MANAGING YOUR TAXES WITH SAFE INVESTMENTS Are you preparing and planning your taxes for optimal performance?
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FOREWORD Thank you for your time and interest. This booklet was created as an educational guide to bring you greater clarity and understanding of the financial decisions you make. If you need more information on a subject discussed, we welcome your email and will attempt to get you the answers you need. Please be mindful as you read this; everyone’s financial situation is different. So any product or solution must match your specific financial picture. We strongly recommend you consult with a highly-rated professional about every financial decision you make. Because, just as not all products are created equal, neither are all financial professionals, and the difference in knowledge and advice can be substantial from one advisor to another. Working with a highly knowledgeable, independent, well-rated professional can make all the difference when it comes to the results you achieve. If you are ready to explore your retirement options and want some help cutting through the clutter and jargon, visit www.CertifiedSafeMoney.com for unbiased information and to connect with professionals who can answer all of your most pressing questions. If you ever have feedback related to this booklet or concerns about your retirement income and financial security, please email us at [email protected]. We’re happy to help. CSM202012ManagingTaxes 3 [email protected] www.certifiedsafemoney.com
Taxes follow us throughout our entire lives – and then some! Most people pay tax on goods and services they buy, income tax on wages, and capital gains tax on investment earnings, even safe money investments like CDs, annuities, or treasuries. All told, taxes can take a significant portion of your money out of your pocket. So, managing taxes is essential to ensure you have more income from safer investments and are able to transfer your assets safely and efficiently to your loved ones in the future. HOW TO MANAGE TAXES AND KEEP MORE OF YOUR MONEY FOR YOURSELF The first step in managing taxes is to obtain a good understanding of how the U.S. tax system works. Becoming familiar with the basics can allow you to more easily spot the safest, most beneficial opportunities for tax deductions and tax credits, as well as deferring when various taxes are due. Regardless of whether you are a full-time employee for a company, a business owner, or a retiree, it is likely that you receive some form of taxable income – and many people receive income from several different sources. But what you decide to do with your money can make a world of difference when it comes to taxation, especially when you plan ahead. TAX PREPARATION VS. TAX PLANNING While you (or someone you hire, such as safe money experts or accountants) may prepare your income tax return each year, there is a big difference between tax preparation and tax planning. For instance, tax preparation is the act of filing your income tax returns. In this case, the primary goal is typically to make sure that your tax reporting complies with both federal and state laws. In many ways, tax preparation is a safe money investment strategy. On the other hand, tax planning is taking a more proactive step that can help you to optimize your tax situation in the future. The right type of tax planning could allow you to use safe money investments, like Indexed Universal Life Insurance, to save a significant amount in taxation, both in the near and distant future. CSM202012ManagingTaxes 4 [email protected] www.certifiedsafemoney.com
HOW MUCH TAX WILL YOU OWE? One of the most significant tax liabilities people have is income tax. This is based on how much you earn each year and how you file your annual tax return (such as single, married, or head of household). Various tax brackets coincide with the total amount of money that you earn. U.S. Tax Brackets and Rates (2021) Source: taxfoundation.org Rate Single Individuals, Taxable Income Over: Married Filing Jointly, Taxable Income Over: Head of Household, Taxable Income Over: 10% $0 $0 $0 12% $9,950 $19,900 $14,200 22% $40,525 $81,050 $54,200 24% $86,375 $172,751 $86,350 32% $164,926 $329,851 $164,901 35% $209,426 $418,851 $209,401 37% $523,600 $628,300 $523,600 Knowing how your income tax is determined is vital because the total amount of your wages will not typically incur one single rate across the board. If, for instance, you are single and you earned $12,000 in 2021, the first $9,950 would be subject to 10% tax, and the remaining $2,050 would be taxed at 12%. So, in total, your income tax for the year 2021 would be calculated as follows: $9,950 X 10% = $995 TAX + $2,050 X 12% = $246 TAX TOTAL TAX DUE = $1,241 As your income increases, your income tax rate can go up as well. And the more you give to Uncle Sam, the less you have for yourself to spend, save, or invest in safe money options like CDs, fixed annuities, or treasuries. Therefore it is reasonable to say the higher the tax rate you have to pay, the more risk you have to accept to generate the same net, after-tax income. While many people may feel that a top federal income tax rate of 37% is high, the truth is that this is low in comparison to the maximum rates over the last 100-plus years in the United States. There have been many years in the past century where the top U.S. federal income tax rate was more than 70%, 80%, or even 90%. CSM202012ManagingTaxes 5 [email protected] www.certifiedsafemoney.com
The Top U.S. Federal Income Tax Rates 1913 – 2020 Because you can be taxed so heavily on your income and investment earnings, you must put managing taxes at the top of your financial “To Do” list. Otherwise, you could end up with much less spendable cash flow – both before and after retirement. Year Rate Year Rate 2018-2020 37 1950 84.36 2013-2017 39.6 1948-1949 82.13 2003-2012 35 1946-1947 86.45 2002 38.6 1944-1945 94 2001 39.1 1942-1943 88 1993-2000 39.6 1941 81 1991-1992 31 1940 81.1 1988-1990 28 1936-1939 79 1987 38.5 1932-1935 63 1982-1986 50 1930-1931 25 1981 69.125 1929 24 1971-1980 70 1925-1928 25 1970 71.75 1924 46 1969 77 1923 43.5 1968 75.25 1922 58 1965-1967 70 1919-1921 73 1964 77 1918 77 1954-1963 91 1917 67 1952-1953 92 1916 15 1951 91 1913-1915 7 Source: Tax Policy Center (https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates) CSM202012ManagingTaxes 6 [email protected] www.certifiedsafemoney.com
TAKING ADVANTAGE OF TAX BREAKS One way you can pay less in income tax is to earn less. But, rather than taking an actual pay cut, there are better ways to accomplish this – at least in the eyes of the IRS. For example, by participating in an employersponsored retirement savings plan, such as a 401(k), you can defer your contributions pre-tax. This means that your contributions into the plan will go in before any of that income has been taxed – which essentially lowers the amount of taxable income you earn for that year. As an example, if Joe (who files his annual tax return as married filing jointly) makes $100,000 in 2021, and he contributes $19,500 to his company’s 401(k) plan, then his taxable income would be lowered to $80,500. (In 2021, the maximum annual contribution to a 401(k) plan is $19,500 for those age 49 and younger and $26,000 for those age 50 and over.) Depending on his contribution, Joe could also receive a matching contribution into his retirement plan, up to a specific limit, from his employer. This “free money” will go to work for him in the account, earning a taxadvantaged return. It is also possible that Joe could open a personal IRA account (Individual Retirement Account). With a traditional IRA, he could contribute $6,000 (and an additional $1,000 if he is age 50 or over). The money in a traditional IRA or employersponsored retirement plan grows taxdeferred. This means there is no tax due on the gain until the time of withdrawal. This allows contributions the opportunity to grow exponentially because you’re getting a return on the contributions and the previous gains and on the funds that would otherwise have been taxed. Another option to consider is the after-tax performance of Indexed Universal Life insurance versus 401(k) contributions because Indexed Universal Life insurance can be used to increase your retirement income and provide a life insurance safety net for your loved ones. IF YOU’RE WONDERING HOW TO MANAGE YOUR TAXES WHILE CREATING MORE SAFE MONEY INCOME IN RETIREMENT, SPEAK WITH A SAFE MONEY EXPERT AT www.certifiedsafemoney.com. CSM202012ManagingTaxes 7 [email protected] www.certifiedsafemoney.com
If your tax filing status is: And your modified adjusted gross income is: You can take: Single or head of household • $66,000 or less • More than $66,000 but less than $76,000 • $76,000 or more • A full deduction up to the amount of your contribution limit • A partial deduction • No deduction Married filing jointly or qualifying widow(er) • $105,000 or less • More than $105,000 but less than $125,000 • $125,000 or more • A full deduction up to the amount of your contribution limit • A partial deduction • No deduction Married filing separately • Less than $10,000 • $10,000 or more • A partial deduction • No deduction 2021 IRA Contribution and Deduction Limits (For investors who are covered by a retirement plan at work) Source: https://www.irs.gov A Roth IRA could also help you manage your taxes, as could Indexed Universal Life insurance or whole life insurance policies. While Traditional IRA’s provide for current tax benefits, a Roth IRA and specific life insurance policies offer tax advantages in the future. Roth IRA contributions are made after-tax, allowing the account to grow tax-free. Withdrawals from a Roth IRA, as a result, can avoid income taxes, similar to withdrawals from Indexed Universal Life insurance policies. There are other ways that you may be able to obtain current tax deductions, too. For example, many income tax filers take the standard deduction – which was nearly doubled by the Tax Cuts and Jobs Act (i.e., the JOBS Act) passed in late 2017. Even if you don’t have any other qualifying tax deductions or tax credits, the IRS allows you to take the standard deduction – which essentially reduces the amount of income you have to pay taxes on. In 2021, the standard deduction is $12,550 for single tax filers and $25,100 for married and filing jointly. There are some cases where it may be more beneficial for a taxpayer to itemize their deductions. (Keep in mind that if you itemize your deductions, you cannot take the standard deduction, too.) Itemized deductions are expenses that the IRS allows to decrease your taxable income. Some common itemized deductions include the following: - Home mortgage interest - Medical expenses (up to a set limit) - Property, state, and local income taxes - Investment interest expense - Charitable donations If you itemize deductions, you should maintain receipts or other proof of these expenses in case of an IRS audit. CSM202012ManagingTaxes 8 [email protected] www.certifiedsafemoney.com
Alternative Minimum Tax Exemptions Source: (https://www.irs.gov/) With that in mind, itemized deductions could provide you with a way to reduce the amount of tax you have to pay. Tax Filing Status Exemption Amount (in 2021) Single Individuals $73,600 Married Filing Jointly $114,600 Some taxpayers may be subject to the Alternative Minimum Tax or AMT. This tax was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This “parallel” tax system requires high-income earners to essentially calculate their tax bill twice – first, under the ordinary income tax system, and then again under the Alternative Minimum Tax. The higher figure is what is owed. The Alternative Minimum Tax uses an “alternate” definition of taxable income referred to as the Alternative Minimum Taxable Income or AMTI. To prevent lower- and middle-income earners from being subject to the Alternative Minimum Tax, taxpayers may exempt a certain amount of their income from the AMTI. (However, this exemption phases out for higher-income taxpayers.) The AMT is levied at two rates – 26% and 28%. The Alternative Minimum Tax exemption amount (in 2021) is $73,600 for single individuals and $114,600 for married couples who file their tax returns jointly. CSM202012ManagingTaxes 9 [email protected] www.certifiedsafemoney.com
Long-Term Capital Gains Rate Single Filers Taxable Income Married Filing Jointly Head of Household Married Filing Separately 0% $0 - $40,400 $0 - $80,800 $0 - $54,100 $0 - $40,400 15% $40,401 - $445,850 $80,801 - $501,600 $54,101 - $473,750 $40,401 - $250,800 20% Over $445,850 Over $501,600 Over $473,750 Over $250,800 Long-Term Capital Gains Tax Brackets TAX IMPLICATIONS OF YOUR INVESTMENTS Another way of managing taxes is to consider how and where you invest and whether you should choose riskier options like stocks or, by contrast, safe money retirement solutions. For example, in addition to (or instead of, if you do not have access to) a traditional 401(k) or other employersponsored savings plan, the length of time that you hold an investment may also either reduce or increase the amount of tax you owe. Some safe money investments also defer taxes on growth, while others offer the owner the ability to avoid taxes altogether. For example, the U.S. tax code treats longterm capital gains and qualified dividends more favorably than ordinary income (i.e., wages or interest). In this case, dividends on stocks held for at least 61 days within a set 121-day period are considered “qualified” for tax purposes. Long-term capital gains are profits you earn on investments you have held for longer than 12 months. The longterm capital gains rates differ from the tax due to short-term capital gains (those held for less than 12 months). While non-qualified dividends and short-term capital gains are taxed as ordinary income, long-term capital gains rates (in 2021) are either 0%, 15%, or 20%, depending on your taxable income and tax filing status. Source: https://taxfoundation.org/ Higher-income earners could be subject to a 3.8% net investment income tax on capital gains, as well as on dividends, interest, royalties, rents received, and passive income if their modified adjusted gross income exceeds $200,000 (for single tax filers) or $250,000 (for filers who are married and filing jointly). CSM202012ManagingTaxes 10 [email protected] www.certifiedsafemoney.com
OTHER AREAS FOR MANAGING TAXES In addition to your income and investments, there are some other areas where managing taxes can be a primary factor in your overall financial planning strategy’s success – including your marital status. For instance, many middle-income couples may receive a tax benefit from just simply being married. An example here is when one spouse earns significantly less than the other or does not have a job. In this case, the couple’s combined income may fall into a lower tax bracket (versus the primary income earner filing separately) – while also taking advantage of deductions and exemptions for both spouses. Those who have children could also be eligible for some tax management strategies. The same is true if a taxpayer is caring for a special needs individual or other loved one who is considered a dependent. Some of the deductions you may be eligible for could include: - Child tax credit - Credit for other dependents - Adoption tax credit - American opportunity credit - Lifetime learning credit In some cases, adjusting tax withholding can be advantageous. For instance, even though it can be nice to receive a tax refund, it can sometimes make sense to reduce the amount of tax deduction each pay period and, in turn, receive more net take-home pay. Although this means you may have to pay taxes the following year at tax time, doing so could also allow you the opportunity to avoid putting your everyday living expenses on credit or enable you to contribute more towards your savings and investments. CSM202012ManagingTaxes 11 [email protected] www.certifiedsafemoney.com
WILL YOU BE AUDITED? While there are many ways to reduce your taxes legally, it is possible to be audited by the IRS. This occurs when the IRS calls for an official inspection of your (or your business’s) accounts to determine whether or not your income and deductions are accurate. Typically, your tax return is chosen for an audit when something you entered on the return is out of the ordinary. This could include taking higher-than-average deductions or making large charitable contributions. Statistically, your likelihood of facing an audit can also go up if you are a high-income earner – particularly in the range of $200,000 or more. It is also essential to make sure that all of the information on your tax return is correct. According to the IRS, some of the most common mistakes that they find on peoples’ tax returns include: - Incorrect or missing Social Security number - Misspelled last name - Incorrect filing status - Mathematical errors - Incorrect bank account information (for direct deposit of one’s refund) - No signature or date included on the tax return (for married taxpayers who file a joint return, both spouses are required to sign) COORDINATING YOUR TAX AND FINANCIAL PLANNING The way you manage your taxes can significantly impact the amount of money you ultimately have available to spend or save and invest. So, discussing your overall financial planning objectives with both a tax and financial advisor can be extremely beneficial. FIND THE BEST-RATED FINANCIAL PLANNING COMPANIES IN YOUR AREA. VISIT www.certifiedsafemoney.com All investments, retirement, and estate planning strategies (collectively “Strategies”) have inherent risks. Content is not personalized financial advice and should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and may change in response to market conditions. Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness. There can be no assurance that you will achieve your goals if you implement any of the Strategies discussed. Past performance does not guarantee future results. Indexed universal life insurance may not be suitable for you depending upon your investment objectives, risk tolerance, financial situation, and liquidity needs. Accessing policy cash value through loans and surrenders may lead to a permanent reduction of the policy’s cash value and death benefit, which may lead to a potential lapse of the policy. Insurance product guarantees are subject to the claims-paying ability of the issuing company. 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