Daily Archives: February 19, 2019

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3 Strategies to Get the Biggest Tax Refund or Lowest Tax Bill

tax Returns
Source: Shutterstock

So far this year, the average tax refund amount is down about 8.4% to $1,865. As should be no surprise, this has stirred up quite a bit of disappointment. A tax refund is often an important part of people’s spending.

The drop is also perplexing because of the new tax law. Wasn’t it supposed to lower taxes?

Well, this is true. However, even though the withholding levels were lowered, they did not account for some of the key changes in the tax code. The result is that for many Americans there was not enough money withheld from their paychecks.

So what to do to boost your tax return? Unfortunately, the tax law has also cut back on many tax breaks. Here are just some examples:

  • Personal exemptions have been eliminated
  • Moving expenses can no longer be deducted
  • Miscellaneous itemized deductions have been eliminated
  • State and local tax deductions have been limited to $10,000

Despite all this, there are still benefits available and strategies to pursue. So let’s take a look:

Tax Refund Strategy: IRA and HSA Contributions

One of the best tax breaks is the IRA (Individual Retirement Account). It not only provides a lucrative deduction (whether you take the standard deduction or itemize) but is also a great vehicle for savings. The presumption is that when you reach retirement your withdrawals from the account will be at a lower tax rate.

Something else to consider: You can make a contribution by April 15th of this year. This can then be included on your 2018 tax return.

The maximum contribution amount for an IRA is $5,500 per person and this must be based on earned income. But if you are 50 or older, this goes up to $6,500.

Yet there are some wrinkles. If you are eligible for a company retirement plan, then the deduction may be limited or disallowed. This is based on your income.

OK then, what about a Roth IRA?  Can this boost your refund?  The answer is no.  While a Roth IRA has nice tax benefits (withdrawals are not taxed) you do not get deductions for the contributions.

Finally, you can setup a Health Savings Account or HSA, which allows for tax benefits when paying for medical bills. Like an IRA, the deadline for contributions is April 15th.

Tax Refund Strategy: Filing Status

What you indicate as your filing status on your tax return can make a big difference. Keep in mind that the new tax law made some significant changes with the standard deduction levels, which now include the following:

  • Single: $12,000
  • Head of Household: $18,000
  • Qualified Widow(er) $12,000
  • Married Filing Jointly $24,000
  • Married Filing Separate $12,000

The rules for filing status can get complicated, especially with the Head of Household designation. You will need to understand the costs of maintaining the household and what types of dependents qualify (which may include parents who do not live with you). But it is worth evaluating.

Another strategy is to compute your tax return using different filing statuses. And yes, may be surprised by the results.  Consider that filing separate could mean bigger tax savings if you or your spouse has substantial medical expenses.

If anything, all this is a good reason to get some advice from a tax professional, say by setting up an appointment at H&R Block (NYSE:HRB) or seeking out a local CPA or Enrolled Agent. The tax benefits could easily exceed the fee.

Tax Refund Strategy: Credits

A tax credit is can go a long way to boosting your refund. The reason is that you get a dollar-for-dollar reduction of your tax liability. A deduction, on the other hand, is subtracted from your income, which is then subject to a potential tax.

There are a variety of credits available, such as for education (American Opportunity Credit) and lower income households (Earned Income Tax Credit). But they do require some research and record keeping.

The new tax law also has improved the Child Tax Credit, so as to help make up for the elimination of the personal exemption. It has been increased by $1,000 to $2,000 for a qualifying child who is under 17.

There is also a personal credit of $500 for the taxpayer, spouse and other dependents that are not eligible for the Child Tax Credit. These credits phase out at $400,000 in income for joint filers and $200,000 for all other taxpayers.

Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Source: Investor Place

Dividends

Sell These 3 High-Yield Dividend Stocks About to Cut Their Dividends

There is a tremendous appeal to owning shares of high-yield stocks. In a world where you are lucky if a bank account pays 2%, income stocks that pay 8%, 9% or even 11% can be very attractive. However, high yield stocks are not a bank account or government bond. Dividend cuts happen and when they do, investors get the double pain of a reduced income stream and a steep drop in share prices. If you want to build a high yield income stream, the primary skill to acquire is how to separate the dangerous high-yield stocks from the more secure ones.

Dividend stocks trade to provide high dividend yields for a reason. The market (as in the whole investing public that is buying or selling an individual stock) believes there is chance the current dividend rate will be cut. The higher the yield, the more the market is pricing in the probability of a dividend reduction. Now here’s the fun part. Whether the dividend is actually reduced is a binary outcome. Either it will be cut, or the company will continue to pay the current dividend rate. Many high-yield stocks continue to pay the dividends for years. The number of dividend cuts each year tend to be a small percentage of the high-yield universe.

Thus, the goal of the income stock investor is to own high-yield stocks with low probabilities of dividend cuts and avoid the ones where the potential of a dividend reduction is high. To do so you need to understand how each individual company generates cash flow to pay dividends. Avoid those where the cash flow per share is at risk due to iffy business operations or a fundamental flaw in the business model. Here are three high yield stocks to sell or avoid.

AGNC Investment Corp (Nasdaq: AGNC) is the largest of a group of companies that own portfolios of government agency backed mortgage backed securities (MBS). You will see these referred to as Freddie Mac, Fannie Mae and Ginnie May mortgage-backed bonds.

The challenge for AGNC and all the agency MBS owning finance REITs is taking the 3.5% yield of the bonds up to a double digit stock yield. The step is done with large amounts of leverage. An agency MBS owning REIT will leverage its equity 5 to 10 times with borrowed money.

For the 2018 fourth quarter AGNC reported leverage of 9.0 times book value. The problem with this amount of leverage is that a flattening of the yield curve can wipe out the net interest margin and the ability to continue paying dividends. A steepening of the yield curve will result in falling prices in the MBS portfolio. The lenders providing the leverage can force the REIT to sell bonds at a loss to bring down the leverage.

REITs like AGNC are better for management compensation than they are for investors looking for stable dividend payments. The AGNC dividend has shrunk by 14% per year on average over the last five years.

Ignore the 12% yield and sell.

CBL & Associates Properties, Inc. (NYSE: CBL) is a shopping mall REIT on the wrong side of the shopping center great divide. At one end are the REITs that own Class A malls which are 95% plus occupied with successful retailers. At the other end are the REITs that own malls with fading demographics anchored by declining retailers like Sears and JC Penny.

These second tier malls will require millions in capital spending to make them again attractive to shoppers, and that spending may not do the trick. Shoppers are fickle, and it may be impossible to draw them back to a near failed mall.

It’s easy to tell the difference between the successful mall REITs and the trouble ones. The good REITs in this category have yields under 5%. The challenged ones have double digit yields. In the case of mall REITs, the high yield is a true danger signal to sell and stay away.

CBL yields 13.3%.

Ellington Residential Mortgage REIT (NYSE: EARN) is another residential agency MBS owning finance REIT. This company has many strikes against it.

First, it is a very small cap with only $141 million market value. This size makes Ellington very susceptible to be “taken down” by the large banks when interest rates get volatile. This happened to many residential REITs during the 2007-2008 financial crisis.

Second, the company currently has an 8.7 to 1 leverage of its equity to support the high yield.

Third, the net interest margin on the portfolio is just 1.1%. A one-quarter percent increase in short term rates could wipe out almost 25% of the spread, resulting in a big dividend cut. Three strikes and you are out for EARN.

Not worth the 12% yield.