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 security offered through Cambridge Investment Research, Incorporated, a broker dealer. A 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.
Announcer:
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. This is Nate Kreinbrink, joined again by James Nelson. Middle of July, dog days of summer, but July 15th in this wonderful 2020 that we’ve been having so far this year, has a different meaning this year. It’s the new tax deadline.
James Nelson:
Right.
Nate Kreinbrink:
It’s usually that tax deadline is April 15th. Obviously, with the CARES Act and some of those extensions that came out, that got pushed back to July 15th this year. So, if you are one of those procrastinators out there, and you need to get your tax return in, today is the day. So, don’t forget.
James Nelson:
Well, based on what we’ve seen through the office the last several days, I think plenty of people have taken advantage of that. Yeah, they’re taking advantage of that extension, and waiting until the last minute. Yeah, crazy that more than halfway through the year and we’ve got a tax deadline. That kind of seemed odd. But I guess that’s a good reminder that people need to do their tax planning throughout the year, and have those conversations. The deadline’s today, so get them done.
Nate Kreinbrink:
Right, and I had Andy Fergurson with NelsonCorp. Tax Solutions join me last week. We talked a little bit as far as some key planning points, or whatever. At the end, I did want to reiterate a point that he did make, that is if you are planning on filing that tax extension just like you could any other year that normally would give you an extra six months from April 15th to October 15th, you are still able to file that extension. However, it’s not a six month extension if you file that today. It still only gets you to that October 15th deadline. Again, if you can’t it in today, make sure you or your accountant that you’re working with files that extension for you. Again, that only gives you to October 15th, not the full six months like it normally would with the normal tax filing deadline.
James Nelson:
Right. Right, the date’s same, but just not as much time between now and then. So, yeah.
Nate Kreinbrink:
Another point that we kind of talked about last week was some of this tax planning versus tax preparation. I know Andy’s big on it, and we harp on it a lot as well. Tax preparation is basically when you meet with your accountant, or you turn all your tax returns in to see what it is that you owe, or what it is that you’re going to get back. Obviously, you’re looking backwards, basically reporting what’s already done. We’re huge, Andy talks about this a lot when he sits down with individuals as he’s getting into that time of the year where he gets excited to sit down with people, have them come in to, “Okay, this is what your tax situation was last year. This is what it’s looking like it’s going to be if we do nothing moving forward. These are some things that I think will help benefit you.”
Nate Kreinbrink:
We get into that tax planning a lot, and I think it’s imperative that people, again, start focusing a little bit more on that tax planning, and knowing that okay, it is July 15th. We still have a good chunk of the year left over where if your return last year wasn’t quite what you thought it was going to be, or it wasn’t the result that you had hoped it would be, we still have some time left in 2020 to be able to make some changes, do some tax planning, and hopefully better it for you from when you go to file it again by next year.
James Nelson:
Yeah, the one that always kills me is, “Yeah, I owed a lot of money this year,” and they don’t change anything. So, you’re going to be in the same boat come 2020.
Nate Kreinbrink:
And complain about it again next year again.
James Nelson:
Yeah. Yeah, exactly. So, yeah you’re right. If you didn’t like the results, and you owed a bunch of money at the end of the year, then maybe you need to adjust your withholding for the second half of this year, and try to compensate for that. Going back to the tax planning, it can be as simple as making an IRA contribution, upping your 401K contributions through work. These are things that need to be looked at in advance. You can’t make lump sum deposit into your 401K the last day of the year. Certainly, you can adjust your contribution amount the last month or two. If you pretty much know what your income is going to be, if it’s fairly consistent, those numbers should be pretty easy for an accountant or a financial advisor to kind of run and give you an idea, “Hey, you put this much away, this is how much it’s going to save.”
James Nelson:
But again, that planning needs to take place throughout the year. The IRA contribution is always a popular one. People do that last minute, and that’s still applicable. You are able to do that kind of last minute. That’s almost the only thing. That’s kind of the last resort, “Okay, I’m out of time here. It’s next April,” as far as tax filing, “I can make an IRA contribution.” But beyond that, there’s not a whole lot you can do. If you’re doing the planning throughout the year, there’s a lot more options and can get you in a better position instead of just kind of getting to the tax deadline, and “Here it is,” type of thing, and not really having a whole lot of options.
Nate Kreinbrink:
Right, and I think there’s a lot of truth to that. Again, something that people… I think they’re used to, “Okay, I filed my taxes. I got them back. Man, that’s done for another year.” They file them away in their drawer.
James Nelson:
Right.
Nate Kreinbrink:
The next time they think about them is starting to be mid-January/late January, when they start having to get the things back in the mail to be able to turn them back in. Again, the planning is key. Another big one, and we touched on it just briefly last week, is Roth conversions. I think this really applies in these years. Again, we go back to the beginning of 2018, and we had the tax cut and Jobs Act getting enacted, where again the… You probably got a little bit of a bonus in your paycheck that early January/February, and it continued on. That was because of the change in the tax brackets. The 15% went down to 12%. The 25 went down to 22, and so on and so on.
Nate Kreinbrink:
Well, that tax cut and Jobs Act is set to sunset on December 31, 2025. If nothing changes up until that point, January 1, 2026 we revert back to the old tax code. The 12% bracket jumps back up to 15%. The 22 jumps back up to 25, and so on and so on. So, we know that until the end of the 2025 we are going to have a 3% tax savings up until that point. Again, a 3% doesn’t sound like a huge chunk, but when we’re talking about taxes that we can save on our behalf, again there’s a prime time in here up until at least the end of it, just from that simple 3% savings that we could look to do a Roth conversion.
Nate Kreinbrink:
Roth conversions, just as a refresher, is taking money from a tax deferred act. So, an IRA account where you put money into it, you got the tax deduction, it’s growing tax deferred, it’s going to be taxable to you on the back end. But if we know what tax rate we’re going to be in, especially if our income’s down, we’re in the lower tax bracket now, we could take money willingly, convert it over to a Roth IRA, willingly pay taxes on this year, but now we get it into a more favorable tax environment for us where it’s in a tax-free bucket rather than having to worry about what the tax rates are into the future. When again, it’s hard to imagine what they’re going to be like just two or three years from now. If we’re talking a 20 or 30 year time frame, who only knows what tax rates are going to do, and how many times they’re going to change about during that time period, especially later on when were going to need that money?
James Nelson:
Well, Nate, you talk about the tax rates going back to the way they used to be in 2025, or worse.
Nate Kreinbrink:
Right.
James Nelson:
That 15% tax rate might look cheap compared to where things could go. I mean, the government has spent a ton of money recently on the pandemic here, just adding. Our federal debt is mounting by the day. At some point, Congress is going to have to get serious-
Nate Kreinbrink:
[crosstalk 00:08:37]
James Nelson:
Yeah, exactly. We’re going to have to get serious about budgets here, and start paying down some of this debt. The only way that that’s going to happen is from tax prayers at a corporate level, or individuals. Rates could be worse. Again, that’s perfect time, perfect reason to at least consider doing some Roth conversions. This just all goes back to I think the whole point and process. Actually sitting down and putting a plan in place, it sounds so simple and we harp on it all the time. But it’s true, if you’re just kind of going through the motions and not having these conversations, and not looking at the tax return and how it relates to your investments and all these other things, then you’re just out there, and you’re not really making any proactive decisions. You’re not putting yourself in a better position to maybe be able to return a year early or tax a little bit more on retirement than what we were planning on, and all of these tax discussions investment decisions go hand in hand.
Nate Kreinbrink:
Right, and I think we mentioned it before that two of your largest expenses in retirement are going to be your healthcare and your taxes. Your healthcare, you really can’t control what it is that you pay. They accept the Medicare premiums in the middle of October for the next year, and that’s what you pay.
James Nelson:
Right.
Nate Kreinbrink:
Your prescriptions, your doctor, it is what it is. You pay it. Hopefully, your insurance company or whatever plan you have, covers a chunk of it. You’re paying the rest of it. You can’t really do much to change that. Your taxes on the other hand, there are some things to do, and the earlier that you start trying to address those tax situations, the better off you’re going to be. I don’t think there’s anyone out there that wouldn’t not rather have more money in their own pocket than paying it in taxes. That does not just happen overnight. It doesn’t just magically happen. There are strategies, there’s planning that need to go into it. So, I know we’ve harped on it the last two weeks a lot, but a lot of things that people can still be doing, and again question on any of it that we talked about, give us a call, coordinating your investments, your retirement plan with your tax situation, anymore in today’s world and how things are so intertwined. If you’re not doing it, you’re really missing out.
James Nelson:
Yeah, and I think the biggest thing is that timeframe is just shrinking by the day. We’re in 2020, and we know that’s set to expire in 2025. So, we’ve got a few years here to potentially do somethings and lower tax rates. Something to consider.
Nate Kreinbrink:
One mention real quick here before we run out of time, that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of July will be donated to the Big Brothers/Big Sisters Over the Edge for Kids’ Sake with WHBS, Andy McCray. Again, James Nelson and Nate Kreinbrink with NelsonCorp Wealth Management. 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 representatives securities offered through Cambridge Investment Research, Incorporated. A broker dealer member of FINRA SIPC. Investment advisor representative Cambridge Investment Research Advisors, Incorporated are registered investment advisors. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.