2016 Federal & Colorado Tax Forms An Overview & Client Conversations. Client Conversations about Taxes 9/17/2016 3

Transcription

1 2016 Federal & Colorado Tax Forms An Overview & Client Conversations John R. Dundon II, E.A. Taxpayer Advocacy Services Inc. Bruce Larsen America s Retirement Store 9/17/ Client Conversations about Taxes Securities and investment advisory services offered through Presidential Brokerage, Inc., Member: FINRA/SIPC AmericasRetirementStore.com 9/17/ /17/

2 America s Retirement Store and Presidential Brokerage, Inc., do not provide tax or legal advice. The information contained in this presentation is general in nature and is for educational purposes only. Please consult your tax advisor to determine what strategy may work with your situation. We would be happy to work alongside your CPA/tax professional to help you and your family navigate through these complex considerations. 9/17/ What We Will Cover Re-setting your Clients Tax Understanding How Taxes Change in Retirement Tax Smart Social Security Planning IRA/401k Exit Strategies Tax Smart Legacy Planning John s Top Ten list of Tax Questions Action Items 9/17/ Your Taxes will Change in Retirement You will no longer pay FICA and Medicare (7.65% to 15.30%) If you are receiving Social Security, it is taxed more favorably than W-2 or Self Employment income You will likely lose deductions for Retirement Plan Contributions, Health Insurance Premiums, and other Employee Benefits 9/17/

3 How much tax will you pay? If you ll need: $50,000 in after-tax retirement income? $75,000? $100,000? $120,000? 9/17/ Example Before and After Retirement Married Couple Each making $60,000 Contributing 10% to 401k s House Paid for Kids have moved out Want the same amount of after-tax income as they have now 9/17/ Taxes While Working Joint Income 120, k Contributions (12,000) Gross Income 108,000 Standard Deduction (12,600) Personal Exemptions (8,100) Taxable Income 87,300 Federal Income Taxes (13,468) 12.5% Colorado Income Taxes (4,042) 3.7% FICA/Medicare Taxes (9,180) 8.5% Total Taxes (26,690) 22.2% Disposable Income 81,311 9/17/

4 Retirement Resources Social Security His 401(k) $250,000 Her 401(k) $500,000 Muni Bonds 4% If both File at 65 = $46,128 balance from Investments $34,994 plus taxes If both File at 66 = $49,416 balance from Investments $31,716 plus taxes If both File at 70 = $65,229 balance from Investments $15,892 plus taxes* 9/17/ Taxation of Social Security Filing status Provisional income* Amount of Social Security subject to tax Married filing jointly Under $32,000 $32,000 - $44,000 Over $44,000 Single, head of household, qualifying widow(er), married filing separately & living apart from spouse Under $25,000 $25,000 - $34,000 Over $34,000 0 Up to 50% Up to 85% 0 Up to 50% Up to 85% Married filing separately and living with spouse Over 0 85% *Provisional income = AGI + One Half of SS benefit + Tax Exempt Interest This Has Never Been Indexed for Inflation! 9/17/ IRS Social Security Worksheet 9/17/

5 Let s take a short cut 9/17/ How Much of Social Security is Taxed? At 65 = $46,128balance from Investments $34,994 plus taxes 48% At 66 = $49,416balance from Investments $31,716 plus taxes 44% At 70 = $65,229balance from Investments $15,892 plus taxes 17% 9/17/ Comparison of Taxes: Social Security at 65 vs. 70 Started Social Security at 65 Started Social Security at 70 Joint Social Security 46,128 48% Taxable Joint Social Security 65,230 17% Taxable Taxable Social Security 21,992 Taxable Social Security 10, k Distributions 33, k Distributions 17,000 Tax Exempt Interest 6,000 Tax Exempt Interest - Gross Income 55,742 Gross Income 27,773 Standard Ded./Exempt. (20,700) Standard Ded./Exempt. (20,700) Taxable Income 35,042 Taxable Income 7,073 Federal Income Taxes 4, % Federal Income Taxes % Colorado Pension Ded. (48,000) State Income Taxes 0 Disposable Income 81,559 Colorado Pension Ded. (27,773) State Income Taxes 0 Disposable Income 81,523 9/17/

6 Do We Have other Issues? 401(k) plans have a mandatory 20% Federal Tax Withholding Requirement. This will result in paying additional unnecessary taxes. What do we know about 401(k) s and IRA s when we turn 70 ½? Required Minimum Distributions 9/17/ IRA/401k Exit Strategies Pay the Taxes now with a Roth Conversion Pay the Taxes over your Lifetime Combination 401k Rollover Options After Tax Money and Net Unrealized Appreciation 9/17/ Advantages of a Roth Conversion Roth IRAs are not subject to RMDs while you are alive. RMDs do apply to Roth IRA non-spouse beneficiaries. You may be able to reduce taxes owed on Social Security benefits by taking tax-free Roth IRA distributions rather than taxable IRA distributions. Single Tax Brackets are less of an issue for the surviving spouse if they have a Roth. 9/17/

7 Who may Benefit from a Roth Conversion If you think your retirement taxes will be the same or higher than current taxes. If you have the time to make up for paying the taxes now. If you expect the IRA to grow and would prefer to pay taxes on the lower current balance instead of the larger future balance. If you do not want to take unnecessary RMDs. If you have the funds to pay the taxes from outside the IRA. 9/17/ Convert to Roth? The Necessary Components to Consider Conversion Projected Excessive RMD s Sufficient After-tax Money to Pay Conversion Taxes Ability to accurately project Before Conversion and After Conversion outcomes Secondary Considerations Client wants to leave a more tax efficient estate Client feels tax rates will substantially increase 9/17/ Surviving Spouse Taxation MARRIED, FILING JOINT IRA s $30,000 Social Security $30,000 Taxable Soc Sec $6,850 Total Income $60,000 Standard Deduction $12,600 Personal Exemptions $8,100 Taxable Income $16,150 Income Tax $1,615 (4%) SINGLE (Surviving Spouse) IRA s $40,000 Social Security $20,000 Taxable Soc Sec $17,000 Total Income $60,000 Standard Deduction $6,300 Personal Exemptions $4,050 Taxable Income $46,650 Income Tax $8,557 (15%) This hypothetical example is for illustrative purposes only. Your individual circumstances will vary. We encourage you to speak with a qualified tax advisor and/or attorney. 9/17/

8 401k Rollover Considerations After Tax Money Many people, especially when contributions were lower in years past, made non-deductible contributions to 401k s If you rollover the entire balance to an IRA, you will have to account for the After Tax money every time you do a distribution A better solution is to roll the After Tax money into a Roth IRA, keeping it separate from the Before Tax money 9/17/ k Rollover Considerations NUA Net Unrealized Appreciation (NUA) refers to Company Stock of Publicly Traded companies held in 401k s When eligible you may rollover any portion of the Company stock into a taxable brokerage account and pay Ordinary income taxes on the Cost Basis. When the stock is sold, you pay Capital Gain taxes on the gain over the cost basis Can make sense if the Cost Basis is very low Make sure you do a complete tax analysis before doing so 9/17/ k Rollover Considerations NUA - Example Client is retiring Has stock ($950,000) with a low cost basis ($120,000) Option 1 Rollover to IRA and be subject to ordinary income tax on lifetime withdrawals Option 2 (NUA) Rollover individual stock to individual account; pay ordinary income on cost basis and capital gains tax on appreciation when the stock is sold Which option is subject to less tax? Option 1 Tax Rate 13% Option 2 Tax Rate 31% 9/17/

9 Business Exit Strategies Ask yourself How am I going to get out of this thing? If you did not determine this when you planned the business do it now. Four methods to exit a business: Transition to Family Transition to Employees Sell the Business Sell what You Can 9/17/ Transition to Family Sell to Family Gradual Exit Be careful of gifting to family members 9/17/ Transition to Employees Transfer to Junior Partner Sell to Management Group ESOP Employee Stock Ownership Plan 9/17/

10 Sell Business One of the hurdles of selling the business is that the value is the owner A known brand may make a sale possible Work with your CPA 9/17/ Sell What you Can Most common option If no Enterprise Value you need to save as much as possible over time The owner can often contribute more than employees 9/17/ Recent Tax Law Changes American Taxpayer Relief Act Individual tax rates 10% 10% 15% 15% 25% 25% 28% 28% 33% 33% 35% 35% 39.6% Capital gains max 15% 20%* Qualified dividends max 15% 20%* Medicare surtax on net 0% 3.8% investment income Estate/Gift tax rate ** 35% 40% *The 20% capital gains rate applies only if a taxpayer's income tax rate falls in the 39.6% bracket. All other taxpayers continue to be subject to a maximum 15% capital gains rate. A 0% capital gains rate applies to taxpayers who are subject to income tax rates of 15% or less. ** Tax rate only applies to estates worth more than $5.45 million (2016). Will be Indexed for Inflation. 9/17/

11 Return of Phase-Outs of Exemptions Phase-out of personal exemptions Started in % for each $2,500 or part thereof adjusted gross income in excess of new thresholds: Phase-out Range for Personal Exemptions for 2016 Filing Status Phase-out Begins Phase-out Ends Married Filing Jointly $311,300 $433,800 Single $259,400 $381,900 Thresholds are adjusted for inflation 9/17/ Limitation on Itemized Deductions Started in 2013 Calculated after any other limits on deductions. Total deductions are reduced by the smaller of: 80% of Schedule A deductions 3% of adjusted gross income in excess of new thresholds: Married Filing Jointly $309,900 $311,300 Single $258,250 $259,400 Thresholds are adjusted for inflation Medical, investment interest, casualty and gambling losses not reduced by limitation 9/17/ Tax Smart Legacy Planning Legacy Planning isn t Confined to Distributions After Death Most People are No Longer Subject to Estate Taxes (2016: $5,450,000) The most important goal of Legacy Planning don t leave a mess for your kids and grandkids. 9/17/

12 The four tax buckets TAXABLE CD s Mutual Funds in NQ Accounts Reinvested Dividends Pension Income Stock Dividends TAX-DEFERRED Traditional IRA 401(k), 403(b), 457(b) Non-Qualified Annuities Savings Bonds TAX-FREE Roth IRA Municipal Bonds Life Insurance Portion of Social Security Income INCOME AND ES TATE TA X-FREE Irrevocable Life Insurance Trusts (ILIT) 9/17/ Tax Considerations of Legacy Planning Do you want to Pay Taxes on Legacy Assets, have your heirs Pay the Taxes, or have nobody Pay the Taxes? No Legacy planning Roth Conversion Annuities Gifts to heirs Gifts to Charity Life Insurance 9/17/ Spend Down Non-Legacy Assets IRA s Non-Qualified Annuities 9/17/

13 Understand Asset Gifting If you give away an asset with an unrealized loss, nobody gets to use the loss against other income If an asset with an unrealized loss is inherited, nobody gets to use the loss against other income If an appreciated asset is inherited, you get a step-up in basis gifted assets do not get a step-up Be careful of Joint Ownership with Heirs 9/17/ Is Your Retirement Picture Accurate? Online Calculators, your 401k & other Pie Chart plans are simplified and don t consider: Temporary Expenses Extra Expenses Varying Inflation Rates Varying Tax Rates 9/17/ John s Top Four 1. Why are my Social Security benefits taxable? 2. Why am I subject to Alternative Minimum Tax on Form 6251? 3. Why am I subject to Net Investment Income Tax on Form 8960? 4. Why am I subject to the Additional Medicare Tax on Form 8959? 9/17/

14 Action Items Make sure you clients and prospects have a basic understanding of the tax issues in retirement Determine if their current strategy is Tax Smart Review Taxable Investment Accounts for potential Tax Loss Harvesting Make sure Withholding on Tax Deferred Accounts is accurate If you don t already have software to project taxes, I would encourage you to look at the options, or work with a tax advisor who can do this for you Use John as a resource 9/17/ America s Retirement Store and Presidential Brokerage, Inc., do not provide tax or legal advice. The information contained in this presentation is general in nature and is for educational purposes only. Please consult your tax advisor to determine what strategy may work with your situation. We would be happy to work alongside your CPA/tax professional to help you and your family navigate through these complex considerations. 9/17/ THANK YOU VERY MUCH FOR YOUR TIME ARRANGE TODAY FOR YOUR OWN DISCOVERY SESSION SM WE WILL COVER ALL THESE ISSUES AND MORE WITHOUT ANY OBLIGATION OR COST TALK WITH YOUR ADVISOR OR CALL TO SCHEDULE YOUR DISCOVERY SESSION SM 9/17/