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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Perhaps Your Last Chance before the Backdoor Closes

October 19, 2021 — Sam H. Fawaz

Among the many provisions in the multi-trillion-dollar legislative package being debated in Congress, is a provision that would eliminate a strategy that allows high-income investors to pursue tax-free retirement income: the so-called “back-door Roth IRA”. The next few months may present the last chance to take advantage of this opportunity.

Roth IRA Background

Since its introduction in 1997, the Roth IRA has become an attractive investment vehicle due to the potential to build a sizable, tax-free nest egg. Although contributions to a Roth IRA are not tax deductible, any earnings in the account grow tax-free as long as future distributions are qualified. A qualified distribution is one made after the Roth account has been held for five years and after the account holder reaches age 59½, becomes disabled, dies, or uses the funds for the purchase of a first home ($10,000 lifetime limit) or for qualified higher education expenses.

Unlike other retirement savings accounts, original owners of Roth IRAs are not subject to required minimum distributions at age 72 — another potentially tax-beneficial perk that makes Roth IRAs appealing in estate planning strategies (but beneficiaries are subject to distribution rules.)

However, as initially passed, the 1997 legislation rendered it impossible for high-income taxpayers to enjoy Roth IRAs. Individuals and married taxpayers whose income exceeded certain thresholds could neither contribute to a Roth IRA nor convert traditional IRA assets to a Roth IRA.

A Loophole Emerges

Nearly 10 years after the Roth’s introduction, the Tax Increase Prevention and Reconciliation Act of 2005 ushered in a change that relaxed the conversion rules beginning in 2010; that is, as of that year, the income limits for a Roth conversion were eliminated, which meant that anyone could convert traditional IRA assets to a Roth IRA (of course, a conversion results in a tax obligation on deductible contributions and earnings that have previously accrued in the traditional IRA.)

One perhaps unintended consequence of this change was the emergence of a new strategy that has been heavily utilized ever since: High-income individuals could make full, annual, nondeductible contributions to a traditional IRA and convert those contribution dollars to a Roth. If the account holders had no other IRAs (see note below) and the conversion was executed quickly enough so that no earnings were able to accrue, the transaction could potentially be a tax-free way for otherwise ineligible taxpayers to fund a Roth IRA. This move became known as the “back-door Roth IRA”.

Employees working for companies which had retirement plans that allowed post-tax contributions into their 401(k)’s, along with “in-service distributions”, could replicate the back-door strategy in a potentially much bigger way, which became known as the “mega-back-door Roth IRA”

Note: When calculating a tax obligation on a Roth conversion, investors have to aggregate all of their IRAs, including SEP and SIMPLE IRAs, before determining the amount. For example, say an investor has $100,000 in several different traditional IRAs, 80% of which is attributed to deductible contributions and earnings. If that investor chose to convert any traditional IRA assets — even recent after-tax contributions — to a Roth IRA, 80% of the converted funds would be taxable. This is known as the “pro-rata rule.”

Current Roth IRA Income Limits

For 2021, you can generally contribute up to $6,000 to an IRA (traditional, Roth, or a combination of both); $7,000 if you’ll be age 50 or older by December 31. However, your ability to make contributions to a Roth IRA is limited or eliminated if your modified adjusted gross income, or MAGI, falls within or exceeds the parameters shown below.

If your federal filing status is:Your 2021 Roth IRA contribution is reduced if your MAGI is:You can’t contribute to a Roth IRA for 2021 if your MAGI is:
Single or head of householdMore than $125,000 but less than $140,000$140,000 or more
Married filing jointly or qualifying widow(er)More than $198,000 but less than $208,000$208,000 or more
Married filing separatelyLess than $10,000$10,000 or more

Note that your contributions generally can’t exceed your earned income for the year (special rules apply to spousal Roth IRAs).

Now or Never … Maybe

While no one knows for sure what may come of the legislative debates, the current proposal would prohibit the conversion of nondeductible contributions from a traditional IRA (or 401(k)) after December 31, 2021. If you expect your MAGI to exceed this year’s thresholds and you’d like to fund a Roth IRA for 2021, the next few months may be your last chance to use the back-door strategy.

You can make 2021 IRA contributions up until April 15, 2022, but if the legislation is enacted, a Roth conversion involving nondeductible contributions would have to be executed by December 31, 2021.

Keep in mind that a separate five-year rule applies to the principal amount of each Roth IRA conversion you make, unless an exception applies.

In addition to eliminating the conversion of nondeductible contributions from traditional IRAs to Roth IRAs, the proposed legislation includes a similar prohibition on the conversion of after-tax 401(k) contributions (so-called mega-back-door Roth conversions), as well as other retirement-related provisions affecting those with large account balances ($10 million and higher) and high incomes (more than $400,000 for single taxpayers and more than $450,000 for joint filers).

Don’t wait until the last minute to make these contributions or conversions. Brokerage firms are extremely busy during the last half of December, and will be especially so if tax legislation is passed this year. Now is the time to be thinking about doing this if it fits within your financial plan.

If you would like to review your current investment portfolio or discuss your Roth IRA options, 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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Tax Proposals in Congress Not as Bad as Feared

September 30, 2021 — Sam H. Fawaz

The latest tax bill advanced in Congress is notable in its absence of provisions that were expected to be “game changers” (see below). And that’s a good thing for taxpayers.

On Saturday, September 25, 2021, the Congressional House Budget Committee voted to advance a $3.5 trillion spending package to the House floor for debate. The House Ways and Means Committee and the Joint Committee on Taxation had previously released summaries of proposed tax changes intended to help fund the spending package. Many of these provisions focus specifically on businesses and high-income households.

Expect these proposals to be modified; some will likely be removed and others added as the legislative process continues. As we monitor progression through the legislative process though, here are some highlights from the previously released proposed provisions worth noting.

Corporate Income Tax Rate Increase

Corporations would be subject to a graduated tax rate structure, with a higher top rate.

Currently, a flat 20% rate applies to corporate taxable income. The proposed legislation would impose a top tax rate of 26.5% on corporate taxable income above $5 million. Specifically:

  • A 16% rate would apply to the first $400,000 of corporate taxable income
  • A 21% rate on remaining taxable income up to $5 million
  • The 26.5% rate would apply to taxable income over $5 million, and corporations making more than $10 million in taxable income would have the benefit of the lower tax rates phased out.

Personal service corporations (professionals providing services as a regular sub-chapter C Corporation, not an S Corporation) would pay tax on their entire taxable income at 26.5%.

Tax Increases for High-Income Individuals

Top individual income tax rate. The proposed legislation would increase the existing top marginal income tax rate of 37% to 39.6% effective in tax years starting on or after January 1, 2022, and apply it to taxable income over $450,000 for married individuals filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married individuals filing separate returns. (These income thresholds are lower than the current top rate thresholds.)

Top capital gains tax rate. The top long-term capital gains tax rate would be raised from 20% to 25% under the proposed legislation; this increased tax rate would generally be effective for sales after September 13, 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.

New 3% surtax on income. A new 3% surtax is proposed on modified adjusted gross income over $5 million ($2.5 million for a married individual filing separately).

3.8% net investment income tax expanded. Currently, there is a 3.8% net investment income tax on high-income individuals. This tax would be expanded to cover certain other income derived in the ordinary course of a trade or business for single taxpayers with taxable income greater than $400,000 ($500,000 for joint filers). This would generally affect certain income of S corporation shareholders, partners, and limited liability company (LLC) members that is currently not subject to the net investment income tax.

New qualified business income deduction limit. A deduction is currently available for up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified real estate investment trust dividends and qualified publicly traded partnership income. The proposed legislation would limit the maximum allowable deduction at $500,000 for a joint return, $400,000 for a single return, and $250,000 for a separate return.

Retirement Plans Provisions Affecting High-Income Individuals

New limit on contributions to Roth and traditional IRAs. The proposed legislation would prohibit those with total IRA and defined contribution retirement plan accounts exceeding $10 million from making any additional contributions to Roth and traditional IRAs. The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000,  $450,000 for married taxpayers filing jointly, and $425,000 for heads of household.

New required minimum distributions for large aggregate retirement accounts.

  • These rules would apply to high-income individuals (same income limits as described above), regardless of age.
  • The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs, employer-sponsored retirement plans) exceeding $20 million distribute funds from Roth accounts (100% of Roth retirement funds or, if less, by the amount total retirement account balances exceed $20 million).
  • To the extent that the combined balance in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $10 million, distributions equal to 50% of the excess must be made.
  • The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.

Roth conversions limited. In general, taxpayers can currently convert all or a portion of a non-Roth IRA or defined contribution plan account into a Roth IRA or defined contribution plan account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. [It appears that this proposal would not be effective until 2032.]

Roth conversions not allowed for distributions that include nondeductible contributions. Taxpayers who are unable to make contributions to a Roth IRA can currently make “back-door” contributions by making nondeductible contributions to a traditional IRA and then shortly afterward convert the nondeductible contribution from the traditional IRA to a Roth IRA. It is proposed that amounts held in a non-Roth IRA or defined contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.

Estates and Trusts

  • For estate and gift taxes (and the generation-skipping transfer tax), the current basic exclusion amount (and GST tax exemption) of $11.7 million would be cut by about one-half under the proposal.
  • The proposal would generally include grantor trusts in the grantor’s estate for estate tax purposes; tax rules relating to the sale of appreciated property to a grantor trust would also be modified to provide for taxation of gain.
  • Current valuation rules that generally allow substantial discounts for transfer tax purposes for an interest in a closely held business entity, such as an interest in a family limited partnership, would be modified to disallow any such discount for transfers of non-business assets.

Notable Absence of Certain Provisions

As mentioned above, what was just as notable is that many feared changes to longtime rules were not included in the proposal:

  • No increases to the current estate and gift tax marginal rates
  • No changes to the current step up basis regime at death
  • No limitations on like-kind exchanges
  • No required realization of gain on gifts or at death
  • No required realization of gain on assets held in trust, partnership or non-corporate entity after being held in trust for 90 years
  • The top capital gains rate for high-income taxpayers going up to “only” 25% instead of the expected 39.6%

Of course, things are quite fluid and much will change before the ultimate passage of the final tax bill. We’re following developments closely and will post and send updates as things approach passage.

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.

Posted in estate planning, Financial Planning, General, retirement planning, small business, tax planning. Leave a Comment »

Update on the Enhanced Child Tax Credit

June 23, 2021 — Sam H. Fawaz

Earlier this year in April, I wrote about the changes Congress made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:

  • Amount has increased for certain taxpayers
  • Is fully refundable (meaning you can receive it even if you don’t owe the IRS any taxes)
  • May be partially received in monthly payments

The new law also raised the age of qualifying children to 17 from 16, meaning that more families will be able to take advantage of the credit for at least one year longer.

The IRS will pay half the credit in the form of advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cash flow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any surprises, please get in touch with us if you’re concerned.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

  • The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
  • The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

  • Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool
  • A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
  • Income less than certain limits (see below)

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’ child tax credit update portal

Using the IRS’ child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

The IRS also has a non-filer portal to use for certain situations.

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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Enhanced Child Tax Credit for 2021

April 24, 2021 — Sam H. Fawaz

The American Rescue Plan Act of 2021 (ARPA) ushered in several tax changes that we highlighted in this post last month. One of those tax changes involves the Enhanced Child Tax Credit.

If you have qualifying children under the age of 18, you may be able to claim a child tax credit (You may also be able to claim a partial credit for certain other dependents who are not qualifying children.) The American Rescue Plan Act of 2021 makes substantial and temporary improvements to the child tax credit for 2021, which may increase the amount you might receive.

Ages of qualifying children

The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are eligible as qualifying children in 2021.

Increase in credit amount

For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.

Phaseout of credit

The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to phaseout based on modified adjusted gross income (MAGI), which for most people, is your total income subject to taxes (this may differ from your taxable income shown on the tax return if you have certain adjustments). Special rules start phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.

The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on MAGI.

Single/Married filing separatelyMarried filing jointlyHead of householdCombined credit
Up to $75,000Up to $150,000Up to $112,500No reduction in credit
$75,001 to $200,000$150,001 to $400,000$112,501 to $200,000Credit can be reduced to $2,000 per qualifying child, $500 per other dependent
More than $200,000More than $400,000More than $200,000Credit can be reduced to $0

Enhanced Child Tax Credit is Refundable

The aggregate amount of nonrefundable credits allowed is limited to your tax liability. With refundable credits, a taxpayer may receive a tax refund at tax time even if they exceed their tax liability.

For most taxpayers, the child tax credit is fully refundable for 2021. To qualify for a full refund, the taxpayer (or either spouse for joint returns) must generally reside in the United States for more than half of the taxable year. Otherwise,  under the pre-existing rules, a partial refund of up to $1,400 per qualifying child may be available. The credit for other dependents is not refundable.

Advance payments

Eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns.  The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6). Due to correspondence backlogs and under-staffing at the IRS, it remains to be seen if they can make good on sending out those payments on a timely basis this year.

If you would like to review your current investment portfolio, discuss any other financial planning or tax 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.

Posted in Financial Planning, General, tax planning. 1 Comment »
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