
Tax Secret: Spousal IRAs
Spousal IRA’s are one of the top tax tricks used by financial planners to help married couples reduce their tax bill. Here is how it works:
Spousal IRA’s are one of the top tax tricks used by financial planners to help married couples reduce their tax bill. Here is how it works:
In most cases you need “earned income” to be eligible to make a contribution to an Individual Retirement Account (“IRA”). The contribution limits for 2021 is the lesser of 100% of your AGI or $6,000 for individuals under the age of 50. If you are age 50 or older, you are eligible for the $1,000 catch-up making your limit $7,000.
There is an exception for “Spousal IRAs” and there are two cases where this strategy works very well.
Case 1: One spouse works and the other spouse does not. The employed spouse is currently maxing out their contributions to their employer sponsored retirement plan and they are looking for other ways to reduce their income tax liability.
If the AGI (adjusted gross income) for that couple is below $198,000 in 2021, the employed spouse can make a contribution to a Spousal Traditional IRA up to the $6,000/$7,000 limit even though their spouse had no “earned income”. It should also be noted that a contribution can be made to either a Traditional IRA or Roth IRA but the contributions to the Roth IRA do not reduce the tax liability because they are made with after tax dollars.
Case 2: One spouse is over the age of 70 ½ and still working (part time or full time) while the other spouse is retired. IRA rules state that once you are age 70½ or older you can no longer make contributions to a traditional IRA. However, if you are age 70½ or older BUT your spouse is under the age of 70½, you still can make a pre-tax contribution to a traditional IRA for your spouse.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Changes to 2016 Tax Filing Deadlines
In 2015, a bill was passed that changed tax filing deadlines for certain IRS forms that will impact a lot of filers. Not only is it important to know the changes so you can prepare and file your return timely but to understand why the changes were made.
In 2015, a bill was passed that changed tax filing deadlines for certain IRS forms that will impact a lot of filers. Not only is it important to know the changes so you can prepare and file your return timely but to understand why the changes were made.
Summary of Changes
IRS Form Business Type Previous Deadline New Deadline
1065 Partnership April 15 March 15
1120C Corporation March 15 April 15
NOTE: The dates in the chart above are for companies with years ending 12/31. If a company has a different fiscal year, Partnerships will now file by the 15th day of the third month following year end and C Corporations will now file by the 15th day of the fourth month following year end.
Why the Changes?
The most practical reason for the change to filing deadlines is that individuals with partnership interests will now have a better opportunity to file their individual returns (Form 1040) without extending. Form K-1 provides information related to the activity of a Partnership at the level of each individual partner. For example, if I own 50% of a Partnership, my K-1 would show 50% of the income (or loss) generated, certain deductions, and any other activity needed for me to file my Form 1040. The issue with the previous Partnership return deadline of April 15th is that it coincided with the individual deadline. This resulted in partners of the company not receiving their K-1’s with sufficient time to file their personal return by April 15th. With Partnerships now having a deadline of March 15th, this will give individuals a month to receive their K-1 and file their personal return without having to extend.
The deadline for Form 1120, which is filed by C Corporations, was also changed with this bill. Where the Form 1065 deadline was cut back by a month, the Form 1120 was extended a month. C Corporations, for tax purposes, are treated similar to individuals whereas they pay taxes directly when they file their return. Partnerships are not taxed directly, rather the income or loss is passed through to each individual partner who recognizes the tax ramifications on their personal return. For this reason, the deadline for Form 1120 being extended a month has little impact, if any, on individuals. The change gives C Corporations more time to file without having to extend the return.
S Corporations are another common business type. The deadlines for S Corporation returns (Form 1120S) were not changed with this bill. S Corporations are similar to Partnerships in that K-1’s are distributed to owners and the income or loss generated is passed through to the individuals return. That being said, Form 1120S already has a due date of March 15th, the same as the new Partnership deadline.
Extension Deadlines
IRS Form Business Type Deadline
1040 Individual October 15
1065 Partnership September 15
1120 C Corporation September 15
1120S S Corporation September 15
Extension deadlines were not immediately changed with the passing of the bill. Although Partnerships previously had the same filing deadline as individuals, the deadline with the filing of an extension was a month before. This was necessary because if a Partnership did not have to file an extended return until October 15th, individuals with partnership interests wouldn’t have a choice but to file delinquent.
The one change to the extension chart above set to take place in 2026 is the C Corporation extension being changed to October 15th.
Summary
Overall, the changes appear to have improved the filing calendar. This may be a big adjustment for Partnerships that are used to the April 15th deadline as they will have one less month to get organized and file. For this reason, you may see an increase in 2016 Partnership extensions.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
Traditional vs. Roth IRA’s: Differences, Pros, and Cons
Individual Retirement Accounts (IRA’s) are one of the most popular retirement vehicles available for savers and the purpose of this article is to give a general idea of how IRA’s work, explain the differences between Traditional and Roth IRA’s, and provide some pros and cons of each. In January 2015, The Investment Company Institute put out a research
Individual Retirement Accounts (IRA’s) are one of the most popular retirement vehicles available for savers and the purpose of this article is to give a general idea of how IRA’s work, explain the differences between Traditional and Roth IRA’s, and provide some pros and cons of each. In January 2015, The Investment Company Institute put out a research report with some interesting statistics regarding IRA’s which can be found at the following link, ICI Research Perspective. The article states, “In mid-2014, 41.5 million, or 33.7 percent of U.S. households owned at least one type of IRA”. At first I was slightly shocked and asked myself the following question: “If IRA’s are the most important investment vehicle and source of income for most retirees, how do only one third of U.S. households own one?” Then when I took a step back and considered how money gets deposited into these retirement vehicles this figure begins making more sense.
Yes, a lot of American’s will contribute to IRA’s throughout their lifetime whether it is to save for retirement throughout one’s lifetime or each year when the CPA gives you the tax bill and you ask “What can I do to pay less?” When thinking about IRA’s in this way, one third of American’s owning IRA’s is a scary figure and leads one to believe more than half the country is not saving for retirement. This is not necessarily the case. 401(k) plans and other employer sponsored defined contribution plans have become very popular over the last 20 years and rather than individuals opening their own personal IRA’s, they are saving for retirement through their employer sponsored plan.
Employees with access to these employer plans save throughout their working years and then, when they retire, the money in the company retirement account will be rolled into IRA’s. If the money is rolled directly from the company sponsored plan into an IRA, there is likely no tax or penalty as it is going from one retirement account to another. People roll the balance into IRA’s for a number of reasons. These reasons include the point that there is likely more flexibility with IRA’s regarding distributions compared to the company plan, more investment options available, and the retiree would like the money to be managed by an advisor. The IRA’s allow people to draw on their savings to pay for expenses throughout retirement in a way to supplement income that they are no longer receiving through a paycheck.
The process may seem simple but there are important strategies and decisions involved with IRA’s. One of those items is deciding whether a Traditional, Roth or both types of IRA’s are best for you. In this article we will breakdown Traditional and Roth IRA’s which should illustrate why deciding the appropriate vehicle to use can be a very important piece of retirement planning.
Why are they used?
Both Traditional and Roth IRA’s have multiple uses but the most common for each is retirement savings. People will save throughout their lifetime with the goal of having enough money to last in retirement. These savings are what people are referring to when they ask questions like “What is my number?” Savers will contribute to retirement accounts with the intent to earn money through investing. Tax benefits and potential growth is why people will use retirement accounts over regular savings accounts. Retirees have to cover expenses in retirement which are likely greater than the social security checks they receive. Money is pulled from retirement accounts to cover the expenses above what is covered by social security. People are living longer than they have in the past which means the answer to “What is my number?” is becoming larger since the money must last over a greater period.
How much can I contribute?
For both Traditional and Roth IRA’s, the limit in 2021 for individuals under 50 is the lesser of $6,000 or 100% of MAGI and those 50 or older is the lesser of $7,000 or 100% of MAGI. More limit information can be found on the IRS website Retirement Topics - IRA Contribution Limits
What are the important differences between Traditional and Roth?
Taxation
Traditional (Pre-Tax) IRA: Typically people are more familiar with Traditional IRA’s as they’ve been around longer and allow individuals to take income off the table and lower their tax bill while saving. Each year a person contributes to a Pre-Tax IRA, they deduct the contribution amount from the income they received in that tax year. The IRS allows this because they want to encourage people to save for retirement. Not only are people decreasing their tax bill in the year they make the contribution, the earnings of Pre-Tax IRA’s are not taxed until the money is withdrawn from the account. This allows the account to earn more as money is not being taken out for taxes during the accumulation phase. For example, if I have $100 in my account and the account earns 10% this year, I will have $10 of earnings. Since that money is not taxed, my account value will be $110. That $110 will increase more in the following year if the account grows another 10% compared to if taxes were taken out of the gain. When the money is used during retirement, the individual will be taxed on the amount distributed at ordinary income tax rates because the money was never taxed before. A person’s tax rate during retirement is likely to be lower than while they are working because total income for the year will most likely be less. If the account owner takes a distribution prior to 59 ½ (normal retirement age), there will be penalties assessed.
Roth (After-Tax) IRA: The Roth IRA was established by the Taxpayer Relief Act of 1997. Unlike the Traditional IRA, contributions to a Roth IRA are made with money that has already been subject to income tax. The money gets placed in these accounts with the intent of earning interest and then when the money is taken during retirement, there is no taxes due as long as the account has met certain requirements (i.e. has been established for at least 5 years). These accounts are very beneficial to people who are younger or will not need the money for a significant number of years because no tax is paid on all the earnings that the account generates. For example, if I contribute $100 to a Roth IRA and the account becomes $200 in 15 years, I will never pay taxes on the $100 gain the account generated. If the account owner takes a distribution prior to 59 ½ (normal retirement age), there will be penalties assessed on the earnings taken.
Eligibility
Traditional IRA: Due to the benefits the IRS allows with Traditional IRA’s, there are restrictions on who can contribute and receive the tax benefit for these accounts. Below is a chart that shows who is eligible to deduct contributions to a Traditional IRA:
There are also Required Minimum Distributions (RMD’s) associated with Pre-Tax dollars in IRA’s and therefore people cannot contribute to these accounts after the age of 70 ½. Once the account owner turns 70 ½, the IRS forces the individual to start taking distributions each year because the money has never been taxed and the government needs to start receiving revenue from the account. If RMD’s are not taken timely, there will be penalties assessed.
Roth IRA: As long as an individual has earned income, there are only income limitations on who can contribute to Roth IRA’s. The limitations for 2021 are as follows:
There are a number of strategies to get money into Roth IRA’s as a financial planning strategy. This method is explained in our article Backdoor Roth IRA Contribution Strategy.
Investment Strategies
Investment strategies are different for everyone as individuals have different risk tolerances, time horizons, and purposes for these accounts.
That being said, Roth IRA’s are often times invested more aggressively because they are likely the last investment someone touches during retirement or passes on to heirs. A longer time horizon allows one to be more aggressive if the circumstances permit. Accounts that are more aggressive will likely generate higher returns over longer periods. Remember, Roth accounts are meant to generate income that will never be taxed, so in most cases that account should be working for the saver as long as possible. If money is passed onto heirs, the Roth accounts are incredibly valuable as the individual who inherits the account can continue earning interest tax free.
Choosing the correct IRA is an important decision and is often times more complex than people think. Even if you are 30 years from retiring, it is important to consider the benefits of each and consult with a professional for advice.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
Do I Have To Pay Taxes On My Inheritance?
Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”? Believe it or not, money you receive from an inheritance is likely not taxable income to you.
Whenever people come into large sums of money, such as inheritance, the first question is “how much will I be taxed on this money”? Believe it or not, money you receive from an inheritance is likely not taxable income to you.
Of course there are some caveats to this. If the inherited money is from an estate, there is a chance the money received was already taxed at the estate level. The current federal estate exclusion is $5,430,000 (estate taxes and the exclusion amount varies for states). Therefore, if the estate was large enough, a portion of the inheritance may have been subject to estate tax which is 40% in most cases. That being said, whether the money was or was not taxed at the estate level, you as an individual do not have to pay income taxes on the money.
Although the inheritance itself is not taxable, you may end up paying taxes if there is appreciation after the money is inherited. The type of account and distribution will dictate how the income will be taxed.
Basis Of Inherited Property
Typically, the basis of inherited property is the fair market value of the property on the date of the decedent’s death or the fair market value of the property on the alternate valuation date if the estate uses the alternate valuation date for valuing assets. An estate will choose to value assets on an alternate date subsequent to the date of death if certain assets, such as stocks, have depreciated since the date of death and the estate would pay less tax using the alternate date.
What the fair market value basis means is that if you inherit stock that was originally purchased for $500 and at the date of death has appreciated to $10,000, you will have a “step-up” basis of $10,000. If you turn around and sell the stock for $11,000, you will have a $1,000 gain and if you sell the stock for $9,000, you will have a $1,000 loss.
Inheriting a personal residence also provides for a step-up in basis but the gain or loss may be treated differently. If no one lives in the inherited home after the date of death, it will be treated similar to the stock example above. If you move into the home after death, any subsequent sale at a loss will not be deductible as it will be treated as your personal asset but a gain would have to be recognized and possibly taxed. If you rent the property subsequent to inheritance, it could be treated as a trade or business which would be treated differently for tax purposes.
Inheriting An IRA or Retirement Plan Account
Please read our article “Inherited IRA’s: How Do They Work” for a more detailed explanation of the three different types of distribution options.
When you inherit a retirement account, and you are not the spouse of the decedent, in most cases you will only have one option, fully distribute the account balance 10 years following the year of the decedents death. The SECURE Act that was passed in December 2019 dramatically change the distribution options available to non-spouse beneficiaries. See the article below:
If you are the spouse of the of the decedent, you are able to treat the retirement account as if it was yours and not be forced to take one of the options above. You will have to pay taxes on distributions but you do not have to start withdrawing funds immediately unless there are required minimum distributions needed.
Note: If the inherited account was an after tax account (i.e. Roth), the inheritor must choose one of the options presented above but no tax will be paid on distributions.
Non-Qualified Annuities
Non-qualified annuities are an exception to the step-up in basis rule. The non-spousal inheritor of a non-qualified annuity will have to take either a lump sum or receive payments over a specified time period. If the inheritor chooses a lump sum, the portion that represents the gain (lump sum balance minus decedent’s contributions) will be taxed as ordinary income. If the inheritor chooses a series of payments, distributions will be treated as last in, first out. Last in, first out means that the appreciation will be distributed first and fully taxable until there is only basis left.
If the spouse inherits the annuity, they most likely have the option to treat the annuity contract as if they were the original owner.
This article concentrated on inheritance at a federal level. There is no inheritance tax at a federal level but some states do have an inheritance tax and therefore meeting with a professional is recommended. New York currently does not have an inheritance tax.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
How Much Money Do I Need To Save To Retire?
This is by far the most popular question that we come across as financial planners. You may have heard some of the "rules of thumb" like “80% of your current take-home pay” or “1 million dollars”. In reality, the answer varies greatly on an individual by individual basis. This article will outline the procedures that we follow as financial planners to help
This is by far the most popular question that we come across as financial planners. You may have heard some of the "rules of thumb" like “80% of your current take-home pay” or “1 million dollars”. In reality, the answer varies greatly on an individual by individual basis. This article will outline the procedures that we follow as financial planners to help individuals answer this very important question.
Step 1: Estimate Your Annual Expenses In Retirement
The first step is to get a ballpark idea of what your annual expenses might look like in retirement. The best place to start is to list your current monthly and annual expenses. Then create a separate column labeled “expenses in retirement”. Whether you are 2 years, 10 years, or 20 years away from retirement the idea is to pretend as if you were retiring tomorrow and determining what your annual expenses might look like. Some of your expenses in retirement will be lower, others may be higher, but most people find that a lot of their current expenses will carry over at the same level into the retirement years. This is because most people have become accustom to a certain standards of living and they intend to maintain that standard of living in retirement. Here are a few important questions that you should ask yourself when forecasting your retirement expenses:
How much should I budget for health insurance?
Will I have a mortgage or debt when I retire?
Do I plan to move when I retire?
Since I will not be working, should I budget additional expenses for vacations and hobbies?
Will I need to keep my life insurance policies after I retire?
Step 2: Adjust Your Retirement Expenses For Inflation
Now that you have a ballpark number of your annual expenses in retirement, you will need to adjust those expenses for inflation. Inflation is just a fancy word for “the price of everything that we buy today will gradually go up in price over time”. If the price of a gallon of milk today is $2 then most likely 20 years from now that same gallon of milk will cost $3.51. A 75% increase!! Historically inflation has grown at a rate of about 3% per year. There are periods of time when the rate of inflation grows faster or slower but on average it grows at 3% per year.
Another way to look at inflation is $20,000 in today’s dollars will not buy the same amount of goods and services 10 years from now because inflation erodes the purchasing power of your $20,000. If I did my annual expense planner and it tells me that I need $50,000 per year in retirement to meet all of my estimated expenses, let’s look at what adjusting that $50,000 for inflation does over different periods of time assuming a 3% rate of inflation:
Today’s Dollars 5 Years From Now 10 Years From Now 20 Years From Now
$50,000 $56,275 $65,238 $87,675
In the above example, if I am retiring in 10 years, and my estimated annual expenses in retirement will be $50,000 in today’s dollars, by the time I retire 10 years from now my annual expenses will increase to $65,238 per year just to stay in the same place that I am in today. Also, inflation does not stop when you retire, it continues into the retirement years. If I am 50 today and plan to live until 90, I have to apply this inflation adjustment for 40 years. It’s clear to see how inflation can have a significant impact on the amount that you may need to withdrawal for your account to meet you estimated expenses at a future date.
Step 3: Gather The Information On Your Current Assets
Once you know your expenses, you now need to gather all of the information on your retirement accounts and pension plans. You should collect the most recent statement for all of your investment accounts (401K, 403B, IRA’s, brokerage accounts, stocks, etc.), pension statements (if applicable), obtain your most recent social security statement, and gather information on the other sources of income and/or assets that may be available when you retire. Such as:
Sale of a business
Downsizing the primary residence
Rental income
Part-time employment
Step 4: Project The Growth Of Your Retirement Assets
There are three main categories to consider when calculating the growth rate of your retirement assets:
Annual contributions
Withdrawals
Investment rate of return
For annual contributions, it’s determining which accounts you plan on making deposits too each year and how much? For most individuals, their employer sponsored retirement plan is the main source of new contributions to their retirement nest egg. If your employer makes regular employer contributions to your retirement plan, you should factor those in as well. For example, if I am contributing 8% of my pay into the plan and my employer is providing me with a 4% matching contributions, I would reasonably assume that I’m adding 12% of my pay to my 401(k) plan each year.
The most popular question that we get in this category is “how much should I be contributing each year to my retirement account with my employer?” We advise employees that they should have a goal of contributing 10% of their pay each year to their retirement accounts. This is an aggregate total between your personal contributions and the employer contributions. Even if you cannot reach that level right now, 10%+ is the target.
Let’s move onto the next category…….withdrawals. Pre-retirement withdrawals from retirement accounts have become much more common in recent years due largely to the rising cost of college education. Parents will take loans from their 401K/403B plans or take early withdrawals from IRA accounts to fulfill the need for additional income during the years that their children are in college. If part of your overall financial plan is to use your retirement accounts to pay for one-time expenses such as college, you will need to factor that into your projections.
The third variable to consider when determining the growth of your assets is the assumed annual rate of return on your investments. There are many items to consider when determining a reasonable annual rate of return for your accounts. Some of those considerations include:
Time horizon to retirement
Allocation of your portfolio (stocks vs bonds)
Concentrated holdings (10%+ of your portfolio allocated to a single investment)
Accumulation phase versus distribution phase
The answer to the question: “what rate of return should I expect from my retirement accounts?”, can really only be determine on a case by case basis. Using an unreasonable rate of return assumption can create a significant disconnect between your retirement projections versus what is likely to actually occur within your investment accounts. Be careful with this step.
Step 5: Factor In Taxes
Don’t forget about the lovely IRS. All assets are not treated equally from a tax standpoint. For most individuals, the majority of their retirement savings will be in pre-tax retirement vehicles such as 401(k), 403(b), and Traditional IRA’s. That means when you take distributions from those accounts, you will realize earned income, and have to pay tax. For example, if you have $400,000 in your 401K account and you are in the 25% tax bracket, $100,000 of that $400,000 will be lost to taxes as withdrawals are made from the account.
If you have after tax investment accounts, it’s possible that you may owe little to no taxes on withdrawals. However, if there are unrealized investment gains built up in your after tax investment accounts then you may owe capital gains tax when liquidating positons.
Also note, you may have to pay taxes on a portion of your social security benefit. The amount of your social security benefit that is taxable varies based on your level of income.
Step 6: Spend Down Your Assets
In the final step, you should run long term projections to illustrate the spend down of your assets in retirement. Here are the steps:Example
Start with your annual after tax expense number $60,000
Subtract social security less taxes: ($20,000)
Subtract pension payments less taxes (if applicable): ($10,000)
Annual Expenses Net SS and Pensions: $30,000
In the example above, this individual would need an additional $30,000 after-tax to meet their anticipated annual expenses in Year 1 of retirement. I stress “after-tax” because if all of the retirement assets are in a pre-tax retirement account then they would need to gross up their distributions for taxes to get to the $30,000 after tax. If it is assumed that $40,000 has to be withdrawn from an IRA each year, the 3% inflation rate is applied to the annual expenses, and the life expectancy of this individual is 20 years from the date that they retire, this individual would need to withdrawal $1,074,814 out of their retirement accounts over the next 20 years to meet their income needs.
Step 7: Identify Multiple Solutions
There are often times multiple roads to reach a destination and the same is true when planning for retirement. If you find that you assets are falling short of the amount that is needed to sustain your expenses in retirement, you should work with a knowledgeable financial planner to identify alternative solutions. It may help you to answer questions like:
If I decided to work part-time in retirement how much would I have to earn?
If I downsize my primary residence in retirement how does this impact the overall picture?
If I can’t retire at age 63, what age can I comfortably retire at?
What are the pros and cons of taking social security benefits prior to normal retirement age
I also encourage clients to spend time looking at their annual expenses. If you find that your are cutting it close on income versus expenses in retirement, it's usually easier to cut expenses than it is to create more income in the retirement year.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How To Prepare Financially For A Divorce
Divorce can stain finances as well as emotions. Both parties are trying to determine financially what life is going to look like after the divorce is finalized. It is also more common than not that in a marriage one of the spouses assumes the role of paying the bills and managing the family's finances. In this arrangement the "non-financial spouse" is now
Divorce can stain finances as well as emotions. Both parties are trying to determine financially what life is going to look like after the divorce is finalized. It is also more common than not that in a marriage one of the spouses assumes the role of paying the bills and managing the family's finances. In this arrangement the "non-financial spouse" is now forced very quickly into the role of understanding their total financial picture.
How much income do they need to meet their living expenses?
Where are all of the marital assets located?
How much debt do they have?
How much should they expect to receive or pay in child support / alimony?
Who is responsible for paying the bills while the divorce process is ongoing?
Step 1: Establish a team of professionals........
Since so many important financial decisions are being made in such a short window of time, we strongly recommend that each spouse surround themselves with a team of professionals that they like and trust. That team of professionals usually consists of an attorney /mediator, accountant, therapist, and a financial planner. Even though the divorce process can be stressful and sometimes scary, surrounding yourself with a knowledgeable team of advisors will help you to better understand your current situation, the options available to you, and to help you better prepare for life after the divorce is final.
Step 2: Identify your assets and debts.............
You need to fully understand your current financial situation before you can begin to plan for your income and expenses going forward. First, make a list of all of your assets, their values, where they are located, and how they are owned (jointly or separately). This can usually be accomplished by gathering statements on all of your accounts.
You will also need a list of all of your debts, the name of each creditor, outstanding balances, monthly payments, interest rates, and how each debt is owned (jointly or separately). This information can typically be obtained by requesting a credit report for both you and your spouse.
Step 3: Create a new budget...............
Before you can figure out how much income/support you will need going forward you need to know what your estimated monthly expenses are going to be once the divorce is finalized. We recommend listing all of your monthly expenses and list separately large one-time expenses that are expected to be incurred in the future such as college expense for the kids or a down payment on a house. Once you know your estimated monthly expenses you can work with your financial professionals to determine how much income/support you will need each month to meet those expenses taking into account taxes, inflation, and an assumed rate of return on your assets. Please feel free to utilize our GFG Expense Planner which is located in the Resource section of our newsroom.
Step 4: Develop financial projections............
Remember, the financial decisions that you are making now during the divorce process will most likely have a dramatic impact on what your financial future will look like. Not all assets are treated equally. Some assets are taxable while others are not. Likewise, you may have access to certain assets now to meet current expense while others assets may not be available until retirement.
The goal of these financial projections is to determine what your financial future may look like next year, 3 years, 10 years, and 20 years from now given the financial decisions that are being made today. There are a lot of variables that need to be considered when creating these projections such as assumed rates of return on current assets, annual contribution amounts, taxes, social security, inflation, and debt. We strongly recommend that individuals work with financial planners that specialize in divorce planning to develop these projections.
Having formal income and expense projections in place will also allow you determine how changes to what is being offered during the negotiation process will impact your financial future.
Step 5: Crossing emotional and financial decisions
It is not uncommon for individuals to have an emotional attachment to a specific marital asset. The two most commons assets that we see that fall into this category are the primary residence and pensions.
We see many situations where one spouse has a strong emotional attachment to the house and they become completely focused on doing whatever it takes to "keep the house". But there are certain circumstances where from a financial standpoint that keeping the house is just not a viable financial option. Couples can underestimate the financial impact of divorce. While married, a couple's total income was being used to maintain a single household. Now that same level of income will need to be used to maintain two separate households which usually comes at a greater overall cost. If projections can be produced early on in the divorce process showing that keeping the current house is just not a viable option, it may remove that addition stress of fighting over an asset that cannot be financially maintain by either spouse.
Disclosure: The information listed above is for educational purposes only. Greenbush Financial Group, LLC does not provide legal advice. For legal advice, please consult your attorney.
About Michael.........
Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Year End Tax Strategies
The end of the year is always a hectic time but taking the time to sit with a tax professional and determine what tax strategies will work best for you may save thousands on your tax bill due April 15th. As the deadline for your taxes starts to get closer, you may be in such a rush to file them on time that you make some mistakes in the process, but
The end of the year is always a hectic time but taking the time to sit with a tax professional and determine what tax strategies will work best for you may save thousands on your tax bill due April 15th. As the deadline for your taxes starts to get closer, you may be in such a rush to file them on time that you make some mistakes in the process, but don't worry, you won't be the only one. If you don't have the relevant tax strategy in place, you are more prone to mistakes. So, the purpose of this article is to discuss some of the most common tax strategies that may apply to you. It may be worth contacting a company that specializes in tax services if you're unsure of how to go about these strategies though. Some of the deadlines for these strategies aren't until tax filing but the majority include an action item that must be done by December 31st to qualify and therefore taking the time before year end is crucial.
Taxable Investment Accounts
Offset some of the realized gains incurred during the year by selling investments in loss positions. Often times dividends received and sales made in a taxable investment account are reinvested. Although the owner of the account never received cash in the transaction, the gain is still realized and therefore taxable. This may cause an issue when the cash is not available to pay the tax bill. By selling investments in a loss position prior to 12/31, you will offset some, if not all, of the gain realized during the year. If possible, sell enough investments in a loss position to take advantage of the maximum $3,000 loss that can be claimed on your tax return.
Note: The IRS recognized this strategy was being abused and implemented the "wash sale" rule. If you sell an investment in a loss position to diminish gains and then repurchase the same investment within 30 days, the IRS does not allow you to claim the loss therefore negating the strategy.
Convert a Traditional IRA to a Roth IRA
If you are in a low income year and will be taxed at a lower tax bracket than projected in the future, it may make sense to convert part of a traditional IRA to a Roth IRA. The current maximum contribution to a Roth IRA in a single year is $5,500 if under 50 and $6,500 if 50 plus. You will pay taxes on the distributions from the traditional but the benefit of a Roth is that all the contributions and earnings accumulated is tax free when distributed as long as the account has been opened for at least 5 years. Roth accounts are typically the last touched during retirement because you want the tax free accumulation as long as possible. Also, Roth accounts can be passed to a beneficiary who can continue accumulating tax free. Roth money is after tax money and therefore the IRS allows you to withdraw contributions tax and penalty free and let the earnings continue to accumulate tax free. If you don't have the cash come tax time to cover the conversion, you can convert the Roth money back to a traditional IRA by tax filing plus extension and the account will be treated as the Roth conversion never took place.
Donate to Charity if you Itemize
If you itemize deductions on your tax return, go through your closet and donate any clothing or household goods that you no longer use. There are helpful tools online that will allow you to value the items donated but be sure you keep record of what was donated and have the charity give you a receipt.
Max Out Your Employer Sponsored Retirement Plan
If you know you will be hit with a big tax bill and want to defer some of the taxes, max out your retirement plan if you haven't already. Employer sponsored plans, such as 401(k)'s, must be funded through payroll by 12/31 and therefore it is important to make this determination early and request your payroll department start upping your contribution for the remaining payroll periods in the year. The maximum for 401(k)'s in 2015 and 2016 is $18,000 if under 50 and $24,000 if 50 plus.
Business Owners – Cut Checks by 12/31
If your company had a great year and the cash is available, use it to pay for expenses you would normally hold off on. This could mean paying state taxes early, paying invoices you usually wait until the end of the payment term, paying monthly expenses like health or general insurance, or buying new office equipment. This might also mean investing in new office furniture such as chairs and desks, or more storage space for all of your paperwork and electronics. Above all, by getting the checks cut by 12/31, you realize the expense in the current year and will decrease your tax bill.
Business Owners – Set Up a Retirement Plan
For owners with no full time employees, a Single(k) plan being put in place by 12/31 will allow you to fund a retirement account up to the 401(k) limits mentioned early. As long as the plan is established by 12/31, the owner will be able to fund the plan any time before tax filing plus extension. If the plan is not established by 12/31, other options like the SEP IRA are available to take money off the table come tax time.With tax laws continuously changing, it is important to consult with your tax professional as there may be strategies available to you that could save you money. Don't procrastinate as some planning before the end of the year may be necessary to take full advantage.
About Rob.........
Hi, I'm Rob Mangold. I'm the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
Understanding Investment Tax Forms
Making a wide variety of investments is a wise move as it means if one market drops, not all of your investments will be affected. If you've only invested in stocks or real estate then it would be a good idea to diversify. Take a look at this review and see if Bitcoin is something you want to invest in. The whole point of investing is to make a profit from your
Types of Investment Income
Making a wide variety of investments is a wise move as it means if one market drops, not all of your investments will be affected. If you've only invested in stocks or real estate then it would be a good idea to diversify. Take a look at this review and see if Bitcoin is something you want to invest in. The whole point of investing is to make a profit from your investments so you want to give yourself as much of a chance of success as possible. Income from investments can be divided into four main categories;
Interest – Interest income is paid on bonds and other types of fixed-income securities such as fixed annuities. Interest is always taxable as ordinary income unless it is paid inside an IRA or qualified plan or annuity contract. Municipal bond interest is also tax free and interest from treasury securities is exempt from taxation at the state and local levels.
Dividends – These represent a portion of a company's current profits that it passes on to shareholders. Dividends can be taxed as ordinary income, or they may qualify for lower capital gains treatment in some cases if they are coded as "qualified" dividends.
Capital Gains – This represents the amount of profit realized when an investment is sold at a higher price than that for which it was bought. Long-term gains are realized for investments held for at least a year and a day before they were sold, and are taxed at a lower rate than ordinary income. Short-term gains are taxed as ordinary income.
Retirement and Annuity Distributions – Although distributions from retirement plans are not technically a form of investment income, they are listed here because IRA and retirement plan owners can only access the gains from their investments in these accounts by taking distributions. Normal distributions are always taxed as ordinary income.
Tax Forms
Each income type listed above is broken out on a corresponding 1099 form issued by the broker or issuer of the income generated. Every form includes the name, address and tax ID number of the issuing entity. These forms are listed as follows:1099-INT – Breaks out the interest paid to the investor. This form is issued for anyone who owns bonds, CDs or mutual funds that invested in fixed income securities or cash or has an interest-bearing bank or brokerage account.
Box 1 shows total taxable interest paid
Box 2 shows the amount of early withdrawal penalty, if any
Box 3 shows the amount of U.S. Treasury security interest paid
Box 4 shows the amount of tax withheld
Box 5 shows investment expenses
Box 6 shows foreign tax paid
Box 7 shows the foreign payor
Box 8 shows tax-exempt interest
Box 9 shows interest from special private activity bonds
Box 10 shows the CUSIP number for tax-free bond interest
Boxes 11-13 show state ID information and withholding
1099-DIV – This breaks down the total amount of dividends paid to an investor. It is issued to holders of any common stock, preferred stock, or mutual fund that invests in them. However, it is not issued to owners of cash value life insurance policies, as those dividends are merely a return of premium.
Box 1a shows total ordinary dividends
Box 1b shows total qualified dividends
Boxes 2a-d break down capital gains from mutual funds, REITs and collectibles
Box 3 shows nondividend distributions
Box 4 shows federal tax withheld
Box 5 shows investment expenses
Boxes 6 and 7 show foreign tax paid and the foreign payor
Boxes 8 and 9 show cash and noncash liquidation distributions
Box 10 shows private interest dividends
Box 11 shows specified private activity bond interest dividends
Boxes 12-14 show state ID information and withholding
1099-B – This form breaks down the amount of capital gain or loss that the investor realized for that tax year. It is issued to everyone who bought or sold publicly traded securities at a gain or loss. Many brokerage firms issue additional statements that break down the loss or gain for each trade and then quantify them into net long- and/or short-term gains and losses for the year.
Box 1a shows the date of sale or exchange
Box 1b shows the date of acquisition
Box 1c shows whether it is a long- or short-term gain or loss
Box 1d shows the ticker symbol of the security
Box 1e shows the quantity sold
Box 2a shows the gross proceeds reported to the IRS both before and after commission and expenses
Box 2b shows a checkbox if loss not allowed due to amount shown in box 2a
Box 3 shows cost or other basis
Box 4 shows federal tax withheld
Box 5 shows any amount of wash sale loss that was disallowed
Box 6 has checkboxes for noncovered securities and for sales where the basis in box 3 was reported to the IRS
Box 7 shows income from bartering
Box 8 is for a description of the security if needed
Boxes 9-12 break down realized and unrealized gains and losses from derivatives contracts
Boxes 13-15 show state ID information and withholding
1099-R – This form is issued to everyone who receives distributions from IRAs, qualified retirement plans or annuity contracts that are not housed inside a tax-deferred account or plan.
Box 1 shows the gross distribution amount
Box 2a shows the amount of taxable distribution
Box 2b has checkboxes for taxable amount not determined and total distribution
Box 3 shows amount of capital gain included in box 2a
Box 4 shows federal tax withheld
Box 5 shows employee/Roth contributions
Box 6 shows net unrealized appreciation in employer securities
Box 7 shows the distribution code that determines how the distribution is taxed
Box 8 shows the value of any annuity contract included in the distribution
Box 9a shows the value of distribution percentage that belongs to the recipient
Box 9b shows the amount of the employee's investment for annuity distributions where the exclusion ratio must be computed
If Box 10 is filled, refer to instructions on Form 5329
Box 11 shows the year the recipient first made a Roth contribution of any kind
Boxes 12-17 show state and local ID information and withholding
1099 MISC – Although most of this form pertains to earned income, it is also used to report royalty income (box 1) and working interest income (box 7) in oil and gas leases.Form 5498 – The receiving custodian of a qualified plan rollover or IRA transfer issues this to the account holder as proof that the transfer was not a taxable event and should not be counted as a distribution.
About Michael.........
Hi, I'm Michael Ruger. I'm the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Should I Incorporate My Business?
Starting your own business is an incredible achievement, and for most, your business will shape your life not only professionally but personally. That being said, setting up your business in the correct way and having the necessary pieces in place day one is extremely important.
Starting your own business is an incredible achievement, and for most, your business will shape your life not only professionally but personally. That being said, setting up your business in the correct way and having the necessary pieces in place day one is extremely important.
Here we will discuss some of the different options for structuring your business which is just a piece of the business infrastructure. We will define the structure as well as give some details such as tax filing. It is recommended you speak with a professional (accountant/attorney) when making this decision as incorporating a business the wrong way may have ramifications like paying more in taxes. Constant communication with a professional about your business as you start to make money and grow is also recommended as the structure of your company may have to evolve.
Sole Proprietorship
This is the most basic type of business structure. There is one owner of the company that is responsible for the business assets and liabilities. No formal action is needed to set up a sole proprietorship. Once business activities commence and you are the only owner, you are a sole proprietor. That being said, there are still registration, licenses, and permits that are generally required which vary based on industry and location.
A sole proprietorship is not separate from the owner for tax purposes and therefore the business activity is included on Schedule C of Form 1040. It is important to know that the owner is responsible for paying all the taxes related to owning a sole proprietorship which includes estimated taxes, if necessary.
The biggest pitfall of a sole proprietorship is that there is unlimited liability. This means the owner is personally responsible for any liability of the company.
Partnership
A partnership includes multiple owners (partners) and can be set up a number of ways. The three types of partnerships include general partnerships, limited partnerships, and joint ventures. Choosing the type of partnership depends on matters such as the participation of each partner in the business and length of time the partnership will be in place.
Partnership agreements are not legally required but are highly recommended as they should document how decisions will be made, the responsibilities of each partner, how profits and losses will be divided, and ownership changes.
To form a partnership, you must register with your state and include the legal name of the partnership. This will allow you to obtain an Employer Identification Number (EIN) for the company. The licenses, permits, and other regulations associated with forming a partnership depend on your location and industry.
Unlike a sole proprietorship, a partnership files a separate tax form (Form 1065). This form is known as an information return as the income shown on Form 1065 passes through to the owners who claim the income on their personal return. There are local excise taxes and other fees that the partnership will be responsible for but the income of the company is passed through to the owners. Form 1065 generates what are known as K-1's for each partner. The K-1 will show what the partner should claim on their personal return.
Advantages of partnerships include multiple sources of additional capital, a shared financial commitment, and the individual skills and experiences of each partner. Pitfalls include unlimited liability, disagreements between owners, and shared profits.
Corporation
A corporation is typically more complex and meant for larger companies with multiple employees. Unlike sole proprietorships and partnerships, corporations are treated as its own legal entity separate from the owners. Forming a corporation requires more filings and registrations and they are typically more costly to administer due to the complexity.
Since corporations are treated separate from individuals, they are required to pay federal, state, and local (if necessary) taxes. For federal purposes, Form 1120 is used to show the activities of the business and pay income tax.
Unlike sole proprietorships and partnerships, individuals are protected from corporate liabilities usually up to the amount they have invested in the company. This structure makes it easier to generate capital for the business and it is possible to become publically traded on a stock exchange. Pitfalls of a corporation include the amount of time and money it takes to set up and administer the corporation and potential double taxation. The corporation pays income tax and then distributes profits (in the form of dividends) to owners. Those dividends are now taxable to the individual after they were already taxed at the corporate level.
S Corporation
An S corporation is similar to a C corporation but is taxed at a personal level and avoids double taxation. The S Corp election passes through income to the owner's personal tax return rather than taxing the corporation and then the individual's dividends.
It is important to determine whether or not your corporation will be eligible to qualify as an S Corp under IRS regulations. A business must first register as a corporation and then file Form 2553 (signed by all owners) to apply for S Corp status.
Form 1120S is used to file taxes at a federal level. Again, S Corp income is passed through to the owners for federal tax purposes. Some states recognize this election but others (like New York) do not and will tax the company as a C Corp.
Limited Liability Company
An LLC provides limited liability features associated with a corporation with the same tax and operational efficiencies of a sole proprietorship or partnership. Owners of a corporation are not personally responsible for the liabilities of a company like sole proprietorships or partnerships.
Forming an LLC is similar to forming a partnership including choosing a business name, registering with the state (filing the "Articles of Organization"), obtaining necessary licenses and permits, and creating an operating agreement (similar to the partnership agreement). New York State also requires you to announce your LLC formation in a local newspaper.
An LLC can be structured similar to a sole proprietorship (single member LLC), a partnership, or an LLC filing as a C Corporation for tax purposes. The same filings will be completed as if the LLC was a sole proprietor, partnership, or corporation. A special election can also be made with the IRS allowing an LLC to be treated as an S Corp in some circumstances.
The main advantage of an LLC is that members are protected from personal liability for business decisions and actions. If provisions are not documented in the operating agreement, one of the pitfalls of an LLC is that when one member leaves, the LLC must dissolve completely. The remaining members can create a new LLC if they choose to continue operations.
About Rob.........
Hi, I'm Rob Mangold. I'm the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.