According to a new survey from online tax preparation company TaxSlayer, 57 percent of Americans are not confident about their understanding of the tax code and ways their investment portfolio impacts their tax burden. Tim Baker, CFA of Metric Financial in Simsbury is trying to reduce that number to zero during this tax season by educating consumers about new tax laws and legislation that affects investments so that everyone can mitigate their tax liability, while increasing their bottom line.
“A big mistake that people make during tax season is not consulting with a financial advisor about their monetary position and overall investment strategy before they meet with their accountant,” said Baker. “Nine times out of 10, there are financial ways to offset one’s income and select investments that offer the maximum tax savings before an accountant files their tax return with the IRS.”
Baker notes that an individual’s financial advisor and accountant should be working in close connection all year round, but especially during tax time, for the mutual client’s ultimate fiscal benefit.
Baker offers the following answers to top ten questions for taxpayers this tax season:
1. What tax bracket am I in? There are 7 distinct tax brackets that an individual may fall under based on their income; however, a big misconception is that people think that they are only taxed in one percentage bracket. In reality, the IRS tax code is tiered, so a person might be taxed at 12% for a portion of their income up to a certain dollar level, as well as simultaneously taxed at 22 % if they earn a greater amount of income. A financial advisor and accountant can help determine a person’s marginal tax rate, which offers a more accurate depiction of their overall tax liability.
2. Why am I paying capital gains taxes on mutual funds if I didn’t sell anything? Every year, investors with mutual funds in non-retirement accounts receive a 1099 with capital gains that they have to pay taxes on even if they didn’t sell anything. Exchange Traded Funds (ETFs), which also have lower costs and are just as diversified, tend not to distribute the same capital gains, offering people savings.
3. Are you taking advantage of any tax loss harvesting in 2022? An accountant can offset any capital gains with losses, while taking a $3,000 deduction in losses due to income. That carries forward, so if a person has $6,000 in losses in 2022, he or she can take $3,000 against income this year and $3,000 again next year.
4. Do I need to take a mandatory IRA distribution this year? If a person turned 72 this year, they do not have to take a required minimum distribution from their IRA. The recent SECURE Act 2.0 changed the age to 73 and in 2033, the age will increase to 75. This does not change your required minimum distributions of an inherited IRA.
5. Should I open a 529 plan for my child’s future college education? Many parents worry about saving in a 529 plan because of the penalties if the money is not withdrawn for educational expenses specifically. The SECURE Act 2.0 changed that too. Starting in 2024, there are provisions for moving unused 529 balances to a Roth IRA. There are nuances to this, so consult a financial advisor or accountant.
6. Should I max out my pre-tax retirement plan contributions? It depends. Remember to think about what it will look like when you take withdrawals in retirement. Anything coming out of retirement accounts will be taxable as income. On the other hand, anything you take out of a traditional brokerage account will only incur capital gains. Long-term capital gains generally are taxed at a lower rate than income, so it’s a good idea to spread your investments around.
7. I own my own business, so I don’t have a 401(k) – how do I save for retirement? Many business owners use a Simplified Employee Pension or SEP. This allows one to invest funds for retirement and contributions are tax-deductible. There is a very specific formula for what the IRS will allow you to contribute, so be sure to consult with a tax accountant. If you have employees, a SIMPLE IRA or SIMPLE 401(k) might be better. A good financial advisor can help you determine what fits best.
8. Can I make a contribution to a Roth IRA? If you are married and filing jointly, the rule in 2023 is that your eligibility begins to phase out when you and your spouse make more than $218,000. If you are single, it begins to phase out at $153,000. Be very careful if you are married and filing separately because you cannot contribute to a Roth IRA if you make more than $10,000.
9. My company offers both a Roth and traditional version of a retirement plan. Which should I contribute to? Again, it’s important to think about what things will look like in retirement when you withdraw. A Roth is after-tax now and tax-free at withdrawal. A traditional retirement plan is pre-tax now and taxable at withdrawal. A person needs to ask when they will be in a higher tax bracket- now or in retirement?
10. I need money to repair my home. Can I borrow against the value of my IRA? No, a person can only borrow against an employer retirement plan. Once a year, an employee can withdraw money from his or her IRA; however, they need to put it back within 60 days. If it is not returned in 60 days, it will become taxable income and, if you are under 59 ½, you will pay a 10% penalty on top of the taxes.
“Americans work hard for their money and the job of any good financial advisor and accountant is to help preserve and grow it,” adds Baker. “My main mission is to educate people on the tax ramifications of each investment option, so that they can keep more of their returns, reduce payouts and improve their financial picture over time.”
Founded in 2018, Metric Financial, LLC is registered as an Investment Adviser with the State of Connecticut. Led by Chartered Financial Analyst Timothy Baker, the firm provides investment management services, comprehensive financial planning, debt management, estate planning, retirement planning, risk management and tax planning, among others. Baker conducts frequent educational sessions and public seminars on a variety of financial topics of interest to schools business groups and associations. For more information, please visit www.metricfin.com or call 860.256.5895.
PHOTO: Chartered Financial Analyst Timothy Baker is the principal owner of Metric Financial, a Connecticut-based investment management and financial planning firm that offers educational sessions and public seminars on creating and preserving wealth for one’s retirement. Baker and his team work closely with accountants to mitigate his clients’ tax liability and increase their bottom line.