How a Financial Advisor can fight for both parties, act as a financial mediator & make things as fair as possible!
Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.
Whether used for capital preservation, growth, or as an additional source of income, investments are always made in hopes of seeing an increase over the long term. The appreciation of assets can eventually be capitalized on by selling. This can generate a tax liability referred to as capital gains tax.
Capital gains are created when an asset is sold at a price higher than its initial purchase price, or cost basis. Depending on the holding period of the investment, these capital gains can be long-term or short-term. A gain is considered long-term if the asset is sold after being held for more than a year, and a gain is deemed short-term if the asset is sold in less than a year from its original purchase date. Generally speaking, long-term capital gains are taxed much more favorably than short-term gains, so it’s important to understand the holding period before disposing of an asset.
Long-term gains are federally taxed at percentages of 0%, 15%, or 20% depending on the investor’s taxable income for the year:
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Based on the above table, for example, a couple that is MFJ (married filing jointly) can have a capital gains tax rate of 0% if their taxable income falls below $89,250 for the year.
Short-term capital gains, on the other hand, are taxed at the investor’s ordinary income tax rate, which can range anywhere from 10-37%.
Note that capital gains may also be taxed at the state level. Many states (such as Alabama and Georgia) tax capital gains as income. Some states allow taxpayers to deduct a certain amount of capital gains. Others don’t tax income, or capital gains at all. Taxpayers should always review the specific capital gains rules in their state.
High income earners must also pay an additional net investment income tax (NIIT) on investment earnings. This additional tax is owed if one has investment income AND has MAGI (Modified Adjusted Gross Income) above a certain threshold. These thresholds are as follows:
If one has investment income and exceeds the MAGI threshold listed above, the 3.8% tax applies to the lesser of (a) their net investment income, or (b) the portion of their MAGI over the threshold.
Example 1: Assume a single filer has earned net investment income of $25,000 from dividends and interest, and she has a modified adjusted gross income (MAGI) of $260,000. Her MAGI falls above the single filing threshold of $200,000, so she will be subject to the net investment income tax. Since $25,000 (her net investment income) is less than $60,000 (the portion of her MAGI over the threshold), she will owe 3.8% tax on $25,000.
As the market fluctuates year to year, not every long-term investment will generate a capital gain; some may even have unrealized capital losses. Fortunately, these losses can be used to offset any capital gains generated in your account. After this, additional capital losses can then be used to reduce taxable income. Single individuals and couples married filing jointly (MFJ) can deduct up to $3,000 in realized losses from ordinary income, and couples married filing separately (MFS) can deduct up to $1,500 from ordinary income. If your total losses exceed your total gains in a given tax year, up to $3,000 (or $1,500 based on filing status) of this excess amount can be applied to your ordinary income. The remaining surplus can be carried over into future years, but can only be utilized in increments of $3,000 or $1,500 each year when no gains have been realized. This is defined as a tax loss carryforward. Below is a demonstration of how to use this carryforward to your advantage:
Example 2: In a given tax year, a married couple realizes a long-term capital gain of $20,000 by selling Security X, and a short-term capital gain of $5,000 by selling Security Y. They also incur a short term capital loss of $40,000 selling Security Z. They can offset 100% of their total capital gains by utilizing $25,000 of their capital loss, which brings their gain liability down to $0 for the current tax year. Now, they can use an additional $3,000 in capital losses to reduce their ordinary income. The remaining $12,000 can be used as a carryforward loss in future tax years as needed.
Understanding how to utilize your capital gains/losses against your taxable income can help with strategic tax planning by knowing which investment accounts to withdraw from on a tax efficient basis.
Here at Cahaba, our holistic approach allows us to be aware of your cash needs and develop an appropriate investment strategy that will minimize capital gains. Your financial plan is always the driving force behind any tax recommendations. There is a better way!
C.J. Laws is a financial planning analyst in the Nashville office of Cahaba Wealth Management, www.cahabawealth.com.
Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.
Life insurance is an important component of a comprehensive financial plan that is often overlooked. While nobody likes to consider their own demise, the idea of a loved one struggling because you didn’t have sufficient coverage is unsettling.
Life insurance can be grouped into two categories: Term and Permanent. Term is the most straightforward and least expensive form of life insurance. It provides coverage to the insured for a specific period of time (usually 10, 20, or 30 years) with a specific premium. Once the period or “term” is over, the policy expires or can be extended for an increased premium. Since term insurance allows a person to only fund the years for which they have a true need for insurance, this type of policy provides a better death benefit for the premiums paid.
Permanent life insurance is designed to provide coverage for the policy holder’s entire life. While lifelong coverage may sound more appealing, these policies are extremely costly and often unnecessary. One example of permanent life insurance is whole life. Whole life insurance policies often carry a 50% minimum front load commission charge that goes directly to the agent. As discussed on our podcast, insurance agents do not have a fiduciary duty, and hence, they are not required to put a client’s interests first when recommending a policy. This can obviously create a conflict of interest, as agents are highly incentivized to sell whole life policies to clients.
In addition to a death benefit, permanent life policies (such as whole life) can offer a savings component. This portion, known as the cash value, typically has a guaranteed return of 2% per year and projected returns of 4-5% over the life of the policy. The word “guarantee” often perks up investor ears. However, keep in mind that historical data1 shows us that a low-cost diversified investment portfolio can provide investors a much higher yield. Over a lifetime, it is highly likely that the investor choosing a well-diversified portfolio will yield more than a life insurance investor. As our core values state, our goal at Cahaba is to always “keep the main thing the main thing”. To that end, we believe insurance should be used for insuring, and investments should be used for investing.
With a few exceptions, we at Cahaba generally prefer the more appropriate term life policies vs. permanent/whole life products when viewing insurance. We acknowledge that there are situations where a permanent policy might be needed, such as for funding an irrevocable trust for estate planning needs or a buy/sell agreement for business owners. However, these situations are an anomaly. Bottom line, it is important you fully understand what you are buying and how the policy is fulfilling your coverage needs.
With these different types of insurance in mind, we are then left to wonder: how much coverage and what type of policy do I need? In truth, there is no one size fits all answer here, as the “right” amount depends on a number of factors. Do your loved ones depend on your income? How much outstanding debt would need to be retired? What amount of Social Security benefits will your family receive at death? These are all questions we ask our clients during our financial plan construction. Based on your specific situation, we are able to evaluate your needs to ensure your loved ones will be taken care of when you’re gone.
As always, do not hesitate to reach out if you have any questions!
Note: At Cahaba Wealth Management, we do not sell life insurance policies themselves, but we can make recommendations on coverage and types. We can also help you prepare to meet with an insurance agent.
Josh Hegland, CFP® is an associate advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.
Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.
