Essential Year-End Tax Planning Tips for 2024

November 30, 2024 — Sam H. Fawaz

Tax planning becomes essential for individuals and businesses as the year ends. Proactively managing your finances before the calendar flips to 2025 can help minimize your tax burden and set you up for a financially secure new year.

Many clients submit their information yearly to have us optimize their 2024 and future years’ taxes. Proactively estimating and making side-by-side multi-year tax projections has permanently saved some clients thousands of dollars in taxes.

Here are some things to consider as you weigh potential tax moves between now and the end of the year.

1. Consider deferring income to next year

The old rule used to be “defer income.” The new rule is “time income.”

Consider opportunities to defer income to 2025, especially if you may be in a lower tax bracket next year.

For example, you may be able to defer a year-end bonus or delay the collection of business debts, rent, and payments for services. Doing so may enable you to postpone tax payments on the income until next year.

If you have the option to sell real property on a land contract rather than an outright sale, that can spread your tax liability over several years and be subject to a lower long-term capital gain rate (which could be as low as 0%.) On the other hand, if you’re concerned about future tax rate hikes, an outright sale or opting out of the installment method for a land contract sale can ease the uncertainty that you’ll pay higher rates on the deferred income.

If your top tax rate in 2024 is lower than what you expect in 2025 (say, because you are retiring or because of significant gains or a big raise or bonus expected in 2025), it might make sense to accelerate income instead of deferring it.

Be mindful of accelerating or bunching income, which can potentially 1) increase the taxability of social security income, 2) increase Medicare premiums, 3) raise your long-term capital gains rate from 0% to 20%, or 4) decrease your ACA health insurance premium credit.

2. Time your deductions

Once again, the old rule used to be “accelerate deductions.” The new rule is “time deductions.”

If appropriate, look for opportunities to accelerate deductions into the current tax year, especially if your tax rate will be higher this year than next.

If you own a business and are in a high tax bracket, consider accelerating business equipment purchases and electing up to a full expense deduction (via bonus depreciation or Section 179 expensing.)

If you itemize deductions, making payments for deductible expenses such as qualifying interest, state, and local taxes (to the extent they don’t already exceed $10,000), and medical expenses before the end of the year (instead of paying them in early 2025) could make a difference on your 2024 return.

For taxpayers who typically itemize their deductions, the strategy of “bunching” deductions can significantly impact them. Instead of spreading charitable contributions, medical expenses, and other deductible costs across multiple years, consider consolidating them into one year. By “bunching” these deductions, you may exceed the standard deduction threshold and maximize your itemized deductions for the year.

For example, if you typically donate $2,000 annually to charity but are not receiving a tax benefit because you are utilizing the standard deduction, consider making multiple years of contributions in 2024. This could help you exceed the standard deduction amount, allowing you to itemize your deductions and providing more tax benefits (see below.)

For those with significant medical expenses, it’s important to note that only the portion of medical expenses exceeding 7.5% of your adjusted gross income (AGI) can be deducted. If you’re close to reaching that threshold, consider scheduling medical procedures, doctor visits, or purchasing necessary medical equipment before the year ends. Remember that medical expenses are only deductible in the year they are paid, so timing matters.

3. Make deductible charitable contributions

Making charitable donations can reduce your taxable income while supporting causes that matter to you.

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 60%, 50%, 30%, or 20% of your adjusted gross income, depending on the type of property you give and the type of organization to which you contribute. Excess amounts can be carried over for up to five years.

You can use checks or credit cards to make year-end contributions even if the check does not clear until shortly after year-end or the credit card bill does not have to be paid until next year.

As you consider year-end charitable giving, there are a few strategies to keep in mind:

  • Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can direct up to $105,000 (2024 limit) from your IRA to a charity as a QCD. This donation counts toward your required minimum distribution (RMD) and is excluded from your taxable income (and can reduce the taxation of social security income.) QCDs cannot be counted as deductible charitable donations.
  • Donor-Advised Funds (DAFs): DAFs allow you to make a significant charitable contribution in 2024 and receive the tax deduction now while deciding which charities to support over the next several years. This is a strategy to help with the bunching of itemized deductions described earlier.
  • Appreciated Stock Donations: Donating appreciated stocks that have been held for over one year instead of cash generally provides a double benefit. It allows you to avoid paying capital gains tax on the appreciation while receiving a charitable deduction equal to the investment’s fair market value.

4. Bump up withholding to cover a tax shortfall

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. Time may be limited for employees to request a Form W-4 change and for their employers to implement it in 2024.

The most significant advantage in doing so is that withholding is considered to have been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This approach can help you avoid or reduce possible underpayment of estimated tax penalties.

Those taking distributions from their IRAs can also request that up to 100% of the distribution be paid toward federal and state income tax withholding to help avoid underpayment of estimated tax penalties.

These increased withholding strategies can compensate for low or missing quarterly estimated tax payments.

5. Save more for retirement

Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2024 taxable income. Consider doing so if you still need to contribute up to the maximum amount allowed.

For 2024, you can contribute up to $23,000 to a 401(k) plan ($30,500 if you’re age 50 or older) and up to $7,000 to traditional and Roth IRAs combined ($8,000 if you’re age 50 or older). The window to make 2024 employee contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2025, to make 2024 IRA contributions.

Various income limitations exist for eligibility to make traditional and Roth IRA contributions. Regardless of your income, however, you can make a non-deductible IRA contribution. Such a contribution can be subsequently converted to a Roth IRA at little or no tax cost for many (this is known by many as the “back-door” Roth.) If a Roth IRA conversion doesn’t make sense, the non-deductible contribution adds cost basis to your traditional IRA, reducing future taxation of IRA distributions or Roth conversions. Note that Roth contributions are not deductible and Roth-qualified distributions are not taxable.

Speaking of Roth Conversions, if you expect your tax rate to be higher in future years, or you’re in a low tax bracket in 2024, converting some or all your traditional (pre-tax) IRA or 401(k) funds into a Roth IRA in 2024 may be beneficial. While this conversion triggers taxes now, it can reduce future tax liabilities, as qualified withdrawals from a Roth IRA are tax-free.

Owners of small businesses with retirement plans may have until the due date of their tax returns (plus extensions) to make some retirement plan contributions. Check with your tax advisor for your particular small-business retirement plan.

Some small business retirement plans must be set up by 12/31/2024 to allow for a deduction for the 2024 tax year.

If you have a small business, check with your tax advisor to ensure your retirement plan deductions are correctly balanced with the qualified business income deduction, assuming your small business is eligible.

6. Take required minimum distributions

If you are 73 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules may apply if you’re still working and participating in your employer’s retirement plan.)

If you reach 73 in 2024, you must begin taking minimum distributions from your retirement accounts (traditional IRAs, 401(k)s, etc.) by April 1, 2025. However, delaying the 2024 RMD until 2025 will require you to include both the 2024 and 2025 RMDs into 2025 income.

You must make the withdrawals by the required date—the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount you failed to distribute as required (10% if corrected promptly).

In 2024, the IRS finalized somewhat complicated regulations relating to RMDs from inherited IRAs after December 31, 2019.

In general, under the SECURE Act, unless an exception applies, the entire balance of a traditional or Roth IRA must be fully distributed by the end of the 10th year after the year of death.

In addition, depending on the age of the original IRA owner, heirs must take an RMD every year until the 10th year, when the remaining account balance must be distributed. These rules require careful and sometimes complex, multi-year planning for large inherited IRAs, so it’s essential to consult your tax advisor.

Review your accounts to ensure you’ve met your RMD requirement for the year, and if applicable, consider making charitable contributions through a QCD.

7. Weigh year-end investment moves

I often tell folks, “You should not let the tax tail wag the investment dog.” That means that you shouldn’t let tax considerations drive your investment decisions.

With that in mind, lower-income taxpayers may be subject to a 0% long-term capital gains rate for up to about $47K of taxable income for single filers and $94K for joint filers. For “kids” under 26, up to $2,600 of long-term capital gains are taxed at 0% if filed on their own tax returns (not filed with parents’ returns.)

Regardless, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all those gains by selling losing positions (also known as tax loss harvesting.)

Any capital losses over and above your capital gains can offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or be carried forward to reduce your taxes in future years.

Wash sale rules prevent investors from selling an investment at a loss and re-purchasing the same or substantially similar security within 30 days in any of their or spouse’s accounts (including retirement accounts). Doing so invalidates the loss for the current year, and the loss deduction is suspended until the new security is ultimately sold. If you wait 31 days to repurchase the same (or substantially similar security), the wash sale rules do not apply.

Digital assets like Bitcoin are not subject to wash sales rules, so there’s no harm in harvesting a loss and then immediately re-purchasing the same digital asset if desired.

8. Contribute to 529 Education Savings Plans

If you’re planning to save for education expenses, the end of the year is an excellent time to consider contributions to a 529 education savings plan. There is no federal tax deduction for 529 plan contributions, but the account grows tax-free if the funds are used for qualifying educational purposes.

Many states offer a limited tax deduction or credit for 529 plan contributions (some states even allow for a deduction for a 529 plan rollover from another state’s 529 plan.) In many states, contributing to a 529 plan you don’t own (say for a sibling, grandkid, nephew, niece, cousin, or friend) also allows for a state tax deduction.

There’s a five-year “super-funding” strategy for those needing to accelerate their college funding. This strategy allows you to contribute up to five years’ worth of gifts to a 529 plan in a year ($90,000 for individuals, $180,000 for married couples). A gift tax return must be filed, but it may not be taxable if this is the only gift made to that person in the current year. This can be a great way to accelerate your child’s education savings.

With the ability to 1) fund private K-12 education, 2) repay some student loans up to $10,000, and 3) rollover some leftover 529 plan funds to a Roth IRA after college graduation, worries about overfunding a 529 education savings plan are far less than they used to be.

In summary, year-end tax planning is a valuable opportunity to control your finances and reduce your taxable income for the year. Reviewing your financial situation, consulting with your tax advisor, and implementing these year-end strategies will ensure that you enter 2025 knowing you’ve made proactive decisions to optimize your tax savings.

Don’t hesitate to contact us if you would like to discuss a tax plan that fully utilizes all available strategies.

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, 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 and your financial plan and investment objectives are different.

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What You Must Know About the Tax Return Deadline

March 31, 2024 — Sam H. Fawaz

It’s that time of year, folks, and I wish I were talking about spring. The federal income tax filing deadline for individuals is fast approaching—generally Monday, April 15, 2024. For taxpayers living in Maine or Massachusetts, you get a couple of extra days to procrastinate—your deadline is April 17, 2024.

The IRS has also postponed the deadline for certain disaster-area taxpayers to file federal income tax returns and make tax payments. The current list of eligible localities and other details for each disaster are always available on the IRS website’s Tax Relief in Disaster Situations page. Interest and penalties are suspended until the postponed deadline for affected taxpayers.

If I refer to the April 15 deadline in this article, you can assume I also mean any other postponed original deadline that applies to you.

Need More Time?

If you cannot file your federal income tax return by the April (or other) due date, you can file for an extension by the April 15 due date using IRS Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Most software packages can electronically file this form for you and, if necessary, remit a payment.

Filing this extension gives you until October 15, 2024, to file your federal income tax return. You don’t have to explain why you’re asking for the extension, and the IRS will contact you only if your extension is denied and explain the reason(s). There are no allowable extensions beyond October 15 unless extended by law, or you’re affected by a federally declared disaster area.

Assuming you owe a payment on April 15, you can file for an automatic extension electronically without filing Form 4868. Suppose you make an extension payment electronically via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) by April 15. In that case, no extension form has to be filed (see Pay What You Owe below for more information).

An extension of time to file your 2023 calendar year income tax return also extends the time to file Form 709, “Gift and generation-skipping transfer (GST) tax returns” for 2023.

Special rules apply if you’re a U.S. citizen or resident living outside the country or serving in the military outside the country on the regular due date of your federal income tax return. If so, you’re allowed two extra months to file your return and pay any amount due without requesting an extension. Interest, currently at 8% (but not penalties), will still be charged on payments made after the regular due date without regard to the extended due date.

You can pay the tax and file your return or Form 4868 for additional filing time by June 17, 2024. If you request an extension because you were out of the country, check the box on line 8 of the form.

If you file for an extension, you can file your tax return any time before the extension expires. And there’s no need to attach a copy of Form 4868 to your filed income tax return.

Tip #1: By statute, certain federal elections must be made with a timely filed return or extension and cannot be made after the original due date has passed. For example, if you’re a trader and want to elect trader tax status for the current tax year (2024), it must be made by April 15, 2024, with your timely filed return or attached to your extension. Once April 15 has passed, you are barred from making the election until the following tax year. Some elections may be permanently barred after the regular due date, so check with your tax advisor to see if you need a timely filed election with your return or extension.

Tip #2: For proof of a timely snail-mailed extension, especially for those with a relatively large payment, be sure to mail it by certified mail, return receipt requested (always request proof of delivery regardless of the method of transportation.)

Caveat: Generally, the IRS has three years from the original due date of your return to examine it and assess additional taxes (six years if fraud is suspected). If you extend your return, the three (or six) year “clock” does not start ticking until you file it, so essentially, by extending your return, you are extending the statute of limitations. But contrary to popular belief, requesting an extension does NOT increase your odds of an examination.

Pay What You Owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if possible. If you cannot pay what you owe, file the return (or extension) and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time. You may be able to work with the IRS to pay the unpaid balance via an installment payment agreement (interest applies.)

It’s important to understand that filing for an automatic extension to file your return does not provide additional time to pay your taxes. When you file for an extension, you must estimate the amount of tax you will owe; you should pay this amount (or as much as you can) by the April 15 (or other) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension, potentially causing you to owe failure to file penalties and late payment penalties as well.

There are several alternative ways to pay your taxes besides via check. You can pay online directly from your bank account using Direct Pay or EFTPS, a digital wallet such as Click to Pay, PayPal, Venmo, or cash using a debit or credit card (additional processing fees may apply). You can also pay by phone using the EFTPS or debit or credit card. For more information, go to Make a Payment.

Tax Refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if 1) the return is filed electronically, 2) the tax refund is delivered via direct deposit, and 3) there are no issues with the tax return. To help minimize delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

To check on your federal income tax refund status, wait five business days after electronic filing and go to the IRS page: Where’s My Refund? Your state may provide a similar page to look up state refund status.

State and Local Income Tax Returns

Most states and localities have the same April 15 deadline and will conform with postponed federal deadlines due to federally declared disasters or legal holidays. Accordingly, most states and localities will accept your federal extension automatically (to extend your state return) without filing any state extension forms, assuming you don’t owe a balance on the regular due date. Otherwise, your state or locality may have its own extension form you can use to send in with your payment. Most states also now accept electronic payments online instead of a filed extension form with payment. Never assume that a federal extension will extend your state return; some do not. Always check to be sure.

Tip: If you want to cover all your bases, if your federal extension is lost or invalidated for any reason, you may want to file a state paper or online extension to extend the return correctly. It rarely happens, but sometimes, it is better to be safe than sorry.

IRA Contributions

Contributions to an individual retirement account (IRA) for 2023 can be made up to the April 15 due date for filing the 2023 federal income tax return (this deadline cannot be extended except by statute). However, certain disaster-area taxpayers granted relief may have additional time to contribute.

If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

Even if your traditional IRA contribution is not deductible, and you are ineligible for a Roth IRA contribution (because of income limitations), the investment income generated by the contribution becomes tax-deferred, possibly for years, and the contribution builds cost basis in your IRA, making future distributions a little less taxing.

If you make a nondeductible contribution to a traditional IRA and shortly after that convert that contribution to a Roth IRA, you can get around the income limitation of making Roth contributions. This is sometimes called a backdoor Roth IRA. Remember, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. If your traditional IRA balance before the non-deductible contribution is zero, then you’ll owe no tax on the conversion, and voila! You have just made a legal Roth IRA contribution.

Making a last-minute contribution to an IRA may help reduce your 2023 tax bill. In addition to the potential for tax-deductible contributions to a traditional IRA, you may also be able to claim the Saver’s Credit for contributions to a traditional or Roth IRA, depending on your income.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 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, 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 are your financial plan and investment objectives.

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Last Minute Year-End Tax Planning for 2023

December 18, 2023 — Sam H. Fawaz

The window of opportunity for many year-end tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2023 tax year.

Timing is Everything

Consider any opportunities you may have to defer income to 2024. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Some examples:

·       Check with your employer to see if there is an opportunity to defer year-end bonuses.

·       Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)

·       Postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

Similarly, consider ways to accelerate deductions into 2023. If you itemize deductions, you might accelerate some deductible expenses by making payments before year-end.

Some examples:

·       Consider paying medical expenses or bills in December rather than January, if doing so will allow you to qualify for the medical expense deduction (must be more than 7.5% of your income).

·       Prepay deductible interest by accelerating your January mortgage payment into December.

·       Make January alimony payments in December

·       Make next year’s charitable contributions in December

·       Pay state and local taxes (income taxes, property taxes, use taxes, etc.) if you’re below the $10,000 maximum allowed itemized deduction for state and local taxes

·       Purchase that piece of equipment or vehicle needed in your business and place it in service by year-end

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2023 and postponing deductible expenses to 2024. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2024; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the Alternative Minimum Tax (AMT)

Although the number of taxpayers subject to the AMT is much lower than in prior years, make sure that you factor in the alternative minimum tax when deciding to accelerate any deductions. If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a potentially negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows several itemized deductions. For example, if you’re subject to the AMT in 2023, prepaying 2024 state and local taxes won’t help your 2023 tax situation but could potentially hurt your 2024 bottom line.

Special Concerns for Higher-Income Individuals

The top marginal tax rate (37%) applies if your taxable income exceeds $578,125 in 2023 ($692,750 if married filing jointly, $346,875 if married filing separately, $578,100 if head of household). Your long-term capital gains and qualifying dividends could be taxed at a maximum 20% tax rate if your taxable income exceeds $492,300 in 2023 ($553,850 if married filing jointly, $276,900 if married filing separately, $523,050 if head of household).

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

Charitable Contribution Planning

If you are planning to donate to a charity, it’s likely better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies surrounding charitable giving:

·       Consider donating appreciated property (such as securities, real estate, or artwork) that has been held for more than one year, rather than cash. Note that an appraisal may be needed for certain properties. Not only do you get a deduction for the fair market value (FMV) of your appreciated stock, but you save on taxes by not recognizing the capital gains on the appreciation.

·       Opening and funding a donor-advised fund (DAF) is appealing to many as it allows for a fully tax-deductible gift in the current year and the ability to dole out those funds to charities over multiple years. Again, if you donate appreciated securities to a DAF, not only do you get a deduction for the FMV of your appreciated stock, but you save on taxes by not recognizing the capital gains on appreciation.

·       Qualified charitable distributions (QCDs) up to $100,000 are another option for certain older taxpayers (age 70-1/2 or older) who don’t typically itemize on their tax returns. If you don’t have a required minimum distribution (RMD) from your retirement accounts (see below), this will help reduce future RMDs and taxable income. If you do have an RMD requirement from your retirement accounts, this could be an even better strategy for you to reduce your current taxable income.

Note that it’s important to have adequate documentation of all claimed donations, including a letter from the charity for donations of $250 or more.

Required Minimum Distributions (RMDs)

Unfortunately, you cannot keep retirement funds in your account indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally now age 73). Failure to do so can result in significant penalties (special rules apply if you’re still working and participating in your employer’s retirement plan). You must make the withdrawals by the date required — the end of the year for most individuals.

As described above, there are also opportunities to distribute retirement funds to a qualified charity to satisfy the RMD without incurring taxes. Missed RMDs are subject to steep excise tax penalties (25%), although recent rules greatly reduce the penalty (to 10%) if the missed RMD is taken within two years.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as any digital representation of value that may function as a medium of exchange, a unit of account, or a store of value. Digital assets may include virtual currencies such as Bitcoin and Ether, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. The trading and use of digital assets must be disclosed on your tax returns and, since they are considered property rather than investments, different tax rules apply to their sales and exchanges.

Energy tax credits

From electric vehicles to home car chargers to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles (EV), and energy-efficient home improvements. The rules are complex but there is still time for these credits to be beneficial in the current and next year. The most notable change to the EV credits is the requirement that the vehicle has final assembly in North America. If you are planning an EV purchase, please ask the dealer whether the vehicle you’re eyeing is on the list of qualifying vehicles, which has changed significantly in the past years. See if they can advance the credit to you as an offset to the vehicle purchase price (you’ll have to sign a form to assign the credit to the dealer.)

Bump Up Withholding to Avoid 2024 Underpayment

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for 2024 with your employer (also consider doing the same on the appropriate state withholding forms). The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This strategy can be used instead of making quarterly estimated tax payments.

If you’re collecting social security, a pension, or taxable IRA distributions, update your Form W-4P with the appropriate payor to ensure you’ve paid in enough to avoid underpayment penalties.

Beneficial Ownership Interest (BOI) Reporting

The Corporate Transparency Act (CTA) requires the disclosure of the beneficial ownership information of certain entities to the Financial Crimes Enforcement Network (FinCEN) starting in 2024. This is not a tax filing requirement, but an online report to be completed if applicable to FinCEN. There are severe penalties for businesses who willingly do not comply with the requirements. The details of this reporting requirement are still being written, so it’s best to get in touch with your business attorney to determine whether your corporation, partnership, or LLC must file this report.

Additional Tax and Financial Planning Considerations

We recommend you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for medical-related expenses. Once you become eligible or sign up for Medicare, you are no longer entitled to make HSA contributions.

IRAs and Retirement Plans

Make sure you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2023 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible since they are made with post-tax dollars, so there’s no tax benefit for 2023, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to a traditional IRA or Roth IRA ($7,500 if you’re age 50 or older). The window to make 2023 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline (April 15, 2024) to make 2023 IRA contributions.

If you started a small business in 2023, talk to your financial or tax advisor about setting up a small business retirement plan before year-end. Most plans must be set up before year-end, but contributions may not be required every year, and they don’t have to be made until the due date of the return (plus extensions). Some small business retirement plans can be set up at tax return time (e.g., SEP-IRA), but they have less contribution flexibility and more stringent rules than other plans (e.g., a solo 401(k)).

Roth IRA Conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions).

If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you will pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates and whether you have the funds to pay the taxes outside of the IRA. Ask your financial or tax advisor whether a Roth Conversion is appropriate for this year or next.

Other Ideas

·       Life changes –– Any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant expenditures (real estate purchases, college tuition payments, etc.) can significantly impact the taxes you owe, so be sure to discuss them with your tax or financial advisor.

·       Capital gains/losses –– Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible. Also, consider selling portfolio investments that are underperforming before the end of the year. Net capital losses can offset up to $3,000 of the current year’s ordinary income. The unused excess net capital loss can be carried forward to use in subsequent years.

·       Estate and gift tax planning –– Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($17,000 per donee in 2023, $34,000 for married couples) to help save on potential future estate taxes. If your estate/trust is worth over $5 million, it’s imperative to discuss your options with a dedicated estate planning attorney to review lifetime gift and generation-skipping transfer (GST) opportunities to use and plan additional exclusions and exemption amounts.

·       State and local taxes –– Remote working arrangements or moving your residency could potentially have state and local tax implications to consider. Be sure to discuss your working arrangements with your tax advisor.

·       Education planning –– Save for education with Section 529 education savings plans. There can be state income tax benefits to do so, and there have been changes in the way these funds can be used for private K-12 school expenses, paying down some student loans, or contributing leftover funds to Roth IRAs.

·       Updates to financial records –– Determine whether any updates are needed to your insurance policies or beneficiary designations. This should be checked at least once a year, and year-end is a good time to do so.

·       Estimated tax payments –– With underpayment interest rates being on the rise (currently at 8% for federal), you must review withholding and estimated tax payments and assess any requirements for any additional payments. The 4th quarter 2023 estimated income tax payment is due by January 16, 2024.

Hopefully one or more of the above tips helps you save a few dollars on your tax bill. By necessity, many of the tips are abbreviated, so be sure to check with your financial or tax advisor to ensure that they’re appropriate for your tax situation, both currently and in the future.

If you would like to review your current investment portfolio or discuss any other tax or 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 are your financial plan and investment objectives.

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Working while Collecting Social Security Benefits Increases Lifetime Benefits

May 31, 2023 — Sam H. Fawaz

The rules governing working while collecting social security benefits are complicated and voluminous. Many people think they can’t work once they start collecting social security or they must return all benefits received. That’s simply not the case.

In some cases, you can earn unlimited income from work and keep 100% of your social security benefits. In other cases, you may have to re-pay some or all your social security benefits if you earn too much money.

In short, anyone can get Social Security retirement or survivors benefits and work at the same time. But, if you’re younger than full retirement age (see below), and earn more than certain amounts, your benefits will be reduced.

The amount that your benefits are reduced, however, isn’t truly lost. Your benefit will increase at your full retirement age to account for benefits withheld due to earlier earnings. Note that spouses and survivors who receive benefits because they care for children who are minors or have disabilities, don’t receive increased benefits at full retirement age if benefits were withheld because of work.
 
NOTE: Different rules apply if you receive Social Security disability benefits or Supplemental Security Income payments. If so, then you must report all earnings to the Social Security Administration (SSA). Also, different rules apply if you work outside the United States.
 
How much can you earn and still get benefits?
If you were born after January 1, 1960, then your full retirement age for retirement insurance benefits is 67.

If you work, and are at full retirement age or older, you keep all your benefits, no matter how much money you earn.

If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits.

  • If you’re younger than full retirement age during all of 2023, the SSA must deduct $1 from your benefits for each $2 you earn above $21,240.
  • If you reach full retirement age in 2023, the SSA will deduct $1 from your benefits for each $3 you earn above $56,520 until the month you reach full retirement age.

The following two examples show how the rules might affect you:

Example #1: Let’s say that you file for Social Security benefits at age 62 in January 2023 and your payment will be $600 per month ($7,200 for the year). During 2023, you plan to work and earn $23,920 ($2,680 above the $21,240 limit). The SSA would withhold $1,340 of your Social Security benefits ($1 for every $2 you earn over the limit). To do this, SSA would withhold all monthly benefit payments from January 2023 through March 2023 ($1,800 total). Beginning in April 2023, you would receive your full $600 benefit and this amount would be paid to you each month for the remainder of the year. In 2024, SSA would pay you the additional $460 ($1,800 minus $1,340) over-withheld in March 2023.

Example #2: Let’s say you aren’t yet at full retirement age at the beginning of the year but reach it in November 2023. You expect to earn $57,000 in the 10 months from January through October. During this period, SSA would withhold $160 ($1 for every $3 you earn above the $56,520 limit). To do this, SSA would withhold the full benefit payment for January 2023 ($600), your first check of the year. Beginning in February 2023, you would receive your $600 benefit, and this amount would be paid to you each month for the remainder of the year. In 2024, SSA would pay you the additional $440 over-withheld in January 2023.

NOTE: If you receive survivors’ benefits, SSA uses your full retirement age for retirement benefits when applying the annual earnings test (AET) for retirement or survivors’ benefits. Although the full retirement age for survivors’ benefits may be earlier, for AET purposes, SSA uses your full retirement age for retirement benefits. This rule applies even if you are not entitled to your own retirement benefits.

What Income Counts and When is it Counted?
If you work for an employer, only your wages count toward Social Security’s earnings limits. If you’re self-employed, only your net earnings from self-employment count. For the earnings limits, SSA doesn’t count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains. However, SSA does count an employee’s contribution to a pension or retirement plan (i.e., 401(k) or 403(b) plan) if the contribution amount is included in the employee’s gross wages.

If you earn salary or wages, income counts when it’s earned, not when it’s paid. If you have income that you earned in one year, but the payment was made in the following year, it should be counted as earnings for the year you earned it, not the year paid to you. Some examples include year-end earnings paid in January, accumulated sick pay, vacation pay, or bonuses.
 
If you’re self-employed, income counts when you receive it, not when you earn it. This is not the case if it’s paid in a year after you become entitled to social security benefits but earned before you became entitled to benefits.

Special Rule for the First Year You Retire
Sometimes people who retire in mid-year have already earned more than the annual earnings limit. That’s why there is a special rule that applies to earnings for one year– usually the first year of retirement.
 
Under this rule, you can get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings. In 2023, a person younger than full retirement age for the entire year is considered retired if monthly earnings are $1,770 or less (1/12th of the annual earnings limit).

Example: Someone retires at age 62 on October 30, 2023 and has earned $45,000 through October. He/she takes a part-time job beginning in November earning $500 per month. Although their earnings for the year substantially exceed the 2023 annual limit ($21,240), they will receive a full Social Security payment for November and December. This is because their earnings in those months are $1,770 or less, the monthly limit for people younger than full retirement age. If they earn more than $1,770 in either November or December, they won’t receive a benefit for that month. Beginning in 2024, only the annual limit will apply.
 
If you’re self-employed, SSA considers how much work you do in your business to determine whether you’re retired. One way is by looking at the amount of time that you spend working. In general, if you work more than 45 hours a month in a self-employment venture, you’re not retired. If you work less than 15 hours a month, you’re considered retired. If you work between 15 and 45 hours a month, you won’t be considered retired if it’s in a job that requires a lot of skill, or you’re managing a sizable business.

Should You Report Changes in Your Earnings?
SSA adjusts the amount of your Social Security benefits in 2023 based on what you told them you would earn in 2023. If you think your earnings for 2023 will be different from what you originally told the SSA, let them know right away.

If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too. If your spouse and children get benefits as family members, however, earnings from their own work affect only their own benefits.

Will You Receive Higher Monthly Benefits Later if Benefits are Withheld Because of Work?
Yes, if some of your retirement benefits are withheld because of your earnings, your monthly benefit will increase starting at your full retirement age. This is to consider those months in which benefits were withheld.

Example: Let’s say you claim retirement benefits upon turning 62 in 2023, and your payment is $910 per month. Subsequently, you return to work and have 12 months of benefits withheld.

In that case, SSA would recalculate your benefit at your full retirement age of 67 and pay you $975 per month (in today’s dollars). Or maybe you earn so much between the ages of 62 and 67 that all benefits in those years are withheld. In that case, SSA would pay you $1,300 a month starting at age 67.

Are There Other Ways That Work Can Increase Your Benefits?
Yes. Each year the SSA reviews the records for all Social Security recipients who work. If your latest year of earnings turns out to be one of your highest years, the SSA refigures your benefit and pays you any increase due. This is an automatic process, and benefits are paid in December of the following year. For example, in December 2023, you should get an increase for your 2022 earnings if those earnings raised your benefit. The increase would be retroactive to January 2023.

The number of possible work and social security benefit scenarios are many and varied. If your situation is unique or complicated, it may be worth a call to your local social security office to find out how the rules affect your situation.

The bottom line is that working while receiving social security benefits may temporarily reduce your benefits, but may, in fact, increase your overall lifetime benefits. If you plan to claim social security benefits before your full retirement age, you should talk to your financial advisor or contact us for help.

If you would like to review your current investment portfolio or discuss any other financial planning or social security benefit 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 are your financial plan and investment objectives.

Source: SSA.gov, “How Work Affects Your Benefits”

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There’s Still Time to Fund an IRA for 2022

March 31, 2023 — Sam H. Fawaz

The tax filing deadline is fast approaching, which means time is running out to fund an IRA for 2022.

If you had earned income as an employee or self-employed person last year, you may be able to contribute up to $6,000 for 2022 ($7,000 for those age 50 or older by December 31, 2022) up until your tax return due date, excluding extensions. For most people, that date is Tuesday, April 18, 2023.

You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2022, even if your spouse didn’t have earned income.

Traditional IRA contributions may be deductible

If you and your spouse were not covered by a work-based retirement plan in 2022, your traditional IRA contributions are fully tax deductible.

If you were covered by a work-based plan, you can take a full deduction if you’re single and had a 2022 modified adjusted gross income (MAGI) of $68,000 or less, or if married filing jointly, with a 2022 MAGI of $109,000 or less. You may be able to take a partial deduction if your MAGI fell within the following limits:

Filing as:MAGI is between:
Single/Head of household$68,000 and $78,000*
Married filing jointly$109,000 and $129,000*
Married filing separately$0 and $10,000*
*No deduction is allowed if your MAGI is more than the above listed maximum MAGI.

If you were not covered by a work-based plan but your spouse was, you can take a full deduction if your joint MAGI was $204,000 or less, a partial deduction if your MAGI fell between $204,000 and $214,000, and no deduction if your MAGI was $214,000 or more.

Consider Roth IRAs as an alternative

If you can’t make a deductible traditional IRA contribution, a Roth IRA may be a more appropriate alternative. Although Roth IRA contributions are not tax-deductible, investment earnings and qualified distributions** are tax-free.

You can make a full Roth IRA contribution for 2022 if you’re single and your MAGI was $129,000 or less, or if married filing jointly, with a 2022 MAGI of $204,000 or less.

Partial contributions may be allowed if your MAGI fell within the following limits:

Filing as:MAGI is between:
Single/Head of household$129,000 and $144,000*
Married filing jointly$204,000 and $214,000*
Married filing separately$0 and $10,000*
*You cannot contribute if your MAGI is more than the above listed maximum MAGI.

Tip: If you can’t make an annual contribution to a Roth IRA because of the income limits, there is a workaround, often referred to as a “Backdoor Roth IRA” contribution. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion.

**A qualified distribution from a Roth IRA can be made after the account is held for at least five years and the account owner reaches age 59½, becomes disabled, or dies. Under this so called 5-year rule, if you make a contribution  — no matter how small — to a Roth IRA for 2022 by your tax return due date, and it is your first Roth IRA contribution, your five-year holding period starts on January 1, 2022. Regardless of your Roth contribution’s holding period, in an emergency, you can withdraw your Roth IRA contributions (not the earnings) without penalty at any time.

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.

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SECURE 2.0 Changes the Required Minimum Distribution Rules

February 26, 2023 — Sam H. Fawaz

The SECURE 2.0 legislation included in the $1.7 trillion appropriations bill passed late last year builds on changes established by the original “Setting Every Community Up for Retirement Enhancement Act” (SECURE 1.0) enacted in 2019. SECURE 2.0 includes significant changes to the rules that apply to required minimum distributions from IRAs and employer retirement plans. Here’s what you need to know.

What Are Required Minimum Distributions or RMDs?

Required minimum distributions, sometimes referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer retirement plans after you reach a certain age or, in some cases, retire. You can withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.

The RMD rules are designed to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The RMD rules aim to ensure that funds are utilized during retirement instead of remaining untouched and benefiting from continued tax deferral until left as an inheritance. RMDs generally have the effect of producing taxable income during your lifetime.

These lifetime distribution rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, as well as qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator or us.

Here is a brief overview of how the new legislation changes the RMD rules.

1. Applicable Age for RMDs Increased

Before the passage of the SECURE 1.0 legislation in 2019, RMDs were generally required to start after reaching age 70½. The 2019 legislation changed the required starting age to 72 for those who had not yet reached age 70½ before January 1, 2020.

SECURE 2.0 raises the trigger age for required minimum distributions to age 73 for those who reach age 72 after 2022. It increases the age again to age 75, starting in 2033. So, here’s a summary of when you have to start taking RMDs based on your date of birth:

Date of BirthAge at Which RMDs Must Commence
Before July 1, 194970½
July 1, 1949, through 195072
1951 to 195973
1960 or later175

Your first RMD is for the year you reach the age specified in the chart and generally must be taken by April 1 of the year following the year you reached that age. Subsequent required distributions must be taken by the end of each calendar year. So, if you wait until April 1 of the year after you attain your required beginning age, you’ll have to take two required distributions during that calendar year. If you continue working past your required beginning age, you may delay RMDs from your current employer’s retirement plan until after you retire.

1 A technical correction is needed to clarify the transition from age 73 to age 75 for purposes of the RMD rule. As currently written, it is unclear what the correct starting age is for an individual born in 1959 who reaches age 73 in the year 2032.

2. RMD Penalty Tax Decreased

The penalty for failing to take a RMD is steep — historically, a 50% excise tax on the amount by which you fell short of the required distribution amount.

SECURE 2.0 reduces the RMD tax penalty to 25% of the shortfall, effective this year. Still steep, but better than 50%.

Also effective this year, the Act establishes a two-year period to correct a failure to take a timely RMD distribution, with a resulting reduction in the tax penalty to 10%. Basically, if you self-correct the error by withdrawing the required funds and filing a return reflecting the tax during that two-year period, you can qualify for the lower penalty tax rate.

3. Lifetime RMDs from Roth Employer Accounts Eliminated

Roth IRAs have never been subject to lifetime RMDs. That is, a Roth IRA owner does not have to take RMDs from the Roth IRA while he or she is alive. Distributions to beneficiaries are required after the Roth IRA owner’s death, however.

The same has not been true for Roth employer plan accounts, including Roth 401(k) and Roth 403(b) accounts. Plan participants have been required to take minimum distributions from these accounts upon reaching their RMD age or avoid this requirement by rolling over the funds in the Roth employer plan account to a Roth IRA.

Beginning in 2024, the SECURE 2.0 legislation eliminates the lifetime RMD requirements for all Roth employer plan account participants, even those participants who had already commenced lifetime RMDs. Any lifetime RMD from a Roth employer account attributable to 2023 but payable in 2024 is still required.

4. Additional Option for Spouse Beneficiaries of Employer Plans

The SECURE 2.0 legislation provides that, beginning in 2024, when a participant has designated his or her spouse as the sole beneficiary of an employer plan, a special option is available if the participant dies before RMDs have commenced.

This provision will permit a surviving spouse to elect to be treated as the employee, similar to the already existing provision that allows a surviving spouse who is the sole designated beneficiary of an inherited IRA to elect to be treated as the IRA owner. This will generally allow a surviving spouse the option to delay the start of RMDs until the deceased employee would have reached the appropriate RMD age or until the surviving spouse reaches the appropriate RMD age, whichever is more beneficial. This will also generally allow the surviving spouse to utilize a more favorable RMD life expectancy table to calculate distribution amounts.

5. New Flexibility Regarding Annuity Options

Starting in 2023, the SECURE 2.0 legislation makes specific changes to the RMD rules that allow for some additional flexibility for annuities held within qualified employer retirement plans and IRAs. Allowable options may include:

  • Annuity payments that increase by a constant percentage provided certain requirements are met.
  • Lump-sum payment options that shorten the annuity payment period
  • Acceleration of annuity payments payable over the ensuing 12 months
  • Payments in the nature of dividends
  • A final payment upon death that does not exceed premiums paid less total distributions made

It is important to understand that purchasing an annuity in an IRA or an employer-sponsored retirement plan provides no additional tax benefits beyond those available through the tax-deferred retirement plan. If you plan to purchase an annuity in your IRA, you should talk to us or your financial planner first. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals before age 59½ may be subject to a 10% federal tax penalty.

These are just a few of the many provisions in the SECURE 2.0 legislation. The rules regarding RMDs are complicated. While the changes described here provide significant benefits to individuals, the rules remain difficult to navigate, and you should consult a tax professional like us to discuss your individual situation.

If you would like to review your current investment portfolio or discuss any RMD 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 are your financial plan and investment objectives.

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Retirement Investors Get Another Boost from Washington

December 31, 2022 — Sam H. Fawaz

If the Inflation Reduction Act passed earlier this year wasn’t amusing enough for having the exact opposite effect, the latest bill will certainly cement Congress’ sense of humor when it comes to fighting inflation.

Amid the 1,650-page, $1.7 trillion omnibus spending legislation passed by Congress last week and signed by President Biden this week, were several provisions affecting work-sponsored retirement plans and, to a lesser degree, IRAs. Dubbed the “SECURE 2.0 Act of 2022” after the similarly sweeping “Setting Every Community Up for Retirement Enhancement Act” passed in 2019, the legislation is designed to improve the current and future state of retiree income in the United States.

“This important legislation will enhance the retirement security of tens of millions of American workers — and for many of them, give them the opportunity for the first time to begin saving,” said Brian Graff, CEO of the American Retirement Association.

What Does the Legislation Do?

The following is a brief summary of some of the most notable initiatives. All provisions take effect in 2024 unless otherwise noted.

  • A later age for required minimum distributions (RMDs). The 2019 SECURE Act raised the age at which retirement savers must begin taking distributions from their traditional IRAs and most work-based retirement savings plans to 72. SECURE 2.0 raises that age again to 73 beginning in 2023 and 75 in 2033.
  • Reduction in the RMD excise tax. Current law requires those who fail to take their full RMD by the deadline, to pay a tax of 50% of the amount not taken. The new law reduces that tax amount to 25% in 2023; the tax is further reduced to 10% if account holders take the full required amount and report the tax by the end of the second year after it was due and before the IRS demands payment.
  • No RMDs from Roth 401(k) accounts. Bringing Roth 401(k)s and similar employer plans in line with Roth IRAs, the legislation eliminates the requirement for savers to take minimum distributions from their work-based plan Roth accounts.
  • Higher limits and looser restrictions on qualified charitable distributions (QCDs) from IRAs. QCDs are a great way to give your RMD (or more) to charity and thereby avoid taxes on the distribution. The amount currently eligible for a QCD from an IRA ($100,000) will be indexed for inflation. In addition, beginning in 2023, investors will be able to make a one-time charitable distribution of up to $50,000 from an IRA to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity.1
  • Higher catch-up contributions. Currently, taxpayers age 50 and older can make an additional “catch-up” contribution to their IRAs and 401(k)’s. The IRA catch-up contribution limit will now be indexed annually for inflation, similar to work-sponsored catch-up contributions. Also, starting in 2025, people age 60 to 63 will be able to contribute an additional minimum of $10,000 for 401(k) and similar plans (and at least $5,000 extra for SIMPLE plans) each year to their work-based retirement plans. Moreover, beginning in 2024, all catch-up contributions for those making more than $145,000 will be after-tax (Roth contributions).
  • Roth matching contributions. The new law permits employer matches to be made to Roth accounts. Currently, employer matches must go into an employee’s pre-tax account. This provision takes effect immediately; however, it may take some time for employers to amend their retirement plans to include this feature.
  • Automatic enrollment and automatic saving increases. Beginning in 2025, the Act requires most new work-sponsored plans to automatically enroll employees with contribution levels between 3% and 10% of income, and it automatically increases their savings rates by 1% a year until they reach at least 10% (but not more than 15%) of income. Workers will be able to opt out of the programs.
  • Emergency savings accounts. The legislation includes measures that permit employers to automatically enroll non-highly compensated workers into emergency savings accounts to set aside up to  $2,500 (or a lower amount that an employer stipulates) in a Roth-type account. Savings above this limit and any employer matching contributions would go into the traditional retirement account.
  • Matching contributions for qualified student loan repayments. Employers may help workers repaying qualified student loans simultaneously save for retirement by investing matching contributions in a retirement account in the employee’s name.
  • 529 rollovers to Roth IRAs. People will be able to directly roll over up to a total of $35,000 from 529 plan accounts to Roth IRAs for the same beneficiary, provided the 529 accounts have been held for at least 15 years. Annually, the rollover amounts would be subject to Roth IRA contribution limits.2
  • New exceptions to the 10% early-withdrawal penalty. Distributions from retirement savings accounts are generally subject to ordinary income tax. Moreover, distributions prior to age 59½ also may be subject to an early-withdrawal penalty of 10%, unless an exception applies. The law provides for several new exceptions to the early-withdrawal penalty, including an emergency personal expense, terminal illness, domestic abuse, to pay long-term care insurance premiums, and to recover from a federally declared disaster. Amounts, rules, and effective dates differ for each circumstance.
  • Saver’s match. Low- and moderate-income savers currently benefit from a tax credit of up to $1,000 ($2,000 for married couples filing jointly) for saving in a retirement account. Beginning in 2027, the credit is re-designated as a match that will generally be contributed directly into an individual’s retirement account. In addition, the match is allowed even if taxpayers have no income tax obligation.
  • More part-time employees can participate in retirement plans. The SECURE Act of 2019 required employers to allow workers who clocked at least 500 hours for three consecutive years to participate in a retirement savings plan. Beginning in 2025, the new law reduces the second component of that service requirement to just two years.
  • Rules for lifetime income products in retirement plans. The Act directs the IRS to ease rules surrounding the offering of lifetime income products  within retirement plans. Moreover, the amount that plan participants can use to purchase qualified longevity annuity contracts will increase to $200,000. The current law caps that amount at 25% of the value of the retirement accounts or $145,000, whichever is less. These provisions take effect in 2023. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% penalty tax.
  • Retirement savings lost and found. The Act directs the Treasury to establish a searchable database for lost 401(k) plan accounts within two years after the date of the legislation’s enactment.
  • Military spouses. Small businesses that provide immediate enrollment and vesting to military spouses in an eligible retirement savings plan will qualify for new tax credits. This provision takes effect immediately.

These provisions represent just a sampling of the many changes that will be brought about by SECURE 2.0. We look forward to providing more details and in-depth analysis for both individuals and business owners in the months to come as more detailed information becomes available.

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 are your financial plan and investment objectives.

Sources: The Wall Street Journal, CNBC, Bloomberg, Kiplinger,Fortune,Plan Sponsor magazine, National Association of Plan Advisors, and the SECURE 2.0 Act of 2022

1 Bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive.

2 As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% tax penalty. The tax implications of a 529 savings plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors. Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses – which contain this and other information about the investment options, underlying investments, and investment company – can be obtained by contacting your financial professional. You should read these materials carefully before investing.

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Year-end 2022 Tax and Financial Planning for Individuals

November 30, 2022 — Sam H. Fawaz

As we wrap up 2022, it’s important to take a closer look at your tax and financial plans and review steps that can be taken to reduce taxes and help you save for your future. Though there has been a lot of political attention to tax law changes, inflation and environmental sustainability, political compromise has led to smaller impacts on individual taxes this year.

However, with the passage of the Inflation Reduction Act of 2022, there are new tax incentives for you to consider. There are also several tax provisions that have expired or will expire soon. We continue to closely monitor any potential extensions or changes in tax legislation and will update you accordingly.

Here’s a look at some potential planning ideas for individuals to consider as we approach year-end:

Charitable Contribution Planning

If you’re planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes. There are many tax planning strategies related to charitable giving. For example, if you give gifts larger than $5,000 to a single organization, consider donating appreciated assets (such as collectibles, stock, exchange-traded funds, or mutual funds) that have been held for more than one year, rather than cash. That way, you’ll get a deduction for the full fair market value while side-stepping the capital gains taxes on the gain.

Because of the large standard deduction, most people no longer itemize deductions. But bunching deductions every other year might give you a higher itemized deduction than the standard deduction. One way to do this is by opening and funding a donor-advised fund (DAF). A DAF is appealing to many as it allows for a tax-deductible gift in the current year for your entire contribution. You can then grant those funds to your favorite charities over multiple years. If you give $2,000 or more a year to charity, talk to us about setting up a DAF.

Qualified charitable distributions (QCDs) are another option for certain taxpayers (age 70.5+) who don’t typically itemize on their tax returns. If you’re over age 70.5, you’re eligible to make charitable contributions directly from your IRA, which essentially makes charitable contributions deductible (for both federal and most state tax purposes) regardless of whether you itemize or not. In addition, it reduces future required minimum distributions, reducing overall taxable income in future years. QCDs keep income out of your tax return, making income-sensitive deductions (such as medical expenses) more viable, lowers the taxes on your social security income, and can lower your overall tax rate. They may also help keep your Medicare premiums low.

Last year, individuals who did not itemize their deductions could take a charitable contribution deduction of up to $300 ($600 for joint filers). However, this opportunity is no longer available for tax year 2022 (and future years).

Note that it’s important to have adequate documentation of all donations, including a letter or detailed receipt from the charity for donations of $250 or more. That letter/receipt must include your name, the taxpayer identification number of the institution, the amount, and a declaration of whether you received anything of value in exchange for the contribution.

Required Minimum Distributions (RMDs)

Tax rules don’t allow you to keep retirement funds in your accounts indefinitely. RMDs are the minimum amount you must annually withdraw from your retirement accounts once you reach a certain age (generally age 72). The RMD is calculated and based on the value of the account at the end of the prior tax year multiplied by a percentage from the IRS’ life expectancy tables. Failure to take your RMD can result in steep tax penalties–as much as 50% of the undistributed amount.

Retirement withdrawals obviously have tax impacts. As mentioned above, you can send retirement funds to a qualified charity to satisfy the RMD and potentially avoid taxes on those withdrawals.

Effective for the 2022 tax year, the IRS issued new life expectancy tables, resulting in lower annual RMD amounts. We can help you calculate any RMDs to take this year and plan for any tax exposure.

Digital Assets and Virtual Currency

Digital assets are defined under the U.S. income tax rules as “any digital representation of value that may function as a medium of exchange, a unit of account, and/or a store of value.” Digital assets may include virtual currencies such as Bitcoin and Ethereum, Stablecoins such as Tether and USD Coin (USDC), and non-fungible tokens (NFTs).

Unlike stocks or other investments, the IRS considers digital assets and virtual currencies as property, not as capital assets. As such, they are subject to a different set of rules than your typical investments. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally have tax impacts –– and the IRS continues to increase its scrutiny in this area. We can help you understand any tax and investment consequences, which can be quite convoluted.

Energy Tax Credits

From electric vehicles to solar panels, “going green” continues to provide tax incentives. The Inflation Reduction Act of 2022 included new and newly expanded tax credits for solar panels, electric vehicles, and energy-efficient home improvements. The rules are complex, and some elements of the law are not effective until 2023, so careful research and planning now can be beneficial. For example, previously ineligible electric vehicles are now eligible for credits, while other eligible vehicles are now ineligible for credits if they don’t contain the right proportion of parts and assembly in the United States.

Additional Tax and Financial Planning Considerations

We recommend that you review your retirement plans at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional individual retirement accounts (IRAs), Roth IRAs, and company retirement plans. It’s also advisable to take advantage of and maximize health savings accounts (HSAs), which can help you reduce your taxes and save for medical-related expenses.

Also, if you withdrew a Coronavirus distribution of up to $100,000 in 2020, you’ll need to report the final one-third amount on your 2022 return (unless you elected to report the entire distribution in 2020 or have re-contributed the funds to a retirement account). If you took a distribution, you could return all or part of the distribution to a retirement account within three years, which will be a date in 2023.

We can work with you to strategize a plan to help restore and build your retirement savings and determine whether you’re on target to reach your goals.

Here are a few more tax and financial planning items to consider and potentially discuss with us:

  • Life changes –– Let us (or your current financial planner) know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business, and significant capital expenditures (such as real estate purchases, college tuition payments, etc.).
  • Capital gains/losses –– Consider tax benefits related to harvesting capital losses to offset realized capital gains, if possible. Net capital losses (the result when capital losses exceed capital gains for the year) can offset up to $3,000 of the current year’s ordinary income (salary, self-employment income, interest, dividends, etc.) The unused excess net capital loss can be carried forward to be used in subsequent years. Consider harvesting some capital gains if you have a large capital loss from the current or prior years.
  • Estate and gift tax planning –– There is an annual exclusion for gifts ($16,000 per donee in 2022, $32,000 for married couples) to help save on potential future estate taxes. While you can give much more without incurring any gift tax, any total annual gift to one individual larger than $16,000/$32,000 requires the filing of a gift tax return (with your form 1040). Note that the filing of a gift tax return is an obligation of the giver, not the recipient of the gift. The annual exclusion for 2023 gifts increases to $17,000/$34,000.
  • State and local taxes –– Many people are now working from home (i.e., teleworking). Such remote working arrangements could potentially have state or local tax implications that should be considered. Working in one state for an employer located in another state may have unexpected state tax consequences. Also, ordering merchandise over the internet without paying sales or use tax might obligate you to remit a use tax to your home state.
  • Education planning –– Consider a Section 529 education savings plan to help save for college or other K-12 education. While there is no federal income tax deduction for the contributions, there can be state income tax benefits (full or partial deductions) for doing so. Funds grow tax-free over many years and can be distributed tax-free when used for qualified education purposes. Lower-income taxpayers (less than $85,800 if single, head of household, or qualifying widow(er); $128,650 if married filing jointly) can redeem certain types of United States savings bonds tax-free when redeemed for college.
  • Updates to financial records –– Tax time is the ideal time to review whether any updates are needed to your insurance policies or various beneficiary designations (life insurance, annuity, IRA, 401(k), etc.), especially if you’ve experienced any life changes in the past year.
  • Last Call for 401(k), 403(b) & Other retirement Plan Contributions –– Once the calendar turns to 2023, it’s too late to maximize your employer plan contributions. It may not be too late to make sure that you’ve contributed the $20,500 maximum (plus $6,500 for those age 50 and older) to the plan. Review your last pay stub and check with your human resources or retirement plan website to see if you can still increase your current year contributions (don’t forget to reset the percentage in early 2023). Remember, if you’ve worked for more than one employer in 2022, your total contributions via all employers cannot exceed the annual maximum, so you must monitor this. For IRAs, you have until April 18, 2023, to make up to a $6,000 contribution for 2022 (plus a $1,000 catch-up contribution for those age 50 and older)
  • Roth IRA conversions –– Depending on your current year’s highest tax rate, it may be prudent to consider converting part of your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts. A conversion is nothing more than a taxable distribution from your IRA which is immediately deposited into your Roth IRA (while income taxes apply, no early withdrawal penalty applies). Roth conversions can help reduce future required minimum distributions and help keep future Medicare premiums lower.  The ideal time to consider Roth conversions is after you retire and before you start collecting your pension or social security checks (or whenever your income is much lower in any particular year).
  • Estimated tax payments –– Review your year-to-date withholding and estimated tax payments to assess whether a 4th quarter 2022 estimated tax payment might be required. An easy way to do this is to compare the total tax line on your 2021 income tax return with your total withholding and estimated payments (total payments) made to date. If your total payments made to date are at least 110% of your 2021 total tax, chances are, you are adequately paid in. While you may owe some tax with the filing of your 2022 return (due on April 18, 2023), you likely won’t owe any penalties for underpayment of estimated tax. Similarly, you may not need to pay 110% of last year’s tax if your income has decreased substantially versus the prior year.

Year-End Planning Means Fewer Surprises

Whether it’s working toward a tax-optimized retirement or getting answers to your tax and financial planning questions, we’re here to help. As always, planning can help you anticipate and minimize your tax bill and position your family and you for greater financial success.

If you would like to review your current investment portfolio or discuss any other tax or 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 are your financial plan and investment objectives.

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‘Tis the Season to Be Thinking about Charitable Giving

November 25, 2021 — Sam H. Fawaz

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help potentially increase your gift.

Example(s): Assume you want to make a charitable gift of $1,000. One way to potentially enhance the  gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

For 99% of the population, this limitation is never a problem.

Nonetheless, for 2021 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction).

Make sure to retain proper substantiation of your charitable contribution. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit-card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. A copy of a canceled check is no longer enough to substantiate your deduction. If you make any non-cash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

If you want to “turbo-charge” your charitable deduction, consider donating appreciated securities (stocks, bonds, mutual funds, etc.) Not only do you get a deduction for full fair market value of the security, you also escape capital gain taxes on the appreciation you donated. If you want to donate securities that have gone down in value, it’s always better to sell them first, capture the capital loss, then donate the cash (there’s no inherent advantage in donating depreciated securities).

If you give more than $1,000 a year to charity, it may be time to consider a Donor Advised Fund (DAF). A DAF allows you to “bunch” your charitable deductions to allow you to itemize deductions when you might otherwise only qualify for the standard deduction. By funding the DAF with an amount large enough to put you over the standard deduction, you can make charitable “grants” over several years while getting a full deduction in the year that you fund the DAF. Keep in mind that money transferred into a DAF can never be removed, and the only beneficiaries of the DAF are qualified Section 501(c)(3) charities. You can set up a DAF with most major brokers at no cost, and some have no minimums. Talk to us if you’d like more information about setting one up.

A word of caution

Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites, email, phone calls, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the “Tax Exempt Organization Search” tool. And never send cash; contribute by check or credit card and be wary of those asking for cash donations, unless perhaps they’re standing in front of a red kettle.

If you would like to review your current investment portfolio or discuss charitable giving or 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.

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It’s Employer Open Enrollment Season: Making Benefit Choices That Work for You

November 7, 2021 — Sam H. Fawaz

Open enrollment is the window of time when employers introduce changes to their benefit offerings for the upcoming plan year. If you’re employed, this is your once-a-year chance to make important decisions that will affect your healthcare choices and your finances. This is the critical time to, at a minimum, consider whether changes in your benefit options are needed.

Even if you are satisfied with your current health plan, it may no longer be the most cost-effective option. Before you make any benefit elections, take plenty of time to review the information provided by your employer. You should also consider how your life has changed over the last year and any plans or potential developments for 2022.

Decipher Your Health Plan Options

The details matter when it comes to selecting a suitable health plan. One of your options could be a better fit for you (or your family) and might even help reduce your overall health-care costs. But you will have to look beyond the monthly premiums. Policies with lower premiums tend to have more restrictions or higher out-of-pocket costs (such as copays, coinsurance, and deductibles) when you do seek care for a health issue.

To help you weigh the tradeoffs, below is a comparison of the five main types of health plans. It should also help demystify some of the terminology and acronyms used so often across the health insurance landscape.

  • Health maintenance organization (HMO). Coverage is limited to care from physicians, other medical providers, and facilities within the HMO network (except in an emergency). You choose a primary-care physician (PCP) who will decide whether to approve or deny any request for a referral to a specialist.
  • Point of service (POS) plan. Out-of-network care is available, but you will pay more than you would for in-network services. As with an HMO, you must have a referral from a PCP to see a specialist. POS premiums tend to be a little bit higher than HMO premiums.
  • Exclusive provider organization (EPO). Services are covered only if you use medical providers and facilities in the plan’s network, but you do not need a referral to see a specialist. Premiums are typically higher than an HMO, but lower than a PPO.
  • Preferred provider organization (PPO). You have the freedom to see any health providers you choose without a referral, but there are financial incentives to seek care from PPO physicians and hospitals (a larger percentage of the cost will be covered by the plan). A PPO usually has a higher premium than an HMO, EPO, or POS plan and often has a deductible.

A deductible is the amount you must pay before insurance payments kick in. Preventive care (such as annual visits and recommended screenings) is typically covered free of charge, regardless of whether the deductible has been met.

  • High-deductible health plan (HDHP). In return for significantly lower premiums, you’ll pay more out-of-pocket for medical services until you reach the annual deductible. HDHP deductibles start at $1,400 for an individual and $2,800 for family coverage in 2022, and can be much higher. Care will be less expensive if you use providers in the plan’s network, and your upfront cost could be reduced through the insurer’s negotiated rate.

An HDHP is designed to be paired with a health savings account (HSA), to which your employer may contribute funds toward the deductible. You can also elect to contribute to your HSA through pre-tax payroll deductions or make tax-deductible contributions directly to the HSA provider, up to the annual limit ($3,650 for an individual or $7,300 for family coverage in 2022, plus $1,000 for those 55+).

HSA funds, including any earnings if the account has an investment option, can be withdrawn free of federal income tax and penalties if the money is spent on qualified health-care expenses. (Some states do not follow federal tax rules on HSAs.) Unspent balances can be retained in the account indefinitely and used to pay future medical expenses, whether you are enrolled in an HDHP or not. If you change employers or retire, the funds can be rolled over to a new HSA.

Three Steps to a Sound Decision

Start by adding up your total expenses (premiums, copays, coinsurance, deductibles) under each plan offered by your employer, based on last year’s usage. Your employer’s benefit materials may include an online calculator to help you compare plans by taking factors such as your chronic health conditions and regular medications into account.

If you are married, you may need to coordinate two sets of workplace benefits. Many companies apply a surcharge to encourage a worker’s spouse to use other available coverage, so look at the costs and benefits of having both of you on the same plan versus individual coverage from each employer. If you have children, compare what it would cost to cover them under each spouse’s plan.

Before enrolling in a plan, check to see if your preferred health-care providers are included in the network.

Tame Taxes with a Flexible Spending Account

If you elect to open an employer-provided health and/or dependent-care flexible spending account (FSA), the money you contribute via payroll deduction is not subject to federal income and Social Security taxes (nor generally to state and local income taxes). Using these tax-free dollars to pay for health-care costs not covered by insurance or for dependent-care expenses could save you about 30% or more, depending on your tax bracket.

The federal limit for contributions to a health FSA was $2,750 in 2021 and should be similar for 2022. Some employers set lower limits. (The official limit has not been announced by the IRS). You can use the funds for a broad range of qualified medical, dental, and vision expenses.

With a dependent-care FSA, you can set aside up to $5,000 a year (per household) to cover eligible child-care costs for qualifying children age 12 or younger. The tax savings could help offset some of the costs paid for a nanny, babysitter, day care, preschool, or day camp, but only if the services are used so you (or a spouse) can work.

One drawback of health and dependent-care FSAs is that they are typically subject to the use-it-or-lose-it rule, which requires you to spend everything in your account by the end of the calendar year or risk losing the money. Some employers allow certain amounts (up to $550) to be carried over to the following plan year or offer a grace period up to 2½ months. Still, you must estimate your expenses in advance, and your predictions could turn out to be way off base.

Legislation passed during the pandemic allows workers to carry over any unused FSA funds from 2021 into 2022, as long as the employer opts into this temporary change. If you have leftover money in an FSA, you should consider your account balance and your employer’s carryover policies when deciding on your contribution election for 2022.

Take Advantage of Valuable Perks

A change in the tax code enacted at the end of 2020 made it possible for employers to offer student debt assistance as a tax-free employee benefit through 2025, spurring more companies to add it to their menu of benefit options. A 2021 survey found that 17% of employers now offer student debt assistance, and 31% are planning to do so in the future. Many employers target a student debt assistance benefit of $100 per month, which doesn’t sound like much, but it adds up.(1) For example, an employee with $31,000 in student loans who is paying them off over 10 years at a 6% interest rate would save about $3,000 in interest and get out of debt 2½ years faster.

Many employers provide access to voluntary benefits such as dental coverage, vision coverage, disability insurance, life insurance, and long-term care insurance. Even if your employer doesn’t contribute toward the premium cost, you may be able to pay premiums conveniently through payroll deduction. Your employer may also offer discounts on health-related products and services, such as fitness equipment or gym memberships, and other wellness incentives, like a monetary reward for completing a health assessment.

If you have an opportunity to change your life insurance, disability insurance or other perks, you may want to talk to us about how much coverage you need. Don’t miss this annual chance to review your coverage and possibly elect higher coverage.

If you would like to review your current investment portfolio or discuss employer benefit options and enrollment, 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.

(1) CNBC, September 28, 2021

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