When Must Taxes Be Paid on IRA and Employer-Sponsored Retirement Funds?Traditional IRAs and most employer-sponsored retirement plans are tax-deferred accounts, which means they are typically funded with pre-tax or tax-deductible dollars. As a result, taxes are not payable until funds are withdrawn, generally in retirement.
Withdrawals from tax-deferred accounts are subject to income tax at your current tax rate. In addition, taxable withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty (a number of exceptions from the penalty tax are available). If you made nondeductible contributions to a traditional IRA, you have what is called a “cost basis” in the IRA. Your cost basis is the total of the nondeductible contributions to the IRA minus any previous withdrawals or distributions of nondeductible contributions. The recovery of this basis is not counted as taxable income. Exceptions are the Roth IRA and the Roth 401(k), Roth 403(b), and Roth 457(b). Roth accounts are funded with after-tax dollars; thus, qualified distributions (after age 59½ and the five-year holding requirement has been met) are free of federal income tax. (Even if a distribution from your Roth account isn't qualified, you still receive your own Roth contributions back tax-free.) Traditional IRAs, most employer-sponsored retirement plans, and Roth 401(k), 403(b) and 457(b) plans, are subject to annual required minimum distributions (RMDs) that must generally begin after you reach age 70½. (The first RMD must be taken no later than April 1 of the year after the year in which you reach age 70½.) Failure to take an RMD triggers a 50% federal income tax penalty on the amount that should have been withdrawn. Roth IRA owners never have to take RMDs; however, the designated beneficiaries of IRAs and employer-sponsored retirement plans do have to take RMDs. When you begin taking distributions from your retirement accounts, make sure to pay attention to any required beginning dates and the appropriate distribution amount in order to avoid unnecessary penalties. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.
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What Happens If I Withdraw Money from My Tax-Deferred Investments Before Age 59½?Withdrawing taxable funds from a tax-deferred retirement account before age 59½ generally triggers a 10% federal income tax penalty, on top of any federal income taxes due. (Distributions from Section 457(b) plans are generally not subject to an early distribution penalty; and the penalty for distributions from SIMPLE plans during your first two years of participation is 25%, 10% thereafter.) However, there are certain situations in which you are allowed to make early withdrawals from a retirement account and avoid the tax penalty. (Check your specific plan provisions to see whether a particular withdrawal option is available.)
IRAs and employer-sponsored retirement plans have different exceptions, although the rules are similar. IRA EXCEPTIONSThe following distributions are not subject to the 10% penalty tax:
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. What Is Tax Deferral?“Tax deferral” is a method of postponing the payment of income tax on currently earned investment income until the investor withdraws funds from the account. Tax deferral is encouraged by the government to stimulate long-term saving and investment, especially for retirement.
Only investment vehicles designated as “tax deferred,” such as IRAs, plans covering self-employed persons, and 401(k)s, allow taxes to be deferred. In addition, many insurance-related vehicles, such as deferred annuities and certain life insurance contracts, provide tax-deferred benefits. There is a substantial benefit to deferring taxes as long as possible, because this allows the entire principal and any accumulated earnings to compound tax deferred. The compounding effect can be dramatic over an extended period of time and can make a big difference in the accumulation of a retirement nest egg. Additionally, investments in tax-deferred vehicles are often made when you are earning a higher income and subject to a higher tax rate. When you reach retirement and begin taking distributions from your tax-deferred accounts, it is possible that your tax bracket will be lower. One note of caution: When formulating your tax plan, recognize that all withdrawals from tax-deferred plans are taxed as ordinary income. Early withdrawals (prior to age 59½) may be subject to a 10% federal income tax penalty. Once again, the government is encouraging a long-term outlook. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. How Can I Benefit from Tax-Advantaged Investments?For many people, tax-advantaged investing is an excellent way to reduce their income tax liability. And while many of the traditional tax-advantaged strategies have been eliminated, there are still alternatives left that can help you reduce your taxes. Some are described below.
REAL ESTATE PARTNERSHIPSTwo of the most common types of real estate partnerships are low-income housing and historic rehabilitation. The federal government grants tax credits to those who construct or rehabilitate low-income housing or who invest in the rehabilitation or preservation of historic structures. Participating in a real estate partnership has many advantages. These partnerships may provide opportunities for tax-advantaged income and long-term capital appreciation. The tax credits generated by these partnerships can be used to offset your income tax liability on a dollar-for-dollar basis. This can make them much more valuable than tax deductions, which help reduce your taxable income, not the tax you pay. These credits are subject to certain limitations, and the rehabilitation tax credit begins to phase out for married taxpayers filing jointly with adjusted gross income (AGI) greater than $200,000 ($100,000 if married filing separately) and is completely phased out when AGI reaches $250,000 ($125,000 if married filing separately). OIL AND GAS PARTNERSHIPSEnergy partnerships can provide shelter through tax deductions taken at the partnership level. These include deductions for intangible drilling costs, depreciation, and depletion. The deductions may be limited; check with a tax professional to see whether you could benefit from oil and gas partnerships. SUITABILITYThere are risks associated with investing in partnerships. Key among these is that they are long-term investments with an indefinite holding period and no, or very limited, liquidity. There is typically no current market for the units/shares, and a future market may or may not be available. If a market becomes available, it may result in a deep discount from the original price. At redemption, the investor may receive back less than the original investment. The investment sponsor is responsible for carrying out the business plan, and thus the success or failure of the venture is dependent on the investment sponsor. There are no assurances that the stated investment objectives will be reached. This type of investment is considered speculative. You want to ensure that the investment is not disproportionate in relation to your overall portfolio and that it is consistent with your investment objectives and overall financial situation. In order to invest, you will need to meet specific income and net worth suitability standards, which vary by state. These standards, along with the risks and other information concerning the partnership, are set forth in the prospectus, which can be obtained from your financial professional. Please consider the investment objectives, risks, charges, and expenses carefully before investing. Be sure to read the prospectus carefully before deciding whether to invest. There are inherent risks associated with real estate investments and the real estate industry, each of which could have an adverse effect on the financial performance and value of a real estate investment. Some of these risks include: a deterioration in national, regional, and local economies; tenant defaults; local real estate conditions, such as an oversupply of, or a reduction in demand for, rental space; property mismanagement; changes in operating costs and expenses, including increasing insurance costs, energy prices, real estate taxes, and costs of compliance with laws, regulations, and government policies. Real estate investments may not be appropriate for all investors. The alternative minimum tax is another concern. Make sure to consult a tax professional to evaluate your exposure to the AMT. As long as they are suitable for your situation, these tax-advantaged investing strategies could be used to help reduce your income tax liability. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. What tax deductions are still available to me?Tax reform measures are enacted frequently by Congress, which makes it hard for U.S. taxpayers to know which deductions are currently available to help lower their tax liability. In fact, a former head of the IRS once said that millions of taxpayers overpay their taxes every year because they overlook one of the many key tax deductions that are available to them.1
Taxpayers may be able to take deductions for student-loan interest, out-of-pocket charitable contributions, health savings account, home mortgage interest, and contributions to a traditional IRA, and deductions for self-employed taxpayers (SE tax, SE health insurance, SE qualified retirement plan contributions). Of course, some tax deductions are limited or disappear as adjusted gross income increases. Another key deduction is unreimbursed medical and dental expenses. Remember that you may only deduct medical and dental expenses to the extent that they exceed 7.5% of your adjusted gross income (AGI) and were not reimbursed by your insurance company or employer. The Tax Cuts and Jobs Act of 2017 reduced the threshold from 10% to 7.5% retroactively for 2017 and through 2018. In 2019, the threshold will increase to 10% of AGI. Home mortgage interest has several modifications. The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. Interest on a new home mortgage is limited to interest paid on a maximum of $750,000 ($375,000 if married filing separately (MFS)) of a new mortgage taken out after December 14, 2017. Taxpayers with a mortgage taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward. Also, the $1 million ($500,000 if MFS) limit continues to apply to a refinanced mortgage incurred before December 15, 2017. Personal casualty and theft losses are no longer generally deductible. The only exception is for certain losses in federally declared disaster areas. The end of the year is the time to take one last good look to determine whether you qualify for a tax credit or deduction or whether you’re close to the cutoff point. If you're not close, you may opt to postpone incurring some medical or other expenses until the following year, when you may be able to deduct them. On the other hand, if you're only a little short of the threshold amount, you may want to incur additional expenses in the current tax year. With a little preparation and some help from a qualified tax professional, you may be able to lower your income taxes this year. You just have to plan ahead. NOTE: Most of the changes to itemized deductions will remain in place through 2025. In 2026, itemized deductions will generally follow the rules in place before the the Tax Cuts and Jobs Act of 2017. Source: 1) Kiplinger.com, December 2016 The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. What Tax-Advantaged Alternatives Do I Have?
A strong savings program is essential for any sound financial strategy. We take Benjamin Franklin’s saying to heart, “A penny saved is a penny earned,” and we save our spare cash in savings accounts and certificates of deposit. Investors who’ve accumulated an adequate cash reserve are to be commended. But as strange as it sounds, it is possible to save too much. Although this may not sound like much of a problem, it can be if you save too much of what you should be investing. You see, many investors simply put their savings into the most convenient and stable financial instrument they can find. Often that turns out to be certificates of deposit (CDs). The benefits of CDs are that they are FDIC insured (up to $250,000 per depositor, per federally insured institution) and generally provide a fixed rate of return. Unfortunately, placing all your savings in taxable instruments like certificates of deposit can create quite an income tax bill. In an effort to help provide stability, some investors inadvertently produce a liability. It’s a bit like turning on all the taps in your house just to make certain the water is still running. Sure, you’ll know that the water is still running, but a lot of it will go down the drain. The solution is simply to turn off some of the taps. A number of financial instruments can help you to defer or eliminate income taxes. By shifting part of your cash reserves to some of these instruments, you can keep more of your money working for you and turn off the taps that hamper your money’s growth. You can consider a number of tax-advantaged investments for at least a portion of your savings portfolio. One possibility is a fixed annuity contract. A fixed annuity is a retirement vehicle that can help you meet the challenges of tax planning, retirement planning, and investment planning. Fixed annuity contracts accumulate interest at a competitive rate. And the interest on an annuity contract is usually not taxable until it is withdrawn. Most annuities have surrender charges that are assessed in the early years of the contract if the owner surrenders the annuity before the insurance company has had the opportunity to recover the cost of issuing the contract. Also, annuity withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company. Another tax-exempt investment vehicle is a municipal bond. Municipal bonds are issued by state and local governments and are generally free of federal income tax. In addition, they may be free of state and local taxes for investors who reside in the areas in which they are issued. Municipal bonds can be purchased individually, through a mutual fund, or as part of a unit investment trust. You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest could be subject to the federal alternative minimum tax. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Bond mutual funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance. A number of other tax-advantaged investments are available. Consult with your financial professional to determine which types of tax-advantaged investments may be appropriate for you. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. What is the most tax-efficient way to take a distribution from a retirement plan?
If you receive a distribution from a qualified retirement plan such as a 401(k), you need to consider whether to pay taxes now or to roll over the account to another tax-deferred plan. A correctly implemented rollover avoids current taxes and allows the funds to continue accumulating tax deferred. PAYING CURRENT TAXES WITH A LUMP-SUM DISTRIBUTIONIf you decide to take a lump-sum distribution, income taxes are due on the total amount of the distribution (except for any after-tax contributions you've made) and are due in the year in which you cash out. Employers are required to withhold 20% automatically from the check and apply it toward federal income taxes, so you will receive only 80% of your total vested value in the plan. (Special rules apply to Roth accounts.) The advantage of a lump-sum distribution is that you can spend or invest the balance as you wish. The problem with this approach is parting with all those tax dollars. Income taxes on the total distribution are taxed at your marginal income tax rate. If the distribution is large, it could easily move you into a higher tax bracket. Distributions taken prior to age 59½ are subject to 10% federal income tax penalty. (Special rules may apply if you were born before 1936.) DEFERRING TAXES WITH A ROLLOVERIf you don’t qualify for the above options or don’t want to pay current taxes on your lump-sum distribution, you can roll the money into a traditional IRA. If you choose a rollover from a tax-deferred plan to a Roth IRA, you must pay income taxes on the total amount converted in that tax year. However, future withdrawals of earnings from a Roth IRA are free of federal income tax after age 59½ as long as the five-tax year holding requirement has been met. Even if you are not 59½, your distribution may be tax-free if you are disabled or a first-time home purchaser ($10,000 lifetime maximum), as long as you satisfy the five-year holding period. If you elect to use an IRA rollover, you can avoid potential tax and penalty problems by electing a direct trustee-to-trustee transfer; in other words, the money never passes through your hands. IRA rollovers must be completed within 60 days of the distribution to avoid current taxes and penalties. An IRA rollover allows your retirement nest egg to continue compounding tax deferred. Remember that you must generally begin taking annual required minimum distributions (RMDs) from tax-deferred retirement plans after you turn 70½ (the first distribution must be taken no later than April 1 of the year after the year in which you reach age 70½). Failure to take an RMD subjects the funds that should have been withdrawn to a 50% federal income tax penalty. Of course, there is also the possibility that you may be able to keep the funds in your former employer's plan or move it to your new employer's plan, if allowed by the plans. (Make sure you understand the pros and cons of rolling funds from an employer plan to an IRA before you take any action.) Before you decide which method to take for distributions from a qualified retirement plan, it would be prudent to consult with a professional tax advisor. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. What is the most tax-efficient way to take a distribution from a retirement plan?If you receive a distribution from a qualified retirement plan such as a 401(k), you need to consider whether to pay taxes now or to roll over the account to another tax-deferred plan. A correctly implemented rollover avoids current taxes and allows the funds to continue accumulating tax deferred.
PAYING CURRENT TAXES WITH A LUMP-SUM DISTRIBUTIONIf you decide to take a lump-sum distribution, income taxes are due on the total amount of the distribution (except for any after-tax contributions you've made) and are due in the year in which you cash out. Employers are required to withhold 20% automatically from the check and apply it toward federal income taxes, so you will receive only 80% of your total vested value in the plan. (Special rules apply to Roth accounts.) The advantage of a lump-sum distribution is that you can spend or invest the balance as you wish. The problem with this approach is parting with all those tax dollars. Income taxes on the total distribution are taxed at your marginal income tax rate. If the distribution is large, it could easily move you into a higher tax bracket. Distributions taken prior to age 59½ are subject to 10% federal income tax penalty. (Special rules may apply if you were born before 1936.) DEFERRING TAXES WITH A ROLLOVERIf you don’t qualify for the above options or don’t want to pay current taxes on your lump-sum distribution, you can roll the money into a traditional IRA. If you choose a rollover from a tax-deferred plan to a Roth IRA, you must pay income taxes on the total amount converted in that tax year. However, future withdrawals of earnings from a Roth IRA are free of federal income tax after age 59½ as long as the five-tax year holding requirement has been met. Even if you are not 59½, your distribution may be tax-free if you are disabled or a first-time home purchaser ($10,000 lifetime maximum), as long as you satisfy the five-year holding period. If you elect to use an IRA rollover, you can avoid potential tax and penalty problems by electing a direct trustee-to-trustee transfer; in other words, the money never passes through your hands. IRA rollovers must be completed within 60 days of the distribution to avoid current taxes and penalties. An IRA rollover allows your retirement nest egg to continue compounding tax deferred. Remember that you must generally begin taking annual required minimum distributions (RMDs) from tax-deferred retirement plans after you turn 70½ (the first distribution must be taken no later than April 1 of the year after the year in which you reach age 70½). Failure to take an RMD subjects the funds that should have been withdrawn to a 50% federal income tax penalty. Of course, there is also the possibility that you may be able to keep the funds in your former employer's plan or move it to your new employer's plan, if allowed by the plans. (Make sure you understand the pros and cons of rolling funds from an employer plan to an IRA before you take any action.) Before you decide which method to take for distributions from a qualified retirement plan, it would be prudent to consult with a professional tax advisor. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. Is There Such a Thing as a Tax-Free Investment?The simple answer to this question is “yes.” There are two main types: (1) municipal bonds and municipal bond mutual funds and (2) tax-free money market funds.
Municipal bonds are issued by state and local governments in order to finance capital expenditures; typically, municipal bond funds invest in municipal bonds. Municipal bonds are generally free of federal tax because the interest from bonds issued by a state, municipality, or other local entity is exempt from federal taxation. As an added benefit, most states will allow a state tax exemption if the owner of the bond resides in the state of issue. However, if you purchase a bond outside your area of residency, it may be subject to both state and local taxes. If you buy shares of a municipal bond fund that invests in bonds issued by other states, you will have to pay income tax. In addition, while some municipal bonds that are in the fund may not be subject to ordinary income tax, they may be subject to federal, state, or local alternative minimum tax. If you sell a tax-exempt bond fund at a profit, there are capital gains taxes to consider. Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance. Municipal bonds come in a variety of forms and should be selected by strict criteria based predominantly on the state’s or municipality’s ability to service the debt. It’s important to remember that the principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Tax-free money market funds invest in short-term notes of state and local governments and can provide a high amount of liquidity. Money market funds can be invested in a wide range of securities, so it is important to analyze your options carefully before investing. Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market funds attempt to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund. If you decide to invest in either type of tax-exempt security, consider the different options carefully. You can purchase individual bonds, which come in denominations of $1,000. Or you might consider investing in a municipal bond mutual fund, a portfolio of bonds in which you can invest for as little as $500. Municipal bonds can also be purchased through a unit investment trust, a closed-end portfolio of bonds with minimums of $1,000. Often tax-exempt securities are the most favorable for those in higher tax brackets, so it’s important to determine whether buying them would be an advantageous move for you. To decide whether municipal bonds or money market funds would be an asset to your portfolio, calculate the taxable equivalent yield, which enables you to compare the expected yield of the tax-exempt investment with its taxable equivalent. For instance, if you are in the 24% federal income tax bracket and invest in a municipal bond yielding 5%, this is equivalent to investing in a taxable investment yielding 6.58%. If you are in the 35% tax bracket and invest in the same bond, it would be the equivalent of investing in a taxable investment yielding 7.69%. Also be aware that tax-exempt income is included in the formula for determining taxes on Social Security benefits. In some instances, it may be necessary to limit your tax-exempt income by shifting to other tax-advantaged investment areas. If they’re in line with your investment objectives, tax-exempt securities can be an excellent means of reducing taxable income. Check your options with your tax advisor. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. How Can I Keep More of My Mutual Fund Profits?
Provisions in the tax code allow you to pay lower capital gains taxes on the sale of assets held more than one year. Short-term gains — those resulting from the sale of assets held for one year or less — are taxed as ordinary income at your highest marginal income tax rate. This means that if you’ve been buying shares in a stock or mutual fund over the years and are considering selling part of your holdings, your tax liability could be significantly affected by the timing of your sale. The main pitfall for most investors is the IRS “first-in, first-out” policy. Simply stated, this means the IRS assumes that the first shares you sell are the first shares you purchased. Thus, the first shares in become the first shares out. As a result, if the value of your shares has appreciated, more of the money you receive from the sale will be considered to be taxable as a capital gain. Fortunately, there is an alternative. When you place a sell order, instruct your broker or mutual fund transfer agent to sell those shares that you purchased for the highest amount of money. This will reduce the percentage of the proceeds of the sale that can be considered capital gain and are therefore taxable. In order for this strategy to work, you must specify exactly which shares you are selling and when they were originally purchased. Ask your broker to send you a transaction confirmation that identifies by purchase date the shares you want to trade. This will enable you to reduce your taxable gain and maximize your deductible losses when you fill out your tax return. In some cases, you may be better off selling the first shares you purchased, even if this results in a larger gain. If the first shares are subject to the 15% long-term capital gains rate, but the recently purchased shares are subject to the higher short-term rate, the correct choice may not be obvious. Always consult a tax professional. By carefully reviewing your brokerage statements, you can determine which shares you paid the most for. You can then specify exactly which shares you’d like to sell. A word to the wise: Make this request in writing. If the IRS calls the transaction into question, the burden of proof is on you. Finally, the IRS also allows you to calculate your tax basis by taking the average cost of all your shares. On an appreciating asset, this should result in a lower tax liability than the first-in, first-out rule would dictate. Be aware, though, that if you elect to average, you must continue to average for any subsequent sales. Using either system, you may end up with a lower tax liability from the sale of your shares than the IRS would assume using the first-in, first-out rule. The value of stocks and mutual funds fluctuates so that shares, when sold, may be worth more or less than their original cost. The Tax Cuts and Jobs Act, signed into law in December 2017 “breakpoints” for application of these rates as under current law, except the breakpoints will be adjusted for inflation. For 2019, the 0% breakpoint will be up to $78,750 for Married Filing Jointly, up to $52,750 for Head of Household, and up to $39,375 for others. The 15% breakpoint will be $78,751 for married taxpayers filing jointly, $52,751 for head of household filers, and $39,376 for all other filers. The 20% breakpoint will be $488,850 for married taxpayers filing jointly, $461,700 for head of household filers, and $434,550 for all other filers. The new law also leaves in place the current 3.8% net investment income tax. Taxpayers with modified adjusted gross incomes over $200,000 ($250,000 for married taxpayers filing jointly) are subject to an additional 3.8% tax on net investment income (unearned income) as a result of a provision in the Patient Protection and Affordable Care Act. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc. |
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