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Announcer:
It’s time now on KROS for Financial Focus brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative ,Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s financial focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate joined this morning by Andy Ferguson with the NelsonCorp Tax Solutions and we’re ready to talk some taxes today. A pleasant morning on the way up today, it’s nice out there today, but it looks like, and looking at the extended forecast, I know at least the next 10 days the bottom’s going to kind of fall out a little bit and I seen that that four letter word with that white stuff is in the forecast for some parts of Iowa coming out.
Andy Ferguson:
Yeah, it’s one of those things, I guess we got our two weeks of fall and now we’re just headed right into the teeth of winter.
Nate Kreinbrink:
Yeah, it’s quite the change as far as those temperatures down into the 30s, I think, and in some of those that we have coming up, I know where we both coach our little kids’ soccer teams and Saturday morning, I think, will be a wide rude awakening, I think, for a lot of those little kids and parents too, I think, sitting out there.
Andy Ferguson:
Might be a lot of standing and shivering on those little kids’ teams.
Nate Kreinbrink:
[crosstalk 00:01:45] have chocolates and blankets and all that type of stuff, but as we get to this time of year, I know you mentioned on the way up here that there is a deadline coming up next week, that’s the October 15th deadline, kind of go over what that falls into and who that applies to.
Andy Ferguson:
Yeah, so that deadline is the deadline that is related to anybody who filed an extension during the tax year. So if you got close to the April 15th deadline and you and your tax preparer decided, “Hey, let’s kick the can down the road a little bit and extend this,” that deadline’s coming up next week, October 15th will be the end of that six month extension. So anybody who filed for a regular extension at the end of April or in the middle of April is due up here next week so…
Nate Kreinbrink:
So those people that that applies to that did file that extension, you got a few days left so make sure we don’t get past that date, so. We’re going to transition a little bit into… I know we talked quite a bit with James, Dana and David when we were all on the shows appear week after week as far as the importance of planning, financial planning, whether it’s investments, which accounts you’re saving into, what it’s going to look at down the road. Tax planning is really no different and has a huge impact on on what we do as far as as people transition into retirement, and what we do with people is, we tell them the biggest thing that they’re going to look at them in retirement as far as expenses are healthcare and taxes is going to be your top two expenses in retirement. So tax planning is a big key that doesn’t have to necessarily translate at retirement though. I know you were saying that there was a case a coming up that you had this past week as far as where a little bit of planning would have saved the people a lot of money as far as when it came to the tax bill.
Andy Ferguson:
Yeah. What’s interesting is you talk about those two big expenses being healthcare and taxes. The thing that’s interesting to me about that is, and what people don’t always understand, is you can kind of control taxes. You can choose when you pay your tax, you can do things to put yourself in position to pay tax in a way that you want to pay tax. Now, you can’t avoid paying tax, you’re going to pay tax, but you can control the wind that’s involved in that. And that can also impact the amount of tax you pay. So the situation that you’re referring to as we come to the end of the year, I see clients that come in and say, “Hey, I want to take some money out. I want to take some money out of my retirement. I want to make a big purchase.”
Andy Ferguson:
And that’s great. We want to help them do that. But being that it’s October, sometimes there’s value in waiting a few months to take that money. And so, I have a situation where I dealt with a client and the difference in their income this year compared to their projected income next year makes a difference in their tax return. And so, if they can maybe wait eight weeks, 10 weeks, 12 weeks, and get that money on January 2nd instead of October 15th, they may be able to avoid a significant portion of their tax bill.
Andy Ferguson:
Especially when you consider income coming out of those IRAs and, and pensions and even cashing out savings bonds, that money all becomes taxable income. When that money comes in, it’s also going to move any social security that you’re not being taxed on and all that stuff. And so, my counsel is always to say, let’s run the situation, let’s take our software, plugin some numbers and see what happens. Because sometimes there’s things that you didn’t think about that rear their ugly heads when you run the scenario, and it’s better to have it show up in the software,. in the practice scenario than it is to have it show up in March
Nate Kreinbrink:
In March. Exactly. I think that may be a valid point. I think for a lot of people around the area, I know there was a lot of local businesses that ran their turnarounds this year, so there’s some individuals that maybe had a little bit higher of an income this year, going to take money out of a an IRA account or any other tax deferred account cashing in some CD savings, blunt, whatever the case may be. As you mentioned, if we can wait at least two months or whatever, get into that new tax year where their maybe isn’t going to be quite as high as what it is this year, they’re going to keep their, their amount of their income at the higher tax brackets at a lower amount than what they would occasionally. So I think that’s important for people to look at.
Nate Kreinbrink:
And also I think that comes into play when we talk to people as far as their Medicare premiums those individuals that are 63 ish or so that are going to be on Medicare and in less than two years, your Medicare premium is tied to your income from two years ago. So if you have a big spike in your income, that Medicare part B premium, it has the five tiers, which is based off of your income, you spike that up, you’re going to be paying a lot more for your Medicare premium for a year until that income goes back down than what you would normally do. So a lot different parts that go into.
Andy Ferguson:
Yeah, and if you can take that spike and your income and spread it across two periods, you save yourself a lot of money. Another example of that has to do with healthcare provided through the marketplace or Obamacare. I’ve run across several people. What people don’t understand about that is there’s an advanced premium tax credit that is given to people who fit certain income thresholds. That tax credit is given to you on the assumption that your income’s going to be at a certain level. And what people don’t realize is that unlike most other tax laws is a straight cliff. It’s not a graduated scale, and so, it doesn’t gradually phase out. If you cross the threshold for that income limitation and you’ve received that premium tax credit, if you cross that threshold by even $5 they’re going to want all of that premium tax credit back.
Andy Ferguson:
So a specific example, I ran a scenario for somebody who wanted to roll money out of their Roth IRA., I’m sorry, roll money out of their traditional IRA into a Roth IRA. And so we ran the scenario and they knew they were going to have to pay some tax, they wanted to move some money and we ran the scenario and all these bells and whistles went off in the software and said, “Hey, this is going to cost you a ton of money.” And when we looked into it, it was because they had marketplace insurance and they were going to cross that threshold if they took on that additional income. And so, what was interesting in that situation was that they were on marketplace insurance this year, but they weren’t going to be on it next year. I said, “If you hold that off one year, you can avoid this $4,000 in repayment of the premium tax credit and save yourself a bunch of money.”
Andy Ferguson:
And so it’s important to always take a look at those things and see if there’s something that is going to be triggered by the increase in income. And like I said, it can be any increase in income. It can be, it can be, like you said, you worked a lot of overtime this year. It can be taking money out of your IRA or cash in savings bonds. You know those things are things that you don’t always think about causing you an impact in your taxes, but they will, as your adjusted income moves, things move in your tax return, and you want to be prepared for those movements.
Nate Kreinbrink:
Right. And I think, yeah, you brought up a big point there as far as conversions, I know we talked to I think on previous shows as far as the importance of everyone looking at a Roth IRA and what the benefits are for them not only now, but 20 years down the road, especially given the favorable tax environment that we are currently in. And then obviously we don’t know what it’s going to be like in the future, but given where we’re at to to look at it. But I think the coordination you just said as far as working with an advisor or working with a tax specialist, as far as looking at those conversions, but not doing it in-mass. I think looking at where we’re falling in the tax bracket system, what we can get at a lower level and do it, that kind of planned out method rather than just saying, “Yep, we’re going to do this amount and not knowing really how it’s going to impact us. So having a plan, looking at, again, getting later on in the year, we have, everyone should have a better idea as far as where their income is going to fall for the year. So we’ll know how much we can look at potentially converting yet in 2019.
Andy Ferguson:
yeah. It’s just like budgeting your household, right? I mean, when you have a liability or a debt, you know you’ve got a car payment and you sit there and go, “man, I want to pay this car payment off.” You don’t just make a blatant payment to pay that car payment off cause you may not have the funds associated with it. What you do is you look at your budget, you look at, you see, okay, I’ve got this much room. I’ve got this much income that I can afford to move over here and pay this, this payment off.” All your taxes work the same way. You’ve got a flexibility in your tax brackets and in your other tax shelters that are available to you that you can manipulate where your taxes are going to land by following the rules. But you have to know the rules and you can’t just say, “I’m going to take it all out.”
Andy Ferguson:
We see this happen all the time. When people leave a job, you know, they leave a job and they’ve got a 401k and it’s not huge, you know, and they’re like, “well I’ll just take it. I’ll pay the taxes on it and I’ll just take it.” Well then they come in in March and they’ve incurred an extra penalty or there’s something, they’ve thrown their income out of whack and now the things that they had planned on happening aren’t happening the way they plan for it. And so, again, anytime you have a lumpy, some like that, you want to talk about it, you want to prepare for it, you keep yourself out of trouble if you can seek out what’s coming down the road.
Nate Kreinbrink:
Yeah and a lot of stuff we went over today, but, very, very important things. So you got questions on any of this be sure to give us a call, and he’d be happy to sit down with you to kind of look at your tax situation and come up with a plan to let me know, let you know where you’re at. I did want to mention real quick that a every Friday Nelson Corp is wearing jeans for charity. Money raised in the month of October will be donated to the Special Olympics with the Eastern Iowa division. Andy, always great talking to you. I appreciate you joining me this morning. Again, this is Nate and Andy bringing you this week’s financial focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated. A broker-dealer, member of FINRA SIPC. Investment Advisor Representative, Cambridge Investment research advisors Incorporated. A registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.
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