PLANNING ALERT!
CHANGE IN IRA ROLLOVER RULES:
If you take money out of an IRA the old rules allowed you to roll it over into another IRA and avoid paying the tax on it--but only once per year for each IRA.
The United States Tax Court recently ruled however that you can only do ONE tax-free IRA rollover a year (a 365 day period) even if you have several IRAs.
Be careful with this new rule--you don't want to be hit with a surprise tax on your next tax return. One way to avoid this problem is to use IRA transfers instead where your IRA goes from the existing firm to the new firm directly. Transfers are not effected by this new rule.
Call me if you have any questions about this BEFORE you "push any button" to make a rollover.
PLANNING TIPS TO LOWER YOUR TAX BILL:
Everyone should have a basic understanding of how income taxes work. Now I’m not talking about taking an accounting course but I want you to have this information so that in any particular year you can use strategies to legally lower the income taxes you pay. It’s not something your accountant usually talks about as the tax year goes by. Don’t be like most people every year and just sign off on your tax return without knowing what you can do to effect it.
The first thing to know is that you are not taxed on your gross income (the total income you earned for the year). You’re allowed to subtract at least a standard amount set each year and then also subtract a set amount per person as well (personal exemptions). What’s left is called your taxable income. Income tax is charged on that taxable income. You are charged a marginal tax rate on a graduating basis. Now don’t fall asleep on me.
Here’s an example for a basic married couple who will have $94,100 in gross income and who file jointly in 2014:
Gross Income: $94,100
Minus Standard Deduction $12,400
Minus amount allowed for 2 people ($3950 each) $ 7,900
The result is their taxable income: $73,800 (they are taxed on this amount)
Their Federal tax would be as follows:
They will pay only a 10% rate on the first $18,150 of the $73,800.
They will pay a 15% rate on the amount from $18,151 up to $73,800 ($55,650).
Now if they made even more taxable income (from $73,801 up to $148,850) the rate on that sliver of income would go up to 25%. So you can see how as your income “graduates” higher the “marginal” rate goes higher for each level (from 10% to 15% to 25%). You always want to know what income bracket you are in so you know what rate you’re paying in that bracket.
So what strategies can you use with this information to help you save tax money:
1) If a married couple had $78,800 in taxable income (and therefore was $5000 over the 15% bracket and into the 25% bracket) they could contribute $5000 to an IRA, if they were qualified, lower their taxable income to $73,800 and save $1,250 in tax (25% on the $5000 that they would have had to pay).
2) If you sell a stock or some other appreciated asset that you owned for more than one year there is a separate tax (Capital Gains tax) on any gains you made. However, if you’re in the 10% or 15% income brackets that I described above the tax on that gain is 0%--no that’s not a typo—you pay no tax. Once you jump into the 25% bracket (more than $73,800) the tax jumps to 15% on the gain you made on the sale. So you’d be tax-wise to sell an asset in a year you were in a 10% or 15% bracket or contribute to an IRA to get down into a 15% bracket because you’d pay no tax at all on the gain you made on the sale of that asset.
3) If you’re in the higher income brackets (25% to 39.6% tax rates) and own a stock or some other appreciated asset and have children or parents in a 15% or lower bracket you could gift the asset to them and take advantage of the 0% rate they would have on the gain when they sold it as opposed to the 15-23.8% rate you would have to pay.
4) If you have traditional IRA accounts (tax-deferred) and foresee that your income will be lower than it usually is in one particular year you may want to convert all or some of the IRA to a Roth IRA. Now you would have to pay the income tax on the amount you convert that year but it will be at a lower rate because of your lower bracket and going forward you’ll take advantage of the Roth provisions where the earnings grow tax-free.
So play bracketology-- know what bracket you’re in, how close you are to the lower bracket and call me to find out if there are ways to take advantage of the lower bracket rates.