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Tax Tip of the Week | The Worst Investment Strategies You Can Make from a Tax Standpoint October 31, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

The Worst Investment Strategies You Can Make from a Tax Standpoint

Needless to say, income taxes can be a big bite. On the other hand, the performance of your overall investment portfolio is obviously important. And, it may be good or bad. But, which is more important – saving income taxes or protecting the overall future of your portfolio by taking some chips off the table now. Do you cash-in your investment now knowing that income taxes may be as low as 0%, or as high as somewhere between 23.8% to 43%. Or, do you risk missing out on an investment gain by failing to cash in because you can’t bring yourself to write an “income tax” check? This answer varies by individual. Each person may have a VERY different tax situation in terms of other income and expenses, loss carryforwards, capital loss carryforwards, credit carryforwards, amount of estimated taxes paid, AMT, NIIT, additional Medicare tax, social security benefits – just to mention a few off the cuff. The other side of the coin is that individuals also have significantly different investment holdings. Both factors may be huge considerations – one cannot be simply ignored to the exclusion of the other.

The article that follows goes into greater depth and covers several examples of what may be considered poor tax planning.

1.     Selling stock too soon.  Capital gains on holdings of more than a year are taxed favorably at rates from zero for those in the lowest bracket to 23.8% for those in the highest individual rates. Efforts should be made, if possible, to retain stocks for at least one year to get the favorable rates.
2.    Not realizing losses when there are taxable gains.  In years that you have taxable gains, you should try to offset taxes as much as possible by realizing losses embedded in your portfolio and selling some of those shares.
3.    Having losses offset the wrong type of capital gains.  If there is a choice, it is better to offset short term gains with long term losses. This way, you will get the full benefit of the loss against income that would be taxed at regular rates. Offsetting long-term gains with short-term losses wipes out income that would have been taxed favorably. This strategy requires some advance calculations and planning.
4.    Not carrying forward capital losses.  Capital losses can offset capital gains with up to $3,000 of losses in excess of gains used to offset other income. Losses not deductible can be carried forward indefinitely until used up, at amounts of $3,000 per year.
5.    Thinking that a surviving spouse can utilize capital losses.  Carried-forward capital losses disappear at death and cannot be used by a surviving spouse who previously filed a joint return if those losses are not attributed to him/her.
6.    Not properly utilizing losses on options trades.  Those that trade in stock options and have losses can offset these against capital gains. If options are sold, income is not recognized until they are repurchased at a gain or expire. If the options are exercised, the amount received is added to the sale price of the shares. If you buy options and exercise them, their cost is added to the purchase price of the acquired shares.
7.    Unintentionally creating a wash sale.  People who trade and have losses and then reacquire shares in the same company within 30 days before or after selling them will have a “wash” sale and cannot recognize the loss. They need to be careful of falling into this trap. See point #8 below for a way to avoid the wash sale rules.
8.    Not harvesting losses.  People with tax losses can harvest these losses to be used currently or in future years without running afoul of the wash-sale rules. This is done by selling the loss shares and immediately buying shares in similar companies so that the market risk hasn’t changed. An example is to sell shares in a certain sector and buy the exchange traded fund (“ETF”) for that sector…hold it for 31 days…and then sell that and repurchase the prior shares that were sold. This puts your portfolio in the same position as before the first sale, but you have the losses to offset current or future capital gains. You can also do this with mutual funds and index funds, not just ETFs. Your risk is that the substituted funds or ETFs don’t perform similarly during that 31-day period as the individual stock you sold.
9.    Putting stocks in children’s names and then selling them.  People who put stocks in their children’s names will not get any tax benefit because, except for minimal amounts, the Kiddie tax will be at the same rates as the parents (As of 2018, Kiddie Tax is now taxed at the trust rates). But this can be done with other people you might be supporting, such as an elderly parent. Caution:  Watch for interactions on their returns that need to be factored in, such as triggering a tax on Social Security benefits.
10.    Owning publicly traded partnerships (“PTP”) in retirement accounts.  Certain types of income from PTPs are considered “unrelated business taxable income” and are subject to taxation even though they are in a tax-deferred or tax-advantaged account, such as an IRA, Roth IRA or 401(k). Also, owning PTPs in your own name can increase your tax preparation fee, since many of these entities issue multiple-page K-1s (up to 10 pages) rather than a single-page 1099.
11.    Buying tax-free government bonds when their earnings will result in higher tax payments. People who buy tax-free government bonds to avoid federal income tax can still be subject to the Alternative Minimum Tax if the bonds are for private activities…or returns from these bonds can trigger a tax on Social Security benefits. You have to run the numbers.
12.    Wrong asset location.  Many investors have stock in their tax-deferred accounts, and tax-exempt bonds in their own names. But income earned in a tax-deferred account, such as an IRA or 401(k), is taxed as ordinary income when distributed, regardless of the nature of the income in the IRA—this means capital gains and dividends would lose their beneficial rates. A better way is to have the tax-deferred account own corporate bonds and keep stock in your personal accounts. The overall yield will increase since corporate bonds pay higher interest than tax-exempt bonds, and the stock will provide capital gains and dividends that will be favorably taxed. Also, unrealized stock appreciation will never be taxed if owned at death.
13.    Not using retirement accounts for active trading.  Tax-deferred accounts should be used by active traders who generate extensive short-term gains or if they trade or sell options. Active traders who have IRAs or self-directed retirement accounts should not overlook doing this.
14.     Investing in mutual funds at the wrong time of the year.  Many mutual funds declare and pay their capital gains dividends for the year in December. Buying such shares in November or December could cause you to pay tax on money you are receiving back from what you just invested. You then pay tax on your own money rather than on earnings.

As I always say, taxes are complicated and need an understanding to not fall into traps or to have you engage in costly strategies. These strategies can help you avoid or minimize your taxes from investing transactions. It’s always wise to review your investment strategies with a tax adviser and not just your investment adviser.

Credit to Edward Mendlowitz, CPA, ABV, PFS (Money, September 15, 2017)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C Bradstreet, CPA

–until next week

Tax Tip of the Week | Keep your Tax Returns Forever? October 24, 2018

Posted by bradstreetblogger in : General, Tax Deadlines, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week
October 24, 2018

One of our more commonly asked questions is, how long do I have to keep my income tax returns?

Maybe, the key words in this question are “have to.” For practically all intents and purposes “have to” refers to the requirement of retaining three (3) years after filing them. The reasoning is that you and the IRS only have three (3) years to amend or change a return (typical statute of limitations).

BUT, there are some notable exceptions to the three (3) year rule:

(1) The IRS may go back six (6) years when a significant income amount (25%) has been omitted from an income tax return. They can also go back indefinitely if the IRS proves you filed a fraudulent tax return.

(2) What about the situation where the IRS says you failed to file a return? Let’s say the IRS asks for a return from four (4) years ago. Oops – you just shredded that one since you were diligently following the three (3) year rule. Who knows why the IRS did not receive the return. Maybe your neighbor hijacked it from your mailbox, possibly your postal carrier lost it or the IRS Center received it but simply missed processing it because the return was attached to another return and overlooked. It matters not, why the return was not shown as received by the IRS, because the burden is yours to prove the return was filed. Now you have to resurrect your records, prepare and file the tax return again or be classified forever and ever as a “non-filer.”

Bob Carlson, editor of Retirement Watch, contends that keeping your tax returns indefinitely may well be worth the hassle. “Once you show a return was filed, the statute of limitations is three (3) years, unless the fraud or six (6) year exceptions apply. With very few exceptions, the IRS won’t be able to question the details of the (older) returns. You can shred and dispose of those supporting records and keep a copy of the return.”

It may well be worth the hassle to store these old returns in an effort to gain just a little peace of mind.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C Bradstreet, CPA

–until next week

Tax Tip of the Week | Meetings (And Their Unintended Benefits!) October 17, 2018

Posted by bradstreetblogger in : General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week
October 17, 2018

Too much is written about wasted meetings. And, without a doubt, many meetings are a huge time suck! The worst meeting is having a meeting just because it is time to have another meeting. No one has their heart and soul in a meeting like that.

But, there is the other side of the coin. I am in a lot of freewheeling, brainstorming business meetings. Many of these sessions have a wide array of topics, many of them unplanned. I love these meetings because so many, really cool, unexpected, great ideas often just appear out of thin air.

Also, please note that rarely do I start a meeting without a written agenda. It not only gives me a starting point but also a place to deviate from. All business owners already have inside them the answers they are seeking. Sometimes all they need is an opportunity to say things out loud and having someone to ask the right questions. Often, these are the moments that open the right doors. So, don’t be afraid of not sticking to the agenda. The good stuff lies just off the beaten path.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Should a Parent or Student Take Out the College Loan? October 10, 2018

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week
October 10, 2018 

Per Forbes (June 13, 2018) who quoted Make Lemonade, “there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone.” These numbers equate to about one in every four American adults who are paying off student loan debt. Many of our clients are fighting this fight. I hope some of you find this article helpful.

“MANY FAMILIES plan to borrow money to pay for college. But some aren’t sure who should take out the loans – the parents or the student.

Considering that 42% of families borrowed money to help pay for college in the 2016-17 academic year, according to Sallie Mae’s “How America Pays for College 2017,” this is a decision that many people will face. More students take out loans than parents, but there is no set formula for making the determination. It is largely a personal choice, based on a family’s preferences and financial circumstances experts say, and the approach could change from year to year.

For those wrestling with the decision, here are a few things to consider:


Students generally should exhaust their federal student-loan eligibility before looking at other options, experts say. That’s because the interest rate on federal student loans is fixed regardless of a student’s credit history (or lack thereof), a cosigner isn’t required, and these loans are typically less expensive than a federal parent Plus loan or private student loans, says Debra Chromy, president of the Education Finance Council, a national trade association representing nonprofit and state-based higher-education finance organizations.

Federal student loans come with other benefits, such as the ability to apply for an income-driven repayment plan, in which loan payments are based on a percentage of the borrower’s discretionary income and family size. Some federal student loans may even be forgiven and discharged under certain circumstances. People who work for the government, at qualifying nonprofits or in teaching, for example, may qualify for loan forgiveness.

The problem is, students may not be able to cover the cost of college with federally backed student loans because there are limits on how much they can borrow annually and in total. (The limits depend on the student’s year in school and whether he or she is considered a dependent.)

If federal student loans won’t fully cover the cost of school (and a student has exhausted scholarship and grant opportunities), it may be appropriate to consider other types of loans. The first step is to decide how much responsibility a parent is willing – and able – to take on.


Not all parents are in a position to take on debt for their children – even if they would ideally like to cover all of their student’s education expenses. And if parents can’t afford to take on college debt they shouldn’t experts say, especially if it is going to take away from their retirement savings. While students have many other ways to pay for college, the same isn’t true of parents trying to save for retirement. And if parents eat up all their retirement money on education costs, they may be forced into the uncomfortable position of having to rely on their children for financial help later on in life.

“If you’re taking the loan as a parent only, you have to feel comfortable that you are paying it off with your earning power,” says Joe DePaulo, co-founder and chief executive of College Ave Student Loans, a private student-loan provider.

For parents who are comfortable taking on debt for college, here are a few options:

Federal Direct Plus loan for parents. With this option, parents can borrow money from the U.S. Education Department to cover any costs not covered by the student’s financial-aid package, up to the full cost of attendance. Parents generally need to start making payments as soon as the loan is fully disbursed, but they may request a deferment while their child is in school and for an additional six months after the student graduates; interest still accrues during this time. A Direct Plus loan made to a parent cannot be transferred to a child. Also, the interest rate may be considerably higher than some private options and there is an origination fee that comes off the top; that fee is 4.248% for loans between Oct. 1, 2018 and Sept. 30, 2019. Under certain conditions, a parent may be eligible to have part of the loan forgiven or discharged.

Home equity.   Parents may be able to take out a secured loan, such as a home-equity line of credit or home-equity loan, to pay education costs. With a home-equity line of credit, borrowers withdraw money as they need it, up to a certain amount. These loans often have a floating interest rate, and borrowers generally have 10 to 20 years to pay the money back. A home-equity loan, by contrast, is a one-time lump-sum loan that often comes with a fixed interest rate. The interest rates on home loans may be more favorable than other types of loans, but parents need to consider factors such as their home’s value, how much they owe, how much they need and whether they are comfortable putting up their home as collateral before proceeding, experts say.

Private parent loans. Private lenders such as Sallie Mae and College Ave Student Loans offer private student loans for parents. Typically, these loans are available to people with strong credit histories. Borrowers may be able to choose between a variable or fixed rate and determine a repayment option that works for them. On the downside, these loans could be more expensive than other alternatives, says Charlie Javice, chief executive of Frank Financial Aid, a company that assists families in the financial-aid process.


Students also have the option of taking on private student loans, which may be offered by state-based agencies, public companies, marketplace lenders or banks. Students generally can borrow up to their cost of attendance.

These kinds of loans usually require a cosigner – often the parent – because most college-age students don’t have the necessary credit history to obtain a loan on their own. With a cosigned loan, payment history – good and bad – will affect the credit record of both people on the loan.

Parents who cosign a private student loan need to consider the possibility that the child could be delinquent or default, Ms. Javice says. This can be a long-term concern since borrowers typically have about 10 years or more to pay off these loans. Several years out of school a child could lose a job, become an addict, go through a divorce or be unable to pay for some other reason, and the parent will be on the hook, Ms. Javice says. In some cases, the loan could become a stain on the parents’ credit record, which might affect their ability to borrow money to buy a home or a car, she says.

For some parents, the desire to encourage fiscal independence and responsible financial behavior in their children outweighs the fear that they could end up on the hook for the child’s debt.

They want their child named on the loan in the belief it will motivate the student to do well in school, finish on time and even spend the money more responsibly, says Mr. DePaulo of College Ave Student Loans. There are also parents who plan to cover the debt on the student’s behalf, but prefer the loan be in their child’s name to start the child’s credit history out on the right foot, he says.

There’s no hard and fast rule about which type of private loan – parent or student – will be the least expensive or most beneficial. Different loans have different rates, perks and requirements, so families should shop around and compare how the various options stack up, says Ms. Chromy of the Education Finance Council.

Families “should explore all their options so that they can make an informed choice that best reflects their needs,” she says.”

Credit given to Cheryl Winokur Munk
Wall Street Journal
Monday, July 9, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | When to Ignore the Crowd and Shun a Roth IRA Conversion October 3, 2018

Posted by bradstreetblogger in : Deductions, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week
October 3, 2018


This is a great article! Laura Saunders is right on point! Many of these factors could also apply to any spike in taxable income in a particular year. Enjoy!

“Switching your traditional individual retirement account to a Roth IRA is often a terrific tax strategy – except when it’s a terrible one.

Congress first allowed owners of traditional IRAs to make full or partial conversions to Roth IRAs in 2010.

Since then, savers have done more than one million conversions and switched more than $75 billion from traditional IRAs to Roth accounts.

The benefits of a Roth conversion are manifold. A conversion gets retirement funds into an account that offers both tax-free growth and tax-free withdrawals. In addition, the account owner doesn’t have to take payouts at a certain age.

While traditional IRAs can also grow tax-free, withdrawals are typically taxed at ordinary income rates. Account owners 70 ½ and older also must take payouts that deplete the account over time.

IRA specialist Ed Slott and Natalie Choate, an attorney in Boston, say that Roth IRAs also yield income that is “invisible” to the federal tax system. So Roth payouts don’t raise reported income in a way that reduces other tax breaks, raises Medicare premiums, or increases the 3.8% levy on net investment income.

Yet both Ms. Choate and Mr. Slott agree that despite their many benefits, Roth conversions aren’t always a good idea.

IRA owners who convert must pay tax on the transfer, and the danger is that savers will give up valuable tax deferral without reaping even more valuable tax-free benefits. For tax year 2018 and beyond, the law no longer allows IRA owners to undo Roth conversions.

Savers often flinch at writing checks for Roth conversions, and sometimes there are good reasons not to put pen to paper. Here are some of them.

Your tax rate is going down. In general, it doesn’t make sense to do full or partial Roth conversions if your tax rate will be lower when you make withdrawals.

This means it’s often best to convert in low-tax rate years when income dips. For example, a Roth conversion could work well for a young saver who has an IRA or 401(k) and then returns to school, or a worker who has retired but hasn’t started to take IRA payouts that will raise income later.

Those who will soon move to a state with lower income taxes should also consider waiting.

You can’t pay the taxes from “outside.” Mr. Slott advises IRA owners to forgo a Roth conversion if they don’t have funds outside the account to pay the tax bill. Paying the tax with account assets shrinks the amount that can grow tax-free.

You’re worried about losses. If assets lose value after a Roth conversion, the account owner will have paid higher taxes than necessary. Ms. Choate notes that losses in a traditional IRA are shared with Uncle Sam.

A conversion will raise “stealth” taxes. Converting to a Roth IRA raises income for that year. So, benefits that exist at lower income levels might lose value as your income increases. Examples include income tax breaks for college or the 20% deduction for a pass-through business.

Higher income in the year of a conversion could also help trigger the 3.8% tax on net investment income, although the conversion amount isn’t subject to this tax. The threshold for this levy is $200,000 for singles and $250,000 for married couples, filing jointly.

You’ll need the IRA assets sooner, not later. Roth conversions often provide their largest benefits when the account can grow untouched for years. If payouts will be taken soon, there’s less reason to convert.

You make IRA donations to charity. Owners of traditional IRAs who are 70 ½ and older can donate up to $100,000 of assets per year from their IRA to one or more charities and have the donations count toward their required payouts.

This is often a highly tax-efficient move. But Roth IRA owners don’t benefit from it, so that could be a reason to do a partial rather than full conversion.

Financial aid will be affected. Retirement accounts are often excluded from financial-aid calculations, but income isn’t. If the income spike from a Roth conversion would lower a financial-aid award, consider putting it on hold.

You’ll have high medical expenses. Under current law, unreimbursed medical expenses are tax deductible above a threshold. For someone who is in a nursing home or has other large medical costs, this write-off can reduce or even wipe out taxable income. If all funds are in a Roth IRA, the deduction is lost.

You think Congress will tax Roth IRAs. Many people worry about this, although specialists don’t tend to. They argue that Congress likes the up-front revenue that Roth IRAs and Roth conversions provide and is more likely to restrict the current deduction for traditional IRAs and 401(k)s- as was considered last year.

Other proposals to limit the size of IRAs and 401(k)s to about $3.4 million, to make non-spouse heirs of traditional IRAs withdraw the funds within five years, and to require payouts from Roth IRAs at age 70 ½ also haven’t gotten traction so far.”

Credit given to Laura Saunders, Wall Street Journal
Saturday/Sunday, August 18-19, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.