Search Results for: RMD

How Qualified Charitable Distributions can Fulfill RMD Obligations

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When saving for retirement, tax advantages play a significant role. Traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s offer tax-deferred growth, so you don’t pay taxes on the investment gains — as long as the money stays in your account.

However, the IRS doesn’t want you to avoid paying taxes on these funds indefinitely.

If you’re approaching age of 70½, required minimum distributions (RMDs) will help ensure that you start withdrawing money from your tax-deferred retirement accounts and pay the appropriate taxes on those distributions. But did you know that a qualified charitable distribution (QCD) can fulfill your RMD obligations while avoiding taxes on the distribution?

The ABCs of a QCD

A QCD refers to a taxable distribution that is paid directly from an IRA to a qualified charity. According to the IRS, this includes nonprofit groups that have a charitable, educational, religious, literary or scientific purpose, or that work to prevent child or animal cruelty.

When a QCD is directly paid from your retirement account to an eligible charity, it’s not included in your taxable income, meaning the distribution is tax-free. The giver must be at least 70½ at the time the QCD is made.

Because it’s tax-free, you cannot deduct the QCD on your Schedule A as an itemized deduction. In order to claim that charitable contribution deduction, your total itemized deductions must exceed the standard deduction. Keep in mind, the increased income resulting from the distribution could impact your eligibility for certain tax credits and push you into a higher tax bracket.

Questions regarding qualified charitable distributions? Let us help you with tax planning to minimize your tax burden and make the most of charitable giving. Reach out to the tax experts at Magone & Company or call us today at (973) 301-2300 for an evaluation of your tax situation.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

The Different Types of Investment Income

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Investing wisely can be a great way to grow your wealth over time. However, much like any money-making venture, there are tax implications to consider.

The IRS taxes each investment income differently, and the tax rate depends on various factors, from your income level to the length of time you’ve held the investment. So before you dive into a new opportunity, find out how taxes work in relation to the income you’ll (hopefully) generate.

Interest income. Interest income is the money you earn from savings accounts, CDs and bonds. This type of investment income is generally taxed at your ordinary income tax rate. (The interest income you earn from municipal bonds is an exception and is typically tax-free.)

It’s important to note that you’ll receive a 1099-INT from your financial institution, reporting the interest income earned during the year. This income must be reported on your tax return and will be taxed accordingly.

Dividend income. Dividend income is the money you earn from owning stocks that pay dividends. It’s taxed at a different rate than interest income.

Qualified dividends — dividends paid by domestic corporations and certain foreign corporations — are taxed at the long-term capital gains tax rate, which is generally lower than the ordinary income tax rate and depends on your income level. Nonqualified dividends, which include dividends paid by real estate investment trusts (REITs) and some foreign corporations, are taxed at your ordinary income tax rate.

Capital gains. Capital gains are the profits earned from selling an asset for a higher price than you paid. The amount you’re taxed depends on whether they’re short-term or long-term gains. Short-term capital gains — gains on assets held for one year or less — are taxed at your ordinary income tax rate.

Long-term capital gains — gains on assets held for more than one year — are taxed at a lower rate than short-term gains, dependent on your income level. If your income is below a certain threshold, you may not have to pay any taxes on long-term capital gains.

Required minimum distributions (RMD). RMDs are the minimum amount you must withdraw from your retirement accounts each year. It’s important to factor in the tax implications of RMDs when planning for retirement.

If you have a traditional IRA or a 401(k), you will be required to take RMDs once you reach age 72. When you withdraw the funds, you’ll be taxed at your ordinary income tax rate.

Estate taxes. If you leave a large estate to your heirs, they may be subject to federal and possibly state estate taxes <Link to new blog post, CPA vs. Estate Attorney> The federal estate tax rate ranges from 18-40% and generally applies to estates valued at more than $12.92 million. However, this threshold is subject to change, so it’s essential to stay informed about any updates to the tax code.

Foreign investment income. If you earn investment income from foreign sources, you may be responsible for additional taxes and reporting requirements. The IRS requires taxpayers to report foreign investment income on their tax returns and may impose penalties for failure to disclose this income.

If you have foreign investments, it’s essential to consult with an experienced international tax professional to ensure compliance with all applicable tax laws.

Finding the tax planning approach that’s best for you

There are various strategies to legally reduce your tax liability on investment income, such as tax lost harvesting. This approach involves selling losing investments to offset gains in other investments to reduce your taxable income.

If your losses exceed your gains, you can offset up to $3,000 of your ordinary income each year. Any remaining losses can be carried forward to future years.

The above general information is provided for education only and should not be considered tax or legal advice.  There’s never a one-size-fits-all approach to treating investment income, so understanding how it’s taxed can help you make more informed decisions on minimizing your tax liability.

The knowledgeable CPAs at Magone & Co can answer your questions and help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300.

5 Actions That Can Unexpectedly Raise Your Taxes

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Knowing what factors can raise your taxes is one of the best ways to keep more money in your pocket. That’s why proper tax planning is a year-round practice. Here are five actions that can unexpectedly increase your tax bill:

  1. Cashing in your retirement plan. There are many reasons not to cash in your plan early, and the tax penalty is one of the biggest. If you take the proceeds from your 401(k) plan in cash, instead of rolling it over into an IRA, you’ll have to pay taxes on the money you withdraw. Even worse, you’ll be subject to a 10% penalty. By the time you’re done, you could lose up to half your hard-earned retirement plan to taxes and penalties.
  2. Working as a freelancer. Working for yourself is great, but it can trigger tax headaches. Freelancers and other self-employed workers are subject to self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. The tax hit can be substantial, especially if you don’t plan for it.
  3. Failing to take your RMD. You can’t keep retirement funds in your account indefinitely. You’re required to start pulling money from your IRA and workplace retirement plans when you turn 70. If you fail to make that required minimum distribution (RMD), the penalty fees can easily offset your savings.
  4. Skipping your IRA contribution. If you’re accustomed to making an annual IRA contribution, skipping that contribution can cost you. Before you omit it completely, run the numbers and see how the decision will affect your tax bill.
  5. Paying off the mortgage. Eliminating mortgage debt can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions. Losing that deduction may leave you owing more to the IRS. That’s not necessarily a reason to keep a mortgage, but it can be an important consideration.

With smart strategies for tax planning, the CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.