Not all investments make money and sometimes things don’t go quite like they were planned. This is the nature of Investment Risk.

In these cases to may become necessary to “clean out the attic” and get rid of some less than successful investment choices and trade them for some more promising choices.

Fortunately the IRS Tax Code (IRC) allows you to write off investment losses against investment gains in the year they are realized and even carry forward some of those losses to future years to reduce your Capital Gains Tax liability. In addition some of the investment losses can also be written off against your Income Tax liability.

However there are some somewhat complicated rules which may require some rather diligent recordkeeping.

Short-Term Gains and Losses and Long Term Gains and Losses

Short-Term Gains and Losses are for investments that are held for less than one year. They are taxed at your current Income Tax rate. Long Term Gain and Losses on investments held for more than a year are taxed at special Capital Gains rates. This is a matching game. Short-Term losses are deducted against Short-Term gains and Long-Term losses are deducted against Long-Term gains. Fortunately most of this information is sorted out and contained in the 1099 tax statement received each year from your Broker. Missing information should be contained in your own records, hence the need for diligent record-keeping. A good Financial Advisor should keep this on file for you.

Account Registrations?

Qualified Accounts – Qualified Accounts, such as an IRA or 401k, are accounts that are tax protected by the IRS. Typically income tax will be paid only when funds, including any investment gains, are distributed from the account. This means that Tax Loss harvesting doesn’t have much usefulness in these accounts since there is no Capital Gains Tax applied to these accounts.

Non-Qualified Accounts – These are accounts that are not tax-protected by the IRS. They are subject to Capital Gains taxes, Income Taxes, and Dividend Taxes. This is where most of our attention needs to be.

What’s the Catch?

Wash Sale Rules – So can you just sell an investment, book the tax loss, and then just immediately buy it back? Not quite. The IRS disallows the tax deduction if “the sale of stock or securities at a loss is within 30 days before or after you buy or acquire in a fully taxable trade, or acquire a contract or option to buy, substantially identical stock or securities.” (See IRS Pub. 550 for more details). So, watch the dates of the trades so you don’t get caught in this trap.

Tax Lot Selling

Professional Investment Managers should have sophisticated software that allows them to pick and choose which investment purchase (“lot”) to sell to realize the investment loss. This comes in handy when there are multiple purchases of an investment that occurred over a period of time at different prices. This may allow you to maximize the tax loss on the sale of your investment shares.

Tax Loss Carry Forwards

If you have a capital loss that is greater than what you can use for current year tax deductions the IRS allows you to carry it forward into future tax years.

An Extra Added Bonus

The IRS also allows you to use a capital loss deduction of up to $3000 of taxable income. This is a good way to potentially reduce your Income Tax liability in addition to your Capital Gains tax liability. This can also be carried forward to future year and applied again, up to the limit, until it is used up.

Conclusion

You can study more about tax management of your investments in our presentation on Tax Avoidance Strategies on our website www.SWRetire.com as well as learn more about our full service Financial Advisory practice. You should also consult your Tax Professional (CPA) to review your tax situation to ensure the most desirable outcome.

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 Loss Harvesting appeared first on Southwestern Retirement Planning Advisors - Retirement Planning Chandler, AZ.

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.

Read More About Our Service

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.

Are you making charitable donations this holiday season? If so, you should know about some of the financial “fine print” involved, as the right moves could potentially bring more of a benefit to the charity and to you.

To deduct charitable donations, you must itemize them on I.R.S. Schedule A. So, you need to document each donation you make. Ideally, the charity uses a form it has on hand to provide you with proof of your contribution. If the charity does not have such a form handy (and some charities do not), then a receipt, a credit or debit card statement, a bank statement, or a cancelled check will have to suffice. The I.R.S. needs to know three things: the name of the charity, the gifted amount, and the date of your gift.[1]

From a tax planning standpoint, itemized deductions are only worthwhile when they exceed the standard income tax deduction. The 2017 standard deduction for a single filer is $6,350. If you file as a head of household, your standard deduction is $9,350. Joint filers and surviving spouses have a 2017 standard deduction of $12,700. (All these amounts rise in 2018.)[2]

Make sure your gift goes to a qualified charity with 501(c)(3) non-profit status. Also, visit CharityNavigator.org, CharityWatch.org, or GiveWell.org to evaluate a charity and learn how effectively it utilizes donations. If you are considering a large donation, ask the charity involved how it will use your gift.

If you donated money this year to a crowdsourcing campaign organized by a 501(c)(3) charity, the donation should be tax deductible. If you donated to a crowdsourcing campaign that was created by an individual or a group lacking 501(c)(3) status, the donation is not deductible.[3]

How can you make your gifts have more impact? You may find a way to do this immediately, thanks to your employer. Some companies match charitable contributions made by their employees. This opportunity is too often overlooked.

Thoughtful estate planning may also help your gifts go further. A charitable remainder trust or a contract between you and a charity could allow you to give away an asset to a 501(c)(3) organization while retaining a lifetime interest. You could also support a charity with a gift of life insurance. Or, you could simply leave cash or appreciated property to a non-profit organization as a final contribution in your will.[1]

Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move.

You may wish to explore a gift of highly appreciated securities. If you are in a higher income tax bracket, selling securities you have owned for more than a year can lead to capital gains taxes. Instead, you or a financial professional can write a letter of instruction to a bank or brokerage authorizing a transfer of shares to a charity. This transfer can accomplish three things: you can avoid paying the capital gains tax you would normally pay upon selling the shares, you can take a current-year tax deduction for their full fair market value, and the charity gets the full value of the shares, not their after-tax net value.[4]

You could make a charitable IRA gift. If you are wealthy and view the annual Required Minimum Distribution (RMD) from your traditional IRA as a bother, think about a qualified charitable distribution (QCD) from your IRA. Traditional IRA owners age 70½ and older can arrange direct transfers of up to $100,000 from an IRA to a qualified charity. (Married couples have a yearly limit of $200,000.) The gift can satisfy some or all of your RMD; the amount gifted is excluded from your adjusted gross income for the year. (You can also make a qualified charity a sole beneficiary of an IRA, should you wish.)[4,5]

Do you have an unneeded life insurance policy? If you make an irrevocable gift of that policy to a qualified charity, you can get a current-year income tax deduction. If you keep paying the policy premiums, each payment becomes a deductible charitable donation. (Deduction limits can apply.) If you pay premiums for at least three years after the gift, that could reduce the size of your taxable estate. The death benefit will be out of your taxable estate in any case.[6]

Should you donate a vehicle to charity? This can be worthwhile, but you probably will not get fair market value for the donation; if that bothers you, you could always try to sell the vehicle at fair market value yourself and gift the cash. As organizations that coordinate these gifts are notorious for taking big cuts, you may want to think twice about this idea.[7]

You may also want to make cash gifts to individuals before the end of the year. In 2017, any taxpayer may gift up to $14,000 in cash to as many individuals as desired. If you have two grandkids, you can give them each up to $14,000 this year. (You can also make individual gifts through 529 education savings plans.) At this moment, every taxpayer can gift up to $5.49 million during his or her lifetime without triggering the federal estate and gift tax exemption.[8]

Be sure to give wisely, with input from a tax or financial professional, as 2017 ends.

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/y8dkleed [8/23/17]
2 – forbes.com/sites/kellyphillipserb/2017/10/19/irs-announces-2018-tax-brackets-standard-deduction-amounts-and-more/ [10/19/17]
3 – legalzoom.com/articles/cash-and-kickstarter-the-tax-implications-of-crowd-funding [3/17]
4 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals [8/17/17]
5 – pe.com/2017/11/04/its-not-that-hard-to-give-cash-or-stock-to-charity/ [11/4/17]
6 – kiplinger.com/article/taxes/T021-C032-S014-gifting-a-life-insurance-policy-to-a-charity.html [11/17]
7 – foxbusiness.com/features/2017/10/18/edmunds-what-to-know-about-donating-your-car-to-charity.html [10/18/17]
8 – law.com/thelegalintelligencer/sites/thelegalintelligencer/2017/11/02/with-2018-fast-approaching-its-time-for-some-year-end-tax-planning-tips [11/2/17]

The post Year-End Charitable Gifting for 2017 appeared first on Southwestern Retirement Planning Advisors - Retirement Planning Chandler, AZ.