Finances

Whether you’ve successfully started a business or paid your dues to climb the corporate ladder, you’ve put in the hours and made sacrifices to find yourself among the ranks of high-income earners.

But with great success comes great responsibility, particularly when it comes to managing your taxes. As a high-income earner, you have unique opportunities and challenges when it comes to tax planning — ensuring you settle up with Uncle Sam while continuing to grow your wealth.

Here are some tax-planning strategies that may be effective in helping a high-earning taxpayer save more cash:

Utilize retirement accounts. Contributions to retirement accounts such as a 401(k) or an Individual Retirement Account (IRA) can provide immediate tax benefits as you save for the future. By maxing out your contributions to these accounts, you can reduce your taxable income, potentially moving you into a lower tax bracket.

Additionally, any earnings within the account grow tax-deferred, meaning you don’t owe taxes on them until you withdraw the money in retirement — when you might find yourself in a lower tax bracket. Keep in mind, the SECURE Act lets high-income earners age 50 and over save $27,000 a year in a 401(k), so your earnings are sheltered from tax until you take a distribution from the account at age 59 ½ or later.

Take advantage of a Roth conversion. Some high-income earners may be eligible for a Roth IRA conversion — a strategy that converts a traditional IRA to a Roth IRA, allowing for tax-free withdrawals in retirement. While the conversion is taxable in the year it occurs, it can be a savvy move for high-income earners who expect to eventually be in a higher tax bracket.

Establish a family trust. Family trusts are common in estate planning, ensuring certain beneficiaries receive assets when the grantor dies. And when properly structured, a family trust, for example, can help reduce your state income tax liability by moving your investment earnings to a relative with lower marginal tax rates.

Make charitable donations. By donating to qualified charitable organizations, you can support causes you care about, while providing valuable tax benefits. However, it’s important to note that the tax benefits vary depending on the type of donation and your overall income level. You may consider establishing donor-advised funds (DAFs) to manage and distribute charitable donations over time. By contributing appreciated assets — like stocks or real estate — to a DAF, you can potentially avoid capital gains taxes, while still benefiting from the charitable donation.

Consider cash-value life insurance. Also referred to as whole life insurance, cash-value life insurance is one of the most popular tax deferral strategies for high-income earners, especially if you’ve maxed out other retirement accounts. Contributions are made with after-tax dollars, and you can borrow against or withdraw up to the amount of premiums paid without having to pay taxes on it.

Invest in opportunity zones. Created by the Tax Cut and Jobs Act of 2017, the Opportunity Zones tax incentive is an economic development tool, allowing people to invest in distressed areas to help the community and receive a tax benefit. You’ll be granted a tax deferral on the capital gain of the investment until December 31, 2025, or until it is sold prior to this date — whichever comes first.

Keep more of your hard-earned money

As a high-income earner, taking steps to optimize your tax situation is a critical aspect of your financial planning. The professionals at Magone & Company help, offering the guidance and expertise to plan your wealth-preserving tax strategy. Reach out to learn more.

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.

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.

If you’re thinking about the future, specifically how to build long-term financial stability for your family, estate planning gives you control of how your assets are dispersed when you’re gone.

As the saying goes, you can’t take anything with you, so making a plan in advance is a vital step in ensuring that your wishes are carried out, no matter how much your assets are worth. Protecting your legacy is one of the most thoughtful things you can do for your loved ones.

Many certified public accountants (CPAs) and attorneys offer estate planning services. But choosing one (or both) comes down to your needs and goals:

CPAs. With a wealth of tax law knowledge, a CPA can offer financial expertise, especially in the areas of estate laws and gift tax laws. They can also advise on how each estate planning tool will impact taxes and fees and can strategize to help families and individuals minimize their tax liabilities. (For example, it may be possible to eliminate estate tax by simply leaving all property to a charity.)

And because a CPA also prepares their clients’ tax returns, they’re aware of personal tax information that can require changes to estate plans and can watch for administrative estate planning issues.

Estate planning attorneys. Like a CPA, attorneys can lend their vast knowledge on wills, trusts and business succession matters, while addressing other legal implications of an estate plan. They specialize in more precise areas of concentration, such as evaluating estate planning options to benefit future generations, drafting a last will and testament, appointing guardians for minors, granting living relatives a power of attorney and preparing a living will to outline end of life decisions.

Working in tandem

When considering estate planning goals, clients may leverage the insight and experience of both professionals. A CPA who works with an attorney on their clients’ behalf can save them time, money and headaches — maximizing tax breaks while efficiently managing the distribution of their assets.

And when sharing a client, a lawyer and CPA are in regular contact, communicating any changes in their planning, adding value in their areas of specialty and improving outcomes for the client and their loved ones.

Collaboration is key

At Magone & Company, we believe that open, ongoing dialogue is critical for building wealth now — and planning what to do with it in the future. We have the tools and knowledge to help create lifelong financial stability and success for your family. Contact us for a complimentary assessment at (973) 301-2300.

From the division of marital property to child custody settlements, ending a marriage often includes complex legal ramifications that can impact your family’s finances. But have you considered the tax implications?

Just as there are financial and legal to-dos for newlyweds, there are also tax-related administrative tasks to tackle once a divorce is finalized.

Most divorcees want to maximize their tax position — and minimize their pay out to Uncle Sam. While every situation is unique, here are some common tax reminders related to a divorce:

Tax filing status. Your marital status controls your filing status. When changing from married to divorced, your standard deduction and income tax payment will likely change as well.

Filing statuses are dependent on when a divorce is finalized. If the new year begins before a divorce is official, you’re still married in the eyes of the IRS and must file a joint return for the previous year or choose married filing separately.

Tax withholding. If you’re working, you need to update the amount withheld from your paycheck. Complete a new Form W-4 to revise your tax withholding amount within 10 days of signing your final divorce papers.

Child support. If you’re receiving child support, the amount is not included as part of your taxable income. If you’re the one paying the support, that expense is not deductible.

Alimony. Alimony is also not deductible by the party on the paying end. And similar to child support, the recipient doesn’t have to include it as taxable income.

Dependents. The custodial parent may claim a child as a dependent for tax purposes. By definition, this is the parent with whom the child spends the majority of nights.

Property settlements. If a marital property is sold as part of your divorce settlement, there can be significant tax ramifications due to unrealized capital gains.

These are general considerations and should not be taken as financial or legal advice.  Consult with your legal or tax professional regarding your personal situation for guidance tailored to your specific needs.

Turning the page on a difficult time of life

Divorce can be the start of an exciting new chapter. But as you settle back into the single life, it’s important to handle financial and administrative chores for a clean a slate. The professionals at Magone & Company have the guidance and expertise in dealing with these tax matters and more. Don’t hesitate to give us a call today at (973) 301-2300.