Learning Center for Tax and Financial Insights

Article Highlights:States With No Income TaxSocial Security Benefits Roth IRA Retirement AccountTraditional IRA Retirement AccountSpousal IRABack-Door Roth IRASaver’s CreditEmployer PensionsEmployee Funded Retirement PlansHealth Savings AccountsBrokerage AccountsMunicipal Bonds InvestmentsHome Equity & Gain ExclusionReverse MortgageWhole Life Insurance Cash Value That is an important question because the actual money you have to spend when you retire depends upon the after-tax sources of your retirement income. Thus it is important to understand how the various retirement vehicles are taxed. There is significant diversity in taxation since a retiree must consider both Federal and state taxes on retirement income. Of all the states one might consider retiring to, there are eight that have no state income tax. These are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. However, to make up for no revenue from individual income taxes these states may be funded by other types of taxes, such as property taxes, sales taxes, or excise taxes.Social Security Benefits – Social Security is probably the leading source of retirement for most retirees, and determining the federal taxation can be somewhat complicated and the IRS provides a worksheet. Without using the worksheet we know that no more the 85% of Social Security benefits are subject to federal taxation and in many lower income situations none of the Social Security benefits are taxable. The actual calculation involves adding your other income to half of your annual Social Security benefit. If the amount is less than $32,000 for married tax filers or less than $25,000 for single filers in 2022, you will avoid federal taxes on your benefits. However, those filing Married Separate will find that 85% of their Social Security benefits are always taxable. State Tax - Besides the states that have no state tax, there 30 that do not tax Social Security benefits, The balance, VT, CT, RI, WV, MO, MN, ND, NE, KS, CO, UT, NM, and MT, tax Social Security benefits based on factors such as age and income or a modified amount. See the Tax Foundation Map. Roth IRA Retirement Account – Roth IRA contributions are limited to the lesser of earned income or the annual limit which is $6,000 ($7,000 if age 50 or over). With a Roth IRA, a taxpayer gets no tax deduction when contributions are made. However, what the taxpayer gets is tax-free accumulation, and after age 59-½, all distributions are tax-free, including the account earnings, provided the 5-year holding period has been met. Since the earnings are also tax free once the age and holding period requirements are satisfied, the sooner an individual begins making contributions, the greater the benefits at retirement. However, contributions to Roth IRA are restricted for higher income taxpayers. Traditional IRA Retirement Account – Like Roth IRA contributions, traditional IRA contributions are limited to the lesser of earned income or the annual limit which is $6,000 ($7,000 if age 50 or over). Unlike Roth IRAs, generally contributions are deductible in the year of the contribution. Thus future distributions are fully taxable including the earnings. Where an individual also has a qualified retirement plan, the deductibility is phased out for those with higher incomes. However, they can still make non-deductible contributions, in which case a prorated amount of the distributions will be nontaxable. In addition, individuals can elect to make non-deductible contributions which may be appropriate when an individual intends to subsequently convert the traditional IRA to a Roth IRA as discussed next. Spousal IRA - Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, if their spouse has adequate compensation. The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse. Example: Tony is employed, and his W-2 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA.Back-Door Roth IRA - Where a high-income individual would like to contribute to a Roth IRA but cannot because of the high-income limitations, there is a work-around, commonly referred to as a back-door Roth IRA, that will allow funding of a Roth IRA for some individuals. Here is how a back-door Roth IRA works:First, an individual contributes to a traditional IRA. For higher-income taxpayers who participate in an employer-sponsored retirement plan, a traditional IRA is allowed but is not deductible. Even if all or some portion is deductible, the contribution can be designated as not deductible.Then, since the law allows an individual to convert a traditional IRA to a Roth IRA without any income limitations, the individual can convert the non-deductible Traditional IRA to a Roth IRA. Since the Traditional IRA was non-deductible, the only tax related to the conversion would be on any appreciation in value of the Traditional IRA before the conversion is completed.

Article Highlights:Estate TaxLifetime ExemptionSurviving SpousePortability ElectionFinancial DrawbackElection ConsiderationsPortability ExtensionWhen an individual dies, the value of that individual’s estate is subject to estate taxation, which is currently 40% of the individual’s taxable estate. However, there is a lifetime exclusion (exemption) to the estate tax, which for 2022 is $12.06 million. The lifetime exclusion can also be used to offset taxable gifts – those that exceed the annual gift tax exclusion. This means for someone dying in 2022 who hasn’t previously dipped into their lifetime exclusion to offset gift tax, the first $12.06 million of the individual’s estate is exempt from estate tax and passes tax-free to the individual’s beneficiaries. This lifetime exclusion amount is annually adjusted for inflation and is also subject to the whims of Congress. The table below illustrates the exclusion amounts for recent years.Lifetime Estate Tax ExclusionYearAmount2019$11.40 Million2020$11.58 Million2021$11.70 Million2022$12.06 MillionIn the case of married taxpayers, each spouse has a separate lifetime exclusion equal to the $12.06 million (for 2022).Example – Looking at a simplistic situation, let’s say a married couple, Ben and Sylvia, have a joint estate valued at $15 million in 2020 when Ben passed away. He had not made any taxable gifts during his lifetime. Ben’s estate subject to estate tax was $7.5 million (half of the $15 million). In 2020, the estate and gift tax exemption amount was $11.58 million; thus Ben’s estate subject to tax is zero ($7.5 million less $11.58 million). Sylvia is Ben’s sole beneficiary, so she inherits his $7.5 million estate, which combined with her $7.5 million brings her estate total to $15 million (and for this example doesn’t increase or decrease over the coming years). Sylvia passes away in 2022 when the estate tax exemption is $12.06 million. Sylvia’s taxable estate is $2.94 million ($15 million less $12.06 million), resulting in an estate tax of $1,121,800 (based on the estate tax rate schedule which is $345,800 on the first $1 million and 40% of the balance).However, married taxpayers have a special benefit that allows a surviving spouse to make what is called a portability election. The portability election essentially allows the surviving spouse to add the deceased spouse’s unused estate tax exclusion to their own. During the surviving spouse’s remaining lifetime, the exclusion can be used to offset taxable gifts and whatever isn’t used that way is available to reduce the surviving spouse’s estate tax upon his or her death.Example – Using the previous example, when Ben passed in 2020, the estate tax exclusion was $11.58 million, and his estate was $7.5 million. Thus, his unused estate tax exclusion was $4.08 million ($11.58 million – $7.5 million). Sylvia made no taxable gifts since Ben’s death. Had the portability election been made, which required filing an estate tax return for Ben’s estate, Sylvia’s estate tax exclusion in 2022 would have been $16.14 million ($4.08 million + $12.06 million). Thus, none of Sylvia’s $15 million estate would have been taxed since the exclusion of $16.14 million exceeded the value of her estate. The resulting tax savings is $1,121,800.

When it comes to deducting loan interest on your taxes, there are a few things you need to keep in mind. First, only interest on certain types of loans is deductible. Second, you can only deduct the interest if you itemize your deductions. And finally, there is a limit on how much interest you can deduct. By being prepared and knowing what to expect, you can make sure that you get the most out of your tax deductions.

Article Highlights: Required Minimum Distributions When the Distributions Must Begin RMD Distribution Tables Figuring the Amount of the Distribution Beneficiary Distribution Rules Surviving Spouse Eligible Designated Beneficiaries Account Owner’s Minor Child Other Beneficiaries Ten Year Rule Pending Legislation Required minimum distributions (RMDs) are required distributions from qualified retirement plans. RMDs are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to keep funds in their qualified retirement plans indefinitely. Eventually, assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, he or she may have to pay a 50% penalty on the amount that is not distributed. (Note that distributions are not required to be taken from Roth IRAs while the account owner is alive.) Generally, RMDs begin in the year that the retirement plan owner attains the age of 72. The first year’s distribution can be delayed to no later than April 1 of the following year. However, delaying the first distribution means taking two distributions in the following year: one for the age-72 year and one for the next year. If an IRA owner dies after reaching age 72 but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. A person who turned 72 in a previous year is required to take the minimum distribution no later than December 31 of each year. The method for determining the minimum amount is explained below. Even though the tax code mandates minimum distributions after reaching age 72, there is no maximum limit on distributions, and the retirement plan owner can withdraw as much as he or she wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. The required withdrawal amount for a given year is equal to the value of the retirement account on December 31 of the prior year divided by the distribution period from a table developed by the IRS. For individual's whose spouse is not the sole designated beneficiary, or, the individual's spouse is the sole designated beneficiary but is not more than 10 years younger than the individual, the Uniform Lifetime Table is used. UNIFORM LIFETIME TABLE – EFFECTIVE 2022 Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period - - 80 20.2 90 12.2 100 6.4 110 3.5 - - 81 19.4 91 11.5 101 6.0 111 3.4 72 27.4 82 18.5 92 10.8 102 5.6 112 3.3 73 26.5 83 17.7 93 10.1 103 5.2 113 3.1 74 25.5 84 16.8 94 9.5 104 4.9 114 3.0 75 24.6 85 16.0 95 8.9 105 4.6 115 2.9 76 23.7 86 15.2 96 8.4 106 4.3 116 2.8 77 22.9 87 14.4 97 7.8 107 4.1 117 2.7 78 22.0 88 13.7 98 7.3 108 3.9 118 2.5 79 21.1 89 12.9 99 6.8 109 3.7 119 2.3 - - - - - - - - 120+ 2.0

Article Highlights: Tax Filing Thresholds Withholding 2021 Recovery Rebate Credit Earned Income Tax Credit (EITC) Child Tax Credit or Credit for Other Dependents Education Credits Some people may choose not to file a tax return because they didn't earn enough money to be required to file, but these folks may miss out getting a refund if they don’t file. Although there are some exceptions, generally individuals are not required to file a tax return if their income for the year is below the filing threshold for their filing status as shown in the following table. 2021 TAX FILING THRESHOLDS FOR MOST INDIVIDUALS Filing Status Age at the end of 2021 Gross Income Filing Threshold Single Under 65 $12,550 65 or older $14,250 Head of Household Under 65 $18,800 65 or older $20,500 Married Filing Jointly Under 65 (both spouses) 25,100 65 or older (one spouse) $26,450 65 or older (both spouses) $27,800 Married Filing Separate Any Age $5 Qualifying Widow(er) Under 65 $25,100 65 or older $26,450 Many social benefits provided by the government for lower income individuals are distributed through the tax return, often in the form of a tax credit, and a return must be filed to claim those benefits, many of which can be substantial. Some of these credits are partially or fully refundable even if an individual has no tax liability. So, even though you might not be required to file a return you may be missing out on a tax refund if you don’t file one. Here are some examples: Withholding – If you are not required to file a tax return but had income taxes withheld from your W-2 wages, Social Security benefits, retirement income, or investment income, or you made estimated tax payments, you are entitled to have that withholding or estimate payments refunded. However, you must file a tax return to recover the withholding or tax payments. 2021 Recovery Rebate Credit – Individuals who didn't qualify for a third Economic Impact Payment or got less than the full amount, may be eligible to claim the 2021 recovery rebate credit . However, a 2021 return will need to be filed, even if not otherwise required to file a tax return. The credit will reduce any tax owed for 2021 or be included in the tax refund.

As a business owner or self-employed individual, you can take advantage of tax deductions for your business-related travel expenses, including airfare, lodging, transportation, and meals. This can be a great way to save money on your taxes, but it is important to keep good records of your expenses and make sure that they meet the requirements by law. This video provides a quick overview of the business travel tax deduction and how it can benefit you.