Unlocking the Mystery of Capital Gains Taxes (Including the Wash Sale Rule)

June 06, 2025

Understanding capital gains and losses is important for managing investments and taxes. The IRS says almost everything you own and use for personal or investment reasons is a capital asset, like your home, stocks, and bonds. When you sell any of these, you either make a profit (a gain) or lose money (a loss). Profits and losses may increase or decrease the amount of tax you owe, depending on how long you’ve owned the asset.

Capital gains and losses can affect how much tax you pay in the year you sell your assets, but remember, if you sell personal things like your home or car, you can’t use those losses to lower your tax bill. For now, let’s focus on investments.

Short-term or long-term

There are two types of gains and losses: short-term and long-term. If you’ve owned something for one year or less, it’s considered short term. If you hold on to it for more than one year, it’s considered long term. This matters for tax purposes because short-term and long-term gains have different tax rates. Keep this in mind when selling investments in a taxable, non-qualified brokerage account.

How the sale of an investment is taxed

Here’s how to figure out how your investments will be taxed:

First, calculate gains and losses on assets you’ve held for one year or less (i.e., short-term assets). To determine a gain or loss, take the proceeds from the sale of each asset and subtract the amount you paid for it (i.e., its cost basis). The result is either a gain or a loss. Subtract short-term losses from short-term gains to find your net short-term gain or loss.

Next, calculate gains and losses on assets you’ve held for more than one year (i.e., long-term assets) using the same process. Subtract long-term losses from long-term gains to find your net long-term gain or loss.

If you have a net long-term gain and a net short-term loss: Subtract your short-term loss from your long-term gain to get your “net capital gain or loss.” Long-term gains are taxed at lower rates than your income. The rate can be 0%,15%, or 20% depending on your income. There may also be an extra 3.8% Medicare surtax. State tax rates can be different, so check with your local tax office.

If you have a net short-term gain and a net long-term loss: Subtract the long-term loss from the short-term gain. Any remaining gain will be taxed at your tax bracket based on your income level.

If you have both a net short-term gain and a net long-term gain: The short-term gain will be taxed at your regular income rate, while the long-term gain will have its own lower rates.

If you have a net loss, you can subtract up to $3,000 of losses from your other income on your tax return. If you have more losses, you can use them in future years.

The Wash Sale Rule

Lastly, there’s a rule called the wash sale rule. If you buy back the same investment (or one very similar) within 30 days before or after selling it, you cannot claim a loss on your tax return for that sale. You can, however, add the loss to the cost of the repurchased investment and benefit from the loss down the road when you sell that investment. Capital gains taxes can be tricky, but a tax professional can help you understand them better. To learn more, check out IRS Tax Topic 409, Capital gains and losses.

How are Restricted Stock Units (RSUs) Taxed?

June 06, 2025

Restricted Stock Units (RSUs) are a form of equity compensation. They are awarded as company stock and can be viewed as part of an employee’s overall compensation package. How this form of compensation is taxed can be tricky, so it is important to know the ins and outs so that there are no surprises come tax time.

RSU Basics

RSUs are typically awarded when an employee starts their job and/or on a regular basis at the discretion of the employer. When RSUs are awarded, the employee does not own them yet. Ownership comes according to a predetermined timetable known as a vesting schedule. For example, an award of 1,600 shares may vest 100 shares per quarter for the next 16 quarters (four years). As shares vest, employees can sell the shares as needed to generate cash. The selling of shares may be subject to restricted trading windows, so employees should check with their employer on that. Here is a breakdown of when and how employees are taxed on RSUs:

Taxation At the Time of Award

Unless your RSUs are immediately vested, they are generally not taxed at this time.

Taxation At the Time of Vesting

The vesting of your shares is a taxable event. The value of the shares that vest is taxed as ordinary income in the year that the vesting occurs, even if you don’t sell the shares. For example, if 100 shares vest on May 15^th and the value per share is $50, $5,000 (100 shares x $50 per share) will be added as taxable income for the year.

The amount of federal taxes owed depends on your tax bracket which is determined by your overall tax situation for the year. Depending on your state of residence, state and local taxes may be owed as well. Note that the employer may automatically sell a certain amount of shares to be used for tax withholding at the federal and state levels, if applicable. Check with your employer to see if the number of shares sold for withholding can be changed to reflect your anticipated overall tax situation.

Taxation At the Time of Sale

The sale of vested RSUs is a taxable event as well. You will have to pay capital gains tax on any appreciation of the value of the stock from the time of vesting to the time of sale. Building on the example above, if the 100 shares are later sold for $60 per share (a total value of $6,000), you will owe capital gains tax on the $1,000 of appreciation (i.e., $6,000 sale value – $5,000 cost basis).

There are two types of capital gains:

Short-term capital gain. If the time between vesting and selling is one year or less, it will be a short-term capital gain and taxed as ordinary income for the year.

Long-term capital gain. If the time between vesting and selling is more than one year, it will be considered a long-term capital gain and will be subject to long-term capital gains tax rates.

Generally, less taxes are owed with a long-term capital gain, but you should always compare short- and long-term gains to identify which sales would reduce tax liability most effectively. If the value of the shares when sold is less than the value when they vested, this will incur a capital loss that may be used to offset capital gains in the same year (but be aware of the wash sale rule).

Pro Tip: If you don’t intend to hold on to them very long, consider selling shares that vest immediately to minimize taxes.

If you are fortunate enough to receive RSUs as a form of stock compensation, it’s important to understand how they are taxed as part of an overall tax planning strategy. As with many tax matters, it’s a good idea to consult with a tax professional to get advice on your specific tax situation.

NUA – One Overlooked Benefit Of Employer Stock In Your 401(k)

April 11, 2025

Should you own stock in your current or former employer? There are mixed opinions out there regarding the risk of holding too much stock in the same company that provides your paycheck, but before you liquidate a large holding in your 401(k), keep reading.

One little known benefit of holding company stock in a 401(k) plan is the ability to have the “net unrealized appreciation” of the stock or “NUA” taxed at a lower tax rate. Normally, when you take money out of a traditional 401(k), it’s taxed at your ordinary income tax rate. However, the gain in employer stock can be taxed at the lower long term capital gains rate if you meet several conditions:

Here’s how NUA works

1) You have to reach a triggering event. This can be death, disability, separation from service, or reaching age 59 ½. You can’t take advantage of this at any time. Most people take advantage of it upon retirement or after.

2) You have to take a lump sum distribution of the entire account. You can’t just withdraw the shares of stock. However, you can choose to roll the rest of the money into an IRA or another retirement account, while moving the company stock shares to a regular brokerage account.

3) The employer stock has to be distributed “in kind.” Basically, this means you can’t sell the shares and then withdraw the cash as you would typically withdraw money from a 401(k). Instead, you have to transfer the shares of stock into a brokerage firm.

If you meet the criteria above, then when you do a withdrawal of the company stock, you will pay ordinary income taxes on the cost basis of the stock (essentially the value of the stock when you purchased or received it) at that time. You may choose to hold the stock or liquidate some or all of it at that point. When you do so, you’ll pay taxes at the lower long term capital gains rate on any growth in the value of the shares beyond what you paid for them (regardless of how long you actually held them).

Be aware that withdrawing a large amount of stock could push you into a higher tax bracket for that year, so you’ll want to be strategic about when you make this move. However, removing the stock from your retirement account would also reduce the amount of required minimum distributions you’d have to take starting at age 73. (Incidentally, the capital gain would not be subject to the 3.8% Medicare surtax on investment income, but the stock would not benefit from a step-up in basis when you pass away.)

It’s about more than just the taxes

As the saying goes, don’t let the tax tail wag the dog. This is not a reason to load up on company stock. After all, individual stocks are always a lot riskier than diversified mutual funds since an individual stock can go to zero and never recover. This is even more true when it’s the company that your job is tied to. A good rule of thumb is to never have more than 10-15% of your portfolio in any one stock, especially your employer’s.

That being said, it could be a good reason to keep some money in company stock, especially if you already have shares that have appreciated quite a bit. In fact, this is one of the main reasons you may not want to roll a former employer’s retirement plan into an IRA or a new retirement plan while still working.

How to decide whether NUA is right for you

You can calculate the value of doing an NUA distribution versus an IRA rollover here. If you’re still not sure whether this makes sense for you, see if your employer offers access to an unbiased financial planner who can help you with what can be a complex decision, or consult your own financial advisor if not.

Commonly Used Tax Deductions

February 10, 2025

Income taxes are one of our largest expenses. They can also become one of our biggest financial planning stressors. While you can’t avoid paying taxes, you can try to minimize the total amount of income taxes that you owe. By paying less in taxes, you’ll have more money to save for your goals. The good news is that you can use popular tax deductions to help reduce your tax bill.

How income tax deductions work for you

Taxpayers can choose between the standard deduction, a fixed amount that reduces income automatically, or itemized deductions, which allow you to deduct specific expenses like mortgage interest, property taxes, and medical costs. The key is to determine which option provides the greatest tax savings, helping you keep more of your money to put toward your financial goals.

Standard Deduction 2024 (Returns Due April 2025)

Filing Status	2024 Standard Deduction
Single	$14,600
Married Filing Jointly	$29,200
Qualified Widow(er)	$29,200
Married Filing Separately	$14,600
Head of Household	$21,900

Note: If another taxpayer can claim you as a dependent in 2024, your standard deduction is limited to the greater of $1,300, or your earned income plus $450, up to the full standard deduction for your filing status.

Standard Deduction 2025 (Returns Due April 2026)

Filing Status	2025 Standard Deduction
Single	$15,000
Married Filing Jointly	$30,000
Qualified Widow(er)	$30,000
Married Filing Separately	$15,000
Head of Household	$22,500

Note: If another taxpayer can claim you as a dependent in 2025, your standard deduction is limited to the greater of $1,350, or your earned income plus $450, up to the full standard deduction for your filing status.

Additional Considerations:

The standard deduction is higher for those over 65 or blind, and even higher if you meet those conditions and your filing status is Single or Head of Household.
If your tax filing status is Married Filing Separately and your spouse itemizes deductions, you may not claim the standard deduction. If one spouse itemizes income tax deductions, then the other spouse must itemize to claim any deductions.
Non-resident aliens must itemize deductions on their tax returns as they are not eligible to claim the standard deduction.

Most commonly used tax deductions

Here are some of the most commonly used tax deductions you may be eligible to use when attempting to minimize your taxes:

Mortgage interest deduction – Homeowners can deduct their mortgage interest (subject to mortgage limits) on Schedule A of Form 1040. The limit for mortgage debt is dependent on when you took out the loan. For loans taken out on or before December 15, 2017, you can deduct home mortgage interest on up to $1,000,000 ($500,000 if you are married filing separately) of that debt. For loans taken after December 15, 2017, you can only deduct home mortgage interest on up to $750,000 ($375,000 if you are married filing separately) of that debt. No matter when the mortgage debt was incurred, you cannot deduct the interest from a loan secured by your home to the extent the loan proceeds were used for purposes other than to buy, build, or improve your home.

State and local taxes (SALT) – You can also deduct up to $10,000 of state, local, and property taxes (or sales and property taxes if you don’t live in a state with income taxes). This is an aggregate limit and is $5,000 for married couples filing separately. The so-called “SALT limitations” underscore the importance of limiting state and local taxes as much as possible.

Examples of state and local taxes that can be itemized on a tax return include the following:

Withholding for state and local income taxes as shown on Form W-2 or Form 1099.
Personal property taxes
Real estate taxes
Estimated tax payments you made during the year
Payments made during the year for taxes that arose in a previous year
Extension tax payments you made during the year

Charitable donations – The IRS agrees that it is better to give than to receive, and they offer some helpful tax savings for giving (if you itemized deductions). There are deductions available for cash and household items donated to charities.

For charitable contributions to be deductible, they must have been made to qualified organizations. Contributions to individuals are never deductible. You may determine if the organization you contributed to qualifies as a charitable organization for income tax deduction purposes by referring to the IRS Tax Exempt Organization Search tool. For more information, see Publication 526, Charitable Contributions and Can I Deduct My Charitable Contributions?

Less frequent itemized deductions

Medical and dental expenses – You can deduct medical and dental expenses if they exceed 7.5% of your Adjusted Gross Income.

Moving expenses – If you are an active-duty member of the military and are required to move due to a military order, you may be eligible to deduct certain moving expenses associated with your relocation.

Home equity loan interest – Home equity loan interest is deductible to the extent loan proceeds were used to buy, build, or make significant improvements to the home. Interest attributed to loan amounts not used for these purposes is not deductible.

Casualty losses due to a disaster – You may be eligible to deduct casualty losses if they occurred due to an event officially declared a federal disaster.

Take Action

If you are not sure which deduction to claim, complete an estimate of your itemized deductions using Schedule A. If your itemized deductions exceed the standard deduction amount for your filing status, you will want to itemize. If you are using the standard deduction amount, you can focus your tax planning efforts on reducing or deferring your taxable income.

How To Find The Right Tax Professional For Your Needs

February 05, 2025

There are lots of reasons to consider outsourcing the preparation of your income taxes to a pro, whether you just don’t want to take the time anymore or you have a more complicated situation such as income sourced from multiple states, income from your side gig or just want to make sure you’re taking advantage of any and all tax savings opportunities. It’s important to know that all tax preparers are not the same – there are different credentials and specialties within the world of tax preparation.

The first step in finding a pro is determining what type of preparer you need. Here are the 5 categories to choose from.

The type of preparer you need depends on your situation

Paid tax preparer:

For a routine return (aka you’re married with kids, own a home and have donations and maybe some investment income, but nothing more complicated), a tax preparer from a storefront service like H&R Block or Jackson Hewitt could do the trick. The convenience of extended hours and immediate tax preparation along with the relatively low cost (starting at about $100 on up, depending on the complexity of your return) is what attracts most customers. While most paid tax preparers must pass employer-administered examinations, they may not be as rigorous as those required to gain the designations or certifications other pros hold.

Also keep in mind that anyone can call themselves a tax preparer as long as they have an IRS issued preparer tax identification number (PTIN), but that doesn’t necessarily mean they know what they’re doing. If you’re looking to hire a tax preparer that doesn’t work for a large service, be sure to ask about experience and other credentials. And beware of any preparer asking you to sign a blank tax return or promising you any type of refund guarantee before looking at your information – they’re most likely up to no good and you’re always on the hook for taxes you owe, no matter who prepares your return.

Accountant:

Someone who practices accounting but hasn’t taken or passed the CPA examination may not be a bad choice for a basic return. Seek someone with a personal tax emphasis. Rates can range from $40 to $75 or more per hour.

Enrolled Agent:

EAs are the only taxpayer representatives who receive their right to practice from the United States government. (CPAs and attorneys are licensed by the states.) Agents have either worked for the IRS for five continuous years or have passed a two-day exam, and must complete 72 hours of continuing education every 3 years. Billing may be hourly (usually $100 to $200 per hour) or by the tax return, which can run from $100 (for a basic 1040) on up depending on the complexity. You may choose to work with an EA if you have an unusual tax situation or have past tax issues that you need help cleaning up.

Certified Public Accountant:

A CPA earns the title by passing the Uniform CPA examination, a rigorous 4-part test that ensures those holding the license are knowledgeable in all areas of accounting. CPAs must also complete a certain amount of on-the-job training in auditing and taxes (the amount varies by state) before they can earn their license and then must maintain their license with a certain amount of continuing education each year (varies by state ). Some CPAs specialize in corporate work and may not be the best choice for personal taxes, while others specialize in tax, but not in individual income taxes. A CPA may be the best choice if you have business income, own rental property or have other tax complexities that extend beyond income you earned from working and/or investing.

Tax Attorney:

If your tax situation is very complex or you are in deep trouble with the IRS, you may want to consider a tax attorney. Of course, a tax attorney is the most expensive of the tax pros, with rates typically running from $150 to $600 an hour.

How to find the best one for you

The best place to start your search for a tax pro is with friends and colleagues or even your local chamber of commerce. You can also check with the National Association of Tax Professionals, which has listings with certifications noted. The Better Business Bureau or the pros certifying agency can tell you if the person you’re considering hiring is in good standing, with no disciplinary actions.

Interviewing a preparer before you hand over your W-2 can prevent problems later. Make sure you’re comfortable with their answers to these questions.

What’s your education and experience? (at minimum they should have a college degree or several years of experience with references available)
Are you licensed or registered? By what agency? For how long? (If they are not licensed or registered, ask to talk with other clients to make sure they know what they’re doing)
What’s your specialty (personal taxes, corporate taxes, audit issues)?
What continuing education courses have you taken recently?
Who from your office would work on my taxes? (many larger offices have interns prepare returns that are then reviewed by more experienced CPAs – if that’s the case, you may be better off going to a smaller office and paying less)
In the event I’m audited, could you represent me?
What are your rates, and how much do you expect the total cost of the return to be? (beware of anyone wanting to charge by the form – you could be overcharged. The best preparers either charge by the hour or are willing to give you a not-to-exceed estimate)
When would the return be finished? (if you’re coming to them after mid-March, don’t be surprised if the answer is after the filing deadline – busy tax preparers often file extensions for clients who procrastinate getting their information in on time, although that doesn’t extend your time to pay any taxes due)

Whatever your needs, there’s a tax pro out there ready to make your life easier. Choose the right one, and you’ll more than likely get your money’s worth.

Be A Tax Savvy Investor

February 05, 2025

Take advantage of long-term capital gains rates

Hold stocks and mutual funds for more than twelve months to have your gains taxed at lower capital gains rates.

Consider tax-advantaged investments

Municipal bonds are issued by state and local government agencies. The interest is tax free at the federal level, but may be subject to the alternative minimum tax. Those issued by the state or municipality where you live are tax free at the state or local level as well.

Sell investments at a loss

If you have stocks or mutual funds in a taxable account that are worth less than you paid for them, and your losses exceed your gains, you can take losses of up to $3,000 against your taxable income. Be sure to evaluate selling costs and the investment’s future potential first.

Watch out for the wash sale

You can sell mutual fund or stock losers and buy them back again if you feel they are good long-term investments (but make sure you wait at least 31 days before you buy them back or the IRS will disallow your loss).

Don’t buy mutual funds at the end of the year

Mutual funds may pay out capital gains accrued throughout the year as a taxable distribution toward the end of the year (even if you just bought the fund, you’ll owe taxes on this payout!). Wait until after the distribution is made if you wish to minimize your tax bill.

Know the limit if you’re selling your home

Qualifying homeowners are exempt from the first $250,000 of capital gains ($500,000 if married filing jointly) when they sell their home.

Understand the different tax rates for dividends versus interest

Qualified dividends paid from stock investments are taxed at the same rate as long-term capital gains. Interest earned on investments such as CDs, savings accounts, and money market funds, however, are taxed at higher ordinary income tax rates.

5 Estate Planning Steps Literally Everyone Needs To Take

February 05, 2025

You may be thinking that you do not have the need for an estate plan or at least there is no harm in delaying getting started with estate planning. The truth is that anyone with savings, debt, a spouse, children, a home, or a retirement plan needs to at least have the basics in place.

Hopefully, it’s true that you won’t need it for decades to come, but should something happen and you don’t have a plan, it could make a HUGE difference, sometimes even while you’re still alive.

Here are the 5 critical steps – make a plan to check these off the list today.

Step 1: Create or review your will

If you have a current will, congratulations! You have already taken an important step in the estate planning process. Your will controls the distribution of everything you own that doesn’t have a beneficiary designation and can also name a guardian for any minor children. Things that you pass via will include:

Tangible personal property like your home, your car, and all your stuff
Individually held financial accounts such as savings, checking, stocks, bonds, and mutual funds held outside retirement accounts which do not have a beneficiary designation.

Don’t have a will? If you die without a will, your state has laws that determine who gets your money called laws of intestacy. These laws vary from state to state but generally give first priority to your spouse and children. If you have neither, then blood relatives including parents, siblings, and others are your default heirs, under a specified order of priority. If no blood relatives can be found, your money goes to the state Treasury.

Protect your children! Should your minor children lose both parents, your will determines who will raise them and manage your money on their behalf until they reach the age of majority. If you die without a will, the state will name a guardian to take the children – and it may not be who you think is the most appropriate person!

In your will, you can designate a guardian for your children, as well as one or more alternates in the event your first choice is not available. You can name the same person, or a different one, to manage any money left to your children as well.

Step 2: Review your assets and update beneficiary designations

Many people think that once they have made a will, all of their assets will pass according to that document. Actually, a large number of your most valuable assets are not subject to probate, meaning they may NOT pass by will. Use this checklist to keep track of specific exceptions to your will.

Do you…

Own any bank accounts, mutual funds, or brokerage accounts in joint name with someone else?

-If yes, the joint account owner will automatically own the assets upon your death (in most cases). Also, in most states, you can designate an individual account to be “Payable On Death” (POD) or “Transfer On Death”(TOD) to a named beneficiary for the same result and the account will “skip” your will (and probate).

Own real estate with another person?

-If yes, real estate owned as joint ownership with rights of survivorship also does not pass by your will but goes directly to the other joint owner automatically.

Have insurance policies, annuity contracts, employer retirement plans and/or IRA’s?

-If yes, keep your beneficiaries updated. All of these account types require you to name who will receive the account or policy value upon your death. If you fail to name a beneficiary or all beneficiaries have died before you, the account will be payable to your estate.

Have a trust?

-If yes, your trust will determine how the trust property is distributed to beneficiaries, but only if you take the necessary steps to re-title accounts and other assets to the trust. Failure to change the title to the name of your trust will cause them to pass by other means, regardless of what the trust says.

All of these exceptions pass directly to the person named, and not by your will. It is extremely important to keep your beneficiary designations up to date – it is not uncommon for older life insurance policies and previous employer retirement plans to be paid out to ex-spouses or other unintentional parties. Updating your will does not fix these accounts, since they are not subject to your will.

Step 3: Evaluate your insurance coverage

Whether your income stops due to death or disability, the effect on your family is the same. Where will the money come from to replace your paycheck? Insurance may be your best option. Without it, your family may need to sell assets, move to a less expensive home and/or disrupt college and retirement plans.

Life insurance. Use this calculator to get an idea of how much insurance you need to have in place. Once you decide on the right amount for you, be sure to find out what benefits you have through work first. Sometimes, you can get all of the life insurance you need there at the most affordable rates, but if you can’t, look into supplementing with a personal policy.
Disability insurance. This is your paycheck insurance – should something happen that keeps you from being able to work, this insurance kicks in to replace some of that until you’re able to work again. Statistically speaking, this is the insurance you’re more likely to use during your working years. First, confirm any coverage you have through work and find out if you can add to it, if necessary — most group plans are broken into Short-Term and Long-Term and often have lower premiums than individual policies. It’s important to know that most policies only provide 60 – 70% replacement income, so should you become disabled, you’ll still have a drop in income. Use this calculator to see if you need to purchase coverage beyond what you have through work.

Step 4: Check your powers of attorney

Remember that your will doesn’t take effect until you actually pass away, but what happens if you have an accident or are otherwise unable to make financial or healthcare decisions for yourself? You can designate someone else to make these decisions for you using the following important documents:

Advanced Directives – There are two types of documents, called advance directives, that can be prepared as part of your estate planning for future medical decisions.

Living Wills – If you have strong feelings about what type of medical care you want (or don’t want!) and you are unable to communicate, a living will can do it for you. This is a document that you can use to state under what circumstances you wish to be kept alive by artificial means. If you do not express your views in writing, all available means of treatment to maintain your life are usually provided, even if family members object. Therefore, if there are conditions where you would not want treatment, it is important that you state your wishes while you are able to do so.
Medical Power of Attorney – While the title and wording of this document may vary from state to state, most states permit a document that enables you to select someone to make medical decisions on your behalf. This power can only be exercised when you are unable to communicate but is not limited to situations where you are terminally ill.

Durable Power of Attorney – There can be a number of situations where you may need someone else to make financial transactions on your behalf. Whether you’re traveling overseas, in a coma, or sequestered in a jury, a document called a durable power of attorney permits the person named as your agent to sign documents, trade securities, and sell property. You do not have to be unable to act for yourself in order for your agent to act on your behalf.

The agent does have to act in good faith, and may not abuse the power of attorney for his/her own advantage. If you sign a power of attorney that is not specifically durable, the power is revoked upon your disability or inability to communicate. With a durable power of attorney, your agent can make the necessary transactions in order to pay your medical bills or make sure your family has the money they need.

Living Trust – Another method is to place your assets in a living trust. Don’t confuse this with the living will described above. Although they sound similar, they are very different. A trust is simply an arrangement that provides for a third party to manage your assets for a beneficiary, upon your death. A living trust allows you to start a similar arrangement while you are still alive. You can be your own trustee, and simply name a successor trustee to take over upon your death or disability. A living trust is a more expensive estate planning tool than a durable power of attorney, but it can also be customized to your specific needs. It is particularly useful for more complicated situations such as second families or people who own property in multiple states.

Step 5: Monitor your estate plan

Things change. That’s why you should review your estate plan whenever a life event occurs for you and your family. Even if it seems like nothing’s changed, you should review your estate plan every few years at a minimum. A good rule of thumb is that you should update your will any time someone enters or leaves your life (aka birth, marriage, divorce, death)

Documents to review

Your will and any trusts
Powers of attorney
Beneficiary designations on employer-sponsored retirement plans (401(k), 403(b), 457, etc), IRAs, life insurance policies, annuities, HSAs

An estate plan, like a financial plan, is always evolving as your life changes. It can be easy to delay making an estate plan because there are several important decisions you must make, but don’t fall victim to analysis paralysis. You can always change your documents as long as you’re still of sound mind, so choose what works for your life today, and then make updates as things change. Also, be sure to check with legal benefits offered by your employer to help with the estate planning process.

Working In the U.S. Temporarily? Here’s What You Need to Know About Retirement

February 05, 2025

We get many retirement benefits questions on our financial coaching line from professionals working in the United States but plan to return eventually to their home countries or take another ex-pat assignment. Frequent questions include: should I participate in my company’s 401(k) plan, and if so, should I choose to make a pre-tax, Roth, or after-tax voluntary contribution? In addition, how can I access my savings when I leave the US?

Get professional tax advice

If you’re a professional from another country working legally in the United States and do not have permanent resident status (e.g., a “green card”), the US taxation system can seem like a maze: one wrong move, and you’re stuck in a corner. Do not try and navigate this yourself. Instead, seek professional tax advice from a tax preparer experienced in ex-pat/non-citizen issues. You’ll need guidance on federal and state withholding, tax treaties, tax filing, benefits choices, and what to do when you leave the US.

Ask ex-pat colleagues first for referrals to a tax professional with experience working with people like you. It’s not expensive and could save you from financial and legal problems later. For a basic overview of types of US tax preparers, see How to Find a Good Tax Preparer.

What do I need to know about US retirement savings programs?

The US retirement savings system is made up of Social Security, defined contribution plans (401(k), 403(b) or 457), traditional pension plans (defined benefit), and individual retirement accounts (IRA and Roth IRA).

Social Security

This is the government-sponsored retirement system, similar to what’s often called a “public pension” in other countries. As a non-citizen employee, you will likely pay the same taxes as US citizens into Social Security and Medicare, which you will not recoup unless you continue to be a US resident. Your employer will also make contributions on your behalf.

If you do not plan to live in the US when you retire, you may or may not be able to receive Social Security income benefits. It depends on how long you paid into the system, your immigration status, country of residence, and whether you started receiving payments before leaving the US.

401(k), 403(b), and 457 plans

Most large employers offer employer-sponsored retirement savings plans, such as 401(k) and 403(b) plans. Employees may contribute a percentage of their gross pay each period to a tax-advantaged account. Frequently, the employer will match up to a set percentage of what you contribute or will sometimes make contributions regardless of whether you make your own contributions.

In addition, you’ll get to choose how your contributions are invested from a menu of mutual funds or other investment vehicles. You may also choose whether you contribute your money into a pre-tax (traditional), after-tax (Roth), or after-tax voluntary account. See tips below for determining what works for you.

IRA and Roth IRA

If you are considered a resident for US tax purposes (have US earned income, have a Social Security number, and meet the substantial presence test), you may open a traditional or Roth IRA. However, if you are a non-citizen and don’t plan to seek US citizenship or permanent residency, you may not be able to reap all the benefits of an IRA or Roth. If you’re eligible, you may contribute up to certain limits.

	IRA limit	IRA catch-up amount	401(k)/403(b) limit	401(k)/403(b) catch-up amount	SIMPLE limit	SIMPLE catch-up amount	SEP
2025	$7,000	$1,000	$23,500	$7,500	$16,500	$3,500	$70,000
2024	$7,000	$1,000	$23,000	$7,500	$16,000	$3,500	$69,000

Traditional pension plans

These are no longer widely available to new employees, but some larger companies and state/local government jobs still offer them. A pension may be fully funded by employer contributions or by combining employer and employee contributions. Typically, it takes 10-20 years to be “vested” in a pension, where the employee is eligible to receive a fixed monthly payout at retirement.

Should I enroll in my 401(k)?

Saving in your employer-sponsored retirement plan has multiple benefits, even if you don’t plan to continue working and living in the US later in your career. If there’s a match on your contributions, that’s like earning additional income. There’s the potential for tax-deferred or tax-free growth, depending on the type of contributions you make. Plus, you can’t beat the ease of contributions deducted automatically from your paycheck!

Always consider your future taxes.

For non-citizens making decisions about which retirement contribution type to choose, you’ll need to consider where you will be living when you withdraw the money, how old you will be when you plan to withdraw it, and whether you think you’ll be a US permanent resident or citizen at that time. If you still expect to be a non-citizen when you withdraw the money, note that you must file a US tax return in any year in which you have US income, including retirement plan withdrawals. According to the IRS, “Most U.S.-source income paid to a foreign person are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty. You may or may not owe that rate in taxes, but the funds will be withheld from the distribution regardless.

If you’ve overpaid through the withholding, you will get a refund after filing your tax return for that year. See this IRS US Tax Guide for Aliens for in-depth reading. Now, do you see why I say you need a tax advisor if you’re an ex-pat working in the US?

If by the time you withdraw the money, you have become a US citizen or a permanent resident but are living overseas, you won’t be subject to the 30 percent withholding. You will, however, have to file a US income tax return every year regardless of your income.

For U.S. citizens, check out this article about what you need to know about taxes while working and living abroad.

Pre-tax, Roth, or After-tax voluntary contributions?

The financial planning goal is to minimize taxes and penalties. Your company’s matching or profit-sharing contributions to your retirement plan are always pre-tax, so they will be taxed when you withdraw them. How much of your retirement contributions will be taxed depends on how you contribute:

Traditional pre-tax contributions are deducted from your taxable income, so you’ll pay less in income taxes today. Earnings grow tax-deferred for retirement. After age 59 1/2, you may withdraw them without penalty, paying US income taxes on whatever you take out. Before that, you may withdraw them only if you a) retire, b) leave the firm, or c) have an extreme financial hardship.

Roth contributions: Roth 401(k) contributions are made after-tax and grow tax-free for retirement if withdrawn 1) after 5 years and 2) after age 59 ½. Therefore, if you meet those requirements for distribution, your Roth distribution would not be included in your taxable US income. See this IRS tool to see if your Roth distribution could be taxable. However, your home country (or country of residence) could tax it, depending on the tax treaty with the US.

If your plan allows, you can leave the funds in the account until after age 59 ½. If you must take an earlier distribution after leaving the firm, you will only be taxed and penalized on the related growth and company contributions, not your original contributions. See this IRS Guide to Roth 401(k)s for more information.

After-tax voluntary contributions: Many employer-sponsored plans permit after-tax voluntary contributions above, or as a substitute for, Roth or pre-tax contributions. This will give you some flexibility, as you may withdraw those contributions at any time (although the growth of your funds will be subject to tax). If you plan to withdraw contributions after leaving the firm, taxation is similar to the Roth 401(k). Your retirement plan may also permit you to convert after-tax voluntary contributions to the Roth account, which could come in handy if you end up staying in the US, or roll them over to a combination of a traditional IRA and Roth IRA when you leave the firm.

On the downside, you typically won’t receive an employer match on voluntary contributions. Your original contributions can be withdrawn at any time tax-free, but any earnings or growth made in the account will be taxed when withdrawn. (That means gains withdrawn before 59 ½ will be taxed and subject to an additional 10 percent penalty.)

If you leave the US, are you required to take distributions?

If you leave to work and reside overseas, you would be able to take a distribution from your company’s retirement plan but are generally not obliged to take any until age 73. If possible, leave it to continue to grow, protected from taxes. Pre-tax contributions later distributed are included in your taxable income and, if taken before age 59 1/2, may be subject to an additional 10% penalty.

Ask for guidance

If your company offers a workplace financial wellness benefit, talk through the pros and cons of your choices with a financial coach. Your financial coach can help you understand the implications of your options, given your personal situation. Also, while you’re working in the US, don’t forget to use a tax advisor experienced in non-resident taxation., such as a certified public accountant or an enrolled agent. This is well worth the relatively low cost of getting good tax advice.

How To Tackle Tax Season

February 05, 2025

When the tax deadline approaches, it can be stressful, especially if you are unsure if you have to pay the IRS. It’s too easy to procrastinate with that potential IOU looming over your head. However, having a game plan to organize and execute filing your taxes can take the bite out of tax season.

Gathering information

Build a tax file for your incoming tax statements. Getting it all together saves the hassle of stopping in the middle of your tax preparation. Visit your checking, savings, and online brokerage accounts for 1099s. Check your mortgage provider for statements on interest paid. If you have an escrow, this may also include property taxes. If not, check your local jurisdiction online to download a statement.

One way to “de-stress” your tax planning is to know in advance if you and the IRS agree on the facts of the previous year. Nothing is more annoying than preparing your return and then getting that letter from the IRS that they found a discrepancy. It can slow down the process of your tax refund. You can view your official transcript with the IRS online account by visiting Your Online Account | Internal Revenue Service (irs.gov). (The IRS made this easier by removing the biometric data requirement.)

Getting your tax filing done

One recent survey shows that almost half (45%) of its respondents use tax planning software. Others (38%) choose to hire a tax preparer in person or virtually. The remainder prepares it the old-fashioned way. People with simple situations (no businesses, no real estate investment, and little to no investment income) are generally satisfied using tax filing software. However, one thing that can get overlooked is the options available to prepare your taxes for free if you fall below a certain income threshold. In addition, over 94% of individual tax returns are filed electronically.

Choosing a tax preparation method has much to do with your personal preference. For example, if you prefer to have a person prepare your return for you and your situation is relatively simple, a national chain franchise like H&R Block, Jackson Hewitt, or their local equivalent could be your cheapest and quickest solution. Just be aware that there is a wide variation in skills and experience among the people who work in these companies.

If your situation is complex or you have lingering issues with the IRS, you may want to consider an Enrolled Agent or CPA specializing in individual taxes. Enrolled Agents are authorized to represent you in front of the IRS and earn their status either through experience as a former IRS employee or by passing a 3-part comprehensive IRS test on individual and business tax returns. You can search for a local one here. Like Enrolled Agents, CPAs can represent you in front of the IRS and have even more rigorous requirements, but they’re not necessarily more qualified as tax preparers. You will want to interview your prospective CPA to determine how much of their practice they dedicate to helping someone with the same tax concerns as you.

Plan for next year today

To make next year’s filing even less stressful than this year, begin planning before the year is over. Maintain that tax file for important documents as they come in throughout the year, so you do not have to pull it all together this time next year. If your refund is getting dangerously close to you having to pay, update your Form W-4 now to increase your withholding. Also, determine if putting more aside into your 401(k) or HSA could benefit you in the future.

Which Federal Tax Breaks Still Apply To College Costs?

May 01, 2023

When it comes to education, most financial planning centers around saving and investing for college. This focus makes sense because we’d all like to be able to cover our education expenses that way in an ideal world and not need to borrow a dime. But in the real world, that’s rarely the case.

Fortunately, parts of the tax code can help lift some of that burden if you know how to use them. As you can imagine, this is an area that we get a lot of questions about during the tax-filing season. So let’s take a look at some of these tax breaks and how you might be able to qualify for them.

The American Opportunity Credit (AOTC)

Since it’s a credit, you can deduct this one right off your taxes up to $2,500 (100% of the first $2k of eligible expenses and 25% of the next $2k) per student (you, your spouse, or a dependent) for up to 4 years of undergraduate tuition and required fees and materials, including books.

However, the credit phases out once your modified AGI reaches $80k for those filing single or $160k for joint filers. On the other hand, 40% of it is refundable for people who don’t earn enough to owe income taxes.

The Lifetime Learning Credit (LLC)

This credit is similar to the American Opportunity Credit, but it’s a little smaller. This credits up to $2k or 20% of the first $10,000 in expenses. That amount begins to phase out when MAGI exceeds $80k or $160k. These amounts will not adjust for inflation for the foreseeable future. It’s also a nonrefundable credit, whereas the AOTC may be refundable. The credit max of $2,000 is per tax return (per family) and not per student.

However, it’s more flexible since it’s not limited to undergraduate education. Thus, you can use it for graduate or qualified job-related programs or just a few courses you take here and there. Unfortunately, you cannot take Both credits for the same student in the same year.

Tuition and fees deduction

This deduction expired at the end of 2017 and was renewed retroactively in December 2019. So, if you had tuition and fees that were deductible from 2018 to 2020 that you didn’t claim (because they had not extended the law at that time), it’s worth looking into amending your tax return to request a refund.

No double-dipping

It’s important to point out that you can only use one of these tax breaks (assuming you qualify). These tax breaks also don’t apply if you’ve used funds from another tax-free account, like a 529 plan or Coverdell account. They also don’t apply if you’ve used other forms of tax-free educational assistance like Pell grants or Veterans’ programs.

In other words, there’s no double-dipping allowed. (This restriction doesn’t apply to funding sources that are generally tax-free, like loans or inheritances and gifts.) So the trick here is to withdraw money from a 529 or Coverdell account for no more than the amount of qualified expenses that aren’t covered by one of these other tax breaks.

Student loan interest deduction

The tax benefits don’t necessarily stop with the tuition bills. Suppose no one can claim you as a dependent on someone’s tax return. Your MAGI is also less than $85k or $170k joint (with phase-out beginning at $70k or $140k joint). In that case, you can deduct (without having to itemize) up to $2,500 of interest yearly on student loans that you’re legally obligated to pay. That last part means you can’t deduct interest for loans in your children’s names even if you make the payments.

Education is expensive and is rising faster than inflation. The good news is that we can offset some of that cost on our taxes. The bad news is that these breaks can be complex. So, unless you have a good tax preparer, you’ll have to take some time to understand them, which can be an education in itself. So why isn’t there a special tax break for that?

The W-4: Getting Your Optimal Tax Refund

January 05, 2023

Tax season can fill you with a sense of dread about filing your returns only to find out you must write a check to the IRS to boot. But the reality is that 76% of taxpayers who file actually get a refund rather than owe. That all sounds good on the surface; who wouldn’t want to get some extra cash every spring? But the reality is that a refund is really an interest-free loan to the government. It represents money you could have kept for your own purposes and goals during the year.

Striking the right balance involves meeting your tax obligations while keeping as much hard-earned money as possible.

Update Withholdings

The primary way we pay our taxes during the year (the IRS is a pay-as-you-go system) is through withholdings from our paychecks. The IRS form W-4 determines your paycheck withholding. Your employer keeps your W-4 on file as it determines the amount they should send to the IRS on your behalf. You can change your W-4 with your employer anytime you want to adjust your withholdings.

The IRS has a great tool to help you determine your withholdings and produce your desired outcome. First, you will need to gather information to help you complete the estimator correctly. For example, you’ll need pay statements, bonus information, side gig income, and your most recent tax returns. The output will then give you instructions to update your W-4 for an approximate refund of $0. You can also adjust the slider bar to get your desired result and determine what adjustments you need to make to your W-4.

The W-4 Form

Let’s look at the form itself in more detail:

Step 1: This is your personal information, including your filing status. Update the form whenever your filing status changes (marriage, children, etc.), as that adjusts the withholding defaults.
Step 2: This section helps coordinate multiple W-4 forms if you have more than one job or your spouse also works. The estimator detailed above will provide instructions for your family unit’s W-4 forms.
Step 3: Input the number of qualifying children or relative dependents in your household. The larger the number you input in this step, the less tax the IRS will withhold to account for the child tax credit. Conversely, the fewer dependents noted in this section, the more tax you will have withheld.
Step 4: Other adjustments can be input here. If you have other income that will not have withholding (e.g., interest, dividends, and retirement income), you can specify additional withholding to account for that. You can also indicate if you expect to itemize deductions this year and not take the standard deduction. You will want to refer to your most recent tax return to determine if you will likely itemize. Lastly, you can specify a set dollar amount of additional tax you want to withhold every pay period. For instance, if you had to write a check for $1,200 this past year and get paid twice a month, you can put $500 in line C to address that.

Other Considerations

You want to adjust your W-4 as your circumstances change. For example, one big thing that can throw a curveball is dependent children that age out of the child tax credit. Once those kiddos turn 17, they are no longer eligible for this credit, which can lead to surprises for parents when they file. So, again, run the estimator tool and update your W-4 when that happens to reflect a lower number of dependents. That will help to increase your withholding.

Ultimately, determining your optimal tax refund is a personal choice, but understanding the implications of getting that big refund needs to be a part of your planning. Get your intended results and avoid tax filing surprises by going through the IRS Tax Withholding Estimator and updating your W-4 forms accordingly.

Tackling Your Taxes

January 05, 2023

Let’s face it. Tax time is no fun. It can also be stressful. Perhaps this explains why 33% of Americans typically wait until the last minute to file their annual income taxes. However, tax season doesn’t have to be a dreadful, stressful time. So let’s look at how to make tackling tax time more manageable and (relatively) stress-free.

Stress Less

Financial issues have long been a source of stress for many people, and tax time makes this stress even more pronounced. Not only might you owe some additional money to the government, but there is also a clock ticking and some uncomfortable financial penalties if you are late. Use these tips to help reduce stress and anxiety the next time you have to file your taxes:

Break the tax filing job up into smaller tasks so you can complete your filing over time
Start early to avoid a stressful time crunch near the tax filing deadline
Use tax software to guide you and help keep you on track with helpful email reminders
Consider hiring a tax professional to handle your filing while you enjoy a fun, relaxing activity instead

Buy More Time

If the looming tax deadline is just too much to take, you can elect to file later and buy yourself more time. First, however, there are a couple of rules to follow:

Individual tax filers at any income level can request an extension until October 15 to file their federal income taxes. However, an extension to file does not give you an extension to pay. If you owe taxes, the IRS expects you to pay some or all of those taxes when you file. Requesting extra time is easy. You can file for an extension electronically using IRS Free File and following the online instructions. When you file an extension, you can pay taxes owed through the IRS website.

If you have time to file but need time to gather enough cash to pay your tax bill, the IRS also allows qualified taxpayers to pay over time. A setup fee may apply, and you must pay accrued interest and penalties. Still, this option will let you spread your tax payments over several months or even years. Apply online for a payment plan with the IRS to see if you qualify and to request a payment schedule.

Get Ready to Be Ready

Before the next tax season rolls around, there are some steps you can take to help make tax filing easier in the future.

Organize your records so you can easily find them. For example, many people scan or take photos of important tax documents as soon as they receive them and file them electronically using Dropbox or similar apps.
Run a W-4 withholding estimator to adjust your payroll withholdings and avoid future tax bill surprises at filing time.
Once tax season starts again, many accountants or services may be too busy to take on new clients. So, if you hire an accountant or tax preparer, conduct your search and decide well before next January.

Feel More Relaxed and Less Taxed

Although death and taxes are inevitable, according to an old saying, no one says that filing your taxes always has to be stressful and unpleasant. However, with a bit of pre-planning and some thoughtful organization, you can make your tax filing efforts simpler and much less hectic in the future. So take some time to review these tips, select a couple that works for you, and become better prepared to tackle your taxes.

Easy Income Tax Strategies

February 26, 2022

As always, I seem to owe a bit extra each year (that’s by design) when doing my taxes. This annual ritual has me thinking about which strategies might help me shave off tax dollars now and next year. Here are a few strategies that come to mind.

Contribute more to your retirement plan at work

Regardless of how Congress tweaks the tax code, there is a critical tool in most of our tax toolboxes. This tool is the ability to shelter some current earnings from income taxes. You can do this by making pre-tax contributions to a retirement plan at work (401k, 403b, etc.). Contribution limits increased to $22,500 per year in 2023. Annual catch-up contributions for workers aged 50+ are $7,500. Contribute at least as much as your employer will match. Aspire to increase your contribution rate to 10% or more of earnings over time.

Remember, if your goal is to minimize taxes NOW, make sure you select the pre-tax option and not the Roth.

Maximize your health savings account (HSA) contributions

An often-overlooked last-minute tax-saving strategy is to make more HSA contributions for the previous tax year. You have until April 15th to make the contributions. First, however, you must have been covered by a high-deductible health insurance plan during the year to qualify. Then, if you didn’t contribute the maximum, you may have some extra tax savings available. The maximum for 2022 is $3,650 for individuals or $7,300 for family coverage. The maximum for 2023 is $3,850 for individuals or $7,750 for family coverage. There is a catch-up contribution of $1,000 for those aged 55+.

Be sure to notify your HSA provider that you want them to code your contribution for the 2022 tax year. The IRS will include your contributions as an adjustment to gross income on your tax return. This works to lower your taxes for that year.

Make deductible contributions to a traditional IRA

This option is available if you are working but not covered by a qualified plan at work (e.g., 401k or 403b), or if you are participating in a plan and have income below certain limits.

If you don’t have a retirement plan through work or do but meet the income limits, you can deduct your contributions to a traditional IRA, and investments can grow tax-deferred until withdrawn.

Itemize & maximize deductions (if you still can)

Under current tax law, you may find it is just not worth it to itemize deductions. Thanks to recent tax reforms, the standard deduction amount has increased for everyone. The deduction is $12,950 for single filers ($13,850 in 2023) and $25,900 ($27,700 in 2023) for married couples filing joint returns.

Home mortgage interest has traditionally been a huge deduction for itemizers. You can deduct home mortgage interest on up to $750,000 of mortgage loans ($375,000 if married filing separately). You can’t deduct interest for home equity loans unless you used the money to remodel or improve your home.

If your itemized deductions are close to the standard deduction amount, itemizing might be better if you make charitable contributions. Some taxpayers are electing to “bundle” their deductions by pushing them to the next tax year. This way they can have larger amounts of itemized deductions every other year and take the standard deduction in-between years.

Make the most of flexible spending accounts (FSAs) for child and healthcare

A Dependent Care FSA (DCFSA) is a pre-tax savings account where you automatically deduct money from each paycheck BEFORE TAX. This gives you a pot of tax-free cash you can use to pay for childcare expenses during the year. Under current IRS rules, you can set aside $5,000 each year, regardless of how many children you have.

Similarly, if you anticipate having regular or one-time healthcare expenses, why not use some tax-free cash for those, too? Healthcare flexible spending account limits increased to $3,050 in 2023. The same contribution is applicable to limited-purpose FSAs restricted to dental and vision care services. You can use this along with health savings accounts (HSAs) tied to high-deductible health insurance plans.

Update your personal spending plan (a.k.a., “The Budget”)

I know; it seems like every financial topic is a reason to talk about budgets. Then again, staying informed and aware of your current and future spending plans will help you identify which dollars might represent additional tax savings. Specifying precisely how much you can afford to redirect to tax advantaged strategies will help you adapt to those pesky tax law changes and maybe even enjoy a few more dollars in your pocket.

Ideas To Make An Impact With Your Tax Refund

February 18, 2022

When tax season arrives it’s time to gather those receipts and crunch those numbers! For millions of Americans, it’s also a time of great anticipation as we await the annual windfall that is our tax refund.

Before spending all your refund on a new TV or that new car that will saddle you with high payments for the next 5-6 years, take a deep breath and think about how you can use that money to improve your current and future financial situation. Here are some ideas:

Shoring up your financial foundation

Establish or strengthen your emergency fund – Most experts recommend having 3-6 months of expenses saved in an emergency fund to deal with unexpected expenses or even bigger events like job loss and illness/injury. Starting with $1,000 – $2,000 will get you on your way and allow you to stop using credit cards to deal with unexpected bills.
Pay down high interest debt – If you have credit cards or other high interest debt (north of 6% interest rate), using your refund to pay that down will save you a lot of money in interest. Once you pay off your cards, stop using them! Breaking the cycle of debt (see emergency fund above) will allow you to save for other goals and keep more of your hard-earned money.
Save for retirement – Using your refund to fund an IRA to help you prepare for retirement may not seem as fun as a trip to Vegas – but is a great way to get the most bang for your refund buck.

Give your financial goals a boost

We all have financial goals that we are saving for, and a tax refund is a fantastic way to give those an extra boost! Here are some examples to consider:

Saving for college – Open or add money to the kiddos 529 plan.
Saving for retirement – Increase your savings into your 401(k) or IRA.
Vacation – Set more money aside for that next vacation.
New car fund – The more cash down you have, the lower your monthly payment, which means less money spent on interest.

Split your refund

It is ok to treat yourself with your tax refund, but be careful about spending all your refund on indulgences. Split your refund to take care of past, present, and future you!

Past You – Pay off those lingering debts.
Present You – Treat yourself! Take 10-20% of your refund to get or do something for yourself.
Future You – Increase your savings for emergencies or other goals.

Evaluate your withholdings

While getting a big tax refund each year feels like a bonus or gift, the truth is you overpaid the government throughout the year. It amounts to an interest free loan that you give to Uncle Sam. If you typically receive a large refund each year, consider using the IRS Withholding Estimator to determine how much you should have withheld from each pay check.

The goal should be to get a small refund each year (around $100 or $200) – nobody wants to write a check to the IRS every spring. While your refund may be less, you will have more money in your paycheck to reach your financial goals more quickly, so if you do make adjustments, make sure you make the most of the extra dollars each pay day. The key with that increased take home pay is to make sound decisions each month to improve your overall financial situation.

Your Next Steps

Decide how your tax refund can best be used to reach your goals – remember, a little indulgence is ok!
Review your withholdings and adjust if necessary, to keep more of each paycheck where it belongs – with you!
If you need some help deciding what to do with your refund or looking at your withholdings, speak with a Financial Coach.

Making good choices with your tax refund and go a long way to improving your financial situation – now and in the future. Focusing on your priorities may not get you all the things you want right now, but it will help you get the things you want most in the long run! Happy Tax Season!

3 Ideas To Help You Pay Less In Taxes

January 24, 2022

When it comes to tax strategies, sooner is better than later.

Disclaimer: Consult with a tax professional before taking action.

Let’s take a look at three easy tax strategies that might save you substantial amounts of money come tax time.

Give your paycheck a checkup

It is always a good time to double-check your W-4 withholding elections. However, checking as early as possible will help you plan the year better. You want to make sure you aren’t paying too little in taxes along the way or paying too much. The idea is to find a balance so you won’t owe the IRS penalties OR pay too much. That would be like giving the government an interest-free loan!

Fortunately, there are two free tools available online to help you calculate how much to withhold. Gather copies of your pay stubs and last year’s tax return. You will need information from these documents to use the IRS withholding calculator or the TurboTax W-4 calculator. Both of these tools will help you see how many withholding elections to select on your W-4.

Max out your traditional retirement plan contributions

This tried-and-true method of lowering your tax bill still works just fine. The more you contribute to a traditional (not Roth) retirement plan at work, the less taxable income you will have with every paycheck. The new annual contribution limit for 2023 is $22,500 for 401(k) and similar plans.

Older workers (ages 50+) can save up to $7,500 each year with an additional IRA catch-up contribution of $1,000. Another strategy is to contribute to your HSA if you are signed up for a health insurance plan that’s eligible.

Get your deductions in a bunch

Itemizing your tax deductions might no longer be your best strategy. The standard deduction is now practically double what it was before the most recent tax reform. There are also new limits on home equity loan deductions, miscellaneous itemized deductions, and other changes. Then again, it might be a good strategy if you are able to bunch your deductions.

How does this strategy work? The idea is to time certain deductible expenses so you squeeze more of them into a single year (e.g., estimated state income taxes, property taxes, medical bills, etc.). If the bunched deductions are larger than your revised, larger standard deduction, then bunch up your deductions and itemize. This might mean on alternate years you take the standard deduction one year and itemize the next. Lather, rinse, repeat.

There you have it. Three relatively easy ways to save money on taxes for the new year. Your tax professional may have other recommendations as well. Give him or her a call.

Is It The Right Time To Convert To Roth?

December 09, 2019

Are you wondering if you should convert your retirement account to a Roth by the end of the year? After all, there’s no income limit on IRA conversions and many employers are now allowing employees to convert their company retirement plan balances to Roth while they’re still working there. At first glance, it may sound appealing since the earnings in a Roth can grow tax free, and who doesn’t like tax free? However, here are some reasons why now might not be the time for a Roth conversion:

3 reasons you might not convert to Roth this year

1) You have to withdraw money from the retirement account to pay the taxes. If you have to pay the taxes from money you withdraw from the account, it usually doesn’t make financial sense as that money will no longer be growing for your retirement. This is even more of a tax concern if the withdrawal is subject to a 10% early withdrawal penalty.

2) You’ll pay a lower tax rate in retirement. This can be a tricky one because the tendency is to compare your current tax bracket with what you expect it to be in retirement. There are a couple of things to keep in mind though. One is that the conversion itself can push you into a higher tax bracket. The second is that when you eventually withdraw the money from your non-Roth retirement account, it won’t all be taxed at that rate.

Let’s take an example where you retire with a joint income of $125,900 in 2022. Because of the $25,900 standard deduction for married filing jointly, your taxable income would be no more than $100,000. Of your taxable income, the first $20,550 would only be taxed at 10%, and everything from there up to $83,550 is taxed at 12%. Only the income over $83,550 is taxed at the 22% rate. As a result, you would be in the 22% bracket but actually pay only about 13% of your income in taxes.

You can calculate your marginal tax bracket and effective average tax rate here for both your current and projected retirement income. (Don’t factor in inflation for your future retirement income since the tax brackets are adjusted for inflation too.) The tax you pay on the conversion is your current marginal tax bracket, but the tax you avoid on the Roth IRA withdrawals is your future effective average tax rate.

3) You have a child applying for financial aid. A Roth conversion would increase your reported income on financial aid forms and potentially reduce your child’s financial aid eligibility. You can estimate your expected family contribution to college bills based on your taxable income here.

Of course, there are also situations where a Roth conversion makes sense:

6 reasons to consider converting to Roth this year

1) Your investments are down in value. This could be an opportunity to pay taxes on them while they’re low and then have a long-term investment time horizon to allow them to grow tax free. When the markets give you a temporary investment lemon, a Roth conversion lets you turn it into tax lemonade.

2) You think the tax rate could be higher upon withdrawal. You may not have worked at least part of the year (in school, taking time off to care for a child, or just in between jobs), have larger than usual deductions, or have other reasons to be in a lower tax bracket this year. In that case, this could be a good time to pay the tax on a Roth conversion.

You may also rather pay taxes on the money now since you expect the money to be taxed at a higher rate in the future. Perhaps you’re getting a large pension or have other income that will fill in the lower tax brackets in retirement. Maybe you’re worried about tax rates going higher by the time you retire. You may also intend to pass the account on to heirs that could be in a higher tax bracket.

3) You have money to pay the taxes outside of the retirement account. By using the money to pay the tax on the conversion, it’s like you’re making a “contribution” to the account. Let’s say you have $24k sitting in a savings account and you’re going to convert a $100k pre-tax IRA to a Roth IRA. At a 24% tax rate, the $100k pre-tax IRA is equivalent to a $76k Roth IRA. By converting and using money outside of the account to pay the taxes, the $100k pre-tax IRA balance becomes a $100k Roth IRA balance, which is equivalent to a $24k “contribution” to the Roth IRA.

Had you simply invested the $24k in a taxable account, you’d have to pay taxes on the earnings. By transferring the value into the Roth IRA, the earnings grow tax free. This calculator helps you crunch your own numbers.

4) You want to use the money for a non-qualified expense in 5 years or more. After you convert and wait 5 years, you can withdraw the amount you converted at any time and for any reason without tax or penalty. Just be aware that if you withdraw any post-conversion earnings before age 59½, you may have to pay income taxes plus a 10% penalty tax on them.

5) You might retire before age 65. 65 is the earliest you’re eligible for Medicare so if you retire before that, you might need to purchase health insurance through the Affordable Care Act. The subsidies in that program are based on your taxable income so tax-free withdrawals from a Roth account wouldn’t count against you.

6) You want to avoid required minimum distributions (RMDs). Unlike traditional IRAs, 401(k)s, and other retirement accounts that require distributions starting at age 72 (or 70½, depending on your age), Roth IRAs are not subject to RMDs so more of your money grows tax-free for longer. If this is your motivation, remember that you can always wait to convert until you retire, when you might pay a lower tax rate. Also keep in mind, Roth conversions are not a one-time-only event. You can do multiple conversions and spread the tax impact over different tax years if you are concerned about pushing your income into a higher tax bracket in any particular year.

There are good reasons to convert and not to convert to a Roth. Don’t just do what sounds good or blindly follow what other people are doing. Ask yourself if it’s a good time for you based on your situation or consult an unbiased financial planner for guidance. If now is not the right time, you can always convert when the timing is right.

How Taxes Work On Assets You Inherit

May 02, 2019

The death of a loved one is often a very emotional and stressful experience. Doubts about finances can compound that stress. One common concern is understanding what is owed in taxes on the financial assets that are left behind. Consulting with an estate planning professional is best, but here are some fundamental concepts about taxes on inherited assets that can help allay your concerns.

Income taxes take a back seat

Most of us are familiar with the concept of income taxes. It is the tax on the income we earn on our jobs, and therefore, the tax we worry about the most. In helping one client deal with the death of her mother, she expressed fear that the value of her mother’s assets would be added to her income for that year, and therefore, would increase the amount she would have to pay in income taxes.

She was relieved when I told her that estate tax rules are different from income tax rules, and therefore, she was most likely not subject to income tax in this situation. Generally speaking, this is true of most things that you inherit.

Step-up in basis

In her mother’s case, most of the money she left behind in investments was subject to the step-up in basis rule. For instance, if her mom owned a stock that she bought at $5 and it grew to be worth $100 at her death, her daughter will inherit that stock at $100, and her cost basis would now be $100. That means if her daughter sold the stock at $100, instead of paying capital gains taxes on the $95 in growth that her mom would have paid, she would pay nothing in tax. Also, any growth from that point forward would not be taxed at income tax rates but at long-term capital gains rates. Despite recent legislative chatter about removing the step-up in basis rules, currently, no laws have changed.

Where income taxes show up

One major exception to this is assets in retirement plans like traditional 401(k)s and traditional IRAs. They are taxable at the income tax rate of the person who inherits the asset. This means if someone inherits a traditional IRA, withdrawals are taxable as income to the beneficiary who makes the withdrawal. In this case, you have multiple options on how to distribute the assets in order to control your taxation.

What about the ‘death tax?’

Federal estate taxes, sometimes called death taxes, are generally not a concern until the person who passed away has a net worth that exceeds a certain threshold. For 2022 that threshold is $12,060,000 per person. (Most spouses receive an unlimited exemption, which means no estate taxes if the money is going to your surviving husband or wife).

This federal estate and gift tax exemption excludes most Americans from having to pay Uncle Sam for money they are passing along to heirs upon their death.

Moving target

It is good to remain aware of the estate tax exclusion number because once an estate exceeds it, the tax rate is usually significantly higher than regular income tax rates. The exclusion is pretty high now, but it’s something that Congress likes to mess around with occasionally. As recently as 2001, the threshold was $675,000, and it affected a much larger percentage of Americans. When tax bills are passed, that number tends to move up or down depending on the political climate.

Not just federal

While the clear majority will avoid federal estate taxes, there could still be estate or inheritance taxes at the state level. Many states still have estate taxes, and the exemption levels may or may not be tied to the federal exemption.

That means that while the federal exemption is a little over $12 million, your state exemption may be much less. In addition, some states impose an inheritance tax, which heirs would have to pay. Like the federal estate tax, state transfer taxes are a moving target with several states rescinding their estate taxes in recent years to become more tax-friendly to retirees.

Talk to an expert

If you are dealing with the death of a loved one and you’re not sure about all of this, consulting with an accountant or estate planning attorney can be very valuable. If you are unsure where to find a professional, contact your employer’s financial wellness benefit or EAP, and they can often help you find the right person to advise you.

When Should You Exercise Your Employee Stock Options?

April 05, 2019

Do you have employee stock options that you’re not quite sure what to do with? Should you exercise them and take the gain now (if there’s no gain, it’s a moot point) or hold onto them a little bit longer for potentially higher profits down the road? Here are some things to consider:

Can you exercise them?

Before you even think about whether you should, you might want to see if you could. There are two main reasons that the answer to that question may be “no.”

The first is if your options aren’t vested, generally meaning that your employer won’t allow you to exercise them until a certain period of time (usually between 3-5 years) passes. This is basically a way of keeping you at the company for a bit longer and encouraging you to work for the long-term good of the company since you’ll directly benefit if the company’s stock price is higher after your vesting period.
The second reason is if the current stock price is lower than the strike price, which is the price that your option allows you to buy it at. For example, if the current stock price is $75 per share and your strike price is $50 per share, then by exercising your option you can buy the shares at $50 and immediately sell them for the current market price of $75 for a $25 per share profit (less applicable taxes, fees, and expenses). That’s the fun part. But what if your strike price is $75 and the current market price is $50? In that case, your options are said to be “underwater,” which is about as fun as it sounds (and we’re not talking scuba diving here).

When will your options expire?

Just as you can’t exercise your options before they vest, you can’t exercise them after they expire either, which is pretty much what it sounds like. Many places will automatically exercise your options at the expiration date as long as they are “in the money” (the opposite of “underwater”) so you may want to check and see if that’s the case. If not, you’ll want to keep track and make sure you exercise them before they expire.

Do you have too much invested in your company stock?

This is a biggie because if you make this mistake, it can really wipe you out financially if the wrong things happen. As risky as the stock market is as a whole (remember 2008?), any individual stock is a whole lot riskier. After all, the overall stock market practically can’t go to zero, but an individual company can, and sometimes they do (remember Enron?).

No matter how safe and secure your employer seems to be, yes, this applies to your company too. Experts in behavioral finance say that we humans have a “familiarity bias,” which is a tendency to overestimate the value of things we know.

After all, you never know what can happen. Pick your villain. You can work for a company that makes great products in a growing field only to find that someone has been cooking the books (corporate crooks) or that a sudden change in the law has a devastating impact on your industry (politicians).

The risk is amplified when you consider that your job, and perhaps your pension, are tied to this company too. It’s bad enough to lose your job and much of your pension. It’s even worse to lose your nest egg at the same time. For this reason, some financial professionals suggest not even investing at all in the industry you work in much less your employer.

How much is too much?

So how much is too much? A rule of thumb is to have no more than 10-20% of your total portfolio in any one stock. In fact, pension plans aren’t even legally allowed to invest more than 10% of their assets in company stock. This is one reason that a lot of companies these days limit the amount of your 401(k) savings that you can have allocated to company stock.

What else would you do with the money?

If you have high-interest debt like credit cards, you’ll probably save more in interest by paying them down than what you’d likely earn by holding on to your options. Beefing up your emergency fund to 6-12 months of necessary expenses could be another good choice. In the unfortunate event that something did happen to your company, you’ll be glad you have some savings rather than underwater options.

Unless you have good reason to be particularly optimistic about your company’s growth prospects (don’t forget that thing about familiarity bias), diversifying the money into mutual funds or other stocks keeps you invested while significantly reducing your risk.

If you haven’t maxed out tax-sheltered accounts like a Roth or traditional IRA, you could use the proceeds from your options to fund them. You still have until April 15th to contribute for last year.

Will your tax bracket be higher now or in the future?

Remember that $25 per share profit we talked about earlier? Well, Uncle Sam will want his cut but the amount can vary. If you have non-qualified stock options, you’ll have to pay payroll and regular income tax rates on it. If you’re in the 24% tax bracket and about to retire next year in the 12% bracket, waiting that year could save you 12% in taxes.

On the other hand, if you have incentive stock options, there are more possibilities. If you exercise the option and sell the stock in the same year, you’ll pay regular income tax rates just like with the incentive stock options, but no payroll taxes.

However, if you exercise the options and hold the stock for more than a year (and 2 years from when the options were first granted to you), then when you eventually sell the stock, the difference between the price at which you sell the stock and the price at which you exercised the option is taxed at lower long-term capital gain rates (currently maxed at 20%) rather than higher ordinary income tax rates (currently maxed at 37%).

In the example we’ve been using, if you held the stock after exercising your options and the stock price continues going up from $75 to $90 then you’ll owe long-term capital gains taxes on the $40 per share difference between the current $90 market price and your original $50 strike price. However, you may owe alternative minimum tax under this scenario so consider consulting with a tax professional.

With either type of option, there could be some reasons to delay. But don’t let the tax tail wag the dog. These tax benefits can be outweighed by the risks of having too much in company stock or the benefits of using the proceeds to pay down debt or build up an emergency fund. The important thing is to understand each of your options (no pun intended) to decide what makes the most sense for you.

What To Do If You Can’t Pay Your Taxes On Time

April 01, 2019

As April 15^th approaches, I dare say a lot of people expecting a tax refund have already filed taxes and a lot of the rest of us are still sitting on our documents dreading the outcome. For most of my life, it never occurred to me that not paying your taxes by the deadline was an option. I’m not sure what I thought might happen if I didn’t pay what I owed. The sky would fall? Zombie apocalypse?

No zombies, but you do have to act

At any rate, it certainly does happen that a taxpayer for one of many reasons may find they do not have the cash available to pay their bill to the IRS on tax day. If that’s you, don’t fear the zombies – you have options.

What happens if I just bury my head in the sand and don’t file?

This is the typically the worst course of action you can take because the penalty for not filing far exceeds the penalty for not paying your taxes. You would owe 5% per month that your taxes remain un-filed, up to 25% of the tax owed. Now, this means there is no penalty for not filing if you’re due a refund, but why would you not want your refund?

Ok, so I filed, but now I can’t pay.

The IRS provides a phone number for you to call if this is the case: 1-800-829-1040.

Here are a few of the options that may be presented. The best one for you depends on your situation.

1. Abatement – Under the IRS’ First Time Penalty Abatement program, you can ask for penalties to be waived if you haven’t received an abatement in the past three years, you have filed all tax forms due and paid or arranged to pay any outstanding taxes. (in other words, it can’t hurt to ask, but make sure you use the word ‘abatement.’) Here are all the types of relief you may qualify for.

2. Delay payment – If you can’t pay right now but think that you will be able to pay within 120 days (basically 4 months or by August), you can ask for a Full Payment Agreement through the Online Payment Agreement application. Interest and any penalties will continue to accrue, but there is a not a fee to apply for this program.

3. Installment agreement – If you can’t pay what you owe within 120 days, then it’s best to enter into an installment agreement. You can also use the Online Payment Agreement or form 9465 to set up a monthly payment arrangement. The IRS accepts payment in many forms including direct deposit, payroll deduction, check, and cash through retail partners. There is a user fee for this service which may be waived for low income taxpayers, but as long as you make your payments on time, the IRS will be happy.

THING TO KNOW: In order to set up a payment plan, you must be caught up on all of your tax filings. Also, if you’re in the middle of bankruptcy proceedings you are not generally eligible for an installment plan.

4. Offer in compromise (OIC) – In the rare circumstance where the IRS believes that you are truly not able to pay your tax debt in full and can not use one of the above methods to help, they may accept an offer for an amount less than what is owed to settle the debt. Here’s how it works:

There is a $186 application fee so read this guide thoroughly and use the OIC prequalifier tool beforehand to see if the expense of applying makes sense. Check your EAP as well – you may qualify for legal help in applying.
If you are already in bankruptcy proceedings or have not filed all tax returns due to date, you are not eligible for an OIC. You also must have paid all taxes due to date for the current year.
Apply by submitting Form 656, Form 433-A or B (OIC), the application fee and an initial offer payment, if applicable.

Does it make sense to pay with a credit card?

It can be tempting to just use a credit card to get the IRS off your back, but that might not make the most sense. As of the first quarter of 2019, the IRS is charging an interest rate of 6%, far less than what most credit cards will charge you, so you may want to look into an installment agreement first.

How to keep this from happening again

You can only have one installment agreement at a time, so you want to make sure that if you’re using it to get caught up on a prior year that you’re paying enough in this year and going forward to avoid another big tax bill that you can’t afford. Use the IRS W-4 calculator tool each year to make sure your employer is withholding the right amount of taxes from your check. (this document has helpful step-by-step instructions for using the calculator)

If you are self employed, be sure to keep up with your quarterly estimated tax payments. Consider setting aside a portion of all income into a special account to use for paying the estimated taxes.

There are options, but you have to ask

Hopefully, one of these options will work for you. Remember, while the IRS may have earned a reputation of being heartless in the past, they do have remedies to help those who are willing to work with them on payment options. It might turn out to be a much better experience than you think! You just have to ask.

Here’s How Your Income Tax Withholdings Work

March 04, 2019

I was recently given the opportunity to explain tax forms to a bunch of 17-year olds with part time jobs. They were eating pizza in my house when one of the guys asked me to explain how they will pay their taxes when they are adults. I was pleased to hear that one of them was not planning on living with me forever. Here’s how I explained it.

Paying your taxes through work

When you get a job, you fill out something called a W-4, usually on your very first day. This form tells your employer how much money to withhold from each paycheck and your employer sends it to the IRS. At the end of the year you get another form, called a W-2, which shows how much was withheld over the course of the year, along with how much you were paid and some other numbers as well.

I went on to tell them that you will use your W-2 to fill out your IRS Form 1040, which is what you use to file your taxes. At this point I realized that in 15 seconds I had referred to 3 separate tax forms – I was losing them fast and had to change tactics.

An example of how withholding taxes work

I started over, saying, “Let’s say you earn $10 an hour and work 10 hours a week. What would your weekly income be?” They correctly said $100 (with a little eye rolling). I went on: Now suppose you worked 50 weeks a year, what would your annual income be? Proving they have some math acumen, they said $5,000, which seemed like a lot of money to them (to be young again!).

The W-4 is what would tell your employer to keep $5 from your paycheck and send it to the IRS, then they would pay you the other $95 (keeping it simple here). At the end of the year, you would have sent $250 to the IRS.

After the end of the year, you get your W-2, which confirms this information – you earned a total of $5,000 and pre-paid $250 of what you owe to the IRS through your employer. You use that to fill out a tax form called a 1040, where you calculate what your actual taxes due on your income should be.

How you end up owing taxes or getting a refund

If you didn’t have enough withheld, aka your taxes for the year are more than $250, you have to pay the balance by the April 15th deadline. If you withheld too much, aka your taxes for the year are less than $250, then you get a refund for the balance as soon as the IRS receives your form and processes it.

Why not always aim for a big refund check then?

They liked the idea of getting a refund and one asked me why you would just have $10 withheld in order to get more back. I told him that is a very common strategy that some people use who have a hard time saving money. The problem is that you don’t get any interest on that money while the IRS is holding it, whereas if you’d instead just took that extra $5 per paycheck and put it in a savings account, you might have earned a few extra dollars from your bank in interest.

The moral of this story is that when you file your income taxes this year, if you’re due a large a refund or owe more taxes than you want to pay in one lump sum, the best way to avoid that next year is adjust your W-4 withholdings at work.