Tax Time Considerations - 2019
websitebuilder • May 12, 2020
We recently covered the subject of financial resolutions to consider for the new year. You are probably thinking "great, but I really need to work on filing my 2019 taxes." Let's dive in; are you working with your financial advisor to ensure you have considered how to reduce your taxable income and maximize your return? Have you considered maximizing your retirement plan contributions ? Not only do you reduce your taxable income, but you are contributing to your future. If you are 50 or older, you could also make catch-up contributions.
Although retirement planning is one way to reduce taxable income, there are other options as well. Do you have a high deductible health plan? A high deductible is considered $1,350 for an individual or $2,700 for family coverage. Provided you are eligible to contribute, you could invest pre-tax dollars of either $3,500 for individual or $7,000 for family coverage into a healthcare savings account (HSA). HSA's are the only accounts that are "triple-tax free", meaning as long as they are used for heath care costs, 1) contributions, 2) account growth and 3) withdrawals are not taxed.
Tax loss harvesting can help lower your taxable income up to $3,000. This technique involves selling a security taht has experiences a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal assest allocation and expected returns. Tax loss harvesting can be employed throughout the year.
Some employers offer flexible spending accounts (FSA) which allow individuals to make pre-tax contributions for dependent care expenses as well as certain qualifying medical expenses. Understanding the structure of this plan is important. First, individuals usually have to enroll during the employer's open enrollment period. Secondly, plans may be designed where contributions not used by the end of the plan year are lost; use it or lose it. According to care.com, nearly 50% of families spend in excess of 15% of their household income on child care and the costs for an one child exceeds $200/week.
If you know what your projected monthly cost of care will be, contributing pre-tax to an FSA could be for you.
Do you itemize your deductions? If so, you are able to deduct your mortgage interest, charitable contributions, and medical expenses (under certain Conditions). There is also the standard deduction to consider. The most recent chart from the IRS shows the following:
One consideration that is different from the prior items mentioned is converting IRA assets to a Roth IRA. This does not reduce your taxable income. In fact, it will raise your taxable income by the amount converted. However, this is a great tax time consideration for those who will not jump to the next tax bracket. Additionally, the funds grow tax-free because you have already paid!
Many of the considerations mentioned can carry exceptions that may apply to you. In order to ensure you are on the right track, it is always best to work with you financial advisor or CPA. And remember that tax filing deadline of April 15th!
*This article is for information purposes only and should not be considered tax advice. Please work with your tax planning professional to see if the situations above apply to you.
As usual I hope this finds you well. As we welcome spring and having just finished the first quarter, things look good. The broad Morningstar index was up 10.24% through 03-31-24. The large cap companies led the way up 11.08% and the small caps up 5.69%. The S&P 500 experienced 22 “all-time highs” with less than 2% drops in-between. Amazing!
I hope you had a safe and enjoyable holiday season. For the first time since COVID we were able to have our entire family together, including the Australians, it was very nice. I hope yours was as enjoyable. The top news stories of the year were the rapid rise of interest rates effectively slowing inflation without crashing the economy:
After the bruising market in 2022 where the broad index was down 19.43%, we are in a better place. Year to date the Morningstar broad index is up 12.81% but down 3.19% for the quarter. That said, we have a lot to keep our eyes on. On the positive side, consumer spending is remaining robust, and the Biden administration passed their TRILLION-dollar spending bill, corporate profits are slowing but still positive, unemployment is a low 3.6% and the Fed again passed on raising interest rates.
Distribution Options...
Some points to consider: 1) Likely the biggest distribution question that a 401(k) participant asks is: should I rollover the proceeds to an IRA or retain it within the 401(k), assuming the plan sponsor allows that? There is no certain answer to this question, although in the majority of situations, it is preferable to roll the proceeds because of participant control of the account. See Willis, Nick, or Keith to begin the paperwork for a Rollover IRA.
I hope you had a wonderful 4th of July celebration. We have a reading of the Declaration at our gatherings, it is always amazing to me to hear how many people under 30 saying they didn’t understand what was declared and to whom it was sent. After the declaration we (our founders) wrote our Constitution taking the best from the Magna Carta of 1215 and the English Parliament’s Bill of Rights of 1689. We have a lot of issues in our country but when you look at our beginning, it is amazing!
You cannot say we do not live in interesting times; A past president indicted on criminal charges; bank failures; FTX collapse; and high inflation to mention a few. The Morningstar broad index was up 7.40% for the quarter and YTD. Most of this was the rebounding of the large tech companies which had been crushed at the end of last year.
First Happy New Year. I hope you and your families had a pleasant, safe, and healthy start to the year. There are so many things causing headline news and affecting the market: COVID, “Transitory Inflation”, Ukraine, another $1.7 trillion spending bill, FTX’s downfall, snowstorms, Trumps Tax Returns, Fentanyl and the border. It is no wonder we are having a rough market! The S&P was down 19.4% in 2022, the worst since 2008. I think the three things that are most affecting the market are:1) the COVID shutdowns,2) massive government spending, and 3) inflation. The shutdown of an enormous part of our economy during the pandemic, in hindsight, was a mistake.
This is not a pretty quarter or year for the markets. The broad Morningstar index is -4.58% for the quarter and- 24.88% for the year. As I noted a few quarters ago the large-cap growth stocks make up the largest part of the index, so when they go up or down the entire market feels it. The Large Cap Growth section of the market is -40.99%, (Time to buy?). We also know on average every 5 years the stock market loses money. It is the price we have to pay for “investing” and receiving better investment results in the long term. It is interesting to note that with few exceptions there have been no safe harbors. Cash -8%, Gold -8%, Bitcoin -70%, Bonds -15% (depends on the class and type Muni vs Corp vs Govt), so if you wanted to go into the currency market and made a “bet” on the US Dollar rising, you would be very happy; too risky for me. As a reminder, when interest rates go up bonds go down, but the usual result of “stocks go down bonds must rise” is not occurring. This is the time to reflect on how much our accounts have gone up in the last few years and to realize it will do so again. It is just a matter of time! Apple, Google, and Procter & Gamble are not going anywhere, just because the market thinks they are a LOT less than last year really means they were overpriced then and now they are likely underpriced. The S&P earnings are at 8% so why are the markets down? If you strip out energy the number drops to 1% and the market thinks inflation is going to take it away: -no earnings and you get a down market! As much as I do not want to admit it, I agree. We don’t know if wages drive prices or vice versa, but we do know inflation is caused by too much money circulating in the economy. The Federal Balance Sheet in 2007 was $850 Billion, today it is close to $9 trillion. We cannot continue printing and sending out trillions of dollars. The Federal Reserve has said it will continue to raise interest rates until inflation is under control. The economy will likely take a hit but sit tight since it will recover. As a reminder, the market went up 9% in July alone. If you are worried about the markets give us a call, we have been through this before.
You cannot say we do not live in interesting times; A past president indicted on criminal charges; bank failures; FTX collapse; and high inflation to mention a few. The Morningstar broad index was up 7.40% for the quarter and YTD. Most of this was the rebounding of the large tech companies which had been crushed at the end of last year.