Mid-Year Steps to Save on Your Taxes (Fidelity)

Key takeaways

✔ Evaluate the tax impact of life changes such as a raise, a new job, marriage, divorce, a new baby, or a child going to college or leaving home.

✔ Check your withholding on your paycheck and estimated tax payments to avoid paying too much or too little.

✔ See if you can contribute more to your 401(k) or 403(b). It is one of the most effective ways to lower your current-year taxable income.

In the midst of your summer fun, taking time for a midyear tax checkup could yield rewards long after your vacation photos are buried deep in your Facebook feed.

Personal and financial events, such as getting married, sending a child off to college, or retiring, happen throughout the year and can have a big impact on your taxes. If you wait until the end of the year or next spring to factor those changes into your tax planning, it might be too late.

“Midyear is the perfect time to make sure you’re maximizing any potential tax benefit and reducing any additional tax liability that result from changes in your life,” says Gil Charney, director of the Tax Institute at H&R Block.

Here are 9 questions to answer to help you be prepared for any potential impacts on your tax return.

1. Did you get a raise or are you expecting one?

The amount of tax withheld from your paycheck should increase automatically along with your higher income. But if you’re working two jobs, have significant outside income (from investments or self-employment), or you and your spouse file a joint tax return, the raise could push you into a higher tax bracket that may not be accounted for in the Form W-4 on file with your employer. Even if you aren’t getting a raise, ensuring that your withholding lines up closely with your anticipated tax liability is smart tax planning. Use the IRS Withholding Calculator; then, if necessary, tell your employer you’d like to adjust your W-4.

Another thing to consider is using some of the additional income from your raise to increase your contribution to a 401(k) or similar qualified retirement plan. That way, you’re reducing your taxable income and saving more for retirement at the same time.

2. Is your income approaching the net investment income tax threshold?

If you’re a relatively high earner, check to see if you’re on track to surpass the net investment income tax (NIIT) threshold. The NIIT, often called the Medicare surtax, is a 3.8% levy on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) above $200,000 for individuals, $250,000 for couples filing jointly, and $125,000 for spouses filing separately. In addition, taxpayers with earned income above these thresholds will owe another 0.9% in Medicare tax on top of the normal 2.9% that’s deducted from their paycheck.

If you think you might exceed the Medicare surtax threshold for 2017, you could consider strategies to defer earned income or shift some of your income-generating investments to tax-advantaged retirement accounts. These are smart strategies for taxpayers at almost every income level, but their tax-saving impact is even greater for those subject to the Medicare surtax.

3. Did you change jobs?

If you plan to open a rollover IRA with money from a former employer’s 401(k) or similar plan, or to transfer the money to a new employer’s plan, be careful how you handle the transaction. If you have the money paid directly to you, 20% will be withheld for taxes and, if you don’t deposit the money in the new plan or an IRA within 60 days, you may owe tax on the withdrawal, plus a 10% penalty if you’re under age 55.

4. Do you have a newborn or a child no longer living at home?

It’s time to plan ahead for the impact of claiming one more or less dependent on your tax return.

Consider adjusting your tax withholding if you have a newborn or if you adopt a child. With all the expenses associated with having a child, you don’t want to be giving the IRS more of your paycheck than you need to.

If your child is a full-time college student, you can generally continue to claim him or her as a dependent—and take the dependent exemption ($4,050 in 2017)—until your student turns 25. If your child isn’t a full-time student, you lose the deduction in the year he or she turns 19. Midyear is a good time to review your tax withholding accordingly.

5. Do you have a child starting college?

College tuition can be eye-popping, but at least you might have an opportunity for a tax break. There are several possibilities, including, if you qualify, the American Opportunity Tax Credit (AOTC). The AOTC can be worth up to $2,500 per undergraduate every year for four years. Different college-related credits and deductions have different rules, so it pays to look into which will work best for you.

Regardless of which tax break you use, here’s a critical consideration before you write that first tuition check: You can’t use the same qualified college expenses to calculate both your tax-free withdrawal from a 529 college savings plan and a federal tax break. In other words, if you pay the entire college bill with an untaxed 529 plan withdrawal, you probably won’t be eligible for a college tax credit or deduction.

6. Is your marital status changing?

Whether you’re getting married or divorced, the tax consequences can be significant. In the case of a marriage, you might be able to save on taxes by filing jointly. If that’s your intention, you should reevaluate your tax withholding rate on Form W-4, as previously described.

Getting divorced, on the other hand, may increase your tax liability as a single taxpayer. Again, revisiting your Form W-4 is in order, so you don’t end up with a big tax surprise in April. Also keep in mind that alimony you pay is a deduction, while alimony you receive is treated as income.

7. Are you saving as much as you can in tax-advantaged accounts?

OK, this isn’t a life-event question, but it can have a big tax impact. Contributing to a qualified retirement plan is one of the most effective ways to lower your current-year taxable income, and the sooner you bump up your contributions, the more tax savings you can accumulate. For 2017, you can contribute up to $18,000 to your 401(k) or 403(b). If you’re age 50 or older, you can make a “catch-up” contribution of as much as $6,000, for a maximum total contribution of $24,000. Self-employed individuals with a simplified employee pension (SEP) plan can contribute up to 25% of their compensation, to a maximum of $54,000 for 2017.

This year’s IRA contribution limits, for both traditional and Roth IRAs, are $5,500 per qualified taxpayer under age 50 and $6,500 for those age 50 and older. Traditional and Roth IRAs both have advantages, but keep in mind that only traditional IRA contributions can reduce your taxable income in the current year.

8. Are your taxable investments doing well?

If your investments are doing well and you have realized gains, now’s the time to start thinking about strategies that might help you reduce your tax liability. Tax-loss harvesting—timing the sale of losing investments to cancel out some of the tax liability from any realized gains—can be an effective strategy. The closer you get to the end of the year, the less time you’ll have to determine which investments you might want to sell, and to research where you might reinvest the cash to keep your portfolio in balance.

9. Are you getting ready to retire or reaching age 70½?

If you’re planning to retire this year, the retirement accounts you tap first and how much you withdraw can have a major impact on your taxes as well as how long your savings will last. A midyear tax checkup is a good time to start thinking about a tax-smart retirement income plan.

If you’ll be age 70½ this year, don’t forget that you may need to start taking a required minimum distribution (RMD) from your tax-deferred retirement accounts, although there are some exceptions. You generally have until April 1 of next year to take your first RMD, but, after that, the annual distribution must happen by December 31 if you want to avoid a steep penalty. So if you decide to wait to take your first RMD until next year, be aware that you’ll be paying tax on two annual distributions when you file your 2018 return.

No significant changes in your life situation or income?

Midyear is still a good time to think about taxes. You might look into ways you can save more toward retirement, gift money to your children and grandchildren to remove it from your estate, or manage your charitable giving to increase its tax benefits and value to beneficiaries. A little tax planning now can save a lot of headaches in April—and maybe for years to come.

Tax-smart investing: What order to take funds out in retirement? (Fidelity)

Keys takeaways

✔ Understand the difference between taxable, tax-deferred, and tax-exempt accounts.

✔ Know which accounts to tap—and when—to maximize tax efficiency.

Chances are you contributed to a 401(k) or IRA as you saved for retirement. Now the time has come to use that money. Withdrawing from retirement savings accounts with an eye toward reducing taxes is important. Taxes can reduce income, and diminish potential future earnings and growth, which affects how long savings may last.

"The important thing to keep in mind is that managing withdrawals with taxes in mind can help boost income in retirement," explains Ken Hevert, senior vice president of retirement at Fidelity.

Let’s start by reviewing the types of investment accounts and then some tax-efficient ways to withdraw from them. Of course, everyone’s situation is unique, so it is important to consult a tax professional.

Three types of investment accounts

A typical retiree may have three types of accounts—taxable, tax-deferred, and tax-exempt. Each has an important, but different, role to play in helping manage tax exposure in retirement.

Taxable accounts like bank and brokerage accounts. Any earnings from these accounts, including interest, dividends, and realized capital gains, are generally taxed in the year they’re generated. In the case of capital gains, keep in mind that any increase in value of the accounts’ investments, such as mutual fund shares or an individual stock, isn’t a taxable event in itself. It’s only when an appreciated investment is sold that the gain is realized; i.e., it generates a taxable capital gain or loss. When you own a mutual fund, however, capital gains may be realized by the fund manager and distributed to you—often subjecting you to a tax liability—even if you haven’t sold your fund shares.
Tax-deferred accounts like traditional IRAs, 401(k)s, 403(b)s, or SEP IRAs. Most, or all, of contributions to these accounts were likely made "pretax." That means ordinary income tax on those contributions are owed when withdrawals are made in retirement. Any earnings from these accounts are also typically taxed as ordinary income when they’re withdrawn.
Tax-exempt accounts like Roth IRAs, Roth 401(k)s, and Roth 403(b)s. Contributions to these accounts are typically made with after-tax money. That means the contributions—and any earnings—are not taxable provided certain conditions are met.1

Manage withdrawals to help reduce taxes

The aim is to manage withdrawals to help reduce taxes, thereby maximizing the ability of remaining investments to grow tax efficiently.

The simplest, most basic withdrawal strategy is to use money from savings and retirement accounts in the order below, with one important caveat. For certain retirement accounts, if you are 70½ or older, required minimum distributions (RMDs) come first. For inherited qualified accounts like a traditional IRA, RMDs may come before age 70½, but the rules are complex, so be sure to check with a tax professional.

1.	Taxable accounts (brokerage accounts)

Money in taxable accounts is typically the least tax efficient of the three types. That’s why it usually makes sense to draw down the money in those accounts first, allowing qualified retirement accounts to potentially continue generating tax-deferred or tax-exempt earnings.

Investments may need to be sold when taking a withdrawal. Any growth, or appreciation, of the investment may be subject to capital gains tax. If you’ve held the investment for longer than a year, you’ll generally be taxed at long-term capital gains rates, which currently range from 0% to 20%, depending on your tax bracket (a 3.8% Medicare tax may also apply for high-income earners). Long-term capital gains rates are significantly lower than ordinary income tax rates, which in 2017 range from 10.0% to 39.6%. These are federal taxes; be aware that states may also impose taxes on your investments. (See your federal tax rate.) If you have a loss, you can use it to reduce up to $3,000 of your taxable income, or to offset any realized capital gains. Read Viewpoints "Five steps to help manage taxes on investment gains."

2.	Tax-deferred, such as traditional IRAs, 401(k)s, 403(b)s, and SEP IRAs.

You’ll have to pay ordinary income taxes when you withdraw pretax contributions and earnings from a tax-deferred retirement account, but at least these investments have had extra time to grow by taking withdrawals from a taxable account first. You may find yourself in a lower income tax bracket as you get older, so the total tax on your withdrawals could be less. On the other hand, if your withdrawals bump you into a higher tax bracket, you might want to consider taking withdrawals from tax-exempt accounts first. This can be complex, and it may be a good idea to consult a tax professional.

And remember, the IRS generally requires you to begin taking RMDs the year you turn 70½. For employer-sponsored accounts, like a traditional 401(k), you may be eligible to delay taking RMDs if you’re still working at the company and do not own 5% or more of the company or business. You cannot, however, delay starting RMDs for retirement accounts for employers you no longer work for. Read Viewpoints "Smart strategies for required distributions."

3.	Tax-exempt, such as Roth IRAs, Roth 401(k)s, and Roth 403(b)s.

Last in line for withdrawals is money in tax-exempt accounts. The longer these savings are untouched, the longer the potential for them to generate tax-free earnings. And withdrawals from these accounts generally won’t be subject to ordinary income tax. They’re totally tax free, as long as certain conditions are met.1

And leaving any Roth accounts untouched for as long as possible may have other significant benefits. For example, money for a large unexpected bill can be withdrawn from a Roth account to pay for a bill without triggering a tax liability (as long as certain conditions are met1). Qualified Roth withdrawals are not factored into adjusted gross income (AGI) because they are not taxable income. This may help reduce taxes on Social Security and other income because they don't bump up taxable income.

For Roth IRAs, it is important to note that RMDs are not required during the lifetime of the original owner, but for Roth 401(k)s and Roth 403(b)s, the original owners do have to take RMDs. That can be a good reason to consider rolling Roth 401(k)s and 403(b) accounts into Roth IRAs. Roth accounts can be effective estate-planning vehicles for those who wish to leave assets to their heirs. Any heirs who inherit them generally won’t owe federal income taxes on their distributions. On the other hand, Roth accounts are generally not an advantageous vehicle for charitable giving, so those involved in legacy planning may want to avoid the use of Roth accounts to the extent that this money is intended for charity. Be sure to consult an estate planner in either case.

Creating a plan

While the traditional withdrawal hierarchy of taxable, tax-deferred, and tax-exempt assets is a good starting point for many retirees, a person's situation and changing circumstances may mean making adjustments. That’s why it is important to have an overall retirement income plan and regularly revisit it and update it when necessary.

Suppose, for example, that a person's tax rate will be higher later in retirement than in the first few years. For instance, they move from a low-tax state to a high-tax state. If so, they might want to consider strategies where they pay taxes on their retirement savings earlier in retirement in order to potentially lower taxable income later. One way to do that, depending on a person's situation, would be to shift more of savings to a Roth IRA by converting a portion of a traditional IRA. Learn more about this in Viewpoints “Four tax-efficient strategies in retirement.”

Those who have a significant portion of investments in taxable accounts may be looking for ways to lower a tax bill on the earnings as they gradually draw down the principal to cover retirement living expenses. One consideration that might help is to invest the bond portion of taxable accounts in a diversified mix of municipal bonds, the earnings from which are generally exempt from federal income tax.

Another situation that many retirees experience when they begin withdrawing money from their traditional IRA or 401(k) is that the amount pushes them into a higher tax bracket. In that case, it might make sense to consider withdrawing from a tax-deferred account until taxable income nears the top of a tax bracket, and then tapping a Roth or other tax-exempt account for any additional income.

Those age 70½ or older might also consider making a qualified charitable distribution (QCD) to satisfy all, a portion of, or even an amount greater than an RMD—up to the IRS limits ($100,000 in 2017). Because the amount donated directly from an IRA to a qualified charity isn’t considered taxable income, this move can help avoid being pushed into a higher tax bracket. It can also be a very useful strategy for those whose high incomes result in phaseouts of itemized deductions. Be sure to consult a tax professional in such cases.

Other factors that could play a significant role in a retirement tax strategy are whether a person intends to continue working, the income tax rate in the state and locality where they plan to retire, and how much of an inheritance they would like to leave for family members or to a charity.

Know your situation

The keys to managing withdrawals from retirement accounts is to know your situation and tax exposure, to understand the basics of smart tax planning, and to consult a trusted professional to get the help you need in designing a tax-efficient retirement income plan.

You work long and hard to build retirement savings; smart tax planning can help keep your savings working for you.

How to Invest in a Rising Rate Environment (Morningstar)

Libor Rising to the Occasion

By Emory Zink | 02-02-17 | 06:00 AM | Email Article

This article appears in the February 2017 issue of Morningstar FundInvestor.

The three-month London Interbank Offer Rate (Libor) surpassed 1 percentage point in early January 2017, a first since May 2009 for the widely referenced interest benchmark. The rate is derived by polling roughly 20 or so global banks on a daily basis for quotes of what they would charge other banks to borrow money for three months, dropping the outliers, and calculating an average. The result is used as a base rate for trillions of dollars in financial transactions and provides insight into liquidity and lending risk in the fixed-income markets. When Libor is higher, borrowing is more expensive, and when it is lower, funding is cheaper to access.

The 1% level may look modest, particularly given that Libor touched 5.7% in 2007, but relative to the rate’s post-financial crisis fate—it sat beneath 0.6% from June 2009 until nearly the end of 2015—its more recent ascent was notable. In 2016, it inched upwards, gaining momentum in the second half of the year as money market regulatory reforms hit full stride. The latter spurred many large investors to move assets out of prime money market funds with significant credit exposure into money markets composed of mostly government securities. Redemptions among prime money market funds trimmed demand for commercial paper and certificates of deposit, which in turn raised borrowing costs, and thus Libor’s levels. In fact, many ultrashort bond funds benefited from this structural adjustment, stepping in to snap up higher-yielding instruments at attractive prices leading up to and after the formal Oct. 14, 2016, date that money market reforms kicked in. The flexible

PIMCO Short-Term (PTSHX) and more buttoned-up

Fidelity Conservative Income Bond(FCONX) are two of our favored active ultrashort bond funds that have benefited from these market dislocations.

Bank loan investors have also benefited from the rise in three-month Libor. Minimum payouts for loans—typically referred to as floors—became ubiquitous after the rate plummeted during the financial crisis, and most floors stipulated that loans would continue to pay at least 1% plus a designated spread, even if Libor were to remain below that level. When three-month Libor rises and exceeds those 1% floors, though, as it did in early 2017, and loans began hitting their 90-day resets (typically) their coupons began floating higher to levels of Libor plus that additional yield premium built into each loan. Essentially, as Libor moved higher, floating-rate loans and notes based on that rate began to look more attractive.

The real question now is whether Libor will continue its climb. The U.S. Federal Reserve has hinted that it will likely gradually hike its own federal-funds rate in the coming months and years—Libor typically tracks that level closely during normal market conditions—which implies a trend of higher borrowing costs, if not necessarily a steep one. With prime money markets shrinking, ultrashort bond funds should likely continue to benefit by answering a healthy supply of commercial paper with selective demand, but there is no guarantee that supply won’t stagnate if borrowers seek less-costly forms of financing.

Perhaps even more important, though, is the impact that a rising Libor will have across an even broader expanse of financial markets given that most derivative transaction prices are linked to that rate, as well. It may seem like an obscure financial industry tool, but Libor is ultimately one of the most important rates affecting the entire global financial system.

Emory Zink is an analyst covering fixed-income strategies on Morningstar’s manager research team.

how to find better dividend paying stocks (motley fool)

10 Highest Dividend Yielding Stocks

Lets put these high-yielding stocks to the test to determine if any are actually worth owning.

Brian Feroldi

Dec 31, 2016 at 1:08PM

IMAGE SOURCE: GETTY IMAGES.

One sound long-term investing strategy is to buy stocks that offer up high dividend yields.This strategy has become particularly enticing in today's low interest rate environment, since it offers investors a chance to generate a lot of income from their portfolio. However, just because a stock offers up a high yield doesn't make it an automatic buy, especially because sky-high yields are often accompanied by sky-high risks. Knowing that, lets take a look at the 10 highest yielding stocks from the S&P 500 to see if any of them are worth buying today. For simplicity's sake, we'll exclude all real estate investments trusts, or REITs, from this article since they play by their own set of rules.

Company	Ticker	Dividend Yield
Frontier Communications	(NASDAQ:FTR)	12.3%
CenturyLink	(NYSE:CTL)	9%
Seagate Technology	(NASDAQ:STX)	6.4%
Mattel	(NASDAQ:MAT)	5.4%
Staples	(NASDAQ:SPLS)	5.2%
Ford	(NYSE:F)	4.8%
Pitney Bowes	(NYSE:PBI)	4.8%
Entergy Corp.	(NYSE:ETR)	4.8%
FirstEnergy	(NYSE:FE)	4.6%
AT&T	(NYSE:T)	4.6%

DATA SOURCES: FINVIZ

Is the payout sustainable?

Most dividend investors know that a key metric for any dividend stock is the payout ratio, which is the percentage of a company's earnings that it uses to pay dividends. In general, a payout ratio over 85% is worrisome as it hints that the dividend could be on the chopping block if the company's earnings ever take a hit. A payout ratio greater than 100% means that the company is paying out more in dividends than it generates in net income.

Here's a look at the current payout ratio for each of these companies.

Company	Payout ratio
Frontier Communications	N/A
CenturyLink	127%
Seagate Technology	200%
Mattel	144%
Staples	54%
Ford	33%
Pitney Bowes	56%
Entergy Corp.	48%
FirstEnergy	51%
AT&T	82%

DATA SOURCES: YAHOO! FINANCE

Right away we can see that this metric removes several companies from contention. Frontier Communications isn't expected to be profitable this year, which is why it doesn't even have a payout ratio. That makes it an easy pass in my book.

CenturyLink, Seagate Technology, and Mattel all boast payout ratios well over 100%, which means their dividend payments currently exceeds their net income. That lets us remove them from consideration, too.

Just like that, our list of 10 has been cut down do 6.

Is the business growing?

The remaining companies all appear to offer up stable dividend payments, but even dividend investors also need to think about growth. After all, if a company's profits are stagnant or declining, its dividend isn't likely to be increased over time, making it a far less attractive investment.

Let's take a look at the projected profit growth rates of our remaining list of companies to see what analysts believe is going to happen over the next five years.

Company	Estimated 5 year growth rates
Staples	1.3%
Ford	1.5%
Pitney Bowes	4%
Entergy Corp.	(8.2%)
FirstEnergy	(5.1%)
AT&T	8.4%

DATA SOURCES: FINVIZ.

While Entergy and FirstEnergy are profitable and paying out solid dividends, Wall Street believes that both of these companies are about to see their profits head in the wrong direction. Those numbers tell me that we should look elsewhere for investment opportunities.

Staples is another company that should give investors pause. The company's business model is under attack from e-commerce companies like Amazon.com, which is a big reason why same store sales numbers have been in decline. To fight back, the company is closing down its under-performing stores and investing heavily in Staples.com, but those moves are going to take their toll on the company's profitability.

The markets also appear to be quite concerned with Ford's long-term prospects. That's likely owing to worries about peaking auto sales in North America -- a theory which, if true, suggest that the company's sales and profit margins are currently unsustainable. In addition, autonomous vehicles and ride-sharing services are both long-term opportunities and threats to the auto industry. Given those realities, it's not hard to understand why analysts are being cautions with their growth estimates.

For these reasons, conservative investors might want to consider removing both Ford and Staples from contention, too.

And then there were two

Pitney Bowes sailed through our first two tests with ease, but that doesn't mean that this is a risk-free stock. In fact, the markets have been punishing shareholders for more than two years as the company has been struggling with growth. Last quarter the company's earnings fell by more than 22% due to lower-than-expected license revenue, which is one of the company's most lucrative business lines. That caused the company to reign in its full year profit forecast. That's a troubling development that could suggest that analysts are over estimating this company's growth prospects.

AT&T, on the other hand, has a lot going for it. The company's wireless division continues to be a cash cow that is supporting by very low churn rates. AT&T also offers investors the potential for growth thanks to its recent purchase of DirecTV. Its pending merger with Time Warner could also be a big win for shareholders if it goes through. . Even if the deal falls through, AT&T should still be able to crank out consistent earnings growth, allowing it to retain its status as a dividend aristocrat.

So there you have it. This simple list of criteria shows that income investors would be wise to add AT&T to their watch list and largely ignore the rest.

OJOS11

What You Will Find Here

READING LIST

Blog List

Mid-Year Steps to Save on Your Taxes (Fidelity)

Midyear tax check: 9 questions to ask

1. Did you get a raise or are you expecting one?