After contributing through payroll and self-employment taxes for decades of work, many Social Security beneficiaries are astonished when they learn that their benefits may be subject to federal and sometimes state income taxes. When benefits were first paid in 1940, they were explicitly and completely excluded from federal taxable income. However, in the 1970s and in the midst of Social Security’s first funding crisis, it became necessary to contemplate some changes. The National Commission on Social Security, chaired by Alan Greenspan, recommended taxing 50% of Social Security benefits. Congress did not like the thought of taxing low-income retirees. In 1983, Congress passed and President Reagan signed into law legislation which would potentially require up to 50% of Social Security benefits to be included in taxable income. As you will see in this article, some low-income taxpayers can exclude some, and in certain cases, all their benefits from taxable income.
The 2018 Tax Cuts and Jobs Act added something new to the tax code called Opportunity Zones. An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury through their authority to the IRS. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
Opportunity Zones are being used to spur economic development and job creation in distressed communities and in return they are providing tax benefits to investors. A Qualified Opportunity Fund (QOF) is formed and used for investing in eligible property that is located in a Qualified Opportunity Zone. A partnership or corporation can be used as an entity type.
Investors can defer tax on any prior gains invested in a QOF until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. To defer/exclude prior capital gain, within 180 days you have to invest the gain amount in a QOF.
- If the QOF investment is held for longer than 5 years, 10% of the deferred gain is excluded and goes away forever.
- If the QOF investment is held for more than 7 years, the 10% becomes 15% and now that 15% deferred gain is excluded and goes away forever.
- If the QOF investment is held for 10 years, any deferred gain recognized on the sale of your interest in the QOF is excluded forever, as long as the sale takes place before the end of 2047.
A list of Opportunity zones can be found here.
If you would like to discuss this topic further, please feel free to call us.
This article was contributed by Michael J. Reynolds, CPA, CEPA
Photo by Pierrick Barfety on Unsplash
There are many types of IRAs. This article will discuss Traditional IRAs, Roth IRAs and non-deductible IRAs, available to individuals (or a spouse of an individual) with earned income or collecting alimony.
The first criterion to consider is your age. If you are over 70 ½ at the end of the tax year, the only IRA to which you can contribute is a Roth IRA.
If you or your spouse is covered by an employer retirement plan, there are limits to the amount that can be contributed to a traditional (deductible) IRA. If you are the covered employee, your ability to contribute to a traditional IRA begins to phase out for 2016 at $98,000 of modified adjusted gross income (AGI) and is completely phased out at $118,000 if married filing jointly. Filing separately won’t help unless your AGI is less than $10,000. However, the phase out range is $61,000-$71,000 if you’re filing single or head of household. If your spouse is covered by a retirement plan it will affect your ability to fund a retirement plan beginning at AGI of $184,000 with a complete phase out at $194,000. Filing separately again is not a viable strategy since the ability to make a contribution phases out completely at $10,000.
Retirement Planning is by far one of the most important areas of financial planning and one that we allocate a good portion of our time and resources to address. We break retirement planning up into two distinct phases:
1) Accumulation Phase
2) Distribution Phase
The accumulation phase is simply the phase in which you are still working and gathering assets to fund the distribution phase. Clients in the distribution phase are usually either retired or semi-retired, and are supplementing their pre-retirement income with distributions from their portfolios. This article is Part 1 of a two-part series on retirement planning and will address the Accumulation Phase of retirement planning.
You could be eligible for some tax breaks in the form of a deduction or, better yet, a tax credit. Unfortunately, most of these tax breaks phase out based on income so be aware that filing status and income can limit the tax benefits.
When it comes to constructing a portfolio it is generally not a matter of stocks or bonds, it is a matter of both. As a matter of fact, there are two other asset classes, cash and alternative investments that also should also be considered for a well-diversified portfolio. The percentage of each asset type, a.k.a. asset allocation, is the prime determinant of your portfolio’s return and volatility. Asset allocation is based upon the investor’s risk tolerance, which is a function of many factors including age, stability of income, family responsibilities, other resources, personal plans, and propensity for risk. There are also a number of objectives to consider such as the desire for capital preservation, current income, growth, risk aversion, and tax issues. A financial planner can assist you in determining your risk tolerance and developing an appropriate comprehensive plan.
Here are the final five axioms for personal finance.
The first five appear here, and can be summarized as:
- Spend less than you make
- Planning precedes every activity
- Systematically monitor your progress
- Save early and as much as possible
- Diversify, diversify, diversify
Reading or remembering them isn’t required to grasp the ones that follow.
There are many core principles that each of us regularly follow throughout our lives. These principles help us navigate through the many decisions we make daily.
I have 10 favorite axioms that I follow — and share with my college classes and clients — to make personal financial life more satisfying and effective. Sometimes, many years after the class or meeting, former students and business acquaintances reflect upon the axiom and remark how it positively influenced their lives.
Here are the first five: