2014 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2014 is April, 15 2015.  The maximum contribution is $5,500 of earned income or $6,500 for those 50 and over.   These amounts will stay the same in 2015.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution.  The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your   Traditional IRA contribution?

If   your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.

Modified   Adjusted Gross   Income  Phase-Out   Range
Single,   participates in an employer-sponsored retirement plan: $61,000-$71,000
Married (filing jointly), participates in an employer-sponsored retirement plan: $98,000-$118,000
Married (filing jointly), your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000-$193,000

Do you qualify to contribute   to a Roth IRA?

Single: $116,000-$131,000
Married, filing jointly: $183,000-$193,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

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Taxable Income Reduction Strategies

As a trusted financial advisors for our clients, our priority is to stay apprised on current tax laws, as well as provide planning opportunities to reduce future tax liabilities. For many of our clients, their Traditional IRAs are also their largest tax liability. When an IRA is responsibly managed, the hope is that the account will continue growing until the owner’s late 70s. At that point in time, the mandatory withdrawals from the account may offset any capital appreciation and earnings on the account. When taking into account these growth expectations, as well as the client’s necessary cash flow, many clients find that the RMDs in their 80s will far exceed their necessary cash flow. These factors contribute to an increasing likelihood of the client having a higher tax rate later in life. Higher Modified Adjusted Gross Income(MAGI) is one concern that has a trickle down effect. When MAGI gets high enough, it can result in an income based adjustment for Medicare Part B and D. It should be clear by now that a healthy retirement can actually increase tax concerns.

So, by now you may be saying, “Thanks for the depressing news Daniel, I don’t think I want to read any further. ” I encourage you to keep reading.
 
Controlling Income

The first step in keeping MAGI low is controlling income. For retired individuals, there are two main sources of cash flow. The first being social security and pensions. These are fixed amounts that cannot be changed. The second source is income from personal assets. This includes brokerage accounts, Traditional IRAs, and Roth IRAs. A brokerage account is not a tax-deferred account. Therefore any income produced by the account will contribute to MAGI. It is possible to manipulate a brokerage account’s holdings to reduce taxable income. The second source of cash flow is withdrawals made from Traditional IRAs to supplement income or fulfill an RMD. These withdrawals are fully taxable to the individual. In addition to Traditional IRA withdrawals, Roth IRA withdrawals can be made, however, these withdrawals are not taxable to the individual if made after 59 ½. The IRS gives us tax tables, from these, we are able to determine the maximum amount of taxable income we want to produce for clients. As I said before, it may become impossible to keep income below this desired threshold when RMDs get larger and larger. If this is the case, we move on to advanced planning techniques.

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Roth Conversions and Charitable Remainder Trusts 
One of our favorite techniques to reduce the impact of RMDs is to combine the benefits of a Roth IRA with a charitable gift. The establishment of a Charitable Remainder Trust may allow someone with charitable intentions for their estate to realize the benefit now. The Charitable Remainder Trust can provide a lifetime income stream for the donor, as well as provide a large charitable deduction. In this tandem planning technique, the charitable deduction can offset the income incurred from a Traditional to Roth conversion. The reduction in the size of the Traditional IRA will also truncate the amount of the RMD going forward.
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This particular technique is just an example of some of the advanced planning options we evaluate with our clients. Every situation is different with special circumstances to consider. If you have any questions about these strategies, contact one of our advisors.
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North Carolina Tax Law Changes

After months of grappling with members of the state’s legislature, Governor Pat McCrory signed a bill authorizing the most significant changes to North Carolina’s tax code since the 1930s on July 15.

The new tax code reduces both personal and corporate income taxes and eliminates the estate tax. Early estimates indicate that taxpayers across the board will pay less in state taxes once the changes go into effect. Some of the other key provisions of the new law are:

• Deductions for mortgage interest on first homes will be capped at $20,000.
• Charitable contributions will remain fully deductible.
• The child tax credit will continue
• Social Security income will remain exempt from state taxes.
• The corporate tax rate will be cut from the current 6.9 percent to 5 percent by 2015.
• North Carolina’s gas tax will be capped until June 30, 2015.
• A deduction on retirement income is eliminated.
• Starting in 2014, the sales tax holidays for back-to-school and Energy Star products are eliminated.
• The deductibility of the first $50,000 of business income has been eliminated
• Service contracts will be subject to sales taxes
• Electricity will be taxed at a general sales tax rate of 7%
• Amusements, movie tickets, etc will be subject to sales taxes

This is only a small representation of the changes. And this information should not be considered tax advice. Individual situations may vary. And as always, please consult your tax advisor regarding how the laws may affect you.

Tracy H. Allen, CFP®
Financial Advisor

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The Fiscal Cliff, Taxes and Investment Decisions

This morning CNBC had a headline “Fending off the Fiscal Cliff”.  I turned off the TV.  You have to beware of headlines that create a sense of urgency to do something in your portfolio.

This sort of reporting promotes what I call the “I’ve got a feeling” trade.  This is when you take some action in your portfolio based on the mood of the day. Currently, there is a lot of focus on the Presidential election.  If you are concerned about the other candidate winning, keep in mind that someone is equally concerned about your candidate winning.  Don’t make investment decisions based on emotion.

Taxes can be a factor, but should not be the sole driver of an investment decision.  Tax planning for this year is particularly difficult due to the uncertainty of future tax rates.  The Bush tax cuts are set to expire on 12/31, which would cause the tax rate on qualified dividends to increase from a current maximum of 15% to as high as 39.6%, depending on your tax bracket.  We likely will not know anything on income tax, estate tax, alternative minimum tax, the possible return of the IRA charitable deduction for those over 70.5, etc. until after the election or even later in December.  It’s also possible that these tax rates could be finalized in the first quarter of 2013 and made retroactive to 12/31.

This year is unusual in that some of the usual rules of thumb about capital gains may not apply.  Typically, people want to delay paying taxes whenever possible.  However, you way want to realize some long-term capital gains in 2012 in order to lock in the 15% tax rate which will likely be higher next year.  In addition, capital gains rates are currently 0% for taxpayers who are in the 10% or 15% tax brackets based on their taxable income.  The 0% tax rate for these people also expires on 12/31/2012.

You may not want to realize capital gains early under certain circumstances.  For example, if you have investments that are highly appreciated and you are advanced in age or in poor health.  Depending on the size of your estate and what happens with estate tax law, the beneficiaries of these assets may receive a step-up in basis for all or a portion of the assets upon the taxpayer’s death.   Therefore, it wouldn’t make sense to sell assets and pay taxes on the gain when a step-up might be available in the near future.

We recommend that you avoid making major decisions or changes to your portfolio based on fears or possibilities that may or may not materialize. While some limited amount of portfolio rebalancing may make sense, you should discuss your particular situation with your Parsec advisor if you have questions.

Disclaimer:  we are not licensed CPAs and do not give tax advice.  We offer some general guidance with respect to the mechanics of tax issues, but we encourage you to consult with your CPA or a qualified tax professional before making any decisions or taking action.

Bill Hansen, CFA

Managing Partner

October 12, 2012

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The “not-so Super” Committee

As expected, this week the Joint Select Committee on Deficit Reduction (the “Super committee”) failed to come to any agreement on what measures would be recommended to reduce the budget deficit by $1.2 Trillion. Therefore, automatic spending cuts are scheduled to begin in 2013.  The major rating agencies did not undertake a further downgrade of U.S.debt as a result of the impasse. 

Much of the deadlock revolves around whether tax increases will accompany spending cuts in order to move closer to a balanced budget.  At the same time, across many cities in the US, protestors are demonstrating against a combination of things like outrageous executive bonuses and the perception that the distribution of wealth in the country is becoming more skewed towards the top income earners.  I have seen signs both on the news and in person saying “we are the 99%”.  Before you go creating your own sign and joining the movement, let’s have a quick review of the math. 

According to a recent study going back to 1922, the peak level of wealth disparity was in 1929, when the top 1% of households controlled 44% of the country’s wealth.  In 2007, it was 34.6%.  Therefore the concentration of wealth in the country is down over the long run, although it has risen significantly since the 1976 low of 19.9%. 

Now let’s move on to income taxes.  According to the National Taxpayers Union, for the 2009 tax year, the top 1% of household incomes paid 36% of total Federal income taxes. This is approximately in proportion to the overall level of wealth that they control.  The top 10% of taxpayers paid over 70% of the total. 

In 1999, the top 10% of taxpayers paid 66% of Federal income taxes.  Therefore, over the last 10 years, the proportion of taxes paid by the top 10% of taxpayers actually increased. 

The top 10% can pay at most 100% of the income taxes.  So the current argument comes down to what number between 70% and 100% they should pay.     

The top 10% starts lower than many people might think.  For 2009, Adjusted Gross Income on your Federal tax return of $112,124 would put you in the top 10%.  This is within reach of many households, particularly for a married couple where both spouses work.  For a family of four who are fortunate enough to enjoy this level of income, I suggest their lifestyle is comfortable but not extravagant.  For the 90% below this level, things are more challenging. 

The current stalemate about taxes is annoying, and it is likely that some combination of tax increases and spending cuts will be needed to achieve any meaningful reduction in the budget deficit. 

Increasing taxes on the top 1% may be part of the solution.  Over the last 10 years, the top 1% paid a relatively stable proportion of taxes, while the tax burden on the next 9% has increased. But there are simply not that many people in the 1% to where they can be expected to pay the tax burden for the entire country. 

How about increasing taxes on the top 10%? The problem here is that the top 10% includes many dual-income families, and this group already pays a disproportionate amount of Federal income taxes (9% of taxpayers are paying about 44% of the taxes). 

Another part of the solution might be to replace part of the income tax with a consumption tax.  This would capture some tax revenue from the underground economy of people currently working for cash, when they eventually go to a store and spend the money they have earned but not declared as income.  As the election approaches over the next 12 months, particularly in light of the Super committee’s failure, taxes are going to be a pivotal issue.  Hopefully there is a chance for true reform.

Bill Hansen, CFA

Managing Partner

November 23, 2011

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2010 Roth IRA and Regular IRA Contributions

The deadline to contribute to your Roth or Traditional IRA for the tax year 2010 is April 15, 2011. You can contribute $5,000 or the amount of earned income for the year, whichever is less. If you’re over 50, you can contribute an additional $1,000.

Your income determines if you qualify for a tax-deductible Traditional IRA contribution, or if you qualify to make a Roth IRA contribution.

Do you qualify to deduct your Traditional IRA contribution?
 If your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.
  Modified Adjusted Gross Income                                          Phase-Out Range
Single, participates in an employer-sponsored retirement plan      $56,000 – $66,000
Married, participates in an employer-sponsored retirement plan      $89,000 – $109,000
Married, your spouse participates in an employer-sponsored retirement plan, but you do not.  $167,000 – $177,000
 
Do you qualify to contribute to a Roth IRA?
Single $105,000 – $120,000
Married, filing jointly     $167,000 – $177,000

 

Harli L. Palme, CFP®

Financial Advisor

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Gold-Plated Paper Clips for All!!!

I recently saw one of the “Oprah” episodes where she gave away mountains of stuff.  I am always shocked at the reaction.  She could say she is giving away a gold-plated paper clip, and people in the audience would lose it.  I mean, people were screaming, crying, hugging each other, jumping up and down.  Really?  The only thing that would garner that type of reaction from me would be if she brought out George Clooney, in an electric blue Bugatti Veyron.  He hands me the keys and says, “Let’s go for a ride.”  Oh, yeah. 

As I continued to watch the show, I realized that I have been working at Parsec way, way too long.  She brought out expensive gift after expensive gift.  Two thoughts popped into my head: “Geez, the taxes on this stuff will be terrible” and “I wonder if you could say no to some of this junk and yes to the other stuff, to reduce the tax liability.”  I doubt anyone in the audience thought the same thing.  They were too excited about rhinestone-studded mop handles.

Just out of curiosity, I asked one of our advisors about the tax consequences.  Unfortunately, the answer is more complicated than I anticipated.  It all depends upon each person’s individual situation and state of residence.  How you receive the gift also comes into play.  Oprah’s gold-plated paper clip might be considered contest winnings, so you might have to pay tax.  However, if Uncle Joe gives you a wad of cash, he might incur a tax liability, again, based upon certain factors.  So, if Clooney does appear in my driveway on Christmas Day in that lovely sports car, I should consult with a tax professional.  (I wonder what the tax appraisal for Clooney himself will be?)

Should Santa be extra generous to you this year, keep the gift tax in the back of your mind.  Do not get all excited about the gift and forget that the tax man always cometh for someone, either Santa or you!

I hope you and your family survives the madness of the holidays and has a healthy, happy new year. 

Cristy Freeman, AAMS
Senior Operations Associate

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Charitable Giving Tips

I recently read a study by The Center on Philanthropy at Indiana University.  “The 2008 Study of High Net Worth Philanthropy,” sponsored by Bank of America, found that over 90 percent of households surveyed planned to make donations using cash and checks in the near future.  A little over 30 percent planned to donate securities.  

As you probably know, donating appreciated securities has tax advantages.  Sure, it is not as easy as writing a check.  With proper planning and some paperwork, you can lower your tax burden while providing the donation amount you already planned to give.  

It is important to consider the option this year if you had a major tax event.  Perhaps you converted from a traditional IRA to a Roth IRA.  Maybe you have a capital gain from a stock sale.  Donating appreciated securities could minimize the resulting tax burden.      

Such donations can also become part of long-term estate planning.  Do you want to provide a legacy for the charity or charities of your choice?  Do you want to donate a fixed sum every year?  Would you like for your children to be involved in charitable giving decisions? 

Your investment advisor can assist you with both your short-term and long-term charitable giving strategies.  If you are interested in donating securities this tax year, I urge you to contact your advisor soon.  It is best to submit securities donations as early as possible to ensure processing before December 31. 

Cristy Freeman, AAMS
Senior Operations Associate

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