Playing by the Rules and Saving Money with Accrued Interest on Bonds

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You’re Kidding Me!

How would you like to limit your capital gains, and therefore limit your capital gains tax, as well as increase the basis of your bonds, which also decreases your capital gains tax?



Did You Know?

When bonds are sold between interest payment dates, part of the cash you receive includes the interest that accrued up until the date of sale. In essence, the cash from your sold investment contains three elements:

  1. The principal
  2. Capital gains on the principal, if any
  3. Interest earned

Here’s How You Do It

If You Are the Seller:

Have your accountant report your accrued interest as gross income. By doing this, you are removing the interest earned as only being capital gains. At the same time, you are increasing the bond’s basis which raises the floor on the bond, also limiting capital gains tax.

Here’s how it looks in an example:

A bond costing $5,000 is sold for $5,300 on May 31. The sale price includes $200 of interest the bond accrued from January 1 through May 31.

Normally the $300 of increased value would be accounted as capital gains, but not this time. Have your accountant report interest income of $200, and capital gains income of $100. By dividing the earned interest and allocating the two portions as shown, you have limited your capital gains income and lowered your capital gains tax accordingly.

If You Are the Purchaser:

As the purchaser, you can deduct the accrued interest from the next interest payment. Use Schedule B to report the total interest payment, and on a separate line list “Accrued Interest”. You can now subtract this amount from the total interest, limiting your tax obligation. By parsing these funds, the basis of the bond does not include the amount of accrued interest.

Here’s a good example of how this works:

The purchaser of the $5,300 bond mentioned above receives $450 in total interest for the year, from June through December. The purchaser’s accountant uses Schedule B to report $250 of taxable interest income ($450 total interest – $200 accrued interest). This reduces the purchaser’s capital gains, siphoning off $200 into the taxable interest income category.

The other advantage is that the bond’s basis remains at $5,100 (the $5,300 purchase price minus the $200 accrued interest), also limiting capital gains taxes.


Limiting the amount of taxes you pay can significantly add to your wealth appreciation, your family’s financial well-being, and an ever-improving lifestyle. Consulting with a Certified Financial Planner® (CFP®), providing you with quality financial information and advice, can be very rewarding.



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Keep Your Investment Vehicles Out of the Tax Man’s Garage

5 Mid-Year Tune-ups You Should Do Right Now

Taxes clearly represent the proverbial two-edged sword: they pay for the necessary services our society requires such as good roads, hospitals, schools, etc.…but taxes also create limitations on lifestyle choices and the growth of investment portfolios. Reviewing tax strategies and selecting those which are applicable to your situation can meet your obligations while simultaneously preserving more of your wealth for your own personal and business needs. Planning for the inevitable now, at mid-year, can make a big difference at the end of fiscal 2016. Here are five strategies that may help increase your bottom line in a big way.

  1. Take a Close Look at Your Investments

This year’s federal income tax rates on long-term capital gains and qualified dividends are 0%, 15%, and 20%. The maximum rate of 20% affects taxpayers with taxable income above $415,050 for single taxpayers, $466,950 for married joint-filing couples, and $441,000 for heads of households. Individuals with high income can also be subject to the 3.8% NITT (Net Investment Income Tax) which can result in a marginal long-term capital gains/qualified dividend tax rate that could reach as high as 23.8%. Though high, this is still substantially lower than the top regular tax rate of 39.6% (or 43.4% if the NITT applies). What can you do?

Tax 2

A. Lower Your Taxes by Holding Your Securities Longer. If your taxable accounts hold appreciated securities, owning them for at least one year and a day will make them qualified for the preferential long-term capital gains tax rates. Your short-term gains are taxed at your regular rate, which could be as high as 39.6% (43.4% if the NITT applies), so it might be smart and in your best interests to hold these securities a little longer. Whenever possible, consider meeting the more-than-one-year ownership rule for appreciated securities in your taxable accounts. (Tax consequences are not the only consideration for making a buy or sell decision; other factors are involved as well, of course.)

B. When You Sell Your Shares, Sell the Right Ones First. As a general rule, when you decide to sell stock or mutual fund shares, the shares that were purchased first are the ones that are sold first. This would be good news if you are intentionally trying to qualify for the long-term capital gain rate. However, situations sometimes arise when it could be better to sell shares you’ve held for less than a year. Deliberately selecting the shares you wish to sell can make a big difference at tax time. When you decide to sell shares other than those that were purchased first, you must properly notify your broker.

2. Tax-Free Income Might Be a Good Choice For You.

A. Retirement Plans Offer Great Benefits. Most retirement account earnings are tax-deferred, meaning your account grows without the burden of taxation; as you withdraw these funds later in life, when you are likely to be in a lower tax bracket, the deferred and reduced tax is paid then. Time is a valuable resource, providing a continuing opportunity for increased growth; the sooner you fund such an account, the sooner your account grows with its tax advantage. If you have the cash, there’s no need to wait until year-end or the April 15 tax filing deadline to set aside your 2016 contributions. The only reason to delay is if your employer offers a 401(k) or SIMPLE-IRA plan at work; it’s smart to first contribute enough to your employee retirement plan to receive the full employer match before making an IRA contribution. Also, as you probably know, a Roth IRA is normally tax-free.

B. Invest in Tax-free Securities. Tax-exempt securities, owned outright or through a mutual fund, is an obvious source of tax-free income. Whether or not these provide a better return than the after-tax return on taxable investments depends on several factors such as your tax bracket and the interest rates. Since these factors change frequently, it’s a good idea to compare taxable and tax-exempt investments periodically.

C. Consider Making Charitable Donations from Your IRAs to Save on Your Taxes. If you’ve reached age 70½, up to $100,000 of taxable IRA money can be paid directly to your specified tax-exempt charities. Known as Qualified Charitable Distributions (QCDs), they are federal income tax-free to you. You aren’t allowed to claim any itemized deductions on your Form 1040 but the tax-free treatment provides a 100% write-off. The benefit to you is that you can count this charitable distribution as part of your legally required annual minimum distribution which you’d otherwise be forced to receive and pay taxes on in that year. To qualify for this special tax break, the funds must go directly between your IRA and the charity.

3. Use the Available Deductions to Your Best Advantage

A. Make Sure the Standard Deduction is Working at Maximum Power for You. The standard deduction rule allows you to make a deduction that is equal to the greater of either your itemized deductions, or a flat amount known as the standard deduction. Thus, itemized deductions only lower your taxable income to the standard deduction. For 2016, the standard deduction is $12,600 for married taxpayers filing joint returns. If single, the amount is $6,300 (unless you qualify as head of household, in which case it’s $9,300). If you’re at least 65, you receive an additional standard deduction of $1,250 if you’re married (plus another $1,250 if your spouse is also 65 or older), or an additional $1,550 if you’re single. In 2017, these amounts are likely to be slightly higher after an inflation adjustment.

If your total itemized deductions are close to whichever standard deduction applies to you, you may be able to leverage an additional benefit by “bunching” your deductions every other year. In this manner, you can time your itemized deductions so they are high in one year and low in the next, claiming actual expenses in the year they are bunched and taking the standard deduction in the intervening year. (Examples of deductions you might shift include charitable contributions, and state and local income and property taxes.)

B. Increase Your Participation in “Passive Activities”. The passive activity rules prevent many taxpayers from deducting losses from business activities in which they do not “materially participate”. These losses are from partnerships in which the taxpayer is not personally involved or does not participate to the extent required by the tax rules. However, taxpayers can satisfy any one of several tests (e.g., spending more than 500 hours per year in day-to-day operations) to meet the material participation standard. If you’re expecting a current-year loss from an activity or are carrying a loss from a prior year, with proper planning between now and year-end, you may be able to increase your involvement and deduct some of the losses, lowering your tax responsibility.

4. Carefully Review Your Business Deductions

A. Take Advantage of Section 179’s Deduction. Under Section 179, an eligible business can often claim first-year depreciation for the entire cost of new and used equipment, software additions, and eligible real property costs, like vehicles. Aside from Section 179, your business can also claim first-year depreciation equal to 50% of the cost of most new equipment and software placed in service by year-end.

B. Sell the Business Vehicles, Don’t Trade Them In. Tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. When it’s time to replace a vehicle, it’s not unusual for its tax basis to be higher than its value. Should you trade-in the vehicle, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one. However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss.

C. Employ Your Child. If you are self-employed, you might want to consider employing your child to work in the business. Income shifts from you to your child, who is in a lower tax bracket and who may avoid tax entirely due to your child’s standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from Social Security, Medicare, and federal unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, have a great start on retirement savings since the compounded growth of the funds over many years can be significant. Remember that wages must be reasonable given the child’s age and work skills, and if the child is in college or entering soon, too much earned income can negatively impact the student’s financial aid eligibility.

D. Establish a Retirement Plan for Your Business. If your business doesn’t offer a retirement plan, now might be the time to benefit from one. Current retirement plan rules allow significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum annual contribution of $53,000. A SIMPLE-IRA, on the other hand, allows you to set aside up to $12,500 plus an employer match that could potentially be the same amount. In addition, if you’re age 50 or older by year-end, you can contribute an additional $3,000 to a SIMPLE-IRA.

5. Also Consider Estate Planning to Save Taxes

The estate tax is a tax levied on an estate being transferred from the deceased to a beneficiary. Estate taxes can be severe, consuming as much as 49% of the estate’s value, or even higher with the tax your estate might have to pay from a combination of federal tax and the state estate tax levied by some states.

Your estate’s taxation can be influenced by various factors, among which are divorced partners, minor children, and below-market loans to family members. These are all excellent reasons to use a team of professionals who are trained to minimize the burden of your estate’s taxation.

The unified federal gift and estate tax exemption is a generous $5.45 million in 2016, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it’s possible it may need updating to reflect the newest changes to current estate and gift tax rules.


Tax planning is an important but complicated task requiring a thorough analysis of your unique financial circumstances, or you could be paying too much in taxes and sacrificing too much of your hard-earned wealth. With the changes approved by Congress in late 2015 that made the long-favored tax breaks permanent, taxpayers can finally determine the impact of these tax provisions on their long-term financial and business planning decisions. For 2016, the top federal income tax rate is 39.6%, but higher-income individuals may also have to pay the 0.9% additional Medicare tax on wages and self-employment income and the 3.8% Net Investment Income Tax (NITT), which can both result in a higher marginal federal income tax rate.

The point is that tax laws remain staggeringly complicated and now, at mid-year, is the perfect time to enjoy the support of trained professionals who will review your situation in detail to see how the tax-reducing strategies mentioned in this report, as well as many other tax reduction ideas, can be used to save your money.

The summer is a great time to assess where you are and where you want to be. Evaluate your tax situation, set a plan, and implement strategic adjustments between now and year-end that preserve your wealth.

Investing with Chicken Little

There will always be people who prefer to look on the dark side of situations, believing the world is about to end. Chicken Little saw danger everywhere, each sign posing imminent destruction. Then there was Pollyanna who was excessively optimistic about everything, positive to a fault.

This same attitude of deep concern or exuberant enthusiasm voiced by economists and analysts gets old after awhile when the promised debacle or economic paradise doesn’t materialize on schedule…or ever.

The most recent example of gloom and doom in the markets has been the unimaginable horror of Britain’s exit from the European Union after 40 years of membership. Investors immediately responded with fear of the unknown, or with the expectation that the markets would fall…which they did…only to exceed their pre-Brexit performance levels a few days later.

British Phone freestockphotosBefore Brexit there was the crisis with Puerto Rico being unable to pay back its debts; before that there was the high price of a barrel of oil, jumping to about $140…though today it’s under $50. Before that there was the housing boom and bust, and before that there was… Each of these events was regarded by many as the End of Life as We Know It.

You must remember that as odd as it may seem, the lure of lucre creates two primary emotions: fear and greed. Fear, because no one wants to lose their hard-earned gains; and greed, because everyone wants to grab as much cash as possible while the treasure gates are open.

Believing that recession is just around the corner when some bad news hits the fan is the game that Chicken Little plays best. There are really only four threats to wealth creation, and that’s monetary policy, tax policy, trade policy, and burdensome spending and regulation. When these four factors don’t overly interfere with the free market, prosperity grows. When they interfere and confuse the market, it’s like jamming a stick in a bicycle’s spokes.

The important take-away is to base one’s decisions on facts, not fantasies. Synergetic Finance’s forecasts always derive from a clear analysis of real data. We do not jump from lily pad to lily pad on the winds of hot news stories or the fanciful imaginations of What Could Be. We are strictly data-driven.

Because of the industry we’re in, and the tendency for human emotions to jump to extreme viewpoints, there may never be an end to the warnings of a falling sky…but by the same token, we count ourselves among those who keep our head when others have lost theirs, steadily minimizing risk and maximizing return, serving our clients in a calm and professional manner that builds their ever-growing financial success and wealth.

Understanding Stock Market Indices

When watching the news on television or listening on the radio, there are often reports about the daily performance of the stock market. Usually the announcer is referring to either the Dow Jones Industrial Average or the S&P 500, and sometimes you might hear about the NASDAQ. These are just three of the many stock market indexes, or indices, that are active in the United States. There are also many stock market indexes in countries around the globe.

What Is a Stock Market Index?

A stock market index represents a particular segment of the stock market and measures, as an average, the performance of all the companies included in that index.

Some indexes measure the performance of large companies known as large caps. Large caps are companies with large capitalization, meaning these companies have large financial resources. Some indexes measure the performance of mid-caps, and small caps. There are also indexes that measure market sectors, such as transportation stocks, utility stocks, and commodity stocks, to name a few. In fact, there are dozens of indexes, all designed to help investors understand whether an investment in a particular area of the stock market has the potential for making a profit.

How Is a Stock Market Index Composed?

The purpose of an index is to identify the trend of a market sector so that investors can determine if they should purchase the stock of companies represented by the index.

Because an index is a collection of many companies, sometimes thousands of companies, each of the companies in the index must represent a mathematical value so the index can measure the performance of the included companies and provide an accurate picture of the market’s trend.

Think of the U.S. House of Representatives for a moment. A state with low population, like Montana, has only 1 representative while a more populous state like California has 53. It’s the same with a stock market index; each company receives a weighting based on its mathematical value within the index.

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Two Types of Indexes:

  1. The first type is the price-weighted index. A price-weighted index like the Dow Jones Industrial Average uses each company’s stock price as its proportional value to the overall average. With a price-weighted index, stocks with higher prices have more impact on the average than stocks with lower prices. If one company’s price-per-share is $60 while another company’s price-per-share is $20, the decline of 1% in the more expensive stock will have a more profound effect on the average than a decline of 1% in the less expensive stock.
  1. The second type of index is market capitalization-weighted. The NASDAQ Composite Index and the S&P 500 are examples. The index average is based on the relative size of each company in the index. Large-cap stocks have more influence on the index average than stocks with lesser capitalization. When a $5 billion company gains 1%, its influence on the index is more profound than a 1% gain by a $1 billion company.

As you can see, these two different types of indexes represent alternatives for calculating the performance of a market segment, offering insight from different perspectives.

What Is the Real Value of a Stock Market Index?

A performance average has value for some investors, but not for others. It depends on your investment philosophy. Some investors prefer a passive investment style and will purchase funds that mirror the performance of a particular index. For example, a passive investor may choose to purchase a small cap index fund because the investor’s research indicates that small-cap companies may soon enter a growth cycle. The passive investor’s fortunes rise and fall with the average performance of all the companies included in that fund. When the index does well, so does the investor; when the index declines, the investment declines as well.

An active investor will study the stock market indexes as a means for understanding a particular market segment in general, but will choose to purchase stocks that are calculated to offer more opportunity for profit than the average fluctuations of a market index. This will be the subject of a future blog, though, if you are interested in knowing more about active investing, please contact me for an eye-opening conversation.

What Are Some of the More Predominant Stock Markets in the U.S.?

Here’s a short list of some of the more popular stock market indexes:

The Dow Jones Industrial Average: This index is composed of the 30 most dominant companies in the United States. (Also known as the Dow, and DJIA.)

  • The S&P 500: Composed of the 500 most-traded stocks in the United States. (Also known as the Standard & Poor’s 500.)
  • The Wilshire 5000: Representing 5,000 companies headquartered in the United States, this index is regarded as a total market index because it includes almost all publicly-traded companies.
  • The NASDAQ: The NASDAQ Composite Index is a technology company index. This index includes some companies that are not headquartered in the United States. Because it also contains a number of small- cap companies, it is regarded by investors as a more speculative index.
  • The Russell 2000: This index became popular when small-cap companies surged in the 1990s. It is composed of the 2,000 smallest companies in the Russell 3000’s largest publicly-traded companies.

Which International Stock Markets Are Important to Follow?

Internationally, these five stock market indices are a good starting point for following the performance of international companies:

  • FTSE: The Financial Times Stock Exchange 100 Index is the United Kingdom’s stock market index, listing 100 of the largest capitalized companies on the London stock exchange.
  • DAX: The Deutscher Aktienindex is composed of 30 major German companies available on the Frankfurt Stock Exchange.
  • CAC 40: This French index measures the capitalization-weighted performance of the top 40 of the top 100 market caps on the Euronext Paris. CAC stands for Cotation Assistée en Continu.
  • Shanghai Composite Index: Also known as the SSE, or Shanghai Stock Exchange, this index represents the top 50 Chinese companies as measured by market capitalization.
  • Nikkei: Japan’s Nikkei 225 Stock Average consists of the top 225 companies traded on the Tokyo Stock Exchange.

Monitoring the performance of these international stock indices can be helpful for understanding international economic influences that may have bearing on the United States stock market. Because we live in a global economy in which a nation’s financial performance often relies on activity in other markets, staying informed is part of the texture of being an astute investor.

Final Thoughts

This overview of stock market indexes should be a good starting point for your further examination. Indexes have value for investors who wish to take an informed role in either monitoring or actively developing their portfolio’s performance and growth.

If you would like to engage in a discussion on the nature of stock market indexes and how your portfolio is affected by these ever-changing market averages, or how to develop a portfolio that may create wealth in excess of average market performance, please call me. I would enjoy discussing opportunities for developing your financial security and growth.

Financial and Investment Expert Joseph M. Maas Publishes Second Book – 401(k) Insight: Getting to “Retired!”

Author Joseph Maas releases 401k Insight: Getting to Retired!Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM, a Principal and Investment Advisor with Seattle-based Synergy Financial Management, LLC, has published the second book in his Insight Series, 401(k) Insight: Getting to “Retired!”

Active for over 23 years in the financial services and investment industries, Maas is an expert with helping business owners establish a 401(k) that benefits the company with reduced taxes, and increases retirement savings for both the owner and employees. John A. Flavin, a Certified Financial Planner, joins Mr. Maas as co-author.

This 280-page, soft-cover book addresses two audiences. For the business owner, the book details the steps involved with creating a 401(k), guiding the owner with understanding the financial value of having a 401(k), the sponsor’s role and responsibilities, and familiarity with the RFP process when hiring the professionals who service the plan.

For the employees, Maas and Flavin explain the value of this outstanding financial opportunity and describe how employees can use their 401(k) to build a retirement fund that creates a comfortable lifestyle for their elder years. Maas and Flavin use an in-depth case study of Linda Nelson, a fictional woman in her late 20s who is contemplating her financial future and retirement. The authors demonstrate how Linda can achieve her financial goals with careful planning, and model the decision-making process through Linda’s experience.

Easy-to-follow charts and illustrations provide business owners with a step-by-step guide to starting a 401(k) plan, and employees with knowing how to take full advantage of this wonderful financial instrument for retirement saving and investing.

401(k) Insight: Getting to “Retired!” is the second book of the Insight Series that guides business owners and professionals toward long-term financial success. The premier book, Exit Insight: Getting to “Sold!”, focuses on teaching business owners how to prepare for the sale of their businesses. Future books will share Maas’ expertise and insight on investing, and with starting a new business.

401(k) Insight: Getting to “Retired!” is available for $24.95 at Merrell Publishing and To learn more about this book, please contact author Joseph M. Maas at 206-386-5455 or

About Joseph M. Maas

Joe Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM, is an unusual financial advisor because he is certified in so many areas of expertise. Maas has earned certificates from nine prestigious organizations. With over two decades of financial industry experience, he offers refined professional advisory skills to business owners, private wealth clients, and trusts. Maas established his company, Synergetic Finance, to provide personalized financial service, customized for each client’s unique circumstances. With a team of capable and broadly experienced financial advisors, Maas provides a complete mix of integrated financial services.

About John A. Flavin

John Flavin is a managing principal with Synergy Financial Management. In this role, John coordinates the efforts of Synergy’s other team members in executing the financial planning and investment process. After completing a postgraduate program in Baltimore, Maryland, John moved to Seattle and began his career in financial services. Mr. Flavin holds the CFP, AIF, CLU, ChFC, and CCIM designations.

For more information, please contact:

Synergy Financial Management, LLC
701 5th Ave., Ste. 3520, Seattle, WA 98104


Tax Exempt Income vs. Tax Deferred Income

estate planning checklistIt’s tax time and everyone wants to know how to reduce their income tax liability. While it may be too late to make changes that impact 2014, you’ve got plenty of time to make changes for 2015. As you do so, keep in mind the differences between tax exempt and tax deferred income.

Tax exempt income:

Many tax-exempt investments are available that provide interest without taxation. Most common are municipal bonds issued for various government operations like building roads, schools, libraries, etc. These are issued free of federal tax, and may also be free of city and state taxes if the purchaser resides in the locale. Your financial planner will guide you with selecting the best tax exempt investments for your portfolio by comparing the after-tax return rate with other investments of similar risk, so you receive the best return available.

Your financial planner will also advise that though the interest is tax exempt, you may be liable for capital gains tax when these bonds are sold. Tax free growth is one of the most potent investment opportunities available, but there are many rules and tactics to contemplate when considering tax exempt income, and your advisor will help you select the best choice for you.

Tax-deferred income:

With tax deferred income, the return on these investments is not taxed until it is withdrawn. Therefore, earnings continue to grow without the restriction of taxation, making these investments another formidable opportunity for investment growth. As these investments have a time-value advantage, your estate may not need to withdraw any earnings for quite a while, at which time you may be retired and in a lower tax bracket.

The preceding text is an excerpt from “Exit Insight: Getting to ‘Sold!’” by author Joseph M. Maas, available for purchase online at Merrell Publishing or Amazon.

Want more information on income taxes and how to reduce your income tax liability? The financial planning experts at Synergetic Finance are ready to help! Contact us and we’ll explain the ins and outs of tax planning and help you make smart choices to reduce your tax liability.

Alternative Minimum Tax and Capital Gains Tax

bigstock-Money-on-a-calendar-concepts-o-8300252While there are a seemingly endless variety of taxes that local, state and the federal government imposes on citizens, here are two taxes that are worth a quick description because these may impact you directly.

  1. The Alternative Minimum Tax (AMT): The AMT is mostly focused on individuals, C corporations, estates and trusts with high income to ensure that these entities don’t completely escape federal-level income tax through the adroit use of deductions, credits and exclusions they may employ. This way, these entities pay income tax through the AMT’s alternative tax system.
  1. Capital Gains Tax: A capital gain occurs when a capital asset such as stocks, land, buildings or equipment is sold at a higher price than the price of its original purchase. The capital gain is the difference between the two prices. If one of your assets has a capital gain when it’s sold, you have incurred a tax liability on the appreciated value. However, since the current highest tax rate for ordinary income is presently 39.6% and the current highest tax rate for capital gains is presently 20%, or almost half, it’s to your tax-savings advantage if you can precipitate more capital gains, either by selling capital assets or earning certain dividends that are taxed at capital gains’ tax rates.

The preceding text is an excerpt from “Exit Insight: Getting to ‘Sold!’” by author Joseph M. Maas, available for purchase online at Merrell Publishing or Amazon.

Want more information on income taxes and how to reduce your income tax liability? The financial planning experts at Synergetic Finance are ready to help! Contact us and we’ll explain the ins and outs of tax planning and help you make smart choices to reduce your tax liability.


Planning for Income Tax Reduction

irs tax creditsThe purpose of planning a tax strategy on the income you receive is to limit the amount of federal income tax you would otherwise have to pay. There are several ways to do this so you can save your hard-earned money, such as reducing your taxable income, or perhaps deferring income to another tax year, or choosing to shift income to family members in lower tax brackets. Other strategies include investment tax planning, deduction planning, and year-end strategies that reduce your estate’s income tax so you preserve as much of your wealth as possible.

Defer Your Income: By postponing income in the current tax year until a future year, you may be able to reduce your immediate tax liabilities, and also be in a lower tax bracket as well, saving taxes in two ways. An arrangement like this is possible with certain retirement plans, or you may be able to structure the sale of your business so that you receive income from the sale on a schedule.

Shift Income to Family Members: Federal income tax liabilities can also be reduced by shifting income to other members of your family who are in lower tax brackets. You may own a stock that generates a lot of dividend income; when you gift the stock, the tax responsibility is shifted, assuming you don’t exceed the $13,000 ceiling on tax-free gifts. A family limited partnership might also be an appropriate way to shift income so tax liabilities can be reduced. As you realize, there are a number of factors involved when income shifting to family members, including children, in a C corporation, an S corporation, or a Family Limited Partnership. A tax advisor will advise you on the feasibility of these and other tactics, and all the pertinent details you’ll need to know and consider.

Deduction Planning: By claiming all the deductions to which you are entitled, you may be able to significantly reduce your income tax liabilities. In addition, you may be able to control whether a deduction is best placed in one year or another, to provide a greater reduction in your tax liability.

Timing Strategies: By consulting with your financial planner, you will have the benefit of premeditated investment choices that control your vulnerability to taxation. Tax-exempt securities could be a good asset class for you, as well as timing the sale of capital assets. Generally, long-term capital gains (ownership of over one year) are taxed at a lower rate than ordinary income, so holding assets for over a year may contribute to a tax saving. Your financial planner will be indispensable for the value of professional advice he can provide.

Year-End Tax Planning: Because year-end planning is conducted in the last quarter of the year, a more factual tax strategy can be implemented because much of what has occurred during the year is known, or can be anticipated. Your financial planner may now be more precise with recommendations to delay income for subsequent years, and more specific about deductions you should take or delay to limit your estate’s tax exposure.

The preceding text is an excerpt from “Exit Insight: Getting to ‘Sold!’” by author Joseph M. Maas, available for purchase online at Merrell Publishing or Amazon.

Want more information on how to reduce your income tax liability? Contact Synergetic Finance. We can answer your questions and advise you on the many options available to you.


The Purpose of Risk Management

Exit Insight: Getting to Sold!There is a great variety of risk in our lives, and mitigating these risks is an intelligent response to achieve financial self-preservation.

Personal risk

When considering insurance as a means for financial protection, two main issues must be considered and resolved:

  • Your ability to accept the financial risk inherent in insurance policy protection, and
  • Your willingness to weather the volatility that sometimes accompanies insurance policies’ value development

There are two main reasons for purchasing insurance policies:

  • To protect your financial well-being
  • To accumulate cash
  • And: a combination of the two

Insurance as a source of financial support for dependents

Insurance can be an excellent tool for providing financial support to the surviving family members. Funds from insurance policies can be used for the typical household expenses of paying bills, maintaining mortgage payments, purchasing food, clothing and health care, and can also be applied to education, day care, legal fees, or business costs.

Insurance to service debt

Insurance is also an effective means for providing resources to pay off a mortgage, vehicle loans, credit card debt, and debts such as college or business loans. Death does not terminate the estate’s obligation to pay back these debts, and an insurance policy could be very useful for preserving your survivors’ finances.

Insurance for personal uses

Insurance policies can also be a great resource during your lifetime. Cash value life insurance policies can potentially accumulate cash you can use for any purpose through a policy loan, or policy termination if circumstances warrant. If you terminate your policy, you would pay taxes on the funds you receive, possibly at a favorable rate.

Assessing your personal needs

Initially, you and your insurance advisor or financial planner should analyze your need for insurance to determine if life insurance fits well into your estate’s strategic plan. The key focus will be to understand the result of your family’s financial situation if the main financial contributor were to die. This analysis of your family’s needs will be a review of the death’s effect on income, existing assets, indebtedness, and living expenses in the future.

Insurance policies can assist with retirement needs, estate and tax planning, educational support for family members, etc. A careful review will determine if your situation would benefit from insurance, and if so, how much should be acquired and what type of policy is best suited for your purposes.

Insurance company risk?

Your advisor should recommend purchasing insurance only from absolutely sound insurance companies. Insurance companies are rated by independent services that assess the financial strength of these companies, and their ability to pay claims. Some of the best rating services are Standard & Poor’s, AM Best, and Moody’s. Your advisor should recommend purchases with high ratings from these companies.

Two types of policies

Term insurance provides only financial protection and has no cash value component. Upon your death, the insurance company pays your beneficiaries.

Term insurance is like renting. You pay rent, and when you leave, you take no equity with you. It provides only financial protection and has no cash value component. Upon your death, the insurance company pays your beneficiaries.

Cash value policies are like owning a home. You can build equity, and when you sell your home, you may even make a profit. They provide a death benefit, and after a period of time, cash value may have accrued and can be loaned to you, or paid out when the policy is terminated.

While there are many other types of polices available, they are all a variation of these two basic types. The right type for you depends on your circumstances.

The preceding text is an excerpt from “Exit Insight: Getting to ‘Sold!’” by author Joseph M. Maas, available for purchase online at Merrell Publishing or Amazon.

Have questions? Wonder what types of policies will reduce your particular risks? Contact Synergetic Finance. We can answer your questions and advise you on the right types of risk management for your needs.


FAQ: What are some of the different types of trusts?

Exit Insight: Getting to Sold!In our most recent post, we gave a brief overview of trusts and why a business owner might need one as part of an estate planning package. In this post, we’ll explain a few other types of trusts, although our list is not all-inclusive. Synergetic Finance founder and author Joseph M. Maas explains trusts in his book, “Exit Insight: ‘Getting to ‘Sold!’” The following is an excerpt from pages 180-182.

Other Types of Trusts

The following is not a full listing of the many trusts available to you, but is intended instead to demonstrate there are myriad choices available to serve your estate according to the strategic plan you and your financial planner have created.

The basic plan is to retain as much of your estate’s value as possible by limiting tax liability, and transferring your estate’s properties efficiently to your beneficiaries. Each person’s circumstances are unique, so the assortment of trusts from which you can choose provides opportunity to protect the wealth you’ve worked so hard to build. Critical to this endeavor is using the trained skills and talents of a professional and independent financial planner who understands your goals and can guide you toward achieving them.

  1. Irrevocable Life Insurance Trusts: By shifting your life insurance policies into a trust, these policies avoid probate, the proceeds are also kept out of your estate, and you ensure that your beneficiaries have liquidity to help them through the transitional period following your death. In addition, though you lose the capacity to exercise complete control, additional advantages are that the assets cannot be claimed by creditors, you can name your trustee and specify how the policy proceeds are to be invested, and you can also specify the timing of when the trust’s beneficiaries will receive their proceeds.
  1. Revocable Life Insurance Trusts: While a revocable life insurance trust won’t provide protection from tax liabilities, it does offer other benefits that may be attractive, such as controlling the trust by yourself or through a professional manager; you can make adjustments according to your life’s changing circumstances of birth, death, divorce, and marriage; and among a variety of other details you will discuss with your planner, including both various advantages and disadvantages, you have shielded these assets from probate.
  2. Bypass Trust: The assets in this trust bypass the surviving spouse’s gross estate, allowing the surviving spouse to potentially receive distributions without triggering tax liabilities, assuming certain parameters are maintained. This trust is best employed with assets that are expected to appreciate in value.
  1. Marital Trust: A marital trust, known also as an “A” trust, is established for the use of the surviving spouse and the children of the married couple. The marital trust effectuates on the death of the spouse, at which time identified assets are moved into the trust, and income generated by the assets, and sometimes the principal, can be used by the spouse. These assets avoid probate and prevent taxation.Then, upon the death of the surviving spouse, the marital trust can be used with a credit shelter trust, also known as a “B” trust and a bypass trust. The purpose of a B trust is to assure that the assets go to the married couple’s children, not to the new children of the surviving spouse if there is a remarriage with children.
  2. The A – B Trust: Also known as a ‘credit shelter trust, or CST, the A – B trust is the name given when the two trusts described above are used to work together. In further explanation, assets are transferred to the beneficiaries, normally the couple’s children, but the surviving spouse retains rights to the assets and the generated income for the rest of their life.
  3. The Qualified Terminable Interest Property (QTIP) Trust: This trust provides income and sometimes the principal for the use of the surviving spouse, and then for the allocation of the assets after the surviving spouse has died.
  4. Trusts to Provide for a Dependent with a Disability: In this case, any of several different types of trusts can be established to benefit an individual with a disability, providing supplemental resources for this person’s well-being without jeopardizing the ability to also receive the assistance of public funds. Supplementation may be for additional nursing care, public housing cost differentials, travel expenses for visits by the family to the individual, and any expenditures which benefit the individual without disqualifying the person from any public assistance program.
  1. Trusts for Minors: As you might imagine, there are also a variety of trusts available for minors.There is the ‘discretionary trust’, also known as the ‘minor’s trust’ which permits tax deductible financial gifts to a minor until they turn 21; it is defined by the Internal Revenue Code, Section 2503(c).

The ‘mandatory income trust’ or ‘income trust’ provides an annual income for a minor’s care and welfare. The income is taxable, but the donor may avoid taxes depending on their meeting the annual gift tax exclusion requirements. This trust is defined by the Internal Revenue Code, Section 2503(b).

The ‘Crummey trust’, named after the first person to use it, provides that the beneficiary has a set time, usually 30 days, to use the newest deposit to the trust; if the newest contribution goes unused, those funds are then added to the inaccessible portion of the trust and released later according to the terms of the trust. This is a ‘use it or save it’ trust.


It’s easy to see there are a variety of trusts available for a variety of purposes, and many more than are mentioned here. As always, it’s important to remember that you don’t know what you don’t know, so it’s the wise person who seeks the counsel of trained professionals who can then provide guidance on the array of choices, and work with you to select the best path to achieve your goals and satisfaction.

Copyright © Joseph M. Maas for Merrell Publishing 2014-2015

We hope these excerpts have given you a helpful summary about trusts and the various types. If you have questions about trusts or how they can assist you with your exit and estate planning, please let us know. Click here to send us an email or call us at 206-386-5455.

Want more information about exit planning, estate planning or trusts? Buy a copy of “Exit Insight” online now at Merrell Publishing or Amazon. A small investment today will give you great peace of mind later!