Essential Year-End Tax and Investment Strategies for University of Missouri Employees to Consider Now

What Are Year-End Investment Decisions?

Many of our University of Missouri clients have questions regarding tax planning and year-end investment decisions. Year-end investment decisions may sometimes result in substantial tax savings, while tax planning may allow you to control the timing and method by which you report your income and claim your deductions and credits. The basic strategy for year-end planning that we'd like to share with our University of Missouri clients all comes down to timing — timing your income so that it will be taxed at a lower rate, as well as timing your deductible expenses so that they may be claimed in years when you are in a higher tax bracket. In terms of investment planning, investing in capital assets may increase your ability to time the recognition of some of your income and may help you to take advantage of potentially lower-than-ordinary income tax rates. You have the flexibility to control when you recognize the income or loss on many types of investment assets. In most cases, you determine when to sell your capital assets, but we'd still like our University of Missouri clients to keep in mind that in some cases, shifting potential capital gain income to other taxpayers through gifting may be an appropriate strategy.

How Do You Use The Capital Gains Tax To Lower Your Taxes?

Our University of Missouri clients often ask us about using capital gains to lower taxes. Capital gains and losses are accorded special tax treatment. Currently, the top long-term capital gains tax rate is 20% (for most types of assets), while the top ordinary income tax rate is 37% — that's a 17% difference. It's important for our University of Missouri clients to remember that as a potential consequence, by converting ordinary income to long-term capital gain income, it may be possible to reduce your federal income tax liability.

Tip: Long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. The actual process of calculating the tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income.

In addition, the 3.8% net investment income tax applies to some or all of your net investment income (including capital gains) if your modified adjusted gross income exceeds $200,000 for single or head of household taxpayers, $250,000 for married filing jointly, or $125,000 for married filing separately.

Timing Your Capital Gain Recognition

If our University of Missouri clients make sure to carefully time when they sell capital assets, this may help to reduce their federal income tax liability. For example, if it's late in the year and you want to sell a capital asset, you can wait until January to sell it so that you realize your capital gain or loss next year (assuming that you have a calendar tax year). This strategy is particularly useful for our University of Missouri clients who are in a higher marginal tax bracket in the current year and expect to be in a lower one in the following year. Timing can also be important because capital gain income increases your adjusted gross income (AGI). The amount and availability of certain tax benefits may depend on the amount of your AGI. For example, the itemized deduction for medical expenses is available only to the extent that medical expenses exceed 7.5% of AGI.

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Plan Your Year-End Capital Gain And Loss Status

We also recommend that our University of Missouri clients plan the time when they recognize capital losses. For any of our clients from University of Missouri who expect to recognize a capital gain this year, you should review your portfolio for possible capital losses that can be used to offset the gains. For any of our University of Missouri clients who have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of such carryforwards. In general, net capital losses are deductible dollar-for-dollar against net capital gains. Excess losses are allowed to offset up to $3,000 ($1,500 for individuals filing married filing separate tax returns) of ordinary income per year. Losses over and above the limit may be carried forward indefinitely.

The following strategies may be appropriate:

Sell capital gain property before the end of the year if you have already realized capital losses for the year that exceed the sum of any capital gains you have realized plus $3,000 ($1,500 for individuals filing married filing separate tax returns).
For our University of Missouri clients who have gains for the year that exceed their losses, sell property with built-in losses to offset the excess gains.
If your other allowable deductions for the year exceed your income, you should, to the extent possible, avoid realizing any further capital losses for the year.
If you've held a capital asset for close to 12 months and want to sell it, wait awhile (if possible). You can take advantage of the lower long-term capital gains rates if you hold the asset for over 12 months before selling it.

How Do You Select Investments To Control Income?

You can select investments likely to produce ordinary income such as interest, or income that is taxed at reduced rates (certain qualifying dividends or long-term capital gains). You can also select investments likely to produce ordinary or capital losses. You can control when your investment earnings are taxed, bearing in mind that income distributions are generally not taxed until you receive them (assuming that you use the cash method of accounting). By our University of Missouri clients knowing the tax rules, they can lower their taxes.

What about Shifting Income?

It may be possible to shift potential capital gains to other taxpayers through gifts. For our University of Missouri clients who are in a higher tax bracket, you might transfer appreciated assets to relatives in lower tax brackets.

How does the eligibility criteria for the Defined Benefit Retirement Plan at the University of Missouri System differ for Level One and Level Two members, particularly in regard to their hire or rehire dates?

Eligibility Criteria for Level One and Level Two Members: Level One members are employees hired before October 1, 2012, or those rehired before October 1, 2019, who had earned a vested benefit but did not receive a lump sum. Level Two members are those hired or rehired between October 1, 2012, and October 1, 2019, without eligibility for Level One benefits. Employees hired after October 1, 2019, do not accrue service credit under the DB Plan(University of Missouri …).

In what ways do service credits accumulated at the University of Missouri System impact an employee's retirement benefits, and how can employees ensure that they effectively maximize their service credit over the years?

Impact of Service Credits on Retirement Benefits: Service credits are critical in calculating retirement benefits at the University of Missouri System. Employees accumulate service credits based on their years of service, which directly affect their pension calculations. Maximizing service credits involves consistent full-time employment without breaks, as any leave of absence or part-time status may impact the total service credits earned(University of Missouri …)(University of Missouri …).

What are the various options available to employees at the University of Missouri System for receiving their retirement benefits upon reaching normal retirement age, and how do these options influence long-term financial planning for retirement?

Retirement Benefit Options: Upon reaching normal retirement age, employees can choose between a Single Life Annuity or a Joint and Survivor Annuity, both with options for lump-sum payments of 10%, 20%, or 30% of the actuarial present value. These choices influence monthly payout amounts, and selecting a lump sum reduces future monthly benefits proportionally(University of Missouri …).

With respect to the University of Missouri System's Defined Benefit Plan, how are employees' contributions structured, and what implications does this have for their overall retirement savings strategy?

Employee Contributions: Employees contribute 1% of their salary up to $50,000 and 2% for earnings beyond that threshold. This structure helps fund the DB Plan, with the University covering the majority of the cost. Employees need to factor in these contributions as part of their overall retirement savings strategy(University of Missouri …).

How can employees at the University of Missouri System assess their eligibility for early retirement benefits, and what considerations should be taken into account when planning for an early retirement?

Early Retirement Eligibility: Employees may retire early if they meet specific criteria: at least 10 years of service credit for ages 55–60 or at least 5 years of service credit for ages 60–65. Early retirees will receive a reduced benefit to account for the longer payout period(University of Missouri …).

What tax implications should employees of the University of Missouri System be aware of when it comes to distributions from their retirement plans, and how can they effectively navigate these implications?

Tax Implications of Retirement Plan Distributions: Distributions from the University of Missouri System’s DB Plan are subject to federal taxes. Employees can mitigate tax burdens by electing to roll over lump-sum distributions to a qualified retirement account, such as an IRA, to avoid immediate tax liability(University of Missouri …).

What are the policies regarding the continuation of benefits for employees who leave the University of Missouri System, particularly for those who are not vested or are classified as non-vested members?

Non-Vested Employee Policies: Employees who leave the University before vesting in the DB Plan (fewer than 5 years of service) are not eligible for retirement benefits but can receive a refund of their contributions. These non-vested employees must decide whether to receive their refunded contributions as a lump sum or through a rollover to another retirement account(University of Missouri …).

How might changes in employment status, such as taking a leave of absence or returning to work after a break, affect the service credit calculation for an employee at the University of Missouri System?

Impact of Employment Status Changes on Service Credit: Employees who take leaves of absence or return after breaks in employment may experience reductions in service credit. However, certain types of leave, such as military service or medical leave, may allow employees to continue earning service credit(University of Missouri …)(University of Missouri …).

In the event of an employee's death prior to retirement, what benefits are available to their survivors under the University of Missouri System's Defined Benefit Plan, and how can members ensure their wishes are respected?

Survivor Benefits: In the event of an employee’s death before retirement, survivors may be eligible for either a lump sum or monthly payments. Employees can designate beneficiaries to ensure that their wishes are honored, providing financial protection for dependents(University of Missouri …).

How can an employee at the University of Missouri System contact the Human Resources Service Center to obtain personalized assistance regarding their retirement options and any inquiries related to their retirement plan details? These questions require detailed answers and are designed to facilitate a comprehensive understanding of retirement processes and options for employees of the University of Missouri System.

Contacting HR for Assistance: Employees can contact the Human Resources Service Center for personalized assistance regarding their retirement options by emailing hrservicecenter@umsystem.edu or visiting the myHR portal for further details(University of Missouri …).