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Individual Tax

Investing for Tax-Favored Income

May 18, 2021 by admin

Tax-Favored Income - Individual TaxIf you are seeking a steady income stream from your portfolio while trying to minimize the tax impact of that income, you may want to look into municipal bonds. Municipal bonds traditionally have had a relatively low default rate and may offer diversification benefits.1

What They Are

Municipal bonds are debt securities that are issued by states, cities, counties, and other government entities. Issuers use the funds to fund day-to-day obligations and to pay for capital projects.

Municipal bonds come in two basic types: general obligation bonds and revenue bonds. General obligation bonds are backed by the issuer’s taxing power. Revenue bond payments are funded by the revenues from a specific project or source.

Why Buy Municipal Bonds?

The interest investors earn on most municipal bonds is exempt from federal income taxes.2 In addition, many states do not tax their residents on interest earned from municipal bonds issued in the state. The tax-exempt feature of municipals may mean that, after taking into account tax considerations, you can earn a better return on a municipal bond than you would from a higher yielding taxable bond.

The value of this tax benefit depends on your tax situation and is highest for investors in higher tax brackets or those who reside in high-tax jurisdictions.

Additional Benefits

You can potentially enjoy several other advantages apart from tax-exempt income when you invest in municipal bonds:

  • A predictable income stream for the life of the bond;
  • Marketability should you need to sell the bonds before maturity; and
  • Choices as to issuer, quality, and geographic location.

Municipal Bonds Are Not Risk-Free

Like all investments, municipal bonds have their own set of risks. The financial health of an issuer and its ability to make timely payments of interest and principal is something you should investigate before buying. Various credit rating agencies, such as Moody’s Investors Services, assess the credit rating of the governmental entities that issue municipal bonds. Generally, issuers with lower credit ratings tend to offer higher yields on their municipals to compensate for the added risk to your principal.

Municipals, like other bonds, are subject to interest rate risk. Rising interest rates cause bond prices to fall. In a period of rising interest rates, selling a municipal bond before it matures may mean having to accept a lower price than you paid for it. In addition, municipal bonds can be impacted by other market forces.

Despite credit, interest, and market force risks, municipal bonds may have a role to play in a carefully structured, diversified fixed-income portfolio. Your financial advisor can help determine whether your portfolio would benefit from holding municipals.

1Diversification does not ensure a profit or protect against loss in a declining market.

2The interest on certain “private activity” bonds must be included in income for federal alternative minimum tax purposes.

Filed Under: Individual Tax

Deductions for Long-Term Care Insurance

May 19, 2020 by admin

David C. Huff, CPA, PCMany people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case. If you are thinking about buying long-term care insurance, you’ll be interested to know that, within limits, premiums paid for qualified policies are deductible as an itemized medical expense. For 2020, premiums for qualified policies are tax deductible to the extent that they, along with other unreimbursed medical expenses, exceed 10% of your adjusted gross income.

The typical long-term care insurance policy will pay for nursing home, home care, or other long-term care arrangements after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.

Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2020 are:

Long-Term Care Insurance Premium Deduction Limits, 2019
Age Premium Limit
40 or under $430
41-50 $810
51-60 $1,630
61-70 $4,350
Over 70 $5,430
Source: Internal Revenue Service

These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $10,860 ($5,430 × 2). Keep in mind, however, that, for individuals under age 65, itemized medical expenses are deductible only to the extent that they, in total, exceed 10% of adjusted gross income (AGI).

As everyone’s situation is different, consider contacting your tax and legal professionals to discuss your personal circumstances.

Filed Under: Individual Tax

The Saver’s Tax Credit — Can You Benefit?

March 18, 2020 by admin

David C. Huff, CPA, PC - Saver's Tax CreditIt’s not always easy to keep contributing to your employer-provided retirement plan. Bills and unexpected expenses can eat up most of your salary, leaving little for retirement savings. You might be tempted to forget about it until you start earning more money.

But before you stop or cut back (or never start) contributing to your plan, understand that you could be entitled to a federal tax credit called the Retirement Savings Contributions Credit, or Saver’s Credit, if you meet certain income requirements. In effect, the credit repays a percentage of the contributions you make to your 401(k) or other retirement savings plan by reducing your income tax liability for the year. It may be just the thing that enables you to keep participating in your retirement plan or increase your contributions.

What It Is

The credit is a percentage — 50%, 20%, or 10% — of up to $2,000 in qualified retirement savings contributions for a maximum credit of $1,000 (or twice that amount for a married couple filing jointly who each contribute $2,000). The percentage depends on adjusted gross income (AGI) and filing status. The credit is available for contributions to a 401(k), 403(b), governmental 457(b), SIMPLE IRA, or salary reduction SEP as well as for traditional and Roth IRA contributions.

To claim the credit, you must be at least age 18, not claimed as a dependent on another person’s return, and not a full-time student. You will not be able to claim the credit if your AGI exceeds the top of the range for the 10% credit.

 

2019 Tax Credit
50% of Contribution 20% of Contribution 10% of Contribution 0% of Contribution
Tax Filing Status Adjusted Gross Income
Married Filing Jointly $38,500 or less $38,501-$41,500 $41,501-$64,000 > $64,000
Head of Household $28,875 or less $28,876-$31,125 $31,126-$48,000 > $48,000
All other filers* $19,250 or less $19,251-$20,750 $20,751-$32,000 > $32,000

*Single, married filing separately, or qualifying widow(er)

Call us at 770-229-7145 today and start working with a top Snellville CPA firm dedicated to exceptional service.

Source: irs.gov

Filed Under: Individual Tax

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