Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
October 2017 Tax Newsletter
WHAT'S NEW IN TAXES:
5 Tax-loss Harvesting Tips
Though the markets have been up strongly this year, your investment portfolio may have a few lemons in it. By using the tax strategy of tax-loss harvesting, you may be able to turn those lemons into lemonade. Here are some tips:
Tip #1: Separate short-term and long-term assets. Your assets can be divided into short-term and long-term buckets. Short-term assets are those you've held for a year or less, and their gains are taxed as ordinary income. Long-term assets are those held for more than a year, and their gains are taxed at the lower capital gains tax rate. A goal in tax-loss harvesting is to use losses to reduce short-term gains.
"Example: By selling stock in Alpha Inc., Sly Stocksale made a $10,000 profit. Sly only owned Alpha Inc. for six months, so his gain will be taxed at his ordinary income tax rate of 35 percent (versus 15 percent had he owned the stock more than a year). Sly looks into his portfolio and decides to sell another stock for a $10,000 loss, which he can apply against his Alpha Inc. short-term gain."
Tip #2: Follow netting rules. Before you can use tax-loss harvesting, you have to follow IRS netting rules for your portfolio. Short-term losses must first offset short-term gains, while long-term losses offset long-term gains. Only after you net out each category can you use excess losses to offset other gains or ordinary income.
Tip #3: Offset $3,000 in ordinary income. In addition to reducing capital gains tax, excess losses can also be used to offset $3,000 of ordinary income. If you still have excess losses after reducing both capital gains and $3,000 of ordinary income, you carry them forward to use in future tax years.
Tip #4: Beware of wash sales. The IRS prohibits use of tax-loss harvesting if you buy a "substantially similar" asset within 30 days before or after selling it at a loss. So plan your sales and purchases to avoid this problem.
Tip #5: Consider administrative costs. Tax-loss harvesting comes with costs in both transaction fees and time spent. One idea to reduce the hassle is to make tax-loss harvesting part your annual tax planning strategy.
Remember, you can turn an investment loss into a tax advantage, but only if you know the rules.
How to Ace the FAFSA
The Free Application for Federal Student Aid (FAFSA) is a tool that students use to apply for more than $120 billion in federal funds. Unfortunately, each year many students miss out. A report from NerdWallet estimates that $1,861 per eligible high school graduate went unused in free federal grant money during 2014 because they did not complete a FAFSA.
Even if you don't think you or your child qualify for federal aid, filling out a FAFSA is important because it could be used to determine eligibility for nonfederal aid and private funds.
FAFSA available October 1, 2017
Previously, the FAFSA was not available until January. A recent change now makes the application available October 1, 2017. This is because the 2018-19 FAFSA can be completed with your 2016 tax information.
Avoid FAFSA mistakes
Don't forgo federal student aid by making one of the following common filing mistakes:
Mistake: Not reading the instructions or questions
Tip: Answer all questions - even if the answer is zero. If left blank, the question will be considered unanswered. Here are some quick tips:
* Write dollar amounts without cents.
* Understand the definitions of key FAFSA language including: legal guardianship, parent and household size.
* "You" and "your" refer to the student, not the parents.
* Provide parent information if you or your child is considered a dependent student.
* Use the available resources, FAQs and FAFSA Information Center.
Mistake: Incorrect, incomplete or non-matching data
Tip: Complete the FAFSA online. Although you can complete the FAFSA on paper, it takes only 3-5 days to process when submitted electronically. The online version has built-in safeguards that identify and prevent many errors. Plus, the IRS Data Retrieval Tool can import information directly from your tax return. Logging in with a Federal Student Aid (FSA) ID will automatically load basic information (e.g., name, DOB, Social Security number), reducing the likelihood of typos. You even receive confirmation of receipt once you submit your online application.
Mistake: Not filing on time
Tip: Note the earlier FAFSA filing date and get the application submitted as soon as possible. The sooner you or your child gets started, the higher the likelihood of being awarded funds since many are distributed on a first-come, first-served basis.
Remember, students need to complete a FAFSA each year because eligibility does not carry over and can vary based on circumstances. Students can use the FAFSA Web Worksheet now to gather and organize the data needed for their application.
How to Fix Your Overfunded Retirement Account
Is socking away large sums in a tax-deferred retirement account ever a bad idea? It is when you exceed the annual IRS limits. And intentional or not, the penalties can be painful. Here's how overfunding occurs and what steps to take to fix the problem.
When do overfunding situations occur?
Overfunding retirement accounts happens more than you may realize. It can be the result of a job change that causes you to participate in the two different employer retirement plans. Sometimes people forget they made IRA contributions early in the year and do it again later. Others forget that the IRA limit is the total of all accounts, not per account. The rules are complicated. Traditional IRAs can't be contributed to after age 70½, while Roth IRA contributions are subject to income limits. Plus all contributions are predicated on having earned income.
The annual Roth and Traditional IRA contribution limit is $5,500 ($6,500 if age 50 or older). If you surpass this amount, you pay a 6 percent penalty on the overpayment every year until it's corrected, plus a potential 10 percent penalty on the investment income attributed to the overfunded amount.
"The fix:" If the overfunding is discovered before the filing deadline (plus extensions), you can withdraw the excess and any income earned on the contribution to avoid the 6 percent penalty. You will potentially owe 10 percent on the earnings of the excess contributions if you're under age 59½. You can apply the withdrawn contribution to the next year. If your issue is due to age (70½ or older for a Traditional IRA) or income limit (for a Roth IRA), consider recharacterizing your contribution from one IRA type to another.
The rules for correcting an overfunded 401(k) are a little more rigid. You have until April 15 to return the funds, period. The nature of the penalty is also different. The excess amount is taxable in the year of the overfunding, plus taxable again when withdrawn. So, you pay tax twice on the same amount. And in certain cases, overfunding a 401(k) could cause it to lose its qualified status.
No matter the cause, if you are in doubt about how to handle excess contributions, give us a call.
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