Which States Do Not Tax Retirement Income?

Choosing where to retire will be one of the most important decisions you make. One factor that impacts this decision is local taxation law. How much your retirement income is taxed may have you considering a move in your golden years. After a little research, you will soon learn that local taxation varies greatly from state to state. In fact, there are some states that don’t tax retirement income at all. Here are a few financial factors you should include when choosing where to put down roots in your retirement years.

States That Don’t Tax Personal Income

If you want to maximize you savings during retirement, there are currently nine states that don’t tax retirement or personal income. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have income taxes. However, New Hampshire and Tennessee do tax dividends and interest for the time being. But, both states have plans to phase out these taxes. Tennessee will see these changes in 2021 while New Hampshire will phase it out by 2025.

States That Don't Tax Income

 

Taxation of Retirement Income by State

The taxation laws and treatment of retirement income in the remaining states vary greatly. Therefore, you should familiarize yourself with the local laws before you make any decisions.  Some states will allow partial exemptions for pensions and social security income. However, others will tax the entire amount of your retirement income. If you are unsure how local tax laws in your state apply to Social Security benefits, you can read more here.

Pension Exemption

If you live in Illinois, Mississippi, or Pennsylvania, then there is some good news! These states exempt all your pension income from taxes. Although, this 0nly applies to qualified individuals.

Partial Exemptions and Credits

Another common structure for tax on retirement income is to allow a partial exemption or provide a credit for part of your pension income. If you settle in one of the following states, you will receive some relief since these states don’t tax your full retirement income: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia and Wisconsin.

An alternative structuring in other states is when pension income is tax included. This applies to residents of Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Vermont and West Virginia.

The Most Tax-Friendly States for Retirees

Tax Friendly States

In 2019, Kiplinger compiled a list comparing the tax burden for retirees state by state. To complete the analysis, they used the same hypothetical household as the constant variable.  The purpose is to compare how the burden of income, property and sales tax varied across the country.

The rankings are based on a family of four with a yearly income of $150,000 and $10,000 in dividends. Additionally, Kiplinger included $10,000 in mortgage interest on a home valued at $400,000. It then applied each state’s local income tax to these figures. Based on these metrics, here are the top 10 states that are the most tax-friendly towards retirees:

1. Wyoming
2. Nevada
3. Delaware
4. Alabama
5. South Carolina
6. Tennessee
7. Mississippi
8. Florida
9. Georgia
10. Arizona

Keep in mind that these rankings are based on a hypothetical model. Although, it may be different for your personal financial situation. If you are considering a move in your retirement years, be sure to do your homework. Lastly, don’t be afraid to seek out professional advice to help you plan for retirement. Choosing where to retire is a huge decision. Moreover, it is not one that should be made lightly. Moving to one of the states that don’t tax retirement income could help stretch your retirement savings through your golden years.

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How Should Fringe Benefits Be Taxed?

Employers entice new applicants and even loyal employees by offering a great total compensation package. In addition to basic pay or salary, fringe benefits, or commonly known as perks, are also being offered. Of course, like basic benefits, the Form W-2 must include taxable fringe benefits that are subject to withholding taxes unless made exempted by the law.

But how should fringe benefits be taxed? Learn more about taxable and non-taxable fringe benefits and how they’re calculated by reading below.

Non-taxable Fringe Benefits 

Generally, anything that’s given by employers to employees should be taxable. However, there have been exemptions made to help employees save as much of their net pay as possible to enjoy working long-term in a company and improve their quality of life.

Fringe benefits come as taxable (tax amount reduced on the employee’s pay) or as non-taxable. A long IRS list of non-taxable benefits includes the following examples:

  • Health Insurance: Company-provided health insurance are not taxable.
  • Life Insurance Coverage: Protects the employee’s beneficiaries from the financial burden in time of the employee’s death.
  • Disability Insurance: Provides disability insurance coverage to disabled employees.
  • Dependent Care Assistance: Child care assistance for full-time employees through bonuses or on-premise daycare center.
  • Educational Assistance: Training courses or seminars that employees undergo to enhance knowledge and skills.
  • Achievement Awards: Gifts or low-value cash incentives for a length of service employees.
  • Commuting Benefits: Use of company vehicle when under duty.
  • Supplemental Unemployment Benefits: Discretionary unemployment benefits given to workers that are fired.
  • De minimis or Minimal Benefits: These benefits are low-value fringe benefits such as holiday, wedding, and birthday gifts, traditional awards, and theater and event tickets.
  • Cafeteria Plans: It includes occasional meal plans, such as meal allowance for overtime employees.
  • Working Condition Fringe Benefits: A good example is a laptop or computer provided to an employee to effectively and efficiently work at home.

When Fringe Benefits Become Taxable 

While common fringe benefits are exempted from being taxed, the IRS specifies limitations.

Here are some scenarios of how fringe benefits are being taxed:

  1. Excessive Mileage Reimbursements

When payments made to a worker for business-related driving exceed the IRS’s standard mileage rate, it becomes a taxable income.

  1. Bicycle Commuting

Employers could provide up to USD$20 a month of bicycle commuting benefit to employees until 2018. The Tax Cuts and Jobs Act makes bicycle commuting benefit taxable from 2018 through 2025.

  1. Moving or Relocation Expenses

Until 2018, workers who moved 50 miles for their current job could receive tax-free reimbursement for moving expenses. The Tax Cuts and Jobs Act considers this benefit taxable until 2025. Thus, any reimbursement of expenses for workers moving less than 50 miles is always taxable.

  1. Excessive Education Reimbursements

Educational assistance payments not related to the job or exceed the allowable exclusion of the IRS are taxable.

  1. Working Conditions Benefit

A company car or mobile phone used outside of business is taxable (however, these benefits could also be eligible as non-taxable de minimis). Employees must meet the required documentation to apply for the deduction.

  1. Clothing

Uniform or clothes given to employees suitable for streetwear are a taxable fringe benefit.

  1. Awards and Prizes 

All cash awards and prizes are taxable unless donated to charity. Also, non-cash awards and prizes are taxable unless given to charity or nominal in value.

Deferred Compensation Plans

President Donald Trump recently issued a Department of Treasury directive to allow payroll tax deferral from September 1, 2020, to December 31, 2020. The deferral applies to the Social Security aspect of employee wages, which is a basic employee benefit. It means that the tax for Social security is not collected or postponed. So, can fringe benefits be deferred, too?

With a deferred compensation plan, a portion of an employee’s pay is withholding until a specified period, usually during retirement. It means that the lump-sum money owed to an employee is paid out on the specified date. Some good examples of deferred compensation include employee stock options, pensions, and retirement plans.

Participants can withdraw deferred compensation funds penalty-free with a 401(k)-retirement plan after 59½ of age.

The IRS Rule of 55 has a loophole because it allows anyone between 55 to 59½ years old to withdraw funds without penalty or tax if they were laid off or quit their job.

Employer Tax Deductions

When starting a business, you should consider studying business taxes. Business taxes come in different forms, and it would be beneficial to know how a business owner or employer can reduce business tax while benefiting employees by providing fringe benefits.

Employer tax deductions may apply with the following:

  • Business-related Automobile Mileage: This refers to any travel made for business-related purposes. The IRS allows the straight-mileage approach, which multiplies the cents-per-mile permitted by the IRS by the number of miles attributed to the vehicle’s business use at 40.5 cents in 2006.

For instance, a small business owner who drove 2,000 miles at .500 per mile would gain a deduction of USD$1000.

  • Entertainment and Travel: The costs for entertainment and travel are only tax-deductible if they’re directly related to business. If they include a personal element, the deductible expenses are only 50 percent.
  • Depreciation: This tax-deductible business expense is under the IRS Code’s Section 179. Small business owners can take advantage of depreciation by writing off the first USD$18,000 of any business-used equipment purchased.
  • Employee Benefits: Fringe benefits are usually tax-deductible, such as pension and retirement plans for small business owners and self-employed individuals. Health insurance can be tax-deductible, too.

Under the IRS Code Section 105, a small business owner can create a medical reimbursement plan wherein the business owner and the spouse can be covered. The entire bill becomes a tax-deductible business expense.

Conclusion

As discussed, fringe benefits that are offered as a bonus to employees from employers are considered taxable income. The Internal Revenue Service (IRS) has a specific list excluding some benefits from being taxed, such as thee minimum and non-cash gifts in nominal value.

Fringe benefits have tax benefits for both employees and employers. But, of course, the way they are taxed depends on the usage and value. Deferred compensation plans provide tax benefits to employees since the amount of net pay is decreased, and the employee will only pay tax upon withdrawal of funds. On the other hand, to reduce business taxes, employers can have tax deductions with the fringe benefits they provide to employees.

 

Should You Roll Over A Retirement Plan Distribution

retirement plan redistribution

Different circumstances arise that call for one to rollover their retirement plan. You may be left with little time and tough decisions to make. The decisions you make on whether you rollover your retirement plan and how you rollover your retirement plan distribution can have profound effects on several areas of your life, including how much you are taxed. Whether or not you rollover your distribution is not a decision to be taken lightly.  Continue reading

Tax Efficiency Currency Spread Betting

spread betting

When you start any sideline or freelance business, one of the most important issues to deal with is handling your income and paying your taxes. The differences are varied from country to country in how to pay your taxes and what income is even subject to being taxed. It pays to educate yourself about the best ways to shelter what income you can from the taxman, legally, of course. That knowledge and skill set may be the most valuable you acquire as you explore ways to trade online.

Spread betting is indeed free from capital gains tax in the United Kingdom. The trading practice is illegal in the United States because regulators consider the practice to be as close to gambling as possible. Spread betting got its start in the sports gambling world, but it quickly migrated over to the financial markets, where intrepid speculators can guess on the price change of a particular financial instrument.

Let’s say that you want to speculate that the price of a mining stock index is going to rise from $1000 to $1400 by the close of trading. You can find a spread betting exchange and bet $100 per point that it moves.

When you get involved in spread betting it is important to note that this is a leveraged method of working in the markets. That means that you can only put down a portion of your position into an account in order to take that position on a bet. That could mean that you only risk $50 and make $500 but it could also mean that you risk losing $500 when you bet $50. The losses can exceed the bet.

Not only is spread betting free for cap gains taxes in the UK, but you also do not have to pay stamp duty or commotions on your winnings. That makes the idea of spread betting tantalizing. You can bank more of your profits from the practice than you could be trading on other types of financial instruments. If you are in any way proficient at spread betting, you can benefit from the tax break and make a killing compared to other forms of financial investing.

It pays to understand how exactly spread betting works as well. The bid is what an investor or traders might offer to buy a security and the ask is what the market maker or broker is setting as the price. The difference between those two prices is the spread. Supply and demand. It harkens back to freshman year economics. When investors are super interested in a stock or product, the spread gets tighter and tighter. With computers algorithms getting better and better at matching buyers and sellers the spread is moving constantly. Being able to predict the movement can be a very lucrative skill to have.

While risk management in regular trading is such an important and complex topic, the same is true for spread betting. You want to be sure that you know how much money you have out there at any one time, so you can keep track of your orders and bets. Taking control of your risk profile is vital.

Day traders tend to be very good at predicting the movement of spreads because they spend all day staring at screens and trying to determine where the bid tick is going. Watching it day after day can give an intuitive feeling to traders and investors that are always paying attention to the markets. So getting into spread betting can be an effective way to diversify your income stream, with the added benefit of avoiding capital gains taxes. Spread betters in the United Kingdom can be sitting pretty if they are good at the game.

2018 Roth IRA Contribution Limits

2018 Roth IRA Contribution Limits

We all know that we should be saving for retirement.  Whether you have a 401k, a pension, or an IRA, retirement accounts give individuals great tax breaks to help them prepare for their golden years.  It is often reported that people misjudge how much they will need in retirement.  The rule of thumb for a long time has been you need your retirement income to supplement 80% of your income when you were working; however, this number is different for everyone based on a number of factors.  One thing is certain.  Maxing out your retirement accounts never hurts.  For 2017, the IRA contribution limits stayed the same as they were in 2016.  You could contribute up to $5,500 towards your IRA, and if you were 50 or older you can contribute an additional $1,000 bringing your total yearly contribution limit to $6,500.  The 2018 Roth IRA contribution limits won’t be released until October of this year, but we can speculate what they might be.

Each year, the Internal Revenue Service (IRS) sets the income and contribution limits for IRA’s.  The last year that the IRS raise the contribution limit was for the tax year of 2013.  The contribution amounts for traditional and Roth IRA’s are the same each year.  They are evaluated and raised based on inflation.  The IRS will raise contribution limits in increments of $500.  This means that the next time they are raised, people under the age of 50 will be able to contribute a maximum of $6,000 a year to their IRA, while people over the age of 50 will be able to most likely contribute $7,000 a year.  In order for this raise in contribution limits to take place, inflation would need to be around 9% over a period of time for this to occur.

9% of $5,500 = $495

This would be near the $500 increment level the IRS would like to see to raise the contribution limits.

Since the last time the IRS raised contribution limits in 2013, inflation has risen by about 6.5% based on data tables.  This means that another 2.5% increase in inflation would be needed for the IRS to raise the contribution limits for traditional and Roth IRA’s.  With all of this being said, the most likely scenario is that 2018 Roth IRA contribution limits will remain unchanged.  A more likely scenario would be a raise in the contribution limits for 2019.

Despite the fact that the 2018 Roth IRA contribution limits won’t change, the IRS will still probably change some limits.  The limit they will change, and almost always do, is the income limits associated with eligibility for participation in IRA’s.  For 2017, the IRS raised the income phase-out limit to $118,000 for single earners and $186,000 for married, joint filling earners, raises of $1,000 and $2,000 respectively.

There are still many months to wait until the IRS reveals their 2018 Roth IRA contribution limits.  An increase in the limit would allow individuals to save an additional $500 a year in a tax-advantaged account.  Although an increase is doubtful, we can still remain hopeful.

Budget Smart, Invest Wise

One Easy Way to Slash Taxes

Slash Taxes

Reduce your taxes and increase your savings.  Sounds almost a little too good to be true right?

It’s possible, it’s easy, and I just did it and so can you.

Today is the final day for you to file your taxes for this year.  Did you pay more in taxes than you would have liked?  Do you want to lower your tax bill for next year?  If so, then here is how to do it:

Increase your 401k contribution to your company’s plan.  What percentage of your salary are you contributing to your 401k currently?  Bump it up.  By increasing your pre-tax 401k contribution to your plan you are in effect reducing the amount of income you take home, thus reducing your tax burden.

I recently increased my pre-tax contribution percentage by 8% and found that I will save roughly $1700 this year on my taxes.  It’s that simple.  Increase your savings, reduce your tax burden.  This offers 3 key benefits.

Benefit 1:

You lower the amount of taxes you will be paying for the year.

Benefit 2:

You increase the amount of savings you will have at retirement.  The more you save now, the more you will have later.

Benefit 3:

Because you don’t see the additional money you put into your 401k plan on your paycheck, you won’t spend it, and most likely you won’t miss it.

 

Budget Smart, Invest Wise

 

Tax Time

tax time

It’s that time of year when we begin collecting our W-2’s, 1099’s and other documents to prepare our tax returns.  For some of us, there is a reason to get excited about tax time.  Why?  A tax refund!

A couple of years ago a car salesman told me that the car industry loves tax season.  Why exactly?  Because many people end up using their tax refunds to help with a down payment of a new automobile.

If you get a tax refund, you might view it as a “bonus”.  Unexpected money just fell into our lap.  We get the urge to spend this money on a luxury that we might otherwise have not been able to afford.  It’s YOUR money, do with it as you please, but I will offer some advice on how to spend your tax refund wisely:

Pay down Debt:  Instead of buying a new car with your refund, use it to pay down an existing car loan if you have one.  Make an extra payment or two to a student loan you might have.  Debt is an obligation you will have to pay down eventually, so why not use the extra money to give you an extra step to being debt free.

Go on a Vacation:  Maybe you feel like you have worked hard, and you probably have.  Use the money, or part of the money, to treat yourself to a vacation.  The enjoyment and peace of mind you can get out of an experience far outweighs any “thing” you might want to purchase.  You will have created lasting memories.  Plus, more than likely, you will be more focused upon your return.

Just save it:  Suppose you are 25 years old and receive a tax refund of $1000.  If you used that money to open a Roth IRA or put it in a taxable brokerage account, you will be well on your way to creating future financial freedom for yourself.  Let’s use the following example: You take the $1000 and open a Roth IRA.  If you put in just $100 a month into that Roth IRA, then assuming an 8% return annually, you will have an account balance of well over $300,000 in 40 years.  Granted 40 years is a way off, but that money can help supplement your retirement.  You can also use the refund to build up an emergency fund or to contribute to a taxable brokerage account.

A tax refund is welcomed by everybody who receives one.  You worked hard last year, you paid a little more in taxes then you should have, now it’s the government’s turn to give a little back to you.  Treat yourself to that vacation you’ve been craving, or use it to help put yourself in a better financial situation at the beginning of the year.

Budget Smart, Invest Wise

The Potential Retirement Cap

retirement cap

In his plan for the 2016 budget, the president and his administration are seeking to disrupt the current retirement process.  A number of retirement topics were mentioned such as Social Security, the elimination of a “back door” Roth, and a cap on the amount eligible in a person’s retirement accounts.

For the subject of this post, I will discuss the president’s plan to limit the amount held in retirement accounts for an individual.  Presently, an individual can have an unlimited amount in retirement accounts.  This includes employer-sponsored 401k’s, traditional IRA’s, and Roth IRA’s.  The only limitations currently imposed on retirement accounts are the amount you can contribute.  This includes$5500 ($6500 for people over 50) for IRA’s and $18,000 ($24,000 for people over 50) for 401k plans.  These limitations are currently set so that individuals don’t stash all of their retirement savings in tax-free or tax-deferred retirement accounts.  The government has to make its money somewhere.

The 2016 budget proposal would now not only put a limit on the number of contributions you can put into a retirement account, but also on the amount held in your various retirement accounts.  The proposed limit: $3,400,000.  For a younger person saving for future retirement, this amount might seem astronomical.  However, I am here to tell you that it is not.  Granted a lot has to happen for this limit to take effect.  It has to be voted on and passed, and then I would assume the government would adjust this number to reflect inflation, roughly 3% a year.  If, and again this is a big if, this law were to be put into place it would impact roughly 10% of 401k plan participants according to Forbes.

Example:

Take the proposed limit on retirement accounts: $3,400,000 and adjust it for inflation of 3%.  In 40 years this inflation adjustment amount would be approximately $11,000,000.

Mike is a 25-year-old with $20,000 in retirement assets.  This includes an employer-sponsored 401k plan along with a Roth IRA.  Mike will contribute $18,000 a year to his 401k and get an employer match of $3,000.  He puts in $21,000 a year into his 401k.  Additionally, he contributes the maximum $5,500 into his Roth IRA every year.  Mike spreads this amount out evenly over the 12-month year.  When Mike turns 50, he contributes the new limit, $24,000 in an employer-sponsored 401k with a $3,000 match and $6500 in a Roth IRA.  Assuming Mike’s portfolio returns 10% a year, Mike will have over $15,000,000 in his retirement accounts, more than what would be allowed.  He would then have to divert some of those funds to a taxable brokerage account or be forced to spend it.

Sure, the example of Mike listed above is an outlier.  Many of us can only dream of having so much set aside for retirement.  The fact is that some people DO!  We can agree this would be a good problem to have, but nonetheless a problem.  Are you aggressive enough with your retirement planning that you have to worry about this law possibly being passed?  I am!  And for that reason, my vote is against it.

Budget Smart, Invest Wise