SHOW NOTES: 2018-01-25 Money in Motion

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Last Week’s Question of the Week: When we are within a five- year window before retirement, should we be increasing or decreasing our risk within our portfolio? ANSWER: If you are within a 5-year window of retirement, you should be decreasing your risk in your portfolio.

HOST: I know lots of people are already thinking about filing their income taxes, and today you are going to educate us on some things to be watching for?

KLAAS FINANCIAL: Yes, Income Taxes are in the air. So first of all, we like to disclaim that we are not accountants, so please refer any specific tax questions to your accountant; however, we do understand most of the basics as we help our clients with these every day.

Some dates to remember:

  • The last day to file personal income taxes is: Monday, April 17, 2018, rather than the traditional April 15 date. In 2018, April 15 falls on a Sunday, and this would usually move the filing deadline to the following Monday – April 16. However, Emancipation Day – a legal holiday in the District of Columbia – will be observed on that Monday, which pushes the nation’s filing deadline to Tuesday, April 17, 2018. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation.

Other dates to remember, when to expect all of your tax forms that you need to provide to complete your taxes.

  • January 31st – W-2s and most 1098 and 1099 forms are due to you, and bank forms and brokerage statements should generally arrive by then also.
  • February 15th – Some 1099 forms; Form 1099-B reports sales of investments over the course of the year; brokers must provided 1099-Bs by mid February; also some real estate forms may not come till then either.
  • March 15th – Most Schedule K-1s for partnership and LLC’s come due; and for others not till April 15th.
    Be patient for your tax forms, if they are rushed and there are mistakes, your accountant will have to file an amended return which will likely take longer!

HOST: With the big tax bill change that was passed at the very end of 2017, can you explain to our listeners the difference in rates between paying Capital Gains tax vs. income tax?

KLAAS FINANCIAL: Yes, this is always a point of confusion.

  1. First, let’s understand what cap gains are…
    • It’s great when the value of an investment rises,(after-tax investment, not retirement accounts) but there’s a side to that success that’s much less exciting: capital gains taxes.
    • The IRS and many states assess capital gains taxes on the difference between what you paid for an asset — your basis — and what you sold it for. Capital gains taxes can be short-term or long-term, depending on how long you owned the asset.
  2. Point of clarification:
    • Short-term capital gains tax rates are equal to your ordinary income tax. There are now have seven tax brackets for income tax (10 %, 12%, 22%, 24%, 32%, 35%,37%).
    • Long-term capital gains tax rates, which usually come into play on investments you’ve held for longer than a year, can actually be as low as 0% tax rate.
  3. So first of all with regards to the tax bill, and the Capital Gains rates:
    • The new rules do not change long-term capital gains tax rates themselves — for the 2018 tax year they’re 0%, 15% and 20%, the same as for 2017.
      But the thresholds have changed.

Married, filing jointly, you will pay 0% for long-term capital gains up to $77,200; or Single, up to $38,600.
Married, filing jointly will pay 15% for long-term capital gains up to $479,000; or Single, up to $425,800.
Married will pay 20% over $479,000, single, over $425,800.

HOST: What about the size of our tax return? Is it OK to be getting back a refund?

KLAAS FINANCIAL: Great question!

  1. In 2016, the average tax refund was $3050 in the United States.
    • Here’s a fact, unless you qualified for tax credits, your tax refund isn’t a gift from the IRS. In fact, remember that when you receive that tax refund, the IRS is just giving you back money it owes you.
    • In other words, what this means is that you’ve loaned the government money from your paychecks throughout the year. And the government is NOT paying it back with interest!
    • A tax refund generally indicates you’ve paid Uncle Sam too much with each paycheck.
  2. A Better Use for Your Funds: What could you do with that extra $3050 if it came to you in increments of $116 in each biweekly paycheck? Pay down debt or Save for retirement.
  3. How to Fix the Problem: If you are interested in getting that money back into your paychecks, how do you go about fixing the problem? It all comes down to one form: the W-4.
    • This is the form you’ll fill out every time you start a new job. It basically tells your employer how much of your paycheck to withhold in federal taxes.
    • On this form, you can claim exemptions for dependents, having only one job, having a non-working spouse or paying for child care, among other things. The more exemptions you have, the less will be withheld from your paychecks in taxes. Meanwhile, the fewer exemptions you claim, the more your employer will withhold from your paycheck.
    • If your tax refund was rather large, you likely didn’t take enough exemptions. Often, employees forget to change their forms after a life event, such as getting married or having a baby.
    • To update your exemptions, all you need to do is ask your employer for a new W-4.

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.