Individual Tax

You may have a teen in your family who holds down a part-time job or works full-time during the summer. You can help your child lay the groundwork for future retirement security early on by encouraging your child to open an individual retirement account (IRA).

You may, or may not, get some resistance, especially if your child has other plans for spending the money. However, you should persist since the benefits can be significant over the long term. Here are some points you can bring up as you make your case.

Savings Can Grow Over Time

When it comes to building savings, your child’s age is a major advantage. Given enough time, even a relatively small investment could grow into a significant sum due to the power of compounding. For example, a one-time investment of $6,000 could grow to $110,521 in 50 years, assuming a hypothetical 6% annual return. Invest $6,000 every year for 50 years at 6%, and your child could accumulate over $1.7 million. Of course, investment returns can vary from year to year and are not guaranteed.

IRAs Offer Tax Advantages

As long as your teen does not participate in an employer’s retirement plan, contributions to a traditional IRA will be fully tax deductible. (With plan participation, income limits may apply.) Any earnings that investments in the IRA make will grow tax deferred. Your child won’t have to pay any income taxes on the IRA funds until they are withdrawn from the IRA.

Contributions to a Roth IRA are not tax deductible, but they can be withdrawn tax free at any time for any purpose. Earnings accumulate tax deferred and can be withdrawn tax free once your child reaches age 59½ and has had a Roth IRA for at least five tax years. Tax-free withdrawals are also available after five years for first-time home buying expenses (to a maximum of $10,000) or on account of disability or death.

Your teen can contribute up to $6,500 to one or more IRAs in 2023 or the amount of his or her annual compensation, if less. The IRS adjusts this IRA contribution limit periodically for inflation. Your child has until the April tax-filing deadline to contribute to an IRA for the prior tax year.

If you would like some help deciding which type if IRA may make the most sense for your teen child, be sure to get in touch with your financial professional.

You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.

Standard Deduction or Itemizing

The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.

Home/Work Tax Breaks

If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.

Moving Expenses

Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.

Health Savings Accounts (HSAs)

HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Family Related Tax Credits

The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 18 at the end of the tax year and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.

The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.

Section 529 Plans*

These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.

A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $85,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $170,000. (These limits may be inflation adjusted.)

Other Education Tax Breaks

As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.

In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.

Keep in mind that there are income limits for these tax breaks.

Investments

To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:

• Selling securities with unrealized losses before year end to offset realized capital gains.
• Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
• Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.

You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.

Retirement

While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.

Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.

Roth alternatives — available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own — provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.

As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.

Did you skip filing or request an extension on your 2021 taxes because you couldn’t pay? You have several options.

It’s happened to many people at one time or another. You wait until the last minute to prepare and file your income taxes, only to receive a very unpleasant surprise: You owe money, and you don’t have it to give. Even if you file for an extension, the IRS still expects you to send in what you estimate you’ll owe. If that’s absolutely impossible, you should always try to send in what you can.

The first thing you should do, of course, is to review your 1040 again. Did you take all of the credits and deductions that you should have? Or make any calculation errors? Did you somehow overstate your income?

If after checking your return you still see that large number on line 37 (Amount you owe), try not to despair. And certainly, don’t neglect to file. Instead, take advantage of one of the many options you have.

If you have to enter a big number on line 37 and you lack the funds to pay the IRS, there are several different steps you can take.

Try to Get a Loan

This is the best solution if it’s possible. Consider approaching family members who you know might have enough disposable income to help you out temporarily. If that’s not possible, check with your bank or credit union or online lenders. Paying interest may be more economical than dealing with IRS penalties and interest – and less harmful to your tax-paying history.

Set Up an Online Payment Plan

If you qualify (and most individual taxpayers do), you can set up an online payment plan through the IRS itself. You don’t have to contact the agency. It can all be done on the web. Once you’ve provided the required information, you’ll be notified immediately about your approval status. There are two types:

• Short-term payment plan. This is designed for taxpayers who owe less than $100,000 and are going to repay it in 180 days or fewer. Keep in mind that the late-payment penalty and interest will continue to accrue, so those amounts have to be figured into your plan. There are no other fees for this.
• Long-term payment plan. This is also known as an installment agreement, and it usually involves a setup fee, though low-income individuals might be able to have the fee waived or reimbursed. Your total debt to the IRS must be less than $50,000 (combined tax, interest, and penalties), and you’re required to make monthly payments. If you filed your return on time, your late-payment penalty will be reduced from up to 1 percent per month to 0.25 percent per month for as long as the installment agreement is in effect.

Offer in Compromise

It may be possible for you to settle your tax bill with the IRS and pay less than what you originally owed. There is a non-refundable fee of $200 that is generally waived for low-income taxpayers. You can see if you’re eligible by visiting this site and completing the multi-step questionnaire.

You can use this IRS tool to see if you pre-qualify for an Offer in Compromise, which could reduce your tax bill

Delayed Collection

If you are absolutely unable to pay and the IRS can confirm this, the agency may delay collection until your finances improve. Call the number on your notice to request this action, or call (800) 829-1040. Interest and penalties will continue to accrue during the delay.

Penalty Relief

You may also be able to get your late-payment penalties reduced or eliminated if you have reasonable cause, as defined by the IRS. The agency decides whether you’re eligible for this on a case-by-case basis. If you have a solid history of compliance, the First Time Abatement program may be available to you.

Planning Ahead Helps

It’s good to know that there are options if you can’t come up with enough money to pay your tax bill, but you can probably avoid that situation if you do year-round tax planning. Looking at your income and expenses—especially the major ones—in terms of their effect on your taxes can go a long way toward avoiding surprises at filing time. Let us know if we can help you develop such a strategy.

You may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.

Standard Deduction or Itemizing

The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.

Home/Work Tax Breaks

If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.

Moving Expenses

Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.

Health Savings Accounts (HSAs)

HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Family Related Tax Credits

The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 17 at the end of the tax year (under age 18 for 2022) and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.

The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.

Section 529 Plans*

These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.

A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $80,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $160,000. (These limits may be inflation adjusted.)

Other Education Tax Breaks

As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.

In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.

Keep in mind that there are income limits for these tax breaks.

Investments

To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:

• Selling securities with unrealized losses before year end to offset realized capital gains.
• Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
• Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.

You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.

Retirement

While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.

Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.

Roth alternatives – available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own – provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.

As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.

Source/Disclaimer:

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used.Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

**You should consider a fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.