Last week I had the pleasure of chatting with Business Insider reporter Liz Knueven to go over some common things I am seeing regarding financial planning. One of the trends I have notice in 2020, either from retirees or those working is that they have an extra amount of cash in savings. This was due to a variety of factors including: extra money from not going on trips, saving on gas, not eating out, not having to pay for parking. In addition to expenses that they did not have, some also received the stimulus checks on top of their normal income from employment or Social Security.  

Check out my featured article with Business Insider here:

https://www.businessinsider.com/personal-finance/invest-money-saved-2020-financial-planner-2021-1 

If you would like to schedule a call or zoom meeting to discuss a review of your investments Click Here

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It is important to note what items can be excluded from your gross income for taxes. These are items that you will not need to worry about paying taxes on for the year. Deductions and more specifically above the line deductions are most often things that will require you to take action on your part to reduce your taxable income.  Above the line deductions are more valuable than itemized deductions. Since the passing of the TCJA in 2017 the vast majority of taxpayers will claim the standard deduction when they are filing their taxes. However, these exclusions and above the line deductions are taken before you would need to start to consider rather to itemized or take the standard deduction for taxes.

I did a presentation last night on Incline Wealth Advisors walking through this information. You can check that out here: Facebook Live Presentation

Items excluded from gross income

• Municipal Bond Interest
• Gain on sale of main home
• Discharge of debt due to bankruptcy or insolvency
• Discharge of qualified principal residence indebtedness
• Price Reduction
• Social Security Benefits – exclude a minimum of 15% from income
• Emoloyee Achievement Awards – up to $1,600
• Fringe benefits – certain employer-provided fringe benefits
• Housing allowance for memeber of clergy
• Military & government disability pensions – must not be based on years of service
• VA benefits
• Gifts and inheritances – Generally property received as a gift, bequest, or inheritance
• Scholarships
• Distributions from 529 or Coverdell Plans
• Workers’ compensation
• Welfare & public assistance
• Interest of Series EE & I Savings Bonds
• Life insurance proceeds
• Accelerated Death Benefits
• Casualty Insurance
• Qualified disaster relief payments
• Property settlements
• Child Support
• Foster Care
• Reimbursements for certain employment-related expenses
• Foreign earned income exclusion

Here are the three most common exclusions from income:

1. Gifts & Inheritance

• Inherited IRA and Roth IRA are not taxed when they are passed on. IRA’s are taxed to beneficiary as the money is withdrawn
• Gifts under $15k annually and $30k for joint tax filers.

2. Education related benefits

• Earnings from a 529 plan, when used for qualified education expenses. Up to $10,000 annually for K-12
• Scholarships
• Interest from education savings bonds

3. Sale of primary home

• Must have lived in the home at least 24 months.
• Single taxpayer can exclude $250k of the gain. Jointly filed may exclude $500k of gain.
• Must not have excluded gain from another home w/in 2 year period.

Items Deducted from Income

“Above the line deductions”

• IRA contributions
• Health Savings Account contributions
• Student loan interest deduction
• Moving Expenses
• Self Employment Deductions
• Alimony
• Qualified Charitable Distribution
• Educator Expenses
• Tuition Deduction

Health Savings Accounts

• The taxpayer receives a deduction for contributions made to their HSA plan
• Employer contributions are excluded from income
• Contributions can be invested
• Money can remain in account year over year.
• contribution deadline = April 15
• Maximum contribution $3,000 for individuals and $7,000 for families with HDHP coverage

IRA Contributions

• Deductible contribution and is taxed when withdrawn
• Contribution deadline = April 15
• Maximum contribution $6,000 under age of 50 $7,000 for those older

Self Employed Retirement Plan Options

SEP IRA

• must contribute equally for all employees
• Contribution deadline = April 15
• Contribution limits = $56,000 or 25% of compensation for the year

SIMPLE IRA

• setup for companies with 100 employees or fewer
• Employer must contibute to plan
• Employer match = 3% matching or 2% non-elective contribution
• must maintain for at least 2 years
• Contribution Limit $13,500 and an additional $3,000 for those over the age of 50

Education Related Deductions

Student loan interest deductions

• $2,500 of loan interest is deductible
• Phased out for individuals making $85,000 or more and couples making $170,000 or more

Educator related expenses

• $250 of expenses and $500 if MFJ and both spouses are educators

Tuition and Fee deductions

• $4,000 is deductible 
• cannot deduct if taxpayer is claimed as dependent
• MAGI is more than $80,000 or $160,000 for couples

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As we are nearing the election in November, we are starting to receive more details on some of the policies that likely Democratic presidential nominee Joe Biden is proposing.  His stances on taxes have begun to take center stage over the past couple of weeks.  Here are some of the details that Joe Biden is proposing.

Individual Tax Rates:

For those making $400,000 or more the top tax rate will be increased from 37% to 39.6%.

President Trump is looking to lower taxes on the middle class by 10%. This could effect those in the 22% or 24% brackets.

Capital Gains:

Increase top long-term capital gain and qualified dividend tax rate to 43.4% (ordinary income tax rate plus healthcare surtax) for income above $1 million. Today the top capital gains tax rate is 20% with a 3.8% net investment income tax.

The net investment income tax remains the same.

Deductions

Biden is looking to limit total itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%, which means taxpayers in tax brackets higher than 28% will face limited itemized deductions.

President Trump is looking to keep the standard deduction amounts the same at $12,400 per individual and $28,800 for married filing jointly.  

Biden is also looking to phase out the 20 percent pass-through deduction for income over $400,000.

Corporate Tax

Presidential candidate Joe Biden is looking to raise the corporate tax rate from 21% up to 28%.  Keep in mind that most corporations pay double taxation due to being taxed at the corporate level and then again at their personal level.  

Biden is also looking at establishing a 15% minimum corporate tax rate for companies reporting a net income over $100 million. Currently, no minimum tax is imposed on companies.

Estate Taxes

Biden is also looking to remove the stepped up basis provision for stock that is inherited by beneficiaries. This means that instead of removing the capital gains the owner of the stock would either have to pay the capital gains or that burden will then be passed the the beneficiaries.

The second shift would be to the exemption amounts on estates. Biden is proposing moving the exemption amount down to $3.5Million and bump the estate tax rate up to 55%.  This would be an increase from the exemption amount of $11,580,000.

There are several other changes that Biden is proposing that he has provided less detail on. He has also suggested raising taxes on wealthy especially around investment income. He also mentioned the possibility of getting rid of the 1031 Exchange for capital gains in real estate.

If you would like to schedule a call or zoom meeting to discuss what these changes could mean to your situation. Click Here

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What is it?

Tax loss harvesting is the strategy of selling investments that are at a loss in order to offset short term or long term capital gains for that year.  However, if the investor does not have realized capital gains for that year the investment loss can be used to offset $3,000 worth of ordinary income for the year.  One thing to keep in mind is that if the investment loss was more than $3,000 the excess amount may be carried forward to future years to offset either ordinary income or capital gains.  This amount only applies to taxable accounts. The gains and losses in retirement accounts are tax deferred and do not apply to this same tax treatment.

Wash Sale Rule

In order to prevent investors from gaming the system the IRS put in the wash sale rule. This rule was created in order to prevent investors from taking a tax deduction and then turning around and repurchasing the same or a “substantially identical” security.  The wash sale rule consists of 61 total days. This is broken down by 30 days before the purchase and 30 days after the sale that an investor cannot purchase a substantially identical security.

When to consider tax loss harvesting

Most investors will take a look at selling some securities at a loss towards the end of the year while they are doing some year end tax planning. However, this strategy can be implied all throughout the year.  A time to consider tax loss harvesting would be during the normal course of rebalancing your investments. This is good because you can capture some tax savings and then invest in a security that may be in a similar asset category to maintain your same overall asset allocation.

Another consideration is if an investor has held stock in a single company over the course of many years.  More often then not the investor may be reinvesting the dividends from this company stock. The first step would be to identify shares that were purchased through reinvestment that may currently be trading at a loss and look to sell those shares. This can help to offset taxes on the qualified dividends or the future sale of the stock to produce income in retirement.

Identifying certain positions in your portfolio now can be a good time to harvest losses if you believe the market may rebound in the future to higher levels.  The strategy could be to sell certain investments to lock in the tax deduction, and look to purchase other securities that are not substantially identical with the expectation of those investments appreciating in the future.  Now is a great time to examine what future income you may need from your investment portfolio and if you see securities that are at a loss right now, it could be a good time to sell those in order to offset future capital gains later this year.

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