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Tax surprise for children of Gold Star families: Tax Strategy Scan

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

Surprising tax bill for sons and daughters of Gold Star families
Children of military personnel who died in active duty are facing a surprise tax bill for their annual survivor's benefit thanks to the new tax law, according to this article on The Wall Street Journal. The new law simplified the Kiddie Tax by switching the rate from the parents' rate to trust tax rates. In one case, the 6-year-old son of the late U.S. Navy Senior Chief Petty Officer Gary Headings owed nearly $7,000 in federal taxes. “This change is outrageous, and I can’t believe Congress intended it,” an accountant says.

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U.S. Army troops march into a hangar at Campbell Army Airfield during a homecoming ceremony at Fort Campbell, Kentucky, U.S., on Thursday, Jan. 22, 2015. The forty-two returning soldiers from the 86th Combat Support Hospital and 101st Airborne Division comprised the first wave of troops returning to Fort Campbell from a humanitarian deployment in the Ebola-stricken West African country of Liberia. Photographer: Luke Sharrett/Bloomberg

Clients nearing or in retirement? Capitalize with a Roth IRA conversion
Income tax cuts under the new tax law create a great opportunity for seniors who are retired or approaching retirement to convert some of their traditional retirement assets into a Roth, a Kiplinger expert writes. They could owe lower tax bill on the converted amount than on future mandatory distributions, as the tax rates could revert to previous levels or rise even higher after 2025, the expert says. “That’s because of our increasing national debt combined with the potentially decreasing tax revenues being collected by the government over the next several years.”

Clients in their 30s are doing a simple thing to get rich
As clients in their 30s are seeing their careers take off and their income increase, they should ensure that they invest for retirement and stick to a strategy or a plan, according to this article on CNBC. As they start building their nest egg, younger clients should know some of the basics, such as the difference between before- and after-tax investing, as well as the difference between a traditional and a Roth IRA, according to a CFP. “Know that you cannot beat the market,” the expert says, adding that younger clients “can afford to be aggressive [and stay] mostly in equities.”

Way too few clients grab this $5,020 tax break
Taxpayers should consider contributing to a traditional IRA to take advantage of the tax deduction for the contributions, according to this article on Motley Fool. Recent IRS data show that an average investor was able to save $5,020 on taxes by making deductible IRA contributions. While saving in a 401(k) and a Roth IRA also provides certain benefits, clients can make last-minute contributions to a traditional IRA and reduce their liability at tax time.

The average expense ratio among the top-performers is 40 basis points higher than the average.
April 9

Taxes on life insurance: Here’s when proceeds are taxable
Proceeds from life insurance are generally not subject to federal taxes, especially if the payouts are intended to help the heirs cover the expenses after the policy holder dies, according to this article on Bankrate. However, the heirs will owe taxes on the proceeds if the life insurance is held within an estate that exceeds $11.4 million. If the proceeds are given in installments, the beneficiaries will also face a tax bill on the interest that accrues on the payouts.

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