There are many taxes levied by Federal, State, and Local Governments. Some of the more significant ones are listed below. In general, they fall into four major categories, Income Taxes, Payroll Taxes, Property Taxes and Consumption Taxes.

Some Significant Taxes Levied by U.S. Taxing Authorities

Income Tax                               Estate Tax                     Social Security Tax                    Property Tax

Capital Gains Tax                       Gift Tax                         MedicareTax                            Sales Tax

Dividend Tax                             Generation Skipping Transfer Tax

In this article we will concentrate on avoidance of the primary taxes involved with Investing:  Income Tax, Capital Gains Tax, and Dividend Tax. We can deal with the other taxes in future discussions.

Remember  … “Tax Avoidance is Legal, Tax Evasion is a Crime”

Income Tax regulations, formally known as the Internal Revenue Code (IRC), are set forth in Title 26 of the Code of Federal Regulations (CFR) also referred to as the U.S. Code. They have the force of law.

You are encouraged to take advantage of every method allowed in the IRC to reduce your tax liability but you are discouraged from using questionable methods to avoid responsibility for paying your fair share of taxes. This may put you in a difficult position with the Department of Justice which may prosecute you for breaking the law.

If you are in doubt please consult with a qualified Tax Professional, either a Certified Professional Accountant (CPA) or an IRS Enrolled Agent (EA), who should be able to give you sound guidance.

Account Registrations and Structures

Qualified Plans

They are “Qualified” by the Internal Revenue Code (IRC) which specifically defines their attributes that give them their special tax protected status. Plan numbers such as “401k” refer to the specific section in the IRC which defines that type of plan (i.e. Section 401, paragraph k).

The general purpose of these plans is to allow individuals to put away funds, including investment gains, that are Tax Deferred until they are distributed. Individual plans are non-employee plans where the contribution is a tax deduction on the individual Income Tax Return in the year it is contributed.  Defined Contribution Plans are for earned income that can consist of Employee contributions, in the form of salary for wage deferrals and Employer contributions in the form of matching contributions or profit sharing contributions. Defined Benefit Plans are funded solely by Employers and consist mostly of the traditional Pension Plans that we know of.

Roth IRAs are a special type of plan in which contributions are made after tax are paid but can be withdrawn as Tax Free, including investment gains, after the required minimum age is attained.

Some Common Qualified Account Types

Individual Plans                        Defined Contribution Plans                  Defined Benefit Plans

Traditional IRAs                        401k, 403b, 457 Plans                           Company Pension Plans

Rollover IRAs                            SEP, SIMPLE, SARSEP Plans                    Government Pension Plans

Beneficiary IRAs                        Profit Sharing Plans                               Union Pension Plans

Spousal IRAs

Roth IRAs

529 College Savings Plans – Contributions are made with after-tax funds but can be distributed Tax Free, including investment gains, if they are made for IRC qualified expenses (tuition and fees).

Health Savings Accounts (HSAs) – Contributions are made with before-tax funds for individuals with high deductible Health Care Plans but can be distributed Tax Free, including investment gains, if they are made for IRC qualified health care expenses.

Charitable Remainder Trusts – Highly appreciated assets can be donated to Charity with a deduction for their full value in exchange for a lifetime income. This technique can convert a large, current capital gains tax liability to an income tax liability and stretch it over a long period That is Tax Deferred.

Irrevocable Life Insurance Trusts (ILITs) – are used to for Estate Tax avoidance for large estates. It essentially gifts current tax premiums and multiplies those into a future insurance Death Benefit which will pass Tax Free to the beneficiaries.

Transactional Techniques

Tax Loss Harvesting.  Not all investments make money. However The IRC allows individuals to take a Tax Deduction for investment losses against investment gains in the year they are sold as well as some income. A professional Investment Manager should be able to identify and maximize these opportunities through sophisticated portfolio management software.

Donation of Appreciated Stock.  Investors can attain concentrated positions in highly appreciated stock, which they are discouraged from selling because of a significant tax liability associated with the sale.  The IRS allows the individual to donate the stock to a qualified charitable institution and take a large charitable Tax Deduction of the entire market value of the stock including the capital gain. This may calculate out to a better financial outcome than paying the capital gains tax on the appreciated value. It is also certainly better than donating cash to charity because of the capital gains tax avoidance feature.

Product Type Characteristics

Certain investment types have their own unique tax avoidance features:

Municipal Bonds – Interest payments are Tax Free at the Federal level and but also at the State level if the investor files tax returns in that state.

Qualified Dividend Income – Dividends from IRC qualified investments are taxed at a Flat Rate of 15% which may be far less than the tax rate paid by Investors with higher incomes.

Real Estate – has the advantage of depreciation deductions that can be taken against income which can decrease the tax liability. This tax protection also extends to Real Estate Investment Trusts (REITs), Limited partnerships, and other fractional ownership programs. This makes the investment income Tax Deferred. This depreciation deduction may have to be recaptured when the property is sold however this can be avoided for some properties by using a 1031 property exchange to a new investment property which can further defer the tax liability.

Annuities – have special tax advantages in the IRC which allows investment gains to be Tax Deferred until distributions are made from the Annuity. Annuities also come with features that can guarantee either future Income Benefits or future Death Benefits. Income Tax free transfers to better Annuities are also allowed.

Life Insurance – also have special tax benefits which allow gains in the contract to accumulate tax-free. Death benefits from Life Insurance policies are Tax Free but may be subject to Estate tax.

 Conclusion

Tax Avoidance strategies take careful planning and construction to work effectively. You should seek out a qualified Financial Professional (CFP) and consult your Tax Professional (CPA) to help ensure the most desirable outcome.

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Views, opinions and analyses expressed in this presentation are those of Southwestern Retirement and not those of Independent Financial Group, LLC.

Registered Representative offering Securities and Advisory Services through Independent Financial Group LLC,

a Registered Broker-Dealer and Investment Adviser. Member FINRA/SIPC.

 Southwestern Retirement Planning Advisors, Inc. is not affiliated with Independent Financial Group LLC.

OSJ Address: 4041 MacArthur Blvd., Suite 240, Newport Beach, CA 92660

The post Tax Avoidance Strategies for Investors appeared first on Southwestern Retirement Planning Advisors - Retirement Planning Chandler, AZ.

Direct a bit of your pay into an emergency fund. Just a little cash per paycheck. Gradually build a cash savings account that can come in handy in a pinch.

 Speaking of emergencies, remember health insurance. Without health coverage, an accident, injury, or illness represents a financial problem as well as a physical one. Insurance is your way of managing that financial risk. A grace period does come into play here. If your employer does not sponsor a health plan, remember that you can stay on the health insurance policy of your parents until age 26. (In some states, insurers will let you do that until age 29 or 31.) If you are in good health, a bronze or silver plan may be a good option.1,2

 Set a schedule for paying off your college debt. Work toward a deadline: tell yourself you want to be rid of that debt in ten years, seven years, or whatever seems reasonable. Devote some money to paying down that debt every month, and when you get a raise or promotion, devote a bit more. Alternately, if you have a federal college loan balance that seems too much to handle, see if you qualify for an income-driven or graduated repayment plan. Either option may make your monthly payment more manageable.3

 Watch credit card balances. Use credit when you must, not on impulse. A credit card purchase can make you feel as if you are buying something for free, but you are actually paying through the teeth for the convenience of buying what you want with plastic. As Bankrate.com notes, the average credit card now carries a 16.8% interest rate.4

Invest. Even a small retirement plan or IRA contribution has the potential to snowball into something larger thanks to compound interest. At an 8% annual return, even a one-time, $200 investment will grow to $2,013 in 30 years. Direct $250 per month into an account yielding 8% annually for 30 years, and you have $342,365 three decades from now. That alone will not be enough to retire on, but the point is that you must start early and seek to build wealth through one or more tax-advantaged retirement savings accounts.5

 Ask for what you are worth. Negotiation may not feel like a smart move when you have just started your first job, but two years in or so, the time may be right. It can literally pay off. Jobvite, a maker of recruiting software, commissioned a survey on this topic last year and learned that only 29% of employees had engaged in salary negotiations at their current or most recent job. Of those who did, 84% were successful and walked away with greater pay.6

Of course, you also have the power to negotiate your pay when you change jobs. That ability is not always acknowledged. Robert Half, the staffing firm, recently hired independent researchers to poll 2,700 U.S. workers employed in professional environments. The pollsters found that just 39% of these workers attempted to negotiate a better salary upon their most recent job offer. The percentage was higher for men (46%) than for women (34%).7     

Financially speaking, your twenties represent a very important time. Too many people look back over their lives at fifty or sixty and wish they had been able to save and invest earlier. These are the same people who may face an uncertain retirement. Rather than be one of them years from now, do things today that may position you for a better financial future.  

Kurt Rohrs may be reached at (480) 812-8640 or kurtrohrs@SWRetire.com

Southwestern Retirement Planning Advisors, Inc.

3800 S. Alma School Road, Suite 123

Chandler, AZ 85248

www.SWRetire.com

Registered Representative offering securities and advisory services through Independent Financial Group LLC,

a registered broker-dealer and registered  investment adviser. Member FINRA/SIPC

Southwestern Retirement Planning Advisors, Inc. is not affiliated with Independent Financial Group LLC

OSJ Branch: 4041 MacArthur Blvd. Ste. 240, Newport Beach, CA 9266

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tinyurl.com/y7nne8bd [11/7/17]

2 – money.cnn.com/2017/10/20/pf/health-insurance-first-time/index.html [10/21/17]

3 – fool.com/investing/2018/03/22/your-2018-guide-to-federal-student-loan-repayment.aspx [3/22/18]

4 – bankrate.com/finance/credit-cards/current-interest-rates.aspx [4/5/18]

5 – investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator [4/5/18]

6 – cnbc.com/2017/05/25/most-employees-dont-negotiate-their-salary.html [5/25/17]

7 – smallbiztrends.com/2018/02/salary-negotiation-statistics.html [2/8/18]

The post Smart Financial Steps After College appeared first on Southwestern Retirement Planning Advisors - Retirement Planning Chandler, AZ.

A federal loan may make much more sense than a private loan. Federal student loans tend to offer kinder repayment terms and lower interest rates than private loans, so for many students, they are a clear first choice. The interest rate on a standard federal direct loan is 4.45%. Subsidized direct loans, which undergraduates who demonstrate financial need can arrange, have no interest so long as the student maintains at least half-time college enrollment.1,2

Still, federal loans have borrowing limits, and those limits may seem too low. A freshman receiving financial support from parents may only borrow up to $5,500 via a federal student loan, and an undergrad getting no financial assistance may be lent a maximum of $57,500 before receiving a bachelor’s degree. (That ceiling falls to $23,000 for subsidized direct loans.) So, some families take out private loans as supplements to federal loans, even though it is hard to alter payment terms of private loans in a financial pinch.1,2 

You can use a student loan calculator to gauge what the monthly payments may be. There are dozens of them available online. A standard college loan has a 10-year repayment period, meaning 120 monthly payments. A 10-year, $30,000 federal direct loan with a 4% interest rate presents your student with a monthly payment of $304 and eventual total payments of $36,448 given interest. The same loan, at a 6% interest rate, leaves your student with a $333 monthly payment and total payments of $39,967. (The minimum monthly payment on a standard student loan, if you are wondering, is typically $50.)3

When must your student start repaying the loan? Good question. Both federal and private student loans offer borrowers a 6-month grace period before the repayment phase begins. The grace period, however, does not necessarily start at graduation. If a student with a federal loan does not maintain at least half-time enrollment, the grace period for the loan will begin. (Perkins loans have a 9-month grace period; the grace period for Stafford loans resets once the student resumes half-time enrollment.) Grace periods on private loans begin once a student graduates or drops below half-time enrollment, with no reset permitted.4

What if your student cannot pay the money back once the grace period ends? If you have a private student loan, you have a problem – and a very tough, and perhaps fruitless, negotiation ahead of you. If you have a federal student loan, you may have a chance to delay or lower those loan repayments.3

An unemployed borrower can request deferment of federal student loan payments. A borrower can also request forbearance, a deferral due to financial emergencies or hardships. Interest keeps building up on the loan balance during a forbearance, though.1

At the moment, federal student loans can be forgiven through two avenues. The first, the Public Service Loan Forgiveness (PLSF) program, requires at least 10 years of public service, government, or non-profit employment, or at least 120 student loan payments already made from the individual. The second avenue, income-driven repayment plans, first lowers the monthly payment and extends the payment timeline based on what the borrower earns. If the balance is finally forgiven, the loan forgiveness is seen by the Internal Revenue Service as taxable income. (If you have student loan debt forgiven via the PLSF, no taxes have to be paid on the amount.)1,3   

Consult financial aid officers and high school guidance counselors before you borrow. Get to know them; request their knowledge and insight. They have helped other families through the process, and they are ready to try and help yours.

Lastly, avoid draining the Bank of Mom & Dad. If your student needs to finance a college education, remember that this financial need should come second to your need to save for retirement. Your student has a chance to arrange a college loan; you do not have a chance to arrange a retirement loan.

Start planning for college now, and give us a call at Southwestern Retirement Advisors.

Kurt Rohrs may be reached at (480) 812-8640 or kurtrohrs@SWRetire.com

Southwestern Retirement Planning Advisors, Inc.

3800 S. Alma School Road, Suite 123

Chandler, AZ 85248

www.SWRetire.com

  Registered Representative offering securities and advisory services through Independent Financial Group LLC,

a registered broker-dealer and registered  investment adviser. Member FINRA/SIPC

Southwestern Retirement Planning Advisors, Inc. is not affiliated with Independent Financial Group LLC

OSJ Branch: 4041 MacArthur Blvd. Ste. 240, Newport Beach, CA 92660

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nbcnews.com/better/business/student-loan-debt-what-kids-their-parents-need-know-ncna865336 [4/12/18]

2 – www2.cuny.edu/financial-aid/student-loans/federal-direct-loans/ [4/19/18]

3 – credible.com/blog/refinance-student-loans/how-much-will-you-actually-pay-for-a-30k-student-loan/ [12/4/17]

4 – discover.com/student-loans/repayment/student-loans-semester-off.html [8/3/17]

The post Financing a College Education appeared first on Southwestern Retirement Planning Advisors - Retirement Planning Chandler, AZ.