How is your tax prep going?
By the end of February, your financial institutions should have sent you all your relevant tax documents for 2017, like earning statements on your investment accounts, interest earned on savings, etc. If you’re missing anything important, you might want to get in touch with those institutions and make sure the info you need is on its way.
This tax season is a bit unique because many people are wondering how the laws passed at the end of last year are going to affect their tax picture and their long-term financial planning. Remember: as we discussed in a previous podcast, the vast majority of folks aren’t going to be affected by the new tax laws until filing their taxes in 2019 for 2018.
But on today’s show, we’re going tackle some other tax questions from listeners and Keen Wealth clients to help you get ready for this April.
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Insights on Three Important Tax Questions
1. “My father recently passed away. I inherited a $200,000 life insurance policy, an IRA worth $37,000 and $300,000 in after-tax investments in stocks and mutual funds. Is all this taxable?"
Once or twice a month one of our clients at Keen Wealth has an inheritance issue like this. Beneficiaries often worry that they’re going to lose a big chunk of money, but usually that’s not the case.
The life insurance policy is distributed to beneficiaries tax free.
The IRA also transfers tax free. However, the beneficiary is responsible for all the deferred tax. This means that the beneficiary has to withdraw a minimum amount annually based on his or her life expectancy, not unlike how the original IRA holder would have had to take required minimum distributions at age 70 ½.
And thanks to the step up in cost basis rules, the basis on inherited investments resets when the original asset owner dies. That means if the beneficiary decides to sell those investments, he or she will not be taxed on the capital gains accrued since the original purchase.
Now, this is a very different conversation if the benefactor has an estate worth more than $11.2 million, in which case all of this inheritance would probably be taxable. But based solely on these numbers and the types of accounts, that inheritance is subject only to your ordinary tax rates on the distributions from the IRA.
2. "I had a zero-tax year last year due to a tax deduction. I realize now that I could have converted part of my IRA to a Roth IRA and had virtually a non-taxable event. Can I still do this now in 2018 for 2017?”
You can make Roth IRA contributions until you file your taxes for that year (2017 contributions are allowed until April 17, 2018). But conversions have to be made by December 31st of the applicable tax year.
These are the kinds of tax questions that can be very confusing and very complicated depending on your overall financial picture. It’s also an item that’s on the checklists we run through each year with clients at Keen Wealth. We never want to look back and ask, “What could we have done?” We want to be out in front of all issues that affect our clients’ taxes and investments.
If you work with an advisor or tax pro who doesn’t run through a checklist or similar process with you, ask them why they don’t. And if you don’t have a fiduciary advisor managing your money, ask yourself if what you save by not investing in advisor fees is worth what you might lose if you miss out on a wealth-building strategy or make a costly mistake.
3. “I understand that my 2017 taxes won’t be affected by the new tax laws, but should I start thinking ahead about any important changes?”
Sure! It’s never too early to plan ahead!
One big change next year will be a big increase in the standard deduction. It’s estimated that 95% of couples will take that $24,000 rather than itemize. Some financial experts are starting to run the numbers on how this would affect more complicated tax strategies, such as “bundling” charitable donations to get your deductibles above $24,000 every couple years, or setting up a donor advised fund. But for most folks, that standard deduction will be the way to go.
Another item that many of our clients are asking us about is 529 accounts. The new tax laws allow you to use 529s to cover K-12 education expenses up to $10,000, not just college expenses. Without the question of “Will my child even go to college?” hanging over this type of account, many people will find it makes sense to set up a 529 for their kids and benefit from the state income tax deduction.
We expect many new tax strategies to emerge in the coming months as financial professionals continue to sort through all the fineries of the new tax bill. But don’t let all the hype and noise around that bill distract you from the task at hand: your 2017 taxes. You have until mid-April to get your tax questions answered and your paperwork in order. Call up my team at Keen Wealth and find out how we can help.
Bill Keen on Listener Tax Questions ...
“We never want to look back and ask, 'What could we have done?' We want to be out in front of all issues that affect our clients’ taxes and investments, and answer all your tax questions."
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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