2018 Year-End Tax Planning Tips

Yep, it’s that time of year again. While the stock markets were busy correcting in October, making for a very volatile month, our thoughts turn to year-end tax planning.

Now is the time to take steps to cut your 2018 tax bill. Here are some relatively foolproof year-end tax planning strategies to consider, taking into account changes included in the Tax Cuts and Jobs Act (TCJA).

Year-end Planning Moves for Individuals

Game the Increased Standard Deduction Allowances. The TCJA almost doubled the standard deduction amounts. For 2018, the amounts are $12,000 for singles and those who use married filing separate status (up from $6,350 for 2017), $24,000 for married joint filing couples (up from $12,700), and $18,000 for heads of household (up from $9,350). If your total annual itemizable deductions for 2018 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.

The easiest deductible expense to accelerate is your home mortgage payment due on January 1. Accelerating that payment into this year will give you 13 months’ worth of interest deductions in 2018. Although the TCJA put new limits on itemized deductions for home mortgage interest, you are most likely unaffected (mostly affects some interest on home equity loans and lines of credit).

Also, consider state and local income and property taxes that are due early next year. Prepaying those bills before year-end can decrease your 2018 federal income tax bill because your itemized deductions will be that much higher. However, the TCJA decreased the maximum annual amount you can deduct for state and local taxes to $10,000 ($5,000 if you use married filing separate status). So, beware of this new limitation, and don’t be in a hurry to pre-pay property taxes by year-end if there’s a better chance that you might be able to deduct them in 2019.

Accelerating other expenditures could cause your itemized deductions to exceed your standard deduction in 2018. For example, consider making bigger charitable donations this year and smaller contributions next year to compensate. Be sure to ask us about a donor advised fund, which can accelerate donation deductions this year, while taking your time (perhaps years) to “grant” amounts to your favorite charities. Also, consider accelerating elective medical procedures, dental work, and vision care. For 2018, medical expenses are deductible to the extent they exceed 7.5% of Adjusted Gross Income (AGI), assuming you itemize.

Warning: The state and local tax prepayment drill can be a bad idea if you owe Alternative Minimum Tax (AMT) for this year. That’s because write-offs for state and local income and property taxes are completely disallowed under the AMT rules. Therefore, prepaying those expenses may do little or no good if you are an AMT victim. While changes in the tax law reduced the number of people subject to the AMT, you may want to contact us if you are unsure about your exposure to the AMT.

Carefully Manage Investment Gains and Losses in Taxable Accounts. If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2018 is only 15% for most folks, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.

To the extent that you have capital losses that were recognized earlier this year, or capital loss carryovers from pre-2018 years, selling winners this year will not result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a sweet deal because net short-term gains would otherwise be taxed at higher ordinary income rates.

What if you have some loser investments that you would like to unload? Biting the bullet and taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains, from other sales this year.

If selling a bunch of losers would cause your capital losses to exceed your capital gains, the result would be what’s known as a net capital loss for the year. No problem! That net capital loss can be used to shelter up to $3,000 of 2018 ordinary income from salaries, bonuses, self-employment income, interest income, royalties, and whatever else ($1,500 if you use married filing separate status). Any excess net capital loss from this year is carried forward to next year and beyond.

In fact, having a capital loss carryover into next year could turn out to be a pretty good deal. The carryover can be used to shelter both short-term and long-term gains recognized next year and beyond. This can give you extra investing flexibility in those years because you won’t have to hold appreciated securities for over a year to get a preferential tax rate. Since the top two federal rates on net short-term capital gains recognized in 2019 and beyond are 35% and 37% (plus the 3.8% NIIT, if applicable), having a capital loss carryover into next year to shelter short-term gains recognized next year and beyond could be a very good thing.

One thing to keep in mind when either “harvesting” losses or holding on to winners to avoid capital gains: don’t let the tax “tail” wag the investment “dog”. Selling a loser for the sake of recognizing tax losses may not be prudent if the investment is temporarily undervalued. Conversely, holding onto an investment just to avoid capital gains taxes or to enjoy long term capital gains treatment may cost you more in lost gains than the taxes you’ll save. Be smart about it.

Take Advantage of 0% Tax Rate on Investment Income. The TCJA retained the 0%, 15%, and 20% rates on Long-term Capital Gains (LTCGs) and qualified dividends recognized by individual taxpayers. However, for 2018–2025, these rates have their own brackets that are not tied to the ordinary income brackets. Here are the brackets for 2018:

Single

Joint

Head of Household

0% bracket

$0–38,600

$0–77,200

$0–51,700

Beginning of 15% bracket

38,601

77,201

51,701

Beginning of 20% bracket

425,801

479,001

452,401

Note: The 3.8% NIIT can hit LTCGs and dividends recognized by higher-income individuals. This means that many folks will actually pay 18.8% (15% + 3.8% for the NIIT) and 23.8% (20% + 3.8%) on their 2018 LTCGs and dividends.

While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If you’re planning to give them cash, alternatively consider giving them appreciated stock or mutual fund shares that they can sell and pay 0% tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient’s ownership period (before the sale) equals at least a year and a day.

Giving away stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient’s 0% rate bracket, they will be federal-income-tax-free.

Warning: If you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates. That would defeat the purpose. Please contact us if you have questions about the Kiddie Tax and refer to our post on the topic: Is Tax Simplification Just A Kiddie’s Play?

Also, one can be doing pretty well income-wise and still be within the 0% rate bracket for LTCGs and qualified dividends. Consider the following examples:

·       Your married adult daughter files jointly and claims the $24,000 standard deduction for 2018. She could have up to $101,200 of AGI (including LTCGs and dividends) and still be within the 0% rate bracket. Her taxable income would be $77,200, which is the top of the 0% bracket for joint filers.

·       Your divorced son uses head of household filing status and claims the $18,000 standard deduction for 2018. He could have up to $69,700 of AGI (including LTCGs and dividends) and still be within the 0% rate bracket. His taxable income would be $51,700, which is the top of the 0% bracket for heads of household.

·       Your single daughter claims the $12,000 standard deduction for 2018. She could have up to $50,600 of AGI (including LTCGs and dividends) and still be within the 0% rate bracket. Her taxable income would be $38,600, which is the top of the 0% bracket for singles.

Give Away Winning Shares, or Sell Losing Shares and Give Away the Resulting Cash. If you want to make gifts to some favorite relatives and/or charities, they can be made in conjunction with an overall revamping of your taxable (non-IRA) stock and equity mutual fund portfolios. Gifts should be made according to the following tax-smart principles.

Gifts to Relatives. Don’t give away losing shares (currently worth less than what you paid for them). Instead, you should sell the shares and book the resulting tax-saving capital loss. Then, you can give the sales proceeds to your relative.

On the other hand, you should give away winning shares to relatives. It’s somewhat likely they will pay lower tax rates than you would pay if you sold the same shares. As explained earlier, relatives in the 0% federal income tax bracket for LTCGs and qualified dividends will pay a 0% federal tax rate on gains from shares that were held for over a year before being sold. (For purposes of meeting the more-than-one-year rule for gifted shares, you can count your ownership period plus the gift recipient’s ownership period.) Even if the winning shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would.

Gifts to Charities. The principles for tax-smart gifts to relatives also apply to donations to IRS-approved charities. You should sell losing shares and benefit from the resulting tax-saving capital losses. Then, you can give the sales proceeds to favored charities and claim the resulting tax-saving charitable deductions (assuming you itemize). Following this strategy delivers a double tax benefit: tax-saving capital losses plus tax-saving charitable donation deductions.

On the other hand, you should donate winning shares instead of giving away cash. Why? Because donations of publicly traded shares that you have owned for over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift (assuming you itemize). Plus, when you donate winning shares, you escape any capital gains taxes on those shares. This makes this idea another double tax-saver: you avoid capital gains taxes, while getting a tax-saving donation deduction (assuming you itemize). Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing anything to the IRS.

Finally, if you’re over age 70-1/2, you are subject to annual required minimum distributions (RMD) on your traditional IRA accounts. Consider making a direct contribution from your IRA to your favorite charity for any amount and it applies towards your annual RMD obligation. That way, the income is never taxed, and reduces your overall AGI, which can benefit you in many ways (e.g., possibly lower medicare premiums, less taxation of social security benefits, less exposure to deduction phaseouts that are based on your AGI).

Convert Traditional IRAs into Roth Accounts. The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings.

A few years ago, the Roth conversion privilege was a restricted deal. It was only available if your modified AGI was $100,000 or less. That restriction is gone. Even billionaires can now do Roth conversions! If you have a lower than normal maximum tax bracket, you may want to consider a Roth conversion before year end.

Take Advantage of Principal Residence Gain Exclusion Break. Home prices are on the upswing in many areas. More good news: Gains of up to $500,000 on the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns. $250,000 is the gain exclusion limit for qualifying unmarried individuals and married individuals who file separate returns. To qualify for the gain exclusion break, you normally must have owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date. You’ll definitely want to take these rules into consideration if you’re planning on selling your home in today’s improving real estate environment.

Watch out for the AMT. The TCJA significantly reduced the odds that you will owe AMT for 2018 by significantly increasing the AMT exemption amounts and the income levels at which those exemptions are phased out. Even if you still owe AMT, you will probably owe considerably less than under prior law. Nevertheless, it’s still critical to evaluate year-end tax planning strategies in light of the AMT rules. Because the AMT rules are complicated, you may want some assistance. We can help.

Don’t Overlook Estate Planning. The unified federal estate and gift tax exemption for 2018 is a historically huge $11.18 million, or effectively $22.36 million for married couples. Even though these big exemptions may mean you are not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules. Also, you may need to make some changes for reasons that have nothing to do with taxes, especially if your estate plan is more than a few years old. Don’t put off this very important life planning task.

Year-end Planning Moves for Small Businesses

Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. For example, if you are self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you are employed by your own corporation, up to 25% of your salary can be contributed with a maximum contribution of $55,000.

Other small business retirement plan options include the 401(k) plan (which can be set up for just one person), the defined benefit pension plan, and the SIMPLE-IRA. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

The deadline for setting up a SEP-IRA for a sole proprietorship, and making the initial deductible contribution for the 2018 tax year, is 10/15/2019 if you extend your 2018 return to that date. Other types of plans generally must be established by 12/31/2018 if you want to make a deductible contribution for the 2018 tax year, but the deadline for the contribution itself is the extended due date of your 2018 return. However, to make a SIMPLE-IRA contribution for 2018, you must have set up the plan by October 1. So, you might have to wait until next year if the SIMPLE-IRA option is appealing.

Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.

Take Advantage of Liberalized Depreciation Tax Breaks. Thanks to the TCJA, 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2018. That means your business might be able to write off the entire cost of some or all of your 2018 asset additions on this year’s return. So, consider making additional acquisitions between now and year-end. Contact us for details on the 100% bonus depreciation break and what types of assets qualify.

Claim 100% Bonus Depreciation for Heavy SUVs, Pickups, or Vans. The 100% bonus depreciation provision can have a hugely beneficial impact on first-year depreciation deductions for new and used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment that qualifies for 100% bonus depreciation. However, 100% bonus depreciation is only available when the SUV, pickup, or van has a manufacturer’s Gross Vehicle Weight Rating (GVWR) above 6,000 pounds. The GVWR of a vehicle can be verified by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you are considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a juicy write-off on this year’s return.

Claim Bigger First-year Depreciation Deductions for Cars, Light Trucks, and Light Vans. For both new and used passenger vehicles (meaning cars and light trucks and vans) that are acquired and placed in service in 2018 and used over 50% for business, the TCJA dramatically increased the so-called luxury auto depreciation limitations. For passenger vehicles that are acquired and placed in service in 2018, the luxury auto depreciation limits are as follows:

· $18,000 for Year 1 if bonus depreciation is claimed.
· $16,000 for Year 2.
· $9,600 for Year 3.
· $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.

These allowances are much more generous than under prior law. Note that the $18,000 first-year luxury auto depreciation limit only applies to vehicles that cost $58,000 or more. Vehicles that cost less are depreciated over six tax years using depreciation percentages based on their cost. Contact us for details.

Cash in on More Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Section 179 deduction to $1 million (up from $510,000 for tax years beginning in 2017). The Section 179 deduction phase-out threshold amount was increased to $2.5 million (up from $2.03 million). The following additional beneficial changes were also made by the TCJA.

Property Used for Lodging. For property placed in service in tax years beginning in 2018 and beyond, the TCJA removed the prior-law provision that disallowed Section 179 deductions for personal property used predominately to furnish lodging or in connection with the furnishing of lodging. Examples of such property would apparently include furniture, kitchen appliances, lawn mowers, and other equipment used in the living quarters of a lodging facility or in connection with a lodging facility such as a hotel, motel, apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.

Qualifying Real Property. As under prior law, Section 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual Section 179 deduction allowance ($1 million for tax years beginning in 2018). There is no separate limit for qualifying real property expenditures, so Section 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar. Qualifying real property means any improvement to an interior portion of a nonresidential building that is placed in service after the date the building is first placed in service, except for expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework.

For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for the Section 179 deduction to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service in tax years beginning after 2017 and after the nonresidential building has been placed in service.

Time Business Income and Deductions for Tax Savings. If you conduct your business using a pass-through entity (sole proprietorship, S corporation, LLC, or partnership), your shares of the business’s income and deductions are passed through to you and taxed at your personal rates. Assuming the current tax rules will still apply in 2019, next year’s individual federal income tax rate brackets will be the same as this year’s (with modest bumps for inflation). In that case, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2018 until 2019.

On the other hand, if you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate. Contact us for more information on timing strategies.

Maximize the New Deduction for Pass-through Business Income. The new deduction based on Qualified Business Income (QBI) from pass-through entities was a key element of the TCJA. For tax years beginning in 2018–2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. The QBI deduction also can be claimed for up to 20% of income from qualified REIT dividends and 20% of qualified income from publicly-traded partnerships.

For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations. The QBI deduction is only available to non-corporate taxpayers (individuals, trusts, and estates).

Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction. So, individuals who can benefit from the deduction must be really careful at year-end tax planning time. We can help you put together strategies that give you the best overall tax results for the year.

Claim 100% Gain Exclusion for Qualified Small Business Stock. There is a 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after 9/27/10. QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Contact us if you think you own stock that could qualify.

Conclusion

This post only covers some of the year-end tax planning moves that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.

Second Quarter 2018 YDFS Market Review

I often remind my clients and prospects that judging market performance for periods shorter than a few years, isn’t very helpful. Market returns are simply random over relatively brief periods. However, over longer periods, such as five years, stocks are almost always profitable and offer very good performance. The S&P 500 has finished higher in 91% of the rolling-five-year periods over the last 50 years.

Nonetheless, it’s helpful to check back and see how well the markets performed over the past quarter  While the U.S. equity markets suffered a small setback in the first quarter of 2018, the second quarter brought us back into positive territory.

The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—finished the quarter up 3.83%, and is now in positive territory for the first half of the year, at +3.04%. The comparable Russell 3000 index is up 3.22% so far this year.

Large cap stocks more than recovered their earlier losses. The Wilshire U.S. Large Cap index gained 3.41% over the past three months, to finish up 2.62% for the first half of the year, while the Russell 1000 large-cap index stands at a 2.85% gain at the year’s halfway point. The widely-quoted S&P 500 index of large company stocks gained 2.93% in value during the year’s second quarter, rallying to a 1.67% gain so far in 2018.

Meanwhile, the Russell Midcap Index is up 2.35% in the first six months of the year.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a 7.87% gain over the second three months of the year, and now stand up 7.08% at the half-year mark. The comparable Russell 2000 Small-Cap Index is up 7.66% for the year. The technology-heavy Nasdaq Composite Index finished the quarter with a gain of 6.31%, and is now up 8.79% at the halfway point of 2018. Much of the over-performance of the NASDAQ can be attributed to a handful of stocks such as Amazon, Facebook, Google and Neflix.

International stocks are not faring quite so well. The broad-based MSCI EAFE index of companies in developed foreign economies lost 2.34% in the recent quarter, and is now down 4.49% for the year. In aggregate, European stocks were down 2.74% over the last three months, posting an overall loss of 5.23% for the year, while MSCI’s EAFE’s Far East Index lost 3.24% in the second quarter, down 3.33% so far in 2018. Emerging market stocks of less developed countries, as represented by the MSCI EAFE EM index, went into negative territory for the quarter, down 8.66%, for a loss of 7.68% for the year.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, gained 9.73% during the year’s second quarter, and is just eking out a 1.52% gain for the year. The S&P GSCI index, which measures commodities returns, gained 8.00% in the second quarter, up 10.36% for the year, mainly due to the rising price of oil.

In the bond markets, coupon rates on 10-year Treasury bonds have continued an incremental rise to 2.86%, while 30-year government bond yields have risen slightly to 2.99%. Five-year municipal bonds are yielding, on average, 2.00% a year, while 30-year munis are yielding 3.00% on average. Simply put, at present, investing in bonds with a term greater than 10 years is not rewarding you for the many years of interest rate risk you’re taking. That may change.

So what’s going on? There appear to be several forces fighting for control over the investment markets. The current bull market started in March of 2009, and seemed to be running out of steam in the first quarter, before a sugar high—the stimulus provided by the recent tax bill—kicked in for companies that have traditionally experienced higher tax rates. This pushed a tired bull market forward for another quarter, and could do the same for the remainder of the year. A fiscal stimulus in the ninth year of an economic expansion is almost unheard of, but it is clearly having a positive effect: economic activity was up nearly 5% in the second quarter, unemployment has continued a downward trend that really started at the beginning of the bull market, and corporate earnings—with the lower corporate taxes factored in—are projected to increase roughly 25% over last year.

The other contestants for control of the economy seem destined to lose this year and possibly start winning in 2019. The Federal Reserve Board has raised short-term interest rates once again, and has announced plans to continue in September, December, next March and next June. Bonds’ share of investors’ dollars at some point will overtake stocks as government 10 year bond yields reach 4% or more, making it difficult for stocks to levitate at current levels.

Meanwhile, the labor markets are so tight that there are more jobs available than workers to fill them. Won’t this eventually force companies to share their profits in the form of higher salaries? And there are potential problems with the escalating trade war that America has picked with its trading partners that will almost certainly not have a positive impact in the long term.

Bigger picture, the flattening yield curve—where longer-term bonds are closer to yielding what shorter-term instruments are paying—is never regarded as a good sign for an economy’s near-term future. It’s worth noting that the financial sector—that is, lending institutions—was one of the economic sectors to experience a loss. Banks borrow short and lend long, and there isn’t much profit in that activity when the rates are about equal.

Beyond that, in a good year, corporate earnings would grow around 5%, so one could argue that the economy is now experiencing five years of earnings growth. Add these factors to the doddering age of the current bull market, and you have to wonder how long the party can continue. Nobody knows what tomorrow will bring, but everybody knows that bull (up-trending) markets don’t last forever. This may be a good time to mentally and financially prepare for an end to the long bull run, and to hope it ends gracefully. For our clients, we remain cautious bulls and are keeping our hedges in place. The higher volatility we’ve experienced so far this year shows no sign of waning, and the low-volume summer trading season is the ideal time for market shenanigans to show up.

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.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.ftse.com/products/indices/russell-us

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

Nasdaq index data: http://quotes.morningstar.com/indexquote/quote.html?t=COMP

http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices: https://www.msci.com/end-of-day-data-search

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

General: https://www.marketwatch.com/story/stocks-see-broad-gains-in-the-second-quarter-but-not-without-turbulence-2018-06-29
https://www.cnbc.com/2018/06/08/gdp-for-second-quarter-on-track-to-double-2018-full-year-pace-of-2017.html

https://finance.yahoo.com/news/jobs-report-4th-july-need-know-week-ahead-191630507.html

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

Is A Donor Advised Fund Right for You?

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.

Tax Bill Provisions to Consider Before You Jingle All the Way

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

Common Estate Planning Mistakes People Make

“Mortality never prevented the majority of human beings from behaving as though death were no more than an unfounded rumor” – Aldous Huxley

A Rocket Lawyer survey in 2014 indicated that 64% of Americans did not have a will. If you’re one of them, then this is a must-read.

The most common way to transfer assets to your heirs is also the messiest: to have a will that is so out-of-date that it doesn’t even relate to your property or estate anymore, to have your records scattered all over the place, to have social media, banking and email accounts whose passwords only you can find—and basically to leave a big mess for others to clean up. I’ve reviewed over a hundred wills and estate plans in my lifetime, and it never ceases to amaze me how out-of-date or incomplete some of them are.

Is there a better way?

Recently, a group of estate planning experts were asked for their advice on a better process to handle the transfer of assets at your death, and to articulate common mistakes. A list of mistakes, including a few that I identified during my reviews, are covered below:

Not regularly reviewing documents. What might have been a solid plan 5 to 15 years ago may not relate to your estate today. The experts recommended a full review every three to five years, to ensure that trustees, executors, guardians, beneficiaries and healthcare agents are all up-to-date. You might also consider creating a master document which lists all your social media and online accounts and passwords, so that your heirs can access them and close them down. Be sure your documents specifically authorize and instruct your executor to access and shut them down after your death.

Not leaving personal property disposition instructions, keys and passwords for your executor. Untold numbers of safes and safety deposit boxes have to either be drilled open or forced open by court order because no one else held the key or numeric combination. If you have a home or office safe, or a safety deposit box at a bank, make sure that your executor and/or trustee knows where the key(s) are, or what the combination is (and what bank location the safe deposit box is in). Even better, and to facilitate distribution, leave a signed inventory of the valuables left in there and who is to inherit them. Having a schedule of valuable property or heirlooms and who is designated to inherit them is invaluable to your executor after you’re gone. Don’t wait until after the will is executed to do this. Do it before you sign the will and make yourself a to-do to update the list at least once a year. Will your executor know where to find and be able to access all of your original estate planning documents?

Using a will instead of a revocable trust. This relates mostly to people who want to protect their privacy or pass their wealth to under-age children. When assets pass to heirs via a will, the transfer creates a public record that anybody can access and read. A revocable trust can be titled in your name, and you can control the assets as you would with outright ownership, but the assets simply pass to your designated successor upon death.

Establishing a longer term trust for a small amount of assets. If the trust distributes assets over multiple years, be sure the value of the trust assets justify the cost and burden of fiduciary administration. Creating a trust holding $50,000 worth of assets to distribute $10,000 to each of five beneficiaries over five years makes little financial sense.

Failure to require mandatory and timely annual income distributions. Not distributing income annually to the beneficiaries can subject the trust to a 35% maximum tax rate on all income over $12,500 (currently), a much steeper income tax schedule than that of any individual beneficiary. With an inexperienced trustee, he/she may not know that not distributing the income from the trust annually will likely result in much higher taxation. By specifically REQUIRING annual income distributions in the trust, an ignorant trustee has no choice, and can thereby avoid high trust tax rates, and the beneficiaries pay their own (likely lower) tax rates on their distributions.

Not carefully vetting the trustee. The role of the trustee is both a powerful and time consuming one: make sure the person is qualified, willing and able to devote the time to properly understand and execute the trust instructions. Be sure to ask your candidate if they’re willing to serve before naming them in your trust. Family members who may also be beneficiaries frequently become a source of conflict or present a conflict of interest, so you may want to try and appoint a trusted non-relative instead if at all possible, or designate a corporate trustee. Also, provide in the trust document for reasonable compensation, expense reimbursement and indemnification of the trustee.

Failing to fund the revocable trust. You’ve set up the trust, but now you and your team of professionals have to transfer title to your properties out of your name and into the trust, with you as the initial trustee. If you forget to do this, then the entire purpose of the trust is wasted. Be sure to specify at least two successor trustees.

Having assets titled in a way that conflicts with the will or trust. You should always pay close attention to account beneficiary designations, because they—not your will or trust—determine who will receive your life insurance proceeds, IRA distributions and employer retirement plan assets. Meanwhile, assets (like a home) owned in joint tenancy with rights of survivorship will pass directly to the surviving joint tenant, no matter what the will or trust happens to say. Review beneficiary designations at least once a year. Does that old employer 401(k) beneficiary still list your former spouse as the beneficiary?

Not using the annual gift exemption. Each person can gift $14,000 a year tax-free to heirs without affecting the value of their $5.49 million lifetime estate/gift tax exemption. That means a husband and wife with four children could theoretically gift the kids $112,000 a year tax-free. Over time, that can reduce the size of a large estate potentially below the gift/estate exemption threshold, and in states where there is an estate or inheritance tax, it can help as well.

Not understanding the generation-skipping transfer tax. A husband and wife can each leave estate values of $5.49 million to any combination of individuals. But if there’s anything left over, there’s a 40% federal estate tax on those additional assets left to heirs in the next generation (the children), and an additional 40% on assets left to the generation after that (the grandchildren). Better to transfer $5.49 million out of the estate before death (tax-free, since this fills up the lifetime gift exemption) into a dynastic trust for the benefit of the grandchildren. You can also transfer that annual $14,000 to grandchildren. If your estate is that large, it is imperative that you seek the assistance of an estate planning attorney unless you favor leaving half or more of your assets to your federal and state governments.

Not taking action because of the possibility of estate tax repeal. Yes, the Republican leadership in Congress includes, on its wish list, the total repeal of those estate taxes (the estate tax is based on the value of the estate on the date of death). But what if there’s no action, or a compromise scuttles the estate tax provisions at the last minute? Federal wealth transfer taxes have been enacted and repealed three times in U.S. history, so there’s no reason to imagine that even if there is a repeal, the repeal will last forever. Meanwhile, dynastic trusts and other estate planning tactics provide tangible benefits even without the tax savings, including protecting assets from lawsuits and claims. And while the estate tax may be going away, the tax on estate and trust income is not, and may become a focus of the IRS as replacements for lost revenue are sought out.

Thinking that having just a will is enough. A health care directive (to allow your designee to speak on your behalf regarding health care decisions when you can’t) and a durable power of attorney (to perform duties on your behalf when you’re possibly incapacitated) are essential for every adult to have, in addition to a will.

Leaving too much, too soon, to younger heirs. Nothing can harm emerging adult values quite like realizing, as they start their productive careers, that they actually never need to work a day in their lives. The alternative? Create a trust controlled by a trusted individual (again, preferably not a family member or beneficiary) or a corporate trust company until the beneficiaries reach a more mature stage of their lives, perhaps 30-35 years old.

There are so many other estate planning provisions that may be unique to you, your family and your business. A fee paid to a legal professional who specializes in estate planning is a final act of love to your loved ones to help them understand your dying intentions, and minimize the hassles inherent in estate administration and disposition.

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.

Tax Reform or Accountant’s Re-employment Act?

For as long as I can remember, tax reduction and simplification have been on the table for congress and past presidents. So why not President Trump? File your next tax return on a postcard (not likely)? I might be a bit cynical, but the only result of the next tax act I see will be extending my employment as a tax planner and preparer for the foreseeable future.

I sincerely doubt I’ll see significant tax simplification in my lifetime, so my fellow CPA’s and Turbotax employees can probably breathe a sigh of relief-their jobs are likely safe for years to come.

You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after multiple failures to overhaul our health care system, but professional advisors are studying the newly-released nine-page proposal closely nonetheless. We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:

First, we would see the current seven tax brackets for individuals reduced to three — a 12% rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%. The proposal doesn’t include the income “cutoffs” for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples–currently $75,900), and joint filers would start paying 35% at $225,000 of income (currently $416,700).

The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal. But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.

The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17. (No actual figure was given.)

At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions. The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.

The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected. Anyone with enough money to be subject to the estate tax, has probably paid lawyers and accountants enough for planning to avoid paying a single dollar of it.

The plan would also limit the maximum tax rate for pass-through business entities like partnerships and limited liability companies (LLC’s) to 25%, which might allow high-income business owners to take their gains through the entity, rather than as personal (1040) income and avoid the highest personal tax brackets.

Finally, the tax plan would lower America’s maximum corporate (C-Corporation) tax rate from the current 35% to 20%. To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.

What are the implications of this bare-bones proposal? The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%. That, plus the elimination of the estate tax, in addition to the lowering of the corporate tax (potentially leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors. But the mysterious “surcharge” on wealthier taxpayers might taketh away what the rest of the plan giveth.

But many Americans with S corporations, LLCs or partnership entities (known as pass-through entities because their income is reported on the owners’ personal returns and therefore no company level tax is paid) would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40% currently. (No big surprise: The Trump organization is a pass-through entity.)

A huge unknown is which itemized deductions would be eliminated in return for the higher standard deduction. Would the plan eliminate the deduction for state and local property and income taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate? Note that on average, only about 35% of Americans itemize their deductions on Schedule A, most of them higher income taxpayers.

Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim state and local tax deductions. Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300. Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now. Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5 percent.

Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt. One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years. According to the Committee for a Responsible Federal Budget analysis, Republican economists have identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.

Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.

CA - 2017-9-30 - Tax Reform Proposal_2

These cost estimates have huge political implications for whether a tax bill will ever be passed. Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.

That means compromise. To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut (gee…thanks?). Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.

Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes. The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy. Would you bet on that sort of compromise?

We shall see, and I’ll keep you posted on tax developments. For now, put away that post card–you’re probably going to need an envelope and more postage.

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.

Sources:
https://www.yahoo.com/finance/news/trump-overpromising-tax-cuts-205013012.html
https://www.aei.org/publication/the-big-six-tax-reform-framework-can-you-dynamically-score-a-question-mark/
https://www.washingtonpost.com/blogs/plum-line/wp/2017/09/27/trumps-new-tax-plan-shows-how-unserious-republicans-are-about-governing/?tid=sm_tw&utm_term=.d37e0bcf718d
https://www.yahoo.com/finance/news/hidden-tax-hikes-trumps-tax-cut-plan-202041809.html
https://www.yahoo.com/finance/news/republicans-700-million-problem-could-173027048.html
https://www.yahoo.com/finance/news/trumps-tax-plan-just-got-180000645.html
The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

 

2017 Retirement Contribution Limits Unchanged

Retirement plan contributions are supposed to be indexed and adjusted annually in line with the change in the rate of inflation. But only in the governmental fantasy world of non-inflation are adjustments not necessary.

That is to say, in case you missed it, the contribution limits to your 401(k) plan, IRA and Roth IRA—set by the government each year based on the inflation rate—will not go up in 2017.  Just like this year, you will be able to defer up to $18,000 of your paycheck to your 401(k), and individuals over age 50 will still be able to make a “catch-up” contribution of an additional $6,000.  (The same limits apply to 403(b) plans and the federal government’s new Thrift Savings Plan.)  Your IRA and Roth IRA contributions will continue to max out at $5,500, plus a $1,000 “catch-up” contribution for persons 50 or older.

SEP IRA and Solo 401(k) contribution limits, meanwhile, will go up from $53,000 this year to $54,000 in 2017.

The government has made small changes to the income limits on who can make deductions to a Roth IRA and who can claim a deduction for their contribution to a traditional IRA.  The phaseout schedule (income range) for single filers for 2016 starts at $117,000 and contributions are entirely phased out at $132,000; for joint filers the current range is $186,000 to $196,000.  In 2017, the single phaseout will run $1,000 higher, from $118,000 to $133,000, and the joint phaseout threshold will rise $2,000, to $188,000 up to $198,000.  Single persons who have a retirement plan at work will see the income at which they can no longer deduct their IRA contributions go up $1,000 as well, with the phaseout starting at $62,000 and ending at $72,000.  Couples will see their phaseout schedule rise to $99,000 to $119,000.

If you would like to review your retirement plan options, 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.

Sources:

http://money.cnn.com/2016/10/27/retirement/401k-ira-contribution-2017/index.html?iid=Lead

http://www.investopedia.com/articles/retirement/111516/2017-cola-adjustments-overview.asp?partner=mediafed

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

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