Tax Tips for Individuals

6 Tax Refund Myths: Setting the Record Straight

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While tax season is still months away, it’s always top of mind with the Magone & Company team — keeping up on tax law changes, helping clients with tax planning strategies and brainstorming ways to make the filing season as simple and painless as possible.

In our roles as tax professionals, we hear a lot of myths and misconceptions from clients — when to file, what constitutes a “good” return and whether or not to adjust your withholding amount. Falling victim to misinformation could jeopardize your finances or worse, leave you in hot water with the IRS.

Protect yourself (and your money) by dispelling these 6 tax refund falsehoods.

MYTH #1: The bigger the refund, the better.

A large refund isn’t always indicative of a positive financial situation. It just means you’re paying the government too much throughout the year. A tax refund is essentially the return of an interest-free loan provided to Uncle Sam.

By overpaying, you’re lending money without earning any interest on it. This is money that you could’ve used over the course of the year for necessary expenses. And just like individual taxpayers, a hefty return could be bad news for businesses, too.

MYTH #2: You don’t need to adjust withholding for tax year 2023 if you received a refund this year.

It’s important to double check your withholding amount every year, especially if you:

  • Received a large tax refund last year
  • Got married, divorced or had a child (birth or through adoption)
  • Claim the child tax credit
  • Have high income or a complex tax return
  • Are a dual-income family
  • Have dependents age 17 or older

The Tax Withholding Estimator tool can help you determine if you’re withholding the right amount. Remember, withholding takes place throughout the year, so it’s in your best interest to make adjustments as soon as possible.

MYTH #3: The IRS legally has to pay the refund shown on your tax return.

Not so fast. There are several reasons why your refund amount may differ from the amount that was originally calculated — from simple math errors to deductions for past due amounts (child support or student loan payments).

Keep in mind, you’ll receive a letter from the IRS, as well as the Department of Treasury’s Financial Management Service .to alert you to an adjustment in the amount of your refund.

MYTH #4: Amending your return automatically triggers an audit.

This misconception can prevent you from correcting errors or making necessary adjustments to your tax filings. In reality, the IRS encourages amended returns as it allows for accurate reporting and ensures that you’re paying the correct amount of tax.

When making changes, it’s important to maintain accurate documentation and provide supporting evidence, including records of income and deductions.

MYTH #5: The IRS has access to your bank account if you received an electronic refund.

Electronic filing is one of the fastest ways to get your refund — and it’s also secure, meaning the IRS does not gain access to your account.

What about if you owe money? The IRS is not able to withdraw money from your account. Rest assured, if you have unpaid back taxes you will be officially notified by postal mail.

MYTH #6: If you file an extension, you don’t have to pay any amount owed by April 15. An extension to file is not an extension to pay.

You’re still required to estimate the taxes you owe and submit that payment on time. Your return, along with any additional taxes owed, must be filed by October 15 of the same tax year.

Never mind the myths

By debunking these myths, you can navigate next tax season with increased confidence, ensuring your finances are in good shape. If you have any questions, reach out to the knowledgeable CPAs at Magone & Company for tax-related expertise. Give us a call today at (973) 301-2300.

 

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.

Trust Taxation: It All Depends on the State

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Trusts are often established to grant legal protection for a party’s assets, ensuring they’re distributed according to the owner’s wishes. In most states, Uncle Sam will still be owed a portion — it just depends on where you live.

A trust can be taxed as a resident trust in multiple states or in no states. The individual or party that creates the trust should pay attention to these four factors for both existing and new trusts to understand how they may be impacted by their location:

  1. Where the trust was created.Several states impose a tax if the party who created the trust (known as the trustor or grantor) resided in that state when the trust was created. In other words, a person could draft a will or establish a trust while briefly residing in the state and the trust will be taxed there — even if that person died after living elsewhere for decades.
  2. Where the beneficiaries reside.A handful of states will tax a trust that has one or more beneficiaries (the trust’s recipients) residing within their borders. For example, California imposes taxes on trust income that is distributed or distributable to a state resident.
  3. Where the trustee resides. Some states will tax a trust if a trustee (the entity that manages the trust) resides in the state. States also may consider the residence of co-trustees, including trust advisors and other non-trustee fiduciaries. For example, a trustee could reside in Nevada, but if the trust also has a fiduciary living in California, California treats the trust as subject to its income tax.
  4. Where the trust is administered. A trust may be taxed by the state in which it’s administered.

Tax nexus trap

Several states don’t impose any income taxes on non-grantor trusts. These are separate taxable entities from the party who created the trust, who retains no control in it. But those states — including Florida, Nevada and Texas — are in the minority.

Moreover, trusts that ostensibly “reside” in those states may be subject to income taxes in other states. That’s because many states find ways to establish tax nexus with trusts that appear to have minimal connection to the state. The term “tax nexus” generally refers to the minimum contacts with a state that are required to subject an entity to taxation in that state.

Minimizing tax risks

It’s worthwhile to review a trust’s connections to high-tax states on an annual basis. Trustors, beneficiaries or trustees may have moved, potentially creating or eliminating tax nexus with different states.

There are also steps you can explore to help cut down the tax liability. For example, the Supreme Court acknowledged that in states that base tax on a beneficiary’s residence, the beneficiary could delay taking distributions until after relocating to a state with a more favorable tax regime. In addition, trusts may avoid taxation in states that base tax on a trustee’s residence by appointing non-resident trustees or replacing resident trustees.

A similar approach could be taken to avoid taxation based on where a trust is administered. Another alternative is removing certain nondiscretionary powers and rights from trustors or beneficiaries.

Proceed with caution

Trusts are generally created to shield assets from taxes, not to create additional tax burdens. As you can surmise from the general information above, they’re a pretty complex undertaking. Be sure to consult with trusted legal and financial professionals to help ensure the outcome you envision

If you have any questions about the tax rules involving a trust, count on Magone & Company as a knowledgeable resource. Reach out today at (973) 301-2300.

This post is for informational purposes only and should not be considered legal or financial advice. Be sure to consult with a knowledgeable tax advisor regarding your particular situation.

Proactive Mid-year Tax Planning Opportunities for Individuals

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Income tax may not be on your mind right now, but we’re always thinking about ways to help you save. Here are some mid-year strategies that may help lower your individual income tax bill for 2023:

Review your tax withholding or estimated payments
Nobody wants the surprise of a larger tax bill — or a smaller refund than you anticipated. This generally occurs when you don’t adjust withholding or estimated payments to account for income changes. Fortunately, there’s still time to ensure the right amount of federal income tax is being withheld from your paycheck for 2023.

Max out generous standard deduction allowances
Consider making additional expenditures for itemized deductions before the year’s end to exceed your standard deduction. For example, making your January 2024 mortgage payment in December 2023 will give you 13 months’ worth of interest in 2023. In addition, prepaying your state and local income and property taxes can decrease your 2023 federal income tax bill because your total itemized deductions will be that much higher.

Review investment gains and losses in your taxable accounts
Have investments in taxable brokerage firm accounts? Consider selling appreciated securities you’ve held for over 12 months. The federal income tax rate on long-term capital gains recognized in 2023 is only 15% for most individuals, but can reach 20% rate at higher income levels (the 3.8% Net Investment Income Tax (NIIT) also can apply here). Biting the bullet on loser stocks and taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains, from other sales this year.

Leverage the 0% tax rate on investment income
The current federal income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts is still 0% when the gains and dividends fall within the 0% bracket. For 2023, you may qualify if your taxable income is $44,625 or less for single filers, $89,250 or less for married couples filing jointly or $59,750 or less for heads of household. What if your income is too high to benefit from the 0% rate? Children, grandchildren or other loved ones may fall into the 0% bracket, so consider giving them some appreciated shares they can then sell and pay 0% tax on the resulting long-term gains. Note that if you give securities to someone under 24, the Kiddie Tax rules may apply.

Consider gifting strategies
When gifting stocks to relatives and other loved ones, don’t give away  shares that are currently worth less than what you paid for them. Instead, sell them and take the resulting tax-saving capital loss, then give the cash sales proceeds to your loved one.

Defer income into next year
Because the thresholds for next year’s federal income tax brackets will almost certainly be significantly higher thanks to inflation, deferred income might be taxed at a lower rate.

Don’t overlook estate planning
The unified federal estate and gift tax exemption for 2023 is a historically huge $12.92 million, or effectively $25.84 million for married couples. Your estate plan may need updating to reflect the current tax regime or various life changes. Be aware that in 2026, the unified federal estate and gift tax exemption is scheduled to fall back to what it was before 2017 tax reform with a cumulative inflation adjustment for 2018–2025. That might put it in the $7 million to $8 million range, depending on what inflation turns out to be through 2025.

We hope you found some useful ideas and strategies in this post. Our goal is to get you thinking about tax planning ideas and potential moves we can make to minimize your taxes before the end of the year. Don’t have a trusted advisor on your side? Give us a call at (973) 301-2300 to learn more about our tax planning services.

This document is for informational purposes only and should not be considered financial advice. Be sure to consult with a knowledgeable tax adviser regarding your taxes.

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.

Saving for College 101

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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.

Estate Planning: CPA or Attorney? How About Both?

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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.