Tag: taxes

A Comprehensive Guide: Are Your Social Security Benefits Taxable?

You may have paid Social Security taxes throughout your working years, so it is natural to wonder whether those benefits can be taxed again in retirement. The answer is that, for many people, some portion of Social Security benefits can be subject to federal income tax.

It is one of the most common questions pre-retirees and new retirees ask. The rules are not always intuitive, and misunderstanding them can lead to an unexpected tax bill that affects your retirement income plan.

That is why this guide is designed to help you understand when Social Security benefits may be taxable, how the calculation works, and what it can mean for your broader financial strategy.

The Key Concept: “Combined Income”

The IRS uses a specific formula to calculate your income for Social Security tax purposes. Your Social Security number (SSN) does not determine your taxability; rather, it’s about your total financial picture.

To understand if your benefits are taxable, you must first determine your Combined Income, also known as Modified Adjusted Gross Income (MAGI).

The Combined Income Formula:

Combined Income = Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Your Social Security Benefits

Think of it as adding all your taxable income (like wages, pensions, and capital gains) plus your tax-exempt interest income (e.g., from municipal bonds), and then adding exactly half of your total Social Security benefits.

Navigating Federal Income Brackets

Once you have your Combined Income, the IRS uses three income thresholds to calculate the percentage of your benefits that are taxable at the federal level. The limits are different for individuals and married couples filing jointly:

If You File as “Single,” “Head of Household,” or “Qualifying Widow(er)”:

  • Under $25,000: 0% of your benefits are taxable. (Congratulations, you might get all your Social Security tax-free!)
  • $25,000 to $34,000: Up to 50% of your benefits may be subject to tax.
  • Over $34,000: Up to 85% of your benefits may be taxable.

If You File as “Married Filing Jointly”:

  • Under $32,000: 0% of your benefits are taxable.
  • $32,000 to $44,000: Up to 50% of your benefits may be subject to tax.
  • Over $44,000: Up to 85% of your benefits may be taxable.

Note on “Up to”: The 50% and 85% are maximums. The calculation is dynamic. For illustrative examples of precise tax situations, you would need to run detailed scenarios, but these brackets give you the essential ranges.

Don’t Forget About State Taxes

While federal rules apply across the entire country, state-level rules vary significantly.

  • Across the United States: The vast majority of states (42 states plus Washington, D.C.) exempt Social Security benefits from state income taxes entirely. However, a small handful of states—including Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont—still tax a portion of Social Security income based on state-specific thresholds.

If you are considering moving or splitting time between states in retirement, factoring state-level taxation into your plan is just as vital as federal planning.

What This Means for Your Financial Strategy

Understanding these rules is about more than just a tax form. It affects everything from your monthly cash flow to your overall retirement strategy.

1. Unexpected Taxes

A larger-than-expected tax bill can reduce the cash flow you thought you had available for spending.

2. Withdrawal Strategy

Where you draw income from matters. Pulling too much from taxable accounts or traditional retirement accounts can increase your provisional income and make more of your Social Security benefits taxable.

3. RMDs

Required minimum distributions can create a ripple effect. If RMDs raise your income enough, they can increase the taxable portion of your Social Security benefits as well.

4. Coordination Matters

Planning withdrawals from Traditional IRAs, Roth IRAs, brokerage accounts, and other sources together can help create a more tax-efficient retirement plan.

Taking the Next Step

These rules are manageable once you understand the framework, but they can still be complicated when you apply them to your own numbers. Your situation may also change over time as income, investment returns, tax law, and retirement needs change.

If you are making retirement income decisions, it is wise to consult a qualified financial professional or tax professional. They can help you run scenarios using your actual figures and build a withdrawal strategy that fits your goals.

The bottom line: Social Security benefits are not always tax-free in retirement, and the amount subject to tax depends on your overall income picture. With the right planning, you can better understand the rules and make smarter decisions about your retirement cash flow.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Midyear Tax Check-In: 5 Strategic Moves to Make Right Now

Summer is the ideal time to conduct a midyear financial check-up. Waiting until December leaves very little room to adjust strategy and waiting until tax filing season means it is already too late.

Taking a proactive approach now allows you to optimize your tax position, capture available incentives, and ensure your investment strategy directly aligns with your long-term goals.

Here are 5 key tax and financial check-ins to perform today while there is still time to take action.

1. Review Your Tax Withholdings (IRS Form W-4)

If you changed jobs, got married, welcomed a child, or experienced a significant shift in income this year, update your IRS Form W-4 with your employer.

  • Avoid large tax surprises: Underwithholding results in unexpected bills and potential penalties at year-end.
  • Stop giving the IRS an interest-free loan: A huge refund means you overpaid throughout the year. The IRS does not pay interest on your money. Redirecting that excess cash flow into high-yield savings or investment strategies allows your money to work for you.
  • Action item: Use the IRS Tax Withholding Estimator online or review your recent pay stubs to verify that your withholdings match your actual year-to-date income.

2. Maximize Pre-Tax Account Limits (FSAs & HSAs)

Review your current contribution levels and balances for employer-sponsored benefit accounts.

  • Flexible Spending Accounts (FSAs): Check your remaining balances for healthcare and dependent care FSAs. Because FSA funds operate on a “use-it-or-lose-it” basis (with limited rollover or grace period options), plan out your qualified medical, dental, or dependent care expenses now rather than rushing at year-end.
  • Health Savings Accounts (HSAs): Unlike FSAs, HSA balances roll over indefinitely. If you participate in a high-deductible health plan, aim to max out your HSA contributions to capture triple-tax benefits: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses.

3. Audit Your 401(k) Pacing and Matching

While IRA contributions can be made until the April tax filing deadline, 401(k) salary deferrals must be completed through payroll by December 31.

  • Employer Match Optimization: Ensure your contributions are paced evenly across all pay periods to capture your employer’s full match. Maxing out your 401(k) too early in the year can cause you to miss out on employer matching dollars in later paychecks unless your plan includes a “true-up” provision.
  • Catch-Up Contributions: If you are age 50 or older, review your payroll deductions to ensure you are utilizing catch-up contribution limits across your retirement accounts.

4. Strategize Capital Gains, Losses, and Business Expenses

Midyear provides enough year-to-date data to accurately project your marginal tax bracket.

  • Tax-Loss Harvesting: If you hold investments in taxable brokerage accounts, evaluate opportunities to offset realized capital gains with capital losses.
  • Roth Conversions: If your income is lower than usual this year, executing a partial Roth conversion can move funds into a tax-free growth bucket at a lower tax rate.
  • Business Owners & Side Hustles: Review business income and expenses. Ensure all legitimate deductions are tracked through dedicated business accounts. If operating as an S-Corporation, evaluate your expected annual income to ensure your mix of reasonable salary and distributions remains compliant and tax-efficient.

5. Streamline and Update Your Financial Records

Proactive tax planning relies entirely on clean, real-time financial data.

  • Maintain Clean Books: Reconcile your business and personal accounts monthly using software like Quicken or QuickBooks to spot errors and monitor cash flow.
  • Track Property Basis: Keep digital copies of closing documents and receipts for major home upgrades or rental property improvements. You will need these to calculate your cost basis accurately when selling.
  • Document Retention: Store tax records, receipts, and supporting documents in a secure, organized system. As a general rule, retain records supporting tax returns for at least 3 to 7 years.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

HSAs vs. FSAs: Key Differences and Tax Strategies Every Saver Should Know

Back in May, I broke down the powerful wealth-building advantages of Health Savings Accounts (HSAs). While that post focused strictly on HSAs, today I want to compare them directly with Flexible Spending Accounts (FSAs). Both accounts allow you to pay for qualified medical expenses using tax-free dollars, but their underlying rules governing ownership, rollover capabilities, and investment growth potential make them vastly different financial tools.

Understanding how to leverage each account—and navigating the updated limits—can significantly lower your annual tax bill while building a dedicated reserve for future medical costs.

HSAs vs. FSAs At-a-Glance

While both accounts deliver immediate tax relief, their structure and long-term utility differ substantially:

FeatureHealth Savings Account (HSA)Flexible Spending Account (FSA)
Health Plan RequirementMust be enrolled in a qualified High Deductible Health Plan (HDHP).Available with most employer-sponsored health plans.
2026 Contribution Limit$4,400 (Self-Only) / $8,750 (Family)$3,400 per employee
Catch-Up Contribution (Age 55+)Additional $1,000 annuallyNot applicable
Account Ownership & PortabilityYou own it. Retained if you change jobs or retire.Employer owns it. Generally lost upon job departure.
Unused Funds Rule100% Roll-Over. Balances accumulate indefinitely.Use-It-or-Lose-It. Subject to carryover caps or grace periods.
Investment OptionsFunds can be invested in stocks, bonds, and mutual funds.Cash-only holding account (no investment component).

The Triple-Tax Advantage of the HSA: The Ultimate Stealth Wealth Tool

For taxpayers looking to maximize tax efficiency, an HSA is often superior to traditional retirement accounts due to its unique triple-tax advantage:

  1. Tax-Deductible / Pre-Tax Contributions: Contributions made via payroll deduction reduce your gross income (and bypass FICA taxes) or can be claimed as a deduction on your income tax return.
  2. Tax-Free Growth: Capital gains, dividends, and interest generated inside an HSA grow completely free of federal and state income taxes.
  3. Tax-Free Withdrawals: Distributions used for qualified medical expenses—ranging from doctor copays to dental care and prescription eyewear—are tax-free at any age.

Strategic Retirement Angle: Once you reach age 65, an HSA functions similarly to a Traditional IRA. You can withdraw funds for non-medical expenses subject to standard income tax without penalty. However, if used for medical expenses in retirement, distributions remain 100% tax-free.

Navigating the FSA “Use-It-or-Lose-It” Trap

Flexible Spending Accounts are valuable employer-provided benefits, but they carry strict timeline constraints. If you do not spend your allocated FSA dollars within the plan year, you risk forfeiting those funds back to your employer.

Employers typically choose one of two relief mechanisms allowed by the IRS:

  • The Carryover Provision: Employers may allow employees to carry over up to $680 of unused 2026 FSA funds into 2027.
  • The Grace Period Provision: Employers can grant up to 2.5 additional months (typically until March 15th) following the end of the plan year on December 31st to spend remaining funds.

Note: Employers are permitted to offer either the carryover option OR the grace period, but not both.

Actionable Tax Strategies for Individuals and Business Owners

1. The HSA “Shoebox Strategy” (Long-Term Compounding)

If your cash flow permits, pay current out-of-pocket medical expenses using external cash rather than tapping your HSA. Save and digitize every medical receipt. Because the IRS imposes no time limit on when you must reimburse yourself from an HSA, you can let your HSA balance compound tax-free in growth investments for 10 to 20 years, then reimburse yourself tax-free in retirement using your saved receipts.

2. Confirm HDHP Qualification Rules for 2026

To contribute to an HSA in 2026, your health insurance plan must meet specific minimum deductible thresholds:

  • Self-Only Minimum Deductible: $1,700 (Max Out-of-Pocket: $8,500)
  • Family Minimum Deductible: $3,400 (Max Out-of-Pocket: $17,000)

3. Utilize a Limited-Purpose FSA Alongside an HSA

If your employer offers a Limited-Purpose FSA (restricted strictly to vision and dental expenses), you can contribute to both an HSA and an FSA simultaneously. This preserves your full HSA balance for long-term investment while funding predictable vision and dental costs with pre-tax FSA dollars.

4. Maximize Contributions Before the Tax Filing Deadline

You have until the federal tax filing deadline (typically April 15th) of the following year to make prior-year HSA contributions.

The Bottom Line

While an FSA is a practical tool for funding immediate, predictable healthcare costs within a single calendar year, an HSA is a powerful wealth-building instrument that should be integrated directly into your long-term retirement and tax strategy.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Mastering the Backdoor Roth: A 2026 High-Earner’s Strategy

Building long-term wealth requires more than just picking the right stocks; it requires picking the right tax structures. For high earners, the IRS often closes the front door to tax-free growth. Fortunately, the “backdoor” remains wide open.

Here is the 2026 blueprint for executing a Backdoor Roth conversion with precision.

🚪What is a Backdoor Roth?

A Backdoor Roth isn’t a specific type of account, it’s a strategy.

By law, if your income exceeds certain limits, you are barred from contributing directly to a Roth IRA. However, there are no income limits on contributing to a Traditional IRA or on converting those funds to a Roth. By combining these two steps, you effectively “bypass” the income cap, allowing your money to grow tax-free for decades.

📈Why It Matters in 2026

Tax-advantaged space is a finite resource. In 2026, the contribution limits and income thresholds have shifted, making this strategy more valuable than ever:

  • 2026 Contribution Limit: $7,500 (or $8,600 if you are age 50 or older).
  • The “Front Door” Income Caps: In 2026, the ability to contribute directly to a Roth begins to phase out if your Modified Adjusted Gross Income (MAGI) exceeds:
    • $153,000 (Single)
    • $242,000 (Married Filing Jointly)

⏳When is the “Best Age” to Start?

The short answer: The best age to start is the very first year your income exceeds the direct contribution limits.

Because Roth IRAs grow tax-free, time is your greatest ally. The earlier you start, the more “tax-free compounding” cycles your money undergoes.

  • Early Career (20s-30s): If you are a high-earning young professional, starting now can result in hundreds of thousands of dollars in tax savings by retirement.
  • The “Sweet Spot” (50+): At age 50, the IRS allows “catch-up” contributions (bringing your 2026 total to $8,600). If you haven’t started yet, this is the time to maximize your contributions while you are likely in your peak earning years.
  • The 5-Year Rule: Remember that every conversion starts its own 5-year clock before earnings can be withdrawn tax-free. Starting earlier ensures you clear these hurdles well before you actually need the cash.

🛠️How to Execute (The 3-Step Process)

  1. Fund a Traditional IRA: Open a Traditional IRA and make a nondeductible contribution. This means you don’t take a tax deduction for the contribution (since you’ve already paid tax on that income).
  2. The “Waiting Period”: While not strictly a legal requirement, I typically recommend waiting until the funds fully clear—usually a few business days—before moving to the next step.
  3. The Conversion: Instruct your custodian to move the funds from the Traditional IRA into your Roth IRA.

Expert Tip: Convert the funds as soon as they settle. If the money sits in the Traditional IRA and earns even a few dollars in interest, those earnings will be taxable upon conversion. We want the “basis” and the “conversion amount” to be as identical as possible.

⚠️The “Pro-Rata” Rule: The Biggest Pitfall

This is where most high earners get caught. The IRS views all of your Traditional, SEP, and SIMPLE IRAs as one giant bucket.

If you have $92,500 in an old Rollover IRA (pre-tax) and you add a $7,500 non-deductible contribution (after-tax), the IRS sees a $100,000 total balance. If you try to convert just that $7,500, they will claim only 7.5% of it is tax-free. You would owe income tax on the other 92.5%.

The Solution: Before executing a backdoor conversion, we must look for a “Reverse Rollover”, moving those pre-tax IRA balances into your current employer’s 401(k). 401(k) balances are excluded from this calculation.

📝Reporting to the IRS

Precision in paperwork is mandatory. You must file IRS Form 8606 with your tax return. This form tracks your “basis” (the after-tax money) so the IRS knows you’ve already paid taxes on that contribution and shouldn’t be taxed again during the conversion.

Summary Checklist

  • Verify your 2026 MAGI exceeds the direct Roth limits.
  • Confirm you have zero existing pre-tax IRA balances (check old SEP/SIMPLE/Rollover accounts).
  • Contribute up to $7,500 (or $8,600) to a non-deductible Traditional IRA.
  • Convert to Roth once funds settle.
  • Ensure your tax preparer files Form 8606.

At the end of the day, the Backdoor Roth is about more than just a single year’s contribution; it’s about the compounding power of tax-free growth over the course of your career. While the process is straightforward, the “Pro-Rata” rule and filing requirements leave zero room for error. If you’re ready to secure this tax-advantaged space for 2026 but aren’t sure how your existing IRA balances might impact the strategy, make sure you talk to a tax professional before you move forward.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

The Ball is in Their Court: How Congress Can Avert the Social Security Cliff

Social Security isn’t failing because of a lack of math; it’s stalling because of a lack of movement in Washington. While the program’s trust funds are undeniably shrinking, this is a crisis of legislative willpower rather than a lack of solutions. The 2025 Trustees Report makes it clear that the “safety net” is held up by a fraying rope, but Congress still holds the scissors—and the spool of thread. To save the program, lawmakers must stop treating Social Security as a political “third rail” and start treating it as a standard legislative repair project.

The Current Trajectory (2025 Trustees Report)

According to the Social Security Board of Trustees’ 2025 Annual Report, the timeline for action has narrowed. The report underscores that without intervention from the Capitol, the following milestones are inevitable:

  • The 2033 Deadline: The Old-Age and Survivors Insurance (OASI) Trust Fund—the primary source for retiree benefits—is projected to be depleted in 2033.
  • The Enforced Benefit Cut: Under current law, once reserves are gone, the Social Security Administration cannot pay full benefits. By 2033, incoming tax revenue would only cover 77% of scheduled payments, resulting in an immediate 23% cut for all beneficiaries unless Congress changes the law.
  • Growing Deficit: The 75-year actuarial deficit has risen to 3.82% of taxable payroll, meaning the gap Congress needs to bridge is larger than it was just one year ago.

The Congressional “Fix-It” List

Congress has several specific levers they can pull to stabilize the system for the next 75 years without cutting benefits for those who rely on them most. Fixing the program will likely require a “grand bargain” involving these components:

  • Scrapping the Earnings Cap: Currently, Social Security taxes are only collected on income up to $176,100 (for 2025). High earners stop paying into the system once they hit that mark. Congress could eliminate this cap or create a “donut hole” (e.g., taxing income above $250,000) to ensure the wealthiest Americans contribute at the same rate as the middle class. I feel this is the best way to fix the problem and can be implemented quickly.
  • Gradual Payroll Tax Adjustments: The 12.4% payroll tax (split between you and your employer) hasn’t moved in decades. A tiny, phased-in increase—such as 0.1% per year—would be barely noticeable on a weekly paycheck but would pour billions back into the trust fund over time.
  • Modernizing the Benefit Formula (The “Six-Figure Limit”): Lawmakers are currently debating a cap on maximum benefits for high-income couples (e.g., a $100,000 limit). By slowing benefit growth for the top 1–5% of earners, Congress can redirect funds to keep the program solvent for everyone else.
  • Longevity Indexing: For younger generations, Congress could index the retirement age to life expectancy. This would mean the age moves by mere months over several decades, reflecting the reality that we are living longer than the workers of 1935.

The math behind Social Security is straightforward; the politics are what’s complicated. We don’t need a miracle to save Social Security; we need a Congress that is willing to trade short-term political points for long-term national stability. By acting now, lawmakers can implement small, gradual changes that protect current retirees and guarantee a future for the next generation. The 2033 “cliff” is seven years away—it’s time for Washington to pick up the tools and get to work.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Be Prepared for 2026 Tax Season Scams

Scammers love tax season almost as much as they look forward to the holidays. In both cases, a seasonal flurry of financial transactions and activity provides cover and opportunities they can use to try to defraud investors and advisor firms.

We all try to be extra-vigilant during these periods. But unfortunately, today’s scams are more sophisticated and subtle than in previous years—with some offering no obvious red flags. The reason? AI.

Gone are the days of misspelled emails from dodgy addresses: these days, many fraudsters send professional, personalized communications that appear to come from trusted sources.

AI allows scammers to create realistic communications that feel timely and in line with legitimate communications you receive from trusted institutions, including polished emails, convincing phone calls, and messages tailored to you. These tactics are designed to create a sense of urgency, encouraging you to act quickly without verifying the request.

Real-World Examples of Tax Scams

“Refund on hold” texts or emails
Taxpayers may receive a notice that their refund can’t be paid until their personal information is verified. A link leads the victim to a realistic-looking fake website designed to capture personal or banking details.

Tax professional impersonation phone calls
Scammers use calm, professional-sounding human or AI voices to impersonate professionals from the IRS, a tax preparer, or a financial institution. These authoritative voices reference real names and firms to appear credible, and encourage recipients to take urgent action to “pay back taxes,” “claim a refund,” or “verify their information,” which of course leads to the theft of data or assets.

Personalized “action required” emails
These messages, which may advertise an unclaimed tax refund, a tax account update, or an important notice from the IRS, may include the victim’s name and top-of-mind tax season topics, making the message seem legitimate, and encouraging quick action without double-checking.

REMEMBER: tax authorities do not initiate contact by email, phone calls or text to request sensitive information. The IRS initiates most contacts through regular mail, not phone calls, and will never demand immediate payment or threaten arrest over the phone.

How to protect yourself

  • Pause before acting—urgency is a common scam tactic.
  • Verify any communications—if the “IRS” has contacted you, visit IRS.gov. and check the message you’ve received using a legitimate phone number.
  • Avoid clicking links or opening attachments in unexpected messages.
  • When in doubt, don’t respond—talk to your advisor or tax professional first.

Scams will continue to evolve as technology advances. Staying alert, slowing down, and verifying requests can help protect your personal and financial information.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Maximizing Your ROI: The Ultimate Guide to Capital Gains Deductions in 2026

When it comes to selling assets, what you keep is far more important than the sale price. Navigating the 2026 tax landscape requires more than just picking the right stocks or timing the real estate market; it requires a strategic understanding of how to lower your tax bill by accounting for every eligible expense. From the hidden costs of closing a deal to the power of tax-loss harvesting, knowing which deductions can offset your capital gains is the key to protecting your portfolio’s growth and ensuring you aren’t overpaying Uncle Sam.

To determine taxable capital gains for the 2026 tax year, the IRS allows you to deduct specific expenses that reduce either the final sale proceeds or the original cost basis of the asset.

Direct Reductions to Capital Gains

Taxable gain is calculated by subtracting your adjusted basis and selling expenses from the total sale price.

Selling Expenses: You can deduct costs directly related to the transfer or sale of the asset, such as:

  • Brokerage commissions and transaction fees for stocks and securities.
  • Legal fees, advertising, and appraisal costs.
  • Closing costs for real estate, including title search fees, notary fees, escrow fees, and recording fees.
  • Marketing and staging costs to prepare a property for sale.
  • Transfer taxes or stamp taxes charged by local or state governments.

Adjusted Cost Basis (Acquisition Costs): You can increase your basis (thereby decreasing your gain) by including:

  • The original purchase price of the asset.
  • Incidental acquisition costs like sales taxes, excise taxes, and shipping/handling.
  • Installation and setup charges required to make the asset usable.
  • Capital improvements for real estate that add value or prolong the property’s life (e.g., a new roof, kitchen remodel, or HVAC system). Note: Routine repairs like painting or fixing leaks are not deductible.

Offsetting Gains with Losses

One of the most effective ways to reduce capital gains tax is by deducting capital losses.

  • Tax-Loss Harvesting: You can use realized capital losses from selling underperforming investments to offset capital gains in the same year.
  • Net Loss Deduction: If your total capital losses exceed your total capital gains, you can deduct up to $3,000 of the remaining loss against ordinary income ($1,500 if married filing separately).
  • Loss Carryover: Any excess net capital loss above $3,000 can be carried forward indefinitely to future tax years.

Investment Interest Expense

If you borrowed money to purchase taxable investments (such as using a margin loan to buy stock), the interest paid may be deductible as an itemized deduction.

  • The deduction is generally limited to your net investment income for the year.
  • Any unused interest expense can be carried forward to the following tax year.
  • This deduction is not allowed in any tax-deferred accounts, such as an IRA.

Non-Deductible Expenses for 2026

Under current laws (including the One Big Beautiful Bill Act effective for 2026), several formerly common expenses are not deductible for individual taxpayers:

  • Miscellaneous Investment Fees: Investment advisory fees, IRA custodial fees, and accounting costs for individual investors are permanently disallowed.
  • Personal Property Losses: You cannot deduct losses from the sale of personal-use property, such as your personal car or a primary residence.
  • Securities Transaction Tax (STT): Certain taxes like STT or annual maintenance charges (AMC) for brokerage accounts cannot be claimed.

Maximizing tax efficiency in your investment portfolio requires careful attention to detail. By effectively tracking and managing adjustments to your cost basis and strategically utilizing tax loss harvesting, investors can potentially reduce their tax liability. Staying informed about current IRS regulations regarding investment expenses is crucial to ensure all deductions are properly claimed, ultimately allowing you to retain more of your investment returns.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

2026 Paycheck Checkup

If you find yourself with a few minutes of free time during these cold winter days, you should take a look at your pay stub to make sure your deductions and withholdings are up to date and squared away.

I think the following pay stub items should be checked at least annually:

  • Federal and state status and exemptions – You set these when you complete form W-4 for your employer. These determine how much tax your employer withholds from your pay. You probably should adjust these if your tax returns show a large refund or if you owe a large amount. You can make these changes online with your employer or turn in a revised W-4 to HR.
  • Deductions – Check that the correct amount is being taken out for your retirement plans and group insurance plans. I have seen too many times where an employee changes their 401k contribution, but it never gets changed in the system. Again, these can typically be changed online on your benefits’ website.
  • Employer Contributions – Make sure your employer is contributing where they are supposed to. Employer matching for retirement plans and insurance premiums are two of the most common employer contributions that you should verify are correct.

The IRS even has a page on their site that you can use to help you figure out what your withholdings (marital status and exemptions on your W-4) should be based on your current pay stub and previous year’s tax filings. Here’s the link: https://www.irs.gov/paycheck-checkup

The IRS say that the following circumstances warrant a check of your withholdings:

  • Are a two-income family
  • Have two or more jobs at the same time
  • Work a seasonal job or only work part of the year
  • Claim credits like the child tax credit
  • Have dependents age 17 or older
  • Itemized deductions on your returns
  • Have high income or a complex tax return
  • Had a large tax refund or tax bill this past year

Now is a good time to review these items because if there are mistakes, there is enough time left in the year to rectify the situation. Also, if you wait until the end of the year, it will be much harder to find the time during the holiday season.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

How to Lower Your Income and Keep Your 2026 Health Insurance Affordable

Starting this year, the landscape of the Affordable Care Act (ACA) has shifted dramatically. With the expiration of temporary enhancements, millions of Americans are now facing a return to the strict “subsidy cliff,” where earning just a dollar over the income limit means losing all premium assistance. So, let’s take a look at the new 2026 rules, including the specific income thresholds that trigger a full repayment “clawback,” and identify some of the ways that you can lower your Modified Adjusted Gross Income (MAGI), maintain essential subsidies, and avoid a massive tax bill.

For 2026, Affordable Care Act (ACA) premium tax credits have reverted to pre-2021 rules following the expiration of temporary enhancements. Subsidies are now generally limited to individuals and families with household incomes between 100% and 400% of the Federal Poverty Level (FPL).

2026 Income Limits for Subsidies

Based on 2025 Federal Poverty Guidelines used for 2026 coverage, the income ranges for eligibility in most states are:

Household SizeLower Limit (100% FPL)Upper Limit (400% FPL)
Single Person$15,650$62,600
Family of Four$32,150$128,600

If the income that you provided on the healthcare.gov (ACA) site falls within the range above, you will receive a healthcare premium subsidy. The amount will vary based on where your income falls within these ranges.

For 2026, the maximum percentage of income you must pay for a benchmark plan is as follows:

  • 100% to 133% FPL: Premiums are limited to approximately 2.1% to 3.14% of your annual income.
  • 300% to 400% FPL: Premiums are capped at approximately 9.96% of your income.
  • Above 400% FPL: The “subsidy cliff” has returned; households earning even $1 over this limit are generally responsible for 100% of their premiums, with no federal tax credits available.

The subsidy covers the difference between the actual cost of the plan and your required income-based contribution. For example, a family of four earning $45,000 (roughly 140% FPL) might pay about $1,607 annually for their premium in 2026, whereas under previous enhanced rules, they might have paid $0.

In 2026, avoiding an ACA subsidy “clawback” (repaying excess tax credits) is critical because the repayment caps that previously protected low-income households have been eliminated. You are now responsible for repaying the full amount of any excess subsidy received.

The following strategies can help you manage your income and eligibility to prevent a large tax bill:

1. Reduce Your Modified Adjusted Gross Income (MAGI)

Since subsidies are based on your MAGI, lowering this figure can increase your credit or keep you under the “subsidy cliff” ($62,600 for individuals; $128,600 for a family of four).

  • Maximize Contributions to Pre-Tax Retirement Accounts: Contributions to a Traditional IRA, 401(k), or 403(b) directly reduce your MAGI.
  • Maximize HSA Contributions: Starting in 2026, all Bronze and catastrophic plans are automatically eligible for a Health Savings Account (HSA). Contributing to your HSA reduces your MAGI dollar-for-dollar.
  • Harvest Investment Losses: If you have stocks or bonds that have lost value, selling them can offset capital gains and reduce your income by up to an additional $3,000.

2. Strategic Income Management

  • Update the Marketplace Immediately: Report any raises, new jobs, or household changes (like a child moving out) to HealthCare.gov as soon as possible. The Marketplace will adjust your monthly credit in real-time to match your new income, preventing a lump-sum debt at tax time.
  • Use Roth Accounts for Extra Cash: If you need more money during the year, withdraw from a Roth IRA or Roth 401(k). Because these are funded with after-tax dollars, qualified withdrawals do not count as income and will not trigger a clawback.
  • Underestimate with Caution: If you are unsure of your income, you can choose to take only a portion of your subsidy upfront (e.g., take 75% of the credit monthly and claim the remaining 25% as a refund when you file).

3. Timing and “Bunching”

  • Time Large Income Events: If possible, postpone large capital gains, property sales, or Roth conversions until a year when you are not using ACA coverage or have reached Medicare age.
  • Make Last-Minute Adjustments: You have until April 15, 2027, to make 2026 contributions to an IRA or HSA. This allows you to calculate your exact 2026 income during tax season and make a final contribution to lower your MAGI and reduce what you owe back to the IRS.

Careful income planning is crucial under the 2026 ACA rules. By maximizing pre-tax contributions, managing income events, and keeping your income information updated with the Marketplace, you can preserve your health insurance subsidies and avoid unexpected tax bills.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Maximize Your Tax Savings with the Senior Bonus Deduction

Starting in 2025, a new temporary federal tax break known as the “Senior Bonus Deduction “is available to taxpayers aged 65 and older. Enacted under the One Big Beautiful Bill Act (OBBBA), this provision is designed to provide additional tax relief through the 2028 tax year.

Key Features of the 2025 Senior Deduction

  • Deduction Amount: Eligible individuals can deduct up to $6,000 from their taxable income.
  • Married Couples: If both spouses are 65 or older and file a joint return, they can claim a combined deduction of $12,000.
  • “Stackable” Benefit: This deduction is in addition to the regular standard deduction and the existing “additional standard deduction” for seniors.
  • Accessibility: You can claim this deduction regardless of whether you take the standard deduction or itemize your deductions.

Eligibility and Income Limits

The full deduction is only available to those under specific income thresholds based on their Modified Adjusted Gross Income (MAGI):

Filing StatusFull Deduction Income LimitPhase-Out Range
Single / Head of HouseholdUp to $75,000$75,001 – $175,000
Married Filing JointlyUp to $150,000$150,001 – $250,000
  • Phase-Out Rule: For every $1 your MAGI exceeds the limit, the deduction is reduced by 6 cents until it reaches zero.
  • Age Requirement: You must be 65 or older by December 31, 2025.
  • Exclusion: The deduction is not available to those who use the “Married Filing Separately” status.

Impact on Social Security

While often discussed as a “No Tax on Social Security” measure, the law does not technically eliminate federal taxes on Social Security benefits. Instead, the $6,000 deduction serves to lower your overall taxable income, which for many seniors with modest incomes effectively offsets the portion of their Social Security that would have been taxed.

Maximum Combined Deductions for 2025

For a senior taking the standard deduction, the total amount of income sheltered from federal tax in 2025 could reach:

  • Single (65+): $23,750 ($15,750 base + $2,000 age-based + $6,000 new bonus).
  • Married (Both 65+): $46,700 ($31,500 base + $3,200 age-based + $12,000 new bonus).

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com