Is A Donor Advised Fund Right for You?

December 23, 2017 — Sam H. Fawaz

Executive Summary: Setting up a Donor Advised Fund (DAF) for 2017 (before December 31, 2017) and front loading charitable deductions can save you thousands of dollars in taxes immediately, while directing distribution to charities in/for future years. Even if you decide not to establish a DAF, you should consider whether accelerating next year’s charitable contributions to 2017 makes sense for you, especially if you are phased out of itemizing deductions starting next year.

As you’ve heard by now, President Donald Trump has signed the Tax and Jobs Act of 2017, which mostly makes sweeping changes to tax rates and eliminates many deductions starting in 2018. For most households, this means no itemized deductions due to an increased standard deduction ($12,000 for single, $24,000 for married), a limit on the deduction of taxes ($10,000 of income, sales and property taxes combined) and elimination of most miscellaneous itemized deductions.

Many of you give generously to charities every year regardless of the prospect of deducting those contributions. While the changes to the deductiblity of contributions is little changed, the fact that you likely won’t be able to itemize, means that you’ll receive no tax benefit going forward if your contributions plus other itemized deductions don’t exceed your standard deduction.

This means that 2017 may be a year that you’ll want to consider a Donor Advised Fund (DAF) to take advantage of what might be your last year for itemizing, and take a large 2017 deduction for your contribution. The deadline for establishing a DAF is December 31, 2017, though for all intents and purposes, December 29 is the last business day of the year and may be the true deadline.

A DAF is simply an account that you establish with the charitable entity of a well-known custodian (Schwab, Fidelity, Vanguard or TD Ameritrade for example) and to which you make a lump sum contribution to fund future years’ contributions. For example, if you give $2,000 a year to charity, you could fund it with $10,000 today, and direct $2,000 a year to your charities each year while the fund grows tax free. Better yet, if you fund the DAF with long-term appreciated stocks or funds, you’ll get a full deduction for the fair market value of the securities, and never have to report the capital gain on your tax return.

This is right for you if:

  1. You’re willing and able to irrevocably contribute at least $5,000 (some custodians have higher minimums) to a managed account where you direct future contributions to the charities of your choice;
  2. You expect to be phased out of itemized deductions starting in 2018 due to the increased standard deduction and other changes to itemized deductions (see above) or,
  3. You would benefit more from an acceleration of charitable deductions to 2017 (than in future years) due to high income or lower tax rates in the years ahead.

Even if you decide not to establish a DAF, you should consider whether accelerating next year’s charitable contributions to 2017 makes sense for you.

The most common ‘strategy’ for creating a donor-advised fund is relatively straightforward – donor-advised funds are a good fit any time there’s a desire to contribute (and get the tax deduction) now, but make the actual grant to the final charity at some later date. In fact, the whole point of a donor-advised fund is to separate the timing of when the tax deduction occurs from when the charity ultimately receives the money.

Once established, you can add funds to a DAF in future years, and you can take as long as you want to distribute the funds to various charities. Some custodians maintain minimum donations you can make to a charity at any one time, say $50.

The important caveat to remember in all donor-advised fund strategies is that once funds go to the donor-advised fund, they must go to some charity, and cannot be retracted for the donor. The charitable gift to a donor-advised fund is still irrevocable, even if the assets have not yet passed through to the underlying charity. Nonetheless, for those who are ready to make the charitable donation – and want to receive the tax deduction now – the donor-advised fund serves as a useful vehicle to execute charitable giving strategies over time. And it certainly doesn’t hurt that any growth along the way will ultimately accrue tax-free for the charity as well.

If you would like to review your current investment portfolio or discuss setting up a Donor Advised Fund, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Posted in estate planning, Financial Planning, retirement planning, tax planning. 1 Comment »

Tax Bill Provisions to Consider Before You Jingle All the Way

December 19, 2017 — Sam H. Fawaz

And the award for the busiest profession during the 2017 year-end holiday season goes to…..tax preparers and planners…..the crowd goes wild and applauds loudly. “I’d like to take this opportunity to thank our President, our senate and our House of Representatives for this “gift”. Without their last minute help and effort, no one could have made this Christmas to New Year’s period any busier for us.”

Laughing all the way…

The new tax law hasn’t been fully ratified by the U.S. House and Senate yet, but all indications are that the Tax Cuts and Jobs Act of 2017 will be sent to the President’s desk in the next two days. As you probably know, the House and Senate versions were somewhat different. What does the new bill look like?

Tax simplification? “Fuggetaboutit!” (think Italian mobster)

Despite the promise of tax “reform” or “simplification,” the bill actually adds hundreds of pages to our tax laws. And the initial idea of reducing the number of tax brackets was apparently tossed aside in the final version; the new bill maintains seven different tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see their bracket go down by one to four percentage points, with the higher reductions going to people with higher income. And the tax brackets, going forward, will be indexed to inflation, meaning that the “real” income brackets will remain approximately the same from year to year.

The new brackets break down like this:

Individual Taxpayers

Income $0-$9,525 – 10% of taxable income
$9,526-$38,700 – $952.50 + 12% of the amount over $9,526
$38,701-$82,500 – $4,453 + 22% of the amount over $38,700
$82,501-$157,500 – $14,089.50 + 24% of the amount over $82,500
$157, 501-$200,000 – $32,089.50 + 32% of the amount over $157,500
$200,001-$500,000 – 45,689.50 + 35% of the amount over $200,000
$500,001+ – $150,689.50 + 37% of the amount over $500,000

Joint Return Taxpayers

Income $0-$19,050 – 10% of taxable income
$19,051-$77,400 – $1,905 + 12% of the amount over $19,050
$77,401-$165,000 – $8,907 + 22% of the amount over $77,400
$165,001-$315,000 – $28,179 + 24% of the amount over $165,000
$315,001-$400,000 – $64,179 + 32% of the amount over $315,000
$400,001-$600,000 – $91,379 + 35% of the amount over $400,000
$600,000+ – $161,379 + 37% of the amount over $600,000

Taxes for trusts and estates were also changed to:

$0-$2,550 – 10% of taxable income
$2,551-$9,150 – $255 + 24% of the amount over $2,550
$9,151-$12,500 – $1,839 + 35% of the amount over $9,150
$12,501+ – $3,011.50 + 37% of the amount over $12,500

Tax geeks like me note that the current 10% tax bracket is little changed, and the 15% bracket is now 12%, while the 25% and 28% tax bracket are replaced with 22% and 24% and a new 32% rate. Notice that in the lower brackets, the joint return (mostly for married couples) are double the individual bracket thresholds, eliminating the so-called “marriage penalty.” However in the higher brackets, the 35% rate extends to individuals up to $500,000, but married couples with $600,000 in income fall into that bracket. In the top bracket, the marriage penalty is more significant; individuals fall into it at $500,000, while couples are paying a 37% rate at $600,000 of adjusted gross income. That means more two-income couples will be calculating their taxes filed jointly and separately to arrive at the lowest resulting tax.

Making spirits bright…

Other provisions: the standard deduction is basically doubled, to $12,000 (single) or $24,000 (joint), $18,000 (head of household), and persons who are over 65, blind or disabled can add $1,300 to their standard deduction (currently $1,250).

The bill calls for no personal exemptions for 2018 and beyond (currently $4,050). For married couples with more than two children, this means that the new standard deduction ($24,000 in 2018) will be less than their current total standard deduction plus personal exemptions ($24,850 with three children in 2017). And the Pease limitation, a gradual phaseout of itemized deductions as taxpayers reached higher income brackets, has been eliminated. The Pease limitation added up to 3% to a high income taxpayer’s rates.

Despite the hopes of many taxpayers, the dreaded alternative minimum tax (AMT), remains in the bill. The individual exemption amount is $70,300; for joint filers it’s $109,400. But for the first time, the AMT exemption amounts will be indexed to inflation, so fewer taxpayers will be ensnared by the AMT. Even without this change, fewer taxpayers would be subject to the AMT because, as described below, the maximum deduction for (state and local income, sales, property) taxes is reduced beginning in 2018, and for most taxpayers, it was the deduction of those taxes that made them subject to the AMT.

Interestingly, the new tax bill retains the old capital gains and qualified dividend tax brackets—based on the prior brackets. The 0% capital gains rate will be in place for individuals with $38,600 or less in income ($77,200 for joint filers), and the 15% rate will apply to individuals earning between $38,600 and $452,400 (between $77,400 and $479,000 for joint filers). Above those amounts, capital gains and qualified dividends will be taxed at a 20% rate.

Misfortune seemed his lot…

In addition, the rules governing Roth conversion recharacterizations will be repealed. Under the old law, if a person converted from a traditional IRA to a Roth IRA, and the account lost value over the next year and a half, they could simply undo (recharacterize) the transaction, no harm no foul. Under the new rules, recharactization would no longer be allowed. This makes more accurate tax projections essential going forward, along with a good working crystal ball.

Before the tax act, fewer than 30% of taxpayers itemized their deductions. With the higher standard deductions, many more people will no longer file Schedule A, Itemized Deductions. Their deductions will simply not be enough to exceed the standard deduction, especially given the other changes in the tax bill. This makes year-end planning and projecting even more essential.

For many taxpayers who can itemize deductions, their taxable income number will likely be higher under the new tax plan, because many itemized deductions have been reduced or eliminated. Among them: there will be a $10,000 limit on how much any individual can deduct for state and local income, sales, and property tax payments. Before you rush to write a check to the state or your local government, know that a provision in the bill states that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017, and instead will be treated as having been paid at the end of calendar year 2018. It’s not clear yet what happens if your 2017 state withholding exceeds your state liability. Normally, you would deduct the full amount on your current return and report the excess (refund) as income in the following year. But prior year state income tax refunds are no longer includible in income starting in 2018. Nothing is mentioned about paying and deducting already issued property tax bills due early in 2018, so it makes sense to figure out whether paying them in 2017 or 2018 yields a higher tax benefit. If you are in the AMT for 2017, prepaying any taxes will not yield a benefit.

The mortgage interest deduction will be limited to $750,000 of principal for new mortgages (down from a current $1 million limit); any mortgage interest payments on principal amounts above that limit will not be deductible. However, the charitable contribution deduction limit will rise from 50% of a person’s adjusted gross income to 60% under the new bill. If you think you’ll be ineligible to itemize starting in 2018, it makes sense to evaluate accelerating some planned 2018 charitable contributions to 2017, including any non-cash contributions.

Miscellaneous itemized deductions such as safe deposit box fees, unreimbursed employee business expenses, tax preparation fees, investment expenses and other deductions (currently subject to a reduction by 2% of adjusted gross income) are no longer deductible in any amount beginning in 2018. Here again, it make sense to see if prepaying some of those expenses makes sense (it does not if you’re in the AMT for 2017). Any prepayment amount and timing must be reasonable in the eyes of the IRS.

What about estate taxes? The bill doubles the estate tax exemption from, currently, $5.6 million (projected for 2018) to $11.2 million; $22.4 million for couples. Meanwhile, Congress maintained the step-up in basis, which means that people who inherit low-basis stock or real estate will see the embedded capital gains go away upon receipt, because the assets will have a cost basis equal to their fair market value on the date of death.

Public “C” Corporations saw their highest marginal tax rate drop from 35% to 21%, the largest one-time rate cut in U.S. history for the nation’s largest companies.

And pass-through entities like partnerships, S corporations, limited liability companies and sole proprietorships will receive a 20% deduction on taxes for “qualified business income,” which explicitly does NOT include wages or investment income. This is one of the more complicated areas of the tax bill, and will require working closely with your accountant or CPA to assess whether your pass-through entity will save money converting to a C Corporation.

As things stand today, all of these provisions are due to “sunset” after the year 2025, at which point the entire tax regime will revert to what we have now.

Assuming the tax bill is signed into law this week, and it likely will, you’ll have just over a week to project your 2017 and 2018 taxes, and decide which deductions (or income) you may want to defer to 2018 or accelerate into 2017. Only by projecting both years and finding the least combined liability will you know what planning tactics makes sense for you. We can help.

Oh what fun it is…

If you would like to review your current taxes, investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://www.washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/?utm_term=.4b0efca718e8

https://www.forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/#42b575bf1401

https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

https://www.bna.com/2017-Individual-Tax/

https://www.nytimes.com/interactive/2017/12/15/us/politics/final-republican-tax-bill-cuts/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

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To Skimp or Not to Skimp

December 17, 2017 — Sam H. Fawaz

The majority of my clients, to no one’s surprise, are baby boomers. You may think that their main concern is overspending their retirement dollars, but you’d be wrong. In fact, for many of my retired clients, convincing them that it is OK to spend and enjoy their hard earned nest egg, is one of the hardest things to do. Even among my non-retired clients, getting them to enjoy their “saving years” while being prudent spenders can be a challenge.

I consider myself to be a frugal spender, while allowing myself to indulge in the durable goods (read: electronic toys and gadgets) that simplify my life, last a long time and bring me comfort or pleasure. I personally would never spend $9.50 on a latte (I’m not a coffee drinker, but I doubt I could bring myself to spend that kind of money on a cup of anything.) Some people won’t skimp on a good meal; I won’t skimp on a good hotel room. We each have our own compromises and “do not compromises.”

But save and invest. Save and invest. Isn’t that all you hear when it comes to planning your financial life?

An online article by an individual who refers to himself as “the Financial Samurai” makes a more balanced case regarding how you deploy your money. Yes, you should be capable of deferring gratification and have a healthy savings rate during your accumulation years. But there are a few items that are well worth investing in: your comfort, well-being and certain aspects of your lifestyle. Some of these items might be considered luxuries by people who are perhaps overly frugal.

For instance? The Samurai says you should splurge on a really good mattress—recognizing, of course, that you can avoid markups and still buy quality. His argument: you spend almost a third of your life sleeping. Your waking hours will be more comfortable and productive if you are spending your nights on the most comfortable, supportive mattress you can afford.

Another example? Your glasses or contact lenses. Vision may be your most important sense, so it is worth buying glasses with the thinnest lenses with anti-reflection and a scratch-proof coating. If you wear contacts, splurge on daily wear that contain the latest breathable technology.

If you’re serious about athletic performance, then the Samurai thinks that buying top-of-the-line sports equipment makes sense. If you have a baby, the best baby care products are worth the extra expenditure. If you’re in the habit of watching movies at the theater, then you might consider buying a high definition TV and surround sound system, which makes watching movies (and listening to music) at home more enjoyable—and economical. He also recommends that you take care of yourself with massages, physical therapy and coaching—arguing that physical and mental health are priceless.

Finally, since most Americans receive very little vacation time from work, the Samurai recommends that you make the most of those days or weeks, by selecting the best adventure and the best amenities possible. The point: live a great life while you’re saving and investing.

To his list, I would add comfortable clothing and footwear. A comfortable desk chair and good sized desk can make all the difference in the world for the time you spend in your office. And if your computer is more than five years old, treat yourself to the latest hardware, including at least a 24 inch monitor to save yourself time and strain on your eyes.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: http://snip.ly/8ohpy#https://www.financialsamurai.com/things-worth-spending-more-money-on-better-life/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

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