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The Housing Affordability Crisis and Proposed Changes That Can Help

With over 15 million millennials experiencing monumental student loan debt, the combination of that and rising home prices has created a housing affordability crisis. Here are some proposed changes to help ease the rising problem.

The post The Housing Affordability Crisis and Proposed Changes That Can Help appeared first on Homes.com.

When Are 2022 Estimated Tax Payments Due?

Our tax system operates on a “pay-as-you-go” basis, which means the IRS wants its cut of your income when you earn it. For employees, the government gets paid through tax withholding each time you get a paycheck (the amount withheld is based on your Form W-4). Retirees can have taxes withheld from Social Security payments and retirement plan distributions, or even have taxes taken out of a required minimum distribution. However, if you’re self-employed or don’t have taxes withheld from other sources of taxable income (such as interest, dividends, or capital gains), it’s up to you to periodically pay the IRS by making estimated tax payments.

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For the 2022 tax year, you can pay all your estimated tax by April 18, 2022, or you can pay them in four equal amounts by the dates shown in the table below.

Due Dates for 2022 Estimated Tax Payments

Payment When Income Earned in 2022 Due Date
1st Payment January 1 to March 31 April 18, 2022
2nd Payment April 1 to May 31 June 15, 2022
3rd Payment June 1 to August 31 September 15, 2022
4th Payment September 1 to December 31 January 17, 2023
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You don’t have to make the payment due January 17, 2023, if you file your 2022 tax return by January 31, 2023, and pay the entire balance due with your return.

Calculating Your Estimated Tax Payments

Use Form 1040-ES to calculate your estimated tax payments. Start by figuring your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year – there’s a worksheet to help you out in the instructions for Form 1040-ES. You can also look at your previous year’s tax return for a general guide. What you ultimately want is an estimate of the income you expect to earn for the year.

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If your estimate is too high, just complete another Form 1040-ES worksheet to recalculate your estimated tax for the next payment. Likewise, if your estimate is too low, go to the Form 1040-ES worksheet again to readjust your next estimated tax payment. You should also recalculate if your own personal situation changes or if there are tax law changes that can affect your tax liability for the year.

No Income Until Later in the Year?

You don’t have to make estimated tax payments until you have income on which you will owe tax. So, for example, if you don’t have any taxable income in 2022 until July, you don’t have to make an estimated tax payment until September 15, 2022. At that point, you can either pay your entire estimated tax by September 15, or pay it in two installments by September 15 and January 17, 2023.

Farmers and Fishermen

If at least two-thirds of your gross income is from farming or fishing, you can make just one estimated tax payment for the 2022 tax year by January 17, 2023. If you file your 2022 tax return by March 1, 2023, and pay all the tax you owe at that time, you don’t need to make any estimated tax payments.

How to Pay

Use Form 1040-ES to pay your estimated taxes. There are several ways to pay estimated taxes, including by check, cash, money order, credit card and debit card. There are many online payment options, too, such as the Electronic Federal Tax Payment System (EFTPS). The various payment methods are described in the instructions for Form 1040-ES.

Penalties

Whether you make estimated tax payments or rely on withholding, you could be hit with a penalty if you don’t pay enough tax throughout the year. The penalty doesn’t apply if you owe less than $1,000 in tax. You can also avoid the penalty if your 2022 withholding or estimated tax payments equal at least 90% of your 2022 tax liability, or 100% of the tax shown on your 2021 return (110% if your 2021 adjusted gross income was more than $150,000).

Don’t Forget About Your State

Finally, unless you live in a state with no income tax, you probably owe estimated tax payments to your state, too. Due dates for state payments may or may not coincide with the federal dates, so be sure to check with the appropriate tax agency in your state.

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Leveraging the Tax Code to Minimize Your Tax Liabilities

As we head toward March, one of most dreaded times of the year approaches: tax season. Right now is the time when you’re inundated with tax documents, including a W-2 from your employer, 1099s from your side gigs, 1099-MISC statements from your online brokers, 1099-Rs for retirement income and more.

There isn’t much you can do now to reduce your 2021 tax obligations outside of contributing more to tax-deferred retirement accounts. That’s why the beginning of the year is the perfect time to adopt new strategies to minimize your tax obligations for 2022.

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All too often, your focus is on the rearview mirror – what you’ve already done and what you’ll have to pay. Instead, when you shift your focus to a proactive stance, you’ll reap the rewards throughout this year and into 2023, when you’ll file your taxes for this year.

As an enrolled agent – a professional who has earned the privilege of representing taxpayers before the Internal Revenue Service (IRS) – and a financial adviser, there are three strategies that I’ll share with you that have the potential to reduce your taxes in coming years. Of course, every situation is different and you may have other factors that cause your taxes to increase even if you adopt these and other tax mitigation suggestions.

Strategy #1: Maximize your tax-deferred retirement contributions

One of the most effective ways to reduce your tax liabilities is to increase your contributions to tax-deferred retirement vehicles, such as company-sponsored 401(k) or 403(b) accounts, government-sponsored Thrift Savings Plans (TSPs) or individual retirement accounts (IRAs). If you’re like many people, you’ve got room to increase your contributions before you hit the maximum allowable contribution.

If you’re in a 401(k) or 403(b) account, that limit is $20,500 for 2022. If you have a SIMPLE account, the limit is $14,000, while the limit for a SEP IRA is $61,000. If you are turning 50 in 2022 or are already older than 50, you can sock away more due to catch-up contributions, which are $6,500 for 401(k)s and 403(b)s and $3,000 for SIMPLE IRAs. There are no catch-up contributions allowed for SEP IRAs, because contributions can only be made by employers not employees.

For traditional tax-deductible IRAs, which are accounts that you establish for yourself, contribution limits are $6,000 a year with $1,000 extra allowed for catch-up contributions for those turning 50 and older in 2022.

Approaching your tax-deductible retirement plan contributions for the entire year in a strategic manner allows you to maximize your contributions while minimizing the impact on your budget. Here’s an example illustrated in Figure 1: Let’s say you want to increase your 401(k)contribution by 50%. If you can divide that over 26 pay periods, those additional contributions will be spread over a longer period of time, meaning that each contribution will be smaller than if you decided to take this action in the summer or in the fall, when you’d have fewer weeks remaining in the year.

Figure 1: Impact of a 50% increase in 401(k) contribution at different times of the year

Initial contribution Additional contribution Total new contribution 26 Pay Periods 13 Pay Periods 7 Pay Periods
$5,000 $2,500 $7,500 $96.15 $192.31 $357.14
$7,500 $3,750 $11,250 $144.23 $288.46 $535.71
$10,000 $5,000 $15,000 $192.30 $384.62 $714.29
$12,500 $6,250 $18,750 $240.38 $480.77 $892.86

You can see how starting early in the year offers a considerable advantage. In this case, increasing your contribution by $2,500 a year would only take additional payroll deductions of $96.15, assuming you’re paid every other week. Even if you wanted to increase your contributions by $5,000, you’d be left with a manageable deduction of $192.30 a week. However, the longer you wait, the higher the hill that you’ll have to climb in terms of the amount you have to contribute per pay period.

The more you contribute, the larger your tax savings, since 401(k), traditional IRAs, SEPs and SIMPLE IRA contributions are made with pre-tax dollars. Think of this strategy as a win-win, because not only do you save money on your taxes today, you’re also building a nest egg for tomorrow, when it’s time for you to retire. Of course, you will have to pay taxes on your contributions when you take money out in retirement.

Strategy #2: Invest in stocks with qualified versus ordinary dividends

Qualified dividends are taxed at more favorable capital gains tax rates, in contrast to ordinary or nonqualified dividends, which are taxed at ordinary income tax rates. Capital gains tax rates are 0%, 10%, 15% or 20%, in contrast to ordinary income rates, which can be as high as 37%.

Generally, if you hold dividend-paying stocks in taxable accounts – not retirement accounts – you’ll pay taxes at the qualified dividend rate, as long as you hold shares in the company that issues those dividends for more than 60 days during the 121-day period that starts before the day that a company’s dividend is recorded, which is also known as the ex-dividend date.

While this definition may seem complicated, there is method to the IRS’ madness – the intention of Congress was to reward long-term shareholders with a lower qualified dividend rate. This is why you must hold stock for a period of time to receive the preferential dividend rate.

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The definition of an ordinary dividend, in contrast to a qualified dividend, is a dividend from certain types of stocks, such as real estate investment trusts (REITs) and master limited partnerships (MLPs). In practice, those stocks may have dividends that are taxed at lower effective rates, but there are many different factors that play into this distinction that are beyond the scope of this article.

In addition, money market funds and dividends paid by employee stock option plans are also ordinary dividends. Fortunately, you don’t have to do the math or know which is which as those will be automatically categorized on your tax statement by type.

To get around these issues and minimize your tax liabilities, it can make sense to hold qualified dividends in taxable accounts and stocks and other instruments with ordinary dividends in tax-deferred accounts, like qualified retirement plans, or in non-taxable accounts, like Roth IRAs.

Strategy #3: Consider investment-only variable annuities

Frequently overshadowed by other types of annuities, investment-only variable annuities offer an option to save money on a tax-deferred basis beyond other tax-deferred vehicles, such as 401(k)s or traditional IRAs. Unlike many other types of variable annuities, which have gotten a bad rap because of their high fees and complexity, investment-only variable annuities are fairly straightforward, provide a wide variety of investment options and carry reasonable fees.

An advantage of investment-only variable annuities, especially compared to 401(k) funds, is the wide variety of investment options available. These can be used to diversify retirement assets, as many 401(k) plans offer limited options in a few asset classes. You can use an investment-only variable annuity to invest in alternative investments or in asset classes that might not be offered within your company-sponsored retirement plan.

Investment-only annuities aren’t suitable for everyone. If you haven’t maxed out your company-sponsored retirement accounts, there’s not much sense in investing in this type of vehicle. However, if you have maxed out your company-sponsored retirement accounts and are looking for another place to stash savings that you can use to get a tax deduction, it might be worthwhile considering an investment-only annuity.

Like other types of annuities, investment-only annuities don’t offer liquidity. In other words, if you’re likely to need the money you’ve saved before you turn 59½, you shouldn’t invest in this type of annuity, because you’ll have to pay a penalty of 10% if you take the money out early.

In addition, contract language for annuities is quite complex and some of the provisions can be difficult to understand. Fees vary widely, so be sure to investigate all your options before committing to one of these products.

Securities and advisory services offered through Registered Representatives of Cetera Advisor Networks LLC (doing insurance business in CA as CFGAN Insurance Agency LLC), Member FINRA / SIPC, a broker/dealer and Registered Investment Advisor. Cetera is under separate ownership from any other named entity. Investment advisory services may also be offered through HBW Advisory Services LLC. LHD Insurance & Financial Services, HBW Insurance & Financial Services, Inc. dba HBW Partners and HBW Advisory Services LLC are separate entities, which do not offer legal or tax advice. CA Insurance license: 0C63007
This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
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