At least once in December you will hear about doing "year-end tax planning", usually from a newspaper, magazine, or a television broadcast.
The source will tell you to sell off your "loser" stocks but also to sell some "winner" stocks and use the losses to offset the gains. Generally, this is good advice...particularly if you were able to make up some ground this year in your taxable (i.e. non-retirement) accounts. But here are some things to keep in mind when following this advice, which might seem basic but is worth repeating!
>Stocks (or bonds or mutual funds) that are in IRAs, 401(k)s, or any other type of "qualified" plan will not benefit from such year-end tax planning, because they do not fall under capital gains tax rules. These investments are not taxed until they are actually distributed to you--and they are taxed at your regular income tax rate.
>If you do have taxable (a.k.a. non-qualified) accounts in which you are considering selling stocks, mutual funds, etc. to take advantage of offsetting your capital gains and losses, be careful about the wash sale rule. The wash sale rule says that you cannot deduct a loss on the sale of securities if you purchase the identical securities within 30 days before or after the sale.
For example, you cannot sell your GE stock at a loss on 11/30, buy more GE stock at a lower price on 12/1 and still deduct the loss from the 11/30 sale. (How will the IRS know? Brokerage statements show wash sales with a notation explaining the disallowed loss.)
>The wash sale rule can also be triggered by selling close to the date that a mutual fund reinvests its dividends, or even if you purchase stocks within an IRA that you just sold from a taxable account at a loss! However, it is OK if you sell a mutual fund and buy a different mutual fund with similar investment goals.
Have a great holiday season and if you have any year-end tax planning questions, please feel free to send me an e-mail or give a phone call!
November 2009: Health Insurance - FSAs & HSAs
Since it is that time of the year to renew our health insurance benefits, below are some tax tips when it comes to Flex Health Spending Plans (FSAs) and Health Savings Accounts (HSAs).
(Note: it is a long tax tip this month, but health insurance can get complex. Will this information change with the new legislation? Most certainly, but any healthcare legislation passed in 2009 won't take effect for awhile, so below are the rules as they currently stand.)
FSAs For those who have an Flex Health Spending Accounts available:
(If you or your spouse work for a company with an HR department, they should be able to tell you if an FSA is available to you. If so, read on! If not, skip ahead to HSAs): An FSA is a Flexible Spending Account, offered for either health care costs, child care costs, or one for each. It is usually a benefit in addition to your health insurance plan at your work. FSAs are a way of paying for certain medical expenses with pre-tax dollars, which can save you a bundle, depending on your tax bracket.
Here's how an FSA works: You set aside a pre-determined amount toward your FSA account. It is deducted from each paycheck over the course of the year. You can then use these funds toward medical expenses, without having to pay the tax on the income first. As always, there are some pros and cons:
Pros:
> Allows for paying most health-related items with pre-tax dollars. This is an FSA’s biggest advantage. So if you are in the 25% tax bracket, you essentially save that much on your medical costs since you don’t have to pay federal and state income tax, Social Security & FICA tax first.
>You can use it for items that are part of your health insurance plan(such as co-pays for doctors’ visits and prescriptions) as well as those that are not (eyeglasses, dental care, chiropractic care, etc.).
> Some plans have a debit card attached to them so you do not have to fill out reimbursement forms—you simply pay at the doctor’s office or pharmacy with the debit card.
> Certain plans allow you to use all of your benefit prior to paying in your entire designated contribution. So if you have a big dental bill in January that uses up your whole contribution, you will not have to wait to get reimbursed.
Cons:
> If you don’t use it, you lose it. This is the biggest drawback on an FSA. If you overfund it and end up with $1,000 left in December, you are going to have to buy an awful lot of vitamins and contact lens solution to use it up. Otherwise, that money is lost.
> Filling out reimbursement forms can be a hassle. Depending on your plan, may not be able to pay for all items with your plan’s debit card (presuming your plan has one). Depending on your plan, this could be very simple or slightly painful. Usually, you complete a form, attach receipts, and fax or mail your documents to the company. Staying organized is key to making this work. > Figuring out how much to put in each year can be daunting. Usually, the open enrollment periodtakes place some time in October, November or December for the following year’s contributions. At this point, you’ll have to guess how sick or accident prone your family will be during the upcoming year.
However, never fear! If you want to use your FSA this year, drop me an email and I will send you an easy worksheet to help you determine a reasonable FSA contribution amount. I even break it down per paycheck for you!
HSAs
For those who are enrolled in a High Deductible Plan with a Health Savings Account (HSA)or have been given the option to switch through their employer, this section is for you:
Many employers are going the "high deductible plan" route due to the rising cost of health insurance. For some employers, health insurance has become so expensive the choice was to switch to a different type of health insurance or drop coverage altogether. And many folks who purchase private insurance also choose this option.
Important Note for Self-Employed Folks: if you (and your spouse, if applicable) are self-employed and do not have employer-sponsored healthcare available to you, you should be able to deduct the cost of your health insurance premiums on your tax return!
About HDHPs & HSAs:
There are actually two parts to a high deductible health insurance plan, one of them discussed with the HSA acronym.
Part 1 is the actual health insurance plan, called a High Deductible Health Plan (HDHP). This is a health insurance plan with a high initial deductible that is at least $1,200 for a single person and $2,400 for a family but no more than $5,950 (single) or $11,900 (family) per year. Historically, these amounts have increased every year and will likely continue to do so in the future.
As the insured person, if you use your health insurance, you pay the initial deductible out of your pocket. As a result, the ongoing premiums of these health plans are usually lower than traditional health insurance, for both the employer and the employee.
After the deductible is met, you may have some co-insurance to pay for doctor’s visits, prescriptions, hospital services, or you might even be covered 100%. It all depends on how you (or your employer) set up your plan.
Part 2 is the Health Savings Account (HSA). Many employers fund an HSA for their employees equal to the deductible of their HDHP. Distributions from the HSA are tax-free if used for qualified medical expenses. If the money in the HSA is not completely exhausted at the end of the year, the employee can use the funds next year for health costs, or eventually, for retirement savings. Either way, once the cash is put in the HSA, it belongs to the employee.
HSA accounts can be opened pretty much anywhere: through the employer’s sponsoring program, through your local bank, or through a brokerage account. Each offering has different benefits that depend on which avenue you choose.
But remember: The employer contribution to the HSA account is common, but not mandatory. So there may come a point where the employer may no longer contribute to the account and you will be responsible out of pocket for your plan’s deductible!
So would a high deductible insurance make sense for my family?
Like many things in life, it depends. If it is between a high deductible plan and no coverage at all, of course go with the high deductible plan. If it is between a traditional health insurance plan (with a higher monthly cost and co-pays) and a high deductible plan, the choice is not as clear.
Things to consider when choosing between a traditional health insurance plan and a high deductible plan:
1. Are you a relatively healthy family? Or do you make regular visits to doctors/specialists/emergency rooms?
2. Are you (or your family members) taking any medication? How expensive would these medications be without a co-pay?
3. Do you have enough reserved cash to cover the high deductible (whether your employer plans to fund it or not)?
4. Are you (or your spouse) the kind of folks who won’t seek medical treatment because of the expected cost?
If you have any other questions about the tax side of health insurance, please feel free to drop me an email.
Have a great month!
September 2009: Student Loan Debt
Often times, you'll hear people tell you that along with your mortgage, student loans are "good debt".
So after you (or your spouse or child) are out of college, there is this loan to be paid. And since it is "good debt", often only minimum payments are made.
Here are a couple of good tax and money-saving reasons to work on eliminating this "not so good" debt:
Your tax deduction may be minimal, if any.
If you qualify, you'll receive a deduction of interest paid on a student loan--up to $2,500. If you make too much according to the IRS guidelines, you might not get any deduction at all.
The student loan interest deduction is phased out when your modified Adjusted Gross Income (MAGI) hits certain targets.
Here are the 2009 figures:
If you are Single or Head of Household, the phase-out begins between $60,000 and $75,000. You lose the deduction completely after $75K.
If you are Married Filing Jointly, the phase-outs occur between $120,000 and $150,000. After $150K income, you lose the deduction completely.
If you are Married Filing Separately, you don't get a deduction, period.
(Note: Modified AGI generally means your income that is totaled up on the bottom of page 1 of your tax return.)
Thus, if you can reorganize your household budget a bit, it's a good idea is to pay off the debt as soon as possible. Save yourself the interest--that's just as good as saving on your taxes.
Your interest rate is probably not low enough in the current economic environment. Conventional wisdom used to say that if you can borrow money at a low interest rate and invest it at a higher rate, you'll make money on the spread in between. And theoretically, it would make sense to only pay the minimum on a low-interest rate student loan.
However, most student loan interest rates are higher than the 1.0% interest that your money market is paying. And the student loan interest rates are almost certainly higher than your stock portfolio's returns over the past year.
So by paying off student loans, you consider that you might be able to save money twice.
First is by saving yourself the interest you would owe in the future.
Second, if you own stocks in a taxable account that declined in value, try selling off some of the losers and paying off a part of your student loan debt. Then you will be able to claim the capital loss on your tax return in 2009 and save yourself some student loan interest.
August 2009: Savings Bonds Put to Good Use
EE & I Bonds--Savings Bonds Used for College Tuition
Did you know that if you cash in EE or I Bonds and use them to pay for college tuition, the interest earned might be tax-free?
It seems that many folks have an Aunt Betty or Grandpa Joe who insisted on buying U.S. Treasury bonds...here's a way to save some tax on the interest earned.
Of course, there are some catches. Here they are:
> The bond owner must be at least 24 years old before the bond's issue date (i.e. giving grandkids bonds in their names for a 5th birthday for won't work--the bonds would have to be in the parents' name). This is the catch that usually disqualifies most people.
> Proceeds must be used for tuition and fees for a dependent, a spouse, or bond owner at a qualifying educational institution. Room, board and books don't count.
> You can't count bond interest against tuition paid by tax-free scholarships, tax-free withdrawals from 529 Plans, ESAs, any expenses used to calculate the Hope & Lifetime Learning Credits.
> Interest is completely tax-free if the redemption amount is less than the actual qualifying expenses in the year of redemption. Otherwise, they are proportionally tax free.
And, unfortunately, there are phase-outs:
Married Filing Joint: $100,650 to $130,650; Single or Head of Household: $67,100 to $82,100; Married Filing Separately: Not eligible.
If you have questions about this or any other tax or insurance topic, please do not hesitate to call or drop me an email.
July 2009: Roth IRAs & Kids
Here's an idea if you have a child (or grandchild) with a summer job this year:
Instead of buying the latest gadget or pair of designer sunglasses for them, consider making a contribution to a Roth IRA for him or her this year.
The maximum you can put in is $5,000, but no more than the child actually earns. (And remember, whatever you contribute counts toward your $13,000 annual tax-free gifting amount.)
You could be helping your child a lot for the future!
Think of it this way: A single $5,000 contribution when your child is 15 years old could equal $97,000 at age 66, with an average of 6% growth each year. If the child continues to work and contributions are made in the future, the future of that Roth IRA could be much larger. (Note: This rate was used for hypothetical illustration only and should not be used to predict investment results.)
And remember: all Roth IRA withdrawals after 59 1/2 years old are tax free. And since Roth IRA contributions are made with after-tax dollars, contributions (not earnings) can be pulled out tax free at any time. This means that the child could even withdraw these contributions in the future to help when buying a first home.
June 2009: Explaining the Homeowners Energy Credits
Making Energy Efficient Home Improvements in 2009
If you are thinking about improving your home's energy efficiency this year, there might be a tax break in it for you. After disappearing in 2008, the Energy Tax Credit is back for 2009 and better than before. Here's how it works for '09: Part 1You may be able to claim an energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2009. These items can include high-efficiency:heat pumps air conditioners, and water heaters
as well as energy-efficient:windows doors insulation materials, and certain roofs (including certain asphalt roofs and stoves that burn biomass fuel)
Be aware: Standards in the new law are higher than the 2007 “energy efficient” qualifying standards. If you are not sure if what you are buying will qualify, contact the manufacturer before that new central air conditioning unit is installed.
The maximum credit allowable is $1,500. Which is not spectacular, but much better than the old $500 limit.
Part 2
Part 2 of this bill has no maximum amounts!
The Residential Energy Efficient Property Credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.
And for CT residents: If you are considering putting solar panels up on your roof, this deal has become more interesting as well. The State of CT has modified their subsidization of this program to make it more interesting for homeowners. Check it out at: http://www.ctsolarlease.com/
