1. ©2015, College for Financial Planning, all rights reserved. Session 10 Income Tax Planning CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Plan Development Course

2. Start Recording This class is being recorded so you may review it at a future time. 10-2

3. Differences Some tax preparers tell clients the consequences of what has been done within tax law. A planner and some tax advisors look forward and tell clients how to structure financial actions to create favorable tax consequences while achieving goals within tax law in current and future years. As a planner, you need to understand the basics and track changes to tax law and trends, identify strategies, and then consult clients’ tax advisors to jointly develop plan. 10-3

4. Tax Analysis Analyze & evaluate client’s tax situation Determine and quantify income tax planning needs Understand tax planning goals and philosophy Review past, present, and future tax planning factors, including AMT Document and evaluate current tax planning Review tax withholding Review use of tax-advantaged savings and debt Target deductions and credits Review prospective planning strategies Develop client-based recommendations Identify and select best strategies to meet needs Frame recommendations: who, what, when, where, why, how, and how much 10-4

5. Learn the Form 1040 & Process 10-5

6. Using the Tax Return Could you estimate how much money they have invested if you know current rates? Don’t you want to know if they are a business owner or real estate investor? 10-6

7. Adjustments Might Be Opportunities Educator expenses 3 self-employment rules: o Deductible self-employment tax o Self-employed health insurance premiums o Self-employed qualified plans Performing artists, reservists, and fee-based government officials Student loan interest Student tuition and fees Health savings accounts Qualified moving expenses Penalty on early withdrawal Alimony Deductible IRAs Domestic production Not only what did they do but what COULD they do? 10-7

8. Itemized Deductions Look through budget. Ask questions. Willingness to change? Know tax strategies: Bunching Accelerating Deferring Shifting to others Eligibility for state income taxes or sales taxes Not all deductible for AMT! 10-8

9. IRA or Roth IRA - 2015 IRA or Roth IRA Contribution limit: $5,500 Catch up: $1,000 Is each a participant in a qualified plan? YES Traditional IRA phaseout for active participants: Married filing jointly: $98,000 – $118,000 Can my clients? Can your clients? Roth IRA phaseout: Married filing jointly: $183,000 – $193,000 Can my clients? Can your clients? Phaseouts not provided for test – so memorize! 10-9

10. Deductions & Exemptions Deductions Medical deduction floor for 2015: 10% (seniors 7.5% until 2016) Taxes Interest (subject to $1 million and $100k limits) Charity Casualty & theft Job & miscellaneous Other Phaseout 3% over $258,250 singles/$284,050 single head of household/$309,900 married filing jointly Exemptions 2014: $3,950 phased out 2% for each $2,500 of AGI over phaseout limits shown above (not always provided on CFP exam) Know who can be claimed as dependent 10-10

11. Alternative Minimum Tax Common adjustments and tax preference items include: Personal exemptions Standard or certain itemized deductions (medical for seniors only & misc. itemized deductions) State and local income tax Accelerated depreciation of certain property Bargain element on incentive stock options Depletion allowances Intangible drilling costs Private activity muni-bonds (except 2009 & 2010) Must calculate! 10-11

12. AMT Start with line 41 (AGI after itemized deductions but before exemptions) Add back preference items (taxes, medical, misc. deductions, private activity bonds) Subtract AMT exemption subject to phaseout $83,400 (married filing jointly) Apply tax rate: 26%, then 28% if over $158,900 (married filing jointly) 10-12

13. Alt. Min. Adjustments Sample Itemized DeductionsWhat is an add-back for AMT? 10-13

14. Tax and Credits There are 7 credits: 2 children, education, foreign, energy, retirement, and other 10-14

15. Dudella Situation Many changes since last year’s return: Partial year’s wages Sold last of investments to fund lifestyle so have capital gains and now will have reduction in interest and dividend income Autumn was 17 and not working Tax bracket was fairly low No flex plan and medical expenses were subject to 10% floor Would like a projection since they have no clue whether they are at the right withholding 10-15

16. Analyze Tax Situation Known Issues Client did not raise any issues other than advice for college funding Tax projection shows they will be significantly under-withheld by $6,025 federal and $1,062 state this year. To avoid penalties they need to pay minimum of $4,284 federal taxes (know how to calculate). What about future trend for withholding? What additional information do you need? Why are they so under water? 1. They didn’t estimate correctly when David started his new job and he is claiming 5 2. Daughter’s age dropped off child credit since last time calculated 10-16

17. Dudella Recommendations You are currently under-withholding for 2014. By claiming married 5 on David’s W-4, your taxes are going to be approximately $6,025 more than your withholdings and will incur a penalty. To avoid a penalty, you need to increase withholdings. State taxes are also under-withheld by $1,062. Options Increase withholdings by full amount of $4,460 per year and reevaluate in December for following year. Increase withholding to 90% requirement of $2,876 and use the balance to fund emergency reserves. You can pay the additional federal and state taxes owed from your savings. Increase contributions to qualified plans, which will reduce your taxes owed by approximately 25% for every dollar entered plus possibly impact lifetime learning tax credit. Borrow additional funds from the 401(k) to pay taxes or utilize IRS installment plan for 2014. 10-17

18. Plan Changes as We Go: Cash Flow Impact Started with one recommendation but had to vary emergency funds due to tax under-withholding; decided not to defer purchase of life insurance until emergency funds built. You may have to adjust your plans! Recommendation # Debt ends 10-18

19. Dowler Situation They have a tax accountant and projection for the year You have projected tax consequences of portfolio transition to provide to their accountant They want your advice on any potential strategies 10-19

20. Dowler Tax Projection Income Tax Calculations Potential Changes? Wages$137,812 Interest$286 Dividends$4,834 Short-term capital gains$550 YES Total Income for tax purposes (line 22 on Form 1040)$143,482 Adjustments to income$0 AGI$143,482 Itemized Deduction Calculations: Medical over 10%$0 State taxes($52,027) Real estate taxes($23,552) Mortgage interest($12,228) YES Misc. deductions over 2%$0 Charitable contributions($4,396) Total Itemized Deductions($24,203) Calculating Taxable Income Income after itemized deductions (line 41)$119,279 Subtract exemptions (3 x $4,000)($12,000) Taxable income after subtracting exemptions$107,279 Amount over $74,901 but under next category. This is amount to be taxed at 25% $313,828 25% of amount over $73,800$7,957 Plus base amount$10,312 Income Tax$18,269 Capital gains tax @15%$83 TOTAL TAX$18,352 10-20

21. Projection continued Alternative Minimum Tax Add-backs less medical (too low—under 10%) less state taxes$5,027 less real estate taxes$2,552 Total of add-backs for AMT$7,579 AMT Tax Calculation Start with income after deductions but before personal exemptions (line 41 on Form 1040) $119,279 Add back adjustments$7,579 AMTI$126,858 subtract AMT exemption($83,400) $43,458 AMT tax multiply by rate 26% =$11,299 Compare to regular tax$18,352 if greater = difference, if lower 0$0 Child Tax Credit $1,000 per child potential Start with AGI$143,482 Subtract phaseout start($110,000) $33,482 ROUND UP$34,000 Multiply by 5% (.05)$1,700 Subtract from credit($1,000) Child tax creditNot Eligible Other taxesN.A. Other creditsN.A. 10-21

22. Projection continued Client told you refunds consistently are ABOVE $5,000. This year will receive $5,600. Accountant projects $5,680 You were told you could redirect the refunds to accomplish goals How much of this refund would you redirect? What are the risks of taking too much? Use 90% or less with understanding that there could be some taxes owed or some refund. (This is already in your cash flow template at $5,000!) You are making changes to their picture that you don’t know the impact of yet. Total Due$18,352 Taxes withheld - Jim($16,672) Taxes withheld - Anne($7,360) Total withheld($24,032) Amount Due$18,352 Projected Refund for this year($5,680) Colorado State Tax 4.63% Start with Taxable Income$107,279 Add back state taxes$5,227 Colorado taxable income$112,506 *.0463 Projected State Tax$5,209 Projected State Refund$18 10-22

23. Concerns & Opportunities Are you planning any strategies that could impact these issues? If I put an extra $14,000 in qualified plans and $1,500 in flex plans, would they qualify for child tax credit? If I sold annuity and life insurance and had cap gains, would it put them in AMT? Your plans have an impact. Think it through! 10-23

24. Plan Development Box #17 Sometimes there may be few opportunities or threats but you don’t know until you analyze. Keep these in mind as you make decisions about whether to cash in policies or contribute to 401(k)s! 10-24

25. Flexible Spending Accounts 2015 maximum of $2,550 per employee. Grace periods or “rollover” of $500 (employer must adopt as part of plan – your client’s plan has done this) OR allow first 2½ months to submit expenses. Reduces GROSS income so federal, state, and FICA savings: 25% + 4.63% + 7.65% = 37.28% savings! Your clients told you they are averaging $1,300 out of pocket on copays and deductibles now. What other expenses may be deductible? 10-25

26. Plan Development Box #18 10-26

27. Gifting Appreciated Stock to Charity Charity won’t pay tax on sale, but if you retain you will at some point in the future Great way to consistently rebalance portfolio Even if you don’t need to rebalance, you can buy back SAME stock without wash rules Impact on cash flow ONLY to extent this was going to create gains; this avoids gains but won’t create a positive cash flow Not good for small donations Rules different for short-term vs. long-term gain Disadvantages: Potential transaction costs Potential timing issues in rebuying or gifting Emotional charge of writing a check on the spot 10-27

28. Gifting: Short- vs. Long-Term Holding Period Short-Term Holding No tax paid on gain at transfer No restrictions on repurchase Charitable deduction limited to basis Long-Term Holding No tax paid on gain at transfer No restrictions on repurchase Charitable deduction for full transferred amount 10-28

29. What would the savings be? 1. Clients normally gift $10,000 to church consistently. 2. Client has investment to reposition this year. 3. Long-term capital gains rate is 15% federal, 6% state. Stock 2 Value: $10,000 Basis: $3,000 Holding period: 2 years Gain: $7,000 Tax if ALL sold:$1,470 Tax if gifted: 0 Consistently used can result in significant savings! 10-29

30. Plan Development Box #19 10-30

31. Next Class Education Planning Read Chapter 5 Work through the education funding calculation on your calculator so you understand the steps. Complete Plan Development #20 Be prepared to discuss Coverdell vs. 529 plans. 10-31

32. ©2015, College for Financial Planning, all rights reserved. Session 10 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Plan Development Course