Is retirement headed your way?

For many taxpayers, retirement choices often include relocating to a warmer year-round climate.  But what about tax considerations?  Currently nine states have no state income tax requirements: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

However, if relocating to a “tax-free” state, do your homework first.  States generate operating revenues somewhere, so it would also be wise to check on the state’s sales tax and property tax rates as well before making any “tax efficient” relocation decisions.

On the other side of the spectrum, the five states with the highest marginal personal income tax rates are: California (12.3%), Hawaii (11.0%), New York (10.9%), New Jersey (10.75%), and Oregon (9.9%).


Review Your Year-to-date Paystubs

Heading into the last quarter of 2022, October is the perfect time of year to review your year-to-date paystubs in order to maximize pre-tax benefits and other withholding items. Examining your year-to-date paystub early in the final quarter of the year gives you a chance to make any needed adjustments before the opportunity passes by if you wait until the end of December.

Are you on target to fund the maximum allowed 401k or 403b salary deferral amount?

For 2022 the maximum salary deferral is $20,500.  Plus, if you are age 50 or older you are eligible to fund an additional “catch-up” amount of $6,500 making your total allowed contribution for 2022 $27,000.  Turning age 50 at any time within the year allows you to fund the “catch up” provision as early as January 1 of the current year.  You don’t need to wait until the actual day of turning 50 to begin funding the additional $6,500.

Did you switch jobs during the year and fund a 403b or 401k at each place of employment within the calendar year?

The 401k/403b max salary deferral is the total allowed salary deferral for employees from all places of employment during the calendar year.  You are not allowed to fund the $20,500/$27,000 max at each separate place of employment.

Does your employer offer either a pre-tax childcare or medical Flexible Spending Account (FSA)?

Don’t forget, FSAs offered by your employer are “use it or lose it”.  If you are funding an FSA for childcare or medical expenses, check the balance available to be sure that the funds are fully used by year-end.  Unless your employer has a grace period feature, your unused funds at year end are forfeited back to the employer and not eligible to be carried over into the following year.  For a medical FSA, the max contribution limit for 2022 is $2,850 per individual.  For a dependent care FSA, the max contribution limit for 2022 is $5,000 per household ($2,500 if married filing separately).

Are you taking advantage of a Health Savings Account (HSA), if offered by your employer?

If your health insurance plan is a “high deductible health plan” you are allowed to fund an HSA.  Funding is made with pre-tax dollars.  For 2022, the max contribution limits are $3,650 for self-only coverage and $7,300 for family coverage.  If you are age 55 or older you can also fund an additional $1,000 per year.  Plus, if your spouse is age 55 or older, he/she can establish a separate HSA and fund an additional $1,000 catch-up contribution to that account making your total family HSA contributions for 2022 $9,300.  The major difference between the medical FSA and an HSA is that the medical FSA is “use it or lose it” at year-end while the HSA works more like an IRA where the unused funds remain in the HSA continuing to grow tax-free and available to be used for qualified medical expenses in future years.

Did you receive a large bonus or have some other significant compensation payout during the year?

The “federal supplemental withholding tax rate” is 22% on special compensation payments to employees.  Typically for bonuses and other special compensation payments paid to you by your employer, federal taxes withheld from the payment are 22% of those taxable wages.  If you are in a higher federal tax bracket than 22% (which is often the case), then federal taxes withheld will be too low and you may find yourself owing taxes next April.  And if you are in a 35% or 37% federal tax bracket and the payout is significant, then your federal tax balance owed the following April tax filing date could be significant as well.  A good idea would be to track down any paystubs reflecting special compensation amounts to see how federal taxes were withheld.


Deadline Oct 17 for 1040 returns on extension

Don’t forget!

Your 2021 tax return needs to be filed by Monday, October 17. With the partnership and S-Corp extension filing date of 9/15 behind us, taxpayers that were waiting on late K-1’s should have received them by now.

Please contact your Tax Preparer soon if you still need to finish up your 2021 personal tax returns.

Are you a Hurricane Ian victim? 

Hurricane Ian victims that have their personal tax returns on extension now have until Feb 15, 2023 to file. IRS extended the deadline from Oct. 17, 2022. More here: * Visit their disaster relief page for more help.


With Stock Markets Down This Year Consider Converting Retirement Accounts To A ROTH IRA

With the stock markets well below recent all-time highs, now might be a great time to consider converting your IRAs and other retirement accounts to a Roth to benefit with decades of tax-free growth.

  • Start by figuring out how much post-tax dollars you have in your IRAs as of 12/31/21. If you’ve been tracking these IRA contributions correctly, you can find the total on the Form 8606 attached to your personal tax returns. If your Form 8606 is incorrect, try to recreate the post-tax contributions within your IRAs as best you can.
  • Next, tally up the value of all of your IRAs. Include your traditional IRAs, rollover IRAs, SEP IRAs and SIMPLE IRAs while omitting money already held in your Roth IRAs. Also exclude the value of all your non-IRA retirement accounts such as your work 401Ks, 403Bs, 457s, Keogh Plans, Profit Sharing Plans, and Solo 401ks since those accounts are employer sponsored retirement plans instead of Individual Retirement Accounts (IRAs).
  • Lastly, divide the total post-tax contributions sitting in your IRAs by the total value of all of your non-Roth IRAs to figure the percentage of the IRAs converted that will NOT be taxed.

 For Example:

 Let’s say you have $100k in your IRAs of which $25k represents post-tax contributions. In this scenario, 75% of each dollar converted will be taxed. Convert all $100k and you would pick up $75k of additional income. Convert just $20k and expect to pick up $15k ($20k * 75%) of additional income even through the amount converted is less than the total post-tax contributions in your IRA.

How to Minimize Taxes on a Roth Conversion

Have you made non-deductible contributions into an IRA over the years but are still reluctant to convert the IRA to a Roth due to the total value of your IRAs? One way around this pitfall is to first roll a chunk of your IRAs into your employer sponsored retirement accounts or your Solo 401k, and then convert the remaining balance to your Roth. Doing so reduces the denominator, and therefore, makes the Roth conversion much more tax efficient.

First check that your employer’s retirement plan accepts IRA rollover. If so, set up for a direct rollover from your IRAs into that 401k or 403b account, making it easier for the IRS to track that the money taken from your IRA was in fact deposited into your work retirement plan.

To figure out the amount to roll into your employer’s plan, look at the total post-tax contributions as reflected on your 2021 Form 8606. Make sure to also factor in 2022 non-deductible IRA contributions made. You then figure the maximum amount to roll out of your IRA by subtracting the total post-tax contributions available from the total of all your IRAs.

 For Example:

 Let’s say you have $100k in your IRAs of which $25k represents post-tax contributions. If you don’t want to pay any taxes on the Roth Conversion, first roll $75k out of your IRAs into your 401k or 403b plan at work or Solo 401k if you are self-employed. That will leave only $25k of post-tax dollars in your IRA that you can now convert tax-free into your Roth. (Please note that a Solo 401k is different from a SEP IRA.)

Maybe take this opportunity to convert a few extra dollars to your Roth. Yes, you will owe some taxes for 2022, but that will provide you with more money growing tax-free within your Roth until withdrawn.

One more warning – please be careful to review the investment options available within your work retirement plan as well as the underlying fees associated with those funds. Rolling money from an IRA held in a high quality, low-cost environment into a platform with a poor selections of mutual funds or with funds that come with high fees could easily cause this strategy to backfire the longer the money sits in those poor performing funds.