Tag: Income

2023 Year-End Tax Tips

January 4, 2024
Taxes, Uncategorized

Here are some things to consider as you weigh potential tax moves between now and the end of the year. Check out these year-end tax tips.

1. Defer income to next year

Consider opportunities to defer income to 2024, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

2. Accelerate deductions

You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as qualifying interest, state taxes, and medical expenses before the end of the year (instead of paying them in early 2024) could make a difference on your 2023 return.

3. Make deductible charitable contributions

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)

4. Bump up withholding to cover a tax shortfall

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. Time may be limited for employees to request a Form W-4 change and for their employers to implement it in time for 2023. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.

5. Save more for retirement

Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2023 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to traditional and Roth IRAs combined ($7,500 if you’re age 50 or older).* The window to make 2023 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2024, to make 2023 IRA contributions.

*Roth contributions are not deductible, but Roth qualified distributions are not taxable.

6. Take required minimum distributions

If you are age 73 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the withdrawals by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount that you failed to distribute as required (10% if corrected in a timely manner).

7. Weigh year-end investment moves

You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

To speak with an advisor about these tax tips or to learn more about CapSouth and what we do, visit https://capsouthwm.com/what-we-do/

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Exercise Financial Muscles to Get Financially Fit

March 6, 2023
Uncategorized

“Those who work their land will have abundant food, but those who chase fantasies have no sense.” This ancient advice from Proverbs illustrates the importance of financial fitness.

What is financial fitness? Well, we are all familiar with the term physical fitness. If pressed for a definition, we might define it in terms of our own ideas and circumstances.

When it comes to an explanation of financial fitness, the same applies. A lot may simply depend on the season you are in. Financial fitness might mean something different to someone who is single versus a couple with young kids, an empty-nester or a retiree. Even within those demographics, one’s perception could be colored by personal circumstances. Are you saddled with debt, debt-free, renting or a homeowner?

There are many ways to get ahold of your finances; you can increase earnings, lower spending, start saving more (short-term and longer-term) and implement debt management. For many, earnings are difficult to influence in the short-term. For most, tackling the spending side of the equation will yield the quickest results. Below we consider six principles that will help you get into financially fit shape wherever you find yourself in life.

6 principles for financial fitness

“An investment in knowledge pays the best interest.”—Benjamin Franklin

Set goals. If you don’t have concrete financial goals, both shorter term and longer term, reaching some level of financial fitness becomes much more problematic. Simply put – you don’t have a destination. You are financially adrift. As George Harrison has noted, “If you don’t know where you’re going, any road will take you there.”

Short-term goals you might consider: Establishing three to six months of cash in an emergency fund, saving for a down payment on a home or auto, or saving for a vacation.

Long-term goals you might consider: College savings for your kids or saving 10-15% of your income for retirement.

Do you know what ‘buckets’ your income lands in? How do you spend your income? If you aren’t tracking expenditures, you won’t have a holistic picture.

You might be surprised at how much you spend on eating out, on entertainment, and even on a daily habit of barista-prepared lattes.Unnecessary spending can be diverted into savings or paying off debt, especially high interest rate credit cards. Make timely payments. This will not only prevent you from accruing needless fees, but it will raise your credit score.

Once credit cards are paid off, channel the excess funds into savings. When you accomplish shorter-term goals, reward yourself. It need not be extravagant, but accomplishments should be celebrated.

Finally, you will struggle to follow a plan that is too draconian. Trim frivolous spending but leave some room for fun and hobbies.

Your lifestyle shouldn’t exceed your income. If it does, you are burning through savings or taking on debt, and your stress level will likely reflect it.

Excessive spending is not a path that leads to financial fitness. You want financial space in your life. You want ‘money at the end of the month,’ not ‘month at the end of your money.’ A budget is your blueprint that helps achieve this goal.

Invest wisely. Among various factors, your financial goals, both shorter and longer term, will greatly influence the proper mix of investments. A diversified portfolio that crosses the spectrum can reduce risk and enhance your return over the long run.

“Don’t look for the needle in the haystack. Just buy the haystack!” advises John Bogle, founder of Vanguard. In other words, diversify!

We are here to assist you with that. Our recommendations are tailored to your financial goals and your unique circumstances.

We avoid get-rich-quick schemes, which are usually nothing more than schemes minus the riches. Accumulation of wealth over a longer period is our goal. We believe it should be yours, too.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” says Paul Samuelson, the first American to win the Nobel prize in economics.

Enjoy your retirement. Many enter retirement after accumulating wealth over decades. They have learned how to save. For some, suddenly relying on that savings rather than earning income from labor seems like a daunting leap, one they may be ill-prepared to make. It doesn’t have to be that way.

Your financial plan continues to be a valuable resource in retirement. Your level of spending in retirement, both regular expenses and those planned extras along the way, along with how much risk you should be taking, when and how to draw Social Security and other sources of income…these factors and more should be considered within a sound financial plan.

Clients are often surprised when we encourage them to spend more money. As you work to identify your values and what is important to you, we want to see you realize those dreams and enjoy your life to the best of your ability. Your plan serves as an outline that arms you with knowledge of necessary guardrails and enhances your financial fitness.

Protect your assets. Do you have life insurance, health insurance, and personal liability insurance? Do you have a will and estate plan? Who are your beneficiaries? What happens if you become disabled? Do you have a trusted advisor to handle your affairs? What about a back-up?

If you own your home without a mortgage, do you have homeowners’ insurance? Surprise, not all do. If you rent, renters’ insurance is cheap. It’s a must-have item in our opinion.

Absorbing the fundamentals—the foundation for success

Those who fail to put sound principles into practice are like those who build their homes on sand. The rains come and the winds blow, and financial misfortune overtakes them.

Wisdom encourages us to build our homes on a solid financial foundation. Though the rains come and the winds blow (and they will), the house and foundation are designed to withstand financial storms. In the words of Maren Morris, “If the bones are good, the rest don’t matter!”

Every situation is unique. You may have mastered the fundamentals, and only need to apply the principles we highlighted selectively, plugging small holes and shoring up your finances. Or a more aggressive approach might be in order. Focus on one theme at a time. Some may apply. Others may not.

Having said all that, we never want to give the impression that you are all alone on a financial lifeboat. We are always here to assist.

To learn more about CapSouth Wealth Management and the services we offer, visit our website at www.capsouthwm.com or capsouthwm.com/what-we-do/

By: Scott F. McDowall, CFP® | Wealth Advisor

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Reverse Budgeting

March 10, 2022
Uncategorized

How Much Do I Spend in Retirement? Does it Really Matter? What if I could budget without…budgeting?

At CapSouth, it is our mission to help clients define and live their One Best Financial Life™. We challenge clients to consider their values and what is important to them, and then to develop actionable goals that we endeavor to help them achieve. This leads to the need to have a sound financial plan in place that considers a client’s assets and resources, and projects their probability of meeting those stated goals. We want clients to live with confidence in peace of mind, knowing that they are on track to live the life they want to live. Sometimes the focus of planning needs to be encouraging a client to scale back and pace their spending to allow for a more secure retirement. Other times that planning focus should be to urge a client to spend more, to travel, to take the family with them on vacations and make memories…to live their life more fully. In all cases, we are looking for the client’s confidence zone in their plan to serve as guard rails, so that they are not worried about running out of money, and on the other end, they are not leaving significant assets behind that are unplanned for.

More often than not, it seems, we meet with clients who do not have a clear idea of how much they spend. Particularly when a couple nearing retirement comes to us as a new prospect, a common answer is that they have just always lived within their means, or spent less than they made. How much you spend in retirement is very important in planning. Depending on your age at retirement and your assets, a seemingly small change in your annual spending can make a significant difference in the success of your plan. Many people plan for thirty years or more in retirement – a long time for inflation and market fluctuations to catch up with you and to affect your probability of meeting all your goals and objectives. We have invested in sophisticated software to factor in these variables for you, to allow you to simply think of how much you will need for retirement in today’s dollars. That does require us, though, to have an accurate number for that element. Whether we are planning for annual living expenses of $50,000 or $500,000, we need some assurance that this number is reliable.

But who wants to budget? You should see some of the facial expressions we get when we mention that “B word”! And if you are newly in, or approaching, retirement, how do you really know what your retirement lifestyle will be and what it will cost you? Further, trying to look at past or future spending can be even more difficult when you have varying sources of income throughout the year. Fear not, we have a solution. Reverse Budgeting. I believe in giving credit where it is due, so I will tell you this is not my concept; I learned it from CapSouth’s founder, Donald Bolden, years ago, and I have been recommending it to clients in retirement ever since.

Here’s how it works:

As best you can, come up with an idea of what you expect your basic living expenses to be in retirement. This should not include other specified goals in your plan such as travel, new cars, etc., but your basic living expenses of utilities, groceries, fuel, clothing, dining out, and the like. For illustration purposes, let’s say that number comes out to $5,000 per month.
Now, figure up what regular income sources you have such as Social Security, pensions, rental income, etc. For this number, let’s assume $3,000 per month.
Set up an “operating account” for your household and start it with a cushion balance of your comfort level. Let’s use $25,000. (Note: You and your spouse may decide to have two operating accounts; the concept still works.)
We would then work with you to establish a conservative Cash Management Account (CMA) among your accounts at Schwab, from which we would establish a recurring monthly transfer of the $2,000 per month to supplement your income and meet your expected expenses of $5,000 per month. We typically recommend this transfer being set up to occur on the 5^th of each month rather than the 1^st, to help track which deposit was for which month and to not allow weekends or holidays to confuse things.
What about those random sources of income throughout the year? Still employed and have a varying income? Receive additional bonuses? It is so easy to allow yourself to quickly spend that seemingly “extra” income without realizing it, giving yourself (and us) an inaccurate picture of the cost of your lifestyle. Under the Reverse Budgeting model, all variable income is deposited into the cash management account at Schwab, adding to the funds available to provide for your monthly transfers to your operating account.
It is likely no surprise to you that some months will cost more than others. You may have family visiting and spend more on groceries. You might have an anniversary and treat yourself to a nice dinner and some gifts to celebrate. Your refrigerator might need to be repaired or replaced. However, if we look back at this operating account in six months, a year, or more, we can get an idea of what you were really spending.

If that $25,000 cushion is down to $5,000, then we have a problem and need to make adjustments. We would review to see if there were a number of non-recurring, unexpected expenses during that period, or if life just cost more than you thought. We could increase the goal for living expenses in the plan to see if the new amount is still successful or what trade-offs need to be considered. If your regular monthly expenses are $6,000 or $7,000, then maybe you need to consider reducing those big trips each year from three down to two.

If that cushion is up to $50,000, we also have an inaccurate plan and need to make adjustments. We might encourage you to consider what goals you had for retirement spending that you haven’t been doing and challenge you to do what you said that you valued. It could also open the door for more travel, giving to charity or your family, upgrading your vehicle, buying a second home…whatever that looks like for you. If you are doing everything you want to, then we need to acknowledge that you are going to likely leave more behind than you might have thought, and we may need to review your estate plan to make sure it aligns with your wishes.

This is a simplified example, and we recognize that yours may be more complex. Life certainly will happen, and circumstances will change. Planning is never complete, and we continue to monitor, review, and update assumptions over time. Reverse Budgeting is a tool that can help to provide more confidence and reliability to your financial planning process, without having to focus on the “B word” of budgeting. We may not be able to tell where the money is going, but we (and you) can tell how much is needed to maintain your lifestyle.

To discuss this article further or to learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or call 800.929.1001 to schedule an appointment to speak with an advisor.

By: Scott McDowall, CFP®

Investment advisory services are offered through CapSouth Partners, Inc, dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.