5 Ways a Financial Advisor Can Help You Prepare for Tax Season

March 1, 2023

A Strong Tax Strategy is Part of a Thoughtful, Comprehensive Financial Plan

Tax season is upon us and, while not every financial advisor is a Certified Public Accountant (CPA), that doesn’t mean they can’t be helpful. Your financial advisor can assist you with making strategic tax moves throughout the year to help reduce your overall tax burden. As you read below, keep in mind that the sooner you begin having these conversations with your advisor about your tax strategy, the better off you’ll be at tax time.

Finding Ways to Maximize Your Tax Savings

There are many financial moves you can make throughout the year that will result in paying lower taxes, and a financial advisor will be educated about them. For example, some investment accounts let you make tax-deferred contributions, which can offer you the opportunity to save money on taxes while working to build your retirement savings. Take a company-sponsored 401(k), for instance. If you max out your contributions to this account, all of the money going in is pre-taxed, so you’ll be putting money away for retirement while reducing your tax bill in the present.

Keeping Record of Your Capital Gains and Losses

When filing your taxes, you’ll have to know how much you earned and lost from your investments for that year. A financial advisor will have an accurate and consistent record of your investments, which they can give to your accountant on your behalf. This will save you time and energy, and help you ensure you’re paying appropriate capital gains tax, without over-paying.

Developing a Tax-Savvy Gifting Strategy

There’s a lot to be gained when we gift our money to others. Not only do you get the intrinsic rewards associated with the joy and meaning that comes from helping others, but you can enjoy valuable tax benefits, too. Sit down with your financial advisor and discuss how you can gift your money in ways that ultimately help lower your tax bill, too. And this isn’t just for charities; if you want to give money to your family members for any reason, there are plenty of gifting strategies that let you transfer your wealth without a tax penalty. Check-in with your financial advisor before making any gifts so you can be sure to maximize the opportunity.

8 Considerations For Passing an Inheritance To Your Children

Minimizing the Tax Burden that RMDs Bring

Once you reach the age of 73, you’ll have to begin taking out Required Minimum Distributions (RMDs) from any IRA or 401(k) accounts that you have. While this comes as no surprise, often the uptick in your tax bill from having to pay income tax on those distributions does come as a surprise to retirees. A financial advisor will be able to provide you with management strategies so that you can lower your tax liabilities and be more prepared when the time comes to begin taking distributions.

Determining Tax-Efficient Investment Strategies

Although a financial advisor can’t necessarily protect you from capital gains tax, they will be able to help you by implementing strategies such as tax-loss harvesting, offsetting gains with losses, and avoiding issues such as “phantom tax,” which limit your overall tax liability. So, they’ll not only be able to help you manage and balance a portfolio, but they’ll be able to ensure you’re following the best investment strategies to benefit you the most when it comes time to file your taxes.

Do You Need a Financial Advisor to Assist with a Tax Strategy?

The world of taxes can be incredibly confusing, especially considering they’re constantly changing depending on the economy and new legislation. Having a financial advisor you trust is an important addition to your tax planning arsenal. A financial advisor can guide you throughout the year to ensure you’re making the best financial choices to help boost your tax strategy, with the ultimate goal of allowing you to save more of your hard-earned dollars.

If you think you would benefit from a conversation about your tax strategy, contact Lane Hipple Wealth Management Group at our Moorestown, NJ office by calling 856-638-1855, emailing info@lanehipple.com, or to schedule a complimentary discovery call, use this link to find a convenient time.

Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

Quarterly Tax Ideas

January 12, 2023

GETTING OUT OF THE MARKET BECAUSE OF TAXES?

Are you thinking about bailing out of stocks because you are worried that the capital gains tax structure might change? Before you hit the sell button, think it over carefully and make sure you truly understand the tax implications – especially the differences between short- and long-term capital gains.

Capital gains taxes are essentially separated into one of two categories: short-term and long-term. And as you might surmise, the category that applies to you depends on how long you’ve held the assets.

• Short-term capital gains taxes are applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are aligned with where your income places you in federal tax brackets – in other words, you pay the same rate as you would on ordinary income taxes.
  
• Long-term capital gains taxes are applied to assets held for more than a year. The long-term capital gains tax rates are 0%, 15% and 20%, depending on your income. Generally speaking, these rates are lower than the ordinary income tax rates.

Long-Term Capital Gains Tax Rates

The tax rate on most net capital gain is no higher than 15% for most individuals, but if you are a high-earner, you might fall into the 20% long-term cap gain bracket.

SOURCE: IRS

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

2023 Mileage Rates Announced

The Internal Revenue Service issued the 2023 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2023, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 65.5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022.
• 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased midyear rate set for the second half of 2022.
• 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022.

In addition, the IRS announced that:

• These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.
• The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
• It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station.
• Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
• Taxpayers can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

Remember, the IRS Will Never…

Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail you a bill if you owe any taxes.

• Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
• Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• Ask for credit or debit card numbers over the phone.

Your Financial Advisor

Although Congress continues to pass large economic bills (the CARES Act and the Inflation Reduction Act were each about 800 pages long), no single bill can account for every unique situation. Worse, the federal tax code is crazily long. At over 2,500 pages, it is 5x the length of the Grapes of Wrath, written by John Steinbeck.

So, before you go down a path that might not be in your best interest long-term, make sure you consult with your financial advisor to determine how any new tax changes and any proposed tax changes might impact you and your family.

Nothing contained herein shall constitute an offer to sell or solicitation of an offer to buy any security. Material in this publication is original or from published sources and is believed to be accurate. However, we do not guarantee the accuracy or timeliness of such information and assume no liability for any resulting damages. Readers are cautioned to consult their own tax and investment professionals with regard to their specific situations.

Inflation Reduction Act: Biden Signs Sweeping Measures into Law

August 30, 2022

What it Means for Climate Change, Health Care, and Taxes

President Biden signed the Inflation Reduction Act into law on Tuesday, August 16, marking a major legislative victory for Democrats.

No Republican lawmakers voted for the bill, and it required a tie-breaking vote in the Senate by Vice President Harris in order to go to Biden’s desk. The legislation was a year in the making, and it contains measures aimed at combatting climate change, increasing tax revenue, and lowering health care costs for Americans. That sounds good, but what does it actually do for the record-high inflation numbers we have seen this year? Critics of the bill argue that it is counterintuitive in the long-run because of the billions in government spending it requires and the stifling of gross national profit through higher corporate tax.

Below, we have a high-level summary of some of the measures taken via the Inflation Reduction Act and how Americans may feel it impacts them now and in the future.

For a more detailed analysis of the bill, the Tax Foundation published this article sharing projections on how the bill will affect the U.S. budget window from 2022-2031.

A Year-Long Legislative Battle

Democrats struggled to make the legislation a reality after conservative Democratic Senator Joe Manchin of West Virginia pulled his support. At the time, Manchin cited concerns over approving more spending measures during a time of record inflation. However, Manchin and Senate Majority Leader Chuck Schumer, D-NY, resumed talks in July and struck a deal.

“The American people won, and the special interests lost,” Biden noted during the bill signing, with Manchin joining him on the dais.

What the Inflation Reduction Act Means for Health Care

When Biden mentioned special interests losing, he was referring to pharmaceutical companies. Many had lobbied against measures in the bill related to Medicare prescription drug costs. That’s because the new law enables the federal health secretary to negotiate the prices of some prescription drugs for Americans on Medicare, leading to lower prices for consumers.

The law also caps out-of-pocket prescription costs for Medicare Part D recipients at $2,000 annually. This cap goes into effect in 2025 and, combined with lower prescription drug costs, it is expected to lower health care spending for more than five million Americans.

Additionally, more than three million diabetic Americans on Medicare are now guaranteed that their monthly insulin costs will be capped at $35.

Finally, the Inflation Reduction Act also provides a three-year extension on the Affordable Care Act (ACA) health care subsidies that were created in 2021 as a pandemic relief measure.

Bold Steps on Climate Change

The Inflation Reduction Act set aside more than $300 billion to be invested in energy and climate reform measures. This gives it the distinction of being the largest federal clean energy investment in American history. In short, it’s the most significant step the U.S. has taken toward addressing climate change.

The law includes a $60 billion allocation to boost renewable energy infrastructure in the manufacturing sector, related to things like wind turbines and solar panels. It also created tax credits for electric vehicles, solar panel systems, and other measures to make homes more energy efficient. These tax credits take effect immediately, and the White House has plans to unveil an interactive website that allows individuals, families, and small businesses to easily access information about the tax credits.

The Biden administration and Democratic congressional leaders say the collective measures will reduce greenhouse gas emissions by 40%, based on 2005 levels, by 2030. However, this still falls short of Biden’s original goal.

Tax Measures

Energy efficiency tax credits aren’t the only tax measure in the new law. The Inflation Reduction Act also established a 15% minimum tax for all corporations earning $1 billion or more in income. This is expected to bring in more than $300 million in revenue.

Critics have noted that the legislation paves the way for 87,000 new IRS agents to be hired. This could disproportionately impact middle-class Americans and small businesses through increased audits.

Read Article: Strategies for Building Wealth In Your 50s

What’s NOT in the Legislation

Democrats initially hoped the new law would include funding for childcare, universal pre-K, and paid family leave. All of these items were dropped as negotiations with Manchin played out.

Additionally, and despite the law’s moniker, it does little to address inflation – at least in the present. The Congressional Budget Office reports that the Inflation Reduction Act will have a negligible impact on inflation in 2022 and into 2023. The Biden Administration says the combination of deficit reduction measures, higher taxes, and new green energy revenue streams will eventually lower inflation.

Additional summary information about the new law is available on the White House website.

If you have questions about the Inflation Reduction Act or wish to speak with a financial professional, contact Lane Hipple Wealth Management Group at our Moorestown, NJ office by calling 856-638-1855, emailing info@lanehipple.com, or to schedule a complimentary discovery call, use this link to find a convenient time.

Illuminated Advisors is the original creator of the content shared herein. We have been granted a license in perpetuity to publish this article on our website’s blog and share its contents on social media platforms. We have no right to distribute the articles, or any other content provided to our Firm, by Illuminated Advisors in a printed or otherwise non-digital format. We are not permitted to use the content provided to us or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

Stock market pullback puts spotlight on Roth conversions

April 29, 2022

You may have heard the strategy, “buy the dip”, but do you know how to “convert the dip”? That is a maneuver some financial planners are educating their clients on to maximize tax benefits. A Roth IRA conversion involves the transfer of assets from a traditional, SEP, or SIMPLE IRA, or from a defined contribution plan like a 401(k), into a Roth IRA. To convert, the account owner pays a one-time income tax on the amount transferred and the account becomes eligible to make tax-free withdrawals in the future. As a result, the Roth IRA is now growing tax-free. The following article from InvestmentNews.com, written by Jeff Benjamin, explains why now may be the right time to convert.

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