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 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.
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 Kreinbrink. I have Andy Ferguson with me today. It’s not the third Wednesday of the month. It’s the fourth Wednesday of the month.
Andy Fergurson:
Who knows? They all run together.
Nate Kreinbrink:
This time of year for you, I completely get that with you. We are into your busy season and less than a month from the actual tax filing deadline unless you file an extension.
Andy Fergurson:
Unless you file an extension. Yeah. We’re we’re not allowed to talk like that, Nate, about how little time is left. We only talk about how much is left to do.
Nate Kreinbrink:
How much is left to do, huh? Well, I know it’s definitely picked up obviously a lot. You guys, your team there, Mike and TJ, and the rest of the staff there is churning them out as quickly as you can, getting people taken care of and fun time of the year, I would say. And you just got to keep looking at it from that optimistic viewpoint, correct?
Andy Fergurson:
Absolutely, absolutely. It’s the most wonderful time of the year. I tell people all the time, but it’s one thing I would point out to anybody who has not yet filed or made their appointment or dropped off their material, the time is now. If you’re not dropping off your stuff in the next couple days or making your appointment, you are probably looking at an extension. And there’s nothing wrong with an extension. Extension is a valuable tool, especially if you’re somebody who normally gets a refund. An extension can kind of get you out of the middle of the race and the herd of people that are trying to get everything done. But if you’re not a fan of extensions, you better get moving. It’s time.
Nate Kreinbrink:
And I know getting into tax season, and you guys are obviously well into the weeds with it, and the last couple years we’ve seen some changes to tax law to things as far as going into that 2022, transitioning to 2023, ’22 tax season it was no different. And we saw some kind of exemptions and some payments and some credits and everything expire, which kind of translated into possibly lower refunds for a lot of people. And maybe talk a little bit about that and why that is the case in a lot of situations.
Andy Fergurson:
Yeah. So we are seeing a lot of people that are coming in with lower refunds. I think a lot of that has to do with the stimulus money that was used to kind of puff up refunds, expanded child tax credit or expanded earned income credit or the refunding of stimulus money that maybe hadn’t been paid. And so pay attention to where your refund was for tax year 20 and 21. And understand that if you got a $2,000 refund but had an $1,800 credit, you can’t expect a $2,000 refund coming back in 2022. So it just is one of those things where be aware. A lot of times we don’t know where the money comes from. We just kind of know what the bottom line is. And if that bottom line was puffed up by stimulus money, you’re going to have a different experience this year.
We’re also seeing some significant impact from the way W4s are filled out. We’re noticing that withholding is slightly moving downward. And so one of the things that we’re seeing is if there’s multiple income streams, multiple jobs in a household that are being reported on the same 1040, we want to make sure that those married couples are not marking that W4 married because if they’re marking it married, they’re withholding at the wrong pace. Unless you fill out that new W4 completely where you fill out all the worksheets and do all the math, you’re better off probably to mark that form single than to mark it married.
Nate Kreinbrink:
So I know you said a lot of those changes there, and obviously if you don’t like the way your return kind of ended up this year, wait till after the deadline, let them catch their breath. And then looking at what you can do for the rest of the year to make those changes. Another item we kind of always talk about, and you kind of hit on it every time we’ve been there, is make sure that your tax repairer is aware of everything that’s out there. And your thing is, if we don’t know about it, we can’t report it.
Andy Fergurson:
Absolutely.
Nate Kreinbrink:
And one of the big things that goes along with that is qualified charitable distributions because it doesn’t necessarily distinguish that when you get your tax forms back, it shows it as a distribution unless you actually note that it is a qualified charitable distribution from those accounts when you do prepare your tax return.
Andy Fergurson:
So the QCD or the qualified charitable distribution is an important tool that is not widely used or is not used as well as it could be. I think part of the problem there is that a lot of times your financial advisor doesn’t have a connection to what your charitable habits are. And so it’s very hard for your financial advisor to know what your charitable tendencies are. And so maybe they’re not offering or reminding you that is a possibility.
And then also your tax advisor doesn’t know what discussions you’ve had with your financial advisor most of the time. And so what we have seen happen in the past is maybe there’s somebody that could be taking advantage of a qualified charitable distribution who’s not, who should be, and maybe there’s somebody who did take advantage of it, but it’s not getting communicated to the tax preparer. Because like you said, it’s not going to be on the forms. And so if that’s a tool you are using, you need to make sure that your tax preparer knows you’re using it. And if it’s a tool that you’re not using, you should probably see if it’s something you can use, right? Because it’s a great tool to eliminate taxable income that comes from your IRA.
Nate Kreinbrink:
And that’s the coordination between tax preparer and advisor and in your investments and making sure the left hand knows what the right hand is doing through that whole process. And another item that goes along with that is IRA distributions. Obviously, when you take money out of those pre-tax retirement accounts, your traditional IRAs, traditional 401Ks, traditional 403Bs, that money is taxable to you. So again, in essence, what a lot of people do is they withhold a little bit extra for federal and depending on where you live, possibly state, to make sure that they’re basically settling up that tax liability with those distributions. The problem with that is it does maybe kind of bring in other stuff as far as to become taxable to it. And that’s an important thing where it’s not always this cut and dry is withholding from any distribution that you take.
Andy Fergurson:
It used to be real cut and dry. It used to be you could always say, I want to prepay my tax. I just don’t want to pay at the end. Right? And that’s a common thing that nobody wants to write a check to the IRS. It’s like it’s worse than a root canal to have to pay the IRS. And so nobody wants to do that. But sometimes, depending on your situation prepaying that tax may be costing you more tax. We have to remember that when our income is coming out of an IRA, it’s taxable income. And so if we need $10,000 out of an IRA and we take 12 to prepay the tax, what we are doing is increasing our taxable income by $2,000. Well, if you increase your taxable income, you are increasing your tax. And so if you’re going to get that $2,000 back, effectively you’ve just paid more tax voluntarily and there’s other things that are impacted by that additional income.
You might be in a situation where your Social Security is only partially being taxed. Well, if you take additional income from your IRA to prepay tax, you are going to add additional taxable Social Security income. You might have an issue with your Medicare premiums going up because you’ve increased your income. You might have an issue where your premium tax credit from health insurance is affected because your taxable income has gone up so that you could prepay that tax. And so it’s just something to look at. It’s something to consider. If you’re taking income from an IRA, whether or not that additional money that’s coming out to be used for withholding is impacting other things on your return. Because if it is, it may be better to pay $1,000 at the end of the year instead of increase your tax and increase your taxable social security and all that stuff and get a $1,000 refund.
Nate Kreinbrink:
Because you’re going to pay taxes on that distribution anyways. You’re either going to pay it when you take it or pay it at the end, but if your overall tax is lower by paying it at the end, it’s definitely something for people to look at. And it’s goes back to the old adage, you don’t know what you don’t know. And that’s literally what happens with a lot of those things.
Andy Fergurson:
And I want to make sure I’m very clear that this is when you are increasing the distribution to cover the tax. If we’re talking about taking taxes out or taking withholding out of your required minimum distribution or other income streams like your pension or your Social Security, that’s not increasing your income. That is just taking some of the income that is being taxed and using it for withholding. That’s appropriate. That’s fine. That’s not hurting anything. It’s when we’re taking the money from an IRA and we are choosing to-
Nate Kreinbrink:
Tax up.
Andy Fergurson:
Yeah. Yeah. Net it up or gross it up. We need $10,000. We’re taking 12. That is an increase of income. That is an increase of what’s being reported and what we’re going to have to pay tax on.
Nate Kreinbrink:
All great stuff. And lastly, I know we’ve talked about it on some of these shows, some of the planning to be done yet in the next couple years, and most notably the sunset of the Tax Cut and Jobs Act at the end of 2025 and how this is really going to change. And we’ve talked changes in tax returns over the last couple years, but again, that ending of that Tax Cut and Jobs Act, unless something changes at the end of 2025, will really, really have an impact on those 2026 tax returns when we start transitioning back to a lot of the old guidelines.
Andy Fergurson:
And you think about how impactful that Tax Cuts and Jobs Act was, it’s almost hard to remember it because it was before COVID and so many things changed over the last couple years inside that Tax Cuts and Jobs Act. But what we have to remember is the changes that are going to sunset it after our 2025 tax year. We’re talking about the bracket changes and the tax rate changes. We’re talking about higher standard deduction. That may go back to where it was, the personal exemptions may come back, the itemized deductions that we take on schedule A, all of those things that for the last five years we’ve been saying out, well, you can’t do that anymore. Well, that may all come back.
And so it’s going to change everything again. I mean, it’s going to have the same effect only in the reverse order. And so those who are advantaged by the Tax Cut and Jobs Act may be disadvantaged when it’s sunsets. So just it’s a planning thing. You got three years left, we got 23, 24, 25, where we can still take advantage of those laws, but just understand that it’s coming and it’s going to change. And when it changes, it’s going to mess everything up again and we’re going to have to figure it out.
Nate Kreinbrink:
All great stuff. And as always, if you got questions, as Andy said, get in there quick and get that stuff done for this year. Did want to mention before we run out of time that every Friday, Nelson Corp Wealth Management and Nelson Corp Tax Solutions are wearing jeans for charity. Money raised in the month of March will be donated to the Command Summer Reading Program at the Commands Library. Andy, take a deep breath. You’re getting there. Andy Ferguson with Nelson Corp Tax Solutions. Nate Kreinbrink with Nelson Corp Wealth Management, bringing you this week’s Financial Focus. Thanks again 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. Representative 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.nelsoncorp.com.