Wednesday, April 5, 2023

I Love Paying Taxes

 


I Love Paying Taxes

FAMILY UPDATE

We have three cats and a dog, all devoted to my wife. When she walks around the house, there is a parade behind her. Why doesn't the dog like me like that? Why does she get all the cuddles and love? It's not fair. How do I get them to like me? My puppy will pay attention to me if I throw him a tennis ball but other than that he is lying by my wife's side.

I've always liked baking and I baked a couple of fruit pies this week. Using frozen cherries is a great way to make a delicious and healthy pie. Canned pie filling is pure sugar.

Below you will see the ugliest blueberry pie ever made (it was still gone in less than an hour).

Tax time is rolling around, which confuses many of my clients. There are a lot of daunting terminologies out there. I’m going to stick with the stuff you actually need to know.

1099-MISC: A “1099-MISC” is for work you did as an independent worker or freelancer.

1099-INT: This reports interest income you’ve received from savings/CD/money market accounts. It also includes any interest you receive from bonds outside a retirement account. This income is taxed at your federal income tax bracket.

1099-DIV: If you are receiving dividends from an account outside a retirement account you must pay taxes. These tax rates can be more favorable.

As an aside, most people believe the long-term capital gains rate to be 15 percent. The truth is that it is dependent on certain factors, which means it often is not 15 percent.

If you are married and show less than $83,350 in income, the tax rate for long-term capital gains is zero. If you add your social security, IRA withdrawals, and capital gains and it totals less than $83,350, there is no capital gains tax.

1099-R: This is probably the most important form to most clients. It reports how much money you distributed from your retirement accounts (IRA, 401(k), etc.). It does not apply to Roth IRAs.

Required Minimum Distributions (RMDs): I get a tremendous number of questions on this subject. The IRS just raised the age at which you need to start withdrawing money from your retirement accounts each year (from 72 to 73). The amount you need to remove depends on your age. At 73 the amount is around 4 percent. It goes up a little each year. At age 80 you need to take out around 5% from your retirement accounts. At age 90 it climbs to 8%; at age 100 it's 15%.

Stretch IRA: When you pass your retirement accounts on to your heirs, they don't need to cash in the account right away. This would trigger massive taxation. The IRS now gives them 10 years to spread the tax burden over time.

Standard Deduction: The vast majority of you will utilize the standard deduction. If you are married, you can deduct $27,700 from your income. Meaning that if your income is $100,000, you only have to pay taxes on $72,300 after the standard deduction. If you are single, the number is $13,850.

The only time you would not use the standard deduction is in situations where you have several other deductions (mortgage interest, charitable giving, etc.). These are called itemized deductions. If these deductions exceed the standard deduction, you would deduct that amount. About 90 percent of the U.S. population uses the standard deduction.

For example, if you are married and your mortgage interest is $15,000, you do not get to deduct it from your taxes, as it is less than the standard deduction.

Progressive Taxation: I find some people can have difficulty with this concept. I put the tax rates at the bottom of this article.

This is where the confusion comes in. Some people believe if they make one dollar over the 12 percent threshold they must pay 22 percent income tax on all their income. This is not how this works.

Let’s say you are single and make $89,077.

The first $9,875 is taxed at 10 percent. From $10,275 to $41,775 you pay 12 percent. From $41,775 to $89,076 you pay 22 percent. So if your income is $89,077, you would only pay 24 percent on that one dollar.

Cost Basis: First look at how much you paid for a stock, bond, or real estate property. Then look at the selling price. You must pay taxes between the cost basis and the selling price. This does not apply to retirement accounts.

Estate Tax: Florida has no estate taxAs far as the federal estate tax goes, it only applies to people worth over $12.92 million dollars.

Gift Tax: This is also extremely misunderstood. Unless you are worth over 12.92 million dollars, you can gift as much as you want. Be generous. You might have to complete a gift tax form for the IRS, but neither you nor the recipient will have to pay taxes.

State Investment Income Tax: Florida does not tax investment income. Some states do. If you lived in New York, in additional to federal tax, you would have to pay an extra 8.82% tax on the gains from your investments. There's a reason why rich people have their residency in Florida!

I hope this helped.

Be Blessed,

Dave

I am holding Social Security webinars each Saturday at 10:00 AM. Go to www.SocialSecurityRSVP.com to register.

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