Why Tax Planning Matters!

Why Tax Planning Matters!

At the start of the year, taxes are on everyone’s minds. The shared goal is to reduce your tax liability and keep more money in your wallet. There are many avenues for doing so, and a financial advisory firm like Nelson Financial Planning is well-equipped to help you find and take full advantage of the most relevant ones.

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Year-End Tax Changes To Make

Year-End Tax Changes To Make

As we gear up for 2024, it’s time to get your taxes sorted out in time for the filing deadline on April 15. Tax planning can be overwhelming, especially because the rules are always changing. Three things to be aware of when filing your taxes include the implications of Roth conversions, yearly inflation adjustments, and changes to Form 1099K. Being proactive about these recent changes will help you achieve your long-term financial goals.

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Trends to Watch in the Current Tax Season

Tax season is upon us, and as the team at Nelson Financial Planning begins to examine tax returns, we’re noticing a few trends, including lighter amounts owed, lower refunds for families, and the proliferation of tax forms.

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Tax Season is Underway

Here are some interesting tidbits and advice you should know as we commence the 2022 tax return season:

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2023 Tax Changes

If you completely trust online retirement calculators, think again. Many of the assumptions these calculators make when projecting your retirement income apply to only a handful of retirees. Continue reading “2023 Tax Changes”

Unemployment Has Changed Forever

The latest stimulus package, known as the American Rescue Plan Act of 2021 (ARPA), injected $1.9 trillion into the US economy. This relief spending has been divided into various categories, including $410 billion for stimulus checks, $360 billion for state and local governments, $130 billion to help schools safely reopen, and $122 billion for COVID-19 testing, tracing, and vaccine distribution.

Another big chunk of the $1.9 trillion stimulus package—$250 billion, to be exact—is allocated for unemployment benefits. The CARES Act, which passed in March 2020, expanded unemployment benefits through December 31, 2020. Now, those expanded benefits extend through September 6, 2021. Here’s what you need to know.

Supplemental Unemployment Benefits

The ARPA adds an extra $300 per week to the baseline employment benefits received from the state for 53 weeks, up from 24 weeks. In Florida, unemployment pays just under $300 per week. With the federal supplement, unemployed Floridians can earn nearly $600 per week. The biggest problem with this is that it incentivizes workers who make roughly $12 to $15 per hour to accept unemployment instead of looking for a job.

Tax-Exempt Unemployment Benefits

The first $10,200 per person of unemployment benefits received in 2020 is exempt from income taxes—assuming your income is less than  $150,000. This gives low- to moderate-wage workers yet another reason to remain unemployed, which could really hamper our country’s economic recovery.

The real kicker is that the government added this significant taxation provision in the middle of tax season! It affects a source of income that millions of Americans received last year, many for the first time ever. A significant portion of these people have already filed their income tax returns and paid taxes on the unemployment benefits they received in 2020.

Now, the only option is to wait, but the IRS has not provided instructions on how to proceed. In fact, the only guidance taxpayers have received so far is not to amend their returns just yet.

Other Tax Changes

In addition to newly tax-exempt unemployment benefits, the ARPA has allocated $143 billion toward three expanded tax credits for 2020:

The child tax credit has increased to $3,000 for children age 6 and older, and $3,600 for younger children, regardless of earned income.

The child and dependent care tax credit increased to $8,000 for one child and $16,000 for multiple kids.

The earned income tax credit was expanded for low- to moderate-income workers with qualifying children.

These tax credits are fully refundable, meaning that even qualified individuals who don’t owe taxes get money back when they file their return.

For answers to your remaining questions about tax-exempt unemployment benefits and other tax implications for 2020, please reach out to Nelson Financial Planning. Our team can fill you in on all the rules so you know what benefits apply to you. Contact us today at 407-629-6477 to schedule your free initial consultation.

Why Taxes Will be a Mess This Year

Has filing your taxes felt confusing in past years? The 2020 tax season is a whole different animal. It’s turning into one of the craziest tax seasons we’ve ever seen. Let’s see if we can cut through all the red tape and make some sense of it all. 

New Tax Filing Deadline  

In mid-March, the Internal Revenue Service (IRS) extended the tax deadline from April 15 to May 17, 2021. Good thing, too—it gives filers more time to sort out the moving target that is this year’s tax season. 

However, if you have already filed and you owe taxes this year, the date you scheduled for your bank account withdrawal is pretty much etched in stone. So if you were hoping to take advantage of the extended deadline, you’re out of luck. 

Be aware that the deadline for funding individual retirement accounts (IRAs and Roth IRAs) and health savings accounts (HSAs) has also been extended to May 17. 

Self-employed people or anyone who generates significant income without having taxes withheld should file quarterly estimated tax payments. If this applies to you, be aware that the deadline for your first payment is still April 15, despite the tax deadline moving forward one month. 

Also, the deadline for corporations, partnerships, and non-profits to file tax returns remains April 15, 2021. 

Tax Changes 

The most recent stimulus package, called the American Rescue Plan Act of 2021 (ARPA), implemented several significant tax changes in the middle of tax season. These include: 

• Unemployment: The first $10,200 per person of unemployment benefits received in 2020 is exempt from income taxes (assuming your income is less than $150,000 ). 
• Health insurance: If you had health insurance through the marketplace in 2020 and earned more than your estimated income, the need to repay the advance premium tax credit is waived. 

While it’s easy to celebrate these changes, the fact that they came so late is creating incredible confusion. For the tens of millions of Americans who filed their returns before the changes were implemented, the only option is to wait. The IRS hasn’t provided instructions on how to proceed. All they have said is not to amend returns yet. But at some point, the IRS must put a mechanism in place to deal with the millions of incorrect returns. 

Even for those who haven’t filed yet, confusion abounds. Electronic filing is a popular option, but tax software hasn’t been updated to reflect the changes yet. Many new tax laws enacted after the CARES Act passed a year ago still haven’t filtered through the tax return system! This includes the 10 percent penalty exemption for taking distributions from retirement accounts due to COVID-19. 

How are filers expected to maximize their returns when the tax law keeps changing in significant ways? 

Interest Rates 

The Federal Reserve announced in mid–March that they intended to hold interest rates near 0 percent until 2023. In addition, the Fed plans to continue quantitative easing, the process of injecting money into the economy by purchasing government bonds and other financial assets to expand economic activity and keep interest rates low. Spending is currently at about $120 billion per month. Despite the Fed’s efforts, 30-year mortgage interest rates recently crept above 3 percent for the first time since July 2020. 

The Fed expects the US economy to grow 6.5 percent this year as the pandemic winds down, the country fully reopens, and economic activity spikes. If that estimate holds, it will be the fastest pace since 1983. Meanwhile, unemployment is back down to 6.2 percent. 

Stock Market 

March 17, 2021 was a big milestone for the Dow Jones. The market closed at just over 33,000 points, a new threshold for the Dow that had never been reached before. This milestone occurred just five days after closing above 32,000, making it the fastest 1,000-point increase in the Dow’s history. 

Just remember to keep this in perspective. Increasing by 1,000 points now is a 3 percent increase, compared to a 10 percent increase if the Dow was at 10,000 points. Still, this is certainly a noteworthy market shift. 

Required Minimum Distributions 

The rules regarding required minimum distributions (RMDs) have already changed in the past year, courtesy of the SECURE Act. Here’s what happened in 2020: 

• The 50 percent penalty for failing to take the minimum distribution was waived. 

• The RMD age rose from 70.5 to 72. 
• The timeframe for retirement account beneficiaries to empty the account changed from a lifetime to just 10 years. 

RMDs were waived in 2020, but they’re back for 2021. You may find that your required minimum distribution jumped quite high compared to 2019. Here’s why this may have happened: 

• The market performed pretty well last year. 
• You’re one year older now. 

• More money has accumulated in the account if you suspended distributions in 2020. 

Looking ahead to 2022, here’s what you can expect from RMDs: 

• The IRS will issue a new Uniform Lifetime Table used for calculating RMDs to reflect higher life expectancies. 72-year-olds can expect a 6.5 percent reduction in required minimum distributions compared to the current Life Expectancy Factors. 
• Some professionals speculate that the RMD age may rise to 75. 

Common Traits of Successful Investors 

Five key things set successful investors apart: 

• Save more: Pay yourself first. Then, make sure everything else gets paid. 
• Avoid worrying: You can expect great long-term results, no matter what the market is doing in the short term. 
• Start early: Compound investing is much more powerful if you start saving early. 
• Stay positive: Having an optimistic outlook helps keep your investments on track. 

• Have a steady temperament: Consider the bigger picture and don’t lose sight of potential growth despite what may be happening now. 

For answers to your questions about tax changes, interest rates, required minimum distributions, or successful investing, please contact Nelson Financial Planning at 407-629-6477.