Hear Emily Petty and Matt Bellomo discuss tax planning issues for those who are working. Our checklist highlights things you may not have considered that can have a tax impact, planning opportunities, tax saving tips, and more. From family and filing issues to state-specific issues, our quick video has it covered.
Note: HSA contributions may be made up until the tax return due date (generally April 15th) for the previous year.
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This webinar is provided by Windward Private Wealth Management Inc. (Windward) for informational purposes. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this webinar is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information in this webinar is derived from sources that Windward believes to be reliable; however, Windward does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Windward is an SEC registered investment adviser. Windward may provide services in those states which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’s registration status and business operations , please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.
Transcript
0:04
Hello I’m Emily Petty.
0:06
I’m a Wealth Manager at Windward Private Wealth Management and I’m here with Matt Bellomo another Wealth Manager at Windward.
0:14
Hello, everyone.
0:16
We’re here to talk to you today about some issues that you should consider when you’re reviewing your 2020 tax return.
0:25
Today’s conversation we’re trying to keep pretty high level.
0:29
If you have any specific questions, you can shoot us an e-mail at info@windwardfp.com.
0:37
And, um, yeah, Matt, you’re gonna start with the first topic. Family and filing issues! So take it away.
Yup, great, thank you.
0:50
Again, as Emily said, we’re going to try to keep this at a very high level today and we’ve broken it up into four different, big picture issues.
0:57
So, we’re going to start with family and filing issues.
1:02
And the first is, in 2017, the standard deduction was raised for most, for everybody.
1:12
And as you can see here, they’re pretty generous $12,400 for single or almost $25,000 if you are married filing joint.
1:21
So, most people just take the standard deduction and just one item of note in that regard is that some individuals are more likely to take the itemized deductions. So if you have questions about that, please reach out to us.
1:38
The next topic is, if there’s been a change in marital status. A divorce, a death, what have you.
1:51
There are different things you can do for filing.
1:53
So you could be qualified widow or widower or even head of household. So those things are important.
2:02
And again, reach out to us and we can help you navigate that.
2:08
Next, we’ve talked about is, what if you have dependents?
2:14
And there are two specific things we want to mention here.
2:17
one is, if you have children who are under the age of 17, you will qualify (generally speaking), for the child tax credit.
2:27
And that’s $2000 per child under current law.
2:31
And one thing to note here, and I’m going through this right now with a child who just turned 16 is, 2020 will be the last year that I qualify for a full credit for him.
2:44
And therefore, I’ve got to make sure that I consider that when I look at my 2021 tax liability.
2:51
Also, for those of you who pay for daycare, there are, there’s a credit available to you as well. And that is for children 13 years and under.
3:05
Is there an income limit to that one?
3:07
I wasn’t sure about that.
3:10
Can you phase out of that?
There is a limit.
3:13
To the point where it computes the percentage that’s deductible, for most people it’s 20%, OK. So again, we don’t want to get into the weeds here, but it’s a really good question.
3:26
So it is available to everyone, I think, is where you’re going with that.
3:30
Yeah, um, another thing, I’ve got two kids approaching college so college is on the mind as, as well.
3:38
And there are two different credits for college or secondary education.
3:44
The first one, and the most typical, is the American Opportunity Tax Credit.
3:50
And that’s a credit up to $2500 per child per year for the first four years of undergraduate education.
3:59
And then after that, or even before that, perhaps, there’s a Lifetime Learning Credit, both are subject to adjusted gross income limits.
4:09
So we can help you navigate that as well.
4:14
The last item here is after you get your 2020 tax return back, take a look at the balance due or the refund and see if it passes the smell test. Is it reasonable for you?
4:24
Some folks say, “Hey, I want to be plus or minus a thousand bucks”, I can live with that.
4:28
And if it gets outside that thousand dollar amount, maybe you want to consider changing your either your estimated tax payments or your withholdings.
4:39
And that’s one of those things that everybody has a little different view on.
4:44
But generally speaking, folks want to be at or near zero-1,000 bucks, something like that.
4:49
So, with that, we will turn it over to Emily to talk about investment income issues. Unless you have anything to add here.
4:57
I don’t, I don’t. In regard to investment income issues, some of these things are just things that can kinda, be surprising that you didn’t really think about, that can come up to bite you.
5:13
You want to make sure any interest-bearing accounts or any investment accounts that are taxable, that have investments in them, that are generating dividends,
5:25
you want to make sure that gets recorded on your tax return on Schedule B and, you know, it’s good to know which accounts you have that are generating interest, even though we’re in a really low interest rate environment.
5:40
So that’s not going to be any big numbers these days, but also knowing if you have ordinary or qualified dividends, because there are different tax treatments, if the dividends are qualified.
5:55
And these days, a lot of people get electronic communication with their financial institutions.
6:01
So these 1099s might only be online, so you want to make sure that you’re logging on and checking for that before you file your taxes.
6:12
Another thing is if your earned income, so when we say earned income, we mean wages or self employment income, is above 200 grand for singles and 250 grand for married filing jointly.
6:27
If you are a high earner, you’re going to be subject to an additional Medicare tax of 0.9%, and that gets calculated on your tax return, unfortunately.
6:41
So that can, I’ve seen that come up to bite people a couple of times and they forgot about that.
6:47
Um, so that’s one thing to consider.
6:50
You also want to consider if you’re in that high income tax bracket where your modified adjusted gross income is above 200K for singles and 250K for those married filing jointly.
7:06
If you have pretty significant net investment income, you might also be subject to Net Investment Income Tax of 3.8% that they tack on there.
7:18
So, you just want to make sure to try to, you know, work with a financial advisor and your CPA to make sure that you can consider ways to reduce that.
7:32
The other thing when it comes to things that you may forget about is, were there any capital gains or losses reported on your 1040 line 6?
7:45
So, you know capital gains are always great. You make money in your account, and you pay tax on it. But capital losses can also be very helpful income tax wise.
7:55
So you want to make sure that any capital gain distributions are reported. They come reported on your 1099, and, um, you can have short term or long term gains and losses that offset each other, and you also want to make sure that any losses from prior years are carried forward to the current year.
8:23
So, a lot there. I don’t know if you have anything to add to that, Matt. I know at, at Windward, you know, we try to do tax loss harvesting for our clients to try to generate capital losses in their portfolio.
8:36
That’s a strategy that we implement, but, sometimes, that’s hard to avoid.
8:42
If you are, you know, invested in mutual funds, you’re kind of a sitting duck, and a big gain comes through, you don’t really have an option, but to pay tax on that.
Right.
8:53
That’s why we use ETFs largely to mitigate that.
8:56
Just two things to keep in mind there: one, if you do had significant cash position, you can investigate some of these online banks.
9:06
Better interest rate.
9:09
They can be a pain to set up. So, you don’t want to be flipping back and forth. But, just something to keep in mind.
9:13
And I think the other thing to keep in mind, too, is, as it relates specifically to the net investment income tax, is, there are some things you can do prospectively to mitigate that. So, like Emily said, make sure you’re working with your CPA and your financial advisor to be aware of that because that 4% can be a very unpleasant surprise come tax time.
9:38
I mean, it’s like paying tax to another state. It’s that high. Effectively, yeah. That’s exactly right, or maybe even if you have a one-time event, a big capital gain, for instance, you might get hit with it that year and then it won’t happen again.
9:54
So, you don’t want to overpay the following year.
9:56
So good points, things to keep in mind.
10:01
With that, I want to talk a little bit about qualified plan issues. This is a little bit of a hodgepodge, but it’s really important to consider these things. The first one is: Can you make just a contribution to an IRA?
10:17
And you can make three different types of IRA contributions.
10:21
They can be the traditional deductible IRA contribution, a non-deductible contribution to a traditional IRA, or you can make a contribution to a Roth IRA. And those limits are $6,000 to either of the three types.
10:41
Or if you’re 50 and older, I’m not there yet, but I’m fast approaching 50, I can add an additional thousand dollars to an account. And that’s for the spouse, generally, and for each spouse, if you’re married.
10:57
So, things to keep in mind.
11:00
The next one, I hit a little bit a bit about this on the Roth IRA.
11:04
We love Roth IRAs at Windward because the beauty of it is that you can put it in, it’s after tax, so you don’t get a deduction, but when it comes out, you’re going to not pay tax when it comes out.
11:19
And so, traditionally, if your income is below a certain level, you can contribute directly to a Roth IRA.
11:28
If your income and that number is about $200,000 for an individual, I’m sorry, $200,000 for married filing jointly, $100,000 for an individual.
11:44
If you are above those limits, you might be able to do what we call a backdoor Roth, which is, without getting into the weeds too much, you make a non-deductible traditional IRA contribution.
11:57
And then 30 days later, you convert it to a Roth IRA.
12:04
So just a little paperwork there but something to keep in mind and really they’re very powerful tools to do over a span of couple of years and all of a sudden, there’s some significant capital in those accounts.
12:21
The next item is an HSA, which is a health savings account.
12:25
And those are accounts that are really neat in that they are triple exempt. That means you don’t pay federal income tax, state income tax, and you don’t pay any payroll taxes on them as well.
12:37
And those are accounts. Exactly.
12:42
But those are accounts that are pre-tax and you can use them for medical expenses as you go through the year to the extent they’re not used they carry forward to the following year.
12:56
And for those folks who make enough money and have enough capital, you can actually pay for your medical expenses out of pocket.
13:04
That is, you don’t use the HSA account and it really functions as an additional IRA account.
13:10
So, again, that’s all I’m going to say about the HSA, but if you have questions about that, reach out to us because that’s another one of those tools that can be really powerful if you understand it, and what it means to your overall financial plan.
13:27
The last thing I’m going to talk about is conversion, from traditional IRA assets to Roth IRA assets. Many years ago, they got rid of the limit that you can do this with, regardless of your income, and this is a powerful tool in that you can convert from a Traditional IRA to a Roth IRA.
13:47
You’ve got to pay the tax at the time of the distribution, and you’ve got to have enough capital, enough money to pay the tax with assets that are exclusive.
14:00
So, in other words, very briefly, if you convert $10,000 and the tax bill is $3,000, you’ve got to have that $3,000 outside of the IRA so that you convert the entire 10 thousand, in my example.
14:16
We saw a lot of this in March and April of 2020, and the market came back, and so that was another, that was a perfect time, now, obviously hindsight’s 2020.
14:28
But those are the kinds of things that, when those opportunities present themselves, we’ve got to be ready to have the discussion, determine whether it makes sense and if it is, then we go ahead and do the conversion.
14:41
So, those are little things you want to just think about in the qualified plan area and Emily, you got anything to add there?
14:50
You can make contributions to traditional and Roth IRAs up until the tax deadline, is HSA’s the same way?
15:02
I don’t think you do have that with an HSA.
15:05
OK, 12/31. But we can certainly check.
15:09
Yeah.
15:10
Um, some other issues that may come up when you’re reviewing your tax return.
15:19
If you’re an employee of a company and your wages are reported on Form W2, you can look on there and you can see if your employer or yourself is contributing to a health savings account or a flexible savings account. Those contributions are typically reported on your W2 if you’re doing that through payroll.
15:44
So you want to make sure that that is accurately reported on there, so that it reduces your income accordingly when you file your taxes. And the same thing with retirement plan contributions.
15:59
You want to make sure that that’s reported there, plus you can see what you put in for the year.
16:04
And I don’t know if employer matching is always a reported on your W2.
Matt, do you know?
Not on your W2.
16:12
OK, I didn’t think so. But wit will be on the statement, if you look at like your year end statement, it would show how much employer contributed and also what you’re vested in.
What your vested and unvested is.
16:22
OK, good, so if you’re looking for employer matching amounts, W2 is not where you’re going to find that, it’s the investment statement for that account. So that, that’s important to review.
16:38
Also, if you have stock options and equity compensation within your company, your employee plan benefits, you want to make sure that you review your W2 and your Schedule D to understand how these benefits are affecting you tax wise.
17:00
There’s a lot of complexities and different types of stock option plans for employees, and so you just want to make sure as you’re going through the year and exercising stocks and whatnot that you understand the tax ramifications.
17:19
As far as state specific issues that can be considered, there are unique tax credits – lots of different state specific tax credits that you want to make sure you’re taking full advantage of those.
17:35
And also, some states allow deductions if you add to a 529 plan, so you want to check your state rules or speak with your CPA about that to make sure on your state tax return that you’re getting benefit for those contributions.
17:54
So do you have anything else in regards to income and other issues? Just a few things. One of them is, if you are employed and W2d one thing to keep in mind is in the fall, when you make your elections for different benefits, be thoughtful about that because a lot of that benefit will manifest itself in additional tax savings.
18:22
So if you have questions about that, we’ve got a previous webinar that’s on our website, you can investigate.
18:27
As well as we help people navigate that each fall. So reach out to us if you have questions there.
18:34
And I think the other thing I just wanted to make a quick mention of as it relates to equity compensation is stock options, restricted stock units, things like that.
18:45
They’re all very different animals and so lean on us to help you educate to help us educate you as to what these mean. So just at a very high level RSUs, they’re going to vest on the calendar.
19:01
So you just got to know, they’re gonna vest and we’ve got to account for them accordingly.
19:05
You control when you take off stock options.
19:10
So, that’s just one of those things that we can really be a good educational resource to you, so you understand the plan.
19:18
And can make the best decisions for you and your family.
19:22
So, just keep those things in mind.
19:27
So, I hope that this quick video was helpful today as far as trying to mitigate some tax surprises and just making sure you’re dotting your I’s and crossing your T’s when you’re going through and reviewing your tax returns.
19:45
If you have any specific questions, please feel free to reach out to us at info@windwardfp.com and thank you very much for your time and attention today.
19:57
All right, have a good day.
19:59
Thank you.
This webinar is provided by Windward Private Wealth Management Inc. (Windward) for informational purposes. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this webinar is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information in this webinar is derived from sources that Windward believes to be reliable; however, Windward does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Windward is an SEC registered investment adviser. Windward may provide services in those states which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’s registration status and business operations , please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.