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EP 75 - Talking About Taxes

The focus today is going to be on taxes. You have more control over your taxes than you think. A big portion of my practice is centered around taxes and being tax smart. This does not mean doing anything illegal or even questionable. It simply means taking advantage of opportunities to not tip Uncle Sam and we do this through a variety of ways to reduce taxes. Now, this time of year, I'm asking all my clients to send me their completed tax returns. I don't do taxes, not even my own. However, I get into the returns to make sure everything is in order and more importantly to do planning for the current and even future years, and now is the time to be looking at taxes not waiting until the end of the year.

You will want to hear this episode if you are interested in...

  • Marginal tax rates [2:20]
  • Taxation of dividends and bracketology [5:16]
  • The differences between qualified and ordinary dividends [7:44]
  • Sun setting of current tax rates [9:52]
  • Will taxes will be lower now or down the road in retirement [13:54]
  • This week’s FLASHBACK [15:22] 

Tax rates 

Let's talk about a few simple tax and income-related concepts that plenty have heard of but not everyone understands. First, you have your marginal tax rate. This is where a lot of people focus their energy, but it's only part of the picture. The marginal tax rate is the additional tax paid for every additional dollar you earned as income. Basically, it's the top end of your tax rate. It's an important number, but it's not the entire picture. Let's now talk about effective tax rates. This is what most of us focus on, especially CPAs. It's also referred to as the average tax rate. Calculating this is simple. You just take the total amount you paid in taxes and divide it by your taxable income. I just want to point out that your average tax rate here is much smaller than your marginal tax rate. 

Differences between qualified and ordinary dividends

The next tax topic I want to talk about is dividends. Qualified dividends haven't been around that long, about two decades. The basic concept is they were created to reward longer-term investors and the dividends tax is set at a more favorable capital gains rate. Unlike long-term capital gains, which must be held for more than 365 days, qualified dividends must be held for more than 60 days during a 121-day period that starts 60 days before the X dividend date. Fortunately, you don't have to figure out if your dividends are qualified or ordinary as you'll get tax forms, letting you know. 

The other type of dividend is the old ordinary dividend. The simplest way to think about ordinary dividends is these are stocks and bonds you have not held for at least two months. The taxation of these two types of dividends is easy to remember, ordinary dividends are taxed like ordinary income. Qualified funds fall under capital gains brackets, which at this point are 0, 15, and 20%. The actual capital gains rate depends on your overall taxable income. 

This week’s FLASHBACK: Hiking Trails - Glens Trail

Glens Trail is part of the Gorge Park in Akron. There are two nice hikes there but I'm going to focus on the one opposite the main park. This is a scenic hike even though you start off with not so pretty views of the lake-like portion of the river overlooking the former energy plant. Just keep walking. Just be careful as the trail isn't the smoothest. Lots of little rocks to catch your feet and stumble, which is what I did on my first walk there. The end of this trail dumps out into the back of a business along Front Street. I wouldn't be surprised if the park system upgrades the entry point at some point as there are a lot of businesses opening up along this stretch. This is a great little hike with some great views. It's less than two miles in length and if you didn't feel like you got enough of a workout you go right back across the street and do a couple more miles right there at the Gorge itself.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.