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 representative 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. 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. I’ve got Andy here with us. It is technically the third Wednesday of the month. We had you on last week. I guess you would call that some bonus material.
Andy Fergurson:
Yeah, I can’t get enough.
Nate Kreinbrink:
But we wrote a list and we only got through the first two bullet points so we have a whole rest of the list to cover.
Andy Fergurson:
So I might be here for the next two weeks.
Nate Kreinbrink:
Keep it going. Taxes are important. Again, moving right along into the year. It is hard to believe we are the third week in June already. I think it is officially the first day of summer today.
Andy Fergurson:
Really? It’s been hot for a month.
Nate Kreinbrink:
Look at the yards. Look at everything else. It’s felt like late July, August already.
Andy Fergurson:
My grass has been dead for three weeks.
Nate Kreinbrink:
I think the dog days of summer have started much earlier this year than it has been. But again, summer is moving right along, seasons and everything.
Andy Fergurson:
And we got to give some credit to the Reds. I told you before this started, we got to talk about the Reds, 10 games in a row. That might never happen again in the history of humankind.
Nate Kreinbrink:
Oh, I wouldn’t sell them short of there.
Andy Fergurson:
There are fantastic right now.
Nate Kreinbrink:
Can’t win 20 if you win 10.
Andy Fergurson:
That’s amazing.
Nate Kreinbrink:
I know. It is fun. But I’ll tell you, the Cubs are making a push. That division is literally going to be flipped here in a couple weeks compared to what it started with. The Brewers and Pirates are kind of falling.
Andy Fergurson:
Coming back to earth is what we call that.
Nate Kreinbrink:
And then again, Reds, Cardinals and Cubs are settling out.
Andy Fergurson:
Cardinals have a stranglehold on the basement.
Nate Kreinbrink:
That’s why. Same thing as with investing. It’s not a sprint, it’s a marathon.
Andy Fergurson:
That’s true.
Nate Kreinbrink:
And that’s what a baseball season is and that’s kind of approach to investing and all that you do with it. It’s the long-term approach. And a season can’t be won in a day, but sometimes it can be lost with a bad decision.
Andy Fergurson:
And it can be very exciting in any given week, right?
Nate Kreinbrink:
Again, I won’t take up any more time, but honestly this is the first time in, I don’t know how many recent years that the Reds are actually still legitimately in it. They’re not mathematically eliminated by this-
Andy Fergurson:
On the first day summer they’re not eliminated.
Nate Kreinbrink:
Let’s talk taxes.
Andy Fergurson:
All right.
Nate Kreinbrink:
We talked a little bit last week as far as letter season, some of that coming out, scams and everything to be aware of. Obviously all that’s still important. But again, where does that all fall into the tax overall concept of it? And I know you always talked as far as tax season is basically that, it’s tax season. Any other time throughout the year is when you want to start looking at planning and strategies and all that type of stuff. Now is that time, now is the time to sit down and let’s start looking at things.
Andy Fergurson:
Yeah, planning and strategy I think is super important. A lot of times people will come to tax season and they’ll ask me questions about, “Hey, what can I do differently?” Well, on tax day there’s nothing you can do differently because we’re reporting at that point. I mean, the year is three months over. We are just kind of doing, we’re kind of reporting and turning in our homework. I mean, the time for preparation has passed. Now’s the time for preparation. And there’s opportunities that exist for strategy, for planning.
One strategy that is important to talk about is the realization of income. We talk about it a lot for retirees. When do you take the money out of the IRA? Do you take it out of the traditional IRA or 401k or do you take it out of the Roth? And that’s all well and good. And what happens with that is we are determining what and how much income we want to put onto our tax return when we do that. We’re not really changing the amount that comes into the bank account, we’re just determining how much is going to be taxable. And that’s a great strategy for retirees.
But what about people that aren’t in that situation? Well, you can do the same thing with your contributions. If you’re putting money into a 401k or you’re putting money into, or you have the option to put it into a Roth, you’re effectively deciding whether or not you want that money to be taxable. And strategy, depending on your tax situation, may indicate that you want it to be taxable right now as opposed to being taxable in 20 years. And so that’s something to consider. I think sometimes people maybe gloss over that when we talk about realizing income if they’re not in that group of people that is choosing where their income streams come from.
But there’s still some strategy available to those that are making contributions at this point. And it might be that if you haven’t maxed out the 12% bracket, you might be somebody that wants to consider reducing the amount that’s going into the traditional because that’s not being taxed today and increase the amount that’s going into a Roth version because that is going to get taxed and we want to fill up that 12% bracket to get a little more tax on the front end and save money on the back end.
Nate Kreinbrink:
Well, and I think too, it’s understanding the brackets, understanding where you fall. And again, we’ve talked that concept, all of it. And I know planning a lot of times thinks of some of those things you do, but sometimes it’s not necessarily planning going forward. It’s looking at life-changing events.
Andy Fergurson:
Oh yeah.
Nate Kreinbrink:
And I think that those life-changing events obviously impact that tax return, whether it’s getting married, whether it’s getting divorced, adding children, changing jobs, changing withholdings, whatever the case may be. Those items need to be looked at too and have just as much impact as that planning. But again, understanding what that life-changing event will have and how it will change your taxes.
Andy Fergurson:
Yeah, the change to the dynamic in a household is a major thing. You think about marriage and divorce, the way the IRS looks at your tax return is you are considered married or divorced based on your marital status on the last day of the year. So if you’re single all year long and get married on the last day of the year, you’re considered married when you file your tax return. And so if you’ve been withholding at a single rate all year and then you get married, you’re going to have a huge refund. Consequently, it goes the other way too. If you’ve got a pending divorce and you think that’s divorce is going to be final before the end of the year, there’s something to consider about changing your withholding right now because if it finalizes before the end of the year, you’re going to be paying a single rate come tax day.
The other changes that are important that people oftentimes overlook is the change in the dynamic of the household. Adding a baby, that’s an easy one to see coming. You get a little bit of warning as that one happens. But the dynamic that changes when a kid goes to school, that changes what types of credits are available to you. And what’s even more important than that is when a kid gets married, if you’ve got it dependent on your tax return that all of a sudden is married before the end of the year, things are going to shift on your tax return. And maybe those credits that you were taking for them in college now are no longer available to you because they’re not on your return anymore.
Nate Kreinbrink:
Right.
Andy Fergurson:
Because they’re married to somebody else. So just definitely thing to consider. Job changes are big things to think about. Most people that are changing jobs today haven’t filled out a W4 since-
Andy Fergurson:
Since high school, right?. And maybe that was 10 years ago, maybe it was five years ago, but it was a while ago. And chances are that form’s a little different than it was last time you did it. It’s important to understand what you’re getting into when you’re checking those boxes. And one of the things I like to point out to people is on that W4 form there, one of the very first questions is what kind of status do you want to elect for withholding? And it’s important to understand that status that you’re electing there is not what you’re claiming to the IRS when you file your taxes. That is just how you’re going to withhold. So you can be married, but still mark that form single. That’s how I mark mine. I mark it single so that they withhold a little bit more so that-
Nate Kreinbrink:
And you’re not cheating anything.
Andy Fergurson:
I’m not cheating. You’re not breaking the law, you’re not doing anything wrong. You are simply indicating that you want more taxes withheld from your paycheck.
Nate Kreinbrink:
From that level. And I know we talked as far as getting married, how that impacts as far as date wise, getting divorced again before the end of the year, how that do. A life-changing event obviously that nobody wants to go through though would be the unfortunate losing of a spouse.
Andy Fergurson:
Oh, yeah.
Nate Kreinbrink:
And there’s some opportunity, again, I don’t don’t want to say opportunities, but again, there’s some things you want to look at in that year as far as taking a advantage of the married filing jointly before those tax brackets change the following year when they’re filing as a single tax filing.
Andy Fergurson:
Just a little silver lining there in that bad year is that you get one more calendar year where you’re going to be married, right? So whether your spouse dies on January 1st or July 1st, that whole year you’re considered married. And so that is a time when you want to realize tax and the reason for or realize income. And the reason for that is we’re going to be in a better bracket, right? The next year, provided you don’t remarry, the next year your bracket’s going to get cut in half, which means the same amount of income will have a higher tax rate.
Nate Kreinbrink:
Right.
Andy Fergurson:
Because you’ll be in a single bracket as opposed to a married bracket and the standard deduction will be different. And so it’s something that we look at when a spouse dies. We want to, and we know it’s hard and we got to be careful and make sure that we give people time to deal with stuff. But when you’re ready to deal with that, it’s time to look at what are the opportunities that you have this one-off year where you’re going to be technically single, but considered married by the government and take advantage of those things in an otherwise bad time.
Nate Kreinbrink:
I know again, we’re getting close to out of time, but you have two more bullet points and I want to get through them. Summertime is a time of summer jobs. People pick up a summer job, kids pick up a summer job. Adults that have the summer free, pick up a summer job. But it also is a time for day camps, whether there’s camps for everything these days, there’s outdoor camps, there’s basketball camps, football camp, like there’re music, there’s just everything for camps. But there may be some tax benefits to those.
Andy Fergurson:
So the day camp one is easy. Just if you’re sending your kids to day camp for sports, arts, music, theater, whatever, if you’re sending your kids to day camp, it’s possible that the cost of that camp is eligible to you as a dependent care credit. So that’s something to consider. Keep track of that cost. Talk to your tax preparer about that.
For summer jobs, if you’ve got kids that are taking summer jobs and they’re only going to work in the summer, it’s also important to consider the withholding on those jobs. Sometimes those jobs are going to generate enough income to generate tax for those kids. Oftentimes they’re not. And so if they’re not going to generate enough income to cause taxation, you might want to have those kids not withhold and go exempt because if they withhold money from those jobs, you got to file a tax return to get the money back. If they don’t withhold, you may not have to file. So again, that’s something to talk about with your tax preparer so.
Nate Kreinbrink:
All great stuff. We got through the list, but I see he is already jotting down stuff for next time so. We will keep continuing going. Did want to mention real quick that every Friday, Nelson Corp Wealth Management and Nelson Corp Tax Solutions are wearing jeans for charity. Money raised in the month of June will be donated to the Shop With a Cop for back to school supplies program. As always, Andy, I appreciate you joining me today. Andy Ferguson, Nelson Corp Tax, Nate Kreinbrink, Nelson Corp Wealth Management, 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 representative 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.