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 joined this morning, third Wednesday of every month. So we’re going to talk some taxes today. I’ve Andy Fergurson with NelsonCorp Tax Solutions joining me this morning. Thanks again for joining me this morning.
Andy Fergurson:
Yeah, I’m excited to be here. Everybody’s getting excited.
Nate Kreinbrink:
It is an exciting time of the year. I know a lot of the area, schools have their homecoming weeks this week, next week. I know they’re all in that-
Andy Fergurson:
[crosstalk 00:01:16] next week, I’m pretty sure.
Nate Kreinbrink:
That’s the kind of fun time of the year, an exciting time of the year in the school districts and the crazy dress-ups and just the school spirit. So wish everybody a safe and fun, I guess, homecoming week, whenever that comes to your time.
Andy Fergurson:
Yeah, Rec soccer’s starting. So everybody’s going to be sunburned on Sunday because they’re going to stand out on a field all day Saturday.
Nate Kreinbrink:
It is a fun time of the year and with all that, and then college football, baseball playoffs, there’s a lot going on here.
Andy Fergurson:
Best time of year.
Nate Kreinbrink:
And again, weather’s starting to turn a little bit, but we still have some of those nice days to enjoy and all that good stuff. And we were kind of looking at that as far as time of the year. And this time of the year actually has some dates for taxes as well. And I know the 15th today is another round of the child tax credit. For those that qualify that will get credited, if you did not opt out of that, as far as getting credited to your account that hits the 15th of every month.
Andy Fergurson:
Yep, everybody should be getting payments in their bank account today or start seeing their check come in the mail. And it’s important for people to start thinking about or understand how that child tax credits can impact their taxes. I know for me, it’s going to cause an issue. You know, I’m going to have to pay attention and make sure that I have funds available to pay in some tax because my child tax credits can mess up the way I normally handle things.
Nate Kreinbrink:
Right. And that, as you said, messing it up, it’s just prepaying you back that credit that you normally would just get on your tax return. It’s your money that you’re getting back that you would normally have. They’re just paying it back too early, starting back in July.
Andy Fergurson:
Yeah, it’s the credit that you get that you would normally use to offset taxes, and getting that early is great. It’s great to have that money in your bank account. Just understand that that money, because it’s in your bank account today, is not going to be on the bottom line of your tax return.
Nate Kreinbrink:
So again, keep that in mind. And again, may have to keep a little bit extra. And when they come do your taxes may be a little bit different of outcome as what you’re normally used to then.
Nate Kreinbrink:
September 15th, I actually went over with me yesterday too, was actually a one month away from the actual October 15th deadline, as far as for anyone who filed extension. So again, that is coming up on us fast. So if you filed an extension and you’re still waiting to get those turned in, you have a month, but that’ll go by fast.
Andy Fergurson:
You’ll have a month and everybody will be there in the last week. So let’s do it this week instead of four weeks from now. The other thing is that extension is normally an automatic six month extension. But this year we didn’t have to file taxes until May 15th. And so it’s not an automatic six months extension. It’s just an automatic extension to October 15th, which is the regular deadline for extension. So if you’re one of those people that always does it on October 15th that time is here. It’s time to go. And it’s a busy season as we were talking about with all this stuff in the beginning. So because time is busy, don’t procrastinate, get that stuff in. Let’s get it done.
Nate Kreinbrink:
And again as we get closer to the end of the year, and I hate saying getting closer to the end of the year, because I don’t want to push it by too fast.
Andy Fergurson:
I bet you don’t hate it as much as I do.
Nate Kreinbrink:
But another thing that we want to still keep in mind too, is those that are 72 and above that have those tax deferred accounts, the required minimum distributions, or probably people refer to them as the RMDs, that’s the amount that you have to take out of those tax deferred accounts every year. We need to make sure that we get that taken out.
Nate Kreinbrink:
Last year we got a pass on that because of the Secure Act and some of the things they got passed because of COVID and the pandemic. You got a free pass. You didn’t necessarily have to take it out last year, if you didn’t want to.
Nate Kreinbrink:
Well, we have to again this year, and it’s a big penalty, I think a 50% penalty on any amount that you don’t take out that you were supposed to. So again, if you have those tax deferred IRAs, 401(k)s, those types of investments, we want to make sure that if you are of age and you are over 72 or age 70 and a half prior to a couple of years ago, you have to start taking those money out. And we want to make sure that we get it out and we don’t forget anything.
Andy Fergurson:
Absolutely, get that money out. And your advisors are probably working with you on that. And they’re probably watching it, but you never want to leave anything for somebody else to be in charge of. Know what you should do, know where your number is. If you’re not sure, call somebody and ask them if you’ve done your RMD yet. And if not, get it out, and make sure you get it out before the end of the year.
Andy Fergurson:
Along those lines also, I would say, if you’re not somebody who’s in RMD and you’re just somebody who draws from your IRA because you’re in retirement, I think it’s important to make sure that you know at this time of year where that number is that’s going to cause you trouble if you take too much money out. Whether it be a Medicare threshold or a threshold for the premium tax credit, that’s another thing that this past year we didn’t have to deal with because of the Cares Act. They eliminated the premium tax credit. So nobody had to pay that back in 2020.
Andy Fergurson:
Well, in 2021, you may have to. If you take more than you need to, or more out of your IRA than you had expected, and it crosses over that threshold, you may be paying back a premium tax credit. You may be crossing the social security, Medicare threshold, causing your premiums to go up. There’s just a lot of things that can happen there because that income that comes out of the IRA is taxable income. We just have to make sure that it’s in the range that we want it to be in, or be prepared to pay the consequence. You don’t want any surprises. We have it happen every year where somebody takes, I don’t know, $5,000 or $10,000 out in February, then they take their normal distributions through the year and they get to the end of the year and they’re $2,000 over what they should have been. And they hit one of these thresholds and they didn’t even need the $2,000 that they took out at the end of the year. They just took it out because that’s what they normally take out.
Andy Fergurson:
And so it’s just important to know where that number is, to have that conversation with your tax advisor, with your financial advisor, and make sure you know what the magic number is for you and where you should be. And then if you need the money, you need the money, but you got to know the consequences.
Nate Kreinbrink:
Right. And I think that’s a great point. And we talk all the time, whether it’s you or James or whoever’s on the shows with me here is the planning aspect of everything that we do. Tax planning is another big part of that with therein.
Nate Kreinbrink:
And I think we see it a lot as far as when people take out the, “Hey, I need a extra thousand dollars, or I need a little bit here, I need a little bit here.” Well, those little bits as you get towards the end of the year, add up to be a big bit sometimes. And that impact that it does have on the overall taxes. And most people understand that taxes have your tax bracket. So whatever amount that you go over into the next tax bracket, that’s the amount that you pay for that higher taxes on that higher tax bracket.
Nate Kreinbrink:
But some of the things that you brought up as far as your Medicare premium, as far as it’s tied to your income, it doesn’t determine it by going over how much you go over. You go over it by a dollar, you’re in it. You’re up to that next tier. You’re going to pay it. So again, it’s understanding some of those things, because some of those distributions that continually add up over the course of the year do have a really big impact on what you’re paying for some of those things. And that’s the unknown and making sure that what you’re doing, the decisions that you are making, you understand the impact that it’s doing on everything else in your situation. I think that’s where you brought up that tax planning is extremely important that people know that.
Andy Fergurson:
Yeah. And not only that you think about it, it’s taxable income that causes that trigger. And so some people will take that money from their IRA and they will withhold money to pay their taxes. Well, that extra money that you’re taking out to prepay your taxes is taxable income. And so it may be the money that’s pushing you over the top where maybe you’d be better off to not withhold that money, to not take the extra money out. Or it may be something where that withholding that you take out is now causing more social security to be taxed. We’ve done some studies and looked at some tax returns where we’ve done an evaluation of people’s taxes with withholding and without withholding. And there are several occasions where people pay more tax by withholding that money than they would if they didn’t withhold it.
Nate Kreinbrink:
And just pay the taxes whenever they filed their return then?
Andy Fergurson:
Right. Because that extra money, that extra taxable income that is going to withholding is now going to cause some social security to be taxed. And it may cause a Medicare issue. It may cause a premium tax credit issue. Generally not both of those in the same time, but just that extra taxable income that they never see in their bank account can cause a tax situation that they’re not prepared for.
Andy Fergurson:
And then at the end of the year, they get that money back. I mean, they’ve prepaid too much and they get the money back. And so it’s just something that you need to be aware of what the magic number is for your situation. You can’t ask your neighbor and you can’t ask the guy that you retired with. You got to ask your tax advisor, you got to ask your financial advisor, and you got to understand where that number is and make sure you’re staying in the range you want to stay in. And sometimes that means paying taxes on tax day, instead of paying the withholding because the withholding is costing you more than it’s giving you.
Nate Kreinbrink:
Right. And I think it’s important to hit it that way. But again, we talk all the time, as far as the flip side of that too, whereas if you have room in the bracket that you’re currently in, looking at doing Roth conversions or looking at taking money that you necessarily would not have to pay taxes on this year, but going ahead and paying taxes on it, getting it into a more tax-free Roth environment, where again, now you have options going forward, where if you need a little bit extra, you have a bucket that’s going to be taxable coming out. You have a bucket that’s going to be, tax-free coming out. Now you have some option. And that’s where the planning really goes into effect.
Andy Fergurson:
And really when you get to the point where you’re in your IRA distributions, you should have a target taxable income. You should have a number that you want to get to. And if you’re below that number, there’s things you can do to push it into that target range. And if you’re above that number, there’s things you can do to reduce that taxable income. And you want to just kind of make sure you hit that sweet spot, because there is a sweet spot for everybody’s tax return. And you just got to know what it is. And it’s hard to do if you don’t do this every day. But we got professionals that do it every day, so come ask us, we’ll tell you.
Nate Kreinbrink:
All good stuff. And I love the third Wednesday of every month, talking taxes with you because you get me so excited to talk taxes. And it’s just that planning and that things to do, but did want to mention real quick that every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of September will be donated to the Gateway Area Community Center here in Clinton.
Nate Kreinbrink:
As always, Andy, I appreciate you joining me. Again, Andy Ferguson, NelsonCorp Tax Solutions. Nate Kreinbrink, NelsonCorp 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 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.nelsoncorp.com.