Read this before mindlessly rechecking through open enrollment.

It's October. That means the NFL is in full swing, the Bay Area weather is beautiful and it's time to recheck the boxes during your company's open enrollment.

But wait! Before you mindlessly keep what you had last year, consider changing to a high-deductible health plan (HDHP).

Why?

Because you'll pay fewer taxes.

If you're enrolled in a high deductible plan, you can open a Health Savings Account (HSA). And if you put money in an HSA, you will never ever pay taxes on it.

Cue breathless, fast-talking infomercial guy- “But wait. There's more!”.

And you can even invest that money and let it grow *mind explodes*.

An HSA is the only type of account that is triple-tax free:

     1. You put in pre-tax dollars, which reduces your taxes this year.

     2. The money grows tax-free (no taxes on capital gains or dividends)

     3. You don't pay taxes when you take the money out (as long as you use it for qualified medical expenses)

So here's the play:

     1. Sign up for a high-deductible plan

     2. Max out and invest your HSA contributions (2019 maximum is $7,000 for families)

     3. Pay for current medical expenses out-of-pocket

     4. Use all HSA money to pay for your medical expenses in retirement (of which there will be many)

The catch is #3. You have to pay current medical expenses out-of-pocket (the out-of-pocket maximum for a high-deductible plan is $13,500. So it won't be more than that). That can be an adjustment.

This is not for everyone. But for the right people, it's a goldmine. Talk to your financial planner to see if this could be a good strategy for you.

(As always, if you don't have one, give us a call. We love helping with this stuff.)



DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

How Much Will You Pay in Capital Gains Tax?

Quite a few Financial Zen members have sold their homes lately. And since Uncle Sam only writes tax code after a few whiskeys, it's not easy to figure out what you'll owe him.

So here's the whiskey-less version of how it works:

Each spouse gets $250,000 in gains tax-free. If you bought your house for $1,000,000 and you sell it for $1,500,000, you will not pay capital gains tax, if:

1. You've lived there for at least 2 out of the last 5 years and

2. It's your primary residence, not an investment property

What happens if you sell it for $1,600,000? Then you'll pay a 15% capital gains tax on the $100,000. $15,000 goes to Uncle Sam. Ouch.

But if you keep good records, you can reduce your gains by increasing your cost basis.

Maybe the price tag was $1,000,000. But you also paid closing costs, title insurance and settlement fees.

When you sold, you paid agent commissions, attorney fees and transfer taxes.

And maybe you renovated your bathroom and kitchen, built a deck and replaced the roof.

All told you spent $100,000 buying, selling and renovating. That gets added to your $1,000,000 purchase price.

So your cost basis is now $1,100,000 and if you sell for $1,600,000 you'll still be under the $500,000 exemption limit.

And you won't owe your drunk Uncle a single dime.

I've simplified the details for illustration purposes. Talk to your financial planner or tax advisor for specifics regarding your specific situation. Don't have one? Then contact us!

(Really) Last Minute Tax Deductions

Want to save a few more bucks on your 2018 taxes?

There's still a few things you can do to reduce your upcoming tax bill:

1. Top off your HSA. You have until 4/15 to make HSA contributions for last year. Anything you put in is a tax deduction regardless of how much money you make. The maximum for a family plan is $6900 for 2018.

2. Top off your IRA…maybe. You have until 4/15 to make an IRA contribution for last year (up to $5500 per spouse). If one of the following describes your family, then it would be deductible:

a. You and your spouse are not eligible for a 401k (i.e. your companies don't offer one)

b. You are eligible for a 401k, but your spouse is not AND you made less than $189,000 last year

c. Your adjusted gross income is below $101,000 (married, filing jointly)

3. Top off your Roth IRA…maybe. This won't save you any taxes this year. But if you'll be in a higher tax bracket when you retire, then contributing now will save you taxes in 30 years. (Nothing like delayed gratification, eh?)

There's plenty of missteps you can make doing this on your own. So talk to your "guy" or "gal" before you do anything. And if you don't have one, email us - help@financialzen.com. We'll sort you out.

DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

One Last Present

The market's in the toilet, but the bowl is half-full!

If you haven't done so already, don't forget to harvest your tax losses (only do this in your taxable accounts, not your 401ks or IRAs).

When I wrote about it in August here, here and here, I had no idea what a tremendous opportunity we would have to actually put it to work.

If you're a client of The Financial Zen Group, then we've already done this for you.

If you're not (and why on earth wouldn't you be?) then you need to do it yourself.

Sell your losses to realize the loss and immediately buy something similar (i.e. sell your Vanguard S&P 500 fund and immediately buy the iShares S&P 500 fund).

For every dollar of tax losses you realize, you will save at least 15 cents in taxes (and possibly up to 50 cents).

Just don't forget to buy back something similar, otherwise you'll miss out on all the fun when the market takes off again.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Pulling One over on Uncle Sam, The Finale

Last week was my 10-year anniversary, so we gave Uncle Sam a break. 

The two weeks prior to that we learned that if we sell at a loss, we can use that loss to offset gains elsewhere  OR use it for up to a $3,000 tax deduction per year until it's all used up

Over the long-term (10+ years), your portfolio will grow.   Over shorter time periods, it will be up or down.   But when it's down, it never stays down.  So you want to take advantage of the temporary downturns by realizing losses (aka selling). 

Uncle Sam's not as dumb as he looks.  He won't let you sell to realize the loss, then turnaround and buy it right back.  If you buy the exact same thing back within 30 days, it's called a "wash sale" and Uncle Sam will pretend like you never sold anything in the first place.

The problem is that you always want to stay 100% invested. 

You just sold your red delicious apples and while you're waiting 30 days to buy them back, apples really take off.  They're up 10% in a month and you missed it.  Saving on taxes will be a small consolation.

The key - and very technical - term is "exact same thing".  

Instead you sell red delicious, realize the loss and immediately buy granny smiths.  You'll still be invested if apples skyrocket this month, and meanwhile Uncle Sam won't care since they're not exactly the same. 

Pretty cool, right? 

As for investments, you can sell your Vanguard S&P 500 fund, realize the loss and immediately buy the iShares S&P 500 fund.    As far as you're concerned, they're the exact same investment.    As far as Uncle Sam is concerned, they’re not.  Because they are from different investment companies, it won't trigger the wash sale rule.

Tax loss harvesting is like checking your credit report every year.   You know you should, but you never seem to get to it.   Working, raising a family and occasionally relaxing get in the way of harvesting your tax losses.   

Wouldn't it be nice if you knew someone who could do that for you?   Then you could live your life AND pull one over on Uncle Sam.

Oh wait!  I heard somewhere that The Financial Zen Group does this for people.   Maybe you should check em out!  - www.financialzen.com

Disclaimer: This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

 

Pulling One over on Uncle Sam, Part Deux

Last week after visiting Financial Zenutopia, we sold the apples at a loss (wahh!), and left the paper gains in the oranges alone and didn't realize them.

So we're sitting here with a realized $20 loss in our apples, and we determined that we can use that to offset gains in any other fruit.   But what if we don't have realized gains in any other fruit?  What then?

Then we can use the loss to offset our income.    As in, the money you get direct deposited every month.  THAT income.  

Let's say instead of a $20 loss in apples, it was a $20,000 loss instead.   Does that mean you can deduct $20,000 against your income?   Not exactly.

The bad news is you can only deduct UP TO $3,000 per year.   The good news is the $17,000 left over after you do that doesn't go away.   You keep it until you use it.   (It's called a "capital loss carryover" in finance-ese if you want to Google it.)

So let's say the following year, you DO sell your oranges and realize a gain of $17,000.   You can use the leftovers from the previous year's realized loss to offset that.  Now you've used up all your capital loss carryover from the previous year. 

Or maybe you don't sell anything and just use it to offset income every year at $3,000 a pop until it's all used up.   That works too. 

The catch is that you have to offset capital gains first, before you offset your income.   Income tax rates are higher than capital gain tax rates, so it'd be better to offset income first, gains second. But Uncle Sam won't let you do that.  So don't even try.

That's enough fruit for this week.  So far we've learned about realized vs. unrealized capital gains and losses.   And we learned what a capital loss carryover is.  

Look at you speaking finance-ese!  And you thought finance was hard!

Next week, we'll pull it all together to really stick it to our Uncle!

Pull One over on Uncle Sam

Isn't it fun legally pulling one over on Uncle Sam?   It's one of life's greatest pleasures.

But he makes paying taxes so #%$@& complicated that you're probably missing some very easy (and legal) ways to pay less taxes.  And that means you're missing out on all the fun!

Let's visit Financial Zen utopia , where you can invest in fresh fruit.   You own a diversified portfolio of apples, oranges, pineapples, grapes and blueberries.   A veritable nuclear bomb of anti-oxidants.  Good for you!  You're gonna live forever!

This year the price of oranges went way up.   But the price of apples went way down.

The $100 you invested in oranges is now worth $120 (woohoo!).  The $100 you invested in apples is now worth $80  (whomp whomp).

But it's all just paper gains and losses until you sell them.

If you sold the oranges, you would have a $20 realized gain and have to pay Uncle Sam a tax of 15% or about $3.

What happens if you sell the apples?   Well then you have a $20 realized loss and Uncle Sam pays YOU $3.  

Gotcha!   Just seeing if you're paying attention.  It totally doesn't work that way!  That'd be nice though, wouldn't it? 

What would actually happen is you can use the $20 loss in apples to offset the $20 gain in oranges.  

Then the net gain for the year is $0 and you wouldn't owe Uncle Sam anything.  Take that, Unc!

But what if you sell the apples, but don't sell the oranges?   What can you do with that $20 loss?  

You can use it to offset gains elsewhere - in grapes or blueberries or pineapples - OR if you don't have any realized gains anywhere then you can use some of it to pay less income taxes.

Even too much fruit isn't good for you.   That should be a digestible amount for this week.  Next week I'll show you how to stick to Uncle Sam - Every. Single. Year. - regardless of what your apples are worth. 

Disclaimer: This blog is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Look Out for IRS Tax Scams

Repeat after me:

"The IRS"…

"Does NOT"…

"Contact people"…

"By email, text message or social media."

If you ever hear from the IRS by email, text message or social media - do not respond, do not open any attachments and delete immediately. 

It is 100% a hacker.

And if you ever get a call from the IRS, it's 95% likely bogus.   Until 2015, they never called.  Now they only call after sending you something in the mail first. 

These scumbags particularly like to prey on senior citizens, so be extra alert if you're a baby boomer. 

Here's some good info straight from the IRS website:

  • Scammers make unsolicited calls.  Thieves call taxpayers claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via phishing email.
     
  • Callers try to scare their victims.  Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.
     
  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.
     
  • Cons try new tricks all the time.  Some schemes provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. Others use emails that contain a fake IRS document with a phone number or an email address for a reply. These scams often use official IRS letterhead in emails or regular mail that they send to their victims. They try these ploys to make the ruse look official.
     
  • Scams cost victims over $23 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 736,000 scam contacts since October 2013. Nearly 4,550 victims have collectively paid over $23 million as a result of the scam.

 

The IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
     
  • Demand that you pay taxes and not allow you to question or appeal the amount you owe.
     
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.
     
  • Ask for your credit or debit card numbers over the phone.
     
  • Threaten to bring in police or other agencies to arrest you for not paying.

 

Be safe out there.

URGENT: The New Tax Law - 3 Things to Do Before December 31st

The Financial Zen Education newsletter is being sent a day early because the new tax legislation will likely be signed into law on Friday.  There are 3 things you need to do immediately before January 1st and 1 thing you probably don't need to worry about.

  1. Pay your 2nd 2017/2018 property tax now.   The new law will cap the deduction you can take on state, local and property taxes to a maximum of $10,000 (that's combined, not each).   So if your combined property taxes and state taxes will be more than $10,000 next year, then pay your property tax by December 31 to get the full deduction in 2017. 
     
  2. Pay 4th quarter taxes.   You are not allowed to prepay 2018 state taxes.  It's written into the law.  However, if you pay taxes quarterly (all you retirees and business owners), you CAN pay your Q4 2017 taxes.  If you pay it by December 31, you can still deduct it. 
     
  3. Defer income.  The tax brackets will be lower.  So any income you can delay until next year should be to your benefit.  Ask if you can get your year-end bonus paid after January 1st.   Don't take anything out of your IRA this month.  Ask to get your RSU grants after January 1st. 
     
  4. Mortgage interest deduction - It has changed, but it probably won't affect you.   You can still deduct your mortgage interest on the first $1,000,000 if you closed your mortgage before December 15, 2017.  You are grandfathered into the old law.  However, if you close a new mortgage AFTER December 15, 2017 then you can only deduct interest on the first $750,000.  

This is not intended to be comprehensive, but it's everything that I was able to research and think of since they finalized the bill last weekend. 

Disclaimer: This blog is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.