Get Ready for Tax Season

Regardless of whether you prepare your own tax return or hire a professional to do it for you, you are still responsible for collecting the information necessary to complete it.  Well-organized records can make the process significantly easier and potentially save money with your CPA who typically charges by the hour.

One way to tackle this chore is to create a checklist of the documents and information needed to complete your return.  As you gather the documents, start to organize them in a file by the following categories and check them off the list.

Prior Year’s Tax Return

Use last year’s tax return as a starting point to create your checklist.  Although you may have new sources of income or different deductible expenses for the current year, this is usually a fairly comprehensive list of needed documents such as Form 1099 or 1098.  It will also serve as a reminder of information you may need to determine from bank statements or receipts such as medical expenses.

Sources of Income

This category generally includes wages, dividends, interest, partnership distributions, retirement and rental income.  You may receive a Form W-2, 1099, or K1 that indicates the amount of income reported to the IRS.  For other types of income, such as alimony received, you may need to determine the amount to report from bank statements.

Adjustments to Income

These are direct reductions to taxable income that commonly include deductible IRA contributions, alimony paid, Health Savings Account (HSA) contributions, SEP, SIMPLE or other self-employed pension plan contributions,  and self-employed health insurance payment records.

Deductible Expenses

If you itemize deductions rather than taking the standard deduction, you may need to collect source documents indicating the amount of mortgage interest paid (Form 1098), real estate and personal property taxes paid, medical expenses, and charitable contributions to be reported on Schedule A.

Tax Credits

Tax credits are a direct reduction of your tax bill so take a few minutes to research available 2017 credits.  You may be able to claim the American Opportunity Credit if you have a child in college or a Residential Energy Credit if you have made any “green” home improvements.

Basis of Property

This is also a good time to review and update the basis of property if necessary.  Home improvements made during the year may have increased the basis so collect and file those valuable receipts.

Taxes Paid

Federal and state taxes you have already paid may be found on your W-2 but if you pay quarterly estimated taxes you may need to collect records of payment.

While this is not a comprehensive list of every possible tax document needed to complete a tax return, it is a starting point from which you can develop your own, one that reflects your unique life circumstances.  Start organizing now and maybe tax season won’t be your least favorite season of the year.

Nancy Blackman - Parsec Financial Corporate Headshots
Nancy Blackman – Portfolio Manager
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Happy Donating!

As we approach the end of the year and the holiday season, we seem to be bombarded with opportunities for charitable giving. Happily, many of us answer this call and donate generously to our favorite charitable organizations. Your generosity may also be beneficial at tax time if you remember a few IRS guidelines for charitable contributions.

  • You must itemize deductions on Schedule A to deduct a charitable contribution.
  • Donate before year end to claim a deduction for 2017. Please remember if you are making a stock donation, to submit the request a few weeks before the end of the year. This will allow your custodian enough time to fulfil the request in time for the deadline.
  • Verify that the charity is tax-exempt (sometimes called 501 (c) (3) organizations) or qualified. The IRS considers the following types of organizations qualified for charitable donation purposes.
    1. A state or possession of the United States, or the United States for public purposes
    2. A community chest, corporation, trust, fund or foundation of the United States organized for charitable, religious, educational, scientific, or literary purposes or for the prevention of cruelty to children or animals
    3. A church, synagogue or other religious organization
    4. A war veterans organization
    5. A nonprofit volunteer fire company
    6. A civil defense organization
    7. A domestic fraternal society if the contribution is used for charitable purposes
    8. A nonprofit cemetery company if the funds are used for the perpetual care of the entire cemetery

More information about qualified organizations can be found in IRS Publication 526, Charitable Contributions. You can also verify the tax-exempt status of an organization on the IRS.gov website.

  • When making your donation of cash or goods, be sure to get a receipt. The IRS requires a receipt for donations greater than $250.
  • Large donations may be limited in the current year to 50% of AGI for public charities or 20-30% for private charities. Any excess donations can be carried forward for five tax years. When planning a large gift, talk to your tax professional to develop the most beneficial giving strategy.
  • Lastly, many employers will match gifts made by their employees, so remember to check your company policy and do twice as much good!

Nancy Blackman - Parsec Financial Corporate HeadshotsNancy Blackman, Portfolio Manager

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Ten Things you can do to Protect Your Accounts from Fraudulent Activity

  1. Protect your account information. If you must e-mail your advisor or others your account number, social security number, or date of birth, be sure to use encrypted e-mail.
  2. Heed the No-Nos:  Do not repeat the same password for multiple sites. Do not use really easy passwords. Do not use your dog’s name followed by the number 1 as your password.
  3. Use a Password manager. Password managers are free tools that you can download to your computer that manage your passwords for you. You no longer have to remember complicated passwords, which frees you from the No-Nos.
  4. Ask your custodian or bank if they offer two-factor authentication. This is a device or app that provides a unique number each time you log in to your account.
  5. Check your credit report annually to ensure no one has taken out credit in your name.
  6. Keep your Social Security and Medicare cards some place secure.
  7. Consider freezing your credit if you don’t plan to take out a loan in the next few years.
  8. Don’t fall prey to phishing scams. If someone calls you on the phone telling you they’ve detected fraudulent activity on your behalf, do not give them your private information. The same goes for someone contacting you over e-mail.
  9. If your e-mail is hacked, change your password immediately and notify pertinent parties.
  10. Encourage your family to do the same – even children’s credit can be stolen.
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QCD – A Bigger Tax Benefit

What, another financial acronym? Yes, in late 2015, Congress passed the PATH (Protecting Americans from Tax Hikes) Act, which made the QCD permanent in early 2016. QCD stands for Qualified Charitable Distribution. This type of charitable gift is made directly from an IRA and isn’t included in taxable income. The QCD was introduced in 2006, but fell into the on-again, off-again bucket of acceptable tax strategies until the end of 2015.

Any individual over the age of 70 ½, who receives an annual RMD (required minimum distribution) from his/her IRA, is eligible to take advantage of a QCD. Now that the strategy is permanent, it’s worth a discussion if you’re already gifting to charity each year, over 70 ½, and the owner of an IRA.

As everyone knows, a gift to charity is tax deductible. So how is the QCD different and potentially more tax beneficial?

The amount of the QCD is excluded from income, which effectively lowers AGI (adjusted gross income) by that same amount. AGI is the threshold by which most itemized deductions are measured to determine if allowable or not. For example, unreimbursed medical and dental expenses are only deductible to the extent that they exceed 10% of AGI. Therefore a lower AGI may translate into an allowable or larger medical/dental itemized deduction.

Another benefit of the QCD is the possibility to reduce Medicare Part B premiums. This year, the standard premium for Medicare Part B is $134/month if you’re a single filer and your 2015 AGI was below $85,000 or married filing jointly and your 2015 AGI was below $170,000. To the extent your AGI was higher that these amounts on your 2015 return, your Medicare Part B premiums this year also increased. Currently, four AGI brackets determine the Part B premium amount that’s deducted from an individual’s monthly Social Security check.

 

MAGI* Limits for Medicare Part B Premiums
Single Tax Filer: Married Filing Jointly:
2015 MAGI: 2017 monthly premium: 2015 MAGI: 2017 monthly premium:
Less than $85,000 $134.00 Less than $170,001 $134.00
$85,001 to $107,000 $187.50 $170,001 to $214,000 $187.50
$107,001 to $160,000 $267.90 $214,001 to $320,000 $267.90
$160,001 to $214,000 $348.30 $320,001 to $428,000 $348.30
Greater than $214,000 $428.60 Greater than $428,000 $428.60

*MAGI (modified adjusted gross income) = AGI + tax exempt interest

 

The maximum QCD amount is $100k per individual (or $200k per couple as long as $100k is given from each taxpayer’s IRA). So, in a year where one spouse gifts the maximum QCD, AGI will be reduced by $100k and the bracket which determines Medicare Part B premiums will also be lowered by $100k. For example, Billy and Betty’s 2015 AGI was $245,000 which translates to 2017 Part B premiums of $6,429.60/year. This year, Billy and Betty gifted $100k through a QCD to their alma mater to establish a named scholarship fund. The QCD lowered their AGI to $145k (assuming all other items remain constant), which reduced their bracket for determining Medicare Part B premiums. The new lower premium of $3,213/year (premium reduction of 50%) will take effect in 2019. Remember the premium change does not happen until the year after the tax return effecting the change is filed.

One further point to make – a QCD must be given to a public charity. A private foundation or donor advised fund does not qualify.
Parsec’s client service team processes QCDs on a regular basis for our clients. Here’s an outline of the simple steps to follow:

  1. Call your Financial Advisor
  2. Complete an IRA distribution form from your custodian – ensure that the gift is coded as a QCD.
  3. No tax withholding selected – the distribution is non-taxable.
  4. Check must be payable to the charity, not to the IRA owner. The check may be mailed directly to the charity or to the individual to hand to the charity.
  5. Make sure that your accountant is aware of the QCD.

Please contact your advisor with any questions.

Thank you,

Betsy Cunagin, CFP®
Senior Financial Advisor

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Update on I Bonds and Other Interest Rates

With interest rates remaining at very low levels, there are few options for earning any sort of a return on cash balances.

Current yields:

Charles Schwab Bank High Yield Savings 0.35%
Bank Money Market 1.30% (same as in my 2011 article)
3 Month U.S. Treasury Bill 1.12%
6 Month U.S. Treasury Bill 1.14%
1 Year CD, National Average 1.42%
5 Year Treasury Note 1.85% (same as in my 2011 article)
10 Year Treasury Note 2.26%
5 Year Treasury Inflation Protected Securities 0.02% (plus inflation)
10 Year Treasury Inflation Protected Securities 0.45% (plus inflation)
Series I Savings Bonds 1.96% (for the next 6 months, then 0% plus the inflation adjustment)

One thing to consider for smaller balances is Series I Savings Bonds (“I Bonds”) issued by the U.S. Government.  The new rates came out May 1, and I Bonds are currently earning an annual rate of 1.96% for the next 6 months.  You can visit www.treasurydirect.gov for a more detailed description of I Bond features.

The earnings rate for I Bonds is a combination of a fixed rate, which applies for the life of the bond, and an inflation rate that changes semi-annually (think “I” as in “inflation”). The 1.96% earnings rate for I Bonds purchased through October 31, 2017 will apply for their first six months after issuance. I Bonds cannot be redeemed for 12 months after issuance, and there is a penalty of 3 months’ interest if they are redeemed before 5 years.  Purchases are limited to $10,000 per Social Security Number annually, so a couple could purchase up to $20,000 per year.

What if there is an emergency and you need the money?  Since you cannot redeem the bonds for 12 months, you need to leave some liquid cash on hand.  After 12 months, a penalty of 3 months’ interest is deducted from the redemption value.  But even after paying the penalty you would still be ahead of a bank CD, and considerably ahead if the change in inflation continues at its current level. In addition, I Bond interest is exempt from state income taxes and is tax-deferred until you redeem the bond.  Also, if you buy the bonds on the last day of the month, you still get interest for the full month (I like to call this the “Mendelsohn Option”, in memory of the man who first pointed this anomaly out to me many years ago).

All I Bonds have the same inflation component.  The only difference is in the fixed rate that each bond offers.  If the fixed rate increases significantly in the future, just redeem some bonds and pay the penalty.  Then buy some new bonds with the higher fixed rate (but remember the $10,000 annual limit on purchases for each Social Security Number).  After 5 years, there is no penalty on redemption.

Another possibility for liquidity needs is a short-term, high quality bond fund.  However, you should be aware that these do carry some interest rate risk.  For example, a popular short-term bond fund has a current yield of 1.96% and an effective duration of 2.60 years.  This means that if interest rates were to suddenly move up by 1%, the value of the fund would be expected to fall by about 2.6%.  This would wipe out over a year’s worth of interest, making it a less attractive alternative for cash balances. I Bonds cannot go down in value (unless the Government fails, in which case we all will have much bigger problems to contend with).  The worst that can realistically happen is if the inflation adjustment was to be negative for a period of time.  In that case, there would be no interest paid on the I Bonds until the inflation adjustment turned positive.  However, we believe that the probability of negative inflation over the next several years is minimal.

An examination of interest rates reveals current market expectations about inflation. We look at this by calculating break-even inflation rates over the next 5-10 years using current yields on Treasury securities.  The break-even inflation rate is simply the difference between the yield on a Treasury Note of a particular maturity and the corresponding TIPS, or Treasury Inflation Protected Security.

For example, using the yields listed previously, the current 5 year break-even inflation rate is 1.83%. This is the difference between the 1.85% yield on 5 the 5-year U.S. Treasury Note and the -0.02% yield on 5 year TIPS). If you believe inflation is going to be lower than the break-even value for a particular investment horizon, you are better off in a Treasury Note. If you believe inflation is going to be higher than the calculated break-even rate, then you should purchase TIPS or I Bonds.

 

Bill Hansen, CFA

 

 

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Medicare: The Basics

Medicare is a complex topic but also an important tool for financial planning during your retirement. You will no doubt be inundated with flyers, pamphlets, and marketing materials from multiple companies and organizations—as you approach your 65th birthday. It can become very overwhelming, so here are five quick things that will help you get a basic understanding of Medicare and what you need to do now to prepare for the big 6-5!

1.) Medicare is health insurance for people 65 or older and people under 65 with certain disabilities. Original Medicare (Parts A & B) pays for about 80% of your health care costs. There are (4) main ‘Parts’ you will hear when talking about Medicare.

Part A– Hospital Coverage- part of Original Medicare
Free to most people

Part B– Doctor Coverage- part of Original Medicare
Has a monthly premium (based on income*) and a yearly deductible (the 2017 deductible amount is $183

Part C– Medicare Advantage- offered by private insurance companies
Takes the place of Original Medicare and usually combines Rx coverage

Part D– Rx Drug Coverage- offered by private insurance companies
Separate monthly premium

Original Medicare pays approximately 80% of qualified expenses, which leaves a gap of 20% that would be out-of-pocket for you.

There is currently no cap on the amount that the 20% could reach.

2.) It is important to know what qualified expenses are. Your ‘Medicare & You’ guide will have detailed information on this but here are a few examples of things Medicare does not cover: long-term care, eye exams for glasses, most dental care, dentures, hearing aids or exams, prescription glasses or exams, cosmetic surgery, routine foot care and acupuncture.

3.) You have options! You can choose Original Medicare (Parts A & B) or you can choose a Medicare Advantage Plan instead.You can also choose to add Supplemental coverage (for an additional monthly premium) to Original Medicare that would cover the approximate 20% gap in out-of-pocket expenses.

4.) There are penalties and fees for failing to enroll into Parts A, B, and D within a specified time frame. There is a 7-month window around your 65th birthday in which you can sign-up for Medicare and have guaranteed approval for any Rx drug, Advantage, or Supplement Plan you choose. You need to enroll in Medicare during this 7-month window to avoid late enrollment penalties/fees.

The 7 months covers 3 months prior to, the month of, and 3 months after your 65th birthday month.

You can enroll in Medicare online (www.medicare.gov) or at your local Social Security office.

5.) Use your resources! Medicare’s website (www.medicare.gov) is a wonderful tool to research, compare and shop for plans, companies, etc.If you are currently employed or covered by an employer health plan, talk to someone in your HR or benefits department as soon as you turn 64; the timing for signing up and your coverages may vary from the normal Medicare process.

As the time approaches, make sure that you complete the necessary steps to take advantage of the Medicare benefits which you have earned. For more detailed information, click here for our upcoming Parsec Newsletter  for an article called “Medicare: What you need to know before you turn 65.”

 

Lori King, RP®, Client Service Specialist

 

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Congratulations Parsec Prize Recipients!

One of the fundamental values at Parsec Financial is giving back to our community. We founded the Parsec Prize in 2005. Since that time, we have given over $1,000,000 in prizes to 66 local non-profit organizations serving Western North Carolina and Charlotte. The Parsec Prize represents approximately one-half of our annual charitable giving.

For the first time, we are expanding the Parsec Prize to a multi-year donation to one of the recipients. OnTrack Financial Education & Counseling will be the inaugural organization to receive this multiyear donation of $100,000 in total over the next four years. This is the largest commitment that Parsec Financial has ever made to one organization. We are giving an additional four Parsec Prizes of $25,000 each to four other worthy organizations. 

The 2017 Parsec Prize recipients are:

  • Guardian ad Litem of Buncombe County – $25,000
  • OnTrack Financial Education & Counseling – $100,000 (4-year commitment)
  • Our VOICE – $25,000
  • United Way of Asheville and Buncombe County, Middle School Success Program – $25,000
  • Western Carolina Rescue Ministries – $25,000

We thank these organizations for the value they provide to our community.

We encourage non-profit organizations to visit our website for information on applying for a Parsec Prize in 2018. The Prize will be considered for non-profits in any region where Parsec has a physical office.

Thank you,

The Parsec Team

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2016 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2016 is April, 18 2017. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

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
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $62,000 – $72,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $99,000 – $119,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $184,000 – $194,000 $186,000 – $196,000

Do you qualify to contribute to a Roth IRA?

Modified Adjusted Gross Income Phase-Out Range – Roth
Tax Filing Status For 2016 Contributions For 2017 Contributions
Single: $117,000-$132,000 $118,000-$132,999
Married, filing jointly: $184,000-$194,000 $186,000-$195,999

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

Harli Palme

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2016: Year in Review

While the year hasn’t officially wrapped up as of this writing, we’re close enough to be able to form some opinions and offer some perspective on 2016.  If nothing else, this year could be characterized as unexpected.  Despite a steep stock sell-off in January, which weighed on investors’ outlooks early in 2016, U.S. stock returns are poised to close up over 10 percent through December.  On the other hand, bond returns, while on target to gain about 2 percent for the year, are finally starting to come under pressure after a bull market of over 30 years.

Looking back, the S&P 500 Index fell over 6 percent in January after U.S. GDP growth came in below expectations, corporate earnings continued to fall, and recession fears spiked.  Despite investor concerns, most economic data at home were relatively healthy, driven primarily by steady gains in employment and disposable personal income.  Additionally, many investors were concerned that slowing global growth would ultimately weigh on a resilient U.S. economy.  Specifically, the International Monetary Fund (IMF) lowered its global growth rate predictions several times, China delivered GDP growth below expectations, and commodity prices remained depressed.

Stocks turned a corner in March, however, surging almost 7 percent at home and over 13 percent in developing countries.  The state-side rally came amid falling U.S. corporate earnings that were driven by lower energy prices, depressed commodity prices, and a strong dollar.  Although declining earnings growth usually leads to lower stock prices, the Federal Open Market Committee’s (FOMC) announcement that it would reduce the number of interest rate hikes for the year buoyed stock valuations.  As a result, stock price-to-earnings multiples (a common valuation metric) expanded while underlying fundamentals remained weak.

After several years of underperformance, emerging markets stocks and bonds reversed course in 2016 as depressed commodity prices started to recover.  The FOMC’s plan for fewer interest rate hikes was also a boost for emerging markets countries, many of which owe significant amounts of U.S. dollar-denominated debt.  Likewise, economic data out of China were better than expected, although growing debt levels and excessive government stimulus there could prove to be longer-term risks.

In another unexpected development, low-growth telecom and utilities sectors led U.S. stocks in the first half of the year.  Utilities and telecom stocks typically carry higher debt levels and the FOMC’s move to keep interest rates lower for longer was viewed favorably by the markets.  Both sectors were up over 20 percent through June, although they have since given back almost half of those gains.

In between tragic terrorist attacks, the U.K. shocked the world in June when it voted to exit the European Union, a development known as “BREXIT.”  Markets tumbled on the news but quickly bounced back and reached new highs.  While shocking headlines dominated the popular press, global economic growth was quietly stabilizing around the globe and accelerating at home.

The summer brought a much-needed reprieve from the barrage of grim headlines earlier in the year.  It also ushered in new confidence in the U.S. expansion as jobs growth continued, wage growth perked up, and housing data improved.  As the Presidential election drew near, corporate spending started to pick up, oil prices rallied, and company earnings improved.

Following a relatively calm summer, the U.S. surprised the world in November with the election of Donald Trump to the presidency, while Republicans maintained their majorities in the House and Senate.  Despite concerns of a global shift towards populism, markets soared on hopes of tax cuts and better growth at home.  After the election and following months of healthy economic data – – including a meaningful pick-up in 3rd quarter U.S. GDP growth and signs that inflation was heating up – – the FOMC raised rates in December, as expected.

Clearly, 2016 was an eventful year for markets, governments, and citizens alike.  While several unknowns have become known, many of this year’s developments have sowed the seeds for more uncertainty ahead.  In terms of markets, although a divide still exists between stock valuation levels and underlying fundamentals, we’re encouraged by improving corporate earnings growth.  On the other hand, bonds have benefited from over thirty years of falling yields (and thus rising prices).  A steeper FOMC rate hike trajectory is clearly a headwind for fixed income, but the central bank’s stance is supported by strong economic growth and signs of inflation.  The end result may mean stagnant fixed income returns, but a healthy economy – a trade-off we’re willing to take.

Overall, we view stocks as most likely to outpace growing inflation expectations over the long term.  While equity prices may be due for a pullback in the near term, evidence suggests that the longer-term secular bull market remains intact.

Thank you,

The Parsec Team

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