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©2013, College for Financial Planning, all rights reserved.
Module 10Income Taxes & the Retiree
Chartered Retirement Planning CounselorSM Professional Designation Program
Learning Objectives
10–1: Explain the essential concepts of U.S. income taxation.
10–2: Describe four basic strategies for minimizing total taxes.
10–3: Describe different issues involved in managing tax-deferred and taxable accounts, and the treatment of life insurance proceeds.
10–4: Describe how mutual fund distributions and share sales are taxed.
10–5: Describe the tax treatment that applies to stocks and fixed-income securities.
10–6: Explain the current rules on handling a gain on the sale of a principal residence.
10–7: Explain when and how Social Security benefits are taxed.
10-2
Questions to Get Us Warmed Up
10-3
Learning Objectives
10–1: Explain the essential concepts of U.S. income taxation.
10–2: Describe four basic strategies for minimizing total taxes.
10–3: Describe different issues involved in managing tax-deferred and taxable accounts, and the treatment of life insurance proceeds.
10–4: Describe how mutual fund distributions and share sales are taxed.
10–5: Describe the tax treatment that applies to stocks and fixed-income securities.
10–6: Explain the current rules on handling a gain on the sale of a principal residence.
10–7: Explain when and how Social Security benefits are taxed.
10-4
Basic Tax Formula
10-5
Basic Tax Formula
10-6
Calculating Federal Income Tax
10-7
Calculating Federal Income Tax
10-8
Income Tax Terms
10-9
Income Tax Terms
10-10
Progressive Federal Tax System
1-11
• 2013 Tax Year (MFJ)
Itemized Deductions
• Medical expenses (after 7.5% or 10% floor)
• State & local income taxes or sales tax• Home mortgage interest including MIP• Property taxes• Investment interest expense• Charitable contributions• Casualty & theft losses• Miscellaneous deductions• Tier II miscellaneous itemized deductions
1-12
Capital Gains & Losses
• Net LTCG taxed at: o 0% if 10% or 15% marginal rateo 15%, if marginal rate 25%-35%o 20% if marginal rate of 39.6%
• Collectibles (maximum 28%) o coins, stamps, artwork, etc.
• Depreciation on realty (unrecaptured §1250 income—maximum 25%)
• Netted in most favorable manner• Net STCG treated as ordinary income• Net loss of $3,000 allowable per year
10-13
Learning Objectives
10–1: Explain the essential concepts of U.S. income taxation.
10–2: Describe four basic strategies for minimizing total taxes.
10–3: Describe different issues involved in managing tax-deferred and taxable accounts, and the treatment of life insurance proceeds.
10–4: Describe how mutual fund distributions and share sales are taxed.
10–5: Describe the tax treatment that applies to stocks and fixed-income securities.
10–6: Explain the current rules on handling a gain on the sale of a principal residence.
10–7: Explain when and how Social Security benefits are taxed.
10-14
General Tax Strategies
• Tax avoidance• Tax reduction• Tax deferral• Conversion
10-15
Mutual Fund InvestmentsDistributions• Distributions: include
short-term capital gains, interest, and dividends
• Dividends may be subject to preferential treatment (LTCG rates)
• Nontaxable: tax-exempt interest
• Capital gain distributions: result in long-term treatment
10-16
Mutual Fund Investments
Cost basis of mutual fund shares• Single-category
average cost • Specific
Identification: most advantageous
• FIFO: assumed if no
other method chosen
10-17
Basis in Mutual Fund Shares
Average Cost Method• Divides total cost of all shares by number of
shares owned, resulting in all shares having same cost basis
• Gain or loss computed from proceeds of shares sold, less average cost, times shares sold
First-In, First-Out (FIFO)• Presumably lower-cost shares
purchased first are used in computing gain or loss from sale
• Generally least advantageous method to investor
10-18
Basis in Mutual Fund Shares
Specific Identification• Investor identifies the particular shares
that are being sold• Identifying highest cost basis shares
results in lowest gain on sale• Identifying lowest cost basis
shares results in lowest loss on sale
10-19
Learning Objectives
10–1: Explain the essential concepts of U.S. income taxation.
10–2: Describe four basic strategies for minimizing total taxes.
10–3: Describe different issues involved in managing tax-deferred and taxable accounts, and the treatment of life insurance proceeds.
10–4: Describe how mutual fund distributions and share sales are taxed.
10–5: Describe the tax treatment that applies to stocks and fixed-income securities.
10–6: Explain the current rules on handling a gain on the sale of a principal residence.
10–7: Explain when and how Social Security benefits are taxed.
10-20
Considerations for Stock
Dividends• Cash (most subject to
preferential rates)• Return of capital• Stock • Dividend Reinvestment
Plan (DRIP)Wash sales charitable contribution—FMV if
held long term
10-21
Municipal Bonds
• Typically tax-exempt at federal level
• Double (or triple) tax exemption if from same municipality
• Private activity muni bond interest part of AMT (unless bonds issued in 2009 or 2010)
• Muni bond interest may increase the taxation of Social Security benefits
10-22
Bonds at Discount
Market discount bonds• Election to treat market discount as
income, ratably over life of the bond
Newly issued at discount• Original Issue Discount (OID) treated as
income over life of the bond
10-23
Bonds at Premium
Taxable bond• election to amortize premium as an
adjustment to interest income• downward adjustment to basis
Tax-exempt bond• premium must be amortized• nondeductible
adjustment to basis
10-24
U.S. Securities
T-bills• short term• sold at discount• taxable at maturity• no state or local taxTreasury notes & bonds• interest taxable• no state or local tax
10-25
U.S. Securities
Treasury inflation-indexed securities
• interest payments taxed when received
• inflation adjustments taxed in year of adjustment, although not paid until maturity
• phantom income causes most to be in tax-deferred accounts
• no state or local taxation
Mortgage-backed securities
• GNMA, FNMA
• part interest, part principal
• interest is subject to federal, state & local taxes
10-26
Learning Objectives
10–1: Explain the essential concepts of U.S. income taxation.
10–2: Describe four basic strategies for minimizing total taxes.
10–3: Describe different issues involved in managing tax-deferred and taxable accounts, and the treatment of life insurance proceeds.
10–4: Describe how mutual fund distributions and share sales are taxed.
10–5: Describe the tax treatment that applies to stocks and fixed-income securities.
10–6: Explain the current rules on handling a gain on the sale of a principal residence.
10–7: Explain when and how Social Security benefits are taxed.
10-27
Section 121
• $250,000/$500,000 Exclusion• Two of five years of ownership• Principal residence for two of
prior five years• Once-every-two-years rule• Partial exclusion available• Nonqualified use—partial exclusion
10-28
Taxation of Social Security Benefits
If income plus ½ Social Security benefitsexceeds the thresholds given, then benefits are subject to taxation at the percentage shown
10-29
Question 1
Which one of the following is not includible in taxable income?
a. unemployment compensationb. IRA withdrawalsc. alimony receivedd. life insurance death benefits
10-30
Question 2
Which one of the following is not considered to be a capital asset?
a. inventoryb. stocksc. land held for investmentd. management
10-31
Question 3
Which one of the following is the next step after calculating the tax based on taxable income for an individual taxpayer?
a. subtract the personal exemptionb. add the nondeductible itemized deductionsc. subtract the allowable creditsd. remit this amount to the IRS or request a
refund
10-32
Question 4
Which one of the following techniques will result in tax deferral?
a. reinvesting mutual fund dividends into more shares of the fund
b. investing in high-growth stocksc. exchanging stocks on a regular basis by
selling and reinvesting the proceedsd. taking a lump sum distribution from a
qualified retirement plan
10-33
Question 5
Dividend reinvestment plans are popular because
a. dividends are not currently taxable, thereby achieving tax deferral.
b. dividends can be used for discounted stock purchases.
c. basis calculations are simplified.d. they offer an efficient means of tax evasion.
10-34
©2013, College for Financial Planning, all rights reserved.
Module 10End of Slides
Chartered Retirement Planning CounselorSM Professional Designation Program
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