Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Most clients who only receive Social Security benefits during their retirement years are likely not going to be taxed unless if they also receive income from other sources like an IRA or 401(k), according to Investopedia. However, if the Social Security benefit hits $25,000 for single individuals or reaches $32,000 for married filing jointly, then the income is subject to tax depending on the amount. To avoid taxes on other sources such as traditional IRAs or 401(k)s, one may consider converting these accounts to Roth IRAs. Some experts also suggest consuming income from taxable accounts first until one is eligible to receive Social Security benefits at age 70. -- Investopedia
Taxpayers will face a 39.6% income tax, a 3.8% net investment income tax and possibly a whopping state income tax of 43.4% if they decide to sell highly appreciated land, according to MarketWatch. However, they can reduce the tax burden by establishing an S corporation and selling the property through the corporation, so the proceeds will be subject to long-term capital gains tax, which is only 20%. Using the strategy would mean the effective tax rate could be 23.8%, considerably lower than when the profit is subject to ordinary income tax. -- MarketWatch
Clients need to avoid contributing to their IRAs and 401(k) plans beyond the set limits, as they could face IRS penalties and double taxation on their contributions, according to Money. Those who have over-contributed to their retirement accounts are advised to seek a refund of the excess deferrals, including any returns on the amount on or before the tax-filing deadline. IRA investors who made the mistake may file an amended return by the filing-extension deadline or they may simply leave the money with the account to carry it over towards contribution limit for the following year but pay a 6% penalty. -- Money
Court rulings show that clients need to avoid tapping their retirement accounts, such as IRA and 401(k) plans and annuities, to finance a business endeavor or personal plan, according to Forbes. Such a move could result in hefty taxes and penalties. -- Forbes