capital losses.  Generally, it will not be desirable to offset the full taxable income.  Consideration of the alternative minimum tax implications will play an important part in the loss recognition planning in this situation.

 Current Tax Rates

The tax rate on long-term capital gains depends on the taxpayer’s taxable income. Married couples filing a joint return pay a 20% tax rate on long-term capital gains to the extent that their taxable incomes exceed $466,950 in 2016. The threshold for the 20% bracket for Single and Head of Household status is $415,050 and $441,200. There are two additional taxes on joint return filers with income over $250,000 and single and head of household filers over $200,000: the net investment income tax and the “Pease” tax. Taxpayers with modified adjusted gross income (“MAGI”, which is higher than taxable income) over $250,000 (Joint) or $200,000 (Single or Head of Household) are subject to the 3.8% tax on net investment income. The “Pease” tax is a 3% disallowance of itemized deductions for joint return filers whose MAGI exceeds $311,300; $285,350 for head of household filers and $259,400 for single filers. This generally increases the marginal tax rate by 1.2%. Thus the maximum long-term capital gains rate is 25% for most taxpayers (23.8% for taxpayers not affected by the “Pease” tax). For short-term capital gains, the Federal income tax rates top out at 44.6% (39.6% + 3.8% + 1.2%). State income tax would further increase these rates.

Married taxpayers filing a joint return pay a 15% tax on long-term capital gains to the extent that their income is between $75,300 and $466,950. For single tax filers the 15% rate applies to income between $37,650 and $415,050 (head of household filers, $50,400 and $441,000). To the extent of taxable income below this level, there is no Federal income tax on long-term capital gains.

 Rules For Applying Capital Gains And Losses

• Short-term capital losses must first be used to offset short-term capital gains.
• If there are net short-term losses, they can be used as an offset against the net long-term capital gains.
• Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
• Long-term capital gains are taxed at rates of 25% (real estate recapture) or 28% (collectibles) instead of the usual rate.
• Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
• Capital losses in excess of capital gains can be used to offset up to $3,000 of ordinary income.
• Any remaining unused capital losses can be carried forward and used in the same manner as described above.
• Unused capital losses expire in the year of the taxpayer’s death, to the extent they remain unused on the final income tax return. On a joint tax return, each spouse’s capital losses must be tracked separately for purposes of this rule.
• The capital losses of the decedent spouse may be used to offset capital gains of the surviving spouse in the year of death, including those gains incurred by surviving spouse after the decedent’s death.

Election makes year-end tax planning tricky

Year-end income-tax planning often is tricky enough. This year, the uncertainty rises due to the pending power transfer in Washington.

President-elect Donald Trump has vowed a significant revamp of the federal income-tax code for individuals. But the details — even with Republican control of Congress — still aren't known, especially since the House GOP leadership has its own ideas and Democrats will demand a voice.

"Democrats maintained the ability to filibuster legislation in the Senate, assuring their seat at the table when it comes to drafting new laws," noted Tim Steffen of Robert W. Baird & Co. in a commentary.

Any changes aren't likely to be made retroactive, meaning they won't directly affect your 2016 return to be filed early next year. But they could affect your planning strategies over the waning weeks of this year.

Where we stand now

Trump wants to cut tax rates and make other substantive changes. But Americans will enter the coming tax season with the status quo intact for 2016 returns. That means individual tax rates ranging from 10 percent to 39.6 percent remain in place for filing next April, noted the National Society of Accountants and tax researcher CCH in a recent commentary. The standard deduction will be $6,300 for singles and $12,600 for married couples filing jointly.


This December won't see the type of year-end legislative adjustments that became common in the past, when Congress made last-minute moves to extend provisions that expired or were set to expire. Legislation in late 2015 ended much of the uncertainty by permanently extending several breaks.

For example, the education-focused American Opportunity Tax Credit and a special classroom-expense deduction for teachers both were made permanent, as was the option to deduct state and local sales taxes. Another permanent move allows seniors to donate some Individual Retirement Account distributions to charity rather than first withdraw the money and count it as taxable income.



Normal strategies

Given that the income-tax rules for individuals likely won't change for 2016 returns, certain planning tips remain viable. For instance, taxpayers often find it wise to defer income (if they can) to the following year so as not to pay taxes in the current year. Similarly, those who itemize deductions often want to accelerate or take these expenses in the current year so they can use them more quickly. An example would be donating  money to a charity in December rather than in January.

Another strategy involves managing unrealized investment gains and losses in taxable accounts. You generally want to delay selling stocks, mutual funds or other profitable assets so that you don't have to pay current-year taxes on any profits. Conversely, it's often wise to sell money-losing investments before year-end to reap a current benefit — if your losses exceed your gains, you often can deduct up to $3,000 of the excess against ordinary income in a year.



Choosing a year

Bunching is another possibility. This involves delaying or accelerating certain expenses so that you have larger overall deductions either this year or next — assuming you don't have sufficient deductions to itemize both years yet have the flexibility to prepay or delay certain expenses.

Similarly, it pays to check your eligibility for certain tax breaks, which can be wise if your income is near the thresholds where benefits phase out. Examples cited by the National Society of Accountants and CCH include personal exemptions, education and adoption credits, the deduction for student loan interest, and allowable contributions to Roth or traditional IRAs.

Possible new wrinkles

Given the shift to Republican control next year, other strategies could become important. Trump wants to compress the current seven individual brackets to three, featuring tax rates of 12 percent, 25 percent and 33 percent. Trump also has vowed to eliminate personal exemptions and repeal both the Alternative Minimum Tax and the 3.8-percent tax on net investment income for high-income taxpayers.

A plan advanced by House Republicans would do much the same, except that certain numbers would differ. For example, long-term capital gains and qualified dividends would be taxed at rates of 0 percent, 15 percent and 20 percent under Trump, similar to now, compared to rates of 6, 12.5 and 16.5 percent under the House plan. Though rates on long-term capital gains might not change, different short-term rates present a year-end strategy. "Because short-term capital gains are taxed as ordinary income, postpone realizing these gains until 2017, when rates may be lower," wrote Paul Pagnato of Pagnato Karp, a wealth-advisory firm.


Things get more interesting with deductions. Trump would more than double the standard deduction to $15,000 (singles) and $30,000 (married filing jointly), with the standard deduction also going up under the House Republican plan. For people who continue to itemize, deductions would get capped at $100,000 (singles) or $200,000 (married filing jointly) under Trump, while House Republicans would eliminate such deductions entirely except for the mortgage-interest and charitable-donation tax breaks.

Only about one in three people itemize currently, and that could shrink under either GOP proposal. Plus, the value of deductions could be capped for those taxpayers who continue to itemize and reduced further if marginal tax rates are cut — deductions generally are more valuable when rates are high.



All this points to taking as many deductions this year as possible. Pagnato offers examples such as prepaying state income taxes, mortgage interest and real estate taxes if you can, while possibly making larger than normal charity donations.

"Use them or lose them" could be the key tax-planning mantra for the rest of 2016.

Small Business Internal Controls Over Cash

Cash is a small business owner’s most valuable asset, but small businesses are more likely to suffer embezzlement and/or misappropriation of cash assets for the following reasons:

• Limited number of employees, prohibiting effective segregation of duties.
• Owners tend to trust employees more – especially long-term employees – and become slack about monitoring or reviewing their work.

Well-designed, effective internal controls will safeguard cash assets by limiting the opportunity for theft or the likelihood of error.

When designing internal controls over cash, think, “Could someone…” instead of, “Would someone….” This removes any question of trust.

Start the process of designing effective internal controls over cash by answering the following questions:

• Who has access to cash and why?
• Where is cash held at all times?
• What is the process flow from beginning to end for cash receipts and disbursements?
• Where do opportunities exist for theft or error?

The most important internal control over cash is the segregation of cash-handling duties among employees.

With proper segregation of duties, no single person will have control over a cash transaction from beginning to end. Segregating duties provides for checks and balances and limits the opportunity for theft and the likelihood of error. Even the smallest business (two to three people) can achieve adequate segregation of duties by ensuring that different people:

• Receive and deposit cash.
• Write and sign checks.
• Reconcile bank statements and review bank reconciliations.
• Bill for goods and services and maintain the approved customer list.
• Process payroll, distribute payroll checks, and review payroll reports.
• Authorize invoices for payment and process vendor payments.

Other internal controls over cash include the following:       

• Mandatory vacations, especially bookkeepers and all cash handlers.
• When cash is held onsite, secure it in a locked location such as a safe. Limit access to authorized personnel. Change combinations or other access codes periodically or when someone leaves.
• Limit bank account signature authority and online access to authorized personnel. Update signature cards and immediately block access when an authorized person leaves the business.
• Make frequent bank deposits to minimize the amount of cash held at the business location overnight.
• Use a buddy system when moving cash from one location to another.
• Count cash in the presence of two people and in a non-public area not easily visible to others.
• Require two-person reviews and approvals for all disbursements – payroll, operating expenses and reimbursements.
• Prohibit cash withdrawals or personal charges of any kind on the company credit cards. Require original receipts and reasons for business-related credit card purchases and set appropriate per transaction dollar limits.
• Perform timely reconciliations of bank and credit card statements to subsidiary and general ledgers and require they be independently reviewed.
• Pay particular attention to all unusual purchases, review supporting documentation and ask a lot of questions.

No system of internal control is 100 percent foolproof but when thoughtfully designed and periodically reviewed for effectiveness, internal controls over cash will safeguard a small business’ most valuable asset.

For 3.8% Trump Tax Cut, Push 2016 Payments To 2017

FROM FORBES.COM

What will Donald Trump and Congress do? President Elect Trump has made no secret of his view that our tax system needs reform. He blamed the tax laws for making it possible for him to manipulate the tax law to pay so little. Among other things, he may have been referring to that controversial $916 million net operating loss. Tax cuts are surely coming, though exactly what and when are much debated. Still, with a Trump Presidency and Republican control over the House and Senate, some tax cuts are inevitable.

Next year, the rates should be lower, but the critical effective dates of those cuts remain unclear. Under current law, we pay ordinary income tax at graduated rates up to 39.6%. Some people are allowing hopes of Mr. Trump’s tax plan to impact their 2016 year-end planning. Trump proposes cutting the tax brackets to 12%, 25%, and 33%. The top ordinary rate would be 33%, with the top capital gain and dividend rate 20%. Yet Trump’s tax plans call for eliminating personal exemptions. More important, itemized deductions would be capped at $200,000 for married couples. 

Under Obamacare, high-income taxpayers pay an additional 3.8% surtax on net investment income. That means the top federal rate for individuals today is really 43.4%. Qualified dividends and long-term capital gains are taxed at 15% or 20%, depending on your income. Yet, that rate too gets hit with the additional 3.8% for Obamacare’s net investment income tax. And of all the coming tax cuts, the elimination of this 3.8% net investment income tax could be the most palpable for some high income taxpayers. It also could impact behavior this year-end.

After all, if you could save 3.8% by delaying a sale until January, wouldn’t you do it? There is no guarantee that the 3.8% tax cut will be effective in January, of course. Assuming this net investment income tax is repealed (that seems a safe bet), the effective date could be later in the year. For example, the effective date of the repeal might coincide with the date a bill is introduced. Conceivably, though, the elimination of the net investment income tax might be retroactive to January 1, 2017.

Even if that seems too much to hope for, the likelihood is that there will be some rate cuts. In turn, they are probably going to make future tax deductions worth less. These potential changes suggest paying state taxes before 2016 ends, and the same for charitable contributions. Businesses are also supposed to be in for big tax cuts. Perhaps the biggest target in the corporate tax law is that corporations currently pay 35%. President Elect Trump has said he would cut it to 15%, and eliminate most business deductions.

Even if that 15% rate gets bumped to 20% or more, that is still a big cut from 35%! Besides, LLCs, partnerships and S corporations could have changes too, possibly even paying the same 15% rate as corporations. Yet, the latter seems unlikely. It could mean someone taxed on flow-through business income at 39.6% or 43.4% could see their tax rate slashed to 15%. Of course, even if the only change in 2017 is the elimination of the 3.8% net investment income tax, it could really be worth waiting to sell assets until 2017.  

There is a usual tax timing element to this too, which also suggests holding until 2017. If you sell in December of 2016, it is obviously 2016 income, taxed at 23.8%, 39.6% or even 43.4%. If you sell in January of 2017, there’s a good chance you will get lower rates. Besides, even if you are not expecting rate cuts, it is standard to defer income and to accelerate deductions. Even if rates are unchanged, selling in December of 2016 means taxes are due in April of 2017. In contrast, selling in January of 2017 means that taxes are due in the following April, April of 2018! And these traditional incentives are underscored this year. Some taxpayers may even be able to strike a binding deal in 2016 that calls for payments in 2017 or later. Just be careful how you do it, since the details can matter a great deal.

Of course, the likelihood that tax rates will fall should make you accelerate tax deductions where you can. Moreover, if you have losses, they may be worth more in 2016 than in 2017. That suggests you may want to sell your losing investments now. While deferring income—pushing it off into the future—requires care, selling assets now is easy. Businesses, too, should accelerate deductions and defer income. If a business needs equipment, buying in 2016 is probably smarter than in 2017.

How 529 Plans Can Help Reduce Taxes And Pay For College

FROM FORBES.COM

Whatever the time of year, paying for college is usually on the minds of parents. For the middle class it is especially daunting. The wealthy usually have the means to afford the $50,000 to $60,000 annual cost at some private colleges. And, if a talented student is from an impoverished background, there are ways (grants, scholarships, need-based financial aid) to get some or even most of the tab covered. But it is the middle class who are squeezed with the high cost of college.

Against this backdrop, a working family often has to sacrifice to set aside funds for this potential future expense. With wage growth slowing over recent decades and health care costs rising at a rapid pace, it is getting harder for millions of Americans to save money for retirement or college. Fortunately, there is section 529 of the tax code which offers attractive tax advantages and other benefits.

Tax-Free Growth. The gains inside a 529 plan can be exempt from both federal and state income taxes provided they are used for a qualified higher education purpose. You must adhere to the rules and guidelines spelled out in the federal tax code, but for many, this is easily accomplished. Of course, as with any tax matter, you should consult with your tax advisor for final tax advice, but I find this portion of the tax code relatively easy to follow. Simply use the funds for college tuition, books, room and board and you should be in good shape.

From a state income tax perspective, currently 41 states tax earned income and 2 others tax dividends and interest.  So for the purposes of saving for college, 43 out of 50 states will join the federal government in taxing the gains on your investment accounts. 

Inside a 529 plan, however, all investment growth, whether it is from interest, dividends, or capital gains is tax exempt as long as the funds are used for qualified higher education expenses. Gains and dividends generated inside a 529 plan avoid federal dividend and capital gains taxes which can be as high as 28%. The interest earned inside this account can also avoid ordinary income taxes which can otherwise be as high as 39.6%. In addition, investment income in a 529 plan avoids the 3.8% investment tax high earners are subject to in the Affordable Care and Patient Protection Act. And, for states with income taxes, the 529 plan may help you avoid those as well.

State Income Tax Deduction. Many states offer a state income tax deduction for contributions into their state specific 529 plan. Each state has its own set of rules for the amount of your 529 plan contribution that they will allow you to deduct off your state income tax. Some states also let you ‘front-load” a large contribution and carry-forward any unused tax deductible portion into future years.  This part can get tricky so please review your states rules carefully – and talk your tax advisor about which plan is best for you. To benefit from a possible state income tax deduction, make sure you use a plan provider that your state partners with.

No Income Limits. There are no income limits or phase outs in order to be eligible to participate and benefit from the federal tax advantages. As a result, it is one of the very rare tax planning tools available for middle class and wealthy families. Please check with your own state’s rules as the contribution limits may vary and be sure to check with your tax advisor for specific advice.

Areas of Concern With 529 Plans

Penalties for non-education purposes. It is important to remember that investing should be guided by your unique situation including your current income and financial situation, your life and investment goals, risk tolerance, liquidity needs, and other factors. This is especially true with 529 plans as non-qualified distributions will be taxed and the gains that are withdrawn will also be hit with a 10% IRS penalty. It is heartbreaking to hear of stories where hardship hit and people needed to withdraw money for living expenses. Despite their hardship, these withdrawals can still incur a 10% penalty.  So be careful and only allocate money into a 529 plan that you can commit for higher education.

Costs. Some articles scare investors and write about the high costs of a 529 plan. I find this to be not always be accurate, but check it out for yourself. Investors have many competing plans to pick from so don’t automatically be discouraged when you read an article complaining about 529 plan costs.

Limits. There may be limits to how much you can contribute to a 529 plan when the balances get to a certain level and that limit varies by state. So once you start having a sizable amount in the plan you will want to keep an eye on the maximum limits (usually north of $200,000 per account).

Overall, the 529 plan may be a tax-smart way for parents (or any friend or relative) to save for a young person’s college. With good planning and regular contributions, when it comes time to start paying for college, hopefully the only tears will be for the joy of watching your child move forward with their life – and not because you had to take out a home equity line of credit to pay the tuition!

Is there such a thing as too much tax planning?

FROM http://www.middletowntranscript.com/

I haven’t yet met the person who claims that they want to pay as much in income taxes as they possibly can. On the other hand, I’ve not yet met the person who didn’t want to pay as little as legally possible. But some carry the theme of paying as little as possible to a point where they risk future pain that may be greater than the pain of paying a little bit more income tax now.

Look at it this way. In my professional career, the top federal income tax rate has spanned from a low of 28 percent to a high of 70 percent. That actually makes today’s top tax bracket on the lower side of the midrange of taxes for the past 35 years. When it comes to long term tax planning, it is a coin toss decision regarding future tax rates. Therefore, all you can do at this point is to plan for the laws as they are now.

When it comes to paying as little as legally possible, you must take into account certain future occurrences that are most likely going to impact you in retirement. These are Social Security income and required minimum distributions from retirement accounts.

In essence of what we are trying to do is to plan your lifetime income tax bill as opposed to a single focus on any particular tax year. This process is most likely to occur for people in a transition year. Your transition may be a job change, retirement or starting a business.

In a job change year, it could cut either way. You may find yourself with unusually high income because of deferred compensation accounts, unused vacation or sick time, or other bonuses that vest upon your departure. In this case, it may be wise to think about additional retirement contributions or deductible payments like charitable contributions to keep your unusually high tax bracket in check.

The other side of the job change equation is you may find yourself out of work for a while with unusually lower than normal taxable income. In these cases, it may be wise to accelerate income and consider measures such as converting traditional retirement accounts to Roth accounts or to accelerate any capital gains in your portfolio or other investment assets.

This same possibility occurs for people that retire before age 70½ when required minimum distributions from retirement accounts must begin. If you find yourself in a tax bracket lower than what it will be upon receiving social security and retirement distributions, you may be wise to accelerate some income to use up the lower rates available now while preventing creeping up to a much higher bracket later when the income begins to flow again.

Don’t wing this. Get the help of a professional tax planner to be sure that all of your bases, such as the alternative minimum tax, are properly covered.