Archives for June 2023

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.

Saving for college could be an investment that pays for itself. But for many families, it can also be a huge strain on your budget.

If you’re looking into ways to help fund your child’s educational future, read on for our handy guide.

Building a college savings

There’s no single “best” way to manage higher education costs. It all comes down to your family, your goals and your finances.

529 plan. A 529 plan allows money to grow in a tax-deferred account. It can be withdrawn tax-free for qualified, education-related expenses at colleges, vocational programs and apprenticeships. The funds from a 529 plan may even be applied toward up to $10,000 in student loan debt.

Education Savings Account (ESA) or Education IRA. An ESA allows investments of up to $2,000 (after tax) per child, per year for tax-free growth. The rate at which it grows varies based on the investments you choose, but it generally offers a higher rate of return compared to a regular savings account.

Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA). While savers can use a UTMA and a UGMA to put away money for college with reduced taxes, they can also be used for non-educational costs. Similar to mutual funds, they give parents control of the funds until the child reaches age 18 or 21 (varies by state), at which point they may choose how to allocate the funds.

Remember, the sooner a plan is opened, the more time investments will have to grow.

Tax savings for current students

Once your child is enrolled in higher education, he or she may also want to take advantage of these tax-savings opportunities. Remember, it’s always best to speak with a tax professional regarding your family’s personal situation.

• American Opportunity Credit. For qualifying students, this credit pays for up to the first $2,000 spent on tuition, fees, books and more. Plus, it’s applicable for all four years of undergraduate studies.
• Lifetime Learning Credit. The Lifetime Learning Credit gives students a tax credit equal to 20% of their tuition and related expenses up to $10,000. The credit maximum is $2,000.
• Tuition and fees deduction. Independent students may qualify for a tax deduction of as much as $4,000.

A plan to save

Let’s face it. Higher education costs are just that — high. The average student attending an in-state, public four-year institution spends about $25,707 in a single academic year. The average student attending a private, nonprofit university spends a whopping $54,501 per academic year. While there are student loans, scholarships and financial aid opportunities, any amount saved will help chip away at the steep costs.

Just like retirement and tax planning, figuring out how to pay for college is an important discussion to have with your trusted financial advisor. Need assistance? Count on Magone & Company as a knowledgeable financial resource. Reach out today at (973) 301-2300.