Announcer:
It is 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, 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. Now here’s today’s financial focus program.
Mike Steigerwald:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday right here on KROS. Well, I’m your guest host today. This is Mike Steigerwald. Nate has the day off and I am joined lucky enough to be joined by the, what some are calling the happiest man this side of the Mississippi. That is because if we look at the calendar and today is April 16th, National Holiday among accountants, no doubt. Happier day than Christmas. Happier day than a birthday, wedding anniversary, anything. Am I right?
Andy Fergurson:
That’s right. It’s the most wonderful time of the year. It’s the day after taxes it is. Or the big tax deadline.
Mike Steigerwald:
So yes, a lot going on here. Of course, we were chatting on the way up here in Spring Sports in full swing. We got graduation right around the corner.
Andy Fergurson:
Yeah, I got a soccer game tonight. I went to a track meet the other day. It’s a great time to, if your kids are in sports, the weather’s always questionable. You go thinking it’s going to be super warm or it looks sunny outside and by the time you get home you got frostbite and you’re wrapped in a blanket. And so, it’s that, you never know what you’re going to get weather.
Mike Steigerwald:
That time of year. Yes, hodgepodge. You got a nice mix and yeah, you really never know what you’re going to get. So plan for the worst and usually it’d end up okay.
Andy Fergurson:
Yeah, don’t plan at all and you’ll be the worst.
Mike Steigerwald:
Yeah, exactly. Kind of like accounting and finance.
Andy Fergurson:
Yeah, there you go. It’s exactly the same.
Mike Steigerwald:
Well, while we’re talking here, we got Andy from NelsonCorp Tax Solutions and again, tax season, just wrapping up. So happy to have him on and just kind of discuss a few things. Maybe Andy, if you could talk about maybe a couple of things that you’ve seen this year that are maybe real life situations that have impacted your clients, and things that can be useful tips for our listeners.
Andy Fergurson:
Yeah, well one thing that we noticed this year was there was some shock and awe that happened as a result of a good investing year. We ended up with, maybe some higher than normal tax returns or tax balances due because of successful investing. What ends up happening is that money comes in. It’s not accounted for with your withholding, because it’s money that’s not coming on a paycheck. And so if you receive interest or dividends or capital gains or inheritance or any other sort of income that’s not from your job, your steady source of income, sometimes you end up with a big tax bill. And a big tax bill’s not so bad, but what sneaks up on people is there’s a failure to prepay penalty, that kind of sneaks in there on people, something that they don’t really expect. That failure to prepay penalty comes usually when you have a large balance due. So it’s kind of added to bad news, right? It’s bad news with bad news added on top of it,
Mike Steigerwald:
Unexpected, and then all of a sudden you get hit again and you say, whoa.
Andy Fergurson:
Yeah, exactly. So that prepayment or failure, prepay penalty is calculated by the IRS and most states actually, when you owe more than a thousand dollars and it’s related to your tax liability. So you’re required by law to pay a hundred percent of the previous year’s tax, or 90% of the current year tax, in order to avoid that penalty. Well, nobody ever knows what the current year tax is going to be, and so it doesn’t really hurt you when you have a big tax bill and you made a lot more money than you did the year before. But if your incomes are close to the same, so let’s say you replace wage income with, say social security income or something like that. Your incomes are relatively similar, but your withholdings are way different. Then you end up with this penalty.
And it can be a couple of hundred bucks sometimes, and it’s just nobody wants to pay anything extra. I don’t know a lot of people that want to pay the tax they have.
Mike Steigerwald:
Exactly.
Andy Fergurson:
Let alone throw in an extra couple of hundred bucks for just not paying them early. That seems kind of unfair, but it is something that happens and we saw a lot of that. So I spent a lot of time this year explaining that penalty to people.
And the way you get away from that is you make estimated payments, you do planning through the year, you look at, hey, I’m expecting this income. What is it going to do to my tax return? What can I do to get around it?
We also saw a fair amount of rejected returns for various reasons. One thing that I saw a lot more than I have, I think in other years, maybe not, maybe it’s the same, I don’t know, was some rejected returns for dependents. A parent goes to claim their child, and when we file it comes back, hey, your kid, that social security number’s already been used.
And the first thing everybody thinks is identity theft. They think, oh, somebody got in and hacked my kid’s social security number and now they got to go through that rigmarole. But usually what it is their kid claimed themselves, they got on a free file or something like that and claimed themselves. And so, that’s a pretty preventable issue. The remedy to it is we paper file the return. The kid usually doesn’t get any advantage by claiming themselves, they just don’t know what they’re doing on that free file.
Mike Steigerwald:
Ignorant mistake.
Andy Fergurson:
Absolutely. And so what we encourage people to do is, if your kids are going to file for themselves, you’ve got to file first. You got to get in and get your return done. Instruct your kids to hold on, wait until your return is filed, until you get confirmation that it’s been sent so that they can’t then mess it up. Because if they try and claim themselves after they’ve been claimed, they’ll get the same error. The message is your number’s already been used.
Mike Steigerwald:
And typically going to be better if it’s on the parent’s return.
Andy Fergurson:
Oh, absolutely. The parents usually get an advantage to having that kid. Maybe it’s just another dependent credit, maybe it’s a college tuition credit, or something like that. But those credits, a lot of those credits are non-refundable, which means you got to have tax to take advantage of them.
And most of the time when kids are filing for themselves, they’re filing after that 120 bucks that came out of their paycheck when they worked at the ice cream stand all summer. And so they’re trying to get back that little bit that was held back and whether they filed as a dependent or independent, they’re still going to get that 120 bucks.
Mike Steigerwald:
Yeah, it’s all the same.
Andy Fergurson:
And so it just is, it’s a matter of clicking a button, usually in those free file programs, and just not knowing what they’re asking.
Mike Steigerwald:
Right.
Andy Fergurson:
Kids think they’re independent way before they’re independent. I got kids that are 10, 12 years old that are telling me how independent they are.
Mike Steigerwald:
They’re ready to file their own, right?
Andy Fergurson:
Yeah. Well, I don’t know about that, but they definitely think they’re independent.
Mike Steigerwald:
All right, well, I want maybe just switch gears here a little bit, Andy, and if you could just give a quick explanation regarding how brackets work, and I know that’s a real hot topic, and often misconstrued by our clients and they come in and are really, really worried and concerned about jumping into that next tier, and really not having a full understanding of how that works. So can you maybe just give a quick rundown of that?
Andy Fergurson:
Sure. Yeah. I have that conversation, oh geez, 200 times a year, where I’m explaining people that brackets work is, no matter how much money you make, you always fill up the lowest bracket first. And so, you and Warren Buffett both pay the same amount of tax on your first $20,000. And then on the next $80,000 if you’re married, you’re paying the same amount of tax because you fill up the 10% bracket first, then you fill up the 12% bracket, then you go to 22. And so where people get nervous is they are worried about when they go from 12 to 22.
Mike Steigerwald:
Sounds like a big jump.
Andy Fergurson:
Or 24 to 32, and they’re like, man, I’m only $5,000 away from that next bracket. If I get a raise or if I work overtime, I’m going to be thrown in that next bracket and they think that all of their income is going to be taxed at that new higher rate.
The truth is what happens when you go into the next bracket, if you go $5,000 into the next bracket, only that $5,000 gets taxed at that higher rate because remember, you got to fill up that lower bracket first. And so yeah, it’s a higher rate, but it’s worth it to make more money because you’re only going to pay, I mean your overall tax rate when you go into the next brackets still isn’t going to be that full 22%, because you still got money in the 10% bracket and in the 12% bracket. And so you’re much better off to take the money, make the extra income, and don’t worry about that extra bracket, because it’s not going to hurt you that bad.
Mike Steigerwald:
Yeah. I feel like we’ve had that come up quite a bit with clients and just again, have that understanding of how that really works is beneficial, because really a lot of scared folks coming in when they see that jump from 12 up to 22 sounds very significant. And like you said, if you’re only a little bit over, not that big of a deal.
Andy Fergurson:
Where it’s more worrisome is when you’re looking at a tier or a cliff for some other benefits. So let’s think about when you cross the Medicare threshold, or if you’ve got marketplace insurance and you cross that threshold. Those are much more significant because those are, you cross over those thresholds by a dollar and now something big changes. Your Medicare premium for 12 months goes up by $50, or your due to pay back all of your advanced premium tax credit. That’s a much more significant worry than just getting a little more income in the next bracket.
Mike Steigerwald:
That’s right. That’s right. So, well, Andy, thanks so much. Before we run out of time, I know it goes quick here without Nate, but we do our thing and before we run out, I just did want to mention every Friday, Nelson Corp is wearing jeans for charity, and money raised in April is donated to the Veterans Affairs in Clinton County. So thanks so much for joining the program this week, Andy. Appreciate it.
Andy Fergurson:
Yeah, you be, I’m glad to do that instead of Doing taxes at 7:00 A.M.
Mike Steigerwald:
Wonderful. Yes. Well, and happy end of tax season to you.
Andy Fergurson:
Well, thank you very much.
Mike Steigerwald:
And to everybody out there, thanks for listening and have a great rest of your week.
Announcer:
Finance Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the 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 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.NelsonCore.com.