Tag Archives: Taxes

Student Loan Debt Forgiveness…Shifting the Burden to American Taxpayers

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Americans collectively owe more than $1.7 trillion in student loan debt, more than three times what it was just 15 years ago.

Many progressive Congressional lawmakers have called for President Biden to forgive all federally owned student loans.

Others lawmakers have argued for up to $50,000 in forgiveness per borrower.

Recent reports suggest the White House is more likely to forgive $10,000 and include an income cap that limits relief to high level borrowers. This more limited approach of forgiving $10,000 would provide relief to people who need it most while ensuring that high-earning borrowers like doctors and lawyers don’t get a bailout.

The White House has also repeatedly extended a pause on loan payments that was put in place by the Trump administration in the early days of the pandemic. That pause has included a freeze on interest, which on its own has saved the average borrower about $5,500, according to one estimate.

Why there’s debate

Supporters of student loan debt forgiveness say the enormous financial burden of loans, many with onerous interest rates, make it impossible for college graduates to get ahead.

Debt relief would directly affect around 43 million Americans. It is believed that forgiving student loan debt would free those people to spend their money on goods and services and would create significant economic benefits for everyone.

Many also argue that debt relief would help reduce racial inequality, since people of color tend to borrow significantly more than their white peers.

Opponents of student debt forgiveness say it would be unfair to the vast majority of Americans who don’t have student debt — particularly those who paid off student loans on their own. Additionally, federal student Liam debt forgiveness doesn’t erase the debt, it only shifts the burden from the borrowers to the American taxpayers, who are already burdened with the tad of inflation.

Some make the case that there are much more effective ways to reduce inequality. Others argue that it would be wasteful to forgive student debt without also taking on the much more difficult task of fixing problems in the higher education system that created the student debt crisis in the first place.

What’s next

If Biden does choose to forgive some student debt, it’s not clear whether the courts will uphold the executive branch’s authority to do so.

References:

  1. https://finance.yahoo.com/student-loan-debt-how-much-should-biden-forgive-213848402.html

Canceling Debt Just Shifts the Burden

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Debt is never completely canceled or forgiven, someone (in the case of student loan debt, it would be taxpayers) always pays the debt or incurs the burden.

About 43 million people, according to CNN.com, are waiting to find out if President Joe Biden will wipe away all or part of their federal student loan debt.

President Biden is “taking a hard look” at canceling or forgiving hundreds of billions of dollars in federal student loan debt — a decision his advisers believe would be “a complete disaster” for the Democratic Party in the midterms.

The White House floated loan forgiveness of $10,000 per student borrower. The debt forgiveness would add $245 billion to federal government debt, according to the Committee for a Responsible Federal Budget.

Digging deeper, it appears that the top 40 percent of wage earners hold the majority of student debt and would be the major benefactors of this Presidential Executive Order. Of student-debt holders between the ages of 25 and 40, the top 40 percent bears half of the total debt.

According to the IRS, if you borrow money and are legally obligated to repay a fixed or determinable amount at a future date, you have a debt. You may be personally liable for a debt.

If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don’t have to pay.

In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.

A majority Americans are opposed to blanket federal student loan debt forgiveness or cancellation. Because, it doesn’t seem fair to them if millions of student loans are forgiven, yet the money to pay the debt is going to have to come from somewhere, and it most likely will be on the backs of the middle class tax payers.

Many Americans made sacrifices so that they and their children could attend college and would not need student loans, largely because they sacrificed and saved enough money to help pay for college costs.

Additionally, many economists opine that you or the government simply cannot cancel debt, you can only move the obligation around. This simple economic principle seems completely loss on many Congressional politicians.

Debt cancellation — it’s a noble yet dangerous concept. Basically, the financial burden may not fall solely on the students with debt. Who would pay for it? Every U.S. taxpayer would pay for this relief. 

So the Executive Order wouldn’t really forgive or cancel debt. It would simply make every American obligated to pay this federal student loan debt they didn’t sign-up for or reap the benefits from.

In short, student loan debts that are forgiven do not go to “debt heaven”. The obligations will fall onto the backs of American taxpayers.

References:

  1. https://www.americanthinker.com/blog/2022/06/well_lend_them_more_money_to_pay_the_higher_tuitions.html
  2. https://www.irs.gov/taxtopics/tc431
  3. https://www.msn.com/en-us/news/us/heres-what-it-would-mean-to-these-americans-if-biden-canceled-student-loan-debt/ar-AAYBK7N?ocid=uxbndlbing
  4. https://www.forbes.com/sites/forbesfinancecouncil/2020/08/06/you-cant-cancel-debt—you-can-only-move-it-around/?sh=7fdfa9c64616

Taxes: Income and Property

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“In this world, nothing is certain except death and taxes.” Ben Franklin

After-tax income inequality has grown over the long term. Between 1979 and 2018, the share of aggregate after-tax income of the top 1% of households grew significantly from 7.4% to 13.6%. In contrast, the shares for the bottom 90 percent of households declined. Tax Policy CenterWealth inequality has also widened. The average white household had $402,000 in unrealized capital gains in 2019, compared with $94,000 for Black households and $130,000 for Hispanic or Latino households. These disparities have generally widened over time. Tax Policy Center

Virtually all families hold some amount of financial assets, broadly defined as brokerage, checking, savings and retirement accounts to name a few. While 98% of families held checking or savings accounts in 2019, only 50% of families held retirement accounts and 15% owned stocks. Tax Policy Center

Salaries and wages are the largest sources of income for most households. In 2018, they comprised 68% of total adjusted gross income across all individual income tax returns, but only 17% for those with incomes over $10 million. Tax Policy Center

Income from capital gains made up about 8% of aggregate adjusted gross income (AGI) in 2018, but this varied by income level. For those with AGI over $10 million, capital gains accounted for nearly half of their income. Tax Policy Center

In 2019, the median net worth for those with college degrees was four times higher than for those with high school diplomas and nearly 15 times higher than for those without high school diplomas. Tax Policy Center

Overall, the share of US families with education loan debt went from 9% in 1989 to 21% in 2019. About 30% of Black families had education loan debt in 2019, compared with 20% of White families and 14% of Latino families. Tax Policy Center

Federal taxes are moderately progressive overall. In 2018, the top 1% had 16.6% of total income before taxes and 13.6% after taxes. Contrastingly, the lowest quintile had 3.8% before taxes and 7.1% after taxes. Tax Policy Center

In fiscal year 2019, state and local governments raised $577 billion in property taxes. As a share of general revenue, New Hampshire relied the most on property tax revenue (36%) whereas Alabama and New Mexico relied the least (7%). Tax Policy Center

State and local taxes as a share of income ranged from 7% in Tennessee to 15% in North Dakota in 2019. This does not measure comparative tax burdens on states’ residents because it includes taxes on business activities borne by residents of other states. Tax Policy Center

Total tax revenue (including federal, state, and local taxes) as a share of GDP was 24.5% for the US in 2019. Tax Policy Center

Wealthier Americans may be more stressed regarding inflation, economic uncertainty and market volatility, but lower-income Americans have much more to fear from rising prices and are experiencing greater daily impact to their wallets. They tend to have less financial cushion to handle higher prices for food, gas, and other necessities, according to the Tax Policy Center.

The above financial inequality and tax snippets are interesting facts/information garnered from the nonprofit Tax Policy Center.

References:

  1. https://www.taxpolicycenter.org/fiscal-fact/top-1-income
  2. https://www.axios.com/wealth-inflation-fears-money-financial-assets-52779e2d-8940-4b87-85cd-29c65744fb29.html

Historic Inflation Worries Americans

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Worries by Americans over historic inflation level and higher retail prices are now larger than concerns about the coronavirus pandemic, according to recent polls from Monmouth and AP-NORC.

The U.S. consumer price index rose 0.8% in November from October. The Labor Department said consumer prices grew last month at an annual rate of 6.8%, which is the highest in 39 years since President Carter administration. The growth in prices were led by cars, food, gasoline, electricity and fuel oil.

As the bulk of Americans cite inflation and paying their bills as their top concerns, President Joe Biden’s job approval ratings fell to new lows with 69% disapproving of how he is handling inflation, according to an ABC/Ipsos poll.

Additionally, inflation concerns could potentially cost the President and Democrats’ their coveted social and environment legislation. It is believed that adding additional fiscal spending to already exploding government debt that adds juice to the economy might worsen inflation critics assert.

Most economists agree that the Build Back Better bill would add to inflationary pressures in the short run, however, they differed over its effects on inflation over the long term. Furthermore, most economists see inflation coming down sometime next year, but the debate is over how soon and by how much.

The bill will probably increase demand over the next few years, Harvard University professor Doug Elmendorf said. “That will tend to push up GDP and employment and inflation — which is not the policy impulse we need right now,” he added. Elmendorf served in the administration of former Democratic President Bill Clinton

References:

  1. https://www.barrons.com/articles/two-thirds-of-americans-polled-disapprove-of-how-biden-has-handled-inflation-51639331904
  2. https://www.bloomberg.com/news/articles/2021-11-17/top-economists-see-biden-s-spending-plan-adding-to-inflation

Retirement Benefits

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“Planning is the key to creating your best retirement.”

Social Security is part of the retirement plan for almost every American worker. It provides replacement income for qualified retirees and their families. On average, retirement beneficiaries receive 40% of their pre-retirement income from Social Security. Thus, it’s important to understand when planning for income during retirement, Social Security was designed to replace only a percentage of your pre-retirement income based on your lifetime earnings.

The amount of your average wages that Social Security retirement benefits replaces varies depending on your earnings and when you choose to start benefits. If you start receiving benefits at age 67 (full retirement age), this percentage ranges from as much as 75 percent for very low earners, to about 40 percent for medium earners, and about 27 percent for high earners. If you start benefits earlier than age 67, these percentages would be lower, and after age 67 they’d be higher.

Most financial advisers state that you will need about 70 percent of pre-retirement income to live comfortably in retirement, including your Social Security benefits, investments, and other personal savings and sources of income.

When you work and pay Social Security taxes, you earn “credits” toward Social Security benefits. The number of credits you need to get retirement benefits depends on when you were born. If you were born in 1929 or later, you need 40 credits (usually, this is 10 years of work).

If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record. If you return to work later, you can add more credits to qualify. Social Security Administration (SSA) can’t pay any retirement benefits until you have the required number of credits.

When you work, you pay taxes into Social Security. SSA use the tax receipts to payout benefits to:

  • People who have already retired.
  • People who are disabled.
  • Survivors of workers who have died.
  • Dependents of beneficiaries.

The money you pay in taxes isn’t held in a personal account for you to use when you get benefits. SSA uses your taxes to pay people who are currently getting benefits.

Any unused money goes to the Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

Retirement benefit

SSA will base your retirement benefit payment on how much you earned during your working career. Higher lifetime earnings result in higher benefits. If there were some years you didn’t work or had low earnings, your benefit amount may be lower than if you had worked steadily.

The age at which you decide to retire will also affect your benefit. If you retire at age 62, the earliest possible Social Security retirement age, your benefit will be lower than if you wait.

Full retirement age, or FRA, is the age when you are entitled to 100 percent of your Social Security benefits. If you were born between 1943 and 1954, your full retirement age was 66. If you were born in 1955, it is 66 and 2 months. For those born between 1956 and 1959, it gradually increases, and for those born in 1960 or later, it is 67.

Those dates apply to the retirement benefits you earned from working and to spousal benefits, which your husband or wife can collect on your work record. Keep in mind:

  • Claiming benefits before full retirement age will lower your monthly payments; the earlier you file — you can start at age 62 — the greater the reduction in benefits.
  • You can increase your retirement benefits by waiting past your FRA to retire. Each month you put off filing up to age 70 earns you delayed retirement credits that boost your eventual benefit.

Choosing when to start receiving retirement benefits is a personal decision. If you choose to retire and begin receiving benefits when you reach your full retirement age, you’ll receive your full benefit amount. SSA will reduce your benefit amount if you decide to start benefits before reaching full retirement age.

References:

  1. https://www.ssa.gov/benefits/retirement/learn.html
  2. https://www.aarp.org/retirement/social-security/questions-answers/social-security-full-retirement-age/
  3. https://www.ssa.gov/pubs/EN-05-10035.pdf

Tax Avoidance vs. Tax Evasion

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“The avoidance of taxes is the only intellectual pursuit that carries any reward.” John Maynard Keynes

There’s nothing wrong with you wanting to pay less in federal, state and local taxes. Where you can run afoul of tax regulations is how you go about decreasing your tax obligation. There are legitimate tax avoidance steps you can take to maximize your after-tax income. But, failing to pay or deliberately underpaying your taxes is tax evasion and it’s illegal.

The U.S. federal income tax system is based on the idea of voluntary compliance. Under this system, it is the taxpayer’s legal responsibility to report all income.

Tax evasion is illegal and is punishable under law

Tax Evasion—The failure to pay or a deliberate underpayment of taxes. Internal Revenue Service

A taxpayer who intentionally hides income— by lying, concealing information, or committing fraud — has committed a willful act known as tax evasion, explained Jo Willetts, Director of Tax Resources at Jackson Hewitt. Tax evasion is illegal and carries serious criminal and civil consequences.

According to the Internal Revenue Service (IRS), one way that people try to evade paying taxes is by failing to report all or some of their income. Sometimes people do not report income gained through illegal activities such as gambling and selling stolen goods. Other times they do not report all the tips they collect or the money they earn through legal activities such as garage sales, baby-sitting, tutoring, or yard work.

Common examples of tax evasion include non-reporting or underreporting of:

  • Overseas income;
  • Cash-in-hand payments for jobs like babysitting, catering, cleaning, or manual labor;
  • Income from side gigs;
  • Income from illegal activities
  • Gains made on digital currencies like Bitcoins; and
  • Payments received from a cash business like tutoring, pet sitting, or childcare.

Tax evasion can also include things like overstating deductions or failing to file a tax return.

Tax avoidance or minimizing your tax obligation is legal and encouraged by IRS

Tax Avoidance—An action taken to lessen tax liability and maximize after-tax income. Internal Revenue Service

Minimizing your federal, state and local taxes is perfectly legal and encouraged. Minimizing your taxes is about managing and structuring your finances in a way that complies with the tax code, while at the same time, lowering your total income tax. 

IRS regulations allow eligible taxpayers to claim certain deductions, credits, and adjustments to income. Essentially, these provisions have been built into the tax code to influence taxpayer behavior.

For instance, to encourage home ownership, an interest deduction is available for eligible homeowners with a mortgage. To make it easier for primary caregivers to get back to their job and career, working parents could potentially qualify for a credit for childcare expenses. To promote financial protection for families, death benefits from a life insurance policy is exempt from taxes.There are also deductions based on the number of family members.

These are only a few of the many ways people can legally limit the tax they pay. However, the taxpayer must be able to prove that he or she qualifies. Many people pay more federal income tax than necessary because they misunderstand tax laws and fail to keep good records.

In reality, most taxpayers are already engaging in some form of tax minimization. For example, if you contribute to an employer-sponsored retirement plan with pre-tax funds, that is a tax-minimization strategy because (1) you’re deferring a tax payment, and (2) you will likely pay less tax when the funds are withdrawn in retirement.

The most common and effective tax planning strategies include:

  • Contribute a 401(k) or IRA: The money people put into their 401(k) or IRA the IRS does not tax until it’s withdrawn. Many employers offer a 401(k) option with a matching contribution to help boost their employees’ retirement funds.
  • Revise W-4 withholdings: Most people have their income tax withholdings set to a standard amount for their tax bracket. Every financial situation is unique. Therefore, consider revising how much money is paid to the IRS to reduce tax liabilities later.
  • Use FSAs and HSAs: With flexible spending and health savings accounts, individuals can contribute to a dedicated account for their medical expenses. This money is specifically for medical care, so it is added to an account pre-tax.

Ultimately, investing money into financial tools that offset taxes can be a significant advantage for both long-term investment and tax planning strategies. The IRS offers a variety of opportunities for people and businesses to reduce their tax liabilities.

Additionally, the most practical IRS tax avoidance methods include:

  • Itemization: Depending on how much an individual or couple’s expenses are every year, it might be more lucrative to itemize tax deductions. It can be time-consuming and requires diligent recordkeeping, but it’s especially valuable for anyone with mortgages or expensive medical bills.
  • Tax credits: A tax credit, which is different from a deduction, gives money back to individuals and families. These credits generally come with stipulations. However, these credits can be worth the investment for people with big tax bills.
  • Tax deductions: Tax deductions are another way to reduce tax liabilities. With a deduction, someone’s taxable income gets reduced, which lowers the total amount owed to the IRS. Popular tax deductions include work-related expenses, property, and real estate taxes, and contributions to charity.

Tax avoidance or minimizing your federal taxes through the IRS can be one of the most critical tools for individuals, families and small businesses that don’t have access to tax-reducing investment strategies.

In summary, tax avoidance is the practice of using legal means to minimize your tax burden. Tax evasion, on the other hand, is using illegal means to hide or under report income from the IRS, or take deductions you aren’t actually allowed.

“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.” Milton Friedman

References:

  1. https://apps.irs.gov/app/understandingTaxes/whys/thm01/les03/media/ws_ans_thm01_les03.pdf
  2. https://www.findlaw.com/tax/tax-problems-audits/tax-evasion-vs-tax-avoidance.html
  3. https://www.wsj.com/articles/buy-borrow-die-how-rich-americans-live-off-their-paper-wealth-11625909583
  4. https://www.jacksonhewitt.com/tax-help/tax-tips-topics/tax-fraud/tax-avoidance-vs-tax-evasion-whats-the-difference/
  5. https://taxcure.com/blog/tax-avoidance-vs-tax-evasion

61% of Americans Paid No Federal Income Tax in 2020 | CNBC

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By Robert Frank, CNBC Wealth Reporter and a leading authority on the American wealthy

“The hardest thing in the world to understand is the income tax.” Albert Einstein

  • More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a report from the Tax Policy Center.
  • The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government.
  • The main reasons for the spike — high unemployment, large stimulus checks and generous tax credit programs.

More than 100 million U.S. households, or 61% of all taxpayers, paid no federal income taxes last year, according to a new report.

According to the Urban-Brookings Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million — or 44% of all taxpayers — in 2019. The main reasons for the spike — high unemployment, large stimulus checks and generous tax credit programs — will largely expire after 2022, so the share of nontaxpayers will fall next year.

“The COVID-19 pandemic and the policy response to it led to an extraordinary increase in the number of American households that owed no federal individual income tax in 2020”, writes Howard Gleckman, Senior Fellow at the Urban-Brookings Tax Policy Center.

The share of Americans who pay zero income taxes is expected to stay high, at around 57% this year (2021), according to the Tax Policy Center.

“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.” Milton Friedman

In contrast, the top 20% of taxpayers by income paid 78% of federal income taxes in 2020, according to the Tax Policy Center, up from 68% in 2019. The top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019.

In 2021, Congress increased the size of the child tax credit, the earned income tax credit, and the child and the dependent care tax credit — all of which erased the federal taxes owed for millions of American families.

Twenty million workers lost their jobs. Many were low-wage workers who were paying very little income tax before the pandemic hit. Effectively, no household making less than $28,000 will pay any federal taxes this year due to the credits and tax changes, according to the Tax Policy Center. Among middle-income households, about 43% will pay no federal income tax.

Federal income taxes do not include payroll taxes. The Tax Policy Center estimates that only 20% of households paid neither federal income taxes nor payroll taxes. And “nearly everyone” paid some other form of taxes, including state and local sales taxes, excise taxes, property taxes and state income taxes, according to the report.

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Winston Churchill

“There is a dichotomy between how capital is taxed in this country and how labor is taxed. That seems wrong to me, to have these two sources of wealth that are taxed so differently”, according to Billionaire philanthropist John Arnold.

References:

  1. https://www.msn.com/en-us/money/markets/61-25-of-americans-paid-no-federal-income-taxes-in-2020-tax-policy-center-says/ar-AANt4dJ?ocid=uxbndlbing
  2. https://www.taxpolicycenter.org/taxvox/covid-19-pandemic-drove-huge-temporary-increase-households-did-not-pay-federal-income-tax

Successful Investing Requires Mastering the Inner Game

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“When you learn how to control your emotions, you can derive more positive, productive meanings, even from seemingly negative events.” Tony Robbins

Inner game helps you improve yourself as you learn from your past life experiences. Learning to work on your inner game helps you develop a better outlook in life and this helps you develop your confidence as well. This new sense of self worth allows you be more successful personally and professionally, and with your over all interaction with other people.

To find your inner game, you have to know who you truly are, what you really want and how you want things to be done. This step is not easy. It takes a lot of self-reflection and looking back to your past mistakes and learning from them. It requires you to open your eyes and see yourself for who you really are now. Then try to look to the future and visualize how you want to see yourself after a couple of years.

It may take a lot of self-reflection, emotional intelligence and psychological understanding of your personal issues and how to deal with them. But the bottom line to becoming confident being the real you, is that you will have to overcome your insecurities, angsts, worries, and fears. If you fail to do so, these negative factors will reveal themselves in your personal and professional life and can cause problems.

When you get the real picture of who you truly are, you also have to learn to appreciate the traits that you have. Don’t focus on the things that you dislike about yourself. Real attractiveness come from within. Before anyone else appreciates your looks, you should be the one to appreciate it first. Know your strongest feature and use it to your advantage. If you believe that you look good then you will feel good about yourself too. Your self confidence will improve and this makes you more.

Inner Personal Scorecard

Warren Buffett frequently relates an interesting way to frame this topic:

Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover? 

Or. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?

Buffett’s getting at a rather fundamental model he’s used most of his life: The Inner Scorecard. When you have an internal scorecard, no one can define success for you but you.

What Buffett and a lot of other people who have been successful in life — true success, not measured by money — have in common is that they’re able to remember what we all set out to do: live a fulfilling life! Not get rich. Not get famous. Not even get admiration, necessarily. But to live a satisfying existence and help others around them do the same.

It’s not that getting rich or famous or admired can’t be deeply satisfying. It can be! I’m positive Buffett deeply enjoys his wealth and status. He’s got more “admiration tokens” than almost anyone in the world.

But all of that can be ruined very, very easily along the way by making too many compromises, by living according to an external scorecard rather than an internal one.

Controlling your emotions

According to James J. Gross, a psychologist and professor at Stanford University and best known for his research in emotion and emotion regulation, the inability to control, or regulate, your emotions is at the root of some psychological disorders including depression, social anxiety and borderline personality. And, no matter how psychologically healthy you think you are, you can benefit from learning how to better manage your emotions in investing and everyday life.

References:

  1. https://www.tonyrobbins.com/ask-tony/cycle-of-meaning/
  2. https://www.essentiallifeskills.net/5-effective-ways-to-control-your-emotions.html

Strategies to Reduce Taxes

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Taxes are one thing retirees tend to have a little control over, as long as they do deliberate tax planning.

Accumulating sufficient assets for retirement is a critical part of retirement income planning, according to Bill Thomas, Financial Adviser, Thomas Financial Services. However, it’s just as important to preserve what you’ve saved over the 25 or 30 years that you may live in retirement. That’s where deliberate tax planning comes in.

It is likely that taxes will increase during your retirement, potentially reducing your income and cash flow. Instead of fretting over increasing taxes, now is the time to figure out how to create a tax-efficient retirement where you can maximize deductions and credits while minimizing taxes.

Getting into the 0% tax bracket may be possible and easier than you think. All it takes is a smart tax strategy that allows combining tax credits and deductions, accumulating more long-term capital gains, or benefiting from qualified dividends.

You can legally decrease or completely eliminate your tax bill by taking advantage of some of the perks in the tax code.

Qualified dividends follow three rules:

  1. The dividend must have been paid by a U.S. corporation or a qualifying foreign company. The dividends must be deemed as qualified in the eyes of the IRS and cannot be listed as a non- qualified dividend.
  2. You’ve held the stock paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
  3. Use the long-term capital gains rates shown above to see the taxable income and filing status for the 0% tax brackets.

Being an investor requires a strategy to reduce your taxes. For many, it’s tempting to buy stocks and sell them as soon as the price shoots up. But if you hold on to your investments for an over a year — you’ll be eligible for long-term capital gains tax rates.

Simply put, it pays to be patient in the stock market. If you sell a stock that you’ve owned for a year or less, you’ll have to pay a short-term capital gains tax, which can be as high as 37%. Once you’ve held an investment over the one-year mark, you’ve hit the long-term capital gains threshold.

Getting into the 0% tax bracket may be easier than you think. All it takes is a smart strategy that allows you to combine tax credits and deductions, accumulate more long-term capital gains, or benefit from qualified dividends.

Make tax-smart investing part of your tax planning

The potential impact of tax-smart investing techniques over time. As the accompanying graphic shows, employing tax-smart investing techniques over time may have a significant impact on your long-term returns. The longer you apply these techniques, the greater the potential impact.

Each line represents a client’s hypothetical value from tax-smart investing techniques at various starting dates, based on a starting portfolio value of $1 million.

Though taxes might not be the first thing you think of when it comes to how you want to spend money in retirement, planning strategically can mean more income and cash flow for the things you love.

References:

  1. https://www.kiplinger.com/retirement/retirement-planning/602880/4-strategies-to-reduce-taxes-in-retirement
  2. https://www.msn.com/en-us/money/retirement/these-strategies-can-reduce-the-taxes-you-will-pay-on-retirement-accounts/ar-AAKcd4U
  3. https://www.fidelity.com/wealth-management/tax-smart-investing-planning

Roth IRA Conversion

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A Roth individual retirement account (IRA) is off-limits for people with high annual incomes.

If your earnings put Roth IRA contributions out of reach, a backdoor Roth IRA conversion is an option that lets you enjoy the tax benefits of a Roth IRA. A backdoor Roth IRA is a strategy that helps you save retirement funds in a Roth IRA even though your annual income would otherwise disqualify you from accessing this type of individual retirement account.

Backdoor Roth IRA conversions are mainly useful for high earners whose annual income (plus access to workplace retirement plans) already make them ineligible for tax deductions for traditional IRA contributions.

Who Benefits from a Backdoor Roth?

  • High earners who don’t qualify to contribute under current Roth IRA rules.
  • Those who can afford the taxes for a Roth conversion and want to take advantage of future tax-free growth.
  • Investors who hope to avoid required minimum distributions (RMDs) when they reach age 72.

A general rule of thumb with Roth IRA conversions is that you will owe taxes on any money that has never been taxed before.

Roth IRA Conversion makes little Tax difference f

A Roth conversion will not make a significant difference to your retirement standard of living, according to an exhaustive new study.

The study findings reveal that “…only if you’re in the top 1% of retirement savers will a Roth conversion move the needle more than a little bit in your retirement.” The study, “When and for Whom Are Roth Conversions Most Beneficial?,” was conducted by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

Unlike many previous analyses of Roth conversions, McQuarrie adjusted all his calculations by inflation and the time value of money, likely changes in tax rates, and a myriad other obvious and not-so-obvious factors.

McQuarrie finds that only if you have millions in your IRA or 401(k)—at least $2 million for an individual and $4 million for a couple—will your required minimum distributions in retirement be so large as to put you into even the middle tax brackets.

Only for those select few will the potential tax savings of a Roth conversion be significant. For most of the rest of us, we’ll likely be in lower tax brackets in retirement years, with an effective rate of 12% or less. That almost certainly will be lower than the tax we would pay for a Roth conversion during our peak earning years prior to retirement.

Even if tax rates themselves go up, furthermore, it’s still likely that your tax rate in retirement will be lower than preretirement. That’s because you’ll likely be at your peak earning years prior to retirement, when you might be undertaking a Roth conversion, and therefore in a relatively high tax bracket.

Once you stop working and retire, and are living on Social Security and the withdrawals from your retirement portfolio, your tax rate will most likely be lower—even if the statutory tax rates themselves have been increased in the interim.

Backdoor Roth IRA conversions lets you circumvent the prescribed AGI limits if your annual earnings put direct Roth IRA contributions out of reach.

References:

  1. https://www.forbes.com/advisor/retirement/backdoor-roth-ira/
  2. https://www.marketwatch.com/story/to-roth-or-not-to-roth-11623431970
  3. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3860359