tax planning

check tax withholding In light of the tax law changes made by the Tax Cuts and Jobs Act of 2017, it may be an appropriate time for taxpayers to review their withholding.

Changes to the tax rates and brackets, the removal of personal exemptions and certain other deductions, the new limit on the deduction for state and local taxes, and various other modifications may have a significant impact on personal income tax liabilities.

BGMF CPAs offers tax planning services to clients to properly strategize and save in taxes. Like many taxpayers found out during tax filing season, their withholding was lower than expected, resulting in lower refunds or a tax bill. At a minimum we recommend reviewing your withholding to ensure you’re not surprised next tax filing season.

The IRS offers workers the opportunity to perform a quick “paycheck checkup” to make sure they have the right amount of tax withheld from their paychecks. The IRS Withholding Calculator can be found at http://irs.gov/individuals/irs-withholding-calculator.

Getting it right is important since you could face an unexpected tax bill or penalty at tax time next year if you have too little tax withheld. Or, if you have too much tax withheld, you may be eligible for a tax refund. Many people see a large tax refund as a plus — but in reality a large tax refund is effectively an interest-free loan of taxpayer money to the IRS. A better approach may be to have less tax withheld up front and receive more in your paycheck. That way, the extra money would be available to save or invest, pay down debt, or spend as you see fit.

The withholding calculator can help you figure out if you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. Your results from the calculator can be used to help you fill out the form and adjust your income tax withholding. If you prefer not to calculate this yourself we’re glad to help. Please contact us today to start that conversation.

Steps to Take

The key is to plan ahead. Before you access the calculator and start entering data, the IRS suggests that you:

Have your most recent pay stubs within reach.
Have a copy of your most recent income tax return available. A copy of your completed Form 1040 can assist you in estimating your 2019 income and identifying other items that may affect your tax.

The IRS cautions that the calculator’s results will only be as accurate as the information you enter. If there is a change to your circumstances during the year, you will have to use the calculator again to ensure that your withholding is still correct.

Moreover, the IRS withholding calculator may not work for those with more complex tax situations. Taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents, or certain other taxes, and those with long-term capital gain or qualified dividends should use the instructions in Publication 505, Tax Withholding and Estimated Tax.

If you have questions about your withholding or would like assistance with analyzing your tax situation, consult with your tax advisor. We’re available all year around to answer your questions.

retirement tax strategies

Now that the 2018 tax filing season is partially behind us, our Springfield, OH CPA firm is starting to review tax strategies for a variety of groups, including retirees at varying stages of their retirement.

As the dust settles, we continue to dive deeper into how the new tax laws are impacting individuals.

Nothing in life is certain except death and taxes. — Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.

Less Taxing Investments

Municipal bonds, or “munis,” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).¹ The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.³ In light of this, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

The Tax-exempt Advantage: When Less May Yield More

Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.
Federal Tax Rate	12%	22%	24%	32%	35%	37%
Tax-exempt Rate	Taxable-equivalent Yield
4%	4.55%	5.13%	5.26%	5.88%	6.15%	6.35%
5%	5.68%	6.41%	6.58%	7.35%	7.69%	7.94%
6%	6.82%	7.69%	7.89%	8.82%	9.23%	9.52%
7%	7.95%	8.97%	9.21%	10.29%	10.77%	11.11%
8%	9.09%	10.26%	10.53%	11.76%	12.31%	12.70%
The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment.

Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you’ll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 37%, while distributions — in the form of capital gains or dividends — from investments in taxable accounts are taxed at a maximum 20%.* (Capital gains on investments held for less than a year are taxed at regular income tax rates.)

For this reason, it’s beneficial to hold securities in taxable accounts long enough to qualify for the favorable long-term rate. And, when choosing between tapping capital gains versus dividends, long-term capital gains are more attractive from an estate planning perspective because you get a step-up in basis on appreciated assets at death.

It also makes sense to take a long view with regard to tapping tax-deferred accounts. Keep in mind, however, the deadline for taking annual required minimum distributions (RMDs).

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. Tip: If you’ll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.

Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.² In fact, you’re never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.² For this reason, you may wish to liquidate investments in a Roth IRA after you’ve exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal because they have several options that aren’t available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you’re close to the threshold for owing estate taxes. In 2018, the federal estate tax applies to all estate assets over $11.2 million. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. Tip: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $15,000 per individual ($30,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed — or gains tapped — at much lower tax rates than those that apply to adults. Tip: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild’s higher education expenses.

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

BGMF CPAs can provide the resources you’ll need to plan properly moving forward. Contact our team today!

Source/Disclaimer:

¹Capital gains from municipal bonds are taxable, and interest income may be subject to the alternative minimum tax.

²Withdrawals prior to age 59½ are generally subject to a 10% additional tax.

³Income from investment assets may be subject to an additional 3.8% Medicare tax, applicable to single-filer taxpayers with modified adjusted gross income of over $200,000 and $250,000 for joint filers.