An Eye On Taxes And Your Portfolio
I learned something new today. Or maybe I received financial revelation. Regardless of what happened, I am about to share this combination income tax, portfolio building finding with my faithful radio listeners and article readers. “Do what the hell I tell you” takes on a new meaning and is a force to be reckoned with.
I was asked by a financial planner to review a new client’s income tax return for the previous year. In familiarizing my self with the situation, I found that the client has W-2 income, makes contributions to his 401K, owns a home and is paying mortgage interest, and even makes contributions that are non deductible to a traditional individual retirement account (IRA). This taxpayer is married with one child and is in the dreaded alternative minimum tax. What can be done for this poor man and his family?
At first glance, there appeared to be nothing that could be done. This guy has a W-2 and some pretty standard itemized deductions. He is in what I refer to as situational AMT. This is to say that he is in the alternative minimum tax due to his normal situation and not by special transactions. I was beginning to feel that this guy was just destined to stay in the AMT until Congress takes action. Starting to think about Roth IRA’s, I considered electing to forgo the 401K salary deferral and contribute to the Roth IRA instead. Remember, a taxpayer is ineligible to contribute to a Roth IRA is his adjusted gross income (AGI) is in excess of $150,000. However, one can contribute to a Roth IRA if it is part of an employer’s 401K, regardless of one’s AGI. This would increase income tax currently but would be beneficial later as earnings and contributions would not be taxable when withdrawn. This could even save tax money by allowing social security benefits to escape income tax. The problem with our guy is that the income sacrifice today is too great (as he would still be in the AMT). This taxpayer is clearly committed to saving by virtue of the fact that he is willing to make non deductible contributions to a traditional IRA.
What this really means is that this family has its entire savings invested in the stock market. Conventional wisdom tells us that here should be some investment that is not correlated with the stock market and its movements. Here’s where real estate comes into play. Real estate will provide for savings through investment and will provide for diversity away from the stock market. The money that was being contributed to the non deductible IRA can be used to finance the debt service on the real estate. The mortgage interest in this case will qualify as a tax deduction (second home qualification) along with the real estate tax paid. Of course, the hope is the real estate will appreciate over time. It is even possible for the family to make this investment a principal residence in the future (see my article regarding the addition of real estate to one’s portfolio). Here’s the icing on the cake. The additional mortgage interest deduction gets this family out of the alternative minimum tax. My additional thoughts are that the traditional IRA’s be converted to Roth’s as long as the new tax law lasts.
In closing, let’s remember that the most important part of adding any investment to a portfolio is its economic value. In this case, we are able to diversify away from the stock market, create a tax deduction that gets this taxpayer out of the AMT, and add something of economic substance to the portfolio. Wow, this has really been a good day in the world of income tax and financial planning. I hope all is right with your financial planning. Always feel free to ask any questions and you are always invited to listen to the most complete business program on radio, “Better Business”, Saturday mornings at 10ET on WBIS AM 1190. “You can do what ever you want, but my way is better. Save yourselves and do what the hell I tell you”!
I was asked by a financial planner to review a new client’s income tax return for the previous year. In familiarizing my self with the situation, I found that the client has W-2 income, makes contributions to his 401K, owns a home and is paying mortgage interest, and even makes contributions that are non deductible to a traditional individual retirement account (IRA). This taxpayer is married with one child and is in the dreaded alternative minimum tax. What can be done for this poor man and his family?
At first glance, there appeared to be nothing that could be done. This guy has a W-2 and some pretty standard itemized deductions. He is in what I refer to as situational AMT. This is to say that he is in the alternative minimum tax due to his normal situation and not by special transactions. I was beginning to feel that this guy was just destined to stay in the AMT until Congress takes action. Starting to think about Roth IRA’s, I considered electing to forgo the 401K salary deferral and contribute to the Roth IRA instead. Remember, a taxpayer is ineligible to contribute to a Roth IRA is his adjusted gross income (AGI) is in excess of $150,000. However, one can contribute to a Roth IRA if it is part of an employer’s 401K, regardless of one’s AGI. This would increase income tax currently but would be beneficial later as earnings and contributions would not be taxable when withdrawn. This could even save tax money by allowing social security benefits to escape income tax. The problem with our guy is that the income sacrifice today is too great (as he would still be in the AMT). This taxpayer is clearly committed to saving by virtue of the fact that he is willing to make non deductible contributions to a traditional IRA.
What this really means is that this family has its entire savings invested in the stock market. Conventional wisdom tells us that here should be some investment that is not correlated with the stock market and its movements. Here’s where real estate comes into play. Real estate will provide for savings through investment and will provide for diversity away from the stock market. The money that was being contributed to the non deductible IRA can be used to finance the debt service on the real estate. The mortgage interest in this case will qualify as a tax deduction (second home qualification) along with the real estate tax paid. Of course, the hope is the real estate will appreciate over time. It is even possible for the family to make this investment a principal residence in the future (see my article regarding the addition of real estate to one’s portfolio). Here’s the icing on the cake. The additional mortgage interest deduction gets this family out of the alternative minimum tax. My additional thoughts are that the traditional IRA’s be converted to Roth’s as long as the new tax law lasts.
In closing, let’s remember that the most important part of adding any investment to a portfolio is its economic value. In this case, we are able to diversify away from the stock market, create a tax deduction that gets this taxpayer out of the AMT, and add something of economic substance to the portfolio. Wow, this has really been a good day in the world of income tax and financial planning. I hope all is right with your financial planning. Always feel free to ask any questions and you are always invited to listen to the most complete business program on radio, “Better Business”, Saturday mornings at 10ET on WBIS AM 1190. “You can do what ever you want, but my way is better. Save yourselves and do what the hell I tell you”!
I learned something new today. Or maybe I received financial revelation. Regardless of what happened, I am about to share this combination income tax, portfolio building finding with my faithful radio listeners and article readers. “Do what the hell I tell you” takes on a new meaning and is a force to be reckoned with.
I was asked by a financial planner to review a new client’s income tax return for the previous year. In familiarizing my self with the situation, I found that the client has W-2 income, makes contributions to his 401K, owns a home and is paying mortgage interest, and even makes contributions that are non deductible to a traditional individual retirement account (IRA). This taxpayer is married with one child and is in the dreaded alternative minimum tax. What can be done for this poor man and his family?
At first glance, there appeared to be nothing that could be done. This guy has a W-2 and some pretty standard itemized deductions. He is in what I refer to as situational AMT. This is to say that he is in the alternative minimum tax due to his normal situation and not by special transactions. I was beginning to feel that this guy was just destined to stay in the AMT until Congress takes action. Starting to think about Roth IRA’s, I considered electing to forgo the 401K salary deferral and contribute to the Roth IRA instead. Remember, a taxpayer is ineligible to contribute to a Roth IRA is his adjusted gross income (AGI) is in excess of $150,000. However, one can contribute to a Roth IRA if it is part of an employer’s 401K, regardless of one’s AGI. This would increase income tax currently but would be beneficial later as earnings and contributions would not be taxable when withdrawn. This could even save tax money by allowing social security benefits to escape income tax. The problem with our guy is that the income sacrifice today is too great (as he would still be in the AMT). This taxpayer is clearly committed to saving by virtue of the fact that he is willing to make non deductible contributions to a traditional IRA.
What this really means is that this family has its entire savings invested in the stock market. Conventional wisdom tells us that here should be some investment that is not correlated with the stock market and its movements. Here’s where real estate comes into play. Real estate will provide for savings through investment and will provide for diversity away from the stock market. The money that was being contributed to the non deductible IRA can be used to finance the debt service on the real estate. The mortgage interest in this case will qualify as a tax deduction (second home qualification) along with the real estate tax paid. Of course, the hope is the real estate will appreciate over time. It is even possible for the family to make this investment a principal residence in the future (see my article regarding the addition of real estate to one’s portfolio). Here’s the icing on the cake. The additional mortgage interest deduction gets this family out of the alternative minimum tax. My additional thoughts are that the traditional IRA’s be converted to Roth’s as long as the new tax law lasts.
In closing, let’s remember that the most important part of adding any investment to a portfolio is its economic value. In this case, we are able to diversify away from the stock market, create a tax deduction that gets this taxpayer out of the AMT, and add something of economic substance to the portfolio. Wow, this has really been a good day in the world of income tax and financial planning. I hope all is right with your financial planning. Always feel free to ask any questions and you are always invited to listen to the most complete business program on radio, “Better Business”, Saturday mornings at 10ET on WBIS AM 1190. “You can do what ever you want, but my way is better. Save yourselves and do what the hell I tell you”!
I was asked by a financial planner to review a new client’s income tax return for the previous year. In familiarizing my self with the situation, I found that the client has W-2 income, makes contributions to his 401K, owns a home and is paying mortgage interest, and even makes contributions that are non deductible to a traditional individual retirement account (IRA). This taxpayer is married with one child and is in the dreaded alternative minimum tax. What can be done for this poor man and his family?
At first glance, there appeared to be nothing that could be done. This guy has a W-2 and some pretty standard itemized deductions. He is in what I refer to as situational AMT. This is to say that he is in the alternative minimum tax due to his normal situation and not by special transactions. I was beginning to feel that this guy was just destined to stay in the AMT until Congress takes action. Starting to think about Roth IRA’s, I considered electing to forgo the 401K salary deferral and contribute to the Roth IRA instead. Remember, a taxpayer is ineligible to contribute to a Roth IRA is his adjusted gross income (AGI) is in excess of $150,000. However, one can contribute to a Roth IRA if it is part of an employer’s 401K, regardless of one’s AGI. This would increase income tax currently but would be beneficial later as earnings and contributions would not be taxable when withdrawn. This could even save tax money by allowing social security benefits to escape income tax. The problem with our guy is that the income sacrifice today is too great (as he would still be in the AMT). This taxpayer is clearly committed to saving by virtue of the fact that he is willing to make non deductible contributions to a traditional IRA.
What this really means is that this family has its entire savings invested in the stock market. Conventional wisdom tells us that here should be some investment that is not correlated with the stock market and its movements. Here’s where real estate comes into play. Real estate will provide for savings through investment and will provide for diversity away from the stock market. The money that was being contributed to the non deductible IRA can be used to finance the debt service on the real estate. The mortgage interest in this case will qualify as a tax deduction (second home qualification) along with the real estate tax paid. Of course, the hope is the real estate will appreciate over time. It is even possible for the family to make this investment a principal residence in the future (see my article regarding the addition of real estate to one’s portfolio). Here’s the icing on the cake. The additional mortgage interest deduction gets this family out of the alternative minimum tax. My additional thoughts are that the traditional IRA’s be converted to Roth’s as long as the new tax law lasts.
In closing, let’s remember that the most important part of adding any investment to a portfolio is its economic value. In this case, we are able to diversify away from the stock market, create a tax deduction that gets this taxpayer out of the AMT, and add something of economic substance to the portfolio. Wow, this has really been a good day in the world of income tax and financial planning. I hope all is right with your financial planning. Always feel free to ask any questions and you are always invited to listen to the most complete business program on radio, “Better Business”, Saturday mornings at 10ET on WBIS AM 1190. “You can do what ever you want, but my way is better. Save yourselves and do what the hell I tell you”!
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