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Calculating Taxes on Mutual Funds

CALCULATING TAXES ON MUTUAL FUNDS

When planning for tax season, don't forget about the taxes that you may owe on any mutual funds you own. Your CPA or Certified Financial Planner™ can help you organize your paperwork and assess the particulars of your situation.

 For mutual fund investors, earnings come from two sources: fund distributions -- dividends or capital gains -- and the sale of fund shares.¹ Income from these sources may be taxable. Fund companies typically send year-end statements to shareholders that summarize the information used to report investment gains or losses to the IRS. Here's a look at how taxes on your mutual funds are calculated.

Taxable Distributions: Dividends and Capital Gains

For non-IRA accounts, you must pay taxes on dividends or capital gains passed on to you in the year they were received, even if they were automatically reinvested to buy additional fund shares. In general, dividends and capital gains attributable to a fund's underlying investments are taxed as follows:

Long-term capital gains and qualified dividends are taxed at 0% for taxpayers in the 10% and 15% tax brackets, 15% for taxpayers filing as singles with incomes less than $413,200 ($464,850 for those who are married filing joint tax returns), and are subject to a top rate of 20% for single taxpayers with income in excess of $413,200 and joint filers with income in excess of $464,850. In addition, net investment income for taxpayers with Adjusted Gross Incomes in excess of $200,000 (single filers) or $250,000 (married filing jointly) may be subject to the 3.8% Medicare surcharge.

Regular interest income and short-term capital gains on securities held in a fund for less than 12 months are taxed at your ordinary federal income tax rate. Keep in mind that funds with higher turnover (i.e., funds that buy and sell securities often) can result in higher tax liabilities even if you haven't sold any shares. Tax-managed strategies can help to keep this tax hit small.

Capital Gains from the Sale of Fund Shares

Gains can also be realized when you sell fund shares that have appreciated in value since purchase. Before you can calculate the tax owed on the sale, you have to know your cost basis -- or how much money you paid for the shares, including shares purchased with distributions.

If you sell all of your shares, your cost basis is how much you paid for your total investment (all purchases and reinvested distributions). If, however, you sell some of your shares, determining your cost basis is a little more complicated. The next section outlines the IRS-approved accounting methods for conducting this calculation.

Calculating Your Cost Basis

● Specific shares: You identify which shares to sell. This method gives you the most control over the amount of gain or loss you report.

● First-in, First-out: This method assumes the first shares purchased are the first to be sold. If you do not indicate otherwise, the IRS assumes you use this method.

● Average cost, single method: With this method you calculate your gain or loss based on the average price you paid for all shares, regardless of how long you have held them. This is the method most mutual fund companies use to provide information to you.

● Average cost, double method: This is the same calculation as above, except shares are divided into short-term and long-term categories and a separate average cost is computed for each.

Keep in mind that net losses incurred from fund investments may be deductible from your income taxes. Your Certified Financial Planner™ may be skilled at offsetting gains with losses to minimize your net tax when you want to create cash. Investments in tax-deferred retirement plans, such as a 401(k)s, traditional IRAs, or variable annuities, allow you to defer taxes on all investment earnings until the funds are withdrawn.²

Because federal tax laws are complex and fast changing, consult CPA to determine how they apply to your situation.

This information is general in nature and should not be construed as tax advice. Always consult a qualified specialist regarding tax affairs.

¹ Investing in mutual funds involves risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. For more complete information about any mutual fund, including risks, charges and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest.

² Withdrawals from qualified plans taken before age 59½ are generally subject to a 10% additional federal tax -- on top of any regular income taxes owed -- although there are a few exceptions to this rule.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Should You "Fix" Variable Rate Debt?

Is the time right to consider converting your variable rate debt to a fixed rate? There are pros and cons associated with both methods, and timing and market cycles can play a large role in the decision.

While investors are keeping a close watch on the Federal Reserve for indications of when it will start raising interest rates, the consensus among economists is that it will begin its credit-tightening cycle at some point this year.

Of course there are two sides to the interest rate coin: the investor and the borrower. Rising rates are generally good news for savers and investors, but they represent an expense for borrowers and increase the cost of taking out loans and mortgages.

In the current environment, individuals may be evaluating the potential benefits of converting variable-rate loans, including adjustable rate mortgages (ARMs), home equity lines of credit, and student loans, to a fixed rate.

Only One Way to Go

Interest rates are still at historic lows and are only likely to go up from here. Personal finance experts typically favor refinancing, when practical, to a fixed rate for the stability it provides the borrower. With a fixed-rate loan the borrower will not have to be concerned if there is a sudden spike in interest rates. What's more, individuals with fixed-rate debt have much more control over their budget and can plan ahead with more confidence, as they have a clear, predictable picture of their monthly income and expenses.

While adjustable-rate loans may have lower initial interest rates than fixed-rate loans, the lower interest rate is only for a set period of time. At the end of the fixed period, the monthly loan amount "adjusts" based on the market rate or index. In this case, refinancing may be a smart choice if your ARM is adjusting to an interest rate that is higher than the current market rate.

How Low Are Rates?

Just how low are short-term rates now, historically speaking? Most lenders base their variable rates off a LIBOR rate, which stands for London Interbank Offered Rate and works as a benchmark rate for banks internationally.¹ As the LIBOR changes, so does the variable rate. The LIBOR is low today, compared to its 10-year and 20-year averages (see table below), but once it begins to increase, borrowers holding adjustable rate loans will see an increase in their regular payments. While most variable rate loans will have an upper interest rate cap, it is important to know what that maximum rate is -- and whether you could handle that potential debt load -- before signing any documents.

LIBOR -- Then and Now

 

10-year average

20-year average

July 6, 2015

6-month LIBOR 

1.95%

3.09%

0.44%

12-month LIBOR

2.17%

3.29%

0.76%

Source: Federal Reserve Economic Data (FRED). For the dates indicated. The 10-year and 20-year averages are for the period ended July 6, 2015.

Generally, a variable rate loan is a safe bet for individuals who plan to repay their loan quickly. And while the Federal Reserve is expected to begin raising rates soon, it is likely to take a very measured, slow path.

¹ U.S. News.com, "Fixed or Variable: Which Interest Rate Should You Choose?" July 14, 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Key College Planning Facts

College planning is a major financial goal for countless American families, and it can be a source of much anxiety and confusion. This "Test Your Knowledge" quiz can serve as a refresher course for some, or an introduction for others, to the world of financial aid and 529 college savings plans.

"Trends in College Pricing 2014," revealed that the inflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was 10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increases were 24% over 10 years and 66% over 20 years.

Test Your Knowledge

Here's your chance to test your knowledge about college planning and 529 plans¹. We hope that the information shared here will shed new light on some of the details of the process.

 

1)  What form do all colleges require of students applying for financial aid?

_____ CSS Financial Aid PROFILE

_____ FAFSA

_____ EFC

Answer: FAFSA. Any college or university that awards federal student aid requires the Free Application for Federal Student Aid (FAFSA). For the majority of colleges this is the only aid application required. The CSS Financial Aid PROFILE is required by some private colleges for assessing eligibility for the specific college's institutional aid dollars. The Expected Family Contribution (EFC) is a number calculated by the financial aid forms.

 

2)  Saving for college in a 529 college savings plan negatively impacts eligibility for financial aid.

_____ True

_____ Maybe, but often the effect is minimal in the financial needs-analysis process

_____ False

Answer: Maybe, but often not enough to worry about. The value of a 529 savings plan account set up by a parent or legal guardian is reported as a parental asset on the FAFSA and only increases the EFC by a maximum of 5.64% of the total account value. 529 plans and Coverdell Education Savings Accounts tend to be two of the better options for saving for college without jeopardizing financial aid. Income is generally more of a determinant of need-based financial aid eligibility.

 

3)  Assets held in a 529 college savings plan can be used to pay for what type of school?

_____ Four-year college or university

_____ Two-year community college

_____ Qualified trade school

_____ All of the above

Answer: All of the above. With a 529 savings program, you can use your account at any accredited college or university in the country (and some outside of the country).

 

4)  What happens to the 529 college savings funds if the student does not go to college?

_____ The money can be used by another family member to pay for qualified expenses

_____ The federal government will seize the account

_____ Nothing

_____ The plan will be declared void, and the money returned to the plan owner

Answer: You may generally change the beneficiary. That money can be used by a sibling, cousin, or other family member for qualified higher education expenses, without penalty.

 

5) 529 plan distributions from a parent-owned 529 account do not increase the family's EFC.

_____ True

_____ False

Answer: True. Unlike distributions from a grandparent-owned account, distributions from a parent-owned 529 plan that are used to pay for a dependent student's college expenses are not reported on the FAFSA and do not typically count as income in the federal needs-analysis process.

 

How did you do? Hopefully this information has helped you to better understand the financial aspects of college planning -- in particular the powerful but somewhat complex 529 college savings plan. To learn more about 529 plans and selecting the right plan for your situation, contact a qualified Certified Financial Planner™.

¹ Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

² Note that some private colleges may treat the needs-analysis process a little differently from what is reported here, and generally the comments in this document apply to the federal needs-analysis process. Individual situations will vary.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Home Equity Loans vs. Lines of Credit

Thinking of tapping the equity in your home to do a renovation, buy a second home, or consolidate debt? Home equity loans and lines of credit are two options you'll want to explore. Before you decide which borrowing option is right for you, it's important to understand the main differences between the two.

Home Equity Loan

Home Equity Line of Credit (HELOC)

Fixed interest rate for the life of the loan

Variable interest rate over the life of the loan

Repayment in regular installments over a specific period of time

Option to re-borrow as loan is paid, up to approved credit limit

Typically used for single large purchase, such as a car

Typically used to fund ongoing expenses, such as home renovations, borrowing only as needed

Entire amount of loan received upon approval

Checks can be written at any time, up to approved limit

 

Comparison Shop

Both types of credit are sometimes referred to as "second mortgages," because, like your first mortgage, they are secured by your property.

Home equity loans are fixed, installment loans. They work more like a mortgage -- you borrow a determined amount for a specific term with a fixed rate of interest. Regular installment payments are made each month for a set amount. Once you receive the lump sum check, you cannot borrow additional funds.

HELOCs are revolving, borrow-as you-go arrangements. They act more like a credit card in that you borrow as you need the money and pay off your balance according to the interest rate being charged, which is variable, and the amount of credit you have used. The term of the credit line is determined by the lender and may be extended/renewed at the lender's discretion. When the term expires, the credit line must be paid in full.

Keep in mind that Janet Yellen, chairman of the Federal Reserve Bank, has already announced that she intends to let interest rates rise before the end of the year. Although most economists expect that rising interest rates will be gradual, it is inevitable after such a long stretch of historically low interest rates. What this means for a variable-interest loan like the HELOC is that the payments you are making now will probably go higher in the future.

Both home equity loans and HELOCs must be settled with the lender if and when you sell your home.

Match the Type of Loan to Your Need

Generally the choice between the two types of credit depends on your intended use for the money and your time frame for repayment. For instance, if you have a set amount in mind for a specific expense - a wedding, a new septic system or roof -- and you have no further foreseeable expenses, then a fixed rate home equity loan makes sense. If however, your needs are more open-ended -- a major home renovation that will span a year or two, or to supplement a child's college tuition each year for the next four years -- then the more flexible HELOC could be the better option.

Used for Debt Management

Perhaps one of the most popular reasons homeowners tap into the equity in their homes via a loan or a line of credit is to consolidate credit card debt. While recent conditions in the housing market may have deterred some from considering this option, generally speaking, home equity is one of the lowest cost loan options, and unlike credit card debt, the interest paid on home equity loans and HELOCs is tax deductible.

To learn more about tapping home equity or to access current rate tables, one consumer-oriented website, bankrate.com may be a useful reference for you.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Where You Live Matters: Counting the Cost of Long-Term Care

It probably comes as no surprise that the cost of long-term care services -- including nursing homes, assisted-living facilities, and home-based care -- continues to rise steadily across the country.

Among the various services tracked by Genworth's annual Cost of Care Survey, home-based care costs are rising at a slower pace than other forms of care. Specifically, Genworth's most recent report found that, on a national basis, home-based care rose just 1% to 1.5% over the last five years, while costs at nursing homes and assisted-living facilities have increased 2.5% to 4% over the same five-year period. ¹

Long-term care costs vary widely nationwide. Genworth's annual Cost of Care Survey tracks the costs of nursing homes, assisted-living facilities, and home-based care across the country. Genworth also tracks long-term care cost data on a regional and state-by-state basis. For planning purposes -- either your own or for an aging parent or other loved one -- this is vital information to know and discuss with your financial professional when forecasting retirement income scenarios.

Following are the 10 most expensive states for a private room in a nursing home -- the top-of-the-line care tracked by the annual study -- and the most expensive mode of care available today. Along with the median annual cost for each state is the comparable median annual cost for home health aide services.

Top 10 States for Cost²

State

Median Annual Nursing Home Cost (private room)

Median Annual Home Health Aide Cost

Alaska

$281,415

$59,488

Connecticut

$158,775

$50,336

Massachusetts

$139,580

$57,200

New York

$136,437

$52,624

Hawaii

$135,050

$56,056

New Jersey

$127,750

$48,506

New Hampshire

$122,275

$54,912

Delaware

$117,895

$50,336

Pennsylvania

$113,150

$47,911

Maryland

$110,230

$45,760

National Median Cost

$91,250

$45,760


It may surprise you that California is not among the top ten most expensive states. California's median annual rate for a private room in a nursing home is $104,025. Review the Genworth 2015 Cost of Care website (https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/130568_040115_gnw.pdf) to find cost information for all types of long-term care services in California.

While the impact of long-term care can be staggering on one's finances, it can also take a significant toll on families and careers. To learn more about strategies for coping with this potential need, speak with your Certified Financial Planner™.

¹ Financial Planning, "LTC: 10 Most Expensive States for Nursing Homes," April 27, 2015.

² Genworth 2015 Cost of Care Survey, March 20, 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS

2019 SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 4, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*Not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 11, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.,

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 13, 2019

9:00 a.m. - 11:00 a.m.

Kondo Wealth Advisors Pasadena Office (tentative)

300 N. Lake Ave. Suite 920

Pasadena, CA  91101

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 20, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 7, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 14, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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