Income Tax Strategies for the Retiree Flashcards
Items not includable as taxable income
(1) Life insurance, and (2) Proceeds of accident and health insurance.
Taxability of Disability Insurance Benefits
(1) Employer-paid policy: the disability insurance is taxable to the employee and subject to FICA and FUTA for the first 6 months.(2) Individual owned and paid for: the benefit is not taxable, (3) Partly paid by employer and partly paid by employee: taxable partly to both
Cash vs Accrual Method of Accounting
(1) Cash:income is recognized when it is actually or constructively received, and deducted when paid. (2) Accrual: Income is recognized when it is actually earned, and deducted when earned.
Marginal vs. Average Income Tax
(1) Marginal Income tax is the rate of tax paid on the last dollar of taxable income. (2) Average Income Tax is the amount of tax divided by taxable income. (3) The average rate is always less than the marginal rate.
Capital Asset
(1) A capital asset is any asset held for investment or personal purposes. (2) This includes stocks, bonds, homes, or investment property
Cost basis
(1) The price paid for an asset, adjusted by costs incurred in buying, selling, or owning it.
Capital Gains and Losses
(1) Long-term capital gains are taxed at 20% at 39.6%, 15% for 25-35%, and 0 for 10-15%. (2) A net capital loss of up to $3,000 per year against ordinary income.
Medicare Contribution Tax
(1) 3.8% for MAGI above $250k for married filed jointly, $125k married filing separately, and $200,000 for single and head of household
Tax minimizing Strategies
(1) Tax avoidance: aims to produce economic return not subject to taxation, (2) Tax reduction: use deduction, credits, gifting, and contributions to deductible accounts, (3) tax deferral: cash value life insurance, deferred annuity, and IRA assets and (4) Income Conversion; the goal is to convert ordinary income into long-term capital gains
Tax-related issues not considered in managing a tax deferred account
(1) No taxes are paid on current earnings, and (2) the account managers need not differentiate between sources of investment return.
Tax related issues when managing a taxable account
(1) Taxable accounts can use a $3,000 per year to reduce taxable income, (2) taxable owners have the opportunity to take advantage of long-term capital gains. (3) Taxable accounts allow for preferential treatment of qualified dividends received.
Determining basis for mutual funds
(1) FIFO: least advantages during bull market, (2) Specific Identification: most advantageous in bull market. (3) Average cost: most common.
Dividend Taxation
(1) Cash (ordinary) dividend: 15-20% rate for most taxpayers, (2) return of capital dividends are generaly not taxable but reduce basis i the stock. If basis is reduced to zero, dividends are taxed as capital gains. (3) Stock dividend: does not constitute a taxable even, but dilutes the basis of the shares.
Taxation of zero-coupon bonds
The annual increase in value of the bond is taxed
Gain on the sale of principal residence
(1) Section 121 allows a qualified single taxpayer to exclude up to $250,000 in capital gains from taxation on the sale of his or her primary residence. (2) The exclusion is $500,000 for married couples.
